AGREEMENT AND PLAN OF REORGANIZATION

Exhibit 2.1

 

EXECUTION COPY

 

AGREEMENT AND PLAN OF REORGANIZATION

 

BY AND AMONG

 

SIGMATEL, INC.

 

AMOEBA ACQUISITION CORPORATION,

 

AMOEBA II ACQUISITION CORPORATION,

 

PROTOCOM CORPORATION,

 

CERTAIN SHAREHOLDERS OF PROTOCOM CORPORATION

 

AND

 

REN-YUH WANG, AS SHAREHOLDERS’ AGENT

 

July 26, 2005

TABLE OF CONTENTS

 

LIST OF EXHIBITS AND SCHEDULES

 

AGREEMENT AND PLAN OF REORGANIZATION

 

This AGREEMENT AND PLAN OF REORGANIZATION (the “ Agreement ”) is made and entered into as of July 26, 2005 by and among SigmaTel, Inc., a Delaware corporation (“ Acquiror ”), Amoeba Acquisition Corporation, a California corporation and wholly owned subsidiary of Acquiror (“ Merger Sub I ”), Amoeba II Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of Acquiror (“ Merger Sub II ”), Protocom Corporation, a California corporation (“ Target ”), Ren-Yuh Wang and Yi-Yung Jeng, certain shareholders of Target agreeing to provide certain representations and warranties under Section 3.10(u) and indemnification obligations under Section 9 hereunder (“ Principal Shareholders ”), and, solely with respect to Sections 6.2, 6.10 and 9 hereof, Ren-Yuh Wang, a shareholder of Target (“ Shareholders’ Agent ”).

 

RECITALS

 

A. The Boards of Directors of Target, Acquiror, Merger Sub I and Merger Sub II believe it is in the best interests of their respective companies and the shareholders and stockholders of their respective companies that (i) Merger Sub I merge with and into Target with Target as the surviving corporation (“ Merger I ”) and (ii) immediately following the effectiveness of Merger I, Target merge with and into Merger Sub II with Merger Sub II as the surviving corporation (“ Merger II ” and together with Merger I, collectively, the “ Merger ”) and, in furtherance thereof, have approved and declared advisable this Agreement and the transactions contemplated hereby, including the Merger.

 

B. Pursuant to Merger I, among other things, the outstanding shares of Target preferred stock, $0.001 par value (“ Target Preferred Stock ”), and Target common stock, $0.001 par value (“ Target Common Stock ”) (collectively, the Target Preferred Stock and Target Common Stock are referred to herein as “ Target Capital Stock ”), shall be converted into the right to receive the Merger Consideration (as defined in Section 2.6(a)) upon the terms and subject to the conditions set forth herein, and Acquiror will assume all outstanding unvested options to purchase, and available shares to reserved to purchase, Target’s Common Stock pursuant to Target’s equity compensation plans.

 

C. Acquiror will place a portion of the Merger Consideration payable to Target’s Stockholders into escrow, the release of which will be contingent upon the occurrence of certain events and the satisfaction of certain conditions as set forth in Section 9.

 

D. In order to induce Acquiror, Merger Sub I and Merger Sub II to enter into this Agreement, prior to the execution thereof, Principal Shareholders and certain Shareholders set forth on Schedule C attached hereto shall deliver to Acquiror executed Voting Agreements in substantially the form attached hereto as Exhibit D (“ Voting Agreement ”).

 

E. Target, Acquiror, Merger Sub I, Merger Sub II, and Principal Shareholders desire to make certain representations and warranties and other agreements in connection with the Merger.

 

F. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the “ Code ”), and to cause the Mergers to qualify as a reorganization under the provisions of Section 368(a) of the Code.

 

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NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties agree as follows:

 

1. Definitions . As used in this Agreement, the following terms shall have the following meanings:

 

“ Acquiror ” has the meaning set forth in the introductory paragraph.

 

“ Acquiror Common Stock ” has the meaning set forth in Section 2.6(a)(i).

 

“ Acquiror Indemnified Person ” and “ Acquiror Indemnified Persons ” have the meanings set forth in Section 9.2(b).

 

“ Acquiror Material Adverse Effect ” has the meaning set forth in Section 4.2.

 

“ Acquiror SEC Documents ” has the meaning set forth in Section 4.3.

 

“ Acquiror Termination Fee ” has the meaning set forth in Section 8.3(a)(ii).

 

“ Acquisition Proposal ” has the meaning set forth in Section 5.2(a).

 

“ Affiliate ” means any Person that is directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, another Person.

 

“ Aggregate Purchase Price ” has the meaning set forth in Section 2.6(a).

 

“ Agreed Acceleration of Options ” has the meaning set forth in Section 6.22.

 

“ Agreement ” has the meaning set forth in the introductory paragraph.

 

“ Ancillary Agreements ” has the meaning set forth in Section 3.2.

 

“ Annual Retention Bonus ” has the meaning set forth in Section 2.11.

 

“ Agreement of Merger ” has the meaning set forth in Section 2.2.

 

“ Assumed Per Share Exercise Price ” has the meaning set forth in Section 2.6(d)(ii).

 

“ Average Closing Price ” has the meaning set forth in Section 2.6(d)(ii).

 

“ BM ” has the meaning set forth in Section 6.15.

 

“ Bonus Eligible Employee ” has the meaning set forth in Section 2.11.

 

“ Cash Consideration ” has the meaning set forth in Section 2.6(a)(i).

 

“ CERCLA ” has the meaning set forth in Section 3.21(a)(i).

 

“ CFRA ” has the meaning set forth in Section 3.23(h).

 

“ Certificate ” has the meaning set forth in Section 2.7(c).

 

“ Certificate of Merger ” has the meaning set forth in Section 2.2.

 

“ Closing ” has the meaning set forth in Section 2.2.

 

“ Closing Balance Sheet ” means a balance sheet of Target as of the Closing Date prepared by Acquiror in accordance with GAAP as applied by Target in preparing the Target Balance Sheet.

 

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“ Closing Date ” has the meaning set forth in Section 2.2.

