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Exhibit 10.1
AGREEMENT AND PLAN OF
MERGER
BY AND AMONG
INCENTRA SOLUTIONS,
INC.
INCENTRA HELIO ACQUISITION
CORP.
HELIO SOLUTIONS,
INC.
AND
DAVID CONDENSA,
AS SHAREHOLDERS’
REPRESENTATIVE
Dated as of August ___,
2007
TABLE OF
CONTENTS
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Page
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RECITALS
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10
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ARTICLE I
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THE MERGER
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11
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Section 1.1
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The Merger
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11
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Section1.2
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Closing
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11
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Section 1.3
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Effective Time
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11
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Section 1.4
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Effects of the Merger
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11
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Section 1.5
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Certificate of Incorporation and By-Laws of
the Surviving Corporation
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11
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Section 1.6
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Directors and Officers
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12
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ARTICLE II
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MERGER CONSIDERATION; EFFECT ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
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12
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Section 2.1
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Merger Consideration
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12
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Section 2.2
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Fractional Shares
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18
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Section 2.3
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Exchange of Certificates
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18
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Section 2.4
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Certain Adjustments
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19
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Section 2.5
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Shares of Dissenting
Shareholders
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20
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Section 2.6
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Tax-Free Reorganization
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20
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ARTICLE III
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REPRESENTATIONS AND WARANTIES OF THE
COMPANY
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20
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Section 3.1
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Organization, Standing and Corporate
Power
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21
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Section 3.2
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Subsidiaries
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21
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Section 3.3
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Capital Structure
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21
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Section 3.4
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Authority; Noncontravention
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22
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Section 3.5
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Financial Statements; Undisclosed
Liabilities
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23
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Section 3.6
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Material Contracts
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25
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Section 3.7
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Permits; Compliance with Applicable
Laws
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27
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Section 3.8
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Absence of Litigation
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28
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Section 3.9
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Tax Matters
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28
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Section 3.10
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Employee Benefit Plans
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30
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Section 3.11
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Labor Matters
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33
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Section 3.12
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Environmental Matters
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34
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Section 3.13
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Intellectual Property
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35
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Section 3.14
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Insurance Matters
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38
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Page 2
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Section 3.15
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Transactions with Affiliates
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38
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Section 3.16
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Voting Requirements
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38
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Section 3.17
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Brokers
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38
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Section 3.18
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Real Property
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38
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Section 3.19
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Tangible Personal Property
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39
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Section 3.20
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Powers of Attorney
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39
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Section 3.21
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Offers
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39
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Section 3.22
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Warranties
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40
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Section 3.23
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Investment Company
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40
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Section 3.24
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Board Approval
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40
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Section 3.25
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Books and Records
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40
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Section 3.26
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Status of Shares Being
Transferred
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40
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Section 3.27
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Investment in Parent Common
Stock
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40
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Section 3.28
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Disclosure
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41
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Section 3.29
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No Shareholder Competing
Business
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42
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ARTICLE IV
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REPRESENTATIONS AND WARRANTIES OF
PARENT
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42
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Section 4.1
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Organization; Standing and Corporate
Power
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42
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Section 4.2
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Capital Structure
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43
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Section 4.3
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Authority; Noncontravention
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43
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Section 4.4
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Parent Documents
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44
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Section 4.5
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Voting Requirements
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44
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Section 4.6
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Brokers
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45
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Section 4.7
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Board Approval
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45
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Section 4.8
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Books and Records
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45
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Section 4.9
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Sarbanes Oxley Act Compliance
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45
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Section 4.10
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Additional Representations
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45
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Section 4.11
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Litigation
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46
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Section 4.12
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Compliance
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46
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Section 4.13
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Contracts with Third Parties
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46
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Section 4.14
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Disclosure
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46
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ARTICLE V
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COVENANTS RELATING TO CONDUCT OF
BUSINESS
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47
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Section 5.1
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Conduct of Business by the
Company
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47
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Section 5.2
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Advice of Changes
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48
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Section 5.3
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No Solicitation by the Company
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48
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Section 5.4
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Conduct of Business by Parent
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49
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Section 5.5
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Transition
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49
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ARTICLE VI
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ADDITIONAL AGREEMENTS
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49
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Page 3
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Section 6.1
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Access to Information;
Confidentiality
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49
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Section 6.2
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Commercially Reasonable Efforts
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50
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Section 6.3
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Fees and Expenses
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51
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Section 6.4
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Public Announcements
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51
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Section 6.5
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Regulation D
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51
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Section 6.6
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Shareholders Covenant Not to
Compete
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52
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Section 6.7
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Parent Audit of Company
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52
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ARTICLE VII
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CONDITIONS PRECEDENT
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52
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Section 7.1
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Conditions to Each Party’s Obligation to
Consummate the Merger
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52
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Section 7.2
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Conditions to Obligations of Parent and Merger
Sub
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53
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Section 7.3
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Conditions to Obligations of the
Shareholders
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55
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Section 7.4
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Frustration of Closing
Conditions
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56
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ARTICLE VIII
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INDEMNIFICATION; ARBITRATION
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57
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Section 8.1
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Survival of Representations and
Warranties
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57
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Section 8.2
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Indemnification by Shareholders
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57
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Section 8.3
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Indemnification by Parent
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59
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Section 8.4
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Claims and Procedures
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59
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Section 8.5
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Arbitration
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61
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Section 8.6
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Shareholders’
Representative
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61
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ARTICLE IX
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TERMINATION, AMENDMENT AND
WAIVER
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63
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Section 9.1
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Termination
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63
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Section 9.2
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Effect of Termination
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64
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Section 9.3
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Amendment
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64
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Section 9.4
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Extension; Waiver
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64
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ARTICLE X
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GENERAL PROVISIONS
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65
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Section 10.1
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Notices
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65
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Section 10.2
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Definitions
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66
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Section 10.3
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Interpretation
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66
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Section 10.4
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Counterparts
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67
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Section 10.5
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Entire Agreement; no Third-Party
Beneficiaries
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67
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Section 10.6
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Governing Law
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67
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Page 4
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Section 10.7
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Assignment
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67
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Section 10.8
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Consent to Jurisdiction
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67
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Section 10.9
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Headings
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68
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Section 10.10
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Severability
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68
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Section 10.11
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Enforcement
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68
