AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made and entered into as of June 9, 2009 (the “ Agreement Date ”), by and among CardioDynamics International Corporation, a California corporation (the “ Company ”), SonoSite, Inc., a Washington corporation (“ Parent ”), and Canada Acquisition Corp., a California corporation and wholly-owned subsidiary of Parent (“ Merger Sub ”).

RECITALS

A. The parties intend that Merger Sub be merged with and into the Company (the “ Merger ”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent (the “ Surviving Corporation ”).

B. The Company Board (defined below) has: (i) determined that the Merger and this Agreement are fair to and in the best interests of the Company; (ii) adopted this Agreement; and (iii) resolved to recommend that the Company Shareholders (defined below) approve this Agreement.

C. The Board of Directors of Merger Sub has unanimously adopted this Agreement.

D. The Board of Directors of Parent, and Parent, as the sole shareholder of Merger Sub, in each case, has approved this Agreement, the Merger and the transactions contemplated hereby.

E. The Company, Parent and Merger Sub desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe certain conditions to the Merger, as set forth herein.

F. Concurrently with the execution and delivery of this Agreement, as a condition of and as a material inducement to the willingness of Parent and Merger Sub to enter into this Agreement, each stockholder of the Company listed on Exhibit B-1 attached hereto is executing and delivering to Parent a Voting Agreement substantially in the form attached hereto as Exhibit B-2 (the “ Voting Agreement ”) pursuant to which, subject to the terms and conditions set forth therein, such stockholder has agreed to vote all shares of the Company’s capital stock owned by it in favor of adoption of this Agreement and to give Parent an irrevocable proxy to do the same.

G. Concurrently with the execution and delivery of this Agreement, as a condition of and an inducement to the willingness of Parent and Merger Sub to enter into this Agreement, each employee of the Company listed on Schedule 7.2(g) attached hereto (each, a “ Transitional Employee ”) is executing and delivering to Parent a Transitional Employment Agreement (a “ Transitional Employment Agreement ”) in a form reasonably acceptable to Parent, in each case to become effective upon the Closing (as defined below).

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements contained herein, intending to be legally bound, the parties agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions . For purposes of this Agreement, the following terms have the respective meanings set forth below:

“ Acceptable Confidentiality Agreement ” has the meaning set forth in Section 5.4(d)(i) .

“ Activities to Date ” has the meaning set forth in Section 3.17 .

“ Adverse Recommendation Change ” has the meaning set forth in Section 5.4(c) .

“ Affiliate ” means, with respect to any Person, any other Person, directly or indirectly, controlling, controlled by or under common control with such Person. For purposes of this definition, the term “ control ” (including the correlative terms “ controlling ,” “ controlled by ” and “ under common control with ”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“ Agreement ” has the meaning set forth in the Preamble.

“ Agreement Date ” has the meaning set forth in the Preamble.

“ Antitakeover Laws ” means any “moratorium,” “control share,” “fair price,” “affiliate transaction,” “business combination,” or other antitakeover laws and regulations of any state or other jurisdiction.

“ Balance Sheet ” means the consolidated balance sheet of the Company as of February 28, 2009 (and the notes thereto).

“ Balance Sheet Date ” means February 28, 2009.

“ Business Day ” means any day other than the days on which banks in the City of San Francisco generally are closed.

“ Cash Consideration Per Share ” means $1.35.

“ Certificate of Merger ” has the meaning set forth in Section 2.1(b) .

“ Claim ” means any claim, suit, action, arbitration, mediation, cause of action, complaint, allegation, criminal prosecution, investigation, demand letter or proceeding, whether at law or at equity, before or by any court or Governmental Authority, any arbitrator, mediator or other tribunal.

“ Closing ” has the meaning set forth in Section 2.1(d) .

“ Closing Date ” has the meaning set forth in Section 2.1(d) .

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Common Shares ” means shares of Common Stock.

“ Common Stock ” means the common stock of the Company.

“ Company ” has the meaning set forth in the Preamble.

“ Company Acquisition Agreement ” has the meaning set forth in Section 5.4(d)(ii) .

“ Company Acquisition Proposal ” has the meaning set forth in Section 5.4(d)(iii) .

“ Company Board ” means the Board of Directors of the Company.

 

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“ Company Employees ” means each current and former employee of the Company and its Subsidiaries.

“ Company Fairness Opinion ” has the meaning set forth in Section 3.2(d) .

“ Company Financial Advisor ” has the meaning set forth in Section 3.2(d) .

“ Company Option Plans ” shall mean the Company’s 2004 Stock Incentive Plan and the Company’s 1995 Stock Option/Stock Issuance Plan, as amended.

“ Company Options ” means the outstanding options to acquire Common Shares.

“ Company Partner ” has the meaning set forth in Section 3.17(d) .

“ Company Proxy Statement ” has the meaning set forth in Section 3.7 .

“ Company Registered Intellectual Property ” means any Intellectual Property subject of an application, certificate, filing, registration or other document issued, filed with, or recorded by any Governmental Authority, that is owned by, registered or filed in the name of, or exclusively licensed to, the Company or a Subsidiary, including, but not limited to, any United States, international and foreign: (i) patents and patent applications (including provisional applications); (ii) registered trademarks, applications to register trademarks, intent-to-use applications, or other registrations or applications related to trademarks; (iii) registered Internet domain names; and (iv) registered copyrights and applications for copyright registration.

“ Company Representatives ” has the meaning set forth in Section 5.4(a) .

“ Company Restricted Shares ” has the meaning set forth in Section 2.2(d).

“ Company SEC Reports ” means any document or report filed or furnished by the Company under the Securities Act or the Exchange Act since November 30, 2006.

“ Company Securities ” has the meaning set forth in Section 3.5(b) .

“ Company Shareholders ” means the holders of Common Shares.

“ Company Shareholder Meeting ” has the meaning set forth in Section 5.2(a) .

“ Confidentiality Agreement ” means, collectively, the Letter Agreement, dated as of February 16, 2009, by and between the Company and Parent and the Non-Disclosure Agreement, dated as of November 27, 2007, by and between the Company and Parent.

“ Contracts ” means contracts, undertakings, understandings, commitments or agreements, whether oral or written.

“ Corporations Code ” means the Corporations Code of the State of California, as amended.

“ Current Company SEC Reports ” means the Company’s annual report on Form 10-K for the fiscal year ended November 30, 2008, the Company’s definitive proxy statement for the 2009 annual meeting of the Company Shareholders and the Company’s quarterly report on Form 10-Q for the fiscal quarter ended February 28, 2009.

“ Designated Employees ” has the meaning set forth in Section 5.5 .

 

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“ Disbursing Agent ” has the meaning set forth in Section 2.3(a) .

“ Disclosure Letter ” has the meaning set forth in the preamble to Article III .

“ Dissenting Common Shares ” has the meaning set forth in Section 2.2(e) .

“ Effective Time ” has the meaning set forth in Section 2.1(b) .

“ Employee Benefit Plan ” means any “employee benefit plan” (as such term is defined in ERISA Section 3(3)) and any other employee benefit plan, program or arrangement, including, without limitation, any equity compensation, phantom, bonus, profit sharing, severance, employment, or offer letter, program or arrangement.

“ Employee Pension Benefit Plan ” has the meaning set forth in ERISA Section 3(2).

“ Employee Welfare Benefit Plan ” has the meaning set forth in ERISA Section 3(1).

“ End Date ” means September 30, 2009.

“ Environmental, Health and Safety Requirements ” means all Laws concerning public health and safety, worker health and safety and pollution or protection of the environment, including those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, control or cleanup of any hazardous materials, substances or wastes, as such requirements are enacted and in effect on or prior to the Closing Date.

“ Environmental Permit ” means any permit, approval, identification number, license and other authorization required under any applicable Environmental, Health and Safety Requirement.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

“ ERISA Affiliate ” means any entity which is a member of: (a) a “controlled group of corporations,” as defined in Section 414(b) of the Code; (b) a group of entities under “common control,” as defined in Section 414(c) of the Code; or (c) an “affiliated service group,” as defined in Section 414(m) of the Code, or treasury regulations promulgated under Section 414(o) of the Code, any of which includes the Company.