 

“ Closing Option Schedule ” has the meaning set forth in Section 2.6(d)(iii).

 

“ Closing Payment Schedule ” has the meaning set forth in Section 2.6(c).

 

“ COBRA ” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

 

“ Code ” has the meaning set forth in Recital F.

 

“ Confidentiality Agreement ” has the meaning set forth in Section 6.4.

 

“ Contemplated Transactions ” shall mean the transactions and other matters contemplated by this Agreement, including the Mergers.

 

“ Copyrights ” has the meaning set forth in Section 3.10(a)(i).

 

“ Damages ” has the meaning set forth in Section 9.2(b).

 

“ DGCL ” has the meaning set forth in Section 2.1.

 

“ Dissenting Shares ” has the meaning set forth in Section 2.6(j).

 

“ DLA Piper ” has the meaning set forth in Section 6.15.

 

“ Domain Names ” has the meaning set forth in Section 3.10(a)(i).

 

“ EDP Agreements ” has the meaning set forth in Section 3.10(o).

 

“ Effective Time ” has the meaning set forth in Section 2.2.

 

“ Effective Time of Merger I ” has the meaning set forth in Section 2.2.

 

“ Effective Time of Merger II ” has the meaning set forth in Section 2.2.

 

“ Environmental Laws ” has the meaning set forth in Section 3.21(a)(i).

 

“ Equity Consideration ” has the meaning set forth in Section 2.6(a)(ii).

 

“ Equity Percentage ” has the meaning set forth in Section 2.6(a)(i).

 

“ ERISA Affiliate ” has the meaning set forth in Section 3.23(a).

 

“ Escrow Agent ” has the meaning set forth in Section 9.1(a).

 

“ Escrow Agreement ” has the meaning set forth in Section 6.10.

 

“ Escrow Fund ” has the meaning set forth in Section 2.7(b).

 

“ Escrow Shares ” has the meaning set forth in Section 2.7(i).

 

“ Exchange Act ” has the meaning set forth in Section 3.4(b).

 

“ Exchange Agent ” has the meaning set forth in Section 2.7(a).

 

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“ Exchange Fund ” has the meaning set forth in Section 2.7(b).

 

“ Exchange Ratio ” has the meaning set forth in Section 2.6(a)(ii).

 

“ Filing Effective Date ” has the meaning set forth in Section 6.2(a).

 

“ FMLA ” has the meaning set forth in Section 3.23(h).

 

“ Governmental Entity ” has the meaning set forth in Section 3.2.

 

“ GPL ” has the meaning set forth in Section 3.10(a)(v).

 

“ Hazardous Materials ” has the meaning set forth in Section 3.21(a)(ii).

 

“ HIPPA ” means the Health Insurance Portability and Accountability Act of 1996, as amended.

 

“ Holder ” has the meaning set forth in Section 6.2(a).

 

“ In-Bound License Agreement ” has the meaning set forth in Section 3.15(c).

 

“ Independent Accounting Firm ” means any independent accounting firm of national reputation (other than PricewaterhouseCoopers LLP) mutually agreed upon by Acquiror and the Shareholders’ Agent.

 

“ Information Statement ” has the meaning set forth in Section 3.31.

 

“ International Trade Law ” has the meaning set forth in Section 3.29.

 

“ IP Encumbrance ” has the meaning set forth in Section 3.10(l).

 

“ IP Rights ” has the meaning set forth in Section 3.10(a)(i).

 

“ Knowledge ,” “ Known ” or “ Know ” means (i) with respect to an individual, that individual’s actual awareness of the fact or other matter after reasonable due diligence inquiry and investigation of facts, and (ii) with respect to a Person (other than an individual), the actual awareness of any individual who is currently serving as a director or executive officer of that Person of the fact or other matter after due diligence inquiry and investigation of facts; provided , further , that Target shall be deemed to have “Knowledge”, “Known” or “Know” a fact or other matter if any director of Target, any executive officer of Target or any of the Individuals listed on Schedule A has Knowledge, has Known or does Know of such fact or matter after due diligence inquiry and investigation of facts.

 

“ Lease ” and “ Leases ” have the meanings set forth in Section 3.20(a).

 

“ LGPL ” has the meaning set forth in Section 3.10(a)(v).

 

“ Limitation ” has the meaning set forth in Section 9.2(c).

 

“ Material Contract ” has the meaning set forth in Section 3.15(c).

 

“ Merger I ” has the meaning set forth in Recital A.

 

“ Merger II ” has the meaning set forth in Recital A.

 

“ Merger ” has the meaning set forth in Recital A.

 

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“ Merger Consideration ” means the Cash Consideration and the Equity Consideration.

 

“ Merger Sub I ” has the meaning set forth in the introductory paragraph.

 

“ Merger Sub II ” has the meaning set forth in the introductory paragraph.

 

“ NASD ” has the meaning set forth in Section 4.2.

 

“ Non-Assumed Target Option ” has the meaning set forth in Section 2.6(d)(i).

 

“ Number of Assumed Shares ” has the meaning set forth in Section 2.6(d)(ii).

 

“ Officer’s Certificate ” has the meaning set forth in Section 9.4.

 

“ Option Exchange Ratio ” has the meaning set forth in Section 2.6(d)(ii).

 

“ Patent Rights ” has the meaning set forth in Section 3.10(a)(ii).

 

“ Pension Plan ” has the meaning set forth in Section 3.23(d).

 

“ Per Share Purchase Price ” has the meaning set forth in Section 2.6(a).

 

“ Person ” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or Governmental Entity.

 

“ Public Software ” has the meaning set forth in Section 3.10(a)(v).

 

“ RCRA ” has the meaning set forth in Section 3.21(a)(i).

 

“ Real Estate ” has the meaning set forth in Section 3.20(b).

 

“ Record Date ” shall mean the record date for the written consents of the Shareholders of Target adopting this Agreement.

 

“ Registration Statement ” has the meaning set forth in Section 6.2(a).

 

“ Representatives ” shall mean officers, directors, partners, trustees, executors, employees, agents, attorneys, accountants and advisors.

