AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

 

TABLE OF CONTENTS

 

				PAGE
1.	DESCRIPTION OF TRANSACTION			2
	1.1	Merger of Merger Sub into the Company		2
	1.2	Effect of the Merger		2
	1.3	Closing; Effective Time		2
	1.4	Certificate of Incorporation and Bylaws; Directors and Officers		2
	1.5	Conversion of Shares in Merger		3
	1.6	Options to Acquire Company Capital Stock		3
	1.7	Warrants to Acquire Company Capital Stock		4
	1.8	Closing of the Company’s Transfer Books		4
	1.9	Exchange of Certificates		5
	1.10	Appraisal Rights		6
	1.11	Further Action		7
2.	REPRESENTATIONS AND WARRANTIES OF THE COMPANY			7
	2.1	No Subsidiaries; Due Incorporation; Etc.		7
	2.2	Certificate of Incorporation and Bylaws; Records		7
	2.3	Capitalization, Etc.		8
	2.4	Financial Statements		9
	2.5	Absence of Changes		9
	2.6	Title to Assets		9
	2.7	Intellectual Property		9
	2.8	Material Contracts		10
	2.9	Liabilities		11
	2.10	Compliance with Legal Requirements		11
	2.11	Certain Business Practices		11
	2.12	Governmental Authorizations		11
	2.13	Tax Matters		11
	2.14	Employee and Labor Matters; Benefit Plans		13
	2.15	Environmental Matters		14
	2.16	Insurance		14
	2.17	Related Party Transactions		15
	2.18	Legal Proceedings; Orders		15

 

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TABLE OF CONTENTS

(CONTINUED)

 

				PAGE
	2.19	Authority; Binding Nature of Agreement		15
	2.20	Non-Contravention; Consents		15
	2.21	Company Action		16
	2.22	Anti-Takeover Provisions		16
	2.23	Financial Advisor		16
	2.24	Investment Representations		16
	2.25	Books and Records		16
	2.26	Reliance		16
	2.27	Full Disclosure		16
3.	REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB			17
	3.1	Due Incorporation; Subsidiaries		17
	3.2	Certificate of Incorporation and Bylaws		17
	3.3	Capitalization, Etc.		17
	3.4	Authority; Binding Nature of Agreement		18
	3.5	Parent Common Stock		18
	3.6	Non-Contravention; Consents		19
	3.7	SEC Reports; Financial Statements		19
	3.8	Intellectual Property		19
	3.9	Absence of Changes		20
	3.10	Title to Assets		20
	3.11	Liabilities		20
	3.12	Compliance with Legal Requirements		20
	3.13	Certain Business Practices		20
	3.14	Governmental Authorizations		21
	3.15	Tax Matters		21
	3.16	Employee and Labor Matters; Benefit Plans		22
	3.17	WARN Compliance		23
	3.18	Environmental Matters		23
	3.19	Insurance		23
	3.20	Related Party Transactions		23

 

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TABLE OF CONTENTS

(CONTINUED)

 

				PAGE
	3.21	Legal Proceedings; Orders		24
	3.22	Financial Advisor		24
	3.23	Merger Sub		24
	3.24	No Parent Vote Required		24
	3.25	Company Action		24
	3.26	Anti-Takeover Provisions		24
	3.27	Books and Records		24
	3.28	Reliance		24
	3.29	Full Disclosure		24
4.	CERTAIN COVENANTS OF THE COMPANY AND PARENT			25
	4.1	Access		25
	4.2	Operation of Parent’s Business		25
	4.3	Operation of the Company’s Business		27
	4.4	No Solicitation by the Company		29
	4.5	No Solicitation by Parent		30
5.	ADDITIONAL COVENANTS OF THE PARTIES			31
	5.1	Stockholder Notice		31
	5.2	Company Stockholder Consent or Approval		31
	5.3	Filings and Consents; Additional Agreements		32
	5.4	Regulatory Approvals		32
	5.5	Disclosure		32
	5.6	Calculation of Merger Consideration		32
	5.7	Tax Matters		33
	5.8	Indemnification of Officers and Directors		33
	5.9	Directors and Officers		34
	5.10	Legends; Restricted Stock		35
	5.11	Creditor Plan		36
	5.12	Audits		36
6.	CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH PARTY			36
	6.1	No Restraints		36
	6.2	Stockholder Approval		36

 

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TABLE OF CONTENTS

(CONTINUED)

 

				PAGE
	6.3	Governmental Authorization		36
	6.4	Company Audited Financials		36
7.	CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB			37
	7.1	Accuracy of Representations		37
	7.2	Performance of Covenants		37
	7.3	Consents		37
	7.4	Agreements and Documents		37
	7.5	Dissenting Shares		38
	7.6	Conversion of Company Preferred Stock		38
	7.7	Securities Act Exemption		38
	7.8	Settlement Condition		38
	7.9	No Material Adverse Change		38
	7.10	No Other Litigation		38
	7.11	Tax Matters		39
	7.12	Company Employee PIIA Agreements		39
	7.13	Delivery of RHL Note and Allonge		39
8.	CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY			39
	8.1	Accuracy of Representations		39
	8.2	Performance of Covenants		39
	8.3	Parent Directors and Officers		39
	8.4	Agreements and Documents. The Company shall have received:		39
	8.5	Cash at Closing		40
	8.6	No Other Litigation		40
9.	TERMINATION			40
	9.1	Termination Events		40
	9.2	Effect of Termination		41
10.	MISCELLANEOUS PROVISIONS			41
	10.1	Nonsurvival of Representations, Warranties and Agreements		41
	10.2	Further Assurances		41
	10.3	Expenses		41

 

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TABLE OF CONTENTS

(CONTINUED)

 

				PAGE
	10.4	Attorneys’ Fees		42
	10.5	Notices		42
	10.6	Time of the Essence		43
	10.7	Headings		43
	10.8	Counterparts		43
	10.9	Governing Law; Jurisdiction and Venue		43
	10.10	Successors and Assigns		43
	10.11	Third Party Beneficiaries		44
	10.12	Remedies Cumulative; Specific Performance		44
	10.13	Waiver		44
	10.14	Amendments		44
	10.15	Severability		44
	10.16	Parties in Interest		44
	10.17	Entire Agreement		44
	10.18	Construction		45

 

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EXHIBITS

 

Exhibit A	-	Certain Definitions
Exhibit B	-	Voting Agreements
Exhibit C	-	Creditor Plan
Exhibit D	-	Form of Company Stockholder Consents

 

 

Execution Version

 

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

 

THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ( “Agreement” ) is made and entered into as of November 8, 2008, by and among:  FAVRILLE, INC. , a Delaware corporation ( “Parent” ); MONTANA MERGER SUB, INC. , a Delaware corporation and a wholly owned subsidiary of Parent ( “Merger Sub” ); and MYMEDICALRECORDS.COM, INC. , a Delaware corporation (the “Company” ). Certain other capitalized terms used in this Agreement are defined in Exhibit A .

