AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

 

 

AGREEMENT AND PLAN OF MERGER

 

by and among

 

CAPTARIS, INC.,

 

IMR ACQUISITION, INC.,

 

INFORMATION MANAGEMENT RESEARCH, INC.,

 

CERTAIN SHAREHOLDERS OF

 

INFORMATION MANAGEMENT RESEARCH, INC.

 

and

 

STEVEN GRANDCHAMP AND ROBERT DRUCKER, AS

SHAREHOLDER REPRESENTATIVES

 

 

Dated as of October 1, 2004

 

 

CONTENTS

 

 

-i-

 

-ii-

 

-iii-

 

EXHIBITS

 

-iv-

AGREEMENT AND PLAN OF MERGER

 

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made and entered into as of October 1, 2004, by and among Captaris, Inc., a Washington corporation (“ Parent ”), IMR Acquisition, Inc., a Washington corporation and wholly owned subsidiary of Parent (“ Acquisition Sub ”), Information Management Research, Inc., a Colorado corporation (the “ Company ”), those shareholders of the Company listed on the attached Exhibit 1 (individually, a “ Signing Shareholder ” and collectively, the “ Signing Shareholders ”) and Steven Grandchamp and Robert Drucker, as the Shareholder Representatives.

 

RECITALS

 

A. Each of the Company, the Signing Shareholders, Parent and Acquisition Sub believe it advisable and in their respective best interests to effect a merger of the Company and Acquisition Sub with the Company as the surviving corporation on the terms and subject to the conditions set forth in this Agreement (the “ Merger ”).

 

B. Pursuant to the Merger, 100% of the capital stock of the Company outstanding immediately prior to the Effective Time (as defined below), on a fully diluted basis, including vested and unvested stock, options, warrants and other equity rights (the “ Shares ”), other than Dissenting Shares (as defined below) will be converted into the right to receive the Merger Consideration (as defined below), on the terms and subject to the conditions of this Agreement.

 

NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, the Company, Parent, Acquisition Sub, the Signing Shareholders and the Shareholder Representatives hereby agree as follows:

 

Section 1. Definitions

 

“ AAA ”: Is defined in Section 10.5(b).

 

“ Accounting Arbitrator ”: PricewaterhouseCoopers LLP.

 

“ Affiliate ”: of a Person (the “ Subject ”) means any other Person which, directly or indirectly, controls or is controlled by or is under common control with the Subject.

 

“ Affiliated Group ”: Any affiliated group as defined in Section 1504 of the Code (or any analogous combined, consolidated or unitary group defined under state, local or foreign income Tax law).

 

“ Articles of Merger ”: Is defined in Section 2.3.

“ Balance Sheet Date ”: Is defined in Section 3.5(a).

 

“ Cap ”: Is defined in Section 9.4(c).

 

“ CBCA ”: The Colorado Business Corporation Act.

 

“ Claim ”: Any claim, demand, cause of action, suit, proceeding, arbitration, audit hearing or investigation.

 

“ Closing ”: Is defined in Section 2.3.

 

“ Closing Balance Sheet ”: Is defined in Section 2.8(a).

 

“ Closing Date ”: Is defined in Section 2.3.

 

“ Closing NWC Statement ”: Is defined in Section 2.8(a).

 

“ COBRA ”: The health care continuation provision of the Consolidated Omnibus Budget Reconciliation Act of 1985, and all rules and regulations promulgated thereunder, all as in effect from time to time.

 

“ Code ”: The Internal Revenue Code of 1986, and all rules and regulations promulgated thereunder, as in effect from time to time.

 

“ Colorado Secretary of State ”: Is defined in Section 2.3.

 

“ Common Per Share Consideration ”: Means the quotient obtained by dividing (a) the Shareholder Merger Consideration less the aggregate dollar amount of the Shareholder Merger Consideration into which the Series A Preferred, Series B Preferred and Series C Preferred are converted pursuant to Section 2.5(b), by (b) the total number of shares of Common Stock outstanding as of immediately prior to the Effective Time.

 

“ Common Stock ”: Is defined in Section 3.3(a).

 

“ Company Balance Sheet ”: Is defined in Section 3.5(a).

 

“ Company 401(k) Plan ”: Is defined in Section 5.10.

 

“ Company Indemnified Parties ”: Is defined in Section 9.3.

 

“ Company Shareholders ”: Means the shareholders of the Company as of immediately prior to the Effective Time.

 

“ Confidentiality Agreements ”: Those certain Reciprocal Non-Disclosure Agreements dated November 21, 2003 and May 19, 2004 between Parent and the Company.

 

-2-

“ Contract ”: Any contract, agreement, lease, license, grant of immunity from suit in regard to intellectual property rights, commitment or purchase or sale order, whether written or oral.

 

“ Debt Agreements ”: Is defined in Section 2.10.1.

 

“ Deficiency Amount ”: Is defined in Section 2.10.3(b).

 

“ Disclosure Schedules ”: The Disclosure Schedules attached and made a part hereof.

 

“ Dispute Notice ”: Is defined in Section 2.8(b).

 

“ Disputed Claim ”: Is defined in Section 9.6(b).

 

“ Dissenting Shares ”: Is defined in Section 2.9(c).

 

“ Effective Time ”: Is defined in Section 2.3.

 

“ Employee Benefit Plan ”: Any retirement, pension, profit sharing, deferred compensation, stock bonus, savings, bonus, incentive, cafeteria, medical, dental, vision, hospitalization, life insurance, accidental death and dismemberment, medical expense reimbursement, dependent care assistance, tuition reimbursement, disability, sick pay, holiday, vacation, severance, change of control, stock purchase, stock option, restricted stock, phantom stock, stock appreciation rights, fringe benefit or other employee benefit plan, program, policy, practice, contract, agreement, fund or arrangement (including, without limitation, any “employee benefit plan,” as defined in Section 3(3) of ERISA) or any employment, consulting or personal services contract, whether written or oral, funded or unfunded or domestic or foreign, (a) sponsored, maintained or contributed to by the Company or to which the Company is a party, (b) covering or benefiting any current or former officer, employee, agent, director or independent contractor of the Company (or any dependent or beneficiary of any such individual), or (c) with respect to which the Company has (or could have) any obligation or liability.

 

“ Encumbrance ”: Any security interest, mortgage, lien, charge, option, easement, license, adverse claim or restriction of any kind, including, but not limited to, any restriction on the use, transfer, receipt of income or other exercise of any attributes of ownership.

 

“ ERISA ”: The Employee Retirement Income Security Act of 1974, and all rules and regulations promulgated thereunder, all as in effect from time to time.

 

“ Escrow Agent ”: Mellon Investor Services LLC.

 

“ Escrow Agreement ”: Is defined in Section 9.6(a).

 

-3-

“ Escrow Amount ”: The Shareholder Escrow Amount and the Management Escrow Amount.

 

“ Escrow Fund ”: Is defined in Section 2.6(a)(ii).

 

“ Escrow Portion ”: Is defined in Section 2.6(a)(ii).

 

“ Final Award ”: Is defined in Section 9.6(e).

 

“ Final Spreadsheet ”: Is defined in Section 5.12.

 

“ Financial Statements ”: Is defined in Section 3.5(a).

 

“ GAAP ”: United States Generally Accepted Accounting Principles.

 

“ Governmental Body ”: Any federal, state or other court or governmental body, any subdivision, agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder, domestic or foreign.

 

“ HIPAA ”: The Health Insurance Portability and Accountability Act of 1997, and all rules and regulations promulgated thereunder, all as in effect from time to time.

 

“ Inbound Licenses ”: Is defined in Section 3.14.2.

 

“ Incentive Plan Participants ”: Is defined in Section 2.10.3(b).