 

“ Required Contract Consents ” has the meaning set forth in Section 3.15(b).

 

“ Required Merger Stockholder Vote ” has the meaning set forth in Section 3.32.

 

“ Resumption Notice ” has the meaning set forth in Section 6.2(a)(iii).

 

“ Retention Bonus Pool ” has the meaning set forth in Section 2.11.

 

“ Retention Bonus Payment Date ” has the meaning set forth in Section 2.11.

 

“ Retention Bonus Schedule ” has the meaning set forth in Section 2.11.

 

“ Returns ” has the meaning set forth in Section 3.22(b).

 

“ SEC ” has the meaning set forth in Section 4.2.

 

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“ Securities Act ” has the meaning set forth in Section 3.12.

 

“ Shareholder ” has the meaning set forth in Section 2.6(c).

 

“ Shareholders’ Agent ” has the meaning set forth in the introductory paragraph.

 

“ Survival Period ” has the meaning set forth in Section 9.2(a).

 

“ Surviving Corporation ” has the meaning set forth in Section 2.1.

 

“ Surviving Corporation I ” has the meaning set forth in Section 2.1.

 

“ Suspension Right ” has the meaning set forth in Section 6.2(a)(ii).

 

“ Suspension Notice ” has the meaning set forth in Section 6.2(a)(ii).

 

“ Target ” has the meaning set forth in the introductory paragraph.

 

“ Target 401(k) Plan ” has the meaning set forth in Section 7.2(m).

 

“ Target Balance Sheet ” has the meaning set forth in Section 3.7.

 

“ Target Balance Sheet Date ” has the meaning set forth in Section 3.6.

 

“ Target Capital Stock ” has the meaning set forth in Recital B.

 

“ Target Common Stock ” has the meaning set forth in Recital B.

 

“ Target Disclosure Schedule ” has the meaning set forth in Section 3.

 

“ Target Employees ” has the meaning set forth in Section 2.11.

 

“ Target Employee Plans ” has the meaning set forth in Section 3.23(a).

 

“ Target Financial Statements ” has the meaning set forth in Section 3.4.

 

“ Target Material Adverse Effect ” has the meaning set forth in Section 3.1.

 

“ Target Option ” has the meaning set forth in Section 2.6(d).

 

“ Target Option Plan ” has the meaning set forth in Section 3.5(a).

 

“ Target Preferred Stock ” has the meaning set forth in Recital B.

 

“ Target Termination Fee ” has the meaning set forth in Section 8.3(a)(i).

 

“ Target Warrants ” has the meaning set forth in Section 3.5(a).

 

“ Target’s Current Facilities ” has the meaning set forth in Section 3.21(b).

 

“ Target’s Facilities ” has the meaning set forth in Section 3.21(b).

 

“ Tax ” and “ Taxes ” have the meanings set forth in Section 3.22(a).

 

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“ Termination Date ” has the meaning set forth in Section 9.3(a).

 

“ Trademark Rights ” has the meaning set forth in Section 3.10(a)(iv).

 

“ Transaction Expenses ” shall mean any fee, cost, expense, payment or expenditure of Target incurred or accrued through the Effective Time of Merger I incurred in connection with this Agreement, the Contemplated Transactions, or arising as a payment outside of the ordinary course of business as result of the Contemplated Transactions; provided , however , that “ Transaction Expenses ” shall in no event include any employee severance or integration fee, cost, expense, payment or expenditure that is or may become payable in connection with the transactions contemplated by this agreement or as a result of actions taken after the Effective Time of Merger I, or those specifically approved expenses to be incurred by the Target as set forth on Schedule E attached hereto as of the date hereof.

 

“ Transaction Expense Excess Amount ” has the meaning set forth in Section 2.6(b).

 

“ Transaction Expense Threshold ” has the meaning set forth in Section 2.6(b).

 

“ Unvested Target Option ” has the meaning set forth in Section 2.6(a)(ii).

 

“ Voting Agreement ” has the meaning set forth in Recital D.

 

“ WARN ” has the meaning set forth in Section 3.23(l).

 

2. The Mergers .

 

2.1 The Mergers . At the Effective Time of Merger I and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the California Corporations Code (the “ California Law ”), Merger Sub I shall be merged with and into Target, the separate corporate existence of Merger Sub I shall cease and Target shall continue as the surviving corporation in Merger I (the “ Surviving Corporation I ”). At the Effective Time of Merger II and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the General Corporation Law of the State of Delaware (the “ DGCL ”), Surviving Corporation I shall be merged with and into Merger Sub II, the separate corporate existence of Surviving Corporation I shall cease and Merger Sub II shall continue as the surviving corporation in Merger II (the “ Surviving Corporation ”). The Mergers shall be structured as back-to-back Mergers (reverse triangular merger under Code Sections 368(a)(1)(A) and 368(a)(2)(E) followed immediately by a forward triangular merger of Surviving Corporation I into Merger Sub II under Code Sections 368(a)(1)(A) and 368(a)(2)(D).

 

2.2 Closing; Effective Time . Unless this Agreement has been previously terminated pursuant to its terms, the closing of the transactions contemplated hereby (the “ Closing ”) shall take place as soon as practicable, but no later than two (2) business days, after the satisfaction or waiver of each of the conditions set forth in Section 7 hereof (excluding provisions that, by their nature, cannot be satisfied until the Closing Date), or at such other time as the parties hereto agree (the “ Closing Date ”). The Closing shall take place at the offices of DLA Piper Rudnick Gray Cary US LLP, 1221 South MoPac Expressway, Suite 400, Austin, Texas 78746-6875, or at such other location as the parties hereto agree. In connection with the Closing, the parties hereto shall cause Merger I to be consummated by the filing of an Agreement of Merger for Merger I in substantially the form attached hereto as Exhibit A (the “ Agreement of Merger ”), together with any required certificates, with the Secretary of State of the State of California, in accordance with the relevant provisions of the California Law (the time of such filing being the “ Effective Time of Merger I ”). Subject to the provisions of this Agreement, a Certificate of Merger for Merger II, satisfying the applicable requirements of the DGCL and the California Law and in substantially the form attached hereto as Exhibit B (the “ Certificate of Merger ”), shall be duly executed

 

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by Merger Sub II and concurrently with or as soon as practicable following the Effective Time of Merger I filed with the Secretary of State of State of Delaware in accordance with the relevant provisions of the DGCL (the time of such filing with the Secretary of State of State of Delaware (or such later time as may be agreed in writing by the parties and specified in the Certificate of Merger) being the “ Effective Time of Merger II ” and, together with Effective Time of Merger I, the “ Effective Time ”).