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“ Expenses ” has the meaning set forth in Section 8.2(b) .

“ FDA ” means the U.S. Food and Drug Administration.

“ GAAP ” means United States generally accepted accounting principles.

“ Governmental Authority ” means any agency, public or regulatory authority, instrumentality, department, commission, court, arbitrator, ministry, tribunal or board of any nation or government or political subdivision thereof, whether foreign or domestic and whether national, supranational, federal, tribal, provincial, state, regional, local or municipal.

“ Hazardous Material ” means petroleum and its products and derivatives including gasoline and diesel fuel, radioactive materials, asbestos and asbestos-containing materials, pesticides, radon, urea formaldehyde, lead and lead-containing materials, polychlorinated biphenyls and any other chemicals, materials, substances or wastes in

 

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any amount or concentration which are regulated pursuant to or the basis for liability pursuant to any Environmental, Health and Safety Requirements or defined as or included in the definition of “hazardous substance,” “hazardous material,” “hazardous waste,” “toxic substance,” “pollutant,” “regulated substance,” “solid waste,” “contaminant” or words of similar import under any applicable Environmental, Health and Safety Requirements.

“ Insurance Policies ” has the meaning set forth in Section 3.20 .

“ Intellectual Property ” shall mean trademarks, service marks, brand names, certification marks, trade dress and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; Internet domain names and web addresses and applications and registrations therefor; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including, without limitation, divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; nonpublic information, trade secrets and confidential information and rights in any jurisdiction that limit the use or disclosure thereof by any Person; writings and other works, whether copyrightable or not, in any jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; databases and data collections and all rights therein; moral and economic rights of authors and inventors, however denominated; any similar intellectual property or proprietary rights anywhere in the world; and all tangible embodiments of the foregoing.

“ Knowledge of the Company ” means the knowledge the Company’s executive officers have or would have with respect to any fact, circumstance, event or other matter in question after reasonable inquiry, including reasonable inquiry of the senior employees of the Company and its Subsidiaries, and managing directors (Geschäftsführers) of the Subsidiaries, who have administrative or operational responsibility for the matter in question.

“ Law ” means applicable, statutes, common laws, rules, ordinances, regulations, codes, licensing requirements, orders, judgments, injunctions, writs, decrees, licenses, governmental guidelines or interpretations having the force of law, permits, rules and bylaws, in each case, of a Governmental Authority.

“ Leased Real Property ” means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures or other interest in real property that is used in the business of the Company or any of its Subsidiaries as of the Agreement Date.

“ Leases ” means all leases, subleases, licenses, concessions and other Contracts, including all amendments, extensions, renewals, guaranties and other agreements with respect thereto, pursuant to which the Company or any of its Subsidiaries holds any Leased Real Property.

“ Lien ” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance in respect of such asset.

“ Material Adverse Effect on the Company ” means any change, circumstance, condition, state of facts, event or effect, (each, an “ Effect ”) (whether or not foreseeable and regardless of whether or not such Effect is inconsistent with the representations or warranties made by the Company in this Agreement) that is or is reasonably likely to be, individually or in the aggregate, materially adverse in relation to the near-term or longer-term condition (financial or otherwise), assets (including intangible assets), liabilities, business, operations or results of operations of the Company and its Subsidiaries taken as a whole, except to the extent that any such Effect is caused by: (i) any change in general economic conditions, whether locally, nationally or internationally ( provided that such change does not affect the Company disproportionately as compared to companies operating in the same industry in which the Company operates); (ii) any change in financing, banking or securities markets

 

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generally ( provided that such change does not affect the Company disproportionately as compared to companies operating in the same industry in which the Company operates); (iii) any change in developments, trends or conditions related to the medical device industry generally ( provided that such change does not affect the Company disproportionately as compared to companies operating in the same industry in which the Company operates); (iv) any change in political conditions, or any act of civil unrest, war or terrorism ( provided that such change does not affect the Company disproportionately as compared to companies operating in the same industry in which the Company operates); (v) any change in Law or GAAP after the Agreement Date; (vi) any change in the market price or trading volume of the Company’s capital stock ( provided that such exclusion shall not apply to any underlying Effect that may have caused such change in trading prices or volumes); (vii) any failure of the Company to meet any internal or published industry analyst projections or forecasts or estimates of revenues or earnings for any period ( provided that such exclusion shall not apply to any underlying Effect that may have caused such failure); or (viii) the execution or announcement of this Agreement or the announcement or consummation of the Merger.

“ Material Contracts ” has the meaning set forth in Section 3.9(d).

“ Merger ” has the meaning set forth in the Recitals.

“ Merger Consideration ” has the meaning set forth in Section 2.2(c) .

“ Merger Shares ” has the meaning set forth in Section 2.2(c) .

“ Merger Sub ” has the meaning set forth in the Preamble.

“ Merger Sub Common Stock ” means the common stock of Merger Sub.

“ Offeree ” has the meaning set forth in Section 5.5 .

“ Offeree Documents ” has the meaning set forth in Section 5.5 .

“ Option Consideration ” has the meaning set forth in Section 2.4(a) .

“ Owned Real Property ” means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights and interests appurtenant thereto, owned by the Company or any of its Subsidiaries.

“ Parent ” has the meaning set forth in the Preamble.

“ Parent Common Stock ” means the common stock of Parent.

“ Permits ” has the meaning set forth in Section 3.17 .

“ Permitted Liens ” means: (i) liens for taxes not yet due and payable or that are being contested in good faith and by appropriate proceedings; (ii) mechanics’, materialmen’s or other liens or security interests that secure a liquidated amount that are being contested in good faith and by appropriate proceedings; or (iii) any other liens, encumbrances, security interests, easements, rights-of-way, encroachments, restrictions, conditions and other encumbrances that do not secure a liquidated amount, that have been incurred or suffered in the ordinary course of business consistent with past practice and that would not, individually or in the aggregate, reasonably be expected to materially impair the continued use and operation of the assets to which they relate.

“ Person ” means any individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including any government or political subdivision or any agency or instrumentality thereof.

 

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“ Products ” has the meaning set forth in Section 3.17 .

“ Recommendation ” has the meaning set forth in Section 5.2(b) .

“ Repurchase Price ” has the meaning set forth in Section 2.2(d) .

“ Required Contractual Consents ” has the meaning set forth in Section 3.4 .

“ Required Governmental Approvals ” has the meaning set forth in Section 3.3 .

“ Requisite Shareholder Vote ” has the meaning set forth in Section 3.2(a) .

“ SEC ” means the Securities and Exchange Commission.

“ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“ Subordinated Notes ” has the meaning set forth in Section 3.5(a) .

“ Subsidiary ” means any corporation, association, business entity, partnership, limited liability company or other Person of which the Company, either alone or together with one or more Subsidiaries or by one or more other Subsidiaries (i) directly or indirectly owns or controls securities or other interests representing more than 50% of the voting power of such Person, or (ii) is entitled, by Contract or otherwise, to elect, appoint or designate directors constituting a majority of the members of such Person’s board of directors or other governing body.

“ Superior Proposal ” has the meaning set forth in Section 5.4(d)(iv) .

“ Surviving Corporation ” has the meaning set forth in the Recitals.

“ Tax ” (including “ Taxes ”) means: (i) all federal, state, local, foreign and other taxes (including withholding taxes), fees and other governmental charges of any kind or nature whatsoever, together with any interest and any penalties, additions or additional amounts with respect thereto; (ii) any liability for payment of amounts described in clause (i) whether as a result of transferee liability, joint and several liability for being a member of an affiliated, consolidated, combined, unitary or other group for any period, or otherwise by operation of law; and (iii) any liability for the payment of amounts described in clause (i) or (ii) as a result of any tax sharing, tax indemnity or tax allocation agreement or any other express or implied agreement to pay or indemnify any other Person.