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Page 5
EXHIBITS
Exhibit A - Surviving Corporation Certificate of
Incorporation
Exhibit B - Form of Escrow Agreement
Exhibit C - Form of Employment
Agreements
Exhibit D –Form of Registration Rights
Agreements
Exhibit E - Form of Legal Opinion of Counsel to
the Company and Shareholders
Exhibit F - Form of Lock-Up and Voting
Agreement
Exhibit G - Form of Legal Opinion of Counsel to
Parent
Exhibit H - Mutual Release and Settlement
Agreement
Exhibit I - Form of Joinder Agreement
SCHEDULES
Company Disclosure Schedule
Parent Disclosure Schedule
Page 6
INDEX OF DEFINED TERMS
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DEFINED TERMS
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SECTION
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DEFINED
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Affiliate
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Section 9.3(a)
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Agreement
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Preamble
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Cash Consideration
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Section 2.1(b)
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Certificate of Merger
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Section 1.3
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CGCL
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Preamble
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Closing
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Section 1.2
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Closing Date
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Section 1.2
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Closing Statement
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Section 1.2(c)(i)
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Closing Net Working Capital
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Section 2.1(e)(i)
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Code
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Section 2.9(e)
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Company
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Preamble
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Company Acquisition Proposal
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Section 4.3(a)
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Company Certificate of Incorporation
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Section 2.2(b)
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Company Common Stock
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Preamble
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Company Disclosure Schedule
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Article II
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Company Financial Statements
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Section 2.5(a)
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Company IP Agreements
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Section 2.13(g)
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Company Material Contracts
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Section 2.6(b)
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Company Permitted Lien
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Section 2.19
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Competing Business
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Section 5.9
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DGCL
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Preamble
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Dispute
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Section 7.3
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Earn Out Payment
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Section 1.1
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EBITDA
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Section 2.11(f)(vi)
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Effective Time
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Section 1.3
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Employee Plans
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Section 2.10(a)
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Employment Agreements
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Section 6.2(h)
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Encumbrance
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Section 9.3(c)
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Environmental Laws
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Section 2.12(d)(i)
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Environmental Permits
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Section 2.12(d)(ii)
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ERISA
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Section 2.10(a)
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ERISA Affiliate
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Section 2.10(a)
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Escrow Agreement
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Section 2.1(d)
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Escrow Deposit
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Section 2.1(d)
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Escrow Account
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Section 2.1(d)
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Escrow Fund
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Section 2.1(d)
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Escrow Termination Date
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Section 1.2(d)
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Excluded Assets
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Section 1.3
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Fair Market Value
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Section 2.1(e)(iv)
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Fiduciary
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Section 2.10(e)
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Page 7
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GAAP
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Section 2.1(e)
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Government Entities
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Section 2.4(c)
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Governmental Entity
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Section 2.4(c)
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Hazardous Substances
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Section 2.12(d)(iii)
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Indemnified party
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Section 7.2(a)
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Indemnifying party
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Section 7.2(a)
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Initial Consideration
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Section 1.1
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Intellectual Property
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Section 2.13(a)
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IRS
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Section 2.10(g)
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Knowledge
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Section 9.3(d)
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Liens
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Section 2.4(d)
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Material adverse change
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Section 9.3(e)
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Material adverse effect
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Section 9.3(e)
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Merger
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Preamble
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Merger Consideration
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Section 2.1(b)
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Merger Sub
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Preamble
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Measurement Period
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Section 2.1(f)(i)
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Measurement Period Earn Out Payment
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Section 2.1(f)(i)
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Multi-Employer Plans
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Section 2.10(d)
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Net Working Capital
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Section 1.2(c)
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NVGL
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Preamble
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NWC Deficit
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Section 2.1(e)(iii)
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NWC Excess
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Section 2.1(e)(iv)
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Other Company Documents
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Section 2.7(c)
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Over 90 Collections
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Section 1.2(c)(iv)
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Person
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Section 9.3(f)
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Parent
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Preamble
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Parent Common Stock
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Section 3.2(a)
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Parent Employee Stock Options
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Section 3.2(a)
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Parent Indemnified Parties
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Section 7.1(a)
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Parent Losses
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Section 7.1(a)
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Parent SEC Documents
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Section 3.4(a)
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Parent Preferred Stock
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Section 3.2(a)
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Parent Shares
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Section 2.1(a)(ii)
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Parent Stock Plans
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Section 3.2(a)
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Permits
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Section 2.7(a)
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Release
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Section 2.12(d)(iv)
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Registration Rights Agreement
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Section 6.2(i)
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Requisite Regulatory Approvals
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Section 6.1(b)
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Restraints
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Section 6.1(c)
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Sarbanes Oxley Act
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Section 3.9
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SEC
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Section 3.4(a)
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Secretary
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Section 1.3
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Securities Act
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Section 2.24(a)
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Shareholder Indemnified Parties
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Section 7.1(b)
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Shareholder Losses
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Section 7.1(b)
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Page 8
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Shareholders
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Preamble
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Shares
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Recitals
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Software
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Section 2.13(a)
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Subsidiary
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Section 9.3(g)
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Surviving Corporation
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Section 1.1
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Tangible Personal Property
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Section 2.18
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Tax
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Section 2.9(i)(i)
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Taxes
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Section 2.9(i)(i)
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Tax Return
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Section 2.9(i)(ii)
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Third Party Rights
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Section 2.13(d)
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Working Capital
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Section 6.2(e)
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Page 9
AGREEMENT AND PLAN OF
MERGER
AGREEMENT AND PLAN OF MERGER (this “Agreement”)
dated as of August ___, 2007, by and among INCENTRA
SOLUTIONS, INC ., a Nevada corporation
(“Parent”), INCENTRA HELIO ACQUISITION CORP ., a
Delaware corporation and wholly owned subsidiary of Parent
(“Merger Sub”), HELIO SOLUTIONS, INC ., a
California corporation (the “Company”), and DAVID
CONDENSA , as Shareholders’ Representative (as defined in
Section 8.6).
RECITALS
WHEREAS , each of Parent, Merger Sub and the Company desire
Parent to consummate a business combination with the Company in a
transaction whereby, upon the terms and subject to the conditions
set forth in this Agreement, the Company will merge with and into
Merger Sub (the “Merger”), each outstanding share of
Common Stock of the Company (“Company Common Stock”)
(other than Dissenting Shares (as defined herein), will be
converted into the right to receive the Merger Consideration, and
Merger Sub will be the surviving corporation in the
Merger;
WHEREAS , the Board of Directors of the Company has
unanimously determined and resolved that the Merger and all of the
transactions contemplated by this Agreement are in the best
interest of the holders of Company Common Stock and that the Merger
is fair and advisable, and has approved this Agreement in
accordance with the California General Corporation Law, as amended
(the “CGCL”), and has further resolved unanimously to
recommend to all holders of Company Common Stock that they
authorize, approve and adopt this Agreement and the transactions
contemplated hereby; and
WHEREAS , the Boards of Directors of Parent and Merger Sub
have unanimously determined and resolved that the Merger and all of
the transactions contemplated by this Agreement are in the best
interest of Parent and the holders of Parent Common Stock and has
adopted this Agreement in accordance with the Nevada General
Corporation Law, as amended (the “ NVGCL ”) and
Parent, as sole Shareholder of Merger Sub, has adopted this
Agreement in accordance with the Delaware General Corporation Law,
as amended (the “ DGCL ”).
NOW, THEREFORE , in consideration of the foregoing and the
mutual representations, warranties, covenants and agreements
contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
parties hereto intending to be legally bound do hereby agree as
follows:
Page 10
ARTICLE I
THE MERGER
SECTION 1.1 The Merger . Upon the terms and subject
to the conditions set forth in this Agreement and in accordance
with the DGCL, at the Effective Time, the Company shall be merged
with and into Merger Sub and Merger Sub shall be the surviving
corporation in the Merger (the “Surviving Corporation”)
and, as such, Merger Sub shall continue its corporate existence as
a direct, wholly owned subsidiary of Parent under the laws of the
State of Delaware, and the separate corporate existence of the
Company thereupon shall cease.
SECTION 1.2 Closing . Subject to the satisfaction or,
to the extent permitted by applicable law, waiver of the conditions
to consummation of the Merger contained in Article VII hereof, the
closing of the Merger (the “Closing”) shall take place
at 9:00 a.m., Denver, CO time, on a date to be specified by the
parties (the “Closing Date”), which date shall not be
later than the third business day next following the satisfaction
or, to the extent permitted by applicable law, waiver of the
conditions set forth in Article VII (other than those conditions
that by their nature are to be satisfied at the Closing, but
subject to the fulfillment or, to the extent permitted by
applicable law, waiver of those conditions), unless another time or
date is agreed to by the parties hereto. The Closing will be held
at the offices of Parent, located at 1140 Pearl Street, Boulder, CO
80302 or at such other location as is agreed to by the parties
hereto.
SECTION 1.3 Effective Time . Upon the terms and
subject to the conditions set forth in this Agreement, at the
Closing the parties shall cause the Merger to be consummated by
filing with the Secretary of State of the State of Delaware (the
“Secretary”) a certificate of merger in form and
substance acceptable to the parties hereto (the “Certificate
of Merger”) duly executed and so filed in accordance with the
DGCL and shall make all other filings and recordings required under
the DGCL and CGCL to effectuate the Merger and the transactions
contemplated by this Agreement. The Merger shall become effective
at such time as the Certificate of Merger is duly filed with the
Secretary, or at such subsequent date or time as Parent and the
Company mutually shall agree and specify in the Certificate of
Merger (the time the Merger becomes so effective being hereinafter
referred to as the “Effective Time”). The parties shall
cooperate with each other and take all commercially reasonable
action to pre-position and/or pre-clear the Certificate of Merger
with the Secretary of State of Delaware so that the Certificate of
Merger is accepted and becomes effective on the Closing
Date.
SECTION 1.4 Effects of the Merger . The Merger shall
have the effects set forth in the DGCL.
SECTION 1.5 Certificate of Incorporation and By-laws of the
Surviving Corporation . The certificate of incorporation of
Merger Sub as set forth in Exhibit A attached hereto shall be the
certificate of incorporation of the Surviving Corporation until
thereafter amended or restated as provided therein or by applicable
law. The by-laws of
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Merger Sub in effect immediately prior to the
Effective Time shall be the by-laws of the Surviving Corporation
until thereafter amended or restated as provided therein or by
applicable law.
SECTION 1.6 Directors and Officers . The directors of
Merger Sub at the Effective Time shall, from and after the
Effective Time, be and become the directors of the Surviving
Corporation until their successors shall have been duly elected and
qualified or until their earlier death, resignation or removal in
accordance with the certificate of incorporation and by-laws of the
Surviving Corporation and the DGCL; provided that the board of
directors of the Merger Sub shall be comprised of two (2)
directors, consisting of Thomas P. Sweeney III and Matthew G.
Richman. The officers of Merger Sub at the Effective Time shall,
from and after the Effective Time, be and become the officers of
the Surviving Corporation until their successors shall have been
duly appointed and qualified or until their earlier death,
resignation or removal in accordance with the certificate of
incorporation and the by-laws of the Surviving
Corporation.