 

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

 

2.4 Articles of Incorporation; Bylaws .

 

(a) At the Effective Time of Merger I, the Articles of Incorporation of Surviving Corporation I shall be amended and restated in its entirety to be identical to the Articles of Incorporation of Merger Sub I, as in effect immediately prior to the Effective Time of Merger I, until thereafter amended in accordance with the California Law and as provided in such Articles of Incorporation; provided, however, that at the Effective Time of Merger I, Article I of the Articles of Incorporation of Surviving Corporation I shall be amended to read as follows: “The name of the corporation is Protocom Corporation.”

 

(b) At the Effective Time of Merger I, the Bylaws of Surviving Corporation I shall be amended and restated in their entirety to be identical to the Bylaws of Merger Sub I, as in effect immediately prior to the Effective Time of Merger I, until thereafter amended in accordance with the DGCL and as provided in such Bylaws.

 

(c) The Certificate of Incorporation of the Surviving Corporation immediately after the Effective Time of Merger II shall be in a form approved by Acquiror. The Certificate of Incorporation of the Surviving Corporation shall be amended and restated consistently with Section 2.4(a) of this Agreement, as applicable.

 

(d) The Bylaws of the Surviving Corporation shall be amended and restated consistently with Section 2.4(b) of this Agreement, as applicable.

 

2.5 Directors and Officers . At the Effective Time of Merger I, the directors and officers of Merger Sub I immediately prior to the Effective Time of Merger I shall be the directors and officers of the Surviving Corporation I, to serve until their respective successors are duly elected or appointed and qualified. At the Effective Time of Merger II, the directors and officers of Surviving Corporation I immediately prior to the Effective Time of Merger II shall be the directors and officers of the Surviving Corporation, to serve until their respective successors are duly elected or appointed and qualified.

 

2.6 Effect on Capital Stock in Merger I . At the Effective Time of Merger I, by virtue of Merger I and without any action on the part of Merger Sub I, Target or the holders of any of the following securities:

 

(a) The per share price shall equal the amount obtained by dividing (A) $47,000,000, as adjusted pursuant to Section 2.6(b) and to Section 7.2.(r) below (the “ Aggregate Purchase Price ”), by (B) the sum of (1) the total number of shares of Target Common Stock issued and outstanding immediately prior to the Effective Time of Merger I, including shares of Target Common Stock issuable, immediately prior to the Effective Time of Merger I, upon conversion of all issued and outstanding Target Preferred Stock and all Target Preferred Stock issuable upon the exercise or conversion of all issued and outstanding Target Warrants convertible into Target Preferred Stock and (2) the total number of shares of Target Common Stock issuable, immediately prior to the Effective Time of Merger I, upon the exercise or conversion of all issued and outstanding vested and exercisable Target Options into Target Common Stock (the “ Per Share Purchase Price ”).

 

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(i) Each share of Target Preferred Stock issued and outstanding immediately prior to the Effective Time (excluding shares to be cancelled in accordance with Section 2.6(g) and Dissenting Shares) shall be converted and exchanged into Target Common Stock, effective immediately prior to the Effective Time of Merger I, and thus the right to receive an amount described below in Section 2.6(a)(ii).

 

(ii) Each share of Target Common Stock issued and outstanding immediately prior to the Effective Time of Merger I (excluding shares to be cancelled in accordance with Section 2.6(f) and Dissenting Shares) shall be converted and exchanged into the right to receive an amount equal to the Per Share Purchase Price, which shall be payable in an amount equal to the Per Share Purchase Price, forty percent (40%) of which shall be payable in cash (the “ Cash Consideration ” ) and sixty percent (60%) of which (the “ Equity Percentage ”) shall be payable with a fraction (the “ Equity Exchange Ratio ”) of a share of validly issued, fully paid and nonassessable common stock, $0.001 par value, of Acquiror (“ Acquiror Common Stock ”) which equals the amount obtained by (A) dividing the Per Share Purchase Price by the average of the closing prices of a share of Acquiror Common Stock on the Nasdaq National Market for the five (5) consecutive trading days ending on the last trading day prior the execution of this Agreement (the “ Average Closing Price ”) and (B) multiplying the quotient of (A) by the Equity Percentage (the “ Exchange Ratio ”) (such equity consideration, the “ Equity Consideration ”).

 

(b) To the extent Target’s Transactions Expenses as calculated as of immediately prior to the Closing exceeds $100,000 (the “ Transaction Expense Threshold ”) in the aggregate at the Closing Date, the Aggregate Purchase Price shall be reduced by an amount equal to the amount, if any, by which Target’s Transaction Expenses exceeds the Transaction Expense Threshold at the time of Closing (the “ Transaction Expenses Excess Amount ”). Any of Target’s Transactions Expenses in excess of the Transaction Expense Threshold shall be paid as liability of Target’s Shareholders, and so, to the extent that Transaction Expenses Excess Amounts are discovered after the Closing, and are not deducted from the Aggregate Purchase Price, they shall be paid out of the Escrow Fund irrespective of any Limitation set forth in Section 9.2(d). Schedule E provides a reasonable, good faith estimate of all Transaction Expenses incurred or to be incurred by or on behalf of Target as of the date on or prior to the date of this Agreement, and shall on two (2) days prior to the Closing be updated to provide for all Transaction Expenses that are or will become payable by Target.

