AGREEMENT AND PLAN OF MERGER

Exhibit 10.36

 

AGREEMENT AND PLAN OF MERGER

 

BY AND AMONG

 

MYKROLIS CORPORATION,

 

STINGRAY MERGER CORPORATION,

 

EXTRACTION SYSTEMS, INC.

 

AND

 

THE REPRESENTATIVE OF THE HOLDERS

 

OF ALL OF THE CAPITAL STOCK OF

 

EXTRACTION SYSTEMS, INC.

 

Dated as of March 3, 2005

 

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TABLE OF CONTENTS

 

 

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AGREEMENT AND PLAN OF MERGER

 

AGREEMENT AND PLAN OF MERGER made as of March 3, 2005 (this “Agreement”) by and among Mykrolis Corporation, a Delaware corporation (“Parent”), Stingray Merger Corporation, a Massachusetts corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), Extraction Systems, Inc., a Massachusetts corporation (the “Company”), and the Representative (as defined below). The holders of all of the outstanding Common Stock, no par value, of the Company (the “Company Common Stock”), and Preferred Stock, par value $.01 per share, of the Company (the “Company Preferred Stock,” and together with the Company Common Stock, the “Company Stock”) are collectively referred to as the “Company Stockholders,” and the Company Stockholders together with the holders of all other equity securities of the Company (including, without limitation, securities exercisable for, or convertible into, equity securities of the Company) are collectively referred to herein as the “Company Securityholders.”

 

A. The respective Boards of Directors of Parent, Merger Sub and the Company have deemed it advisable and in the best interests of their respective corporations and stockholders that Parent and the Company consummate the business combination and other transactions provided for herein in order to advance their respective long-term strategic business interests.

 

B. The respective Boards of Directors of Parent, Merger Sub and the Company have approved, in accordance with applicable provisions of the laws of the State of Delaware (“Delaware Law”) and the Commonwealth of Massachusetts (“Massachusetts Law”), as the case may be, this Agreement and the transactions contemplated hereby, including the Merger (as defined in Section 1.1).

 

C. Concurrently with the execution and delivery of this Agreement, and as a condition and inducement to Parent’s willingness to enter into this Agreement, certain executive officers and key employees of the Company are entering into Non-Competition and Non-Solicitation Agreements (collectively, the “Non-Competition and Non-Solicitation Agreements”), the effectiveness of which are contingent upon the consummation of the Merger.

 

D. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent’s willingness to enter into this Agreement, certain employees of the Company are delivering countersigned employment offer letters accepting employment with Parent, the effectiveness of which are contingent upon the consummation of the Merger.

 

E. The Board of Directors of the Company has resolved to recommend to its stockholders approval and adoption of this Agreement, the Merger and the other transactions contemplated hereby.

 

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

 

1. The Merger

 

1.1 The Merger . At the Effective Time (as defined below), and subject to and upon the terms and conditions of this Agreement and the Massachusetts Business Corporation Act (the “MBCA”), Merger Sub shall be merged (the “Merger”) with and into the Company, whereupon the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the “Surviving Corporation.”

 

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1.2 Effective Time; Closing . The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place as soon as practicable (and in no event later than five business days) after the satisfaction or waiver of each of the conditions set forth in Sections 7, 8 and 9 below or at such other time as the parties agree (the “Closing Date”). In connection with the Closing, the parties shall cause the Merger to be consummated by filing articles of merger with the Secretary of State of the Commonwealth of Massachusetts, as contemplated by the MBCA and in the form attached hereto as Exhibit A (the “Articles of Merger”), and make all other filings or recordings required by Massachusetts Law in connection with the Merger. The Merger shall be effective upon the later of: (a) the date and time of the filing of the Articles of Merger with the Secretary of State of the Commonwealth of Massachusetts, or (b) such other date and time as may be specified in the Articles of Merger (such later date being referred to as the “Effective Time”). The Closing shall take place at 10:00 a.m., Eastern Time, on the Closing Date at the offices of Ropes & Gray LLP, One International Place, Boston, Massachusetts.

 

1.3. Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Articles of Merger and the applicable provisions of the MBCA. Without limiting the generality of the foregoing, and subject thereto, from and after the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

 

1.4. Articles of Organization, By-laws .

 

(a) Articles of Organization . At the Effective Time, the Articles of Organization of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Organization of the Surviving Corporation until thereafter amended in accordance with the MBCA, except that, at the Effective Time, Article I of such Articles of Organization shall be amended, as set forth in the Articles of Merger, to read as follows: “The exact name of the corporation is Extraction Systems, Inc. (hereinafter, the “Corporation”).”

 

(b) By-laws . At the Effective Time, the by-laws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the by-laws of the Surviving Corporation until thereafter amended in accordance with the MBCA and such by-laws.

 

1.5. Directors and Officers . The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Organization and by-laws of the Surviving Corporation, and the officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified.

 

1.6.

Appointment of Representative . The Company Stockholders, by written agreement or by virtue of having approved and adopted this Agreement under the MBCA, will be deemed to have irrevocably constituted and appointed, effective as of the Effective Time, Richard Condon, who may act individually, (individually and, together with his permitted successors, the “Representative”), as their true and lawful agent, proxy and attorney-in-fact to exercise all or any of the powers, authority and discretion conferred on him under this Agreement (including, without limitation, Section 13) or

 

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any other agreement or instrument entered into or delivered in connection with the transactions contemplated hereby (including, without limitation, the Escrow Agreement (as defined below)). The Representative agrees to act as, and to undertake the duties and responsibilities of, such agent, proxy and attorney-in-fact. This power of attorney is coupled with an interest and is irrevocable.

 

2. Conversion and Exchange of Securities

 

2.1. Effect on Capital Stock . At the Effective Time and on the terms and subject to the conditions of this Agreement, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or any Company Securityholder:

 

(a) Conversion of Securities .

 

(i) Except as otherwise provided in Section 2.1(b), each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than any Dissenting Shares (as defined below)), including without limitation any and all shares of Company Common Stock issued upon conversion of shares of Company Preferred Stock in accordance with the Merger Consent (as defined below), shall be converted into the right to receive, subject to Section 2.1(f), the appropriate Allocable Portion of the Merger Consideration (as defined below) in cash, payable to the holder thereof, without interest, upon the surrender of the certificate representing such share in accordance with the terms hereof and in the manner provided herein. For purposes of this Agreement, with respect to each share of Company Common Stock, the “Allocable Portion of the Merger Consideration” shall mean an amount equal to a fraction, the numerator of which is equal to the Merger Consideration, and the denominator of which is the sum of (X) aggregate number of shares of Company Common Stock outstanding immediately prior to the Effective Time (including any shares of Company Common Stock issued after the date hereof but prior to the Effective Time pursuant to the exercise of currently outstanding Company Options (as defined below) or Warrants (as defined below) or the conversion of shares of Company Preferred Stock), (Y) the number of shares of Company Common Stock subject to Company Options outstanding and vested immediately prior to the Effective Time (including such Company Options which become vested upon consummation of the transactions contemplated by this Agreement) (the “Vested Company Options”) and (Z) the number of shares of Company Common Stock subject to Warrants.

