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 August 25, 2004, by and among Low Carb Creations, Inc., a Washington corporation (the “ Company ”), Cascade Sled Dog Adventures, Inc., a Nevada corporation (“ Parent ”), Cascade LCC Merger Sub, Inc., a Washington corporation and a newly-formed, wholly owned subsidiary of Parent (“ Merger Sub ”), Sunset Brands, Inc., a Nevada corporation (“ Sunset ”), and the shareholders of the Company set forth on the signature page of this Agreement (the “ Shareholders ”; and collectively with the Company, Parent, Merger Sub, and Sunset, the “ Parties ”), with reference to the following facts:

 

RECITALS

 

A.             WHEREAS, Company is a privately held Washington corporation engaged in the business of developing and marketing low-carbohydrate food and beverage products, and Parent is a Nevada corporation not currently engaged in any active business;

 

B.             WHEREAS, the Company has previously entered into a letter of intent (the “ Letter of Intent ”), dated as of March 2, 2004, with Sunset, pursuant to which the Company has agreed to be acquired by a publicly traded corporation to be designated by Sunset;

 

C.             WHEREAS, Sunset, Parent and Cascade Sled Dog Merger Sub, Inc., a wholly-owned subsidiary of Parent (“ Parent/Sunset Merger Sub ”), have entered into an Agreement and Plan of Merger, dated as of August 25, 2004 (the “ Sunset Merger Agreement ”), pursuant to which Parent has agreed to acquire Sunset in a merger transaction (the “ Sunset Merger ”) pursuant to which Sunset would become a wholly-owned subsidiary of Parent and the securityholders of Sunset would become securityholders of Parent.

 

D.             WHEREAS, pursuant to the terms of a Confidential Term Sheet, dated on or about August 6, 2004 (together with the supplement thereto dated on or about August 23, 2004, the “ Term Sheet ”), Sunset is offering up to $6,300,000 in Units (the “ Units ”), each Unit having a purchase price of $900 and consisting of 1,000 shares of Series A Redeemable Convertible Preferred Stock (“ Sunset Preferred Stock ”) and warrants (collectively, the “ Term Sheet Warrants ”) to purchase an aggregate of 1,000 shares of Common Stock, $0.0001 par value, of the Company (“ Sunset Common Stock ”) at the following exercise prices: (i) 500 shares at an exercise price of $1.08 per share, (ii) 250 shares at an exercise price of $1.20 per share, and (iii) 250 shares at an exercise price of $1.32 per share (subject to adjustment in certain circumstances)

 

E.              WHEREAS, the respective Boards of Directors of the Company, Parent and Merger Sub have each determined that it is advisable and in the best interests of their respective stockholders that the Parent acquire the Company pursuant to the terms and conditions of this Agreement, and, in furtherance of such acquisition, such Boards of Directors have approved the merger of the Company with and into Merger Sub (the “ Merger ”) in accordance with the terms of this Agreement and the applicable provisions of the Nevada Revised Statutes

 

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(the “ NRS ”) and the Washington Business Corporation Act (collectively, the “ Washington Corporation Law ” or the “ Corporation Law ”);

 

F.              WHEREAS, the Shareholders wish to evidence their acceptance of the terms and conditions of this Agreement and their approval of the Merger and the transactions contemplated by this Agreement as shareholders of the Company under the Washington Corporation Law;

 

G.             WHEREAS, for United States federal income tax purposes, it is intended that the Merger shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”), and that this Agreement shall be, and is hereby, adopted as a “plan of reorganization” for purposes of Section 368(a) of the Code;

 

H.             WHEREAS, pursuant to the terms of the Merger and subject to satisfaction of certain conditions set forth in this Agreement, the outstanding shares of Common Stock, no par value, of the Company (“ Company Common Stock ”) shall be converted into the right to receive (i) unsecured promissory notes in the aggregate amount of $2,000,000, (ii) an aggregate of up $1 million in cash upon satisfaction of certain post-closing financial performance targets by the Company, and (iii) an aggregate of up to 7,136,736 shares of common stock of Parent, $.001 par value per share (“ Parent Common Stock ”), subject to cancellation of certain shares owned by Linda Langdon and Cynthia Langdon immediately following the Effective Time in accordance with Section 8.11 hereof;

 

I.               WHEREAS, the Parties have determined it to be in their best interest for the Parent to issue its Parent Common Stock and securities convertible into Parent Common Stock under the exemption made available pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “ Securities Act ”); and

 

J.              WHEREAS, the Parties desire to make certain representations, warranties, covenants, and agreements in connection with, and establish certain conditions precedent to, the Merger.

 

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

 

ARTICLE I

 

THE MERGER

 

1.1            The Merger .  Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 1.3 hereof), the Company shall merge with and into Merger Sub in accordance with the Washington Corporation Law and the NRS, the separate corporate existence of the Company shall cease, and Merger Sub shall continue as the surviving corporation in the Merger.  The Merger Sub, in its capacity as the corporation surviving the Merger, is sometimes referred to herein as the “ Surviving Corporation .”  The Surviving Corporation shall possess all the rights, privileges, powers, immunities and franchises, of the Company (sometimes referred to hereinafter as the “ Disappearing Corporation ”); all property,

 

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real, personal and mixed, and all debts due on whatever account, including subscriptions for shares, stock options and warrants, and all choses in action, and all and every interest, of or belonging to or due the Disappearing Corporation shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed; and the title to any real estate, or any interest therein, vested in the Disappearing Corporation shall not revert or be in any way impaired by reason of the Merger.  The Surviving Corporation shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under the Washington Corporation Law.

 

1.2            Certificate of Merger .  In order to effectuate the Merger, a certificate of merger (the “ Certificate of Merger ”) shall be prepared, executed and delivered to the Secretary of State of the State of Washington (the “ Washington Secretary ”) for filing on the Closing Date, as defined in Section 3.1, in accordance with the Washington Corporation Law.

 

1.3            Effective Time .  The Merger shall become effective upon the filing of the Certificate of Merger with the Washington Secretary in accordance with the provisions of the Washington Corporation Law.  The date and time of the filing with the Washington Secretary is referred to herein as the “ Effective Time .”

 

1.4            Effect of Merger; Tax-Free Merger .  The Merger shall have the effects provided for in this Agreement, the Certificate of Merger and the applicable provisions of the Washington Corporation Law and the NRS. The Parties intend that the Merger will be treated as a tax-free reorganization under Section 368 of the Code.

 

1.5            Certificate of Incorporation and Bylaws of Surviving Corporation .

 

(a)            The Certificate of Incorporation of Merger Sub in effect at the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation.

 

(b)            The Bylaws of Merger Sub in effect at the Effective Time shall be the Bylaws of the Surviving Corporation.