 

(c) Closing Payment Schedule . At the Closing, Target shall deliver to Acquiror a definitive closing payment schedule (the “ Closing Payment Schedule ”) accurately setting forth: (i) the name of each holder of Target Capital Stock immediately prior to the Effective Time of Merger I (after giving effect to any exercises of Target Options or Target Warrants prior to the Effective Time of Merger I) (each, a “ Shareholder ”); (ii) the number of shares of Target Capital Stock of each class and series held by each such Shareholder immediately prior to the Effective Time of Merger I; (iii) the shares of Acquiror Common Stock to be withheld and contributed to the Escrow Fund on behalf of each such Shareholder pursuant to Section 2.7(i); and (iv) the Cash Consideration and the number of shares of Acquiror Common Stock that each such Shareholder is entitled to receive at the Closing pursuant to Section 2.6 (after deduction of the Escrow Share amounts to be withheld and contributed to the Escrow Fund on behalf of such Shareholder pursuant to Section 2.7(i)). The Closing Payment Schedule shall be accompanied by reasonable documentation which supports the information provided therein (including written confirmations from those Target Representatives, if any, identified by Acquiror as of the date of this Agreement as to all amounts paid, owed and to be owed by Target to such Representative in connection with the transactions contemplated by this Agreement and copies of all relevant invoices therefrom).

 

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(d) Target Stock Options .

 

(i) Vested Options . At the Effective Time of Merger I, each option to purchase Target Common Stock (each a “ Target Option ”) that was granted under the Target Option Plan and is outstanding immediately prior to the Effective Time of Merger I and (A) held by an employee of Target and is vested as of the Effective Time of Merger I or (B) held by a non-employee of Target, whether or not vested (each option described in clause (A) or (B) being a “ Non-Assumed Target Option ”), shall not be assumed by Acquiror and, accordingly, at the Effective Time of Merger I shall remain vested and exercisable for such number of shares of Target Capital Stock subject to such Non-Assumed Target Option to the extent of its vesting and, to the extent not exercised at or before the Effective Time of Merger I, shall terminate and cease to be outstanding immediately upon the Effective Time of Merger I, in each case in accordance with the terms of each of the Target Option Plan and the applicable stock option agreement. However, Target shall enter into an agreement with each holder of an outstanding Non-Assumed Target Option which will provide such holder with the following rights: (A) the right to exercise the Non-Assumed Target Option to the extent of its vesting, determined as of the Effective Time of Merger I, as proximately as possible prior to the Effective Time of Merger I by such holder’s payment to Target of the applicable exercise price in United States currency or immediately available funds in accordance with the terms of the applicable stock option agreement for such Non-Assumed Option and (B) the right to receive with respect to the Target Common Stock acquired upon such exercise of the Non-Assumed Target Option the applicable Cash Consideration and Equity Consideration in accordance with Section 2.6(a)(ii). Any such executed and binding agreement of any exercising option holder shall be provided to Target at least three (3) business days prior to the Effective Time of Merger I in order for Target to prepare, and Acquiror to review, the Closing Option Schedule, Closing Payment Schedule and Updated Target Disclosure Schedule, which shall be amended to reflect the shares exercised and amounts received by Target for the exercises of Non-Assumed Target Options described above. At the Effective Time of Merger I, all shares of Target Capital Stock distributable pursuant to the exercise of the rights authorized pursuant to this Section 2.6(d)(i), shall be certificated and held by Target’s corporate secretary for purposes of the exchange procedures set forth in Section 2.7 below. Upon the exercise of Non-Assumed Target Options, Target shall satisfy all of its tax withholding obligations with respect to such exercises.

 

(ii) Unvested Options/Reserve . At the Effective Time of Merger I, Acquiror shall assume all Target Options outstanding at the Effective Time of Merger I which are not Non-Assumed Target Options and which do not otherwise terminate with their terms at the Effective Time of Merger I (the “ Unvested Target Options ”). Each Unvested Target Option so assumed by Acquiror shall be deemed to constitute an option to acquire a number of shares of Acquiror Common Stock (the “ Number of Assumed Shares ”) at an exercise price per share of Acquiror Common Stock (the “ Assumed Per Share Exercise Price ”) determined as follows:

 

a) The Assumed Per Share Exercise Price shall be a dollar amount (rounding any fractional cent up to the nearest whole cent) which bears the same relationship to the fair market value of a share of Acquiror Common Stock immediately after the Effective Time of Merger I as the exercise price per share of Target Common Stock subject to the assumed Unvested Target Option immediately prior to the Effective Time of Merger I bears to the fair market value of a share of Target Common Stock immediately prior to the Effective Time of Merger I.

 

b) For the purposes of this Section,

 

i) the fair market value of a share of Acquiror Common Stock immediately after the Effective Time of Merger I shall be deemed to be equal to the average of the closing prices of a share of Acquiror Common Stock on the Nasdaq National Market for the five (5)

 

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consecutive trading days beginning on the date of the Effective Time of Merger I or such other measure of such fair market value as may be required to avoid subjecting the assumed Unvested Target Options to Section 409A of the Code;

 

ii) the fair market value of a share of Target Common Stock immediately prior to the Effective Time of Merger I shall be equal to the fair market value of the consideration payable pursuant to Section 2.6(a)(ii) with respect to a share of Target Common Stock, taking into account with respect to the Equity Consideration component of such consideration the fair market value of a share of Acquiror Common Stock immediately prior to the Effective Time of Merger I; and

 

iii) the fair market value of a share of Acquiror Common Stock immediately prior to the Effective Time of Merger I shall be deemed to be equal to the average of the closing prices of a share of Acquiror Common Stock on the Nasdaq National Market for the five (5) consecutive trading days immediately preceding the date of the Effective Time of Merger I or such other measure of such fair market value as may be required to avoid subjecting the assumed Unvested Target Options to Section 409A of the Code.