 

“ Incurred Damages ”: Is defined in Section 9.6(e).

 

“ Indemnification Claim ”: Is defined in Section 9.5(a).

 

“ Indemnified Party ” or “ Indemnified Parties ”: Is defined in Section 9.3.

 

“ Indemnifying Party ” or “ Indemnifying Parties ”: Is defined in Section 9.5(a).

 

“ Intellectual Property Agreements ”: Is defined in Section 3.14.2.

 

“ IRS ”: The United States Internal Revenue Service.

 

“ J.A.M.S ”: Is defined in Section 10.5(b).

 

“ Knowledge ”: With respect to the Company, means the actual knowledge of the Company’s officers, directors and other senior managers, after reasonable inquiry. With respect to any Signing Shareholder, the actual knowledge of such Signing Shareholder, if an individual, or any officer of such Signing Shareholder, if an entity, in each case, after reasonable inquiry.

 

-4-

“ Losses ”: Is defined in Section 9.2.

 

“ Management Escrow Amount ”: Is defined in Section 2.10.3(b).

 

“ Material Contracts ”: Is defined in Section 3.9.

 

“ Merger ”: Is defined in Recital A.

 

“ Merger Consideration ”: Is defined in Section 2.5(a).

 

“ Net Cash ”: Is defined in Section 2.12.

 

“ Net Working Capital ”: Is defined in Section 2.8(a).

 

“ Non-Disclosure Agreements ”: Is defined in Section 3.14.2.

 

“ Non-Prevailing Party ”: Is defined in Section 9.6(c).

 

“ Outbound Licenses ”: Is defined in Section 3.14.2.

 

“ Outstanding Debt Amount ”: Is defined in Section 2.10.1.

 

“ Outstanding Transaction Costs ”: Is defined in Section 2.10.2.

 

“ Outstanding Incentive Plan Payments ”: Is defined in Section 2.10.3(a).

 

“ Parent Indemnified Parties ”: Is defined in Section 9.2.

 

“ Permits ”: Any permit, license, approval, certification, consent or authorization of any Governmental Body.

 

“ Permitted Liens ”: Means (a) liens for current taxes not yet due and payable, (b) imperfections or irregularities in title, if any, that (i) have arisen in the ordinary course of business, consistent with past practice, (ii) individually or in the aggregate are not material, and (iii) do not materially adversely affect the ownership or use of the asset subject to such lien.

 

“ Person ”: Any individual, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization, Governmental Body and any other legal entity.

 

“ Pre-Closing Tax Periods ”: Collectively, all taxable periods ending on or prior to the Closing Date and the portion of a taxable period through the end of the Closing Date for all Straddle Periods.

 

-5-

“ Pre-Closing Taxes ”: Any and all Taxes (a) of the Company or the Subsidiary for all Pre-Closing Tax Periods and (b) of any member of an Affiliated Group of which the Company or the Subsidiary (or any predecessor thereof) is or was a member on or prior to the Closing Date and not a member after the Closing Date, including pursuant to Treasury Regulations Section 1.1502-6 (or any predecessor or successor thereof or any analogous or similar state, local, or foreign law or regulation).

 

“ Pre-Effective Time Articles Amendment ”: Means the amendment to the Restated Articles in the form attached hereto as Exhibit 1.1 .

 

“ Preliminary Spreadsheet ”: Is defined in Section 2.6(b).

 

“ Prevailing Party ”: Is defined in Section 9.6(c).

 

“ Principles and Procedures ”: Is defined in Section 2.8(a).

 

“ Pro Rata Contribution ”: Is defined in Section 10.14.

 

“ Pro Rata Portion ”: Means, with respect to each Company Shareholder, an amount equal to the quotient obtained by dividing (a) the amount of cash payable pursuant to Section 2.5(b) in respect of the Shares owned by such Company Shareholder as of the Effective Time by (b) the aggregate amount of cash payable to all Company Shareholders pursuant to Section 2.5(b) in respect of Shares as of the Effective Time.

 

“ Public Software ”: Is defined in Section 3.14.12.

 

“ Release Date ”: Is defined in Section 9.6(i).

 

“ Requisite Holders ”: Is defined in Section 9.7(b).

 

“ Restated Articles ”: Means the Amended and Restated Articles of Incorporation of Information Management Research, Inc. in effect as of the date hereof.

 

“ Seller IP ”: Is defined in Section 3.14.1.

 

“ Seller IP Registrations ”: Is defined in Section 3.14.6.

 

“ Seller Intellectual Property Rights ”: All intellectual property and proprietary rights worldwide owned, used or licensed (whether as licensor or licensee) by the Company, including without limitation any and all foreign and domestic trade names, trademarks, service marks, domain names, copyrights, moral rights, trade secret rights, rights in mask works, patent and all associated rights and all registrations, applications, renewals, extensions and continuations (in whole or in part) of any of the foregoing, together with all goodwill associated therewith and all rights and causes of action for infringement, misappropriation, misuse, dilution, unfair trade practice or otherwise associated therewith but excluding any intellectual property rights licensed to the Company by Parent before the date of this Agreement.

 

-6-

“ Seller-Owned IP ”: Is defined in Section 3.14.1.

 

“ Seller Technology ”: Means all products, tools, devices, mask works, computer programs, software, source code, object code, development tools, techniques, concepts, know-how, algorithms, methods, processes, procedures, formulae, designs, drawings, customer lists, supplier lists, databases, specifications, programmer notes, packaging, trade dress, content, graphics, images, user interfaces, “look and feel” inventions (whether or not patentable), invention disclosures, discoveries, works of authorship (whether or not copyrightable) and other technology owned, used or licensed (whether as licensor or licensee) by the Company, excluding any software or other technology licensed to the Company by Parent before the date of this Agreement.

 

“ Series A Per Share Consideration ”: Means the portion of the Shareholder Merger Consideration that a holder of one share of Series A Preferred is entitled to receive, if any, as provided in Article VII(d) of the Restated Articles, as amended by the Pre-Effective Time Articles Amendment.

 

“ Series A Preferred ”: Is defined in Section 3.3(a).

 

“ Series B Per Share Consideration ”: Means the portion of the Shareholder Merger Consideration that a holder of one share of Series B Preferred is entitled to receive, if any, as provided in Article VII(d) of the Restated Articles, as amended by the Pre-Effective Time Articles Amendment.

 

“ Series B Preferred ”: Is defined in Section 3.3(a).

 

“ Series C Per Share Consideration ”: Means the portion of the Shareholder Merger Consideration that a holder of one share of Series C Preferred is entitled to receive, if any, as provided in Article VII(d) of the Restated Articles, as amended by the Pre-Effective Articles Amendment.

 

“ Series C Preferred ”: Is defined in Section 3.3(a).

 

“ Settled Claim ”: Is defined in Section 9.6(h).

 

“ Shareholder Escrow Amount ”: Is defined in Section 2.6(a)(ii).

 

“ Shareholder Representatives ”: Steven Grandchamp and Robert Drucker.

 

“ Shareholders’ Meeting ”: Is defined in Section 5.2.

 

-7-

“ Shareholder Merger Consideration ”: The Merger Consideration less the Outstanding Obligations.

 

“ Shares ”: Is defined in Recital B.

 

“ Shrink-Wrapped Licenses ”: Is defined n Section 3.14.2.

 

“ Source Code ”: Is defined in Section 3.14.7.

 

“ Straddle Period ”: Each taxable period beginning before and ending after the Closing Date.

 

“ Subsidiary ”: Is defined in Section 3.2(b).

 

“ Surviving Corporation ”: Is defined in Section 2.1.

 

“ Target Net Working Capital ”: $3,059,310: the net working capital (defined as current assets (less cash) minus current liabilities) of the Company as of April 30, 2004.