 

1.6            Management of Surviving Corporation and Parent .

 

(a)            At the Effective Time, each of the directors of the Company shall resign and the following persons shall be appointed as the directors of the Surviving Corporation each of whom shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner provided in the Certificate of Incorporation or Bylaws of the Surviving Corporation or as otherwise provided by applicable law:

 

Todd Sanders

Linda Langdon

Robert Moore

 

(b)            At the Effective Time, the following persons shall be appointed and shall become the officers of the Surviving Corporation and shall hold office from the Effective Time until their respective successors are duly elected or appointed and qualified in the manner

 

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provided in the Certificate of Incorporation or Bylaws of the Surviving Corporation or as otherwise provided by applicable law:

 

Todd Sanders – Chairman and Chief Executive Officer

Stephen Radusch – Chief Financial Officer

Dan Langdon — President

Linda Langdon – Executive Vice President – Product Development

Saif Mansour – Vice President – Corporate Development

 

(c)            In accordance with the terms of the Sunset Merger Agreement, immediately following completion of the Sunset Merger, it is expected that the officers and directors of Parent will resign, to be replaced by the following officers and directors:

 

Directors:                Todd Sanders

Linda Langdon

Robert Moore

Robert Ives

 

Officers:                  Todd Sanders – Chairman, President and Chief Executive Officer

Stephen Radusch – Chief Financial Officer

Linda Langdon – Executive Vice President – Product Development

 

Such persons shall promptly make all filings which shall be required of such persons under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).  Parent shall make such filings as may be required or indicated under the Exchange Act; provided, however, the appointment of the additional directors shall accomplished through the filling of vacancies in the Board of Directors of Parent in compliance with the NRS and the Bylaws of Parent and without the vote (by written consent or otherwise) of the shareholders of Parent.

 

1.7            Taking of Necessary Action, Further Assurances .  Each of the Parties agrees to use its or their commercially reasonable efforts to take all such action as may be necessary or appropriate to effectuate the Merger in accordance with this Agreement as promptly as possible and at the time contemplated by this Agreement.  If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company, Sunset, Parent and Merger Sub immediately prior to the Effective Time are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action.

 

1.8            Stockholder Representative .  The holders of the outstanding shares of the capital stock of the Company, by virtue of the execution and delivery of this Agreement or, with respect to Company Stockholders that are not signatories to this Agreement, if any, by virtue of approval of this Agreement and the Merger, will be deemed to have irrevocably constituted and appointed, effective as of the date of this Agreement, Dan Langdon (together with his permitted respective successors, collectively, the “ Stockholder Representative ”), as their true and lawful agent and attorney-in-fact, and the Stockholder Representative, by his execution of this Agreement shall be

 

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deemed to have accepted such appointment, to enter into any agreement in connection with the transactions contemplated by this Agreement or the Escrow Agreement, to exercise all or any of the powers, authority and discretion conferred on him under any such agreement, to act as proxy for each Company Stockholder in connection with any shareholder approvals required in connection with the transactions contemplated by this Agreement, to waive or modify any terms and conditions of any such agreement (other than payment of the portion of the Merger Consideration payable at Closing), to give and receive notices on their behalf, and to be their exclusive representative with respect to any matter, suit, claim, action or proceeding arising with respect to any transaction contemplated by any such agreement, including, without limitation, the assertion, prosecution, defense, settlement or compromise of and claim, action or proceeding for which any Company Stockholder, Parent, Sunset or the Merger Sub may be entitled to indemnification and the Stockholder Representative agrees to act as, and to undertake the duties and responsibilities of, such agent and attorney-in-fact.  This power of attorney is coupled with an interest and is irrevocable.  The Stockholder Representative shall not be liable for any action taken or not taken by him in his capacity as Stockholder Representative either (i) with the consent of stockholders who, as of the date of this Agreement, own a majority in number of the outstanding shares of Company Stock (considered on an as converted basis), or (ii) in the absence of his own willful misconduct.  If the Stockholder Representative shall be unable or unwilling to serve in such capacity, his successor shall be named by those persons holding a majority of the shares of Company Common Stock outstanding immediately prior to the Effective Time who shall serve and exercise the powers of Stockholder Representative hereunder.  Solely with respect to any actions taken by the Stockholder Representative in his capacity as such, the Stockholder Representative shall have no liability to Parent, Sunset or any of their respective affiliates except for claims based upon fraud by the Stockholder Representative.

 

ARTICLE II

CONVERSION AND EXCHANGE OF SECURITIES

 

2.1            Conversion of Securities .  At the Effective Time, by virtue of the Merger and without any action on the part of any of the Parties or the holder of Company Common Stock, the following shall occur:

 

(a)            Conversion of Company Common Stock .  Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares, as defined below, which shall be treated as set forth in Section 2.3 below) shall be converted automatically into the right to receive the following consideration (the aggregate amount of consideration payable to holders of Company Common Stock (the “ Company Stockholders ”) upon consummation of the Merger is referred to in this Agreement as the “ Merger Consideration ”):

 

(i)             an unsecured promissory note in substantially the same form as Exhibit D attached hereto (the “ Closing Note ”) equal to (A) $2,000,000 divided by (B) the number of Outstanding Company Shares (as defined below);

 

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(ii)            the number of validly issued, fully paid and nonassessable shares of Parent Common Stock equal to the Exchange Ratio (as defined below); provided, however, that, subject to cancellation of an aggregate of 349,220 shares of Parent Common Stock in accordance with Section 8.11 of this Agreement, an aggregate of 2,378,912 shares (the “ Escrow Shares ”) of the 7,136,736 shares of Parent Common Stock issuable hereunder will be delivered into escrow pursuant to Section 2.5 hereof and held as specified in such Section 2.5 and the Escrow Agreement (as defined below) and will be subject to release to the Company Stockholders upon satisfaction of the Sales Condition (as defined below); and

 

(iii)           upon satisfaction of the Sales Condition, an additional cash payment (the “ Deferred Cash Consideration ”) equal to (A) $1,000,000 divided by (B) the number of Outstanding Company Shares.  If the Sales Condition has been satisfied (and subject to holdback for indemnification claims made against the Company Stockholders in accordance with Article XI of this Agreement) the Deferred Cash Consideration shall be distributed to the holders of Company Common Stock within sixty (60) days following the end of the calendar quarter in which the Sales Condition was first satisfied.

 

(b)            Assumption of Bridge Securities; No Other Company Options .  The Company and the Shareholders represent and warrant to Parent and Sunset that, as of the date of this Agreement and immediately prior to the Effective Time, the Company will not have any outstanding options, warrants, or instruments or securities convertible by their terms into Company Common Stock (collectively, the “ Company Options ”) other than (i) 322,222 shares of Company Common Stock issuable upon conversion of $290,000 principal amount of secured bridge loans received by the Company from third party financing sources, and (ii) warrants to purchase 522,000 shares at $.78 per share issued to such lenders (the “ Bridge Securities ”).  Each of the Bridge Securities shall be assumed by Parent and shall be deemed to constitute convertible notes and warrants, as the case may be, to acquire, on the terms and conditions as were applicable under the original Bridge Securities, the same number of shares of Parent Common Stock as the holder of such option, warrant or convertible note would have been entitled to receive pursuant to the Merger had such holder exercised or converted such Bridge Securities in full immediately prior to the Effective Time.  In the event that any Company Options other than the Bridge Securities are outstanding immediately prior to the Effective Time, each such Company Option, if not exercised prior to the Effective Time, shall be cancelled and of no further force and effect upon consummation of the Merger.