 

(ii) The Company shall use its best efforts to cause the conversion of all outstanding shares of Company Preferred Stock into shares of Company Common Stock in accordance with the Merger Consent such that, at and as of the time that is immediately prior to the Effective Time there shall be no shares of Company Preferred Stock issued and outstanding.

 

(iii) The “Merger Consideration” shall equal:

 

(1) $25,000,000, plus

 

(2) the aggregate amount (but not in excess of the lesser of (A) $541,664.00 and (B) the Estimated Seller Expenses) of the exercise prices payable in respect of all Warrants outstanding and vested immediately prior to the date hereof and to be cancelled pursuant to Section 2.1(e)(iii), plus

 

(3) 50% of the aggregate amount (but not in excess of (a) the Estimated Seller Expenses less (b) the amount calculated pursuant to clause (2) above) of the exercise price payable in respect of all Company Options outstanding and vested immediately prior to the Effective Time and to be cancelled pursuant to Section 2.1(e)(ii), minus

 

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(4) the amount of Estimated Seller Expenses, minus

 

(5) the amount of the Estimated Working Capital Adjustment.

 

The term “Estimated Seller Expenses” shall mean the Seller Expenses as agreed in good faith by the Company and Parent no later than three business days prior to the Closing Date. The term “Seller Expenses” shall mean any and all Transaction Expenses (as defined below) of the Company, any of its Subsidiaries or, to the extent that the Company, or any of its Subsidiaries may pay or reimburse others or may otherwise be or become obligated to pay or reimburse others or may be or become liable, any Company Securityholder; provided, however, that for avoidance of doubt the Company and Parent acknowledge and agree that the bonus payable to Robert E. Brierley that is contingent upon the closing of the Merger (such bonus not to exceed $100,000) shall not be considered a “Seller Expense”. A statement of Estimated Seller Expenses shall be attached to this Agreement as Schedule 2.1(a)(iii)(X).

 

The term “Estimated Working Capital Adjustment” shall mean the good faith estimate of the Working Capital Adjustment as agreed by the Company and Parent no later than three business days prior to the Closing Date. A statement of Estimated Working Capital Adjustment shall be attached to this Agreement as Schedule 2.1(a)(iii)(Y). The term “Working Capital Adjustment” shall mean the aggregate amount payable to Parent from the Escrow Funds pursuant to Section 2.3(c) (without giving effect to Section 2.3(g)) as of the date of determination provided for in Section 2.3(c).

 

(iv) From and after the Effective Time, each such converted share of Company Stock shall no longer be outstanding and shall be automatically cancelled and retired and shall cease to exist, and each holder of a certificate representing each such share shall cease to have any rights with respect thereto, except the right to receive (subject to the terms of this Agreement) the appropriate Allocable Portion of the Merger Consideration with respect to such share, without interest, upon the surrender of such certificate in accordance with the terms hereof and in the manner provided herein, or the right, if any, to receive payment from the Surviving Corporation of the “fair value” of such Dissenting Shares as determined in accordance with the applicable provisions of the MBCA. Section 2.1(a)(iv) of the Disclosure Schedule sets forth the following information with respect to each Company Stockholder: (a) the aggregate Allocable Portion of the Merger Consideration that would have been payable to such Company Stockholder in accordance with the terms hereof and in the manner provided herein in respect of all of the shares of Company Stock owned by such Company Stockholder (based upon an estimate of the Estimated Seller Expenses and Estimated Working Capital Adjustment identified therein), subject to withholding for taxes as described in Section 2.2(e) (such applicable amount, with respect to each Company Stockholder, the “Aggregate Allocable Portion of the Merger Consideration”); (b) that portion, if any, of such Company Stockholder’s Aggregate Allocable Portion of the Merger Consideration that would have been deliverable, on behalf of such holder, to the Escrow Agent (as defined below) pursuant to Section 2.1(f) (based upon an estimate of the Estimated Seller Expenses and Estimated Working Capital Adjustment identified therein), as part of the Escrow Amount (as defined below) (such applicable amount, with respect to each Company Stockholder, the “Aggregate Allocable Portion of the Escrow Amount”); and (c) the mailing address of such Company Stockholder; provided, however, that the Company and Parent shall agree to update Section 2.1(a)(iv) of the Disclosure Schedule immediately prior to the Closing Date to reflect the actual Estimated Seller Expenses and Estimated Working Capital Adjustment, and to give effect to the exercise between the date hereof and the Effective Time of any currently outstanding Company Options or Warrants under the terms thereof or the conversion of shares of Company

 

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Preferred Stock under the terms thereof. In addition, Section 2.1(a)(iv) of the Disclosure Schedule sets forth the names of the holders of all Company Options and Warrants and the amounts and nature of the Company Options and/or Warrants held by each such holder.

 

(b) Cancellation . Each share of Company Stock owned by the Company as treasury stock or any direct or indirect wholly-owned subsidiary of the Company immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, be canceled and retired without payment of any consideration therefor and cease to exist.

 

(c) Capital Stock of Merger Sub . Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become, and shall represent, one fully paid and nonassessable share of common stock of the Surviving Corporation with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of capital stock of the Surviving Corporation.

 

(d) Shares of Dissenting Holders . Notwithstanding anything to the contrary contained in this Agreement, any holder of shares of Company Stock with respect to which appraisal or dissenters’ rights, if any, are granted by reason of the Merger under the MBCA and who does not vote in favor of the Merger and who otherwise complies with Part 13 of the MBCA (“Dissenting Shares”) shall not be entitled to receive any portion of his, her or its Aggregate Allocable Portion of the Merger Consideration and the Dissenting Shares held by such holder shall not be so converted pursuant to Section 2.1(a) (or in the event that such appraisal rights are properly asserted after the Effective Time, the shares of Company Stock with respect to which such rights are asserted shall be deemed not to have converted pursuant to Section 2.1(a) notwithstanding the provisions of Section 2.1(a)), unless such holder fails to perfect, effectively withdraws or loses his, her or its right to appraisal or to dissent from the Merger under the MBCA, as applicable, prior to or following the Effective Time. At the Effective Time (or after the Effective Time with respect to shares of Company Common Stock with respect to which appraisal rights are properly asserted after the Effective Time), all Dissenting Shares shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and the holders thereof shall be entitled to receive only the payment provided for by Part 13 of the MBCA. If any such Company Stockholder so fails to perfect, effectively withdraws or loses his, her or its right to appraisal or to dissent from the Merger under the MBCA prior to or following the Effective Time, his, her or its Dissenting Shares shall thereupon be deemed to have been converted pursuant to Section 2.1(a), as of the Effective Time, into the right to receive his, her or its Aggregate Allocable Portion of the Merger Consideration in accordance with the terms hereof and in the manner provided herein. The Company shall give Parent (i) prompt notice of any demands received by the Company for appraisal or payment of the fair value of any shares, withdrawals of such demands, and any other instruments served on the Company pursuant to the MBCA and (ii) the opportunity to participate in, or, if the Company elects not to direct such actions itself, to direct all negotiations and proceedings with respect to demands for appraisal or payment under the MBCA. Except with the prior written consent of Parent, the Company shall not make any payment with respect to any demands for appraisal or settle or offer to settle any such demands. Any payments relating to the Dissenting Shares shall be made solely by the Surviving Corporation and no funds or other property have been or will be provided by Parent or any of Parent’s other direct or indirect subsidiaries for such payment.