ARTICLE II
MERGER CONSIDERATION; EFFECT ON
CAPITAL STOCK; EXCHANGE
OF CERTIFICATES
SECTION 2.1 Merger Consideration . At the Effective
Time, by virtue of the Merger and without any action on the part of
Parent, Merger Sub, the Company or the holders of any of the
following securities:
(a)
The Company Common Stock issued and outstanding immediately prior
to the Effective Time (other than any Dissenting Shares, as defined
in Section 2.5 hereof) shall be converted into the right for each
stockholder of the Company, as set forth in Section 3.3(a) of the
Company Disclosure Schedule (the “Shareholders”) to
receive his or her respective pro rata share of:
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(i)
cash in the amount of Three Million Four Hundred Thousand Dollars
($3,400,000.00); and
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(ii)
Five Million shares of Parent’s unregistered common stock,
par value $.001 per share (the “Parent
Shares”).
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(iii)
For purposes of this Agreement, a Shareholder’s pro rata
share shall be such Shareholder’s percentage interest in the
total number of shares of Company Common Stock as set forth in
Section 3.3(a) of the Company Disclosure Schedule.
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(b)
For purposes of this Agreement, the payment pursuant to Section
2.1(a)(i) shall be referred to as the “Cash
Consideration”, and the term “Merger
Consideration” shall mean, collectively, the Parent Shares
and the Cash Consideration. At the Closing, Parent shall (i) pay
the Cash Consideration described in Section 2.1(a)(i), less the
Escrow
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Deposit (as defined in Section 2.1(c) hereof), to
the Shareholders by wire transfer of immediately available U.S.
federal funds to such accounts as the Shareholders may direct by
written notice delivered to Parent or Parent’s counsel; and
(ii) issue and deliver stock certificates to the Shareholders
representing their respective pro rata shares of the Parent
Shares.
(c)
Simultaneously with the Closing, Shareholders’ Representative
and Parent shall enter into an escrow agreement (the “Escrow
Agreement”) with an escrow agent selected by Parent and
reasonably acceptable to the Shareholder Representative (the
“Escrow Agent”) substantially in the form of Exhibit B
hereto. Pursuant to the terms of the Escrow Agreement, Parent shall
deposit Seven Hundred Fifty Thousand Dollars ($750,000.00) of the
Cash Consideration (the “Escrow Deposit”) into an
interest bearing escrow account, which account is to be managed by
the Escrow Agent (the “Escrow Account”). Any Escrow
Deposit, any interest thereon, and any other property in the Escrow
Account are referred to as the “Escrow Fund”. The
Escrow Fund shall be available to satisfy any NWC Deficit (as
defined in Section 2.1(d)(iii) below) and any amounts owed by
Shareholders to Parent pursuant to Article VIII of this Agreement
and the terms of the Escrow Agreement (which amounts shall be paid
first from the Escrow Fund until the Escrow Fund is exhausted).
Distributions from the Escrow Account shall be governed by the
terms and conditions of the Escrow Agreement. The adoption of this
Agreement and the approval of the transactions contemplated herein
by Shareholders shall constitute approval of the Escrow Agreement
and all of the arrangements relating thereto, including, without
limitation, the placement of the Escrow Deposit in
escrow.
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(d) (i) As
promptly as practicable, but no later than ninety (90) days after
the Closing Date, Parent shall cause to be prepared and delivered
to the Shareholders’ Representative a closing statement (the
“Closing Statement”) presenting the Net Working Capital
(defined in accordance with generally accepted accounting
principles (“GAAP”) as current assets minus current
liabilities) as of the end of business on the Closing Date
(“Closing Net Working Capital”). Accounts receivable
included within Net Working Capital for this purpose shall be
valued at face value if the age of the receivable is ninety (90)
days or less , and at zero (0) if the age of the receivable is more
than ninety (90) days; provided, however receivables aged more than
ninety (90) days shall be valued at the face value with respect to
purchase orders that have extended terms as a result of extended
terms granted to the Company by its vendors, all of which purchase
orders are identified in Section __ of Schedule III hereto.
Shareholders’ Representative shall have twenty (20) days from
receipt of the Closing Statement to dispute the calculation of Net
Working Capital by Parent. Shareholders’ Representative shall
provide notice to Parent of any such dispute in accordance with the
notice provisions of Section 10.1 below. In the event no notice of
dispute is provided to Parent, the Closing Statement shall be
deemed final and binding on the parties. In the event Shareholders
and Parent are not able to agree within thirty (30) days of receipt
of the Closing Statement by the Shareholders’ Representative
on such calculation, it shall be submitted to a mutually agreed
upon independent public accounting firm for final resolution in
accordance with the guidelines as provided herein.
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(ii)
The independent accounting firm selected by Parent and
Shareholders’ Representative will be a firm with offices in
more than one location. Each party may present financial
information to the accounting firm for review within ten (10) days
of selection of the firm provided that all such information is
simultaneously provided to the other party. No such firm will be
engaged that does not undertake to provide its final determination
within thirty (30) days of submission of all materials to be
reviewed. The decision of the selected accounting firm will be
presented in a written report to include the basis for all
adjustments made to the Closing Statement. The fees of the
accounting firm will be paid one-half by the Parent and one-half by
the Shareholders.
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(iii)
In the event Closing Net Working Capital is less than One Million
Eight Hundred Thousand Dollars ($1,800,000.00), the shortfall shall
be referred to herein as the “NWC Deficit”, the
Purchase Price shall be reduced by the amount of the NWC Deficit,
and an amount equal to the NWC Deficit shall be released from the
Escrow Account to Parent. As soon as reasonably practicable (which
shall in any case be within fifteen (15) days after the Closing
Statement is deemed final), the Parties shall execute and deliver
to the Escrow Agent joint instructions as contemplated in Section 4
of the Escrow Agreement, instructing the Escrow Agent to liquidate
such portion of the Escrow Fund as required and deliver to Parent
funds from the Escrow Fund in an amount equal to the NWC Deficit.
In the event the Escrow Fund is less than the NWC Deficit, then
each Shareholder shall, within fifteen (15) days of the Closing
Working Capital Statement being deemed final, pay to Parent his or
her pro rata share of the amount by which the NWC Deficit exceeds
the Escrow Fund.
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(iv)
In the event Closing Net Working Capital is greater than Two
Million Two Hundred Thousand Dollars ($2,200,000.00), the excess
shall be referred to herein as the “NWC Excess”, the
Purchase Price shall be increased by the amount of the NWC Excess,
and an amount equal to the NWC Excess shall be paid to Shareholders
in their respective pro rata shares by Parent within fifteen (15)
days after the Closing Statement is deemed to be final.
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(v)
As soon as reasonably practicable (which shall in any case be
within fifteen (15) days after the twelve (12) month anniversary
date hereof), the Parties shall execute and deliver to the Escrow
Agent joint instructions, as contemplated in Section 4 of the
Escrow Agreement, instructing the Escrow Agent immediately to
liquidate the Escrow Fund and deliver to Shareholders or Incentra
(together with interest earned thereon in proportion to the
distribution being made), as designated in such joint instructions,
funds then remaining in the Escrow Fund, less the aggregate amount
of all disputed amounts relating to any claims made pursuant to
Section 8.2 of this Agreement, if any, not paid or otherwise
resolved by the aforementioned date. If any such claims are pending
resulting in disputed amounts remaining in escrow, the Parties
shall, as soon as reasonably practicable after the resolution of
such claim, execute and deliver to
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the Escrow Agent joint instructions (which shall
be within fifteen (15) days of such resolution) as contemplated in
Section 4 of the Escrow Agreement, instructing the Escrow Agent to
liquidate the Escrow Fund and deliver the funds then remaining in
escrow in accordance with the resolution of the claim or
dispute.
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(e)
Subject to the conditions set forth below, Parent will pay
Shareholders their respective pro rata shares of Measurement Period
Earn Out Payments, as defined below and to be computed as
follows:
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(i)
For the first twelve (12) calendar month period beginning on the
first day of the first calendar month after Closing (the
“First Measurement Period”), in the event
Company’s EBITDA is in excess of Two Million Dollars
($2,000,000.00), Parent will pay Shareholders, in their respective
pro rata shares, additional consideration (the “First
Measurement Period Earn Out Payment”) equal to One Dollar for
each dollar of Company EBITDA earned during the First Measurement
Period, up to a maximum First Measurement Period Earn Out Payment
of Five Million Dollars ($5,000,000.00). The First Measurement
Period Earn Out Payment shall be payable within ninety (90) days
after the end of the First Measurement Period and shall be paid
one-half (1/2) in cash and one-half (1/2) in unregistered Parent
Common Stock, with the total number of shares of Parent Common
Stock to be issued pursuant to this Subsection 2.1(e)(i) determined
by dividing one-half (1/2) of the total First Measurement Period
Earn Out Payment by One Dollar ($1.00). In the event First
Measurement Period EBITDA exceeds Four Million Dollars
($4,000,000.00), the excess EBITDA above Four Million Dollars
($4,000,000.00) shall be carried over and considered EBITDA earned
for the Second Measurement Period and thus included in the
determination of the Second Measurement Period Earn Out
Payment.