 

(c)            No Fractional Shares .  No fraction of a share of Parent Common Stock will be issued to holders of Company Common Stock in connection with the Merger, but in lieu thereof, each holder of Company Common Stock who would otherwise be entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder) shall receive from Parent an amount of cash without interest (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the Average Closing Price.

 

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(d)            Capital Stock of Merger Sub .  At the Effective Time, each share of common stock, par value $0.001 per share, of Merger Sub (“ Merger Sub Common Stock ”) issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $0.001 per share, of the Surviving Corporation, and the Surviving Corporation shall be a wholly-owned subsidiary of Parent.  Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation.

 

(e)            Definitions .  For purposes of this Agreement, the following terms shall be defined as set forth below:

 

(i)             “ Sales Condition ” shall be deemed satisfied at such time as cumulative net sales of the Surviving Corporation (including net sales of the Company for periods from January 1, 2004 until the Closing) exceed $17,500,000.  For purposes of determining whether the Sales Condition has been satisfied, net cumulative sales will be determined by Parent on a quarterly basis within fifty-five (55) days following the end of each calendar quarter and shall be based on and consistent with Parent’s regularly prepared quarterly financial statements (which shall be prepared in accordance with GAAP, consistently applied).  Notice of satisfaction of the Sales Condition (the “ Sales Condition Notice ”) shall be given by Parent in writing to the Stockholder Representative and the Escrow Holder within fifty-five (55) days following the end of the calendar quarter in which the Sales Condition shall have been satisfied.

 

(ii)            “ Exchange Ratio ” shall equal: (i) 7,136,736 shares divided by (ii) the total number of shares of Company Common Stock issued and outstanding immediately prior to the Effective Time (“ Outstanding Company Shares ”).

 

(iii)           “ Average Closing Price ” shall mean the average closing bid price of Parent Common Stock on the OTC Bulletin Board over the ten (10) trading days ending three (3) calendar days prior to the Effective Time.

 

(f)             Adjustment to Exchange Ratio .  The Exchange Ratio shall be adjusted in the event of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Common Stock), reorganization, recapitalization, combination, exchange of shares, adjustment or other like change with respect to Parent Common Stock or Company Common Stock occurring after the date hereof and prior to the Effective Time, so as to provide holders of Company Common Stock and Parent the same economic effect as contemplated by this Agreement prior to such stock split, reverse stock split, stock dividend, reorganization, recapitalization, combination, exchange of shares adjustment or other like change; provided, however, that the Sunset Merger shall not result in any such adjustment.

 

2.2            Cancellation of Company Common Stock; Payment of Merger Consideration .  All shares of Company Common Stock, when converted in accordance with the provisions of Section 2.1(a) above, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a stock certificate representing any such shares (each a “ Certificate ” and, collectively, “ Certificates ”) shall cease to have any rights with respect

 

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thereto, except the right to receive the Merger Consideration pursuant to Section 2.1(a), and any cash in lieu of fractional shares payable pursuant to Section 2.1(c) hereof, all to be issued or paid in consideration therefor upon the surrender of such Certificates in accordance with Section 2.4, without interest.  The Merger Consideration payable following the Effective Time to each Company Stockholder in respect of the shares of Company Common Stock owned by such Company Stockholder shall be as set forth on Schedule 2.2 , which schedule lists the name and mailing address of each Company Stockholder, the number of shares of Company Common Stock held by such Company Stockholder, and confirming that such Company Stockholder is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act.  On the Closing Date, the Company shall deliver an updated version of Schedule 2.2 (the “ Updated Schedule 2.2 ”) that shall identify (i) the number of shares of Parent Common Stock issuable to such Company Stockholder (including a separate indication of the number of Escrow Shares initially deliverable to the Escrow Holder and subject to the provisions of the Escrow Agreement), (ii) the Closing Notes issuable to such Company Stockholder, and (iii) the Deferred Cash Consideration payable to such Company Stockholder upon satisfaction of the Sales Condition.

 

2.3            Dissenting Shares .  Notwithstanding any provision of this Agreement to the contrary, dissenting shares of the Company as defined in the Washington Corporation Law (“ Dissenting Shares ”) shall not be converted into the right to receive any of the Merger Consideration at or after the Effective Time unless and until the holder of such Dissenting Shares withdraws his or her demand for payment of the fair value of such shares in accordance with the provisions of the Corporation Law or becomes ineligible for such payment.  If a holder of Dissenting Shares shall withdraw his or her demand for payment of the fair value of such shares in accordance with the Corporation Law or shall become ineligible to receive such payment, then, as of the later of the Effective Time or the occurrence of such event, such holder’s Dissenting Shares shall be automatically converted into the corresponding amount of Merger Consideration in accordance with the terms of this Agreement.  Company shall give Parent prompt notice of any notices of intent to assert dissenters’ rights and to demand payment or withdrawals of notices of intent to assert dissenters’ rights and will not, except with the prior written consent of Parent, settle or compromise or offer to settle or compromise any such notices, voluntarily make any payment with respect to any notice of intent to demand payment for shares of Company Common Stock or approve any withdrawal of any such notice.  Each holder of Dissenting Shares shall have only such rights and remedies as are granted to such holder under the Corporation Law.  The foregoing section notwithstanding, in the event that ten percent (10%) or more of the outstanding shares of the Company are Dissenting Shares, Sunset or Parent (but solely with the prior written consent of Sunset) shall have the right to terminate this Agreement, which shall forthwith become void and of no further force and effect and the Parties shall be released from any and all obligations hereunder; provided, however, that nothing herein shall relieve any Party from liability for the breach of any of its representations, warranties, covenants or agreements set forth in this Agreement.