 

(e) Company Options and Warrants .

 

(i) As soon as practicable following the Closing, but effective as of the Effective Time, each outstanding option to purchase shares of Company Common Stock granted under a Company equity incentive plan (each such option, a “Company Option,” and collectively, the “Company Options,” and each such equity incentive plan, an “Option Plan” and collectively, the “Option Plans”) that is not vested and exercisable as of the Effective Time, shall be cancelled as of the Effective Time without any payment in respect thereof.

 

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(ii) Each outstanding Company Option that is vested and exercisable at the Effective Time shall be canceled as of the Effective Time in exchange for the right to receive, subject to Section 2.1(f), a lump sum cash payment equal to the difference of (A) the product of (x) the appropriate portion of Allocable Portion of the Merger Consideration attributable to one share of Company Common Stock multiplied by (y) the number of shares of Company Common Stock subject to such option minus (B) the aggregate amount of the exercise prices payable in respect of such Option. Such payment, subject to the portion of such payment to be placed in escrow pursuant to Section 2.1(f), shall be made immediately following the Effective Time.

 

(iii) Each outstanding Warrant that is exercisable as of the Effective Time shall be canceled as of the Effective Time in exchange for the right to receive, subject to Section 2.1(f), a lump sum cash payment equal to the difference of (A) the product of (x) the appropriate Allocable Portion of the Merger Consideration attributable to one share of Company Common Stock multiplied by (y) the number of shares of Company Common Stock subject to such Warrant minus (B) the aggregate amount of the exercise prices payable in respect of such Warrant. Such payment, subject to the portion of such payment to be placed in escrow pursuant to Section 2.1(f), shall be made immediately following the Effective Time.

 

(iv) Each outstanding Warrant that is not vested and exercisable as of the Effective Time, shall be cancelled as of the Effective Time without any payment in respect thereof.

 

(f) Escrow . At the Effective Time, Parent shall deliver, or cause to be delivered, on behalf of the Company Securityholders, an aggregate amount equal to ten percent (10%) of the Merger Consideration (the “Escrow Amount”), which amount would otherwise have been deliverable to the Company Securityholders pursuant to Section 2.1(a), to Wachovia Bank N.A. (the “Escrow Agent”), as Escrow Agent under an Escrow Agreement to be entered into on the Closing Date by and among Parent, the Representative, on behalf of the Company Securityholders, and the Escrow Agent in the form attached hereto as Exhibit B (the “Escrow Agreement”), for deposit into an account (the “Escrow Account”) established pursuant to the Escrow Agreement. The Escrow Amount, together with all interest and earnings thereon while held in escrow under the Escrow Agreement, are referred to collectively in this Agreement as the “Escrow Funds.” The Escrow Agreement provides Parent with recourse against the Escrow Funds with respect to the Company Securityholders’ indemnification obligations under Section 12, subject to the terms and conditions set forth therein. The Escrow Funds (or any portion thereof) shall be distributed to the Representative, on behalf of the Company Securityholders, and Parent at the times, and upon the terms and conditions set forth in the Escrow Agreement. Subject to Section 13.5, the Representative will promptly distribute any and all Escrow Funds received by the Representative, on behalf of the Company Securityholders, from the Escrow Agent to the Company Securityholders in accordance with each Company Securityholder’s Pro Rata Share (as defined below) of such distribution. Each Company Securityholder’s “Pro Rata Share” shall be a fraction identified on a schedule or exhibit to the Escrow Agreement, which shall represent the percentage of the aggregate Merger Consideration payable hereunder that is payable to such Company Securityholder; provided, however, any holder of Dissenting Shares shall not be deemed to be a Company Securityholder for purposes of such determination.

 

2.2 Surrender of Certificates .

 

(a) Paying Agent . At the Effective Time, Parent shall deposit, or cause to be deposited, with Wachovia Bank N.A. (the “Paying Agent”), for the benefit of the Company Stockholders, an amount equal to the aggregate amount required to be paid to the Company Stockholders pursuant to Section 2.1(a)(i) minus the Escrow Amount. Such funds shall be invested as directed

 

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by Parent or the Surviving Corporation pending payment thereof by the Paying Agent to the Company Stockholders. Earnings from such investments, if any, shall be the sole and exclusive property of the Surviving Corporation, and no part of such earnings shall accrue to the benefit of the Company Stockholders.

 

(b) Exchange Procedures . As soon as reasonably practicable after the Effective Time, Parent shall instruct the Paying Agent to mail to each Company Stockholder at the Effective Time (i) a letter of transmittal in customary form (which shall specify that delivery shall be effected, and risk of loss and title to the certificate(s) representing all of the Company Stock shall pass, only upon delivery of the certificate(s) to the Paying Agent and shall be in such form and have such other reasonable provisions not inconsistent with this Agreement as Parent may specify) and (ii) instructions for use in effecting the surrender of certificate(s) representing all of the shares the Company Stock held by him, her or it in exchange for his, her or its Initial Merger Payment (as defined below). The letter of transmittal shall include the agreement by each Company Stockholder to irrevocably constitute and appoint, effective as of the Effective Time, the Representative, as his, her or its true and lawful agent, proxy and attorney-in-fact to exercise all or any of the powers, authority and discretion conferred on him, her or it under this Agreement and a waiver of any appraisal rights such Company Stockholder may have under Part 13 of the MBCA. The receipt of the appropriate Initial Merger Payment by any Company Stockholder is conditioned upon the execution and delivery of such transmittal letter containing such appointment and waiver. After the Effective Time, within two business days after receipt by the Paying Agent of certificate(s), properly endorsed or otherwise in proper form for transfer, representing all the shares of Company Stock held by any Company Stockholder for cancellation, together with such letter of transmittal, duly executed, the Paying Agent shall, in exchange therefor, pay to such Company Stockholder an amount equal to such Company Stockholder’s Aggregate Allocable Portion of the Merger Consideration less such Company Stockholder’s Aggregate Allocable Portion of the Escrow Amount (such amount, with respect to each such Company Stockholder, being the “Initial Merger Payment”), if any, but without interest, and the certificate(s) so surrendered shall forthwith be cancelled. If payment of any portion of any such amount is to be made to a Person other than the Person in whose name the surrendered certificate(s) are registered, it shall be a condition of payment that the Person requesting such payment (i) shall have paid any transfer and other taxes required by reason of the payment of those amounts to a Person other than the registered holder of the certificate(s) surrendered, and shall have established to the satisfaction of the Surviving Corporation that such tax has been paid, or (ii) shall have established to the satisfaction of the Surviving Corporation that such tax is not applicable. Until surrendered as contemplated by this Section 2.2, each certificate representing shares of Company Stock shall be deemed at any time after the Effective Time to represent for all purposes only the right to receive the applicable Allocable Portion of the Merger Consideration in respect of each share of Company Stock represented thereby in accordance with the terms hereof and in the manner provided herein.

 

(c) Transfer Books; No Further Ownership Rights in the Shares . At the Effective Time, the stock transfer books of the Company shall be closed, and thereafter there shall be no further registration of transfers of the shares of Company Stock on the records of the Company. From and after the Effective Time, the holders of certificates evidencing ownership of the shares of Company Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares, except as otherwise provided for herein or by applicable Legal Requirements (as defined below). After the Effective Time, the Surviving Corporation or the Paying Agent shall cancel and exchange, as provided in this Section 2, any presented certificate representing shares of Company Stock outstanding immediately prior to the Effective Time.