“ Tax Return ” means any return, declaration, report, statement, information statement or other document filed or required to be filed with respect to Taxes, including any claims for refunds of Taxes and any amendments or supplements of any of the foregoing.

“ Termination Fee ” has the meaning set forth in Section 8.2(a) .

“ Transitional Employee ” has the meaning set forth in the Recitals.

“ Transitional Employment Agreement ” has the meaning set forth in the Recitals.

“ Voting Agreement ” has the meaning set forth in the Recitals.

 

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Section 1.2 Terms Generally . The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation,” unless the context expressly provides otherwise. All references herein to Articles, Sections, paragraphs, subparagraphs, clauses, Exhibits or Schedules shall be deemed references to Articles, Sections, paragraphs, subparagraphs or clauses of or Exhibits or Schedules to this Agreement, unless the context requires otherwise. Unless otherwise expressly defined, terms defined in this Agreement have the same meanings when used in any Exhibit or Schedule hereto, including the Disclosure Letter. Unless otherwise specified, the words “herein,” “hereof,” “hereto” and “hereunder” and other words of similar import refer to this Agreement as a whole (including the Schedules and Exhibits) and not to any particular provision of this Agreement.

ARTICLE II

THE MERGER

Section 2.1 The Merger .

(a) At the Effective Time, in accordance with the Corporations Code and upon the terms and subject to the conditions set forth in this Agreement, Merger Sub shall be merged with and into the Company, at which time the separate existence of Merger Sub shall cease and the Company shall survive the Merger as a wholly-owned subsidiary of Parent.

(b) As soon as reasonably practicable after the satisfaction or valid waiver of all conditions to the Merger set forth in Article VII , the Company and Merger Sub shall file a certificate of merger (the “ Certificate of Merger ”) meeting the requirements of the Corporations Code with the Secretary of State of the State of California. The Merger shall become effective at such time as the Certificate of Merger is endorsed by the Secretary of State of the State of California, or at such later time as the Company and Merger Sub may agree and specify in the Certificate of Merger (such time as the Merger becomes effective, the “ Effective Time ”).

(c) The Merger shall have the effects set forth in the applicable provisions of the Corporations Code. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, all rights and property of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts and liabilities of each of the Company and Merger Sub shall become the debts and liabilities of the Surviving Corporation.

(d) The closing of the Merger (the “ Closing ”) shall take place (i) at the offices of the Company located in San Diego, California, as soon as reasonably practicable (but in any event, no later than the second Business Day) after the day on which the last condition to the Merger set forth in Article VII is satisfied or validly waived (other than those conditions that by their nature cannot be satisfied until the Closing Date, but subject to the satisfaction or valid waiver of such conditions) or (ii) at such other place and time or on such other date as the Company and Merger Sub may agree in writing (the actual date of the Closing, the “ Closing Date ”).

(e) The articles of incorporation of the Company as in effect immediately prior to the Effective Time shall be amended as set forth on Exhibit A , and, as so amended, shall be the articles of incorporation of the Surviving Corporation until thereafter amended in accordance with the terms thereof and as provided by applicable Law.

(f) The bylaws of the Company in effect at the Effective Time shall be amended to read the same as the bylaws of the Merger Sub in effect immediately prior to the Effective Time, and shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with the terms thereof and as provided by applicable Law.

 

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(g) From and after the Effective Time, (i) the directors of Merger Sub at the Effective Time shall be the directors of the Surviving Corporation and (ii) the officers of Merger Sub at the Effective Time shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified in accordance with applicable Law.

Section 2.2 Conversion of Securities . At the Effective Time, pursuant to this Agreement and by virtue of the Merger and without any action on the part of the Company, Parent, Merger Sub or the holders of the Common Stock:

(a) Each Common Share held by the Company in any form or otherwise owned by Parent, Merger Sub or any Subsidiary immediately prior to the Effective Time, if any, shall be canceled and retired and shall cease to exist, and no payment or distribution shall be made or delivered with respect thereto.

(b) Each share of Merger Sub Common Stock issued and outstanding immediately prior to the Effective Time shall be converted into and become one newly issued, fully paid and non-assessable share of common stock of the Surviving Corporation.

(c) Each Common Share issued and outstanding immediately prior to the Effective Time (other than Common Shares to be canceled pursuant to Section 2.2(a) , Company Restricted Shares and Dissenting Common Shares), automatically shall be canceled and converted into the right to receive the Cash Consideration Per Share, without interest, payable to the holder thereof upon surrender of the stock certificate formerly representing such Common Share in the manner provided in Section 2.3 . Such Common Shares (including Company Restricted Shares), other than those canceled pursuant to Section 2.2(a) , sometimes are referred to herein as the “ Merger Shares .” The amount that is to be paid pursuant to this Section 2.2(c) and Section 2.2(d) below is sometimes referred to herein as the “ Merger Consideration .”

(d) Each unvested restricted Common Share issued and outstanding immediately prior to the Effective Time (“ Company Restricted Shares ”), automatically shall be canceled and converted into the right to receive the Cash Consideration Per Share, without interest, payable to the holder thereof upon surrender of the stock certificate formerly representing such Common Share in the manner provided in Section 2.3 , provided that such Cash Consideration Per Share payable with respect to such Company Restricted Shares shall be subject to the same vesting schedule as such Company Restricted Shares are subject to such that the holder of the Company Restricted Shares shall become vested in Cash Consideration Per Share at the same times and under the same conditions as applicable to such Company Restricted Shares. Parent or Merger Sub shall retain such unvested consideration and shall pay it to the former holder of such Company Restricted Shares promptly after such holder vests therein. At the Effective Time, all outstanding rights to repurchase Company Restricted Shares that the Company may hold or similar restrictions in the Company’s favor immediately prior to the Effective Time (all such rights, the “ Repurchase Rights ”) shall be assigned to Parent in the Merger, without any action required on the part of any Person, and shall thereafter be exercisable by Parent upon the same terms and subject to the same conditions that were in effect immediately prior to the Effective Time, except that the Repurchase Rights may be exercised by Parent by (x) retaining the Merger Consideration into which such Company Restricted Shares have been converted and (y) paying to the former holder thereof the repurchase price in effect immediately prior to the Effective Time for such Company Restricted Shares that were converted into that Merger Consideration. No Merger Consideration to be received in exchange for Company Restricted Shares, or the right thereto, may be pledged, encumbered, sold, assigned or transferred (including any transfer by operation of law), by any Person, other than Parent, or be taken or reached by any legal or equitable process in satisfaction of any liability of such Person, prior to the distribution to such Person of such Merger Consideration following the vesting thereof, in accordance with this Agreement.

(e) Notwithstanding any provision of this Agreement to the contrary, if required by the Corporations Code, but only to the extent required thereby, Common Shares that are issued and outstanding immediately prior to the Effective Time (other than Common Shares to be canceled pursuant to Section 2.2(a) ) and that are held by

 

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holders of such Common Shares who have not approved of the adoption of this Agreement and who have properly exercised appraisal rights with respect thereto in accordance with, and who have complied with, Sections 1300 et seq. of the Corporations Code (the “ Dissenting Common Shares ”) shall not be convertible into the right to receive the Merger Consideration, and holders of such Dissenting Common Shares shall be entitled to receive payment of the appraised value of such Dissenting Common Shares in accordance with the provisions of Section 1300 et seq. of the Corporations Code unless and until any such holder fails to perfect or effectively withdraws or loses such holder’s rights to appraisal and payment under the Corporations Code. If, after the Effective Time, any such holder fails to perfect or effectively withdraws or loses such right, such Dissenting Common Shares shall thereupon be treated as if they had been converted into and have become exchangeable for, at the Effective Time, the right to receive the Merger Consideration. At the Effective Time, any holder of Dissenting Common Shares shall cease to have any rights with respect thereto, except the rights provided in Section 1300 et seq. of the Corporations Code and as provided in the previous sentence. The Company shall give Parent (i) notice of any demands received by the Company for appraisals of Common Shares within twenty-four (24) hours of such receipt and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to such notices and demands. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any demands for appraisals of Common Shares or settle any such demands.