 

2.4            Exchange Procedures .

 

(a)            As soon as practicable after the Effective Time, Parent shall instruct its transfer agent (the “ Transfer Agent ”) to promptly issue stock certificates representing the number of shares of Parent Common Stock issuable pursuant to Section 2.1(a) or 2.1(b) in exchange for

 

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outstanding shares of Company Common Stock, which shares of Parent Common Stock (collectively, the “ Merger Shares ”) shall be deemed to have been issued at the Effective Time and which Merger Shares will bear appropriate legends evidencing, among other things, the fact that such shares have not been registered under the Securities Act.  Parent shall instruct the Transfer Agent to issue and deliver the Merger Shares to be delivered to the Company Stockholders and the Escrow Holder in the name of the holders of record of the certificates that immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the “ Certificates ”); provided, however, that Parent may instruct the Transfer Agent to not deliver certificates representing Merger Shares pending receipt by Parent or the Transfer Agent of the Certificates representing the right to receive such Merger Shares (or an affidavit or indemnity reasonably acceptable to Parent in accordance with Section 2.4(e) hereof).  As soon as practicable following the Effective Time and subject to delivery of the Certificates representing the right to receive such portion of the Merger Consideration (or an affidavit or indemnity in accordance with Section 2.4(e) ), Parent shall deliver to the Company Stockholders or the Stockholder Representative, for the benefit of the Company Stockholders, the Closing Notes and checks representing the payments, if any, due to the Company Stockholders in lieu of fractional shares in accordance with Section 2.1(c) , which checks shall be distributed to the Company Stockholders by the Stockholder Representative.  In the event of a transfer of ownership of shares of Company Common Stock which is not registered in the transfer records of the Company as of the Effective Time, a certificate representing the proper number of Merger Shares may be issued to a transferee if the Certificate evidencing such Company Common Stock is presented to Parent, accompanied by all documents required by Parent to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid.  Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, to represent only the right to receive, upon surrender, the Merger Consideration.

 

(b)            No Liability .  Neither Parent, Sunset, Merger Sub nor the Company, nor any of their respective directors, officers, employees or agents, shall be liable to any holder of Company Common Stock or Parent Common Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

(c)            Withholding Rights .  To the extent that any portion of the Merger Consideration is paid in cash, Parent shall be entitled to deduct and withhold from such Merger Consideration such amounts as Parent is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law.  To the extent that amounts are so withheld by Parent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Company Stockholder in respect of which such deduction and withholding was made by Parent

 

(d)            No Further Ownership Rights in Company Common Stock .  At the Effective Time, the stock transfer books of the Company shall be closed, and thereafter there shall be no further registration of transfers on the stock transfer books of the Company or the Surviving Corporation of the shares of Company Common Stock that were outstanding immediately prior to such time.  If, after such time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II

 

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(e)            Lost, Stolen or Destroyed Certificates .  In the event any Certificates shall have been lost, stolen or destroyed, Parent shall instruct the Transfer Agent to issue in exchange therefor, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock as may be required pursuant to Section 2.1(a) as well as the other Merger Consideration as provided in this Article II; provided , however that Parent may, in its sole discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver an agreement of indemnification in form satisfactory to Parent, or a bond in such sum as Parent may reasonably direct as indemnity against any claim that may be made against Parent with respect to the Certificates alleged to have been lost, stolen or destroyed

 

(f)             Restrictions on Transfer of Merger Shares .  The Merger Shares are being issued pursuant to an exemption from registration provided for in Section 4(2) of the Securities Act.  Each certificate representing any Merger Shares shall be subject to stop transfer instructions and shall bear all legends required under all applicable federal and state securities laws.

 

2.5            Escrow .  At or promptly following the Effective Time, Parent shall instruct the Transfer Agent to deliver to the Stockholder Representative certificates evidencing the Escrow Shares issued in the name of each Company Stockholder in the amounts set forth after such Company Stockholder’s name on the Updated Schedule 2.2.  Promptly following the Effective Time, the Stockholder Representative, upon request by Parent, shall deliver the certificates representing the Escrow Shares to a third-party escrow holder selected by Parent and mutually agreeable to the Stockholder Representative (for purposes of this Agreement, the Stockholder Representative, as holder of the Escrow Shares and the third-party escrow holder selected by parent shall be referred to as the “ Escrow Holder ”).  The parties agree that Parent may instruct the Transfer Agent to place stop transfer orders on the Escrow Shares for so long as they are subject to the escrow contemplated by this Section 2.5. The portion of the Escrow Shares deposited with the Escrow Holder by or on behalf of each Company Stockholder shall be determined on a pro rata basis in proportion to each Company Stockholder’s relative ownership interest in the total number of Merger Shares issued in connection with the Merger.  The terms by which the Escrow Holder shall hold and distribute the Escrow Shares shall be set forth in an escrow agreement (the “ Escrow Agreement ”) among Escrow Holder, the Stockholder Representative as representative of the Company Stockholders, and Parent.  The Escrow Agreement shall be in a customary form reasonably acceptable to the parties thereto and shall provide as follows:

 

(a)            Purpose of Escrow .  The Escrow Shares (and any Escrow Income) shall be held by the Escrow Holder in an escrow account (the “ Escrow Account ”) in order to secure the indemnification obligations of the Company Stockholders pursuant to ARTICLE VIII of this Agreement and in order to assure that the Sales Condition is satisfied.

 

(b)            Escrow Income .  Any interest or other earnings generated with respect to the Escrow Shares, including any dividends or other distributions (subject to any deduction of Tax at source or any bank or other charges properly charged to the Escrow Account) (the “ Escrow Income ”) shall accrue to and form part of the Escrow Account and be released on a pro

 

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rata basis simultaneously with, and to the same persons or entities as, the Escrow Shares.  Any bank or other charges arising on the Escrow Account shall be charged to the Escrow Account.

 

(c)            Duration of Escrow .  Subject to Sections 2.5(d) , (e) and (f) below the Escrow Shares (and any Escrow Income) in the Escrow Account shall be retained until receipt by the Escrow Holder of the Sales Condition Notice (the “ Release Date ”).

 

(d)            Release from Escrow .

 

(i)             Release for Indemnification Claims .  The Escrow Holder shall make distributions from the Escrow Account in satisfaction of the requirements of ARTICLE VIII of the Purchase Agreement as follows:

 

(1)            At any time, or from time to time, before the Release Date, Parent may deliver a Notice of Claim to the Stockholder Representative and the Escrow Holder providing the information required under Section 11.2 hereof and requesting a disbursement of the amount of the Claim from the Escrow Account.

 

(2)            The Stockholder Representative shall respond to the Notice of Claim as provided in Section 11.2 of this Agreement.  The Stockholder Representative, acting alone and without any requirement that he act jointly or in conjunction with the other Company Stockholders, will have authority and power to act on behalf of each of the Company Stockholders under the Escrow Agreement.  If Parent and the Stockholder Representative agree as to the liability of such Claim and the amount or any portion thereof, Parent and the Stockholder Representative shall provide to the Escrow Holder a jointly executed written notice instructing the Escrow Holder to release to Parent the number of Escrow Shares having a fair market value (which fair market value shall be calculated using the Average Closing Price of the Escrow Shares) equal to the amount of the liability for such Claim or the undisputed portion thereof (“ Joint Instructions ”).