 

(d) Termination of Fund; No Liability . At any time following the first anniversary of the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any

 

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funds (including, without limitation, any earnings received with respect thereto) that had been made available to the Paying Agent and that have not been disbursed to Company Stockholders, and thereafter such Company Stockholders shall be entitled to look only to the Surviving Corporation (subject to abandoned property, escheat or other similar Legal Requirements) and only as general creditors thereof with respect to the payments provided in Section 2.2(b), upon due surrender of their certificates, without any interest thereon. Notwithstanding the foregoing, none of the Parent, the Surviving Corporation or the Paying Agent shall be liable to any holder of a certificate representing shares of Company Stock for any amounts delivered to a public official pursuant to any applicable abandoned property, escheat or similar Legal Requirement. Any amounts remaining unclaimed by Company Stockholders two years after the Effective Time (or such earlier date, immediately prior to such time when the amounts would otherwise escheat to or become the property of any Governmental Authority (as defined below)) shall become, to the extent permitted by applicable Legal Requirements, the property of Parent, free and clear of any claims or interest of any Person previously entitled thereto.

 

(e) Withholding Rights . Each of Parent, the Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold from payment of the appropriate Aggregate Allocable Portion of the Merger Consideration or the consideration to be paid under Section 2.1(e)(ii) (in either case, or any portion thereof) or otherwise payable pursuant to this Agreement to any Company Stockholder or any holder of Options or Warrants such amounts as may be required to be deducted and withheld with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the “Code”), or any provision of state, local or foreign tax Legal Requirement. To the extent that amounts are so withheld by Parent, the Surviving Corporation or the Paying Agent, such withheld 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.

 

(f) Lost, Stolen or Destroyed Certificates . In the event any certificate(s) representing shares of Company Stock shall have been lost, stolen or destroyed, Parent shall instruct the Paying Agent to issue in exchange therefor, upon the making of an affidavit of that fact by the Company Stockholder thereof in form reasonably satisfactory to the Parent, such Company Stockholder’s Initial Merger Payment as provided in this Section 2; 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 reasonably satisfactory to Parent, against any claim that may be made against Parent, the Surviving Corporation or the Paying Agent with respect to the certificate(s) alleged to have been lost, stolen or destroyed.

 

(g) Dissenting Shares . The provisions of this Section 2.2 shall also apply to Dissenting Shares that lose their status as such, except that the obligations of Parent under this Section 2.2 shall commence on the date of loss of such status and the holder of such shares shall be entitled to receive in exchange for such shares his, her or its Aggregate Allocable Portion of the Merger Consideration in accordance with the terms hereof and in the manner provided herein.

 

2.3. Adjustments .

 

(a) Within 20 business days after the Effective Time, Parent shall present to the Representative, on behalf of the Company Securityholders, its determination of the Net Working Capital, Stockholders’ Equity and Net Cash (each as defined below) along with appropriate supporting documentation. Parent and the Representative shall use their reasonable efforts to agree upon the Net Working Capital, Stockholders’ Equity and Net Cash within 20 business days after the delivery of such initial determination. In connection with their review of the Parent’s determination of the Net Working Capital, Stockholders’ Equity and Net Cash, Parent’s and the Representative’s respective accountants, counsel and other representatives shall have: (i) reasonable access to all of the Company’s and its Subsidiaries’ properties, books, Contracts, records and personnel related to such determination and (ii) reasonable access to all other information concerning such determination.

 

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(b) If Parent and the Representative do not agree upon the amount of the Net Working Capital, Stockholders’ Equity or Net Cash within 20 business days after the delivery of the initial determination thereof referred to in paragraph (a) above, thereafter either Parent or the Representative may direct Ernst & Young LLP (the “Accountants”) to determine the disputed Net Working Capital, Stockholders’ Equity and Net Cash. If the issues in dispute are submitted to the Accountants for resolution: (i) each party will furnish to the Accountants and the other party such work papers and other documents and information relating to the disputed issues as the Accountants or such other party may reasonably request that are available to that party or parties, or its or their independent public accountants, and will be afforded the opportunity to present to the Accountants any material relating to the determination and to discuss the determination with the Accountants; (ii) the Accountants shall consider only those items or amounts in the calculation of the Net Working Capital, Stockholders’ Equity and Net Cash as to which the Parent and Representative have disagreed; (iii) the determination by the Accountants, as set forth in a notice delivered to Parent and the Representative by the Accountants, will be made and such notice shall be so delivered within 45 days after the Representative or Parent first gives notice that it is directing the Accountants to determine the Net Working Capital, Stockholders’ Equity and Net Cash. The Accountants’ determination of the disputed Net Working Capital, Stockholders’ Equity and Net Cash shall be binding and conclusive on the parties, not subject to appeal or any proceeding of any type brought by any party. Fifty percent (50%) of the costs of the Accountants’ services in making such determination shall be treated as Seller Expenses under this Agreement, subject to reimbursement by a claim for indemnification pursuant to Section 12.1(a)(iii).

 

(c) On the second business day following any agreement by Parent and the Representative upon the Net Working Capital, Stockholders’ Equity and Net Cash or, in the absence of such an agreement, the date that the Accountants deliver the notice to Parent and the Representative finally determining the Net Working Capital, Stockholders’ Equity and Net Cash pursuant to Section 2.3(b):

 

(i) if the Net Working Capital (as so finally agreed or determined) is less than $6,200,000, the Representative, on behalf of the Company Securityholders, shall direct the Escrow Agent to pay to Parent the amount by which $6,200,000 exceeds the Net Working Capital (as so finally agreed or determined) from the Escrow Funds;

 

(ii) if the Stockholders’ Equity (as so finally agreed or determined) is less than $4,100,000, the Representative, on behalf of the Company Securityholders, shall direct the Escrow Agent to pay to Parent the amount by which $4,100,000 exceeds the Stockholders’ Equity (as so finally agreed or determined) from the Escrow Funds; and

 

(iii) if the Net Cash (as so finally agreed or determined) is less than $525,000, the Representative, on behalf of the Company Securityholders, shall direct the Escrow Agent to pay to Parent the amount by which $525,000 exceeds the Net Cash (as so finally agreed or determined) from the Escrow Funds.

 

(d) As used in this Section 2.3,

 

(i) “Net Working Capital” means, as of the close of business on the Closing Date: (i) the sum of (A) cash prior to the payment of any incentive compensation or debt plus (B) net accounts receivable plus (C) net inventory minus (D) accounts payable minus (E) accrued expenses (excluding accruals for the current portion of debt, profit-sharing and management incentive programs) (all as determined in accordance with generally accepted accounting principles

 

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(“GAAP”) applied on a basis consistent with the Balance Sheet (as defined below) and the Audited Financial Statements (as defined below) minus (F) accumulated vacation plus (G) the amount, if any, by which accumulated vacation plus amounts paid in respect of accumulated vacation to the extent required by Parent to be paid prior to Closing and actually paid by the Company prior to the Closing Date, exceeds $100,000 in the aggregate (and only such amount, if any, in excess of such $100,000);

 

(ii) “Stockholders’ Equity” means, as of the close of business on the Closing Date, the stockholders’ equity of the Company determined in accordance with GAAP applied on a basis consistent with the Balance Sheet and Audited Financial Statements; and

 

(iii)”Net Cash” means, as of the close of business on the Closing Date: (A) cash minus (B) capital leases minus (C) notes payable minus (D) accrued profit-sharing and management bonuses payable for the year ended December 31, 2004, (all as determined in accordance with GAAP applied on a basis consistent with the Balance Sheet and the Audited Financial Statements) minus (E) accumulated vacation plus (F) the amount, if any, by which accumulated vacation plus amounts paid in respect of accumulated vacation to the extent required by Parent to be paid prior to Closing and actually paid by the Company prior to the Closing Date, exceeds $100,000 in the aggregate (and only such amount, if any, in excess of such $100,000).