 

“ Tax ” (and, in the plural, “ Taxes ”): Any and all (a) domestic or foreign federal, state or local taxes, charges, fees, levies, imposts, duties and governmental fees or other like assessments or charges of any kind whatsoever (including, without limitation, any income, net income, gross income, receipts, windfall profit, severance, property, production, sales, use, business and occupation, license, excise, registration, franchise, employment, payroll, withholding, alternative or add-on minimum, intangibles, ad valorem, transfer, gains, stamp, estimated, transaction, title, capital, paid-up capital, profits, occupation, premium, value-added, recording, real property, personal property, inventory and merchandise, business privilege, federal highway use, commercial rent or environmental tax), (b) interest, penalties, fines, additions to tax or additional amounts imposed by any taxing authority in connection with (i) any item described in clause (a) or (ii) the failure to comply with any requirement imposed with respect to any Tax Returns, and (c) liability in respect of any items described in clause (a) and/or (b) payable by reason of contract, assumption, transferee liability, operation of law or otherwise.

 

“ Tax Returns ”: Any report, return, statement or other written information, including any schedules or attachments thereto and any amendment thereof, required to be supplied to a taxing authority in connection with Taxes.

 

“ Third Party Claim ”: Is defined in Section 9.5(a).

 

“ Third Party IP ”: Is defined in Section 3.14.1.

 

“ Threshold ”: Is defined in Section 9.4(a).

 

-8-

“ Transaction Costs ”: All of the Company’s and the Company Shareholders’ fees and expenses associated with the Merger, this Agreement and the other Transaction Documents, including legal, financial, advisory and escrow fees (provided that with respect to the fees and expenses of the Company Shareholders, Transaction Costs shall include only such fees and expenses which the Company is obligated to pay).

 

“ Transaction Documents ”: This Agreement, the agreements and documents referenced in Sections 6 and 7, and any other documents or certificates delivered in connection with the Closing.

 

“ Transaction Incentive Plan ”: Is defined in Section 2.10.3(a).

 

“ Upset Date ”: Is defined in Section 8.1(b).

 

“ Washington Secretary of State ”: Is defined in Section 2.3.

 

“ WBCA ”: The Washington Business Corporation Act.

 

Section 2. The Merger; Effective Time

 

2.1 Merger of Acquisition Sub Into the Company

 

Upon the terms and subject to the conditions set forth in this Agreement and in accordance with the WBCA and the CBCA, at the Effective Time, Acquisition Sub shall be merged with and into the Company, and the separate existence of Acquisition Sub shall cease. The Company will continue as the surviving corporation in the Merger (the “ Surviving Corporation ”) and shall succeed to and assume all the rights and obligations of Acquisition Sub in accordance with applicable law.

 

2.2 Effect of the Merger

 

The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the WBCA and CBCA. If at any time after the Effective Time, the Company or the Surviving Corporation shall consider or be advised that any further assignments or assurances in law or otherwise are necessary or desirable to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, all rights, title and interests in all real estate and other property and all privileges, powers and franchises of the Company and Acquisition Sub, the Surviving Corporation and its proper officers and directors, in the name and on behalf of the Company and Acquisition Sub, shall execute and deliver all such proper deeds, assignments and assurances in law and do all things necessary and proper to vest, perfect or confirm title to such property or rights in the Surviving Corporation and otherwise to carry out the purpose of this Agreement, and the proper officers and directors of the Surviving Corporation are fully authorized in the name of the Company and Acquisition Sub or otherwise to take any and all such action.

 

-9-

2.3 Closing; Effective Time

 

On the earliest practicable business day, but no later than the fifth business day after the satisfaction or waiver of the conditions set forth in Sections 6 and 7, the parties shall cause properly executed articles of merger conforming to the requirements of the WBCA and the CBCA (the “ Articles of Merger ”) to be filed with the Secretary of State of the State of Washington (the “ Washington Secretary of State ”) and the Secretary of State of the State of Colorado (the “ Colorado Secretary of State ”). If the Washington Secretary of State or the Colorado Secretary of State requires any changes in the Articles of Merger as a condition to filing or to issuing their respective certificates to the effect that the Merger is effective, the parties will execute any necessary revisions incorporating such changes, provided such changes are not inconsistent with and do not result in any material change in the terms of this Agreement. The Merger shall take effect at the time the Articles of Merger are filed with the Washington Secretary of State and the Colorado Secretary of State (the “ Effective Time ”). At 10:00 a.m. local time on the date (the “ Closing Date ”) on which the Articles of Merger are to be so filed, a closing (the “ Closing ”) shall be held at the offices of Perkins Coie LLP, 1201 Third Avenue, Suite 4800, Seattle, Washington 98101 (or such other place or time as Parent and the Company may jointly designate) for the purpose of confirming the satisfaction or waiver of each of the conditions set forth in Sections 6 and 7. At the Closing, each of the parties shall deliver all documents, instruments, certificates and other items as may be required under this Agreement.

 

2.4 Articles of Incorporation and Bylaws; Directors and Officers

 

Unless otherwise jointly determined by Parent and the Company prior to the Effective Time:

 

(a) the Articles of Incorporation of the Surviving Corporation shall be amended and restated as of the Effective Time to conform to the articles of incorporation attached hereto as Exhibit 2.4 ;

 

(b) the Bylaws of the Surviving Corporation shall be amended and restated as of the Effective Time to conform to bylaws approved by Parent prior to the Effective Time; and

 

(c) the directors and officers of the Surviving Corporation immediately after the Effective Time shall be the respective individuals who are directors and officers of Acquisition Sub immediately prior to the Effective Time, and such directors and officers shall hold office in accordance with and subject to the Articles of Incorporation and Bylaws of the Surviving Corporation.

 

2.5 Merger Consideration; Conversion of Shares

 

(a) Subject to the terms and conditions hereof, as consideration for the Merger, Parent shall pay (in the manner set forth in Section 2.6 of this Agreement) an aggregate of $26,500,000 in cash, as adjusted prior to the Closing pursuant to Section 2.8 of this Agreement (the “ Merger Consideration ”).

 

-10-

(b) At the Effective Time, by virtue of the Merger and without any further corporate action on the part of the holders of the Shares and provided that, prior to the Effective Time, the Company shall have taken all actions necessary so that all outstanding options and warrants shall have been exercised or converted into Shares or terminated immediately prior to the Effective Time:

 

(i) each share of the Series A Preferred issued and outstanding immediately prior to the Effective Time, if any, other than any shares of Series A Preferred to be canceled pursuant to Section 2.5(b)(v) and any Dissenting Shares, shall automatically be converted into the right to receive the Series A Per Share Consideration;

 

(ii) each share of the Series B Preferred issued and outstanding immediately prior to the Effective Time, if any, other than any shares of Series B Preferred to be canceled pursuant to Section 2.5(b)(v) and any Dissenting Shares, shall automatically be converted into the right to receive the Series B Per Share Consideration;

 

(iii) each share of the Series C Preferred issued and outstanding immediately prior to the Effective Time, if any, other than any shares of Series C Preferred Stock to be canceled pursuant to Section 2.5(b)(v) and any Dissenting Shares, shall automatically be converted into the right to receive the Series C Per Share Consideration;

 

(iv) each share of Common Stock issued and outstanding immediately prior to the Effective Time, other than any shares of Common Stock to be canceled pursuant to Section 2.5(b)(v) and any Dissenting Shares, shall automatically be converted into the right to receive the Common Per Share Consideration; and

 

(v) each Share owned directly by the Company immediately prior to the Effective Time shall be automatically canceled and extinguished without any exchange thereof and without any further action on the part of Parent, Acquisition Sub or the Surviving Corporation.