 

RECITALS

 

WHEREAS , Parent, Merger Sub and the Company intend to effect a merger of Merger Sub with and into the Company (the “Merger” ) in accordance with this Agreement and the Delaware General Corporation Law (the “DGCL” ).  Upon consummation of the Merger, Merger Sub will cease to exist, and the Company will become a wholly owned subsidiary of Parent;

 

WHEREAS , it is intended that the Merger qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code” );

 

WHEREAS , this Agreement has been approved by the respective boards of directors of Parent, Merger Sub and the Company;

 

WHEREAS , in order to induce Parent to enter into this Agreement, concurrently with the execution and delivery of this Agreement, the Company will issue to Parent, on the next business day following the date of this Agreement, a promissory note in the principal amount of $500,000 (the “Second Bridge Note” ) on substantially similar terms as those included in the Bridge Note, the proceeds of which are to be used exclusively by the Company for general corporate purposes and Expenses related to the Merger;

 

WHEREAS , in order to induce Parent to enter into this Agreement, concurrently with the execution and delivery of this Agreement, Robert H. Lorsch, Naj Allana, Hector V. Barreto, Jr., George Rebensdorf, Bernard Stolar, Rich Teich and The RHL Group, Inc., a California corporation ( “RHL Group” ) are executing Voting Agreements in the form of Exhibit B (the “Voting Agreements” );

 

WHEREAS , in order to induce Parent to enter into this Agreement, concurrently with the execution and delivery of this Agreement, the Company has executed the Creditor Plan in the form of Exhibit C (the “Creditor Plan” ), pursuant to which Parent intends to settle all of its outstanding Liabilities and obtain releases from Parent’s creditors, subject to the terms and conditions set forth therein; and

 

WHEREAS , Parent, Merger Sub and the Company intend that the issuance of Parent Common Stock in connection with the Merger and the Creditor Plan be accomplished through a private placement of the requisite shares of Parent Common Stock exempt from registration under Regulation D promulgated under the Securities Act.

 

 

AGREEMENT

 

The parties to this Agreement agree as follows:

 

1.                                       DESCRIPTION OF TRANSACTION .

 

1.1                                Merger of Merger Sub into the Company.   Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with and into the Company, and the separate existence of Merger Sub shall cease. The Company will continue as the surviving corporation in the Merger (the “Surviving Corporation” ).

 

1.2                                Effect of the Merger.   The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the DGCL.

 

1.3                                Closing; Effective Time.  The consummation of the transactions contemplated by this Agreement (the “Closing” ) shall take place at the offices of Cooley Godward Kronish LLP, 4401 Eastgate Mall, San Diego, California 92121 at 10:00 a.m. Pacific Time on a date to be mutually agreed upon by Parent and the Company which shall not be more than one (1) business day after the date on which the last of the conditions set forth in Sections 6, 7 and 8 (other than conditions which by their terms must be satisfied as of the Closing Date) has been satisfied or waived, or such other time and/or place as may be mutually agreed upon by Parent and the Company.  The date on which the Closing actually takes place is referred to in this Agreement as the “Closing Date.”   Contemporaneously with or as promptly as practicable after the Closing, a properly executed certificate of merger conforming to the requirements of the DGCL (the “Certificate of Merger” ) shall be filed with the Secretary of State of the State of Delaware. The Merger shall become effective upon the date and time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware or such other date and time as may be mutually agreed by Parent and the Company and included in the Certificate of Merger (the “Effective Time” ).

 

1.4                                Certificate of Incorporation and Bylaws; Directors and Officers.   Unless otherwise mutually determined by Parent and the Company prior to the Effective Time:

 

(a)                                   the Company Certificate of Incorporation immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation immediately after the Effective Time, except that the Company Certificate of Incorporation shall be amended, effective as of the Effective Time, to change the name of the Surviving Corporation to “MyMedicalRecords, Inc.”;

 

(b)                                   the Bylaws of the Company immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation immediately after the Effective Time; and

 

(c)                                   unless otherwise agreed in writing between Parent and the Company, the directors and officers of the Surviving Corporation immediately after the Effective Time shall be as follows:

 

Directors:  Robert H. Lorsch, Bernie Stolar, George Rebensdorf

 

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Officers:                                                  Robert H. Lorsch, Chief Executive Officer

Naj Allana, Chief Financial Officer and Secretary.

 

1.5                                Conversion of Shares in Merger.

 

(a)                                   Any shares of Company Common Stock or Company Preferred Stock then held by the Company (or held in the Company’s treasury) shall be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor.

 

(b)                                   Each share of the common stock of Merger Sub outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation immediately after the Effective Time.

 

(c)                                   Subject to Sections 1.9 and 1.10, at the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any stockholder of the Company, each share of Company Common Stock outstanding immediately prior to the Effective Time shall be converted into the right to receive that number of shares of Parent Common Stock equal to the Common Exchange Ratio.

 

1.6                                Options to Acquire Company Capital Stock .  At the Effective Time, each Company Option, whether vested or unvested, shall be substituted or replaced by Parent in accordance with the terms (as in effect as of the date of this Agreement) of the Stock Option Plan and the stock option agreement by which such Company Option is evidenced with a new Parent Option under the Parent Option Plan.  Accordingly, from and after the Effective Time:

 

(a)                                   each Parent Option issued as a replacement or substitute for a Company Option may be exercised solely for shares of Parent Common Stock;

 

(b)                                   the number of shares of Parent Common Stock subject to each Parent Option shall be equal to the number of shares of Company Common Stock that were subject to the replaced or substituted Company Option immediately prior to the Effective Time multiplied by the Common Exchange Ratio, rounded down to the nearest whole number;

 

(c)                                   the per share exercise price for the shares of Parent Common Stock issuable upon exercise of each replacement or substituted Parent Option shall be determined by dividing the exercise price per share of Company Common Stock subject to such Company Option as in effect immediately prior to the Effective Time, by the Common Exchange Ratio, and rounding the resulting exercise price up to the nearest one-tenth (1/10) of one cent;

 

(d)                                   the replacement or substituted Parent Option shall contain the same restrictions on exercise and the same term, exercisability and vesting schedule as in effect on the Closing Date for the Company Option that was replaced or substituted; and

 

(e)                                   the adjustment provisions herein with respect to any Company Options that are incentive stock options as defined in Section 422 of the Code shall be and are intended to be effected in a manner which is consistent with Section 424(a) of the Code and which does not modify the incentive stock option within the meaning of Section 424(h) of the Code.

 

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The Company and Parent shall take all action that may be necessary under the Stock Option Plan and Parent Stock Option Plan, to effectuate the provisions of this Section 1.6, including adopting such resolutions and obtaining any consents as required.  Following the Closing, Parent will send to each holder of a replaced or substituted Company Option a replacement or substituted Parent Stock Option, including (i) a grant notice setting forth (A) the number of shares of Parent Common Stock subject to such replaced or substituted Company Option; (B) the exercise price per share of Parent Common Stock issuable upon exercise of such replaced or substituted Company Option; and (C) the vesting schedule for the replacement or substituted Parent Stock Option and (ii) a Parent stock option agreement related to the replacement or substituted Parent Stock Option.