(f) If, between the Agreement Date and the Effective Time, the number of outstanding Common Shares is changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split-up, combination, exchange of shares or the like, other than pursuant to the Merger (in each case, as approved by Parent and Merger Sub pursuant to Section 5.1 ), the amount of Cash Consideration Per Share shall be correspondingly adjusted.

(g) The Company Options shall be treated as provided in Section 2.4 .

Section 2.3 Payment of Cash for Merger Shares .

(a) Prior to the Closing Date, Parent shall designate a bank or trust company that is reasonably satisfactory to the Company, that is organized and doing business under the Laws of the United States or any state thereof, to serve as the disbursing agent for the Merger Consideration and the Option Consideration (the “ Disbursing Agent ”). As promptly as practicable after the Effective Time (but no later than five (5) Business Days after the Effective Time), Parent shall cause to be deposited with the Disbursing Agent cash in an aggregate amount sufficient to pay the Merger Consideration in respect of all Merger Shares outstanding immediately prior to the Effective Time plus any cash necessary to pay the Option Consideration for canceled Company Options pursuant to Section 2.4(a) . Pending distribution of the cash deposited with the Disbursing Agent, such cash shall be held in trust for the benefit of the holders of Merger Shares and such Company Options and shall not be used for any other purposes; provided , however , that Parent may direct the Disbursing Agent to invest such cash in obligations of (or guaranteed by) the United States so long as no such investments have maturities that could prevent or delay payments to be made pursuant to Section 2.3(b) , and any interest and other income resulting from such investment shall be paid to Parent, upon demand.

(b) As promptly as practicable after the Effective Time (but no later than five (5) Business Days after the Effective Time), the Surviving Corporation shall send, or cause the Disbursing Agent to send, to each record holder of Merger Shares as of immediately prior to the Effective Time a letter of transmittal and instructions for exchanging their Merger Shares for the Merger Consideration payable therefor. The letter of transmittal shall be in customary form and shall specify that delivery of Merger Shares will be effected, and risk of loss and title will pass, only upon delivery of the stock certificates representing the Merger Shares to the Disbursing Agent. Upon surrender of such stock certificate or certificates to the Disbursing Agent, together with a properly completed and duly executed letter of transmittal and any other documentation that the Disbursing Agent may reasonably require, the record holder thereof shall be entitled to receive (and Parent shall cause the Disbursing Agent to pay) the Merger Consideration payable in exchange therefor less any amounts required to be withheld for Tax. Until

 

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so surrendered and exchanged, each such stock certificate shall, after the Effective Time, be deemed to represent only the right to receive the Merger Consideration, and no cash shall be paid to the holder of such outstanding certificate in respect thereof until such surrender and exchange.

(c) If payment is to be made to a Person other than the registered holder of the Merger Shares represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Disbursing Agent any applicable stock transfer taxes required as a result of such payment to a Person other than the registered holder of such Merger Shares or establish to the satisfaction of the Disbursing Agent that such stock transfer taxes have been paid or are not payable.

(d) After the Effective Time, there shall be no further transfers on the stock transfer books of the Surviving Corporation of the Common Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, certificates representing Merger Shares are presented to the Surviving Corporation, such shares shall be canceled and exchanged for the consideration provided for, and in accordance with the procedures set forth, in this Article II .

(e) If any cash deposited with the Disbursing Agent remains unclaimed 180 days after the Effective Time, such cash shall be returned to the Surviving Corporation upon demand and any holder who has not surrendered Merger Shares certificates for the Merger Consideration prior to that time shall thereafter look only to the Surviving Corporation for payment of the Merger Consideration. Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of Merger Shares for an amount with respect to the Merger Shares paid to a public official pursuant to any applicable unclaimed property Laws.

(f) No dividends or other distributions with respect to capital stock of the Surviving Corporation with a record date after the Effective Time shall be paid to the holder of any unsurrendered certificate for Common Shares.

(g) From and after the Effective Time, the holders of Common Shares (other than Dissenting Common Shares) outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Common Shares, other than the right to receive the Merger Consideration as provided in this Agreement.

(h) In the event that any Merger Share certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Merger Share certificate to be lost, stolen or destroyed, in addition to the posting by such holder of a bond in such amount as the Surviving Corporation shall determine is reasonably required (if any) as indemnity against any claim that may be made against the Surviving Corporation with respect to such Merger Share certificate, the Disbursing Agent shall issue in exchange for such lost, stolen or destroyed Merger Share certificate the proper amount of the Merger Consideration.

(i) Parent, Surviving Corporation and the Disbursing Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable hereunder any amounts required to be deducted and withheld under any applicable Tax Law. To the extent any amounts are so withheld, such withheld amounts shall be treated for all purposes as having been paid to the holder from whose Merger Consideration the amounts were so deducted and withheld.

Section 2.4 Treatment of Company Options; Rule 16b-3 .

(a) At the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any holder of a Company Option, each outstanding Company Option shall become fully vested, be canceled and extinguished, and the holder thereof shall be entitled to receive (and Parent shall

 

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cause the Disbursing Agent to pay) an amount in cash equal to the excess (if any) of (i) the product of (A) the number of Common Shares subject to such Company Option (assuming full vesting of such Company Options) and (B) the Cash Consideration Per Share over (ii) the aggregate exercise price of such Company Option, without interest and less any amounts required to be deducted and withheld under any applicable Law (the “ Option Consideration ”). As promptly as reasonably practicable after the Effective Time, the Surviving Corporation shall cause the Disbursing Agent to pay, from funds deposited by or at the direction of Parent, such amount with respect to cancelled Company Options in accordance with Section 2.3(a) . Parent and the Surviving Corporation shall be entitled to deduct and withhold from any amounts to be paid hereunder in respect of Company Options any amounts required to be deducted and withheld under any applicable Tax Law. To the extent any amounts are so withheld, such withheld amounts shall be treated for all purposes as having been paid to the holders of the Company Options from whose payments in respect of Company Options the amounts were so deducted and withheld. All unexercised Company Options as of the Effective Time that have a per share exercise price equal to or exceeding the Merger Consideration per share shall be canceled and retired and shall cease to exist, and no payment or distribution shall be made or delivered with respect thereto.

(b) All Company Option Plans shall terminate as of the Effective Time and the provisions in any Company Option Plans or any other plan providing for the issuance, transfer or grant of any capital stock of the Company or any interest in respect of any capital stock of the Company shall be deleted as of the Effective Time, and the Company, the Company Board and the compensation committee of the Company Board, as applicable, shall adopt such resolutions and shall take such action as is necessary to ensure that following the Effective Time no holder of a Company Option or any participant in any Company Option Plans or any other plan shall have any right to acquire any capital stock of the Company, the Surviving Corporation or any of their Subsidiaries, or any interest in respect of any capital stock of the Company, the Surviving Corporation or any of their Subsidiaries.

(c) Prior to the Effective Time, the Company shall take all such steps as may be required (to the extent permitted under applicable Law) to cause any dispositions of Common Stock (including, in each case, derivative securities) resulting from the transactions contemplated hereby by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to the Company to be exempt under Rule 16b-3 promulgated under the Exchange Act.

Section 2.5 Payoff of the Subordinated Notes . At the Effective Time, Parent or Merger Sub shall prepay in full all of the Company’s Subordinated Notes in accordance with the terms thereof, and such Subordinated Notes shall thereupon be cancelled.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as set forth in the corresponding numbered or lettered sections or subsections of the Disclosure Letter delivered to Parent and Merger Sub by the Company concurrently with entering into this Agreement (the “ Disclosure Letter ”) referencing a representation or warranty herein (each of which exceptions, in order to be effective, shall clearly indicate the section and, if applicable, the subsection of this Article III to which it relates (unless and only to the extent the applicability to other representations and warranties is reasonably apparent from the actual text of the disclosed exception), and each of which exceptions shall also be deemed to be representations and warranties made by the Company under this Article III ), the Company hereby represents and warrants to Parent and Merger Sub that:

Section 3.1 Corporate Existence and Power; Subsidiaries .