 

(c) All shares of common stock of Acquisition Sub outstanding as of the Effective Time shall, in the aggregate, be converted into one share of common stock of the Surviving Corporation.

 

2.6 Payment of Merger Consideration

 

(a) The Merger Consideration shall be payable as follows:

 

(i) At the Closing, a dollar amount equal to the Outstanding Obligations shall be paid to the Company and used for the sole purpose of paying the Outstanding Obligations or, at Parent’s option, shall be paid directly to the parties entitled to payment of the Outstanding Obligations.

 

-11-

(ii) At the Closing, $4,602,500 (the “ Shareholder Escrow Amount ”) shall be deposited with the Escrow Agent subject to the terms of the Escrow Agreement (the “ Escrow Fund ”). The Shareholder Escrow Fund shall be allocated among the Company Shareholders as follows:

 

(A) each holder of Series A Preferred issued and outstanding immediately prior to the Effective Time shall be deemed to have contributed to the Escrow Fund a portion of the Shareholder Escrow Amount equal the product obtained by multiplying (I) the quotient obtained by dividing (x) the aggregate amount of Merger Consideration payable to such holder in respect of such holder’s shares of Series A Preferred pursuant to Section 2.5(b)(i) by (y) the aggregate amount of Merger Consideration payable to all holders of Series A Preferred pursuant to Section 2.5(b)(i), by (II) $995,146;

 

(B) each holder of Series B Preferred issued and outstanding immediately prior to the Effective Time shall be deemed to have contributed to the Escrow Fund a portion of the Shareholder Escrow Amount equal the product obtained by multiplying (I) the quotient obtained by dividing (x) the aggregate amount of Merger Consideration payable to such holder in respect of such holder’s shares of Series B Preferred pursuant to Section 2.5(b)(ii) by (y) the aggregate amount of Merger Consideration payable to all holders of Series A Preferred pursuant to Section 2.5(b)(ii), by (II) $825,043;

 

(C) each holder of Series C Preferred issued and outstanding immediately prior to the Effective Time shall be deemed to have contributed to the Escrow Fund a portion of the Shareholder Escrow Amount equal the product obtained by multiplying (I) the quotient obtained by dividing (x) the aggregate amount of Merger Consideration payable to such holder in respect of such holder’s shares of Series C Preferred pursuant to Section 2.5(b)(iii) by (y) the aggregate amount of Merger Consideration payable to all holders of Series A Preferred pursuant to Section 2.5(b)(iii), by (II) $1,595,835; and

 

(D) each holder of Common Stock issued and outstanding immediately prior to the Effective Time shall be deemed to have contributed to the Escrow Fund a portion of the Shareholder Escrow Amount equal the product obtained by multiplying (I) the quotient obtained by dividing (x) the aggregate amount of Merger Consideration payable to such holder in respect of such holder’s shares of Common Stock pursuant to Section 2.5(b)(iv) by (y) the aggregate amount of Merger Consideration payable to all holders of Series A Preferred pursuant to Section 2.5(b)(iv), by (II) $1,186,476 (provided that, if the outstanding shares of Series A Preferred are converted to Common Stock prior to the Effective Time, such amount shall be $2,181,622).

 

Disclosure Schedule 2.6(a) , which the Company represents and warrants to Parent is accurate and complete, sets forth each Company Shareholder’s portion of the Escrow Amount, calculated in accordance with the foregoing provisions (each such

 

-12-

Company Shareholder’s “ Escrow Portion ”). Each Company Shareholder’s Escrow Portion shall be subject to adjustment pursuant to Section 2.10.3(b) of this Agreement. The adoption of this Agreement and the approval of the Merger by the Company Shareholders shall constitute approval of the Escrow Agreement and of all the arrangements relating thereto, including without limitation, the placement of the Shareholder Escrow Amount in the Escrow Fund and the appointment of the Shareholder Representatives pursuant to Section 9.7 hereof.

 

(iii) The remaining Merger Consideration shall be paid to the Company Shareholders by check or bank wire transfer at the Effective Time (subject the provisions of Section 2.7 below), each such Company Shareholder to receive such shareholder’s portion of the Merger Consideration shown on the Final Spreadsheet under the column titled “Closing Cash Payment.”

 

(b) Attached to Disclosure Schedule 2.6(b) is a spreadsheet (the “ Preliminary Spreadsheet ”), which separately lists (as of the date hereof and assuming (i) each outstanding option and warrant to purchase shares of capital stock of the Company is terminated without being exercised (ii) each share of Series A Preferred is converted into one share of Common Stock and (iii) no adjustments are made to the Merger Consideration prior to the Effective Time pursuant to Section 2.8 of this Agreement) all Company Shareholders and their respective addresses, the numbers of Shares held by such persons (including whether such Shares are Common Stock, Series A Preferred, Series B Preferred or Series C Preferred and the respective certificate numbers), the amount of Merger Consideration payable to each Company Shareholder, each Company Shareholders Escrow Portion and each Company Shareholder’s Pro Rata Portion. The Company represents and warrants to Parent that, subject to the assumptions outlined above and subject to approval by the shareholders of the Company of the Pre-Effective Time Articles Amendment, the appropriate distribution of the Merger Consideration under the Restated Articles, as amended by the Pre-Effective Time Articles Amendment, is as set forth in the Preliminary Spreadsheet.

 

2.7 Exchange of Certificates

 

At the Effective Time, upon surrender to Parent (or its designee) for cancellation of a certificate or certificates representing Shares (or a lost certificate affidavit reasonably acceptable to Parent), together with an executed letter of transmittal in the form attached hereto as Exhibit 2.7 (the “ Letter of Transmittal ”) and such other documents as may reasonably be required by Parent, the holder of such certificate or certificates shall be entitled to receive in exchange therefor, such Company Shareholder’s portion of the Merger Consideration shown on the Final Spreadsheet. No interest will be paid or will accrue on the cash payable upon the surrender of any certificate. If payment is to be made to a party other than the Company Shareholder in whose name the certificate so surrendered is registered, it shall be a condition of payment that such certificate shall be properly endorsed or otherwise in proper form for transfer and that the party requesting such payment shall pay any transfer or other Taxes required by reason of such certificate or establish to the satisfaction of Parent that such tax has been paid or is not applicable. Until surrender as contemplated by this

 

-13-

Section 2.7, each certificate (other than certificates representing any Shares to be canceled or retired pursuant to Section 2.5(b)(v) and any Dissenting Shares) shall be cancelled and shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender that portion of the Merger Consideration into which the Shares theretofore represented by such certificate shall have been converted pursuant to this Agreement.

 

2.8 Net Working Capital Adjustment

 

(a) At least five business days prior to the Closing, the Company shall provide Parent with (i) an estimated balance sheet of the Company as of the Closing Date prepared from the Company’s books and records in a manner consistent with the balance sheet of the Company as of April 30, 2004 and in accordance with GAAP (subject to normal year end adjustments and except for the absence of footnotes) and (ii) a statement showing the Company’s good faith estimate of the net working capital (defined as current assets (less cash), minus current liabilities) of the Company as of the Closing Date prepared in accordance with the Principles and Procedures. At least one business day prior to the Closing, the Company shall provide Parent with (x) a final balance sheet of the Company as of the Closing Date, which shall be prepared from the Company’s books and records in a manner consistent with the balance sheet as of April 30, 2004 and in accordance with GAAP (subject to normal year end adjustments and except for the absence of footnotes) (the “ Closing Balance Sheet ”) and (y) a final statement (the “ Closing NWC Statement ”) showing the final net working capital (defined as current assets (less cash), minus current liabilities) of the Company as of the Closing Date (the “ Net Working Capital ”) prepared in accordance with the principles and procedures set forth on Exhibit 2.8(a) (the “ Principles and Procedures ”). Solely for purposes of calculating the Net Working Capital, the bad debt reserve with respect to accounts receivable shall be $611,000. The Closing Balance Sheet and the Closing NWC Statement shall be certified by the Chief Executive Officer and Chief Financial Officer of the Company to be prepared in good faith and, with respect to the Closing Balance Sheet, in accordance with GAAP (subject to normal year end adjustments and except for the absence of footnotes) and, with respect to the Closing NWC Statement, in accordance with the Principles and Procedures. If the Net Working Capital is greater than the Target Net Working Capital, then the Merger Consideration shall be increased, dollar for dollar, by the amount of such excess, and if the Net Working Capital is less than the Target Net Working Capital, then the Merger Consideration shall be decreased, dollar for dollar, by the amount of such shortfall .