 

1.7                                Warrants to Acquire Company Capital Stock.  Prior to the Effective Time, Company shall enter into an agreement with each holder of a Company Warrant to provide that subject to the Closing of the Merger and as of the Effective Time, each Company Warrant will be exchanged for a new warrant issued by Parent ( “Parent Warrant” ), or shall be amended or modified to automatically be converted into a warrant issued by Parent, in each case in form and substance reasonably acceptable to Parent, which shall be exercisable for a number of shares of Parent Common Stock equal to the number of shares of Company Common Stock or Company Preferred Stock, as applicable, that were subject to the exchanged Company Warrant immediately prior to the Effective Time multiplied by the Common Exchange Ratio, rounded down to the nearest one-tenth (1/10) of a share.  The per share exercise price for the shares of Parent Common Stock issuable upon exercise of each exchanged Parent Warrant shall be determined by dividing the exercise price per share of Company Common Stock or Common Preferred Stock subject to such Company Warrant as in effect immediately prior to the Effective Time, by the Common Exchange Ratio, and rounding the resulting exercise price up to the nearest one-tenth (1/10) of one cent, and the exchanged Parent Warrant shall contain the same restrictions on exercise and the same term, exercisability and vesting schedule as in effect on the Closing Date for the Company Warrant that was replaced or substituted.

 

The Company and Parent shall take all action necessary to effectuate the provisions of this Section 1.7 including in the case of the Company obtaining the Consent of all holders of Company Warrants to exchange the Company Warrants in accordance with this Section 1.7.

 

1.8                                Closing of the Company’s Transfer Books.   At the Effective Time: (a) all shares of capital stock of the Company outstanding immediately prior to the Effective Time shall automatically be canceled and retired and shall cease to exist, and all holders of certificates representing shares of capital stock of the Company that were outstanding immediately prior to the Effective Time shall cease to have any rights as stockholders of the Company, and (b) the stock transfer books of the Company shall be closed with respect to all shares of such capital stock of the Company outstanding immediately prior to the Effective Time. No further transfer of any such shares of capital stock of the Company shall be made on such stock transfer books after the Effective Time. If, after the Effective Time, a valid certificate previously representing any shares of capital stock of the Company (a “Company Stock Certificate” ) is presented to the Surviving Corporation or Parent, such Company Stock Certificate shall be canceled and shall be exchanged as provided in Section 1.9.

 

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1.9                                Exchange of Certificates.

 

(a)                                   On the Closing Date, to the extent that the Company shall have delivered a written request to Parent and the relevant Company Stock Certificates have been surrendered for cancellation to Parent no later than five (5) business days prior to the Closing Date and Parent has received a letter of transmittal from the relevant holder of Company Capital Stock in customary form and containing such customary provisions (as reasonably agreed to by Parent and Company within 10 days after the date of this Agreement), Parent shall deliver certificates representing shares of Parent Common Stock to each such holder of record of a Company Stock Certificate that immediately prior to the Effective Time represented outstanding shares of Company Capital Stock whose shares were converted into the right to receive shares of Parent Common Stock pursuant to Section 1.5(c).  As soon as reasonably practicable after the Effective Time, Parent will send (or cause to be sent) to the record holders of Company Stock Certificates (other than record holders of Company Stock Certificates as to which certificates representing Parent Common Stock are delivered at Closing) (i) a letter of transmittal in customary form and containing such customary provisions as Parent or its transfer agent may reasonably specify (including a provision confirming that delivery of Company Stock Certificates shall be effected, and risk of loss and title to Company Stock Certificates shall pass, only upon delivery of such Company Stock Certificates to Parent), and (ii) instructions for use in effecting the surrender of Company Stock Certificates in exchange for the Merger Consideration. Upon surrender of a Company Stock Certificate to Parent or its transfer agent for exchange, together with a duly executed letter of transmittal and such other documents as may be reasonably required by Parent, Parent shall cause to be delivered to the holder of such Company Stock Certificate a certificate representing that number of shares of Parent Common Stock that such holder has the right to receive pursuant to Section 1.5(c) rounded up to the nearest whole number. All Company Stock Certificates so surrendered shall be canceled. Until surrendered as contemplated by this Section 1.9, each Company Stock Certificate shall be deemed, from and after the Effective Time, to represent only the right to receive the Merger Consideration in accordance with this Agreement. If any Company Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its discretion and as a condition precedent to the issuance of any certificate representing Parent Common Stock or the payment of cash in lieu of fractional shares, require the owner of such lost, stolen or destroyed Company Stock Certificate to provide an appropriate affidavit and indemnity and to deliver a bond (in such sum as Parent may reasonably direct) as indemnity to Parent against any claim that may be made against Parent or the Surviving Corporation with respect to such Company Stock Certificate.

 

(b)                                   No dividends or other distributions declared or made with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Company Stock Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of any fractional share shall be paid to any such holder, until such holder surrenders such Company Stock Certificate or an appropriate affidavit and bond with respect to any lost, stolen or destroyed Company Stock Certificate, in each case in accordance with this Section 1.9 (at which time such holder shall be entitled to receive all such dividends and distributions and such cash payment).

 

(c)                                   Each of Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts as Parent and the Surviving Corporation are required to deduct or withhold therefrom under the Code or any provision of state, local or foreign tax law or under

 

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any other applicable Legal Requirement. To the extent Parent or the Surviving Corporation is deducting and withholding any such consideration based on any Legal Requirement other than any Legal Requirement under the Code, Parent or the Surviving Corporation, as applicable, shall use its commercially reasonable efforts to notify the Company of the amounts required to be withheld and the Legal Requirement that imposes such withholding obligation at least ten (10) days prior to the date when the applicable withholding shall be made, and in any event shall provide such notification when such withholding is made. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.

 

(d)                                   Each certificate representing shares of Parent Common Stock to be issued in accordance with this Agreement shall bear a legend substantially in the following form:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO PARENT IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED”.

 

(e)                                   Neither Parent nor the Surviving Corporation shall be liable to any holder or former holder of capital stock of the Company or to any other Person for any shares of Parent Common Stock (or dividends or distributions with respect thereto), or for any cash amounts, delivered to any public official pursuant to any applicable abandoned property law, escheat law or similar Legal Requirement.

 

1.10                         Appraisal Rights.

 

(a)                                   Notwithstanding any other provision of this Agreement to the contrary, shares of Company Capital Stock that have not been voted in favor of (nor consented in writing to) adoption of this Agreement, and with respect to which a demand for payment and appraisal have been properly made in accordance with (i) Section 262 of DGCL or (ii) Chapter 13 of the California Corporations Code (to the extent applicable to the Company by virtue of Section 2115 thereof)  (in either case, “Dissenting Shares” ), will not be converted into or represent the right to receive the Merger Consideration in accordance with Section 1.5(c) and Section 1.9, but will be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the DGCL or the California Corporations Code, as applicable; provided, however , that if a holder of Dissenting Shares (a “Dissenting Stockholder” ) withdraws such holder’s demand for such payment and appraisal or becomes ineligible for such payment and appraisal then, as of the later of the Effective Time or the date on which such Dissenting Stockholder withdraws such demand or otherwise becomes ineligible for such payment and appraisal, such holder’s Dissenting Shares will cease to be Dissenting Shares and will be converted into the right to receive Parent Common Stock as determined in accordance with Section 1.5(c).