 

(3)            If the Stockholder Representative and Parent do not deliver Joint Instructions to the Escrow Holder then the Escrow Holder shall not disburse the Escrow Shares requested pursuant to the Notice of Claim but rather hold such amount (the “ Disputed Amount ”) until the earlier of receipt by the Escrow Holder of (1) Joint Instructions instructing the Escrow Holder to release monies to Parent in satisfaction of the Claim asserted in the Notice of Claim and specifying the number of Escrow Shares to be released to Parent in satisfaction of the Claim, or (2) receipt by Escrow Holder of a final, non-appealable award of any court or arbitrator having jurisdiction over the matter specifying a release of Escrow Shares to Parent in satisfaction of the Claim specified in the Notice of Claim and the number of Escrow Shares to be released (a “ Final Award ”).  Upon the Escrow Holder’s receipt of the Joint Instructions or the Final Award, the Escrow Holder shall disburse the Escrow Shares, or a portion thereof, under the terms of the Joint Instructions or Final Award.

 

(e)            Distribution Upon Release Date .  On the Release Date, the Escrow Holder shall automatically, upon written request by the Stockholder Representative and with no written notice from Parent, distribute to the Stockholder Representative, for the benefit of the Company Stockholders, all of the Escrow Shares remaining in the Escrow Account, less any Disputed

 

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Amounts (valued at the Average Closing Price) and the amount of all other Claims not yet resolved pursuant to the provisions of this Section 2.5 .

 

(f)             Subsequent Distribution(s) .  If the Escrow Holder is required to retain any portion of the Escrow Shares after the Release Date, then the duration of the Escrow shall be extended and, from time to time upon the satisfaction of the terms and conditions of this Section 2.5 , the Escrow Holder shall distribute to Parent such portion of the Escrow Shares, if any, that is necessary to satisfy the Claims in accordance herewith, and distribute the amount that is in excess of the amount, if any, that is necessary to satisfy such Claims, to an account or accounts designated by the Stockholder Representative.

 

(g)            Indemnification of Escrow Holder .  Parent, the Company and each of the Company Stockholders hereby agrees to indemnify, defend and hold the Escrow Holder harmless from and against any claims, causes of actions, suits or similar proceedings (including reasonable attorneys fees and costs of investigation) arising out of or relating to Escrow Holder’s actions as Escrow Holder; provided, however, that no indemnification shall be required with respect to any actions determined by a court or arbitrator of competent jurisdiction to be grossly negligent or taken in bad faith.  Any Escrow Agreement shall contain customary indemnification provisions whereby Parent and the Stockholder Representative, on behalf of all Company Stockholders, indemnify, defend, and hold Escrow Holder harmless from and against claims arising out of or relating to the Escrow Account or the Escrow Agreement.

 

ARTICLE III

CLOSING

 

3.1            Closing .  Subject to the provisions of this Agreement, the closing of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Jeffer, Mangels, Butler & Marmaro LLP, 1900 Avenue of the Stars, 7th Floor, Los Angeles, California, on the date (the “ Closing Date ”) that is (i) immediately following the closing of the Sunset Merger, or (ii) at such other place and on such other date as is mutually agreeable to Parent and the Company.  The Closing will be effective as of the Effective Time.

 

3.2            Closing Deliveries .  At the Closing, each of the Parties shall make the Closing deliveries required of it pursuant to Article VIII of this Agreement.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF COMPANY

 

Except as set forth in the written disclosure schedule attached hereto as Exhibit A dated as of the date hereof prepared by the Company, signed by the President and Chief Financial Officer of the Company and delivered to Parent simultaneously with the execution hereof (the “ Company Disclosure Schedule ”), the Company represents and warrants to Parent and Merger Sub that all of the statements contained in this Article IV are true and correct as of the date of this Agreement (or, if made as of a specified date, as of such date).  Each exception set forth in the Disclosure Schedule and each other response to this Agreement set forth in the

 

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Disclosure Schedule is identified by reference to, or has been grouped under a heading referring to, a specific individual section of this Agreement and relates only to such section except to the extent that one portion of the Disclosure Schedule specifically refers to another portion thereof, identifying such other portion by section reference or similar specific cross-reference.

 

4.1            Organization and Qualification .

 

(a)            Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Washington and has the requisite corporate power and authority to carry on its business as it is now being conducted.  There is no pending or threatened proceeding for the dissolution or liquidation of the Company.

 

(b)            The Company (i) does not, directly or indirectly, own any interest in any corporation, partnership, joint venture, limited liability company, or other Person and (ii) is not subject to any obligation or requirement to provide funds to or to make any investment (in the form of a loan, capital contribution or otherwise) in or to any Person.  For purposes of this Agreement, “ Person ” shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, government, entity or government or any group comprised of one or more of the foregoing.

 

(c)            Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the properties owned or leased by it makes such qualification or licensing necessary, except for any such jurisdiction where the failure to so qualify or be licensed, individually and in the aggregate for all such jurisdictions, would not reasonably be expected to have a Material Adverse Effect. For purposes of this Agreement, “ Material Adverse Effect ” means an action, event or occurrence if it has, or could reasonably be expected to have, a material adverse effect on the capitalization, financial condition or results of operations of the person or entity in question.  Any item or event susceptible of measurement in monetary terms which, when considered together with similar items or events, does not exceed the amount of $20,000, shall not be considered a Material Adverse Effect.

 

(d)            The Company has provided or will, promptly following the date of this Agreement, provide to Parent complete and accurate copies of the Certificate of Incorporation and Bylaws of the Company and Merger Sub, as currently in effect, and minutes and other records of the meetings and other proceedings of the Board of Directors and shareholders of the Company.  The Company is not violation of any provisions of its Certificate of Incorporation or Bylaws.

 

4.2            Capitalization .

 

(a)            The authorized capital stock of Company consists of 5,000,000 shares of Company Common Stock of which 300,000 is issued and outstanding.  All issued and outstanding shares of Company Common Stock are validly issued and outstanding, fully paid and nonassessable and free of preemptive rights.  Other than the 300,000 shares of Company Common Stock and the Bridge Securities, (i) there are no shares of capital stock or other equity securities of Company outstanding and, (ii) there are no outstanding options, warrants,

 

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subscription rights (including any preemptive rights), calls, or commitments, or convertible notes or instruments of any character whatsoever to which the Company is a party or is bound, requiring or which could require the issuance, sale or transfer by the Company of any shares of capital stock of the Company or any securities convertible into or exchangeable or exercisable for, or rights to purchase or otherwise acquire, any shares of capital stock of the Company.  There are no stock appreciation, phantom stock or similar rights relating to the Company.

 

(b)            All of the shares of Company Common Stock issued and outstanding immediately prior to the Effective Time have been issued in compliance with applicable federal and state securities laws in reliance on exemptions from registration or qualification thereunder.

 

4.3            Authority .

 

(a)            The Company and each of the Shareholders has the requisite power and authority to enter into this Agreement and the agreements contemplated by this Agreement, to perform each of their obligations thereunder, and to consummate the transactions contemplated thereby.  The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated thereby, including the Merger, have been duly authorized by all necessary corporate action on the part of the Company and its shareholders.  This Agreement has been duly executed and delivered by the Company and the Shareholders and constitutes a legal, valid and binding obligation of the Company and the Shareholders, enforceable against each of them in accordance with its terms.