 

(b) Within 60 days after Parent’s receipt of the Closing NWC Statement, Parent shall deliver written notice to the Shareholder Representatives of any items shown in the Closing NWC Statement to which Parent objects, specifying in reasonable detail the nature of such objections (the “ Dispute Notice ”). If no Dispute Notice is delivered within such 60-day period, Parent shall be deemed to have agreed with all items and amounts shown in the Closing NWC Statement, and the Net Working Capital shown in the Closing NWC Statement shall be deemed to have been finally determined. If, within 30 days after the Shareholder Representatives’ receipt of any Dispute Notice, Parent and the Shareholder

 

-14-

Representatives are unable to resolve matters raised by the Dispute Notice, the parties shall submit the Dispute Notice to the Accounting Arbitrator for resolution. The Accounting Arbitrator shall be directed to make a final determination of Net Working Capital within 45 days of engagement, limited to those areas at issue, and in accordance with the Principles and Procedures, and such determination shall be conclusive and binding on all parties. Judgment upon the determination of the Accounting Arbitrator may be entered in any court having jurisdiction over the party against which such determination is to be enforced. The fees and expenses of the Accounting Arbitrator shall be borne by Parent; provided, however, that if the final determination of Net Working Capital is less than the amount set forth on the Closing NWC Statement by at least $25,000, Parent shall be entitled to reimbursement of such fees and expenses from the Company Shareholders and shall be entitled to a distribution from the Escrow Amount in the amount of such fees and expenses in accordance with the Escrow Agreement (without regard to any limitations set forth in Section 9, including, without limitation, the Threshold).

 

(c) If the final determination of Net Working Capital (either pursuant to mutual agreement or by determination of the Accounting Arbitrator) is less than the amount set forth on the Closing NWC Statement, the Escrow Agent shall distribute the entire deficiency to Parent in accordance with the terms of the Escrow Agreement (without regard to limitations set forth in Section 9, including, without limitation, the Threshold).

 

(d) Any adjustments made pursuant to this Section 2.8 shall be treated as an adjustment to the Merger Consideration.

 

2.9 Dissenting Shares

 

(a) Notwithstanding anything to the contrary contained in this Agreement, any Shares that constitute Dissenting Shares shall not be converted into or represent the right to receive a portion of the Merger Consideration, and each holder of Dissenting Shares shall be entitled only to such rights as may be granted to such holder pursuant to Section 7-113 of the CBCA. From and after the Effective Time, a holder of Dissenting Shares shall not have and shall not be entitled to exercise any of the voting rights or other rights of a shareholder of the Surviving Corporation. If any holder of Dissenting Shares shall fail to perfect or shall otherwise lose such holder’s right of appraisal under Section 7-113 of the CBCA prior to the Effective Time, then (i) any right of such holder to require the Surviving Corporation to purchase the Dissenting Shares for cash shall be extinguished, and (ii) such Dissenting Shares shall automatically be converted into and shall represent only the right to receive (upon the surrender of the certificate or certificates representing such Dissenting Shares) a portion of the Merger Consideration in accordance with Section 2.6.

 

(b) The Company shall give Parent written notice of any demand by any Company Shareholder for appraisal of such shareholder’s Shares pursuant to the CBCA, and shall negotiate and proceed with respect to any such demand pursuant to the instructions of Parent.

 

-15-

(c) For purposes of this Agreement, “ Dissenting Shares ” shall mean any Shares outstanding immediately prior to the Effective Time that are held by a Company Shareholder that is entitled to demand, and that properly demands, appraisal of such Shares pursuant to, and thereafter complies with, the applicable provisions of Section 7-113 of the CBCA, and that has not effectively withdrawn or lost such holder’s appraisal rights under the CBCA.

 

2.10 Debt Agreements; Transaction Costs, Transaction Incentive Plan

 

2.10.1 Debt Agreements

 

Immediately prior to the Closing, the Company shall take all such actions as are permitted or required under the terms of all loans, promissory notes, lines of credit, swaps, interest rate derivatives, other interest rate derivative products or similar obligations of the Company identified on Disclosure Schedule 3.9(i)(e) , other than capital lease obligations, (the “ Debt Agreements ”), to ensure that all obligations pursuant to each of the Debt Agreements are terminated, and commitments thereunder for future fundings are terminated and all collateral and guaranties therefore have been released. Notwithstanding the other provisions of this Section 2, at the Closing, if any amounts remain outstanding under any of the Debt Agreements, including, without limitation, any amounts required to effect the termination of any such Debt Agreements (the “ Outstanding Debt Amount ”), such Outstanding Debt Amount shall be paid in the manner set forth in Section 2.6(a)(i) of this Agreement.

 

2.10.2 Transaction Costs

 

Immediately prior to the Closing, the Company shall pay all Transaction Costs. Notwithstanding any other provision of this Section 2, at the Closing, if the Company fails to make any or all of such payments, the aggregate amount of all unpaid Transaction Costs at the Closing (the “ Outstanding Transaction Costs” ) shall be paid in the manner set forth in Section 2.6(a)(i) of this Agreement.

 

2.10.3 Transaction Incentive Plan

 

(a) Subject to Section 2.10.3(b), immediately prior to the Closing, the Company shall make any payments to management required to be made under the terms of the Information Management Research, Inc. Transaction Incentive Plan (the “ Transaction Incentive Plan ”). Notwithstanding any other provision of this Section 2, at the Closing, if the Company fails to make any or all of such payments, the aggregate amount of all unpaid amounts payable under the Transaction Incentive Plan at the Closing (the “ Outstanding Incentive Plan Payments ”) shall be paid in the manner set forth in Section 2.6(a)(i) of this Agreement.

 

(b) Notwithstanding the foregoing, $397,500 of the amounts otherwise payable under the Transaction Incentive Plan (the “Management Escrow Amount”) shall be withheld by the Company pursuant to Section 6(c) of the Transaction Incentive Plan and deposited

 

-16-

with the Escrow Agent subject to the terms of the Escrow Agreement. To the extent the aggregate payments to be made under the Transaction Incentive Plan are less than the Management Escrow Amount, the dollar amount of such deficiency (the “ Deficiency Amount ”) shall be deducted from the Merger Consideration and deposited in the Escrow Fund at the Closing. Each Company Shareholder shall be deemed to have contributed his, her or its pro rata portion of the Deficiency Amount to the Escrow Fund, according to each such Company Shareholder’s pro rata portion of the Shareholder Escrow Fund (without regard to the Deficiency Amount). Each Company Shareholder’s Escrow Portion shall include such shareholder’s portion of the Deficiency Amount.