 

(b)                                   The Company shall give Parent (i) prompt written notice of any demands by Dissenting Stockholders received by the Company prior to the Effective Time, withdrawals of

 

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such demands and any other material notice, instrument or correspondence delivered to the Company prior to the Effective Time in connection with such demands, and (ii) the opportunity to participate in all negotiations and proceedings with respect to any such demand, notice, instrument or correspondence. The Company shall not make any payment or settlement offer prior to the Effective Time with respect to any such demand unless Parent shall have consented in writing to such payment or settlement offer.

 

1.11                         Further Action.  If, at any time after the Effective Time, any further action is reasonably determined by Parent to be necessary or desirable to carry out the purposes of this Agreement and any Related Agreement or to vest the Surviving Corporation or Parent with full right, title and possession of and to all rights and property of Merger Sub, the Company and the Surviving Corporation, the officers and directors of the Surviving Corporation and Parent shall be fully authorized (in the name of Merger Sub, in the name of the Company, in the name of the Surviving Corporation and otherwise) to take such action.

 

2.                                       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

Except as set forth in the Disclosure Schedule, the Company hereby represents and warrants to Parent as follows (it being understood that each representation and warranty contained in this Section 2 is subject to: (a) the exceptions and disclosures set forth in the part or subpart of the Disclosure Schedule corresponding to the particular Section or subsection in this Section 2 in which such representation and warranty appears; (b) any exceptions or disclosures explicitly cross-referenced in such part or subpart of the Disclosure Schedule by reference to another part or subpart of the Disclosure Schedule; and (c) any exception or disclosure set forth in any other part or subpart of the Disclosure Schedule to the extent it is reasonably apparent that such exception or disclosure is intended to qualify such representation and warranty, provided that, Part 2.3 of the Disclosure Schedule may not be modified by reference to any other Part of the Disclosure Schedule):

 

2.1                                No Subsidiaries; Due Incorporation; Etc.

 

(a)                                   The Company has no subsidiaries and does not hold any equity interest in, and does not possess any right or obligation to purchase any equity interest in, any Person.

 

(b)                                   The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all necessary power and authority to own and use its assets in the manner in which its assets are currently owned and used and to conduct its business in the manner in which its business is currently being conducted.

 

(c)                                   The Company is qualified or licensed to do business as a foreign corporation, and is in good standing, in each jurisdiction where the nature of its business requires such qualification or licensing, except where the failure to be so qualified, licensed or in good standing does not have, and would not reasonably be expected to have, a Material Adverse Effect. Part 2.1(c) of the Disclosure Schedule sets forth each jurisdiction in which the Company is qualified or licensed to do business.

 

2.2                                Certificate of Incorporation and Bylaws; Records.  The Company has delivered or otherwise made available to Parent or its counsel copies of the Company Certificate

 

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of Incorporation and bylaws of the Company, including all amendments and restatements thereto (the “Company Constituent Documents”).

 

2.3                                Capitalization, Etc.  The authorized capital of the Company consists of:

 

(a)                                   10,000,000 shares of Company Preferred Stock, of which (i) 3,357,694 shares have been designated Series A Preferred Stock, (ii) 4,000,000 shares have been designated Series B Preferred Stock and (ii) 2,350,000 shares have been designated Series C Preferred Stock. As of the date of this Agreement, 3,332,694 shares of Series A Preferred Stock are issued and outstanding, 1,263,750 shares of Series B Preferred Stock are issued and outstanding and 1,580,082 shares of Series C Preferred Stock are issued and outstanding. The rights, preferences, privileges and restrictions of the Company Preferred Stock are as stated in the Company Certificate of Incorporation.

 

(b)                                   100,000,000 shares of Company Common Stock, of which, as of the date of this Agreement, 17,767,407    shares are issued and outstanding.

 

(c)                                   5,000,000 shares of Company Common Stock are reserved for issuance under the Company’s Option Plan to officers, directors, employees and consultants, of which, 3,681,450 shares have been granted as stock options under the Option Plan and, as of the date of this Agreement, are outstanding, 50,000 shares have been issued upon exercise of stock options or as direct stock grants under the Option Plan and 1,018,550 shares remain available for future grant under stock options under the Option Plan or as direct stock grants to officers, directors, employees and consultants.

 

(d)                                   300,000 shares of Company Preferred Stock and 40,000 shares of Company Common Stock are reserved for issuance under outstanding Company Warrants.

 

(e)                                   Part 2.3(e) of the Disclosure Schedule sets forth, (i) the name and address of each holder of Company Common Stock and Company Preferred Stock, Company Option, Company Warrant or any securities convertible, exchangeable or exercisable for capital stock of the Company and (ii) as of the date of this Agreement, the number or amount and type of such holding. Except as described in this Section 2.3 and as set forth in Part 2.3(e) of the Disclosure Schedule, and except for the conversion privileges of the Company Preferred Stock, there are outstanding (w) no shares of capital stock or other securities; (x) no options, warrants, convertible or exchangeable securities or other rights (including conversion rights, preemptive rights, co-sale rights, rights of first refusal or other similar rights) to acquire from the Company, or to cause the Company to issue, sell or return any capital stock or other securities; (y) no phantom stock rights, stock appreciation rights or other equity related rights of the Company and (z) no agreements permitting or obligating the Company to issue, sell, redeem or purchase any shares of capital stock or other securities of the Company.

 

(f)                                     All of the outstanding shares of Company Common Stock and Company Preferred Stock have been duly authorized and validly issued, and are fully paid and nonassessable. All shares of outstanding Company Common Stock and Company Preferred Stock and all outstanding Company Options and Company Warrants have been issued and granted in compliance with all applicable securities laws. Each share of Series A Preferred Stock,

 

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Series B Preferred Stock and Series C Preferred Stock is convertible into one share of Company Common Stock. Except as set forth in Part 2.3(f) of the Disclosure Schedule, neither the Company, nor, to the Knowledge of the Company, any stockholder of the Company, is a party to any voting agreement, voting trust, proxy, registration rights agreement or stockholders agreement relating to the Company Common Stock or Company Preferred Stock.

 

(g)                                  No dividends have been declared on, or are owing or payable with respect to, any of the Company Preferred Stock.

 

2.4                                Financial Statements.  Attached as Part 2.4 of the Disclosure Schedule are (a) the Company’s unaudited balance sheets as of December 31, 2007 and 2006, and (b) the Company’s unaudited statements of operations for the three years ended December 31, 2007, 2006 and 2005 and (c) the Company’s unaudited balance sheet (the “Unaudited Balance Sheet” ) and statement of operations as of August 31, 2008 (all of the foregoing financial statements of the Company and any notes thereto are hereinafter collectively referred to as the “Company Financial Statements” ). The Company Financial Statements were prepared in accordance with generally accepted accounting principles ( “GAAP” ) consistently applied, are substantially in accordance with the books and records of the Company, and fairly present in all material respects the financial condition of the Company at the dates therein indicated and the results of operations of the Company for the periods therein, except (i) as may be indicated in the footnotes to such financial statements and (ii) that the unaudited financial statements do not contain all of the footnotes required by GAAP and are subject to normal year end adjustments.