 

(b)            The execution and delivery by the Company of this Agreement does not, and the consummation of the transactions contemplated thereby will not, (i) conflict with, or result in a violation of, any provision of the certificate of incorporation, bylaws or other charter documents of the Company, (ii) constitute or result in a breach of or default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the termination or suspension of, or accelerate the performance required by, or result in a right of termination, cancellation or acceleration of any obligation or a loss of a benefit under, any Material Contract, (iii) result in the creation of any security interest, lien, claim, pledge, agreement, limitation in voting rights, charge or other encumbrance of any material nature (collectively, “ Liens ”) on any of the properties or assets of the Company, or (iv) constitute, or result in, a violation of any law applicable to the Company or any of the properties or assets of the Company.

 

(c)            No consent, approval, order or authorization of, notice to, registration or filing with any Governmental Entity or other Person is required to be obtained or made by the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except for filing of the Certificate of Merger with the Washington Secretary.

 

4.4            No Conflict, Required Filings and Consents .

 

(a)            The execution and delivery of this Agreement and each instrument required hereby to be executed and delivered by the Company at the Closing does not, and the performance of this Agreement by the Company will not, (i) conflict with or violate the Articles

 

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of Incorporation or Bylaws of the Company; (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or by which it or any of its properties is bound or affected; or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default), or impair in any material respect the Company’s rights or materially alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of any Material Contract, or result in the creation of any security interest, lien, claim, pledge, agreement, limitation in voting rights, charge or other encumbrance of any material nature (collectively, “ Liens ”) on any of the properties or assets of the Company pursuant to any Company Agreement.

 

(b)            The execution and delivery of this Agreement and any instrument required hereby to be executed and delivered by the Company at the Closing does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any court, administrative or regulatory agency or commission or other governmental authority or instrumentality (whether domestic or foreign, a “ Governmental Entity ”).

 

(c)            The consent of, or the delivery of notice to or filing with, any party to a Material Contract is not required for the execution and delivery by the Company of this Agreement or the consummation of the transactions contemplated by this Agreement.

 

4.5            Compliance; Permits .

 

(a)            The Company is not in conflict with, or in default or violation of (and has not received any notices of violation. with respect to), any law, rule, regulation, order, judgment or decree applicable to the Company or by which it or any of its properties is bound or affected, and the Company has no knowledge of any such conflict, default or violation thereunder, except in each case for any such conflicts, defaults or violations that is not currently having or would not have a material adverse effect on the Company.

 

(b)            The Company holds all permits, licenses, easements, variances, exemptions, consents, certificates, authorizations, registrations, orders and other approvals from Governmental Entities, including the Federal Trade Commission and the Food and Drug Administration, that are material to the operation of the business of the Company as it is now being conducted (collectively, the “ Company Permits ”).  The Company Permits are in full force and effect, have not been violated in any respect that is currently having or would have a material adverse effect on the Company, and no suspension, revocation or cancellation thereof has been threatened and there is no action, proceeding or investigation pending or, to the Company’s knowledge threatened regarding suspension, revocation or cancellation of any Company Permits, except where the suspension, revocation or cancellation of such Company Permits would not have a material adverse effect on the Company.

 

4.6            Litigation .  There are no legal actions (a) pending or, to the knowledge of the Company, threatened against the Company, its assets, or the transactions contemplated by this Agreement or (b) pending or, to the knowledge of the Company, threatened against any current employee, officer or director of the Company that, in any way relates to the Company, its assets

 

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or the transactions contemplated by this Agreement. The Company is not subject to any order, judgment, writ, injunction or decree of any governmental authority.

 

4.7            Taxes .  The Company has timely filed all tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a governmental entity having authority to do so) (“ Company Tax Return ”).  Each such Company Tax Return is true, correct and complete in all material respects.  Company has paid, within the time and manner prescribed by law, all material taxes that are due and payable.  No Company Tax Return is the subject of any investigation, audit or other proceeding by any federal, state or local tax authority.

 

4.8            Labor Matters .

 

(a)            The Company is in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and laws, and is not engaged in any unfair labor practices;

 

(b)            There are no controversies pending or, to the knowledge of the Company, threatened, between the Company and any of its respective employees, consultants or independent contractors, which controversies have had or could reasonably be expected to have a Material Adverse Effect on the Company;

 

(c)            The Company is not a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company, nor does the Company know of any activities or proceedings of any labor union to organize any such employees; and

 

(d)            The Company has no knowledge of any labor disputes, strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of, or consultants or independent contractors to, the Company.

 

4.9            Benefit Plans .

 

(a)            Section 4.10(a) of the Company Disclosure Schedule includes a true, accurate and complete list of each “ Employee Plan ” of the Company which consists of each:

 

(i)             “employee welfare benefit plan,” as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), (A) which the Company maintains or administers or to which the Company contributes or is required to contribute, and (B) which covers any employee or former employee of the Company or under which the Company has any liability (a “ Welfare Plan ”);

 

(ii)            “multiemployer plan,” as defined in Section 3(37) of ERISA, (A) which the Company or any corporation or other trade or business which is treated as a single employer with the Company under Section 414(b), (c), (m) or (o) of the Code or under Section 4001(b)(1) of ERISA (a “ Controlled Group Member ”) maintains or administers or to which the Company or Controlled Group Member contributes or is required to contribute, either currently or at any time since the Company’s inception, and (B) which covers or covered any employee or former employee of the Company or

 

16

 

Controlled Group Member or under which the Company or Controlled Group Member has any liability (a “ Multiemployer Plan ”);

 

(iii)           Employee Plan which is maintained in connection with any trust described in Section 501(c)(9) of the Code;

 

(iv)           “employee pension benefit plan” as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which the Company maintains or administers or to which the Company contributes or is required to contribute, and (B) which covers any employee or former employee of the Company or under which the Company has any liability (a “ Pension Plan ”); and

 

(v)            plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers’ compensation, disability benefits, severance benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or under which the Company has any liability, and (C) covers any employee or former employee of the Company (collectively, “ Benefit Arrangements ”);

 

(b)            (i)             There is no Pension Plan, nor has the Company or any Controlled Group Member at any time maintained, administered, contributed or been required to contribute to any “employee pension benefit plan” as defined in Section 3(2) of ERISA, which is subject to the minimum funding requirements of Section 412 of the Code or Section 302 of ERISA, or the provisions of Title IV of ERISA.

 

(ii)            Each Pension Plan and each related trust agreement, annuity contract or other funding instrument which is intended to be qualified and tax-exempt under the provisions of Section 401(a) (or 403(a) as appropriate) of the Code and Section 501(a) of the Code is so qualified and has been so qualified during the period from its adoption to date.