 

(c) Attached hereto as Disclosure Schedule 2.10.3(c) is a list (the “ Incentive Plan Payout Schedule ”), which the Company hereby represents and warrants to Parent is accurate and complete as of the date of this Agreement, showing each Participant (as defined in the Transaction Incentive Plan) under the Transaction Incentive Plan (the “ Incentive Plan Participants ”), the dollar amount of the Incentive Payment (as defined in the Transaction Incentive Plan) payable to each such Participant in connection with the Closing and the dollar amount of each such Participant’s Incentive Payment to be withheld pursuant to Section 6(c) of the Transaction Incentive Plan and this Section 2.10.3(b). The Company shall update the Incentive Plan Payout Schedule to reflect any changes made to the information required to be set forth therein after the date hereof and prior to the Closing Date and shall deliver the final Incentive Plan Payout Schedule, which the Company represents and warrants shall be accurate and complete as of the Closing Date, to Parent at least one business day prior to the Closing.

 

2.10.4 Disbursement Reconciliation

 

At least one business day prior to the Closing, the Company shall deliver to Parent a reasonably detailed written reconciliation, which the Company hereby represents and warrants to Parent shall be accurate and complete (the “ Disbursement Reconciliation ”), showing (a) the disbursements made, or to be made, immediately prior to the Closing, pursuant to Sections 2.10.1, 2.10.2 and 2.10.3, above, and (b) the Outstanding Debt Amount, the Outstanding Transaction Costs and the Outstanding Incentive Plan Payments (collectively, the “ Outstanding Obligations ”), if any, in each case showing the party or parties to whom such amounts are owing.

 

2.11 Tax Withholding

 

Each of Parent and the Company shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts as shall be required to be deducted and withheld therefrom under the Code or under any provision of state, local or foreign tax law or under any other applicable legal requirement. To the extent that amounts are so deducted and withheld, such amounts shall be treated for all purposes of this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.

 

-17-

2.12 Distribution of Company Net Cash

 

Immediately prior to the Effective Time, it is agreed and understood that the Company may make a distribution of all of its net cash, if any, which shall be computed in accordance with Exhibit 2.12 (“ Net Cash ”), to the Company Shareholders.

 

Section 3. Representations and Warranties of the Company and the Signing Shareholders

 

3-A By Company

 

To induce Parent to enter into and perform this Agreement, and except as is otherwise set forth in the Disclosure Schedules, which exceptions shall identify the paragraph or paragraphs of this Section 3-A to which such exceptions relate with reasonable particularity, the Company represents and warrants to Parent that the following statements are complete and correct as of the date of this Agreement.

 

3.1 Organization; Good Standing; Corporate Authority; Enforceability

 

The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation. The Company has all requisite power, right and authority to own, operate and lease its properties and assets, to carry on its business, to execute, deliver and perform its obligations under this Agreement and the other Transaction Documents to which it is a party, and to carry out the transactions contemplated hereby and thereby. All actions on the part of the Company and its officers and directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the other Transaction Documents, the consummation of the transactions contemplated hereby and thereby, and the performance of the Company’s obligations under this Agreement and the other Transaction Documents have been taken or will be taken as of the Effective Time. This Agreement and the other Transaction Documents to which the Company is a party have been duly executed and delivered by the Company, and this Agreement is, and each of the other Transaction Documents to which it is a party is, a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms subject to the effect, if any, of (a) applicable bankruptcy and other similar laws affecting the rights of creditors generally and (b) rules of law and equity governing specific performance, injunctive relief and other equitable remedies.

 

3.2 Subsidiaries

 

(a) Except as set forth in Section 3.2(b), the Company does not have, and has never had, any subsidiaries. The Company does not own, directly or indirectly, any ownership, equity, profits or voting interest in, or otherwise control, any corporation, partnership, joint venture or other entity, and has no agreement or commitment to purchase any such interest.

 

-18-

(b) Information Management Research, Ltd. (the “ Subsidiary ”) has no liabilities or obligations of any nature (absolute, contingent or otherwise) that are not fully reflected or reserved against in the Company Balance Sheet. The Subsidiary does not currently conduct any business. Disclosure Schedule 3.2(b) sets forth (i) the name of each of the officers and directors of the Subsidiary and (ii) the jurisdictions in which the Subsidiary is qualified or holds licenses to do business as a foreign corporation. The Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the United Kingdom. The Subsidiary is duly qualified or licensed to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification or licensing, except where the failure to be so qualified, licensed or in good standing has not had, and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company. The Subsidiary has all requisite power and authority to carry on its business as it is now being conducted and to own, lease and otherwise use the assets and properties owned and used by it. The Company has delivered to Parent complete and accurate copies of the charter, bylaws or other organizational documents of the Subsidiary. The Subsidiary is not in default under or in violation of any provision of its charter, bylaws or other organizational documents. All of the issued and outstanding shares of capital stock of the Subsidiary are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. All shares of the Subsidiary are held of record or owned beneficially by the Company and are held or owned free and clear of any restriction on transfer (other than restrictions under federal or state securities laws), claim, security interest, option, warrant, right, lien, call, commitment, equity or demand. There are no outstanding or authorized options, warrants, rights, agreements or commitments to which the Company or the Subsidiary is a party or which are binding on either of them providing for the issuance, disposition or acquisition of any capital stock of the Subsidiary. There are no outstanding stock appreciation, phantom stock or similar rights with respect to the Subsidiary. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any capital stock of the Subsidiary.

 

3.3 Capitalization

 

(a) The authorized capital stock of the Company consists of 10,000,000 shares of common stock (“ Common Stock ”) and 9,568,306 shares of preferred stock, 2,068,306 of which are designated Series A Convertible Preferred Stock (the “ Series A Preferred ”), 1,500,000 of which are designated Series B Convertible Preferred Stock (the “ Series B Preferred ”) and 1,904,762 of which are designated Series C Convertible Preferred Stock (the “ Series C Preferred ”).

 

(b) As of the date of this Agreement, the issued and outstanding capital stock of the Company consists solely of 2,465,968 shares of Common Stock, 2,068,306 shares of Series A Preferred, 931,429 shares of Series B Preferred and 1,904,762 shares of Series C Preferred, which are held of record by the Company Shareholders set forth on Disclosure Schedule 3.3(b) . Disclosure Schedule 3.3(b) also separately indicates the number of shares of common stock into which the outstanding preferred stock is convertible. Such outstanding

 

-19-

shares are duly authorized and validly issued, fully paid and nonassessable, and were issued in compliance with all applicable federal and state securities laws. Complete and correct copies of the stock records of the Company have been provided to Parent.

 

(c) As of the date of this Agreement, other than (i) options to purchase up to 197,250 shares of Common Stock, (ii) warrants to purchase up to 34,690 shares of Common Stock, and (iii) other stock purchase rights set forth on Disclosure Schedule 3.3(c) , there are no outstanding rights of first refusal or offer, preemptive rights, options, warrants, conversion rights or other agreements, either directly or indirectly, for the purchase or acquisition from the Company or any Company Shareholder of any shares of the Company’s capital stock or any securities convertible into or exchangeable for shares of the Company’s capital stock except as set forth on the Disclosure Schedule 3.3(c) . Set forth as Disclosure Schedule 3.3(c) is a spreadsheet accurately reflecting the number of such options, warrants and stock purchase rights outstanding, the grant or issue dates, vesting schedules and exercise or conversion prices thereof, whether such options, warrants or rights will become exercisable between the date of this Agreement and the Effective Time, and the identities of the holders. The Company has delivered to Parent complete and correct copies of all agreements and documents relating to such options, warrants or rights on Disclosure Schedule 3.3(c) .

 

(d) The Company is not a party or subject to any agreement or understanding and, to the Knowledge of the Company (other than voting agreements entered into in connection with this Agreement), there is no agreement or understanding among any Persons regarding any securities of the Company.