 

2.5                                Absence of Changes.  Except as expressly contemplated by this Agreement or as set forth in Part 2.5 of the Disclosure Schedule, since January 1, 2008, the Company has operated in the ordinary course of business and, between January 1, 2008 and the date of this Agreement there has not occurred any event, change, action, failure to act or transaction that, individually or in the aggregate, has had or would be reasonably expected to have, a Company Material Adverse Effect. Since January 1, 2008, the Company has not taken any actions which, had such actions been taken after the date of this Agreement, would have breached any of the covenants set out in Section 4.3.

 

2.6                                Title to Assets.   The Company has good and valid title to all assets owned by it as of the date of this Agreement, including all assets (other than capitalized or operating leases) reflected on the Unaudited Balance Sheet (except for assets sold or otherwise disposed of since the date of the Unaudited Balance Sheet), except where the failure to have good and valid title would not have, and would not be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on Company.  All of said assets are owned by the Company free and clear of any Encumbrances (other than Permitted Encumbrances).

 

2.7                                Intellectual Property.

 

(a)                                   Part 2.7(a) of the Disclosure Schedule identifies each item of Registered IP in which the Company has or purports to have an ownership interest of any nature (excluding ownership of any in-license to Registered IP). Each of the Registered IP identified in Part 2.7(a) of the Disclosure Schedule is subsisting, and each item of such Registered IP is, to the Knowledge of the Company, valid and enforceable.

 

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(b)                                   The Company has good, valid, subsisting, unexpired and enforceable title (free and clear of all Encumbrances other than Permitted Encumbrances), or otherwise possesses adequate and exclusive rights to use, all of the Intellectual Property necessary to enable operation of, or used in, its business as now being conducted.

 

(c)                                   To the Company’s Knowledge, none of the operation of the business of the Company or the Company Products, has ever infringed, misappropriated, violated or conflicted with the Intellectual Property Rights of any third party. To the Company’s Knowledge, no Person has infringed, misappropriated, or otherwise violated any Company IP. No action, claim or proceeding has been asserted or is pending or, to the Knowledge of the Company, threatened (including by way of any cease and desist demands or unsolicited offers of license) against the Company or by the Company related to any Company IP.

 

(d)                                   Part 2.7(d) of the Disclosure Schedule identifies a true and correct list of each Company IP Contract pursuant to which any Intellectual Property Right or Intellectual Property is or has been licensed, sold, assigned or otherwise conveyed to or provided to the Company (other than non-exclusive licenses to third-party software that is not incorporated into, or used in the development, manufacturing, testing, distribution, maintenance or support of, any Company Product and that is not otherwise material to the business of the Company). Except as set forth in Part 2.7(d) of the Disclosure Schedule and except for non-exclusive licenses to the Company’s Products that are granted pursuant to standard Company IP Contracts (the forms of which have been provided to Parent), no Person has any license or other right, including any right to obtain a license or obtain a copy of the source code to any Company Product, with respect to the Company IP. The Company (i) has never been a member or promoter of, or a contributor to, any industry standards body or similar organization, and (ii) no Company Product has been developed using Open Source Code, in either case, that imposes or could impose any material limitation, restriction, or condition on the right or ability of the Company to use or distribute any Company Product.

 

2.8                                Material Contracts.

 

(a)                                   Part 2.8(a) of the Disclosure Schedule lists all of the Material Contracts to which the Company is a party or by which the Company or its assets may be bound, in each case, as in effect as of the date of this Agreement. The Company has delivered or otherwise made available to Parent or its counsel a true and correct copy of each Material Contract (including amendments thereto).

 

(b)                                   With respect to each Material Contract: (i) such Material Contract is a valid agreement, binding, in full force and effect and, to the Company’s Knowledge, enforceable by the Company in accordance with its terms, subject to (A) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (B) rules of law governing specific performance, injunctive relief and other equitable remedies; and (ii) neither the Company nor, to the Company’s Knowledge, any other party to such Material Contract is in material breach or material default under such Material Contract, and no event has occurred which, with notice or lapse of time or both would constitute a breach, violation or default thereof or permit termination or modification thereof or acceleration thereunder that would have, either individually or in the aggregate, a Material Adverse Effect on the Company. The Company has not waived any rights

 

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under any Material Contract that would have, either individually or in the aggregate, a Material Adverse Effect on the Company.

 

2.9                                Liabilities.   The Company has no material Liabilities, whether accrued, absolute, fixed or contingent, except for those liabilities (a) set forth or reserved against in the Unaudited Balance Sheet; (b) arising in the ordinary course of business since September 30, 2008 and which do not have, individually or in the aggregate, a Material Adverse Effect on Company; (c) that are obligations to pay or perform under Company Contracts; (d) incurred pursuant to or in connection with the execution, delivery or performance of this Agreement which do not result in, individually or in the aggregate, a Material Adverse Effect on the Company; or (e) identified on Part 2.9 of the Disclosure Schedule.

 

2.10                         Compliance with Legal Requirements.   The Company is, and has at all times been, in compliance in all material respects with all Legal Requirements that are applicable to the conduct of its business, including Company Products or the ownership of its assets. The Company has never received any written notice or other written, or, to the Knowledge of the Company, other communication from any Governmental Body or any other Person regarding any actual, alleged, possible or potential violation of, or failure to comply with, any Legal Requirement.

 

2.11                         Certain Business Practices.   The Company has not, at any time prior to the date of this Agreement, (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, or (b) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns.

 

2.12                         Governmental Authorizations.  The Company has obtained each material approval or authorization of a Governmental Body that is required, as of the date of this Agreement, for the operation by the Company of its business, and all of such approvals and authorizations are in full force and effect.

 

2.13                         Tax Matters.

 

(a)                                   All Tax Returns required to have been filed (taking into account any extensions) by or on behalf of the Company with any Governmental Body with respect to any taxable period ending on or before the Closing Date (the “Company Returns” ) (i) have been timely filed, and (ii) have been accurately and completely prepared in all material respects in compliance with all applicable Legal Requirements. All amounts shown on the Company Returns to be due on or before the Closing Date have been or will be paid on or before the Closing Date. The Company has delivered or made available to Parent accurate and complete copies of all Company Returns.

 

(b)                                   The Company Financial Statements accrue all actual and contingent liabilities for unpaid Taxes with respect to all periods through the dates thereof in accordance with GAAP. The Company shall establish, in the ordinary course of business and consistent with its past practices, reserves adequate for the payment of all unpaid Taxes by the Company for the period from the date of the Unaudited Balance Sheet through the Closing Date.

 

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(c)                                   As of the date of this Agreement, no Company Return relating to income Taxes has ever been examined or audited by any Governmental Body, and there are no current examinations or audits of any Company Return in progress (in each case excluding, for this purpose, desk audits of which the Company has no Knowledge). The Company has delivered or made available to Parent accurate and complete copies of all audit reports and similar documents (to which the Company has access) relating to the Company Returns which have been requested by Parent. As of the date of this Agreement, no extension or waiver of the limitation period applicable to any of the Company Returns has been granted and is currently in effect.