 

(iii)           Each Pension Plan, each related trust agreement, annuity contract or other funding instrument and each Welfare Plan complies in all material respects and has been maintained in material compliance with its terms and, both as to form and in operation, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including but not limited to ERISA and the Code.

 

(c)            Each Benefit Arrangement has been maintained in material compliance with its terms and with the requirements prescribed by any and all applicable laws, rules and regulations of any Governmental Entity.

 

(d)            As of the date of this Agreement and as of the Closing Date, neither the Company nor a Controlled Group Member maintains, administers, contributes to or is required to

 

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contribute to a Multiemployer Plan.  Neither the Company nor a Controlled Group Member has, at any time, withdrawn from a Multiemployer Plan in a “complete withdrawal” or a “partial withdrawal” as defined in Sections 4203 and 4205 of ERISA respectively, which has resulted in any liability to the Company.

 

(e)            Neither the Company nor any plan fiduciary of any Welfare Plan or Pension Plan has engaged in any transaction in violation of Section 406(a) or (b) of ERISA or any “prohibited transaction,” as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 4975(c)(2) or 4975(d) of the Code.

 

(f)             Copies of each of the following documents have been delivered by the Company to Parent: (i) each Welfare Plan, Pension Plan and Multiemployer Plan (and, if applicable, related trust agreements) and all amendments thereto, all written interpretations thereof and written descriptions thereof which have been generally distributed to the persons entitled to benefits thereunder, and all annuity contracts or other funding instruments, (ii) each Benefit Arrangement, including written interpretations thereof and written descriptions thereof which have been generally distributed to the persons entitled to benefits thereunder (including descriptions of the number and level of persons covered thereby) and complete descriptions of any Benefit Arrangement which is not in writing, (iii) the most recent determination letter and/or opinion letter or notification letter, as applicable, issued by the IRS with respect to each Pension Plan intended to be a qualified plan under Section 401(a) of the Code, (iv) Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Pension Plan and Welfare Plan for the three most recent plan years, (v) each form of notice and certification relating to group health plans provided by the Company to its employees and their beneficiaries required under the Consolidated Omnibus Budget Reconciliation of 1985, as amended, or under the Health Insurance Portability and Accountability Act of 1996, as amended, (vi) the results of nondiscrimination testing performed with respect to each Pension Plan for the three most recent plan years, (vii) a description of complete age, salary, service and related data as of the last day of the last plan year for employees and former employees of the Company covered under the Pension Plans, and (viii) a description setting forth the amount of any liability of the Company for payments more than thirty days past due with respect to each Welfare Plan as of the Closing Date.

 

(g)            Each Welfare Plan, Pension Plan, related trust agreement, annuity contract or other funding instrument and each Benefit Arrangement is a legal, valid and binding obligation of the Company and is in full force and effect.

 

(h)            Neither the Company nor any Welfare Plan has any obligation to make any payment to or with respect to any former officer, director, employee, independent contractor, agent, representative or consultant of the Company (“ company personnel ”) pursuant to any retiree medical benefit or other Welfare Plan, except as required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and, to the Company’s knowledge, no condition exists which would prevent the Company from amending or terminating any such benefit or Welfare Plan.

 

(i)             The Company would not have any obligation to make any severance or other payments to any company personnel if such personnel was terminated prior to, at or after

 

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the Closing other than such severance obligations disclosed in the employment offer letters or employment agreements, copies of which have been provided to Parent and each of which is listed in the Company Disclosure Schedule.

 

(j)             No benefit, payment or other entitlement under any Pension Plan, Welfare Plan or Benefit Arrangement, or under any agreement relating to the employment or retention of company personnel, will be established or become accelerated, vested, payable or funded by reason of the execution and delivery of this Agreement, or any of the transactions contemplated under this Agreement.

 

(k)            There are no claims, actions or proceedings pending, or to the knowledge of the Company, threatened with respect to any Pension Plan, Welfare Plan or Benefit Arrangement, other than claims for the payment of benefits in the ordinary course of operation of such plan or arrangement.

 

4.10          Financial Statements .  Attached to Section 4.11 of the Company Disclosure Schedule are (i) the audited balance sheet of the Company as of December 31, 2003 (the “ Audited Company Balance Sheet ”), together with the related statements of income and cash flows for the fiscal years of the Company then ended (the “ Audited Financial Statements ”), all certified by BDO Seidman LLP whose audit reports thereon are included therewith, and (ii) the unaudited balance sheet of the Company as of March 31, 2004 (collectively, with the Audited Company Balance Sheet, the “ Company Balance Sheet ”), together with the related statements of income and cash flows for the quarter then ended (together, with the Audited Company Balance Sheet, the “ Financial Statements ”).  Each of the Financial Statements (including, in each case, any related notes thereto) (i) was prepared in accordance with generally accepted accounting principles (“ GAAP ”) applied on a consistent basis throughout the periods involved (except for the absence of notes to the financial statements with respect to the Financial Statements for the three months ended March 31, 2004), (ii) are complete and correct, and (iii) fairly presents the financial position of the Company as of the dates thereof and the results of its operations and cash flows and stockholder equity for the periods indicated.  Except as noted in the opinions contained in the Audited Financial Statements, such Audited Financial Statements and opinions were rendered without qualification or exception and were not subject to any contingency.  No event has occurred since the preparation of the most recent Financial Statements that would require a restatement of any of the Financial Statements under GAAP other than by reason of a change in GAAP.

 

4.11          Contracts and Commitments .

 

(a)            Except for the contracts, commitments, leases, licenses, plans and agreements listed on Section 4.11 of the Company Disclosure Schedule (the “ Company Agreements ”), the Company is not party to or subject to:

 

(i)             any agreement (or group of related agreements) which requires future expenditures by the Company in excess of $20,000 or which could reasonably be expected to result in payments to the Company in excess of $50,000 (other than purchase orders entered into in the ordinary course of Company’s business consistent with past practices) or is otherwise material to the Company’s business;

 

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(ii)            any material contract or agreement for, the purchase or sale of any commodity, product, material, supplies, equipment or other personal property, other than purchase or sale orders entered into in the ordinary course of business consistent with past practices;

 

(iii)           any employment, consulting or independent contractor agreements, employee benefit, bonus, pension, profit-sharing, stock option, stock purchase or similar plans and arrangements;

 

(iv)           any distributor, sales representative, sales agent, commission or similar agreement, whether or not in writing;

 

(v)            any material license agreement (whether as licensor or licensee) with respect to any Intellectual Property (as defined below) other than commonly available third party software;

 

(vi)           any agreement with any current or former stockholder, officer or director of the Company, or any “affiliate” or “associate” of such persons (as such terms are defined in the rules and regulations promulgated under the Securities Act), including without limitation any agreement or other arrangement providing for the furnishing, of services by, rental of real or personal property from, or otherwise requiring payments to, any such person;

 

(vii)          any agreement or other commitment with any person or entity containing covenants limiting the freedom of the Company or any of the Company’s affiliates, employees, directors, officers, consultants or agents to compete in any line of business or with any person or entity or in any geographical location or to use or disclose any information in their possession;