(a) Each of the Company and its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the Laws of its jurisdiction of incorporation. Each of the Company and its Subsidiaries has all corporate powers and authority required to own, lease and operate its respective properties and other assets

 

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and to carry on its business as now conducted. The Company has all corporate powers and authority to execute and deliver this Agreement, to consummate the Merger and the other transactions contemplated hereby and to perform each of its obligations hereunder.

(b) Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or be in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company.

(c) The Company has made available to Parent and Merger Sub true and complete copies of the currently effective articles of incorporation and bylaws or similar organizational and governing documents of the Company and its Subsidiaries. Neither the Company nor any of its Subsidiaries is in violation of its articles of incorporation or bylaws or similar organizational and governing documents. The Company has made available to Parent and Merger Sub true and complete copies of the minutes (or, in the case of draft minutes, the most recent drafts thereof as of the date of this Agreement) of all meetings of the Company Shareholders, the Company Board and each committee of the Company Board held since January 1, 2006, other than the minutes of the meeting of the Company Board convened in order to evaluate the Merger and the other transactions contemplated by this Agreement and any issues related thereto.

(d) Section 3.1 of the Disclosure Letter lists all of the Subsidiaries of the Company. All the outstanding shares of capital stock of, or other equity or voting interests in, each Subsidiary are duly authorized, validly issued, fully paid and nonassessable and are owned directly or indirectly by the Company, free and clear of all Liens and free of any other restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Except for the capital stock of, or other equity or voting interests in, its Subsidiaries, neither the Company nor any of its Subsidiaries owns, directly or indirectly, any stock, membership interest, partnership interest, joint venture interest, or other equity or voting interest in, or any interest convertible into, exercisable or exchangeable for any of the foregoing, and neither the Company nor any of its Subsidiaries is under any current or prospective obligation to form or participate in, provide funds to, make any loan, capital contribution, guarantee, credit enhancement or other investment in, or assume any liability or obligation of, any Person.

Section 3.2 Corporate Authorization .

(a) The Company has all requisite corporate power and authority and has taken all corporate action necessary in order to execute and deliver this Agreement and to perform its obligations under this Agreement subject only to obtaining the Requisite Shareholder Vote. The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby have been duly, validly and unanimously authorized by the Company Board, except for one (1) director of the Company Board who was recused from such authorization. The only Company Shareholder approval or authorization required to approve this Agreement and effect the Merger is the approval of the holders of Common Shares as required by the Corporations Code (the “ Requisite Shareholder Vote ”).

(b) This Agreement has been duly and validly executed and delivered by the Company and, assuming the due and valid execution and delivery by Parent and Merger Sub, constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except: (i) as rights to indemnity hereunder may be limited by federal or state securities Laws or the public policies embodied therein; (ii) as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or similar Laws affecting the enforcement of creditors’ rights generally; and (iii) as the remedy of specific performance and other forms of injunctive relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

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(c) On or prior to the Agreement Date, the Company Board has adopted resolutions (i) adopting this Agreement and declaring the Merger and the other transactions contemplated by this Agreement advisable and in the best interests of the Company and the Company Shareholders and (ii) resolving to recommend that the Company Shareholders approve this Agreement. All such resolutions are in full force and effect and none have been amended or superseded.

(d) Cain Brothers & Company, LLC (the “ Company Financial Advisor ”) has delivered to the Company Board its opinion to the effect that, as of the date such opinion was delivered, and subject to the qualifications, limitations and assumptions set forth therein, the Cash Consideration Per Share is fair, from a financial point of view, to the holders of Common Shares (the “ Company Fairness Opinion ”). The Company has been authorized by the Company Financial Advisor to permit the inclusion in full of the Company Fairness Opinion in the Company Proxy Statement. The Company Fairness Opinion has not been withdrawn, revoked or modified.

(e) As of the Agreement date, there is no action required to be taken by the Company or the Company Board to exempt this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby from, and this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby are exempt from, the requirements of, any and all Antitakeover Laws.

Section 3.3 Governmental Authorization . The execution, delivery and performance by the Company of this Agreement and the consummation of the Merger and the other transactions contemplated by this Agreement by the Company require no action by, or by the Company or any Subsidiary in respect of, or notice, report or other filing by the Company or any Subsidiary with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained from, any Governmental Authority other than: (i) the filing of the Certificate of Merger; (ii) compliance with any applicable requirements of any Laws specified in Section 3.3 of the Disclosure Letter (the “ Required Governmental Approvals ”); (iii) compliance with the applicable requirements of the Exchange Act; (iv) compliance with the applicable requirements of the Securities Act; (v) compliance with any applicable foreign or state securities or Blue Sky Laws; and (vi) such other items or filings, which if not taken or made, (A) would not, individually or in the aggregate, be reasonably expected to be material to the Company or the applicable Subsidiary and (B) would not reasonably be expected to adversely affect in any material respect, or materially hinder or delay, the consummation of the Merger or the Company’s ability to observe and perform its obligations hereunder.

Section 3.4 Non-Contravention . The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby do not and will not: (i) contravene or conflict with the organizational or governing documents of the Company or any of its Subsidiaries; (ii) assuming compliance with the matters referenced in Section 3.3 and the receipt of the Requisite Shareholder Vote, contravene or conflict with or constitute a violation of any provision of any Law binding upon or applicable to the Company or any of its Subsidiaries or any of their respective properties or assets; or (iii) except for those instances for which consents are required as set forth in Section 3.4 of the Disclosure Letter (the “ Required Contractual Consents ”), constitute or result in, with or without notice, lapse of time or both, a breach or violation of, a termination (or right of termination) or a default under, the creation or acceleration of any obligations, the loss of a benefit under or the creation of a Lien on any of the assets of the Company or any of its Subsidiaries pursuant to any Contract binding upon the Company or any of its Subsidiaries; except, in the case of clauses (ii) and (iii) above, which (A) would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect on the Company and (B) would not be reasonably expected to materially hinder or delay the consummation of the Merger or the Company’s ability to observe and perform its obligations hereunder.

Section 3.5 Capitalization .

(a) The authorized capital stock of the Company consists of (i) 14,285,714 authorized Common Shares, of which 7,396,370 Common Shares are issued and outstanding and (ii) 2,571,429 authorized shares of preferred stock, of which no shares are outstanding. There are outstanding Company Options to purchase an aggregate of

 

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427,194 Common Shares, all of which were issued under one of the two Company Option Plans. Each Company Option that is intended to qualify as an “incentive stock option” under Code Section 422 so qualifies, and the exercise price of each other Company Option is no less than the fair market value of a Common Share on the date of grant of such Company Option. The Company has made available to Parent and Merger Sub true and complete copies of all Company Option Plans and the forms of all agreements evidencing outstanding equity or equity based awards thereunder. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. Section 3.5(a) of the Disclosure Letter sets forth a list of all outstanding Company Options and other stock-related awards, including grants of Company Restricted Shares, including the names of the holders thereof and, to the extent applicable thereto, the exercise price or purchase price thereof, the governing Company Option Plan with respect thereto and the expiration date thereof. The Company has $5.25 million of subordinated convertible debt securities outstanding (the “ Subordinated Notes ”). Such Subordinated Notes bear interest at an annual rate of 8.0%, are convertible into Common Stock at a price of $8.05 per share and are scheduled to be repaid on April 11, 2011.