 

(d)                                   As of the date of this Agreement, no Legal Proceeding involving the Internal Revenue Service is pending (excluding, for purposes of this representation, any pending desk audit of which the Company has no Knowledge) or, to the Company’s Knowledge, has been threatened against or with respect to the Company in respect of any Tax. There are no unsatisfied liabilities for Taxes with respect to any notice of deficiency or similar document received by the Company with respect to any Tax. There are no liens for Taxes upon any of the assets of the Company except liens for current Taxes not yet due and payable. The Company has not been, and the Company will not be, required to include any adjustment in taxable income for any tax period (or portion thereof) after the Closing pursuant to Section 481 of the Code or any comparable provision under state or foreign Tax laws as a result of changes in accounting methods employed prior to the Closing.

 

(e)                                   Except as set forth in Part 2.13(e) of the Disclosure Schedule, there is no agreement, plan, arrangement or other Contract covering any employee or independent contractor or former employee or independent contractor of the Company that, considered individually or considered collectively with any other such Contracts, will, or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G of the Code. The Company is not a party to any Contract that would require, nor does the Company have any obligation (current or contingent), to compensate any individual for excise taxes paid pursuant to Section 4999 of the Code.

 

(f)                                     The Company has never (i) been a member of an affiliated group (within the meaning of Section 1504(a) of the Code) filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company), (ii) incurred any Liability for the Taxes of any Person (other than the Company) under Section 1.1502-6 of the Treasury Regulations (or any similar provision of state, local or foreign law), as a transferee or successor, or otherwise and (iii) been a party to any joint venture, collaboration, partnership or other agreement treated as a partnership for Tax purposes. The Company is not currently and has never been a party to or bound by any tax indemnity agreement, tax-sharing agreement, tax allocation agreement or similar Contract other than (i) Contracts listed in any part of the Disclosure Schedule, or (ii) Contracts entered into with customers, vendors, and other third parties the principal purpose of which was not to address Tax matters.

 

(g)                                  The Company has not been either a “distributing corporation” or a “controlled corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code (y) in the two years prior to the date of this Agreement or (z) which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the Merger.

 

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(h)                                  The Company has made available to Parent all documentation relating to any currently applicable Tax holidays or incentives. The Company is in compliance with the requirements for any currently applicable Tax holidays or incentives and none of those Tax holidays or incentives will be adversely affected by the transaction contemplated in this Agreement.

 

(i)                                     The Company has reported, withheld and paid all material Taxes required to have been reported, withheld and paid in connection with any amounts paid or owing by it to any officer, employee, independent contractor, creditor, stockholder or other third party, and has timely filed all related withholding Tax Returns.

 

2.14                         Employee and Labor Matters; Benefit Plans.

 

(a)                                   Part 2.14 of the Disclosure Schedule lists each employee benefit plan, program, arrangement and contract (including, without limitation, any “Employee Benefit Plan” , as defined in Section 3(3) of the Employment Retirement Income Security Act of 1974,  as amended ( “ERISA” ) maintained, contributed to or sponsored by the Company for the benefit of any current or former employee, officer or director of the Company, or with respect to which the Company could incur Liability under Section 4069, 4201 or 4212(c) of ERISA (collectively,  the “Plans” ).

 

(b)                                   The Company does not maintain, sponsor or contribute to, and, to the Knowledge of the Company, has not at any time in the past maintained, sponsored or contributed to, any employee pension benefit plan (as defined in Section 3(2) of ERISA). None of the Plans is subject to Title IV of ERISA and the Company has not incurred, and does not reasonably expect to incur, any direct or indirect Liability under or by operation of Title IV of ERISA.

 

(c)                                   Each of the Plans is now and always has been operated in all material respects in accordance with its terms and all applicable Legal Requirements, including but not limited to ERISA and the Code. The Company has performed in all material respects all obligations required to be performed by it under, is not in any material respect in default under or in violation of, and, to the Knowledge of the Company, there is no default or violation by any other party to, any Plan.

 

(d)                                   Each Plan that is intended to be qualified under Section 401(a) of the Code or Section 401(k) of the Code has timely received a favorable determination letter from the Internal Revenue Service ( “IRS” ) covering all of the provisions applicable to the Plan for which determination letters are currently available that the Plan is so qualified and each trust established in connection with any Plan which is intended to be exempt from federal income taxation under Section 501(a) of the Code has received a determination letter from the IRS that it is so exempt, and no fact or event has occurred since the date of such determination letter or letters from the IRS to adversely affect the qualified status of any such Plan or the exempt status of any such trust. All contributions required to be made to any Plan have been made on a timely basis.

 

(e)                                   None of the Plans in effect on the date hereof would result, separately or in the aggregate (including, without limitation, as a result of this Agreement or the transactions

 

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contemplated hereby), in the payment of any “excess parachute payment” within the meaning of Section 280G of the Code.

 

(f)                                     The Company has made available to Parent (i) copies of each Plan (and, if applicable, related trust agreements) and all amendments thereto, all written interpretations  thereof and all written descriptions thereof that have been distributed to the Company employees,  all annuity contracts or other funding instruments, and a complete description of any Plan which  is not in writing; (ii) the most recent determination letter issued by the IRS with respect to each  applicable Plan; (iii) for the three most recent plan years, annual reports on Form 5500 series  with respect to each applicable Plan, (iv) copies of all employment agreements and severance  agreements plans and policies with or relating to employees, officers and directors; and (v)  copies of all plans, programs, agreements and other arrangements of the Company with or relating to its current or former employees, officers and directors which contain change in  control provisions. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (vi) result in any payment (including, without  limitation, severance, unemployment compensation, “golden parachute” or otherwise) becoming due to any employee, officer or director of the Company under any Plan or otherwise, (vii)  increase any benefits otherwise payable under any Plan, or (viii) result in any acceleration of the  time of payment or vesting of any benefits.

 

(g)                                  Neither the Company nor any Plan has any present or future obligation to  make any payment to, or with respect to, any present or former employee, officer or director of the Company pursuant to any retiree medical benefit plan or other retiree welfare plan.

 

(h)                                  The Company is not a party to any collective bargaining or other labor union contract applicable to its employees, officers or directors. As of the date hereof, there is no labor dispute, strike or work stoppage against the Company pending or, to the Knowledge of the Company, threatened which may interfere with the business activities of the Company. As of the date hereof, neither the Company nor any of its representatives or employees, has committed any unfair labor practices in connection with the operation of the business of the Company, and there is no pending, or to the Knowledge of the Company threatened charge or complaint against the Company by the National Labor Relations Board or any comparable state agency.  The Company’s relations with its employees are good.

 

2.15                         Environmental Matters.   The Company is, and has at all times been, in compliance in all material respects with all applicable Environmental Laws.  The Company has never received any written notice from a Governmental Body that alleges that the Company is materially violating any Environmental Law. To the Knowledge of the Company, no current or prior owner of any property leased or controlled by the Company has received any written notice from a Governmental Body that alleges that such current or prior owner or the Company is materially violating any Environmental Law.

 

2.16                         Insurance.   The Company has the insurance of the types and in the amounts set forth in Part 2.16 of the Disclosure Schedule. As of the date of this Agreement, there is no material claim pending under any of the Company’s insurance policies or fidelity bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. The Company is in compliance in all material respects with the terms of such policies and

 

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bonds. The Company has no Knowledge as of the date of this Agreement of any threatened termination of, or material premium increase with respect to, any of such policies or bonds.