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(ii)
For the second twelve (12) calendar month period beginning on the
first day of the first calendar month after Closing (the
“Second Measurement Period”), in the event
Company’s EBITDA is in excess of Two Million Five Hundred
Thousand Dollars ($2,500,000.00), Parent will pay Shareholders, in
their respective pro rata shares, additional consideration (the
“Second Measurement Period Earn Out Payment”) equal to
One Dollar for each dollar of Company EBITDA earned during the
Second Measurement Period, up to a maximum Second Measurement
Period Earn Out Payment of Five Million Dollars ($5,000,000.00).
The Second Measurement Period Earn Out Payment shall be payable
within ninety (90) days after the end of the Second Measurement
Period and shall be paid one-half (1/2) in cash and one-half (1/2)
in unregistered Parent Common Stock, with the total number of
shares of Parent Common Stock to be issued pursuant to this
Subsection 2.1(e)(ii) determined by dividing one-half (1/2) of the
total Second Measurement Period Earn Out Payment by the greater of
One Dollar ($1.00) or ninety percent (90%) of the Fair Market Value
of Parent Common Stock (as defined in Section 2.1(e)(iv) below) at
the end of the Second Measurement Period (the “Second Period
Determination Date”). In the event
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Second Measurement Period EBITDA exceeds Five
Million Dollars ($5,000,000.00), the excess EBITDA above Five
Million Dollars ($5,000,000.00) shall be carried over and
considered EBITDA earned for the Third Measurement Period and thus
included in the determination of the Third Measurement Period Earn
Out Payment.
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(iii)
For the third twelve (12) calendar month period beginning on the
first day of the first calendar month after Closing (the
“Third Measurement Period”), in the event
Company’s EBITDA is in excess of Three Million Dollars
($3,000,000.00), Parent will pay Shareholders, in their respective
pro rata shares, additional consideration (the “Third
Measurement Period Earn Out Payment”) equal to One Dollar for
each dollar of Company EBITDA earned during the Third Measurement
Period, up to a maximum Third Measurement Period Earn Out Payment
of Five Million Dollars ($5,000,000.00). The Third Measurement
Period Earn Out Payment shall be payable within ninety (90) days
after the end of the Third Measurement Period and shall be paid
one-half (1/2) in cash and one-half (1/2) in unregistered Parent
Common Stock, with the total number of shares of Parent Common
Stock to be issued pursuant to this Subsection 2.1(e)(iii)
determined by dividing one-half (1/2) of the total Third
Measurement Period Earn Out Payment by the greater of Two Dollars
($2.00) or ninety percent (90%) of the Fair Market Value of Parent
Common Stock (as defined in Section 2.1(f)(iv) below) at the end of
the Third Measurement Period (the “Third Period Determination
Date”).
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(iv)
For purposes of this Agreement, the Fair Market Value of Parent
Common Stock, shall be: (i) if the Company’s common stock is
traded on the American Stock Exchange or another national exchange
or is quoted on the National or SmallCap Market of The Nasdaq Stock
Market, Inc. (“Nasdaq”), then the average of the
closing price, reported for the last five (5) business days
immediately preceding and including the Determination Date, or (ii)
if the Company’s common stock is not traded on the American
Stock Exchange or another national exchange or on the Nasdaq but is
traded on the National Association of Securities Dealers, Inc.
Over-the-Counter Bulletin Board, then the mean of the average of
the closing prices reported for the last five (5) business days
immediately preceding and including the Determination
Date.
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(v)
In the event that Company EBITDA for any individual Measurement
Period is less than the respective EBITDA threshold for that
Measurement Period, there shall be no Measurement Period Earn Out
Payment for that Measurement Period.
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(vi)
In the event Company EBITDA for any individual Measurement Period
is less than the amount of EBITDA required for a Measurement Period
Earn Out Payment for that Measurement Period and the
Company’s aggregate EBITDA for the three Measurement Periods
is greater than Seven Million Five
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Hundred Thousand Dollars ($7,500,000.00), an
adjustment to the earn-out consideration will be calculated whereby
Parent shall pay Shareholders their respective pro rata shares of
an amount equal to the difference between (y) the actual aggregate
EBIDTA over the three Measurement Periods, up to a maximum of
Fifteen Million Dollars ($15,000,000.00), and (z) the actual
Measurement Period Earn Out Payments made by Parent to Shareholders
pursuant to Sections 2.1(e)(i) - (iii) above (the “Adjusting
Earn Out Payment”). Any payment pursuant to this Section
2.1(e)(vi) shall be made within ninety (90) days of the end of the
final Measurement Period and shall be paid one-half (1/2) in cash
and one-half (1/2) in unregistered Parent Common Stock. The number
of shares of unregistered Parent Common Stock to be issued shall be
determined by dividing one-half (1/2) of the Adjusting Earn Out
Payment by the greater of Two Dollars ($2.00) or ninety percent
(90%) of the per share Fair Market Value of Parent’s
unregistered Common Stock.
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(vii)
Notwithstanding anything herein to the contrary, One Million
(1,000,000) shares of the Parent Shares issued to Shareholders at
Closing pursuant to Section 2.1(a)(ii) above shall be deemed issued
as an advance against Parent Common Stock to be issued in payment
of Measurement Period Earn Out Payments such that Parent shall not
be required to issue any new Parent Common Stock to Shareholders in
payment of any Measurement Period Earn Out Payment unless and until
Shareholders shall become entitled to receive, in the aggregate, in
excess of One Million (1,000,000) shares of Parent Common Stock in
payment of one or more Measurement Period Earn Out Payments, and
then, and only then, Parent shall be required to issue to
Shareholders only the number of shares of Parent Common Stock by
which the total to which they are otherwise entitled pursuant to
this Section 2.1(e) exceeds One Million (1,000,000). Parent shall
not, however, be entitled to recover any Parent Shares issued to
Shareholders at Closing which have not been applied to payment of
one or more Measurement Period Earn Out Payments pursuant to this
Section 2.1(e)(vii) as of the end of the third Measurement
Period.
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(viii)
For purposes of this Agreement, EBITDA shall be defined as the net
income of the Company, as determined by generally accepted
accounting principles, plus interest, taxes, depreciation and
amortization and subject to the other restrictions or limitations
on allocation of expenses as provided in this Agreement.The parties
agree that no headquarters or overhead expenses or costs of Parent
or its Affiliates or Subsidiaries or other charges of or from
Parent, its affiliates or subsidiaries will be allocated or charged
to Company for purposes of determining EBITDA under this Agreement,
provided that direct costs incurred by Parent, its affiliates or
subsidiaries for services provided to and paid for by customers of
the Company to the Company, at rates agreed to by the Company and
Parent with respect to such services, shall be included at such
agreed upon rates for purposes of determining EBITDA hereunder. The
parties agree that no new “line items” reflecting costs
or expenses shall be permitted to be included as
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an expense in arriving at this EBITDA, unless
previously approved by the Shareholder Representative in his
reasonable discretion. In the event of a merger, consolidation or
other combination of the Company with another entity, the EBITDA
calculation, for purposes of this Agreement, shall be made in a
manner that as nearly as is reasonably possible reflects the EBITDA
of the Company as it would have been but for such merger,
consolidation or combination. Nothing in this Section 2.1(e) shall,
however, be construed to prevent any such merger, consolidation or
combination or the introduction of new goods and/or services to the
line of goods and services provided by the Company. An accountant
of Shareholders’ choosing shall be permitted to review and
approve the computation of EBITDA following each of the Measurement
Periods in question, which approval will not be unreasonably
withheld.
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(ix)
Parent shall have the right to withhold payment of any Measurement
Period Earn Out Payment to a Shareholder up to the amount of the
Shareholder’s pro rata liability for any claim reasonably
made by Parent pursuant to Article VIII hereof to the extent such
claim or claims (A) are not limited by the amount of the
Shareholder’s pro rata share of the Escrow Funds in
accordance with Section 8.2 below, and (B) exceed the
Shareholder’s pro rata share of the then current Escrow
Funds.
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(x)
Notwithstanding anything herein to the contrary, in the event a
Shareholder other than David Condensa resigns his or her employment
with the Surviving Corporation during any Measurement Period, such
Shareholder shall receive a percentage of his or her pro rata share
of the Measurement Period Earn Out Payment for the Measurement
Period during which he or she left equal to the percentage of such
Measurement Period he or she was employed by Surviving Corporation
during such Measurement Period, and shall forfeit and not be
entitled to receive any Measurement Period Earn Out Payment for any
future Measurement Period. In the event a Shareholder is terminated
by the Surviving Corporation For Cause (as defined in his or her
employment agreement), such Shareholder shall forfeit and not be
entitled to receive any Measurement Period Earn Out Payment for the
Measurement Period in which such termination For Cause occurred or
for any future Measurement Period thereafter. Any Measurement
Period Earn Out Payment forfeited by a Shareholder other than David
Condensa pursuant to this Section 2.1(e)(x) shall be reallocated
among the non-forfeiting Shareholders in their pro rata
shares.