(b) Except as set forth in Section 3.5(a) , and except for changes since the Agreement Date resulting from the exercise of Company Options outstanding on such date or the vesting of Company Restricted Shares outstanding on such date, there are no outstanding, and there have not been reserved for issuance, any: (i) shares of capital stock or other voting securities of the Company; (ii) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or voting securities of the Company or its Subsidiaries; (iii) Company Options or other rights or options to acquire from the Company or its Subsidiaries, or obligations of the Company or its Subsidiaries to issue, any shares of capital stock, voting securities or securities convertible into or exchangeable for shares of capital stock or voting securities of the Company or such Subsidiary, as the case may be; or (iv) equity equivalent interests in the ownership or earnings of the Company of its Subsidiaries or other similar rights (the items in clauses (i) through (iv), collectively, “ Company Securities ”). There are no outstanding obligations of the Company or its Subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. There are no preemptive or other similar rights giving any Person a right to subscribe for or acquire, any equity or voting securities of the Company or any of its Subsidiaries. There are no shareholder agreements, voting trusts or other agreements or understandings to which the Company or any of its Subsidiaries is a party or by which any of such entities is bound (or that is otherwise on file with the Company) relating to the holding, voting, registration, redemption, repurchase or disposition of, or that restricts the transfer of, any shares of capital stock or other equity or voting (other than the Voting Agreements) interests of the Company or any of its Subsidiaries, or preemptive rights with respect thereto.

(c) No bonds, debentures, notes or other indebtedness of the Company having the right to vote on any matters on which holders of capital stock of the Company may vote are issued or outstanding.

(d) Each Company Shareholder that is executing a Voting Agreement concurrent with the execution of this Agreement holds that number of shares of Common Stock as is set forth beside such Company Shareholder’s name on Exhibit B-1 .

Section 3.6 SEC Reports and Financial Statements .

(a) The Company has timely filed with or otherwise furnished to the SEC all forms, reports, schedules, statements and other documents required to be filed or furnished by it under the Securities Act or the Exchange Act since November 30, 2006. No Subsidiary of the Company is required to file with or furnish to the SEC any such forms, reports, schedules or other documents. As of their respective filing dates, each of the Company SEC Reports, including any financial statements or schedules included or incorporated by reference therein, complied, and all documents required to be filed by the Company with the SEC after the Agreement Date will comply, in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as applicable. As of their respective dates (or, if amended, as of the date of such amendment), none of the Company SEC Reports contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

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(b) The audited consolidated financial statements and unaudited consolidated interim financial statements included or incorporated by reference in the Company SEC Reports (including any related notes and schedules) fairly present, in all material respects, the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof, and the results of their operations and their cash flows for the periods set forth therein, and in each case were prepared in accordance with GAAP consistently applied during the periods involved (except as otherwise disclosed in the notes thereto and subject, where appropriate, to normal year-end adjustments that would not be material in amount or effect).

(c) As of the Agreement Date, the Company in good faith estimates that at the end of its second fiscal quarter of 2009, it will have (A) cash (excluding restricted cash and net of issued but uncleared checks and drafts) and cash equivalents (as such terms are defined under U.S. GAAP) totaling no less than $4,100,000, and (B) revenues for the second fiscal quarter of 2009 (recognized in accordance with GAAP and consistent with past practices) totaling no less than $5,600,000.

(d) The Company is in compliance in all material respects with the applicable listing and corporate governance rules and regulations of the NASDAQ Stock Market.

(e) The Company and its Subsidiaries have implemented and maintained a system of internal accounting controls and financial reporting (as required by Rule 13a-15(a) under the Exchange Act) that are designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. The Company maintains disclosure controls and procedures required by Rule 13a-15 or 15d-15 under the Exchange Act. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is recorded and reported on a timely basis to the individuals responsible for the preparation of the Company’s filings with the SEC and other public disclosure documents. The Company has disclosed, based on its most recent evaluation prior to the date of this Agreement, to the Company’s outside auditors and the audit committee of the Company Board (A) any significant deficiencies and material weaknesses in the design or operation of its internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that would be reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (B) to the Knowledge of the Company, any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. A true, correct and complete summary of any such disclosures made by management to the Company’s outside auditors and audit committee is set forth in Section 3.6(e) of the Disclosure Letter.

(f) There are no outstanding or unresolved comments in the comment letters received from the SEC staff with respect to the Company SEC Reports. To the Knowledge of the Company, none of the Company SEC Reports is subject to ongoing review or outstanding SEC comment or investigation.

(g) Since November 30, 2006, (i) neither the Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any director or executive officer of the Company or any of its Subsidiaries has received any complaint, allegation, assertion, or claim that the Company or any of its Subsidiaries has engaged in questionable accounting or auditing practices and (ii) no attorney representing the Company or any of its Subsidiaries, whether or not employed by the Company or any of its Subsidiaries, has reported evidence of a violation of securities Laws, breach of fiduciary duty or similar violation by the Company or any of its officers, directors, employees or agents to the Company Board, any committee thereof, or to any director or executive officer of the Company.

Section 3.7 Disclosure Documents . The proxy statement (the “ Company Proxy Statement ”) to be filed by the Company with the SEC in connection with seeking the adoption and approval of this Agreement by the Company Shareholders will not, at the date it is first mailed to Company Shareholders (in the case of the Company Proxy Statement) or at the time of the Company Shareholders Meeting (other than as to information supplied by Parent and Merger Sub for inclusion in the Company Proxy Statement), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the

 

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statements therein, in light of the circumstances under which they are made, not misleading. The Company will cause the Company Proxy Statement and all related SEC filings to comply as to form in all material respects with the requirements of the Exchange Act applicable thereto as of the date of such filing. No representation is made by the Company with respect to statements made in the Company Proxy Statement based on information supplied, or required to be supplied, by Parent and Merger Sub or their Affiliates specifically for inclusion therein.

Section 3.8 No Undisclosed Liabilities . Except as set forth on Section 3.8 of the Disclosure Letter or the Balance Sheet, neither the Company nor any of its Subsidiaries has any liabilities or obligations of any nature (whether known or unknown, absolute or contingent, liquidated or unliquidated, due or to become due, accrued, fixed or otherwise), and there is no existing fact, condition or circumstance which could reasonably be expected to result in such liabilities or obligations, except liabilities or obligations incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice (but excluding any incurrence of Indebtedness).

Section 3.9 Material Contracts . Section 3.9 of the Disclosure Letter lists:

(a) all Contracts applicable to the Company or any of its Subsidiaries or any of their respective properties or assets that are reasonably expected to require the payment (whether by or to the Company or any of its Subsidiaries) of $200,000 or more in the aggregate or payments in any twelve-month period aggregating $100,000 or more;

(b) all Contracts calling for the purchase of products or services of the Company or any of its Subsidiaries that generate or are reasonably expected to generate $100,000 or more of annualized revenues;

(c) all Contracts pursuant to which any Person has a right to market, distribute, resell or sublicense any product or service of the Company or its Subsidiaries that generate or are reasonably expected to generate $75,000 or more of annualized revenues;

(d) except for non-exclusive rights to distribute software products of the Company and its Subsidiaries and non-exclusive licenses to use trademarks of the Company or a Subsidiary granted by the Company or a Subsidiary to a distributor of products of the Company and its Subsidiaries, all Contracts pursuant to which the Company or its Subsidiaries have (A) granted any Person any right or interest in any Intellectual Property owned or licensed by the Company or its Subsidiaries, (B) agreed to any restriction on the right of the Company or its Subsidiaries to use or enforce any such Intellectual Property or (C) agreed to encumber, transfer or sell rights in or with respect to any such Intellectual Property;

(e) (other than end-user licenses to generally commercially available software that have an individual acquisition cost of $50,000 or less, all Contracts pursuant to which the Company or any of its Subsidiaries acquired or are authorized to exercise rights in any Intellectual Property owned by a third party;

(f) all Contracts providing for the development of any Intellectual Property, independently or jointly, by or for the Company or any of its Subsidiaries, including, but not limited to, any proof-of-concept, collaboration, development or co-development agreement but excluding all Contracts entered into by the Company and its Subsidiaries in the ordinary course of business with employees or consultants pursuant to which the Company or its Subsidiaries secured unencumbered and unrestricted exclusive ownership of all Intellectual Property developed under the Contract and the employee or consultant retained no rights or licenses with respect thereto;

(g) all Contracts to license or authorize any third party to manufacture any products of the Company or any of its Subsidiaries and all Contracts pursuant to which the Company purchases components included in the products of the Company or any of its Subsidiaries;

 

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(h) all Contracts between the Company and any of its Subsidiaries, on the one hand, and any Company Shareholder or an Affiliate of a Company Shareholder, on the other hand;