 

(e) Notwithstanding the foregoing, the final determination or agreement, as the case may be, of Net Working Capital, Stockholders’ Equity and Net Cash shall not be deemed to constitute a waiver of any right to indemnification under Section 12 for any misrepresentation or breach of warranty made by the Company in this Agreement or in any certificate required to be delivered by the Company under this Agreement; provided , that the remedy set forth in Section 12.1(a)(iv) shall, absent fraud or intentional misrepresentation by the Company, be the sole remedy available to Parent and Merger Sub to effect the adjustment to the Merger Consideration resulting from the Working Capital Adjustment.

 

(f) Any amount paid to Parent from the Escrow Funds pursuant to Section 2.3(c) shall be deemed an adjustment to the aggregate Allocable Portion of the Merger Consideration payable in respect of the shares of Company Stock pursuant to Section 2.1(a)

 

(g) Notwithstanding the foregoing provisions of Section 2.3(c), the amount otherwise payable to Parent out of the Escrow Funds pursuant to Section 2.3(c) shall be reduced by the amount, if any, of the Estimated Working Capital Adjustment included in the calculation of the Merger Consideration pursuant to Section 2.1(a)(iii).

 

2.4. Taking of Necessary Action; Further Action . Each of Parent, Merger Sub and the Company will take all such reasonable and lawful action as may be necessary or appropriate in order to effectuate the Merger in accordance with this Agreement as promptly as possible. 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, perfect or confirm of record or otherwise in the Surviving Corporation full right, title, interest and possession to and under all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Surviving Corporation will be fully authorized to execute and deliver, in the name and on behalf of the Company or Merger Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company or Merger Sub, any other such lawful and necessary actions.

 

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3. Representations and Warranties of the Company . The Company represents and warrants to Parent and Merger Sub, subject to the exceptions provided in the Disclosure Schedule to this Agreement furnished by the Company to Parent with this Agreement, with specific references in such Disclosure Schedule to the Sections hereof to which such exceptions relate (the “Disclosure Schedule”) as follows:

 

3.1. Organization and Standing . Each of the Company and each Subsidiary (as defined below) of the Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to conduct its business as currently conducted and as proposed to be conducted by it. The Company and each Subsidiary of the Company is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction where the properties, owned, leased or operated, or the business conducted by it require such qualification, except for such failures to be so duly qualified and in good standing that would not have a Material Adverse Effect. The term “Material Adverse Effect” as used herein shall mean any circumstance, condition, change in or effect on the Company or its Subsidiaries that, individually or in the aggregate with all other circumstances, conditions, changes in or effects on the Company or its Subsidiaries: (i) is, has or would reasonably be expected to be materially adverse to the business as currently operated and conducted, capitalization, operations, assets or liabilities (including, without limitation, contingent liabilities), results of operations or the condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or (ii) would reasonably be expected to materially and adversely affect the ability of Parent or the Surviving Corporation to operate or conduct the business of the Company or its Subsidiaries in the manner in which it is currently operated or conducted by the Company and its Subsidiaries. Material Adverse Effect shall not be deemed to include the impact of (i) changes in laws or interpretations thereof of governmental authorities or entities, (ii) changes in GAAP, and (iii) changes in general economic conditions other than those affecting the Company disproportionately relative to the Company’s industry.

 

3.2. Capitalization and Ownership of Shares.

 

(a) The authorized capital stock of the Company (immediately prior to the Closing) consists of (a) 2,372,151 shares of Company Common Stock, of which, as of the date of this Agreement, 368,852 shares are issued and outstanding, and (b) 739,591 shares of Company Preferred Stock of which, as of the date of this Agreement, 733,591 shares are issued and outstanding. The Company’s 739,591 shares of authorized Preferred Stock consists of 4,000 shares of Series A Convertible Preferred Stock, $0.01 par value, all of which, as of the date of this Agreement, are issued and outstanding, 6,000 shares of Series B Preferred Stock, $0.01 par value, of which, as of the date of this Agreement, no shares are issued or outstanding, 5,720 shares of Series C Convertible Preferred Stock, $0.01 par value, all of which, as of the date of this Agreement, are issued and outstanding, 243,950 shares of Series D Convertible Preferred Stock, $0.01 par value, all of which, as of the date of this Agreement, are issued and outstanding, 157,770 shares of Series E Convertible Preferred Stock, $0.01 par value, all of which, as of the date of this Agreement, are issued and outstanding, and 322,151 shares of Series F Convertible Preferred Stock, $0.01 par value, all of which, as of the date of this Agreement, are issued and outstanding. Prior to the Effective Time (i) each outstanding share of the Company’s Series A Preferred Stock and Series C Preferred Stock shall have been converted, in accordance with the terms of the Company’s Articles of Organization, into 20 shares of Company Common Stock, and (ii) each outstanding share of the Company’s Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall have been converted, in accordance with the terms of the Company’s Articles of Organization, into 1 share of Company Common Stock. Immediately prior to the Effective Time there will be no outstanding shares of Company Preferred Stock. As of the date of this Agreement, there were outstanding Company Options to purchase an aggregate of 347,894 shares of Company Common Stock (of which options to purchase an aggregate of 347,894 shares of Company Common Stock were exercisable or will become exercisable prior to the Effective Time). As of the date of this Agreement, there were outstanding warrants to purchase 83,333 shares of Company Common Stock (all of which warrants were exercisable) (collectively, the “Warrants”) as follows: (a) warrants to purchase 83,333 shares of Company Common Stock at a purchase price of $6.50 per share. Section 3.2 of the Disclosure Schedule identifies the name of the Company Securityholder holding each outstanding security of the Company and identifying the number and class of

 

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securities of the Company held by each such Company Securityholder. All of the issued and outstanding shares of Company Common Stock and Company Preferred Stock have been, and all of the shares of Company Common Stock that may be issued pursuant to the Option Plans (as defined below) or the Warrants will be, when issued in accordance with the respective terms thereof, duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in the preceding sentences of this Section 3.2, there are no issued or outstanding (a) shares of capital stock or other voting securities of the Company, (b) securities of the Company or any Subsidiary of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, (c) subscriptions, warrants, options or other rights (contingent or otherwise) to purchase or acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company or (d) stock rights, stock appreciation rights, phantom stock, phantom stock rights, restricted stock awards, dividend equivalent awards, or other stock-based awards or similar rights pursuant to which any Person is or may be entitled to receive any payment or other consideration or value based upon, relating to, or valued by reference to, the dividends paid on the capital stock of the Company or the revenues, earnings or financial performance or stock performance of the Company or any of its Subsidiaries (the items in clauses (a), (b), (c) and (d) being referred to collectively as the “Company Securities”). Neither the Company nor its Subsidiaries have any obligation (whether written, oral, contingent or otherwise) to issue any Company Securities or to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of the Company or its Subsidiaries. Neither the Company nor its Subsidiaries have any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. All of the issued and outstanding shares of capital stock of the Company and its Subsidiaries have been offered, issued and sold by the Company in compliance with applicable federal and state securities laws and not in violation of any preemptive rights of any Person. No Subsidiary of the Company owns any capital stock or other voting securities of the Company.