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(xi)
In the event David Condensa resigns his or her employment with the
Surviving Corporation without Good Reason (as defined in his or her
employment agreement) during any Measurement Period, he shall
receive a percentage of his pro rata share of the Measurement
Period Earn Out Payment for the Measurement Period during which he
left equal to the percentage of such Measurement Period he was
employed by Surviving Corporation during such Measurement Period,
and shall forfeit and not be entitled to receive any Measurement
Period Earn Out Payment for any future Measurement Period. In the
event David Condensa is terminated by the Surviving Corporation For
Cause
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(as defined in his employment agreement), he
shall forfeit and not be entitled to receive any Measurement Period
Earn Out Payment for the Measurement Period in which such
termination For Cause occurred or for any future Measurement Period
thereafter. Any Measurement Period Earn Out Payment forfeited by
David Condensa pursuant to this Section 2.1(e)(xi) shall be
forfeited in full and shall not be reallocated among non-forfeiting
Shareholders.
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(xii)
Notwithstanding anything herein to the contrary, in the event
Parent or Surviving Corporation engages in any Fundamental Business
Changes (as defined below) without the prior written consent of the
Shareholder Representative, which consent shall not be unreasonably
withheld or delayed, Parent shall pay the Shareholders, in their
then applicable percentage interests, the sum of Fifteen Million
Dollars ($15,000,000), less the amount of any Measurement Period
Earn Out Payments already paid to the Shareholders (such
difference, the “Accelerated Earn Out Payment”). The
Accelerated Earn Out Payment shall be payable within ninety (90)
days after the occurrence of the Fundamental Business Change
(unless the prior consent of the Shareholder Representative was
obtained) and shall be paid one-half (1/2) in cash and one-half
(1/2) in unregistered Parent Common Stock, with the total number of
shares of Parent Common Stock to be issued pursuant to this
Subsection 2.1(e)(xii) determined by dividing one-half (1/2) of the
total Accelerated Earn Out Payment by the greater of One Dollars
($1.00) or the Fair Market Value of Parent Common Stock (as defined
in Section 2.1(e)(iv)) at the time of the Fundamental Business
Change. “Fundamental Business Change” shall mean (A)
the termination of employment of Dave Condensa other than For Cause
(as defined in his employment agreement) after Closing; (B) the
resignation of Dave Condensa for Good Reason (as defined in his
employment agreement); (C) a Change of Control (as defined below)
of Parent or Surviving Corporation; (D) a change in the business
strategy, fundamental areas of business or corporate objectives of
the Surviving Corporation, other than changes consistent with the
natural evolution of the business, as operated by the Company, or
the industry that results in a Material Adverse Effect on the
EBITDA of Surviving Corporation; (G) any material changes in the
accounting practices, revenue recognition policies, cost allocation
methodologies or categories or types of operating expenses of the
Surviving Corporation in a manner inconsistent with those used in
the preparation of the prior financial statements of the Company
(except to the extent necessary to comply with any changes in GAAP)
that results in a Material Adverse Effect on the EBITDA of
Surviving Corporation; or (H) any acceleration of recognition of
revenue or delay in incurrence of capital expenditures or expenses
in a manner inconsistent with past practices of the Company (except
to the extent necessary to comply with any changes in GAAP) that
results in a Material Adverse Effect on the EBITDA of Surviving
Corporation; provided, however, in no event shall a Fundamental
Business Change be deemed to have occurred as a result of the
addition of services offered by Parent or its Affiliates to the
Surviving Corporation’s line of business and accounting or
revenue recognition practices required thereby, changes to
accounting or revenue recognition practices to the extent necessary
to comply with any changes in GAAP or SEC reporting
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requirements, or by any change in business
strategy or accounting practices implemented by the Shareholder
Representative in his capacity as an officer or manager of
Surviving Corporation. “Change of Control” means any
sale of voting securities or sale of assets (whether by sale,
merger, consolidation, share exchange, or otherwise in one
transaction or a series of transactions) of Parent or Surviving
Corporation that results in any third party that is not a
shareholder immediately prior to the Closing
becoming the owner of securities or assets of the Surviving
Corporation or Parent representing over fifty percent (50%) of the
combined voting power of Surviving Corporation’s or
Parent’s then outstanding securities or all or substantially
all of their respective assets; provided, however, no Change of
Control shall be deemed to have occurred as a result of any
transfer or acquisition of Parent shares or other Parent securities
by one or more Shareholders.
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SECTION
2.2 Fractional Shares . No certificates representing
fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of certificates representing Company capital
stock (“Company Stock Certificates”), no dividend or
distribution by Parent shall relate to such fractional share
interests, and such fractional share interests shall not entitle
the owner thereof to vote or to any rights as a Shareholder of
Parent. Further, no holder of a Company Stock Certificate who
otherwise would have been entitled to receive in the Merger a
fractional share interest in exchange for such Company Stock
Certificate shall have the right to receive cash payment in lieu
thereof. In lieu of any such fractional shares or cash payment, (x)
any such fractional share interest greater than or equal to
one-half of a share (0.5) shall be rounded up to the next whole
share number, and (y) any such fractional share less than one-half
of a share (0.5) shall be rounded down to the preceding whole share
number and the certificates representing shares of Parent Common
Stock to be issued in the Merger shall reflect such
adjustments.
SECTION
2.3 Exchange of Certificates . (a) At the Closing, the
Shareholders shall surrender to the Parent all Company Stock
Certificates in proper form for cancellation, and upon such
surrender shall be entitled to receive in exchange therefor his or
her respective Merger Consideration, including a certificate (or
certificates) representing such whole number of shares of Parent
Common Stock as such holder is entitled to receive pursuant to this
Article II in such denominations and registered in such names as
such holder may request. The shares represented by the Company
Stock Certificate so surrendered shall forthwith be cancelled.
Without limiting the generality of the foregoing (and
notwithstanding any other provisions of this Agreement), no
interest shall be paid or accrued in respect of any of the Merger
Consideration payable to holders of Company Common Stock in
accordance with this Article II. Until surrendered in accordance
with this Section 2.3, each Company Stock Certificate shall be
deemed at all times from and after the Effective Time to represent
only the right to receive upon such surrender the Merger
Consideration.
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(b)
If any Company Stock Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
person claiming such Company Stock Certificate to be lost, stolen
or destroyed and, if required by the Surviving Corporation, the
posting by such person of a bond, in such reasonable amount as the
Surviving Corporation may direct, as indemnity against any claim
that may be made against it with respect to such Company Stock
Certificate, Parent shall issue in exchange for such lost, stolen
or destroyed Company Stock Certificate, the applicable Merger
Consideration to which such person is entitled pursuant to the
provisions of this Article II.
(c)
Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared or made after the
Effective Time in respect of shares of Parent Common Stock having a
record date after the Effective Time shall be paid to the holder of
any unsurrendered Company Stock Certificate until the holder shall
surrender such Company Stock Certificate as provided in this
Section 2.3. Subject to applicable law, following surrender of any
such Company Stock Certificate, there shall be paid to the holder
of the certificates representing whole shares of Parent Common
Stock issued in exchange therefore, in each case without any
interest thereon, (i) at the time of such surrender, the amount of
dividends or other distributions, if any, having a record date
after the Effective Time theretofore payable with respect to such
whole shares of Parent Common Stock and not paid, less the amount
of all required withholding Taxes in respect thereof, and (ii) at
the appropriate payment date subsequent to surrender, the amount of
dividends or other distributions having a record date after the
Effective Time but prior to the date of such surrender and having a
payment date subsequent to the date of such surrender and payable
with respect to such whole shares of Parent Common Stock, less the
amount of all required withholding Taxes in respect
thereof.
(d)
All shares of Parent Common Stock issued upon surrender of Company
Stock Certificates in accordance with this Article II shall be
deemed to have been issued and paid in full satisfaction of all
rights pertaining to such shares of Company Common Stock
represented thereby and, as of the Effective Time, the stock
transfer books and records of the Company shall be closed and there
shall be no further registration of transfers on the stock transfer
books and records of the Company of shares of Company Common Stock
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Company Stock Certificates are properly presented
to the Surviving Corporation for any reason (but otherwise in
accordance with this Article II), they shall be cancelled and
exchanged for the Merger Consideration as provided in this Section
2.3.