 

3.4 No Approvals or Notices Required; No Conflicts

 

The execution, delivery and performance of this Agreement and the other Transaction Documents by the Company, and the consummation of the transactions contemplated hereby and thereby, will not (a) constitute a violation (with or without the giving of notice or lapse of time, or both) of any provision of any law or any judgment, decree, order, regulation or rule of any court, agency or other governmental authority applicable to the Company, (b) require any consent, approval or authorization of, or declaration, filing or registration with, any Person, (c) result in a default (with or without the giving of notice or lapse of time, or both) under, acceleration or termination of, or the creation in any party of the right to accelerate, terminate, modify or cancel, any agreement, lease, note or other restriction, encumbrance, obligation or liability to which the Company is a party or by which it is bound or to which any assets of the Company are subject, (d) result in the creation of any Encumbrance upon any assets of the Company, (e) conflict with or result in a breach of or constitute a default under any provision of any of the charter documents of the Company, or (f) invalidate or adversely affect any Permit used in the conduct of the business of the Company.

 

-20-

3.5 Financial Statements; Obligations; Internal Controls

 

(a) Attached as Disclosure Schedule 3.5 are the following financial statements of the Company (collectively, the “ Financial Statements ”): (i) balance sheets and statements of operations, shareholders’ equity and cash flows of the Company at and for the fiscal years ended December 31, 2001, 2002 and 2003, and accompanying notes, audited by Ernst & Young LLP, independent auditors and certified public accountants, and (ii) unaudited balance sheets and unaudited statements of operations, shareholders’ equity and cash flows of the Company at and for the quarterly periods ending March 31, 2004 and June 30, 2004, and (iii) unaudited balance sheet and unaudited statement of operations, shareholders’ equity and cash flows of the Company at and for the four-month period ended April 30, 2004, and (iv) unaudited balance sheet (the “ Company Balance Sheet ”) and unaudited statements of operations, shareholders’ equity and cash flows of the Company at and for the eight-month period ended August 31, 2004 (the “ Balance Sheet Date ”). The Financial Statements were prepared from the Company’s books and records and fairly present the financial position of the Company as of their respective dates and the results of operations of the Company for the respective years or periods then ended, in accordance with GAAP, subject, in the case of interim financial statements, to normal year-end adjustments, and except that the interim financial statements do not contain all of the footnote disclosures required by GAAP.

 

(b) The Company has no liabilities or obligations of any nature (absolute, contingent or otherwise) that are not fully reflected or reserved against in the Company Balance Sheet and that would be required under GAAP to be so reflected or reserved, except (i) current liabilities incurred since the date of the Company Balance Sheet through and as of the date of this Agreement in the ordinary course of business and consistent with past practice, (ii) any other liabilities or obligations that are not in excess of $25,000 in the aggregate or $10,000 individually or (iii) as permitted by Section 5.1. To the Knowledge of the Company, as of the Balance Sheet Date, the Company has no liabilities or obligations of any nature (absolute, contingent or otherwise) not required under GAAP to be reflected or reserved in the Company Balance Sheet, except (x) liabilities or obligations incurred in the ordinary course of business and consistent with past practice and which are not in default and (y) other liabilities or obligations that are not in excess of $25,000, in the aggregate, or $10,000 individually.

 

(c) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

-21-

3.6 Absence of Certain Changes or Events

 

Except as set forth in Disclosure Schedule 3.6 , since the Balance Sheet Date and through and as of the date of this Agreement, the Company has conducted its business in the ordinary course consistent with past practice, and has not:

 

(a) received oral or written notice that there has been, will be or may be a contract cancellation by any current customer, supplier or licensor of the Company, which cancellation would result in lost annual revenues of at least $25,000, or $50,000 in the aggregate;

 

(b) taken any action or entered into or agreed to enter into any transaction, agreement or commitment other than in the ordinary course of business;

 

(c) permitted or allowed any of its assets to be subjected to any Encumbrance;

 

(d) other than in the ordinary course of business, sold, transferred or otherwise disposed of any of its properties or assets with an aggregate net book value in excess of $25,000;

 

(e) disposed of or permitted to lapse any rights to the use of any trademark, trade name, patent or copyright, or disposed of or disclosed to any Person other than representatives of Parent or any Person who has signed a written nondisclosure agreement containing customary terms (copies of which have been delivered to Parent) any trade secret, formula, process or know-how not theretofore a matter of public knowledge;

 

(f) received notice of, or otherwise obtained Knowledge of: (i) any Claim involving, pending against or threatened against the Company or any employee of the Company before or by any Governmental Body or other Person or (ii) any outstanding or unsatisfied judgments, orders, decrees or stipulations to which the Company or any officer, director or employee of the Company is a party, which in the case of either clause (i) or (ii) relate directly to the transactions contemplated herein or that could have any material adverse effect upon the business of the Company or its assets;

 

(g) entered into or agreed to any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets of the Company to a third party or any amendment or change to any existing license or other agreement relating to intellectual property; or

 

(h) received notice of, or otherwise obtained Knowledge of, any other events or facts that would be reasonably likely to have a material adverse effect on the Company.

 

-22-

3.7 Tax Matters

 

(a) Disclosure Schedule 3.7(a) sets forth (i) all income Tax Returns filed by or on behalf of the Company or the Subsidiary with any jurisdiction for which the applicable statute of limitations on assessment and collection has not expired, and (ii) all jurisdictions in which the Company or the Subsidiary is required to pay sales, use, excise or property Taxes.

 

(b) Each of the Company and the Subsidiary (i) has timely filed on or before the applicable due date with each appropriate Governmental Body all Tax Returns required to be filed by or with respect to it, and all such Tax Returns have been properly completed in compliance with applicable legal requirements and are correct and complete, and (ii) has fully and timely paid, or has made adequate provision on the Financial Statements in accordance with GAAP for, all Taxes required to be paid by it (whether or not such Taxes have been reflected on any Tax Return). All Pre-Closing Taxes, to the extent not required to have been previously paid, will be fully and adequately reserved for on the Company’s books and records in accordance with GAAP. All Taxes that the Company or the Subsidiary has been required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid over to the appropriate Governmental Body in compliance with all applicable legal requirements, and the Company and the Subsidiary has complied with all information reporting and backup withholding requirements under all applicable legal requirements, including maintenance of required records with respect thereto.

 

(c) Except as set forth in Disclosure Schedule 3.7(c) , (i) there are no pending or threatened Claims by any Governmental Body with respect to Taxes relating to the Company or the Subsidiary; (ii) no extension or waiver of the limitation period applicable to any Tax Return of the Company or the Subsidiary is in effect or has been requested; (iii) all deficiencies claimed, proposed or asserted or assessments made as a result of any examinations by any Governmental Body of the Tax Returns of, or that include the income of, the Company or the Subsidiary have been fully paid or fully settled, or are being contested in good faith by appropriate proceedings, and adequate reserves have been made for such Taxes on the books and records of the Company in accordance with GAAP; (iv) there are no liens for Taxes upon any of the assets of the Company, except liens for current Taxes not yet due and payable; (v) the Company has not entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code; (vi) neither the Company nor the Subsidiary is or will be required to include any adjustment in taxable income for any Tax period pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions or events occurring, or accounting methods employed, prior to the date of this Agreement; and (vii) no power of attorney that currently is in effect has been granted by the Company or the Subsidiary with respect to any Tax matter.

 

(d) None of the Company or the Subsidiary (i) has been a member of any Affiliated Group that filed or was required to file a consolidated, combined or unitary Tax Return, or (ii) is or will not be liable for Taxes of any Person (other than its own) by reason

 

-23-

of contract, agreement, assumption, transferee liability, operation of law, Treasury Regulations Section 1.1502-6 (or any predecessor or successor thereof or any similar provision of law) or otherwise. The Company has not made any payment or payments, is not obligated to make any payment or payments and is not a party to (or a participating employer in) any agreement or employee benefit plan that could obligate it, the Surviving Corporation or Parent to make any payment or payments that would constitute an “excess parachute payment,” as defined in Section 280G of the Code (or any similar provision of state, local or foreign law) or that would otherwise not be deductible under Section 162 or Section 404 of the Code.