 

(b) Except as set forth on Section 3.2(b) of the Disclosure Schedule, the Company has no Indebtedness (as defined below). For purposes of this Agreement, “Indebtedness” shall include all obligations (including, without limitation, all obligations in respect of principal, accrued interest, penalties, fees and premiums) (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business consistent with past practices), (iv) under capital leases (in accordance with GAAP), (v) in respect of letters of credit and bankers’ acceptances, (vi) for Contracts relating to interest rate protection, swap agreements and collar agreements and (vii) in the nature of guarantees of the obligations described in clauses (i) through (vi) above of any other Person.

 

(c) The terms of the Option Plans permit the assumption, substitution, termination or cancellation of the Company Options in connection with the Merger, without the consent or approval of the holders of such securities, the Company Stockholders, or otherwise and without any acceleration of the exercise schedule or vesting provisions in effect for the Company Options.

 

(d) The information set forth on Section 2.1(a)(iv) of the Disclosure Schedule, including, without limitation, with respect to each Company Stockholder, the Aggregate Allocable Portion of the Merger Consideration and the Aggregate Allocable Portion of the Escrow Amount, if any, is true, complete and accurate (based on the estimate of the Estimated Seller Expenses and estimate of the Estimated Working Capital Adjustment included in such calculations as of the date hereof), and, after giving effect to any updates to such schedule pursuant to Section 2.1(a)(iv), will be true, complete and accurate as of the Effective Time, and the calculations done to compute such information are and will be accurate and in accordance with the terms of this Agreement.

 

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3.3. Subsidiaries . A true, complete and correct list of all of the Subsidiaries of the Company, together with the jurisdiction of incorporation of each Subsidiary and the authorized capitalization of each Subsidiary is attached hereto as Schedule 3.3 of the Disclosure Schedule. All of the outstanding capital stock or other voting securities of each Subsidiary of the Company is owned by the Company, directly or indirectly, free and clear of any Security Interests (as defined below) (except for limitations on transfer imposed by federal or state securities laws). There are no issued or outstanding (a) securities of the Company or any Subsidiary of the Company convertible into or exchangeable for shares of capital stock or voting securities of any Subsidiary of the Company, (b) subscriptions, warrants, options or other rights (contingent or otherwise) to purchase or acquire from any Subsidiary of the Company, and no obligation of the Company or any Subsidiary of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of any Subsidiary of the Company or (c) stock rights, stock appreciation rights, phantom stock, phantom stock rights, restricted stock awards, dividend equivalent awards, or other stock-based awards or similar rights pursuant to which any Person is or may be entitled to receive any payment or other consideration or value based upon, relating to, or valued by reference to, the dividends paid on the capital stock of any Subsidiary of the Company (the items in clauses (a), (b) and (c) being referred to collectively as the “Subsidiary Securities”). Except as set forth therein, the Company does not own or control, directly or indirectly, any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, or have any commitment or obligation to invest in, purchase any securities or obligations of, fund, guarantee, contribute or maintain the capital of or otherwise financially support any Person. As used in this Agreement, “Subsidiary” shall mean, with respect to any Person, any corporation or other organization, whether incorporated or unincorporated, of which (a) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries or (b) such Person or any other Subsidiary of such Person is a general partner (excluding any such partnership where such party or any Subsidiary or such party does not have a majority of the voting interest in such partnership).

 

3.4. Securityholder Lists and Agreements . Section 2.1(a)(iv) of the Disclosure Schedule is a true, complete and correct list of all of the holders of Company Securities, including, without limitation, holders of Company Stock and holders of options and warrants to purchase Company Stock, and shows the shares of Company Common Stock, Company Preferred Stock or other securities of the Company held by each such securityholder as of the date of this Agreement. Except as set forth on Section 3.4 of the Disclosure Schedule, there are no Contracts, between the Company or its Subsidiaries and any holder of its securities or others, or, to the Company’s Knowledge, among any holders of its securities, relating to the acquisition (including, without limitation, rights of first refusal, anti-dilution or pre-emptive rights), disposition, registration under the Securities Act of 1933, as amended (the “Securities Act”), or voting of the capital stock of the Company or its Subsidiaries.

 

3.5. Authority for Agreement .

 

(a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and, subject to the receipt of the Requisite Approvals (as defined below), each instrument required hereby to be executed and delivered at the Closing and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Company of this Agreement and each instrument required hereby to be executed and delivered at the Closing and the consummation by the Company of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than the Requisite Approvals). The Board of

 

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Directors of the Company (a) has duly determined that it is fair to, and advisable and in the best interests of, the Company Stockholders for the Company to enter into a business combination with Parent upon the terms and subject to the conditions of this Agreement, (b) has unanimously approved and adopted this Agreement and the Merger and (c) has unanimously recommended that the Company Stockholders approve and adopt this Agreement and the Merger. None of such actions by the Board of Directors of the Company has been amended, rescinded or modified. This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent, Merger Sub and the Representative, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, reorganization or similar laws of general application affecting the rights and remedies of creditors, and to general equity principles. The only approvals from the Company Stockholders necessary in connection with this Agreement and the transactions contemplated hereby (the “Requisite Approvals”) are the receipt by the Company of the Merger Consents (as defined below) from (a) the holders of sixty-six and two-thirds percent (66  ² / 3 %) of the outstanding shares of Company Common Stock and Company Preferred Stock, as a single class with holders of the Company Preferred Stock being entitled to vote on an as-converted to Common Stock basis, approving and adopting this Agreement and the Merger and (b) the holders of sixty-six and two-thirds percent (66  ² / 3 %) of the outstanding shares of Company Preferred Stock, as a separate class voting on an as-converted to Common Stock basis, approving and adopting this Agreement and the Merger. The delivery of the Requisite Approval Certificate (as defined below) pursuant to Section 6.1 shall constitute a representation and warranty by the Company under this Section 3.5(a) that the Requisite Approvals have been obtained.