SECTION
2.4 Certain Adjustments . If, after the date hereof and
prior to the Effective Time and to the extent permitted by this
Agreement, the outstanding shares of Parent Common Stock or Company
Common Stock shall be changed into a different number, class or
series of shares by reason of any reclassification,
recapitalization or combination, forward stock split, reverse stock
split, stock dividend or rights issued in respect of such stock, or
any similar event shall occur (any such action, an
“Adjustment Event”), the Merger Consideration shall be
adjusted correspondingly to provide to the
Page 21
holders of Company Common Stock the right to
receive shares of Parent Common Stock having the same economic
value as contemplated by this Agreement immediately prior to such
Adjustment Event and Parent’s payment obligations likewise
shall be correspondingly adjusted such that it shall be required to
pay and deliver not more than the aggregate Merger Consideration
contemplated by this Agreement. Notwithstanding the foregoing
provision, the aggregate amount of the Cash Consideration shall not
change under any circumstances.
SECTION
2.5 Shares of Dissenting Shareholders . Notwithstanding
anything in this Agreement to the contrary, any shares of Company
Common Stock that are outstanding as of the Effective Time and that
are held by a holder of Company Common Stock who has properly
exercised his or her rights under Section 1300 et. seq. of the CGCL
(the “Dissenting Shares”) or under the DGCL shall not
be converted into the right to receive the Merger Consideration;
provided, however, if any such holder shall have failed to perfect
or shall have effectively withdrawn or lost his right to dissent
from the Merger under the CGCL or DGCL and to receive such
consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to and subject to the requirements of
the CGCL or DGCL, each share of such holder’s Company Common
Stock thereupon shall be deemed to have been converted into and to
have become, as of the Effective Time, the right to receive,
without any interest thereon, the Merger Consideration in
accordance with Article II. The Company shall give Parent prompt
written notice of (i) all demands for appraisal or payment for
shares of Company Common Stock received by the Company prior to the
Effective Time in accordance with the CGCL or DGCL, and (ii) any
settlement or offer to settle any such demands. The Company shall
not, except with the prior written consent of Parent, make any
payment with respect to any demands for appraisal or offer to
settle or settle any such demands.
SECTION
2.6 Tax-Free Reorganization . The Merger is
intended to qualify as a reorganization described in Section
368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the
“Code”), and the parties hereto agree not to take any
action which could result in the Merger failing to so qualify. The
parties hereto further agree to report the Merger for all purposes
as a reorganization under Section 368 of the Code, and that this
Agreement is intended to be a “plan of reorganization”
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations. The parties agree to cooperate
to minimize the taxes payable with the respect to the transactions
contemplated by this Agreement.
ARTICLE
III
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
Except
as set forth on the Disclosure Schedule delivered by the Company to
Parent prior to the execution of this Agreement which hereby is
incorporated by reference
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in and constitutes an integral part of this
Agreement (the “ Company Disclosure Schedule ”),
Company hereby represents and warrants to Parent as
follows:
SECTION
3.1 Organization, Standing and Corporate Power
.
(a) The Company is
a corporation duly organized, validly existing and in good standing
under the laws of the state of its incorporation or organization
and has the requisite corporate power and authority to carry on its
business as presently being conducted. The Company is duly
qualified or licensed to conduct business and is in good standing
in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes such
qualification or licensing necessary, except for those
jurisdictions where the failure to be so qualified or licensed or
to be in good standing individually or in the aggregate would not
reasonably be expected to have a Material Adverse Effect on the
Company.
(b) The Company has
delivered or made available to Parent prior to the execution of
this Agreement complete and correct copies of the certificate of
incorporation and by-laws of the Company and each of its
subsidiaries, each as in effect at the date of this
Agreement.
SECTION
3.2. Subsidiaries . The Company has no Subsidiaries.
Except as set forth in Section 3.2 of the Company Disclosure
Schedule, the Company does not own, directly or indirectly, any
capital stock of or other equity or voting interests in any
person.
SECTION
3.3 . Capital Structure . As of the date
hereof:
(a)
(i) The only class of capital stock authorized by the Company is
common stock (“Company Common Stock”); and (ii)
8,000,000 shares of Company Common Stock are authorized and
3,940,000shares of Company Common Stock are issued and outstanding,
all held by those persons named in Section 3.3(a) of the Company
Disclosure Schedule in the amounts set forth next to their
respective names therein.
(b)
Except as set forth on Section 3.3(b) of the Company Disclosure
Schedule, all outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable and are not subject to preemptive rights created by
the Company’s Articles of Incorporation (the “
Company Certificate of Incorporation ”) or any
agreement to which the Company is a party or by which the Company
may be bound.
(c)
Except as set forth in Section 3.3(c) of the Company Disclosure
Schedule, there are outstanding (i) no shares of capital stock or
other voting securities of the Company, (ii) no securities of the
Company convertible into or exchangeable for shares of capital
stock or voting securities of the Company, and (iii) no options or
other
Page 23
rights to 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 of the Company, other than the shares of Company
Common Stock set forth in Section 3.3(a) of the Company Disclosure
Schedule.
SECTION
3.4. Authority; Noncontravention.
(a)
The Companyhas all necessary corporate power and authority to
execute, deliver and perform this Agreement and, subject to
obtaining the necessary approvals of the Shareholders, to perform
its obligations hereunder and to consummate the Merger and the
other transactions contemplated by this Agreement. The execution
and delivery of this Agreement by the Company and the consummation
by the Company of the Merger and the other transactions
contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action and no other corporate
proceedings on the part of Company are necessary to authorize this
Agreement or to consummate the Merger and the other transactions
contemplated by this Agreement (other than the approval and
adoption of this Agreement and the Merger by the Shareholders as
described in Section 3.16 hereof and the filing and recordation of
the appropriate merger documents as required by the CGCL, NGCL and
DGCL). This Agreement has been duly and validly delivered by the
Company and, assuming the due authorization, execution and delivery
by Parent and Merger Sub, constitutes a valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms.
(b)
Except as set forth in Section 3.4(b) of the Company Disclosure
Schedule, the execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby will
not, conflict with or result in a violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any material
obligation under (i) any provision of the Company Certificate of
Incorporation or by-laws, (ii) any material loan or credit
agreement, note, mortgage, indenture, lease or other material
agreement or (iii) material instrument, permit, license, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or its properties or assets.
(c)
The execution, delivery and performance by the Shareholders of this
Agreement and the consummation of the purchase and sale of the
Shares by Shareholders require no consent, approval, order or
authorization of, action by or in respect of, or registration or
filing with, any governmental body, court, agency, official or
authority (each, a “Governmental Entity”, collectively
“Government Entities”).
(d)
The execution and delivery of this Agreement and the consummation
of the purchase and sale of the Shares will not result in the
creation of any pledges, claims, liens, charges, encumbrances,
adverse claims, mortgages and security
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interests of any kind or nature whatsoever
(collectively, “Liens”) upon any asset of the
Company.
(e)
Except as set forth in Section 3.4(e) of the Company Disclosure
Schedule, no consent, approval, waiver or other action by any
person (other than the Governmental Entities referred to in (d)
above) under any Company Material Contract is required or necessary
for, or made necessary by reason of, the execution, delivery and
performance of this Agreement by the Shareholders or the
consummation of the purchase and sale of the Shares.
SECTION
3.5. Financial Statements; Undisclosed
Liabilities.
(a)
The Company has furnished to the Parent true, correct and complete
copies of a balance sheet, income statement, statement of cash
flows and statement of Shareholders equity and the footnotes
thereto for each of the fiscal years ended December 31, 2004,
December 31, 2005, and December 31, 2006 reviewed by the
Company’s independent accountants, and Company prepared
balance sheets, income statements, statements of cash flow and
statements of Shareholders equity for each of the fiscal years
ended December 31, 2005, December 31, 2006 and for the three month
period ended March 31, 2007 (collectively, the “Company
Financial Statements”). Except as set forth in Section 3.5(a)
of the Company Disclosure Schedule, the Company Financial
Statements have been prepared in accordance with Generally Accepted
Accounting Principles in the United States and fairly present in
all material respects the financial condition of the Company and
its subsidiaries as at the respective dates thereof; provided,
however, that the Company prepared financial statements for the
three month period ended March 31, 2007 are subject to normal
year-end adjustments (which will not be material individually or in
the aggregate) and lack footnotes and other presentation
items.
(b)
Except for liabilities (i) set forth in Section 3.5 of the Company
Disclosure Schedule, (ii) reflected in the Company Financial
Statements or described in any notes thereto (or for which neither
accrual nor footnote disclosure is required pursuant to GAAP), or
(iii) incurred in the ordinary course of business, consistent with
past practice or in connection with this Agreement or the
transactions contemplated hereby, neither the Company nor any of
its subsidiaries has any material liabilities or obligations of any
nature. The Company is not in default in respect of any terms or
conditions of any indebtedness.