 

(e) Each of the Company and the Subsidiary has delivered or made available to Parent correct and complete copies of all Tax Returns for which the statute of limitations has not expired (other than state sales and use Tax Returns), and all audit reports and statements of deficiencies assessed against or agreed to by it.

 

(f) None of the Company or the Subsidiary is or ever has been, a party to or bound by any tax indemnity agreement, Tax sharing agreement, Tax allocation agreement or similar contract.

 

(g) Except as set forth on Disclosure Schedule 3.7(g) , none of the Company or the Subsidiary has done business in or derived income from any jurisdiction other than jurisdictions for which Tax Returns have been duly filed, and no claim has been made by a Governmental Body in a jurisdiction where the Company does not file Tax Returns that is or may be subject to taxation by that jurisdiction. Neither the Company nor the Subsidiary is, or ever has been, required to pay Taxes or file Tax Returns in any jurisdiction listed on Disclosure Schedule 3.7(g).

 

(h) The Company is not a party to any joint venture, partnership, other arrangement or contract treated as a partnership for federal income tax purposes.

 

(i) The Company has not 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 Section 355 of the Code.

 

(j) The Company has not, to its Knowledge, in any year for which the statute of limitations has not expired (i) taken a reporting position on a Tax Return that, if not sustained, would be reasonably likely to give rise to a penalty for substantial understatement of federal income Tax under Section 6662 of the Code (or any similar provision of state, local or foreign law), or (ii) engaged in a transaction that is the same as one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction, as set forth in Section 1.6011-4(b)(2) of the Treasury Regulations.

 

(k) The Company has not entered into a transaction that is being accounted for under the installment method of Section 453 of the Code or similar provision of state, local

 

-24-

or foreign law, and there is no taxable income of the Company that will be reportable in the taxable period beginning after the Closing Date that is attributable to a transaction or event that occurred prior to the Closing.

 

3.8 Property

 

(a) The Company has good, valid and marketable title to all of its assets free and clear of all Encumbrances, except (i) for liens for Taxes not yet due and payable (ii) with respect to the Seller IP, for nonexclusive Outbound Licenses listed on Disclosure Schedule 3.14.2, and (iii) with respect to assets other than Seller IP, for other Permitted Liens. Such assets are sufficient for the conduct of the Company’s business as currently conducted and as currently proposed to be conducted by the Company.

 

(b) Disclosure Schedule 3.8(b) contains a complete and accurate list of all real property owned, leased or used by the Company. The Company has delivered to Parent correct and complete copies of all leases, subleases, rental agreements, contracts of sale, tenancies or licenses relating to such real property.

 

(c) Disclosure Schedules 3.8(c) contains a complete and correct list of each item of personal property owned, leased or used by the Company other than the Seller IP with a cost basis in excess of $5,000.

 

3.9 Contracts

 

Disclosure Schedule 3.9(i) sets forth a list of each of the following Contracts to which the Company is a party or by which it is bound (the “ Material Contracts ”):

 

(a) any Contract (i) providing for payments (whether fixed, contingent or otherwise) by or to it in an aggregate amount of $10,000 or more as of, or after, the date of this Agreement or (ii) that cannot be canceled by the Company with 30 days’ notice without liability, penalty or premium;

 

(b) any dealer, distributor, OEM (Original Equipment Manufacturer), VAR (Value Added Reseller), sales representative or similar agreement under which any third party is authorized to sell, sublicense, lease, distribute, market or take orders for any product, service or technology of the Company or to provide training or other services (including, without limitation, maintenance or support services) to the Company’s customers;

 

(c) any joint venture or partnership Contract that has involved, or is reasonably expected to involve, a sharing of profits, expenses or losses with any other party or the joint development of any product, service, software or other technology with any third party;

 

(d) any Contract for or relating to the employment of any officer, employee or consultant of the Company or any other type of Contract with any officer, employee or consultant of the Company that is not immediately terminable by the Company without cost or other liability;

 

-25-

(e) any Contract, including any indenture, mortgage, trust deed, promissory note, loan agreement, security agreement or guarantee, for the borrowing of money, for a line of credit or for a leasing transaction of a type required to be capitalized in accordance with Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board;

 

(f) any Contract, including any lease, under which the Company is lessee of or holds or operates any items of tangible personal property or real property owned by any third party, other than tangible personal property with a fair market value of less than $5,000; and

 

(g) any Contract that restricts the Company from, (i) engaging in any aspect of its business; (ii) participating or competing in any line of business or in any market; (iii) freely setting prices for its products, services or technologies (including most favored customer pricing provisions); (iv) engaging in any business in any market or geographic area; or (v) soliciting potential employees, consultants, contractors or other suppliers or customers.

 

The Material Contracts are valid, binding and enforceable in accordance with their terms against the Company and, to the Knowledge of the Company, each party thereto, and are in full force and effect except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a court of law or equity); the Company has performed in all material respects all obligations imposed upon it thereunder; and the Company is not in default thereunder; nor is there any event that, with notice or lapse of time, or both, would constitute a default thereunder. Furthermore, to the Knowledge of the Company, no breach or default by any other party to any Material Contract or any provision thereof, nor any condition or event that, with notice or lapse of time, or both, would constitute such a breach or default, has occurred. Correct and complete copies of each Material Contract have been delivered to Parent. Except as set forth in Disclosure Schedule 3.9(ii) , no consent is required from any Person under any Material Contract in connection with the consummation of the transactions contemplated by this Agreement, and the Company has not received notice, and is not otherwise aware, that any party to any Material Contract intends to cancel, terminate or refuse to renew such Material Contract or to exercise or decline to exercise any option or right thereunder.

 

3.10 Customers and Suppliers

 

Disclosure Schedule 3.10 sets forth (a) a complete and accurate list of the customers of the Company accounting for 1% or more of the Company’s revenues during the 12-month period ended and through July 31, 2004, showing the approximate total revenues from each such customer during such period, and (b) a complete and accurate list of the suppliers from whom the Company has purchased 3% or more of the goods or services purchased by the

 

-26-

Company in the 12-month period ended and through July 31, 2004. As of the date of this Agreement, the Company has not received any notice from its customers or suppliers that would cause it, in its reasonable judgment, to expect any material modification to its relationship with any customers or suppliers named on such Disclosure Schedule 3.10 .

 

3.11 Orders, Commitments and Warranties

 

Disclosure Schedule 3.11 contains an accurate summary of all outstanding purchase orders received by the Company as of five business days prior to the date of this Agreement which, individually, are in excess of $10,000, and the aggregate of all outstanding purchase orders issued by the Company as of such date (which aggregate includes all material contracts or commitments for the purchase by the Company of materials or other supplies). All such sale and purchase commitments, and any sale or purchase commitments received or made during the five business days prior to the date of this Agreement, were received or made in the ordinary course of business consistent with past practice. During the thirty business days prior to the date of this Agreement, there has been no material increase or decrease in the sale or purchase commitments received or made by the Company from those reflected in Disclosure Schedule 3.11. Disclosure Schedule 3.11 also sets forth the Company’s warranties currently made with respect to its products and services and current policies with respect to returns of products. Except as set forth on Disclosure Schedule 3.11 , the Company has not made any other express warranties, and has disclaimed all implied warranties and conditions, in connection with the sale of its products and services. Except as reserved in the Financial Statements, there are no material Claims against the Company for warranty costs with respect to products and services. As used above, the term “ warranty costs ” shall mean costs and expenses associated with correcting, returning or replacing defective or allegedly defective products or services, wh