 

(b) The execution and delivery of this Agreement by the Company and the Representative and the Escrow Agreement by the Representative, the compliance with the provisions hereof by the Company and the Representative and the provisions of the Escrow Agreement by the Representative and the consummation of the transactions contemplated hereby or thereby, will not (i) conflict with or violate the Company’s Articles of Organization or by-laws (or equivalent constituent documents of any Subsidiary organized in a jurisdiction outside the United States) of the Company or any of its Subsidiaries, each as amended to date and currently in effect, or the Option Plans, (ii) except as set forth on Section 3.5(b) of the Disclosure Schedule, conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice, consent or waiver under, or result in the loss of any benefit to which the Company or any Subsidiary of the Company is entitled under, any Contract required to be disclosed pursuant to Section 3.12, Permit (as defined below), Security Interest or other interest to which the Company, any Subsidiary of the Company or the Representative is a party or by which the Company, any Subsidiary of the Company or the Representative is bound or to which their respective assets are subject, (iii) result in the creation or imposition of any Security Interest upon any assets of the Company or any Subsidiary of the Company or (iv) will not violate any Legal Requirement applicable to the Company, any Subsidiary of the Company or the Representative or any of their respective properties or assets, except in the case of (ii), (iii) or (iv) above, where such conflict, breach, default or other violation would not have a Material Adverse Effect. “Security Interest” means any mortgage, security interest, pledge, license, interest, encumbrance, claim, charge, option, restriction on the right to sell or dispose (and in the case of securities, vote), lien or other adverse claim of any kind (whether arising by contract or by operation of law and whether voluntary or involuntary). For the purposes of this Agreement, “Legal Requirements” shall mean any United States federal, state, municipal or local or foreign order, judgment, writ, injunction, decree, law, statute, standard ordinance, code, resolution, promulgation, rule, regulation or any similar provision having the force or effect of law.

 

3.6. Governmental Consents . No consent, approval, order or authorization of, or registration, declaration or filing with any United States federal, state, municipal or local or any foreign government, or political subdivision thereof, or any multinational organization or authority or any authority, agency or

 

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commission entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power, any court or tribunal (or any department, bureau or division thereof), or any arbitrator or arbitral body (collectively, “Governmental Authorities”) is required to be obtained or made by the Company, any of its Subsidiaries or the Representative in connection with the execution and delivery of this Agreement or the Escrow Agreement or the consummation of the Merger and other transactions contemplated hereby or thereby, except for the filing of the Articles of Merger with the Secretary of State of the Commonwealth of Massachusetts and appropriate documents with the relevant authorities of other states in which the Company and/or Parent are qualified to do business.

 

3.7. Financial Statements . Attached hereto as Section 3.7 of the Disclosure Schedule are the following financial statements (collectively, the “Financial Statements”): (i) the audited consolidated balance sheets of the Company and its Subsidiaries as at December 31, 2002 and December 31, 2003 (such balance sheet as at December 31, 2003 being herein referred to as the “Balance Sheet”) and the related consolidated statements of operations, stockholders’ deficiency and other comprehensive income (loss) and cash flows for the corresponding years then ended including the notes thereto (collectively, the “Audited Financial Statements”), and (ii) the unaudited consolidated balance sheet of the Company and its Subsidiaries as at December 31, 2004 (the “Interim Balance Sheet”) and related consolidated statements of operations and cash flow for the year then ended (collectively, the “Interim Financial Statements”), in each case prepared in accordance with GAAP, consistently applied throughout the periods presented, subject, in the case of the Interim Financial Statements, to an absence of notes and normal period-end adjustments. The Financial Statements are complete and correct in all material respects, are in accordance with the books and records of the Company and its consolidated Subsidiaries and present fairly the consolidated financial condition and results of operations of the Company and its consolidated Subsidiaries in all material respects, as at the dates and for the periods indicated. The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to comply in all material respects with the legal and accounting requirements applicable to the Company and its Subsidiaries. The audited consolidated balance sheet of the Company and its Subsidiaries as at December 31, 2004 and the related consolidated statement of operations, stockholders’ deficiency and other comprehensive income (loss) and cash flows for the corresponding year then ended will not, in any material respect, differ from the Interim Financial Statements. None of the Interim Balance Sheet or any balance sheet referred to in Section 6.11 of this Agreement includes any accrual for any Seller Expenses.

 

3.8. Absence of Changes . Since the date of the Interim Balance Sheet, and except as set forth on Section 3.8 of the Disclosure Schedule, there has been no change in the business, condition (financial or otherwise), or results of operations of the Company or its Subsidiaries, other than changes occurring in the ordinary course of business consistent with past practices (which such ordinary course changes have not, individually or in the aggregate, had a Material Adverse Effect). Without limiting the generality of the foregoing, neither the Company nor its Subsidiaries have:

 

(a) declared, set aside, made or paid any dividend or other distribution in respect of its capital stock, or agreed to do any of the foregoing, or purchased, redeemed or acquired or agreed to purchase, redeem or acquire, directly or indirectly, any shares of its capital stock;

 

(b) issued or sold any shares of its capital stock of any class or Company Securities or Subsidiary Securities;

 

(c) made any change in its financial or tax accounting methods, principles or practices;

 

(d) incurred, assumed or guaranteed any Indebtedness;

 

mortgaged, pledged or subjected to any Security Interest any of its properties or assets, tangible or intangible;

 

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(e) acquired or disposed of any assets or properties having a value in excess of $5,000 (singly or in the aggregate) outside of the ordinary course of business consistent with past practices;

 

(f) forgiven, relinquished or canceled any debts or claims, or waived any rights (under any Contract or otherwise), other than in the ordinary course of business consistent with past practice, having a value in excess of $5,000;

 

(g) made any payment of any nature to any Company Securityholder other than compensation or reimbursement of expenses payable as an officer or employee in the ordinary course of business consistent with past practices;

 

(h) entered into, adopted or amended, in any material respect, any bonus, profit-sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, severance, termination or other material plan, agreement, trust, fund, policy or arrangement for the benefit of any current or former director, officer or employee;

 

(j) experienced any picketing, strike, labor dispute, slowdown, lockout, walkout, work stoppage or other similar labor trouble or any activity or proceeding by a labor union or representative thereof to organize any of its employees;

 

(k) experienced any damage, destruction or other casualty loss affecting its business or any of its assets (whether or not covered by insurance) that has had or would reasonably be expected to have a Material Adverse Effect;

 

(l) taken any other action that would have required the consent of Parent pursuant to Section 5.1 had such action occurred after the date of this Agreement; or

 

(m) entered into any agreement to do any of the foregoing.

 

3.9. Absence of Undisclosed Liabilities . Except as set forth on Section 3.9 of the Disclosure Schedule, neither the Company nor any of its Subsidiaries has any liability of any kind that is or would have been required to be reflected in, reserved against, or otherwise described on a balance sheet or in the notes thereto in accordance with GAAP and has not been so reflected, except for (a) liabilities shown on the Interim Balance Sheet, (b) liabilities under this Agreement and (c) liabilities which have arisen since the date of the Interim Balance Sheet in the ordinary course of business consistent with past practices.

 

3.10. Taxes . Except as set forth on Section 3.10 of the Disclosure Schedule:

 

(a) The amount shown on the Interim Balance Sheet as provision for taxes is sufficient in all material respects for payment of all accrued and unpaid due and payable state, county, local and foreign taxes for the period then ended and all prior periods.

 

(b) The Company and its Subsidiaries have filed or have obtained currently effective extensions with respect to, all income and other material federal, state, county, local and foreign tax returns which are required to be filed by them, such returns are true and correct in all material respects and all taxes shown thereon to be due and payable have been timely paid with exceptions not material to the Company or any Subsidiary, other than those not delinquent or those for which adequate reserves have been established on the Balance Sheet.

 

(c) Federal tax returns of the Company and its Subsidiaries have not been audited by the Internal Revenue Service and no controversy with respect to income or other material taxes of any type is pending or, to the Knowledge of the Company and its Subsidiaries, threatened.