(c)
Other than changes in the usual and ordinary conduct of business
since December 31, 2006, there have been, and at the Closing Date
there will be, no material, adverse changes in the financial
condition of the Company. Specifically, but, not by way of
limitation, since its balance sheet of December 31, 2006 the
Company has not, and prior to the Closing Date will not
have:
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(i)
Issued or sold any stock, bond, or other Company
securities;
(ii)
Except for current liabilities incurred and obligations under
contracts entered into in the ordinary course of business and
except as set forth in Section 3.5(c)(ii) of the Company Disclosure
Schedule, incurred any obligation or liability, whether absolute or
contingent (in excess of $100,000 individually or in the
aggregate);
(iii)
Except for current liabilities shown on the balance sheet and
current liabilities incurred since that date in the ordinary course
of business and except as set forth in Section 3.5(c)(iii) of the
Company Disclosure Schedule, discharged or satisfied any lien or
encumbrance, or paid any obligation or liability, absolute or
contingent nor has it delayed or postponed the payment of accounts
payable and other Liabilities outside the ordinary course of
business;
(iv)
Mortgaged, pledged or subjected to lien or any other encumbrance,
any of its assets, tangible or intangible;
(v)
Except in the ordinary course of business, sold or transferred any
of its inventory or other tangible assets or canceled any debts or
claims, except any excluded assets, or canceled debts or claims as
listed in Section 3.5(c)(v) of the Company Disclosure
Schedule;
(vi)
Sold, assigned, or transferred any patents, formulas, trademarks,
trade names, copyrights, licenses, or other intangible assets other
than in the ordinary course of business;
(vii)
Suffered any extraordinary losses, been subjected to any strikes or
other labor disturbances, or waived any rights of any substantial
value; or
(viii)
Except for transactions contemplated by this Agreement, entered
into any transaction other than in the ordinary course of business;
including, but not limited to, any loan to or other transaction
with any of its owners, directors, officers, and employees outside
the ordinary course of business.
(d)
Subject to any changes that may have occurred in the ordinary and
usual course of business, the assets of the Company at the Closing
Date will be substantially those owned by it and shown on the
Company Financial Statements.
(e)
All accounts receivable of the Company and the Subsidiaries
reflected on the Company Financial Statements are valid receivables
subject to no setoffs
Page 26
or counterclaims and are current and collectible
(within 90 days after the date on which they first become due and
payable), net of the applicable reserve for bad debts on the
Company Financial Statements. All accounts receivable reflected in
the financial or accounting records of the Company and the
Subsidiaries that have arisen since the date of the Company
Financial Statements are valid receivables subject to no setoffs or
counterclaims and are current and collectible (within 90 days after
the date on which they first become due and payable), net of the
applicable reserve for bad debts on the Company Financial
Statements.
(f)
Section 3.5(f) of the Company Disclosure schedule describes each
account maintained by or for the benefit of the Company or any
Subsidiary at any bank or other financial institution.
(
g ) All inventory of the Company and the Subsidiaries
whether or not reflected on the Company Financial Statements,
consists of a quality and quantity usable and saleable in the
ordinary course of business, except for obsolete items and items of
below-standard quality, all of which have been written-off or
written-down to net realizable value on the Company Financial
Statements. All inventories not written-off have been priced at the
lower of net realizable value on a first -in, first-out basis. The
quantity of each type of inventory, whether raw materials, or
work-in-process or finished goods, are not excessive in the present
circumstances of the Company and the Subsidiaries.
SECTION
3.6. Material Contracts.
(a)
Each Company Material Contract is valid and binding on and
enforceable against the Company (or, to the extent a subsidiary is
a party, such subsidiary) and each other party thereto and is in
full force and effect. Except as set forth in Section 3.6 of the
Company Disclosure Schedule, neither the Company nor any of the
individual Shareholders nor any of the Company’s subsidiaries
nor any related parties is in breach or default under any Company
Material Contract nor has caused an event, committed any act or
failed to commit any act which would create a breach or default
under any Company Material Contract. Except as set forth in Section
3.6 of the Company Disclosure Schedule, neither the Shareholders,
the Company nor any of its subsidiaries knows of, regardless of
whether or not notice has been received, any violation or default
under (nor does there exist any condition which with the passage of
time or the giving of notice or both would result in such a
violation or default under) any Company Material Contract by any
other party thereto. In addition, the Company is not in breach or
default and none of the Shareholders, individually, has performed
any act that would create a breach or default under the Sun
Microsystems reseller and partner agreements nor that would violate
the spirit of the aforementioned agreements. Prior to the date
hereof, the Shareholders have made available to Parent true and
complete copies of all Company Material Contracts.
Page 27
(b)
Section 3.6(b) of the Company Disclosure Schedule lists (under the
appropriate subsection) each of the following written or oral
contracts and agreements of the Company or any Subsidiary of the
Company (such contracts and agreements being the “Company
Material Contracts”):
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(i) each contract and agreement for the purchase
or lease of personal property with any supplier or for the
furnishing of services to the Company or any Subsidiary with
payments greater than One Hundred Thousand Dollars ($100,000.00) in
the aggregate;
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(ii) all contracts and agreements relating to
indebtedness other than trade indebtedness of the Company or any,
including any contracts and agreements in which the Company is a
guarantor of indebtedness;
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(iii) all contracts and agreements that limit or
purport to limit the ability of the Company or any Company
Subsidiary to compete in any line of business or with any person or
in any geographic area or during any period of time;
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(iv) all contracts and agreements between or
among the Company and any Shareholder of the Company or any
Affiliate of a Shareholder;
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(v) all contracts and agreements relating to the
voting and any rights or obligations of a stockholder of the
Company or any
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(vi) all contracts regarding the acquisition,
issuance or transfer of any securities and each contract affecting
or dealing with any securities of the Company, including, without
limitation, any restricted stock agreements or escrow
agreements;
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(vii) any agreement of the Company that is
terminable upon or prohibits assignment or a change of ownership or
control of the Company;
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(viii) all other contracts and agreements,
whether or not made in the ordinary course of business, that
contemplate an exchange of consideration with an aggregate value
greater than One Hundred Thousand Dollars ($100,000.00);
and
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(ix) all contracts with Sun Microsystems, Arrow
Electronics (Moca) and other contracts and agreements with
distributors or manufacturers essential to the ongoing operation of
the business of Company.
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(c)
The Company has delivered or made available to Parent accurate and
complete copies of (i) all Company Material Contracts identified in
Section 3.6(b) of the Company Disclosure Schedule, including all
amendments thereto, and (ii) all correspondence related to the
status of, any alleged breach of or noncompliance with Company
agreements with Sun Microsystems and Arrow Electronics (Moca).
Section 3.6(b) of the Company Disclosure Schedule provides an
accurate description of the terms of each Company Material Contract
that is not in written form.
SECTION
3.7. Permits; Compliance with Applicable Laws
.
(a)
The Company owns and/or possess all material permits, licenses,
variances, authorizations, exemptions, orders, registrations and
approvals of all Governmental Entities which are required for the
operation of the business of the Company (the “
Permits ”) as presently conducted. The Company is in
compliance in all material respects with the terms of the Permits.
All the Permits are in full force and effect and no suspension,
modification or revocation of any of them is pending or threatened
nor do grounds exist for any such action.
(b)
Except as set forth in Section 3.7(b) of the Company Disclosure
Schedule, the Company, to its Knowledge, is in compliance in all
material respects with all applicable statutes, laws, regulations,
ordinances, Permits, rules, writs, judgments, orders, decrees and
arbitration awards of each Governmental Entity applicable to the
Company.
(c)
Except for filings with respect to Taxes, which are the subject of
Section 3.9 and not covered by this Section 3.7(c) and except as
set forth in Section 3.7(c) of the Company Disclosure Schedule, the
Company has timely filed all material regulatory reports,
schedules, forms, registrations and other documents, together with
any amendments required to be made with respect thereto, that they
were required to file with each Governmental Entity (the “
Other Company Documents ”), and have timely paid all
fees and assessments, if any, due and payable in connection
therewith, except where the
Page 29
failure to make such payments and filings
individually or in the aggregate would not have a Material Adverse
Effect on the Company.
SECTION
3.8. Absence of Litigation . Section 3.8 of the Company
Disclosure Schedule contains a true and current summary description
of each pending and, to the Knowledge of the Company, threatened
litigation, action, suit, case, proceeding, investigation or
arbitration. Except as set forth in Section 3.8 of the Company
Disclosure Schedule, no action, inquiry, demand, charge,
requirement or investigation by any Governmental Entity and no
litigation, action, suit, case, proceeding, investigation or
arbitration by any person, shareholder, former shareholder or
Governmental Entity, in each case with respect to the Company, its
officers or directors in such capacities, or any of its
subsidiaries or any of their respective properties or Permits, is
pending or, to the knowledge of Shareholders,
threatened.
SECTION
3.9. Tax Matters.
(a)
Except as set forth in Section 3.9 of the Company Disclosure
Schedule, the Company has (i) filed with the appropriate
Governmental Entities all United States federal and state income
and other material Tax Returns required to be filed by it (giving
effect to all extensions) and such Tax Returns are true, correct
and complete in all material respects; (ii) paid in full all United
States federal income and other material Taxes required to have
been paid by it; and (iii) made adequate provision for all accrued
Taxes not yet due. The accruals and provisions for Taxes reflected
in the Company Financial Statements are adequate for all Taxes
accrued or accruable through the date of such
statements.