 

2.17                         Related Party Transactions.   Part 2.17 of the Disclosure Schedule describes all transactions or series of transactions between the Company, on the one hand, and any Related Party, on the other hand (other than (a) agreements, arrangements and understandings that are Material Contracts, (b) Company Plans, (c) Employee Agreements, (d) director and officer indemnification agreements (including indemnification provisions contained in the Company’s bylaws), and (e) options or warrants to purchase shares of Company Common Stock) that would be required to be disclosed pursuant Item 404 of Regulation S-K (assuming for purposes of this Section 2.17 that the Company was subject to such disclosure requirements) with respect to the period from January 1, 2006 through the date of this Agreement, and sets forth all current balances payable to or receivable from such Related Party with respect thereto.

 

2.18                         Legal Proceedings; Orders.  Except as set forth on Part 2.18 of the Disclosure Schedule, the Company (i) is not subject to any Order, and (ii) is not a party to or the subject of and, to the Company’s Knowledge, has not been threatened to be made a party to or the subject of, any Legal Proceeding. To the Company’s Knowledge, there is no Legal Proceeding by any Person pending or threatened that has resulted in or would be reasonably likely to result in a Material Adverse Effect.

 

2.19                         Authority; Binding Nature of Agreement.   Subject to obtaining the requisite approval of the Company’s stockholders in accordance with the DGCL and the California Corporations Code (to the extent applicable to the Company by virtue of Section 2115 thereof) and the filing and recording of the Certificate of Merger pursuant to the DGCL, the Company has the corporate power and authority to enter into and to perform its obligations under this Agreement and any Related Agreement to which it is a party, and the execution, delivery and performance by the Company of this Agreement and any Related Agreement to which it is a party have been duly authorized by all necessary action on the part of the Company and its board of directors. The approval or consent of a majority of the voting power represented by Company Common Stock and Company Preferred Stock, voting together as a single class, and a majority of the Series A Preferred Stock voting as a separate series, a majority of the Series B Preferred Stock voting as a separate series and a majority of the Series C Preferred Stock voting as a separate series are the only approvals or consents of the stockholders of the Company needed to approve this Agreement and approve the Merger and the transactions contemplated hereby (the “Required Company Stockholder Approval” ). This Agreement and each Related Agreement to which the Company is a party has been duly executed and delivered by the Company, and assuming due authorization, execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.

 

2.20                         Non-Contravention; Consents.   Except as set forth in Part 2.20 of the Disclosure Schedule, the execution and delivery of this Agreement and each Related Agreement to which the Company is a party and the consummation by the Company of the transactions contemplated by this Agreement will not: (a) cause a violation of any of the provisions of the Company

 

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Constituent Documents; (b) cause a violation by the Company of any Legal Requirement or Order applicable to or to which the Company is subject; or (c) conflict with, result in breach of, constitute a default under, create in any Person the right to accelerate, terminate, modify, or cancel, or give rise to any payments or compensation. Except as may be required by the DGCL, the Company is not required to give notice to, make any filing with, or obtain any Consent from any Person at any time prior to the Closing in connection with the execution and delivery of this Agreement, each Related Agreement to which the Company is a party, or the consummation by the Company of the Merger and the transactions contemplated hereby.

 

2.21                         Company Action.   The board of directors of the Company (at a meeting duly called and held in accordance with the Company Constituent Documents) has (a) unanimously determined that the Merger is advisable and in the best interests of the Company and its stockholders, and (b) unanimously recommended the approval of this Agreement and the Merger by the stockholders of the Company and directed that this Agreement and the Merger be submitted to the stockholders of the Company for approval.

 

2.22                         Anti-Takeover Provisions.  The board of directors of the Company has taken all action necessary or required to render inapplicable to the Merger, this Agreement or any Related Agreement and the transactions contemplated herein or therein any anti-takeover provision in the Company Constituent Documents.

 

2.23                         Financial Advisor.   No broker, finder or investment banker is entitled to any commission or brokerage or finder’s fee in connection with the Merger or any of the other transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company.

 

2.24                         Investment Representations.   Part 2.24 of the Disclosure Schedule sets forth the location (and address) where each holder of Company Common Stock, Company Preferred Stock, Company Options and Company Warrants is a resident, is domiciled, or maintains its principal executive office, in each case based solely on the books and records of the Company. Each stockholder of the Company executing a Voting Agreement is an “accredited investor” as defined under the Securities Act.

 

2.25                         Books and Records.   The Company has provided to Parent copies of the Company’s minutes of directors’ and stockholders’ meetings and written consents through the date of this Agreement.

 

2.26                         Reliance.   The Company has not relied on and is not relying on any representations, warranties or other assurances regarding Parent, Merger Sub or their respective businesses other than those representations and warranties expressly set forth in Section 3 of this Agreement.

 

2.27                         Full Disclosure.  The information supplied by the Company for inclusion in the Information Statement (including any financial statements of the Company) (the “Company Information” ) will not, as of the date of the Information Statement or as of the date of any amendments or supplements related thereto, (i) contain any statement that is inaccurate or misleading with respect to any material facts, or (ii) omit to state any material fact necessary in

 

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order to make such information, in the light of the circumstances under which such information will be provided, not false or misleading.

 

3.                                       REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.

 

Except as set forth in the Parent Disclosure Schedule, Parent and Merger Sub hereby represent and warrant to the Company as follows (it being understood that each representation and warranty contained in this Section 3 is subject to: (a) the exceptions and disclosures set forth in the part or subpart of the Parent Disclosure Schedule corresponding to the particular Section or subsection in this Section 3 in which such representation and warranty appears; (b) any exceptions or disclosures explicitly cross-referenced in such part or subpart of the Parent Disclosure Schedule by reference to another part or subpart of the Parent Disclosure Schedule; and (c) any exception or disclosure set forth in any other part or subpart of the Parent Disclosure Schedule to the extent it is reasonably apparent that such exception or disclosure is intended to qualify such representation and warranty):

 

3.1                                Due Incorporation; Subsidiaries.   Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Except for Merger Sub, Parent has no subsidiaries and does not hold any equity interest in, and does not possess any right or obligation to purchase any equity interest in, any Person.  Parent is qualified as a foreign corporation and is in good standing in the State of California.

 

3.2                                Certificate of Incorporation and Bylaws . Parent has delivered or otherwise made available to the Company or its counsel copies of the certificate of incorporation and bylaws of Parent, including all amendments and restatements thereto (the “Parent Constituent Documents” ).

 

3.3                                Capitalization, Etc.

 

(a)                                   The authorized capital of the Parent consists of 5,000,000 shares of preferred stock, none of which are outstanding, and 150,000,000 shares of Parent Common Stock, of which, as of the date of this Agreement, 41,299,598 shares are issued and outstanding.

 

(b)                                   The authorized capital of Merger Sub consists of 1,000 shares of common stock, of which 1,000 shares are issued and outstanding and held of record and beneficially owned by Parent.