(i) all Contracts applicable to the Company or any of its Subsidiaries or any of their respective properties or assets that contain covenants that, following the consummation of the Merger, would reasonably be expected to restrict the ability of the Surviving Corporation to compete or operate in any business or with any Person or in any field, industry or geographic area, or to sell, supply or distribute any service or product or to otherwise operate or expand its current businesses, or that restricts the rights of the Company and its Subsidiaries (or, following the consummation of the transactions contemplated by this Agreement, would limit the ability of Parent or any of its Subsidiaries, including the Surviving Corporation) to sell to or purchase from any Person or to hire any Person, or that grants the other party or any third Person “most favored nation” status or any type of special discount rights, exclusive sales, distribution, marketing or other exclusive rights, rights of refusal, rights of first negotiation or similar rights;

(j) all Contracts which are “material contracts” (as such term is defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC) to be performed after the date of this Agreement and have not been filed or incorporated by reference in the Company SEC Reports;

(k) all Contracts which require a consent to or otherwise contain a provision relating to a “change of control”; and

(l) all Contracts applicable to the Company or any of its Subsidiaries that relate to the formation, creation, operation, management or control of a joint venture, partnership, limited liability or other similar agreement or arrangement (the Contracts described in clauses (a) through (l) being collectively referred to herein as the “ Material Contracts ”).

Each of the Material Contracts is in full force and effect and enforceable against the Company and its Subsidiaries, as applicable, and, to the Knowledge of the Company, against the other party or parties thereto, in each case in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditors generally or by general equity principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). None of the Company or any of its Subsidiaries has received any written notice of cancellation or termination of any of the Material Contracts. With respect to any Material Contract which by its terms will terminate as of a certain date unless renewed or unless an option to extend such Material Contract is exercised, neither the Company nor any of its Subsidiaries has received any written notice that any such Material Contract will not be so renewed or that any such extension option will not be exercised. There exists no event of default or occurrence, condition or act on the part of the Company or any of its Subsidiaries or, to the Knowledge of the Company, on the part of the other parties to the Material Contracts, that constitutes or would constitute (with notice, lapse of time or both) a material breach of or material default under any of the Material Contracts. Since November 30, 2006, no event has occurred that would be required to be reported as a “Certain Relationship” or “Transaction with a Related Person” pursuant to Statement of Financial Accounting Standards No. 57 or Item 404 of Regulation S-K promulgated by the SEC.

Section 3.10 Absence of Certain Changes or Events .

(a) Since the Balance Sheet Date, the businesses of the Company and its Subsidiaries have been conducted in all material respects in the ordinary course of business consistent with past practice.

(b) Without limiting the generality of the foregoing Section 3.10(a) , since the Balance Sheet Date, there has not been:

(i) any: (A) incurrence of, or guarantee with respect to, or provision of credit support for, any indebtedness for borrowed money by the Company or any of its Subsidiaries, other than pursuant to the Company’s or any of its Subsidiaries’ existing credit facilities in the ordinary course of business consistent

 

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with past practice; (B) event of default or default under the Company’s or any of its Subsidiaries’ existing credit facilities or outstanding loans; or (C) creation or assumption by the Company or any of its Subsidiaries of any material Lien on any material asset, other than Permitted Liens;

(ii) events, changes, effects, developments, conditions or occurrences that, individually or in the aggregate, constitute a Company Material Adverse Effect;

(iii) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company or any of its Subsidiaries (except for dividends or other distributions by any direct or indirect wholly owned Subsidiary to the Company or to any wholly owned Subsidiary);

(iv) any redemption, repurchase or other acquisition of any shares of capital stock of the Company or of any of its Subsidiaries;

(v) any material change in any method of financial accounting or financial accounting principle or practice used by the Company or any of its Subsidiaries, other than such changes required by Law or a change in GAAP;

(vi) any (A) deferred compensation, severance or similar agreement entered into or amended by the Company or any of its Subsidiaries and any employee; (B) increase in or acceleration in the vesting or payment of the compensation or benefits payable or to become payable to any director, officer, employee, independent contractor or consultant of the Company or any of its Subsidiaries; (C) any increase in the coverage or benefits available under any vacation pay, company awards, salary continuation or disability, sick leave, deferred compensation, bonus or other incentive compensation, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any of the directors or officers of the Company or any of its Subsidiaries or generally applicable to all or any category of the Company’s or any of its Subsidiaries’ employees; (D) grant of equity or equity-based awards that may be settled in Common Shares or any other equity securities of the Company or any of its Subsidiaries or the value of which is linked directly or indirectly, in whole or in part, to the price or value of any Common Shares or other equity securities of the Company or any of its Subsidiaries; (E) change in the terms of any outstanding Company Option; or (F) establishment or adoption of any new arrangement that would be an Employee Benefit Plan or would terminate or materially amend any existing Employee Benefit Plan (other than changes necessary to comply with applicable Law or the Company’s obligations under this Agreement);

(vii) any loan, advance or capital contribution made by the Company or any of its Subsidiaries to, or investment in, any Person other than loans, advances or capital contributions made to a Subsidiary; or

(viii) any agreement to take or permit any actions specified in this Section 3.10(b) , except for this Agreement.

Section 3.11 Litigation . There is no Claim pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or their respective assets or properties before any arbitrator, arbitration provider or Governmental Authority. None of the Company, any of its Subsidiaries, any officer or director of the Company or any of its Subsidiaries, or, to the Knowledge of the Company, any other employee of the Company or any of its Subsidiaries has been permanently or temporarily enjoined by any Law from engaging in or continuing any conduct or practice in connection with the business or assets of the Company or any of its Subsidiaries.

Section 3.12 Intellectual Property .

(a) The Company or its Subsidiaries own exclusively, free and clear of any Liens, all Intellectual Property that is used in and necessary to the conduct of the businesses of the Company and its Subsidiaries, other than Intellectual Property owned by a third party that is licensed to the Company or a Subsidiary pursuant to a valid and existing written license agreement to which the Company or one of its Subsidiaries is a party and used by the Company or such Subsidiary within the scope of such license, and all of such rights shall survive unchanged by the consummation of the transactions contemplated by this Agreement.

 

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(b) Section 3.12(b) of the Disclosure Letter sets forth a true, correct and complete list as of the Agreement Date of all Company Registered Intellectual Property, including the owner(s) of each such item of Company Registered Intellectual Property and the jurisdictions in which each such item of Intellectual Property has been issued or registered or in which any application for such issuance and registration has been filed, or in which any other filing or recordation has been made. Each item of Company Registered Intellectual Property is subsisting or, to the Knowledge of the Company, valid (or in the case of applications, applied for), all registration, maintenance and renewal fees currently due in connection with such Company Registered Intellectual Property have been paid and all documents, recordations and certificates in connection with such Company Registered Intellectual Property currently required to be filed have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of prosecuting, maintaining and perfecting such Company Registered Intellectual Property and recording the Company’s or its Subsidiaries’ ownership interests therein. None of the Company Registered Intellectual Property is currently involved in any interference, inventorship dispute, reissue, reexamination, opposition proceeding, or cancellation proceeding, and neither the Company nor its Subsidiaries has received any written notice from any Person regarding any such proceeding, and to the Knowledge of the Company, there is no threatened proceeding of this nature and there is no substantial basis for a proceeding of this nature. Neither the Company nor any of its Subsidiaries has entered into any Contract granting any person the right to control the prosecution of any of the Company Registered Intellectual Property.

(c) To the Knowledge of the Company, neither the Company nor any of its Subsidiaries has any liability for infringement or misappropriation of the Intellectual Property of any third party or for unfair competition or unfair trade practices under the laws of any jurisdiction. To the Knowledge of the Company, the operation of the business of the Company and its Subsidiaries, including (i) the design, development, manufacturing, reproduction, marketing, licensing, sale, offer for sale, importation, distribution, provision and/or use of any products or services of the Company and its Subsidiaries and (ii) the Company’s or its Subsidiaries’ use of any product, device or process used in the business of the Company or its Subsidiaries, has not, does not and will not infringe or misappropriate the Intellectual Property of any third party and does not constitute unfair competition or unfair trade practices under the laws of any jurisdiction.