 

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(d) The Company and its Subsidiaries have withheld or collected from each payment made to their employees the amount of all material taxes required to be withheld or collected therefrom and have paid all such amounts to the appropriate taxing authorities when due.

 

(e) Neither the Company nor any Subsidiary or stockholder has ever filed (i) an election pursuant to Section 1362 of the Code, that the Company be taxed as an S-corporation or (ii) a consent pursuant to Section 341(f) of the Code relating to collapsible corporations.

 

(f) Neither the Company nor any Subsidiary has received any notice of deficiency or assessment of any material amount of additional taxes which has not been paid in full or for which adequate reserves have not been established on the Interim Balance Sheet and is not a party to any action or proceeding by any federal, state, local or foreign governmental authority for assessment or collection of income or other material taxes, assessments or other governmental charges.

 

(g) Neither the Company or any other Person has made any payment in the nature of compensation (as that term is defined in Code section 280G) (“Payment”), nor is the Company or any other Person a party to any agreement, contract, arrangement or plan that could result in its making a Payment that has resulted or could result, separately or in the aggregate, in the payment of any “excess parachute payment” within the meaning of Code section 280G or in the imposition of an excise Tax under Code section 4999 (or any corresponding provisions of state, local or foreign tax law) with respect to the transactions contemplated by this Agreement or that was or could be nondeductible under Code sections 162 or 404.

 

3.11. Property . The Company or its Subsidiaries have good and marketable title to, or, in the case of leases of properties and assets, a valid leasehold interest in, all of their material properties and assets (whether real, personal, tangible or intangible), including, without limitation, all properties and assets reflected in the Balance Sheet or acquired after the date of the Balance Sheet, and none of such properties or assets is subject to any Security Interest. The Company does not own any real property. Each of the leases for real property of the Company or its Subsidiaries is identified in Section 3.11 of the Disclosure Schedule.

 

3.12. Contracts . Except as described on Section 3.12 of the Disclosure Schedule, neither the Company nor its Subsidiaries are a party to, subject to or otherwise bound by:

 

(a) any Contract or series of related Contracts which requires aggregate future expenditures by the Company or any of its Subsidiaries in excess of $5,000 or which provides for aggregate payments to the Company or any of its Subsidiaries in excess of $5,000 or is otherwise material to the Company’s or its Subsidiaries’ business, except in each case Contracts for raw materials purchased for inventory in the ordinary course of business consistent with past practices;

 

(b) any Contract 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;

 

(c) any distributor, reseller, manufacturer’s representative, sales representative, marketing or similar Contract;

 

(d) any Contract with respect to any Intellectual Property (as defined below) owned or licensed to or by the Company or any of its Subsidiaries other than commonly available third party software which involves annual payments by the Company or any of its Subsidiaries in excess of $5,000;

 

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(e) any Contract with any current or former stockholder, officer or director of the Company or any of its Subsidiaries, or any “affiliate” or “associate” of such persons (as such terms are defined in the rules and regulations promulgated under the Securities Act) (any of the foregoing, a “Related Party”), including, without limitation, any Contract providing for the furnishing of services by, rental of real or personal property from, or otherwise requiring payments to or from, any Related Party;

 

(f) any Contract under which the Company or any of its Subsidiaries is restricted from carrying on any business or other services or competing with any Person anywhere in the world or which would so restrict the Company or any of its Subsidiaries after the Closing Date;

 

(g) any loan agreement, indenture, note, bond, debenture or any other document or Contract evidencing Indebtedness to any person, firm, entity, partnership, association or any business organization or division thereof (each, a “Person”), any capitalized lease obligation, or any commitment to provide any of the foregoing, or any agreement of guaranty, indemnification or other similar commitment with respect to the obligations or liabilities of any other Person;

 

(h) any Contract for the disposition of the Company’s or any of its Subsidiaries’ business or assets with a value in excess of $5,000 (including the assumption of any indebtedness) (whether by merger, sale of stock, sale of assets or otherwise);

 

(i) any Contract for the acquisition of the business or capital stock of another party (whether by merger, sale of stock, sale of assets or otherwise);

 

(j) any Contract concerning a partnership, joint venture, joint development or other similar arrangement with one or more Persons;

 

(k) other than options or warrants to acquire Company Common Stock, any hedging, futures, options or other derivative Contract;

 

(l) any other Contract (or group of related Contracts) to the extent not otherwise disclosed in the Disclosure Schedule, the performance of which provides for consideration paid by the Company or its Subsidiaries in excess of $5,000 during the year ended December 31, 2004, except Contracts for raw materials purchased for inventory or Contracts for temporary employees, in each case in the ordinary course of business consistent with past practices; or

 

(m) any Contract creating any obligation with respect to the payment of any severance, retention, bonus or other similar payment to, or the accelerated vesting of any Company Options of, any Person, one condition to the payment or acceleration of which is the Company entering into this Agreement or the consummation of any of the transactions contemplated hereby.

 

Each Contract disclosed in the Disclosure Schedule or required to be disclosed pursuant to this Section 3.12, each real property lease disclosed in the Disclosure Schedule or required to be disclosed pursuant to Section 3.11 is a valid and binding agreement of the Company or one of its Subsidiaries, as the case may be, and is in full force and effect, and none of the Company, its Subsidiaries nor, to the Knowledge of the Company and its Subsidiaries, any other party thereto is in default or breach in any material respect under the terms of any such Contract or real property lease (a “default” being defined for purposes hereof as an actual default or event of default or the existence of any fact or circumstance which would, upon receipt of notice or passage of time, constitute a default). True and complete copies of each such Contract and real property lease have been delivered or made available to Parent.

 

Exhibit Volume Page 41 of 84

As used in this Agreement, a “Contract” shall mean any legally binding agreements, understandings, contracts, deeds, mortgages, leases, subleases, licenses, sublicenses, instruments, commitments or other binding arrangements, whether written or oral.

 

3.13. Benefit Plans .

 

(a) Plans . For purposes of this Section 3.13, the term “Plan” means any employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), any other bonus, profit sharing, compensation, pension, retirement, “401(k),” “SERP,” severance, savings, deferred compensation, fringe benefit, insurance, welfare, post-retirement health or welfare benefit, health, life, stock option, stock purchase, restricted stock, tuition refund, service award, company car or car allowance, scholarship, housing or living allowances, relocation, disability, accident, sick pay, sick leave, accrued leave, vacation, holiday, termination, unemployment, individual employment, consulting, executive compensation, incentive, commission, payroll practices, retention, change in control, non-competition, other material plan, agreement, policy, trust fund or arrangement (whether written or unwritten, insured or self-insured), and any plan subject to Sections 125, 127, 129, 137 or 423 of the Code, currently maintained by the Company or any of its Subsidiaries or to which the Company or any of its Subsidiaries makes or is required to make contributions. Each Plan is in writing, Section 3.13(a) of the Disclosure Schedule includes a true and complete list of all Plans and the Company has provided or made available to Parent a complete copy of each Plan as well as, if applicable, a copy of each trust or other funding arrangement, each summary plan description and summary of material modifications, and the most recent determination letter or opinion letter received from the Internal Revenue Service (the “IRS”). The Company has delivered to Parent prior to the Closing true and complete copies of all Form 5500 Series annual reports filed for each Plan, toget