 

c) The Number of Assumed Shares shall be a number of shares of Acquiror Common Stock (rounding any fractional share down to the next whole share) determined by dividing (1) the product of (X) the number of shares of Target Common Stock subject to the assumed Unvested Target Option at the Effective Time of Merger I and (Y) the difference between the fair market value of a share of Target Common Stock immediately prior to the Effective Time of Merger I (as determined pursuant to subsection (B) above) and the exercise price per share of Target Common Stock subject to the assumed Unvested Target Option immediately prior to the Effective Time of Merger I by (2) the difference between the fair market value of a share of Acquiror Common Stock immediately after the Effective Time of Merger I (as determined pursuant to subsection (B) above) and the Assumed Per Share Exercise Price.

 

(iii) Schedule 2.6(d) sets forth a true and complete list as of the date hereof of each outstanding Target Option, with information specified in detail below in this subsection, and the number of shares available for issuance under the Target Option Plan. Target has represented and warranted in Section 3.5 to Acquiror that Schedule 2.6(d) accurately sets forth the following information with respect to each Target Option as of the date of execution of this Agreement: (i) the name of the holder of each outstanding Target Option, and whether or not such holder is a then-employed employee of Target; (ii) the Target Option Plan pursuant to which such Target Option was granted; (iii) the number of shares of Target Common Stock subject to such Target Option, and the applicable exercise price per share of Target Common Stock; (iv) the vesting schedule applicable to such Target Option (including the number of shares vested and unvested as of the date hereof); (v) to the extent applicable, a description of any acceleration of vesting provisions to which such Target Option is subject; (vi) the expiration date of such Target Option; and (vii) the tax status of such Target Option. At the Closing, Target shall deliver to Acquiror a definitive closing option schedule (the “ Closing Option Schedule ”) accurately setting forth: (A) the information described in clauses “(i)” through “(vii)” of the preceding sentence immediately prior to the Effective Time of Merger I, (B) the Option Exchange Ratio and (C) the number of shares of Acquiror Common Stock that will be subject to each Target Option immediately after its assumption by Acquiror at the Effective Time of Merger I, and the applicable exercise price per share of Acquiror Common Stock.

 

(iv) Prior to the Effective Time of Merger I, Target and Acquiror shall take all action that may be necessary (under the Target Option Plans or otherwise) to effectuate the provisions of this Section 2.6(d) and to ensure that, from and after the Effective Time of Merger I, holders of Target Options have no rights with respect to such Target Options other than those specifically provided in this Section 2.6.

 

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(e) Target Warrants . At the Effective Time of Merger I, all warrants and options (other than those granted under the Target Option Plan and assumed above in Section 2.6(d)(ii)) to purchase Target Capital Stock then outstanding (“ Target Warrants ”) shall be cancelled in accordance with Section 6.7.

 

(f) Cancellation of Target Capital Stock Owned by Acquiror and Treasury Stock . At the Effective Time of Merger I, each share of Target Capital Stock owned by Acquiror or any direct or indirect wholly owned subsidiary of Acquiror immediately prior to the Effective Time of Merger I, and each share of Target Capital Stock that is held in the treasury of Target, shall automatically be canceled and extinguished without any conversion thereof and no Merger Consideration shall be deliverable in exchange therefor.

 

(g) Capital Stock of Merger Sub I . At the Effective Time of Merger I, each share of common stock of Merger Sub I issued and outstanding immediately prior to the Effective Time of Merger I shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation I. Each stock certificate of Merger Sub I evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation I.

 

(h) Adjustments to Exchange Ratio . The Exchange Ratio, the Option Exchange Ratio and Merger Consideration payable with respect to Target Capital Stock shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Acquiror Common Stock, Target Preferred Stock or Target Common Stock), reorganization, recapitalization or other like change with respect to Acquiror Common Stock or Target Capital Stock occurring after the date hereof and prior to the Effective Time of Merger I.

 

(i) Fractional Shares . No fraction of a share of Acquiror Common Stock will be issued, but in lieu thereof each Stockholder who would otherwise be entitled to a fraction of a share of Acquiror Common Stock (after aggregating all fractional shares of Acquiror Common Stock to be received by such holder) shall receive from Acquiror a share of Acquiror Common Stock rounded to the nearest whole share.

 

(j) Dissenters’ Rights . Notwithstanding any provision of this Agreement to the contrary, any shares of Target Capital Stock held by a holder who has demanded and perfected such holder’s right for appraisal of such shares in accordance with the California Law and who, as of the Effective Time, has not effectively withdrawn or lost such right to appraisal (“ Dissenting Shares ”), if any, shall not be converted into the Merger Consideration but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the California Law. Target shall give Acquiror prompt notice of any such demand received by Target, and Acquiror shall have the right to direct and participate in all negotiations and proceedings with respect to such demand. Target agrees that, except with the prior written consent of Acquiror, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such demand. Each holder of Dissenting Shares who, pursuant to the provisions of the California Law, becomes entitled to payment of the fair value for shares of Target Capital Stock shall receive payment therefore (but only after the value therefore shall have been agreed upon or finally determined pursuant to such provisions). If, after the Effective Time, any Dissenting Shares shall lose their status as Dissenting Shares, Acquiror shall issue and deliver, upon surrender by such shareholder of a Certificate or Certificates representing shares of Target Capital Stock, the portion of the Merger Consideration to which such shareholder would otherwise be entitled under this Section 2.6(j) and the Agreement of Merger less the portion of the Merger

 

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Consideration allocable to such shareholder that has been deposited in the Escrow Fund (as defined in Section 2.7(i) hereof) in respect of such shares of Target Capital Stock pursuant to Section 2.7(i) and Section 9 hereof.

 

2.7 Surrender of Certificates .

 

(a) Exchange Agent . Computer Share shall act as exchange agent (the “ Exchange Agent ”) in the Merger.