(d) To the Knowledge of the Company, no Person is challenging, infringing on, misappropriating or otherwise violating any right of the Company or any of its Subsidiaries with respect to any Intellectual Property owned by and/or licensed to the Company or its Subsidiaries. Neither the Company nor any of its Subsidiaries has brought any action, suit or proceeding for infringement or misappropriation of any Intellectual Property owned or licensed by the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has entered into any Contract granting any Person the right to bring infringement, or misappropriation actions with respect to, or otherwise to enforce rights with respect to, any Intellectual Property owned by and/or exclusively licensed to the Company or its Subsidiaries.

(e) Neither the Company nor any of its Subsidiaries has been sued in any Claim or received any written notice of any pending or threatened Claim which involves a claim of infringement or misappropriation of any Intellectual Property of any third party.

(f) Each of the Company and its Subsidiaries has taken reasonable steps in accordance with standard industry practices to protect its rights in its Intellectual Property and maintain the confidentiality of all information of the Company or its Subsidiaries that derives economic value (actual or potential) from not being generally known to other persons who can obtain economic value from its disclosure or use, including safeguarding any such information that is accessible through computer systems or networks.

(g) The Company and its Subsidiaries have secured from all Persons who independently or jointly contributed to the conception, reduction to practice, creation or development of any Intellectual Property for the Company or its Subsidiaries and/or any Company Registered Intellectual Property unencumbered and unrestricted exclusive ownership of, all such third party’s Intellectual Property in such contribution that the Company or its Subsidiaries do not already own by operation of law and such third party has not retained any

 

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rights or licenses with respect thereto. Without limiting the foregoing, each current or former consultant or employee of the Company and its Subsidiaries has entered into the Company’s or the applicable Subsidiary’s current form of Proprietary Information and Invention Agreement or a similar customary agreement. The Company and its Subsidiaries have exercised all rights pursuant to the German Act on Employee’s Inventions (Arbeitnehmererfindungsgesetz) and similar statutes and complied with all obligations under these statutes.

(h) The execution, delivery and performance by the Company of this Agreement, and the consummation of the transactions contemplated hereby, will not result in the loss or modification of, or give rise to any right of any third party to terminate or modify any of the Company’s or any Subsidiaries’ rights or obligations under any agreement governing any Intellectual Property which is owned by or is licensed to the Company or any of its Subsidiaries.

(i) All products sold, licensed, leased or delivered by the Company or its Subsidiaries to customers and all services provided by or through the Company or its Subsidiaries to customers on or prior to the Closing Date conform to applicable contractual commitments, express and implied warranties (to the extent not subject to legally effective express exclusions thereof), and conform in all material respects to packaging, advertising and marketing materials and to applicable product or service specifications or documentation. The Company and its Subsidiaries have no liability for replacement or repair thereof or other damages in connection therewith in excess of any reserves therefor reflected on the Balance Sheet.

(j) No (i) government funding; (ii) facilities of a university, college, other educational institution or research center; or (iii) funding from any Person (other than funds received in consideration for the Company Securities) was used in the development of the Intellectual Property owned or purported to be owned by the Company or its Subsidiaries.

(k) Neither the Company nor its Subsidiaries nor any other Person then acting on its or their behalf has disclosed, delivered or licensed to any Person, agreed to disclose, deliver or license to any Person, or permitted the disclosure or delivery to any escrow agent or other Person of, any source code included in products of the Company or its Subsidiaries. No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time, or both) will, or would reasonably be expected to, result in the disclosure, delivery or license by the Company or its Subsidiaries or any Person then acting on their behalf to any Person of any such source code.

(l) None of the Company or any of its Subsidiaries has (i) incorporated open source software or materials into, or combined open source software or materials with, Intellectual Property owned or licensed by the Company or its Subsidiaries or products of the Company or its Subsidiaries; (ii) distributed open source software or materials in conjunction with any such Intellectual Property or products; or (iii) used open source software or materials, in such a way that, with respect to (i), (ii), or (iii), imposes any copyleft obligations on any Intellectual Property owned by the Company or its Subsidiaries. As used above, “copyleft obligations” are obligations or considerations that require that other software incorporated into, derived from or distributed with such open source software or materials be (A) disclosed or distributed in source code form, (B) be licensed for the purpose of making derivative works, or (C) be redistributable at no charge.

(m) The Company and its Subsidiaries have complied with all applicable Laws and their respective internal privacy policies relating to the use, collection, storage, disclosure and transfer of any personally identifiable information collected by the Company or its Subsidiaries or by third parties having authorized access to the records of the Company or its Subsidiaries. The execution, delivery and performance of this Agreement, will comply with all applicable Laws relating to privacy and with the Company’s and its Subsidiaries’ privacy policies. Neither the Company nor any of its Subsidiaries have received a complaint regarding the Company’s or its Subsidiaries’ collection, use or disclosure of personally identifiable information.

 

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Section 3.13 Taxes .

(a) Within the times and in the manner prescribed by Law, each of the Company and its Subsidiaries has properly prepared and timely filed all income and material Tax Returns required by Law, has timely paid all Taxes due and payable (whether or not shown on any Tax Return) and has timely withheld and deposited all Taxes required to be withheld and deposited. All such Tax Returns filed by the Company and its Subsidiaries are true, correct and complete and include all statements and other information required to avoid penalties or additions to Tax. The Company and its Subsidiaries have complied with all Law relating to Taxes. There is no dispute or claim concerning any material Tax liability of the Company or any of its Subsidiaries claimed or raised by any authority in writing. The Company has made available to Parent and Merger Sub all federal and material state and local Tax Returns with respect to periods commencing on or after January 1 , 2004. Neither the Company nor any of its Subsidiaries has (A) been a party to a “reportable transaction” (as such term is defined in Treasury Regulations issued under the Code), (B) been a party to a “listed transaction” (as such term is defined in Treasury Regulations issued under the Code) or (C) filed with respect to any item a disclosure statement pursuant to Section 6662 of the Code or any comparable disclosure under state, local or foreign Tax statutes.

(b) Neither the Company nor any of its Subsidiaries: (A) is a party to or bound by any closing agreement, offer in compromise or any other agreement with any Tax authority or any Tax indemnity agreement, Tax sharing agreement or other agreement whereby amounts due thereunder are determined with reference to Taxes, taxable income, taxable losses, deductions, credits or other Tax-related items or items used to determine the amount of any such Taxes, taxable income, taxable losses, deductions, credits or other Tax-related items, in each case, of any Person that is currently in effect; (B) has requested in writing a ruling or other advice or guidance from any Governmental Authority with respect to Taxes; (C) has present or contingent liabilities for Taxes, other than Taxes that either have been (1) incurred in the ordinary course of business thereof and reflected as a liability on the Balance Sheet or (2) incurred in the ordinary course of business with respect to taxable periods or portions of taxable periods following the Balance Sheet Date in amounts consistent with prior years (adjusted for changes in ordinary course operating results and ordinary course changes in assets) and for which adequate reserves have been established and separately reflected in the financial records of the Company; (D) has distributed stock of another Person or had its stock distributed by another Person, in a transaction that was purported or intended to be governed, in whole or in part, by Code Section 355 or Code Section 361; or (E) has any liability for the Taxes of any Person (other than the Company or any of its Subsidiaries) under Code Section 1502 or the Treasury Regulations issued thereunder (or any similar provision of state, local, or non-U.S. law), as a transferee or successor, by contract, or otherwise.

(c) The Company (i) is not a United States real property holding corporation within the meaning of Code Section 897(c)(2) and (ii) has not been such a corporation at any time during the applicable period specified in Code Section 897(c)(1)(A)(ii).

(d) The amount of the net operating loss, capital loss and general business credit carryforwards of the Company, and the expiration dates relating thereto, are as set forth on Section 3.13 of the Disclosure Letter. No net operating loss, capital loss and general business c