 

(c)                                   8,148,773 shares of Parent Common Stock are reserved for issuance under Parent’s Amended and Restated 2001 Equity Incentive Plan to officers, directors, employees and consultants, of which, 2,379,283 shares have been granted as stock options under such plan and, as of the date of this Agreement, are outstanding, 1,262,408 shares have been issued upon exercise of stock options or as direct stock grants, and 23,485 shares have been repurchased under such plan and 4,530,567 shares remain available for future grant as stock options under such plan or as direct stock grants to officers, directors, employees and consultants; 600,000 shares of Parent Common Stock are reserved for issuance under Parent’s 2005 Non-Employee Directors’ Stock Option Plan to directors, of which, 234,375 shares have been granted as stock

 

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options under such plan and, as of the date of this Agreement, are outstanding, no shares have been issued upon exercise of stock options, and 365,625 shares remain available for future grant as stock options under such plan to directors; and 1,450,000 shares of Parent Common Stock are reserved for issuance under Parent’s 2005 Employee Stock Purchase Plan to employees, of which, 449,961 shares have been issued under such plan and 1,039,000 shares remain available for future issuance under such plan to employees;

 

(d)                                   Except as described in this Section 3.3 and as set forth in Part 3.3(d) of the Parent Disclosure Schedule, there are outstanding (w) no shares of capital stock or other securities of Parent or Merger Sub; (x) no options, warrants, convertible or exchangeable securities or other rights (including conversion rights, preemptive rights, co-sale rights, rights of first refusal or other similar rights) to acquire from Parent or Merger Sub, or to cause Parent or Merger Sub to issue, sell or return any capital stock or other securities; (y) no phantom stock rights, stock appreciation rights or other equity related rights of Parent or Merger Sub and (z) no agreements permitting or obligating Parent or Merger Sub to issue, sell, redeem or purchase any shares of capital stock or other securities of Parent or Merger Sub.

 

(e)                                   All of the outstanding shares of Parent Common Stock have been duly authorized and validly issued, and are fully paid and nonassessable. All shares of outstanding Parent Common Stock and all outstanding stock options exercisable for Parent Common Stock have been issued and granted in compliance with all applicable securities laws. Except as set forth in Part 3.3(e) of the Parent Disclosure Schedule, neither Parent, nor, to the Knowledge of Parent, any stockholder of Parent, is a party to any voting agreement, voting trust, proxy, registration rights agreement or stockholders agreement relating to the Parent Common Stock or Parent preferred stock.

 

(f)                                     No dividends have been declared on, or are owing or payable with respect to, any of Parent’s capital stock.

 

3.4                                Authority; Binding Nature of Agreement.   Each of Parent and Merger Sub has full corporate power and authority to enter into and perform its respective obligations under this Agreement and any Related Agreement to which they are a party and authorize, issue and deliver the shares of Parent Common Stock pursuant to this Agreement, and the execution, delivery and performance by each of Parent and Merger Sub of this Agreement and the transactions contemplated hereby have been duly authorized by all necessary action on the part of Parent, Merger Sub and their respective Boards of Directors. This Agreement and each Related Agreement to which Parent or Merger Sub is a party constitutes the legal, valid and binding obligation of each of Parent and Merger Sub, as the case may be, enforceable against each of them in accordance with its terms, subject to (a) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (b) rules of law governing specific performance, injunctive relief and other equitable remedies.

 

3.5                                Parent Common Stock.   Parent has validly reserved a sufficient number of authorized but unissued shares of Parent Stock to pay the Merger Consideration to be paid by Parent under this Agreement and to establish the Creditor Stock Pool. The shares of Parent Common Stock to be issued pursuant to the Merger and the Creditor Stock Pool will be duly and validly authorized and issued, will be fully paid and non-assessable, assuming the representation

 

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and warranty in Section 2.24 is true and complete, will be exempt from the registration requirements of the Securities Act pursuant to Regulation D promulgated thereunder, will be issued in compliance with all state securities and blue sky laws (subject to reliance on Section 2.24), will not be issued in violation of the preemptive rights of any stockholder of Parent and shall be free of any liens or Encumbrances.

 

3.6                                Non-Contravention; Consents.   The execution and delivery of this Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub of the transactions contemplated by this Agreement will not: (a) cause a violation of any of the provisions of the certificate of incorporation or bylaws of Parent or Merger Sub; or (b) cause a violation by Parent or Merger Sub of any Legal Requirement or Order applicable to Parent or Merger Sub, or to which Parent or Merger Sub is subject; or (c) conflict with, result in breach of, constitute a default under, create in any Person the right to accelerate, terminate, modify, or cancel, or give rise to any payments or compensation.  Except as may be required by the DGCL, neither Parent nor Merger Sub is required to give notice to, make any filing with, or obtain any Consent from any Person at any time prior to the Closing in connection with the execution and delivery of this Agreement, or the consummation by Parent of the Merger and the transactions contemplated hereby.

 

3.7                                SEC Reports; Financial Statements .  Since January 1, 2007, Parent has filed all required reports, schedules, forms, statements and other documents (including exhibits and all other information incorporated therein) with the SEC (the “Parent SEC Documents”). As of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Parent SEC Documents and, except to the extent that information contained in any Parent SEC Document has been revised, modified or superseded (prior to the date of this Agreement) by a later filed Parent SEC Document, none of the Parent SEC Documents when filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Parent included in the Parent SEC Documents comply as to form, as of their respective dates of filing with the SEC, in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements, as otherwise permitted by rules and regulations applicable to the filing of a Quarterly Report on Form 10-Q under the Exchange Act) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the financial position of Parent as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal recurring year-end audit adjustments).

 

3.8                                Intellectual Property.

 

(a)                                   Part 3.8(a) of the Parent Disclosure Schedule identifies each item of Registered IP in which Parent has or purports to have an ownership interest of any nature.

 

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(b)                                  Parent has good, valid and enforceable title (free and clear of all Encumbrances other than Permitted Encumbrances), or otherwise possesses adequate and exclusive rights to use, all of its Registered IP.

 

(c)                                   To Parent’s Knowledge, none of the operation of the business of Parent has ever infringed, misappropriated, violated or conflicted with the Intellectual Property Rights of any third party. To the Parent’s Knowledge, no Person has infringed, misappropriated, or otherwise violated Parent’s Registered IP. No action, claim or proceeding has been asserted or is pending or, to the Knowledge of Parent, threatened (including by way of any cease and desist demands or unsolicited offers of license) against Parent or by Parent related to any Parent IP or any of Parent’s Intellectual Property Rights.

 

3.9                                Absence of Changes.   Except as expressly contemplated by this Agreement, since January 1, 2008, Parent has operated in the ordinary course of business and, between January 1, 2008 and the date of this Agreement there has not occurred any event, change, action, failure to act or transaction that, individually or in the aggregate, has had or would be reasonably expected to have, a Parent Material Adverse Effect. Since January 1, 2008, Parent has not taken any actions which, had such actions been taken after the date of this Agreement, would have breached any of the covenants set out in Section 4.2.

 

3.10                         Title to Assets.   Parent has good and valid title to all assets owned by it as of the date of this Agreement, including all assets (other than capitalized or operating leases) reflected on the unaudited balance sheet in the last Quarterly Report on Form 10-Q filed by Parent with the SEC (except for assets sold or otherwise disposed of since the date of such unaudited balance sheet), except where the failure to