 

(b) Acquiror to Provide Common Stock and Cash . Promptly after the Effective Time of Merger I, Acquiror shall supply or cause to be supplied to the Exchange Agent for the benefit of the holders of the Certificates for exchange in accordance with this Section 2.7 through such reasonable procedures as Acquiror may adopt and as are reasonably acceptable to Target (i) certificates evidencing the shares of Acquiror Common Stock issuable pursuant to Section 2.6 in exchange for shares of Target Capital Stock outstanding immediately prior to the Effective Time of Merger I, less the number of shares of Acquiror Common Stock to be deposited into an indemnity escrow fund (the “ Escrow Fund ”) pursuant to the requirements of Section 2.7(i) and Section 9, and (ii) cash in an amount sufficient to permit the payment of the Aggregate Cash Consideration to be paid pursuant to Section 2.6(a) in exchange for shares of Target Capital Stock outstanding immediately prior to the Effective Time of Merger I, less cash in an amount equal to the Transaction Expenses Excess Amount (the “ Exchange Fund ”).

 

(c) Exchange Procedures . Promptly on and after the Effective Time of Merger I, the Acquiror shall direct the Exchange Agent to obtain from or mail to each holder of record of Target Capital Stock, whose shares were converted into the right to receive the Merger Consideration pursuant to Section 2.6, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the stock certificates representing shares of Target Capital Stock (each a “ Certificate ”) shall pass, only upon receipt of the Certificates by the Exchange Agent, and shall be in customary form and have such other provisions as Acquiror may reasonably specify, including but not limited to, a general release of claims against the Target and its Representatives with respect to all matters relating to or arising out of the ownership of the securities or Target or as a shareholder of Target, and as are reasonably acceptable to Target, representations as to ownership of the Target Capital Stock, any applicable lock-up restrictions relating to the shares of Acquiror Common Stock under Section 6.2 hereof, and a joinder to the indemnity obligations of Section 9.2(b)(iv) hereof); (ii) such other customary documents as may be required pursuant to such instructions; and (iii) instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Acquiror, together with such letter of transmittal and other documents, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefore (i) the number of whole shares of Acquiror Common Stock less the number of shares of Acquiror Common Stock to be deposited in the Escrow Fund on such holder’s behalf pursuant to Section 2.7(i) and Section 9 hereof; (ii) any dividends or other distributions to which such holder is entitled pursuant to Section 2.7(d); (iii) a check in the amount equal to the portion of the Aggregate Cash Consideration that such holder has the right to receive pursuant to this Section 2; and (iv) cash (without interest) in respect of fractional shares as provided in Section 2.6(j), and the Certificate so surrendered shall forthwith be canceled. Until so surrendered, each outstanding Certificate that prior to the Effective Time of Merger I represented shares of Target Capital Stock will be deemed from and after the Effective Time of Merger I, for all corporate purposes other than the payment of dividends (subject to Section 2.7(d), to evidence the ownership of the number of full shares of Acquiror Common Stock into which such shares of Target Capital Stock shall have been so converted, the right to receive the portion of the Aggregate Cash Consideration which shall be issued for such Target Capital Stock and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 2.6.

 

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(d) Distributions With Respect to Unexchanged Shares . No dividends or other distributions with respect to Acquiror Common Stock with a record date after the Effective Time of Merger I will be paid to the holder of any unsurrendered Certificate with respect to the shares of Acquiror Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Acquiror Common Stock issued in exchange therefor, without interest at the time of such surrender, the amount of any such dividends or other distributions with a record date after the Effective Time of Merger I theretofore payable (but for the provisions of this Section 2.7(d)) with respect to such shares of Acquiror Common Stock.

 

(e) Transfers of Ownership . At the close of business on the date of the Effective Time of Merger I, the stock transfer books of Target shall be closed, and there shall be no further registration of transfers of Target Capital Stock thereafter on the records of Target. If any certificate for shares of Acquiror Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Acquiror or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Acquiror Common Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of Acquiror or any agent designated by it that such tax has been paid or is not payable.

 

(f) Termination of Exchange Fund . Any portion of the Exchange Fund which remains undistributed to the Shareholders twelve (12) months after the Effective Time of Merger I shall be delivered to Acquiror, upon demand, and any Shareholders who have not previously complied with this Section 2.7 shall thereafter look only to Acquiror for payment of their claim for the Merger Consideration and any dividends or distributions with respect to Acquiror Common Stock.

 

(g) No Liability . Notwithstanding anything to the contrary in this Section 2.7, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

(h) Dissenting Shares . The provisions of this Section 2.7 shall also apply to Dissenting Shares that lose their status as such, except that the obligations of Acquiror under this Section 2.7 shall commence on the date of loss of such status and the holder of such shares shall be entitled to receive in exchange for such shares the Merger Consideration to which such holder is entitled pursuant to Section 2.6 hereof.

 

(i) Escrow . As soon as practicable after the Effective Time of Merger I, and subject to and in accordance with the provisions of Section 9 hereof and the Escrow Agreement, Acquiror shall cause to be delivered an aggregate amount of $4,700,000 (or such lesser amount which shall be equal to 10% of the Aggregate Purchase Price in the event such amount is adjusted under Section 7.2 (r) hereof) of the Merger Consideration to the Escrow Agent (as defined in Section 9 hereof), 100 percent (100%) of which shall be represented by a certificate or certificates representing shares of Acquiror Common Stock to be issued at the Closing (the “ Escrow Shares ”) (which shall be registered in the name of the Escrow Agent as nominee for the holders of Certificates canceled pursuant to this Section 2.7). For the purpose of valuing Acquiror Common Stock which shall be the Escrow Shares, the value of such shares shall be the Average Closing Price. Such shares shall be beneficially owned by such holders and such shares shall be held in escrow and shall be available to compensate Acquiror for certain damages as provided in Section 9. To the extent not used for such purposes, such shares shall be released, all as provided in Section 9.

 

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2.8 Effect on Capital Stock in Merger II . At the Effective Time of Merger II, each share of common stock of Surviving Corporation I issued and outstanding immediately prior to the Effective Time of Merger II shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. Each stock certificate of Surviving Corporation I evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation.

 

2.9 No Further Ownership Rights in Target Capital Stock . The Merger Consideration delivered upon the surrender for exchange of shares of Target Capital Stock in accordance with the terms hereof (including any dividends or distributions) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Target Capital Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Target Capital Stock which were outstanding immediately prior to the Effective Time of Merger I. If, after the Effective Time of Merger I, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 2.