 

(viii)         any loan agreement, indenture, note, bond, debenture, guarantee or any other document or agreement evidencing a capitalized lease obligation or indebtedness to any person or any agreement of guaranty, indemnification or other similar commitment with respect to the obligations or liabilities of any other person;

 

(ix)            any agreement for the disposition of Company assets other than in the ordinary course of business consistent with past practices;

 

(x)             any agreement for the acquisition of the business or shares of another party (except repurchase rights in favor of the Company for shares of Company common stock owned by any employee, officer, director, consultant, or advisor to the Company);

 

(xi)            any contract or agreement concerning a partnership or joint venture with one or more person;

 

(xii)           any hedging, futures, options or other derivative contracts;

 

(xiii)          any lease of real property;

 

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(xiv)         any agreement which contains a fixed penalty or liquidated damages clause for late performance or other default by the Company to the extent that such late performance or default would cause a Material Adverse Effect to the Company; or

 

(xv)          any other agreement or contract (or group of related agreements or contracts) to the extent not otherwise disclosed in the Company Disclosure Schedule, the performance of which involves consideration paid by the Company in excess of $20,000 in any one year period.

 

(b)            Correct and complete copies of all Company Agreements, including all amendments thereto, have been delivered to Sunset and made available to Parent.  The Company has not breached, is not in default under, and has not received written notice of any breach of or default under, any agreement required to be disclosed in Section 4.12 of the Company Disclosure Schedule (each, a “ Material Contract ”).  To the Company’s knowledge, no other party to any Material Contract has breached or is in default of any of its obligations thereunder to the extent that such breach or default would cause a Material Adverse Effect to the Company. Each Material Contract is in full force and effect, except in any such case for breaches, defaults or failures to be in full force and effect that do not currently have or would not have a Material Adverse Effect on the Company. Each Material Contract is a legal, valid and binding obligation of the Company and each of the other parties thereto, enforceable in accordance with its terms, except that the enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and (ii) general principles of equity.

 

(c)            The consent of, or the delivery of notice to or filing with, any party to a Material Contract is not required for the execution and delivery by the Company of this Agreement or the consummation of the transactions contemplated under the Agreement.

 

4.12          Absence of Certain Changes and Events .  Since the date of the Audited Company Balance Sheet, the Company has conducted its business in the ordinary course consistent with past practice and, since such date, there has not occurred:

 

(a)            any event, damage, destruction or loss, whether covered by insurance or not, which has had or reasonably is expected to have a Material Adverse Effect on the Company or its assets;

 

(b)            any entry by the Company into a commitment or transaction material to the Company, which is not in the ordinary course of business consistent with past practice;

 

(c)            any change by the Company in accounting principles, methods or practices, except insofar as may have been required by a change in GAAP;

 

(d)            any declaration, payment or setting aside for payment of any dividends or distributions in respect to shares of Company Common Stock, or any redemption, purchase or other acquisition of any shares of Company Common Stock;

 

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(e)            any cancellation of any debts or waiver or release of any right or claim of the Company individually or in the aggregate material to the Company, whether or not in the ordinary course of business;

 

(f)             any revaluations by the Company of any of its assets or liabilities, including without limitation, writing-off notes or accounts receivable;

 

(g)            any material increase in the rate or terms of compensation payable or to become payable by the Company or any of its personnel or consultants; any bonus, incentive compensation, service award or other benefit granted, made or accrued, contingently or otherwise, for or to the credit of any Company personnel; employee welfare, pension, retirement, profit-sharing or similar payment or arrangement made or agreed to by the Company for any Company personnel except for contributions in accordance with prior practice made to, and payments made to employees under, plans and arrangements existing on the date of the Audited Company Balance Sheet;

 

(h)            any adoption of a plan of liquidation or resolutions providing for the liquidation, dissolution, merger, consolidation or other reorganization of the Company, other than in connection with the transactions contemplated hereby;

 

(i)             any purchase, acquisition or sale by the Company of any assets, other than in the ordinary course of business;

 

(j)             any material addition to, or material modification of, the Employee Plans, arrangements or practices existing on the date of the Audited Company Balance Sheet which affect any Company personnel;

 

(k)            any amendment, cancellation or termination of any Material Contract, including, without limitation, license or sublicense, or other instrument to which the Company is a party or to which the Company or any of the assets of the Company is bound;

 

(l)             any failure to pay when due any material obligation of the Company;

 

(m)           any failure to operate the business of the Company in the ordinary course with an effort to preserve the business intact, to keep available to the Company the services of their personnel, and to preserve for the Company the goodwill of their customers and others having business relations with the Company except for such failures that would not have a Material Adverse Effect on the Company;

 

(n)            any commitment to borrow money entered into by the Company, or any loans made or agreed to be made by the Company, involving more than $10,000 individually or $25,000 in the aggregate (other than credit provided by suppliers or manufacturers in the ordinary course of the Company’s business consistent with past practices);

 

(o)            any liabilities incurred by the Company involving $10,000 or more individually and $25,000 or more in the aggregate, other than liabilities incurred in the ordinary course of business consistent with past practices;

 

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(p)            any payment, discharge or satisfaction of any material liabilities of the Company or any material capital expenditure of the Company, other than (i) the payment, discharge or satisfaction in the ordinary course of business consistent with prior practice of liabilities reflected or reserved against in the Audited Financial Statements or incurred in the ordinary course of business consistent with prior practice since the date of the Audited Company Balance Sheet, and (ii) any capital expenditures involving $10,000 or less individually and $25,000 or less in the aggregate;

 

(q)            any amendment of the Company’s Certificate of Incorporation or Company Bylaws; or

 

(r)             any agreement by the Company to do any of the things described in the preceding clauses (a) through (q) of this Section 4.13, other than as expressly contemplated or provided for in this Agreement.

 

4.13          Properties, Assets, Encumbrances; No Undisclosed Liabilities .

 

(a)            The Company has good, valid and marketable title to, a valid leasehold interest in, or valid license rights to, all the properties and assets which it purports to own, lease or license (real, personal and mixed, tangible and intangible), including, without, limitation, all the properties and assets reflected in the Company Balance Sheet (except for personal property sold since the date of the Company Balance Sheet in the ordinary course of business consistent with past practice), except as would not have a Material Adverse Effect on the Company, and such properties and assets are all of the assets (whether tangible or intangible) that are used or required for use in the operation of its business as currently or proposed to be conducted.  All properties and assets reflected in the Company Balance Sheet are free and clear of all Liens, except for Liens reflected on the Company Balance Sheet and Liens for current taxes not yet due and other Liens that do not, individually or in the aggregate, materially detract from the value or impair the use of the property or assets subject thereto.  Section 4.13 of the Company Disclosure Schedule contains a complete and accurate list of all leases pursuant to which the Company leases from others ma