(b)
Except as set forth in Section 3.9 of the Company Disclosure
Schedule, as of the date of this Agreement, no Federal, state,
local or foreign audits or other administrative proceedings or
court proceedings are presently pending with regard to any Taxes or
Tax Returns of the Company, and the Company has not received a
written notice of any material pending or proposed claims, audits
or proceedings with respect to Taxes.
(c)
Except as set forth in Section 3.9 of the Company Disclosure
Schedule, no deficiency or proposed adjustment which has not been
settled or otherwise resolved for any amount of Tax has been
proposed, asserted, or assessed in writing by any Governmental
Entity against, or with respect to, the Company or any of its
subsidiaries. There is no action, suit or audit now in progress,
pending or, to the Knowledge of the Company, threatened against or
with respect to the Company or any of its subsidiaries with respect
to any material Tax.
Page 30
(d)
Neither the Company nor any of its subsidiaries has been included
in any “consolidated,” “unitary” or
“combined” Tax Return (other than Tax Returns which
include only the Company) provided for under the laws of the United
States, any foreign jurisdiction or any state or locality with
respect to Taxes for any taxable year.
(e)
No election under Section 341(f) of the Internal Revenue Code as
from time to time amended (the “Code”) has been made by
the Company or any of its subsidiaries.
(f)
No claim has been made in writing by any Governmental Entities in a
jurisdiction where the Company or any of its subsidiaries does not
file Tax Returns that the Company is, or may be, subject to
taxation by that jurisdiction.
(g)
Except as set forth in Section 3.9 of the Company Disclosure
Schedule, the Company has made available to Parent correct and
complete copies of (i) all of its material Tax Returns filed within
the past three (3) years, (ii) all audit reports, letter rulings,
technical advice memoranda and similar documents issued by a
Governmental Entity within the past three (3) years relating to the
Federal, state, local or foreign Taxes due from or with respect to
the Company or any of its subsidiaries, and (iii) any closing
letters or agreements entered into by the Company with any
Governmental Entities within the past three (3) years with respect
to Taxes.
(h)
Except as set forth in Section 3.9 of the Company Disclosure
Schedule, the Company has not received any notice of deficiency or
assessment from any Governmental Entity for any amount of Tax that
has not been fully settled or satisfied, and to the knowledge of
the Shareholders, no such deficiency or assessment is
proposed.
(i)
For purposes of this Agreement:
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(i) “
Tax ” or “ Taxes ” shall mean all
federal, state, county, local, foreign and other taxes of any kind
whatsoever (including, without limitation, income, profits,
premium, excise, sales, use, occupancy, gross receipts, franchise,
ad valorem, severance, capital levy, production, transfer, license,
stamp, environmental, withholding, employment, unemployment
compensation, payroll related and property taxes, import duties and
other governmental charges and assessments), whether or not
measured in whole or in part by net income, and including
deficiencies, interest, additions to tax or interest, and penalties
with respect thereto, and including expenses associated with
contesting any proposed adjustment related to any of the
foregoing.
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(ii) “ Tax
Return ” shall mean any return, information report or
filing with respect to Taxes, including any schedules attached
thereto and including any amendments thereof.
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SECTION
3.10. Employee Benefit Plans.
(a)
Section 3.10 of the Company Disclosure Schedule contains a true and
complete list of all pension, stock option, stock purchase,
benefit, welfare, profit-sharing, retirement, disability, vacation,
severance, hospitalization, insurance, incentive, deferred
compensation and other similar fringe or employee benefit plans,
funds, programs or arrangements, whether written or oral, in each
of the foregoing cases which (i) covers, is maintained for the
benefit of, or relates to any or all current or former employees of
the Company or any of its subsidiaries and any other entity
(“ ERISA Affiliate ”) related to the Company
under Section 414(b), (c), (m) and (o) of the Code and (ii) is not
a “multiemployer plan” as defined in Section 3(37) or
Section 4001(a)(3) of the Employee Retirement Income Security Act
of 1974, as amended (“ ERISA ”) or Section 414
of the Code (the “ Employee Plans ”). Section
3.10 of the Company Disclosure Schedule identifies and includes but
is not limited to, each of the Employee Plans that is subject to
Section 302 or Title IV of ERISA or Section 412 of the Code.
Neither the Company, any of its subsidiaries nor any ERISA
Affiliate of the Company or any of its subsidiaries has any
commitment or formal plan, whether or not legally binding, to
create any additional employee benefit plan or modify or change any
existing Employee Plan other than as may be required by the express
terms of such Employee Plan or applicable law.
(b)
With respect to each Employee Plan that has been qualified or is
intended to be qualified under the Code or that is an
“Employee Benefit Plan” within the meaning of Section
3.3 of ERISA, such Employee Plan has been duly approved and adopted
by all necessary and appropriate action of the Board of Directors
of the Company (or a duly constituted committee
thereof).
(c)
Except as set forth in Section 3.10 of the Company Disclosure
Schedule, with respect to the Employee Plans, all required
contributions for all periods ending before the Closing Date have
been or will be paid in full by the Closing Date. Subject only to
normal retrospective adjustments in the ordinary course, all
required insurance premiums have been or will be paid in full with
regard to such Employee Plans for policy years or other applicable
policy periods ending on or before the Closing Date by the Closing
Date. As of the date hereof, none of the Employee Plans has
unfunded benefit liabilities, as defined in Section 4001(a)(16) of
ERISA.
(d)
The Company has no “multi-employer plans,” as defined
in Section 3(37) or Section 4001(a)(3) of ERISA or Section 414
(“ Multi-Employer Plans ”), and never has had
any such plans.
Page 32
(e)
With respect to each Employee Plan (i) no prohibited transactions
as defined in Section 406 of ERISA or Section 4975 of the Code have
occurred or are expected to occur as a result of the Purchase or
the transactions contemplated by this Agreement, (ii) no action,
suit, grievance, arbitration or other type of litigation, or claim
with respect to the assets of any Employee Plan (other than routine
claims for benefits made in the ordinary course of plan
administration for which plan administrative review procedures have
not been exhausted) is pending or, to the knowledge of the
Shareholders, threatened or imminent against the Company, any ERISA
Affiliate or any fiduciary, as such term is defined in Section
3(21) of ERISA (“ Fiduciary ”), including, but
not limited to, any action, suit, grievance, arbitration or other
type of litigation, or claim regarding conduct that allegedly
interferes with the attainment of rights under any Employee Plan.
To the knowledge of the Shareholders, neither the Company, nor its
directors, officers, employees nor any Fiduciary has any liability
for failure to comply with ERISA or the Code for any action or
failure to act in connection with the administration or investment
of such plan. None of the Employee Plans is subject to any pending
investigations or to the knowledge of the Company threatened
investigations from any Governmental Agencies who enforce
applicable laws under ERISA and the Code.
(f)
Except as set forth in Section 3.10 of the Company Disclosure, each
of the Employee Plans is, and has been, operated in accordance with
its terms and each of the Employee Plans, and administration
thereof, is, and has been, in all material respects in compliance
with the requirements of any and all applicable statutes, orders or
governmental rules or regulations currently in effect, including,
but not limited to, ERISA and the Code. Except as set forth in
Section 3.10 of the Company Disclosure Schedule, all required
reports and descriptions of the Employee Plans (including but not
limited to Form 5500 Annual Reports, Form 1024 Application for
Recognition of Exemption Under Section 501(a), Summary Annual
Reports and Summary Plan Descriptions) have been timely filed and
distributed as required by ERISA and the Code. Any notices required
by ERISA or the Code or any other state or federal law or any
ruling or regulation of any state or federal administrative agency
with respect to the Employee Plans, including but not limited to
any notices required by Section 4980B of the Code, have been
appropriately given.
(g)
The Internal Revenue Service (the “ IRS ”) has
issued a favorable determination letter or opinion letter with
respect to each Employee Plan intended to be
“qualified” within the meaning of Section 401(a) of the
Code that has not been revoked and, to the knowledge of the
Shareholders, no circumstances exist that could adversely affect
the qualified status of any such plan and the exemption under
Section 501(a) of the Code of the trust maintained thereunder. Each
Employee Plan intended to satisfy the requirements of Section 125,
501(c)(9) or 501(c)(17) of the Code has satisfied such requirements
in all material respects.
(h)
With respect to each Employee Plan to which the Company or any
ERISA Affiliate made, or was required to make, contributions on
behalf of any employee
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during the five-year period ending on the last
day of the most recent plan year end prior to the Closing Date, (i)
no liability under Title IV or Section 302 of ERISA has been
incurred by the Company or any ERISA Affiliate that has not been
satisfied in full, and (ii) to the knowledge of Shareholders, no
condition exists that presents a material risk to the Company or
any
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