 

2.10 Lost, Stolen or Destroyed Certificates . In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof such Merger Consideration (and dividends or distributions) as may be required pursuant to Section 2.6; provided , however , that Acquiror may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Acquiror, the Surviving Corporation or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed.

 

2.11 Employee Retention Bonus; Allocation . In addition to the Merger Consideration, for the benefit of Target, Acquiror shall set aside and reserve a cash amount equal to $3,000,000 above the Aggregate Purchase Price (the “ Retention Bonus Pool ”) to distribute to certain employees of Target who shall be offered employment by Acquiror listed on Schedule D , to be mutually determined by Acquiror and Target prior to the Closing (the “ Target Employees ”), to remain with the Surviving Corporation immediately after the Closing pursuant to the terms set forth herein. Prior to Closing, Target and Acquiror shall mutually agree upon a schedule under which each of the Target Employees shall be paid from the Retention Bonus Pool (“ Retention Bonus Schedule ”), with the applicable agreed upon bonus amounts set forth opposite such employee’s name on such Retention Bonus Schedule under the heading “Retention Bonus Aggregate Payment.” The Retention Bonus Pool shall be paid in three equal aggregate installments of $1,000,000 (each an “ Annual Retention Bonus ”) on each of the three annual anniversary dates of the Closing Date (each, a “ Retention Bonus Payment Date ”) to all of the Target Employees who are then employed with the Acquiror, provided, further, that on each of the Retention Bonus Payment Dates at least half of the Target Employees originally listed on Schedule 6 . 11 are then employed by Acquiror (for the purposes of this calculation, all Target Employees who are terminated by Acquiror without cause shall not be included), and for certain Target Employees indicated on the Retention Bonus Schedule as “Target Management Employees”, in addition to the foregoing requirements, they may only share in the Annual Retention Bonus if at least half of those Target Employees who are not indicated as Target Management Employees remain employed by the Acquiror on such Retention Bonus Payment Date (each such Target Employee eligible to share in the Annual Retention Bonus, an “ Bonus Eligible Employee ”). On each Retention Bonus Payment Date, each Bonus Eligible Employee will share in the Annual Retention Bonus pro rata amongst all then remaining Bonus Eligible Employees. The calculation of pro rata for each Bonus Eligible Employee shall be the quotient determined by such Bonus Eligible Employee’s Retention Bonus Aggregate Payment divided by the sum of all of the then Bonus Eligible Employees’ Retention Bonus Aggregate Payments. The payment of any portion of the Annual Retention Bonus shall be subject to the Target Employee’s execution and delivery of the Acquiror’s form of at-will

 

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employment offer letter, proprietary rights agreements, and a Non-competition and Non-solicitation Agreement substantially in the form attached hereto as Exhibit E to Acquiror duly executed by such employee; and provided, further , that Acquiror shall withhold from such any amount of Annual Retention Bonus paid to each Target Employee the applicable income, unemployment, FICA, social security and other taxes and pay such taxing authority all such amounts in accordance with Acquiror’s standard payroll practices.

 

2.12 Tax Consequences . For federal income tax purposes, the Mergers are intended to constitute a reorganization within the meaning of Section 368 of the Code. The parties to this Agreement hereby adopt this Agreement as a “plan of reorganization” within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.

 

2.13 Taking of Necessary Action; Further Action . Each of Acquiror, Merger Sub I, Merger Sub II, Principal Shareholders and Target will take all such reasonable and lawful action as may be necessary or desirable in order to effectuate the Mergers in accordance with this Agreement as promptly as possible. If, at any time after the Effective Time, of Merger I or the Effective Time of Merger II, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Target, Merger Sub I and Merger Sub II, the officers and directors of Target, Merger Sub I and Merger Sub II are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement.

 

3. Representations and Warranties of Target and Principal Shareholders . Target and, in the instance of certain representations made in Section 3.10(u), the Principal Shareholders, represent and warrant to Acquiror, Merger Sub I and Merger Sub II that the statements contained in this Section 3 are true and correct, except as specifically disclosed in a document of even date herewith and delivered by Target to Acquiror on the date hereof referring to the representations and warranties in this Agreement attached hereto as Schedule B (the “ Target Disclosure Schedule ”).

 

3.1 Organization, Standing and Power . Target is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Target has the corporate power to own its properties and to carry on its business as it is now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would reasonably be expected to have a Target Material Adverse Effect (as defined below). Target has delivered or made available to Acquiror a true and correct copy of the Articles of Incorporation and Bylaws of Target, each as amended to date. Target is not in violation of any of the provisions of its Articles of Incorporation or Bylaws. Target has no Subsidiaries (as defined below). Target does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. As used herein, the term “ Target Material Adverse Effect ” shall mean the occurrence of any event, change, circumstance or effect, except for economic changes of general effect or changes affecting the semiconductor industry in general, that individually or in the aggregate (taking into account all other such events, changes, circumstances or effects) (A) is materially adverse to the financial condition, properties, assets (including intangible assets), liabilities, business, operations or results of operations of Target in each case taken as a whole, or (B) would prevent Target’s ability to consummate the transactions contemplated herein.

 

3.2 Authority . Target has all requisite corporate power and authority to enter into this Agreement and the agreements contemplated hereby to which it is a party (the “ Ancillary Agreements ”) and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement

 

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and the Ancillary Agreements and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Target, subject only to the adoption of this Agreement by the Shareholders as contemplated herein. The Board of Directors of Target has unanimously (a) approved this Agreement and Mergers; (b) determined that in its opinion the Mergers are in the best interests of the Shareholders and are on terms that are fair to such Shareholders; and (c) recommended that the Shareholders adopt this Agreement. This Agreement and the Ancillary Agreements have been duly executed and delivered by Target and, assuming this Agreement constitutes the valid and binding obligations of the other parties thereto, this Agreement constitutes the valid and binding obligation of Target enforceable against Target in accordance with its terms, except that such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors’ rights generally, and is subject to general principles of equity. The execution and delivery of this Agreement and the Ancillary Agreements by Target does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any material obligation or loss of any material benefit under (a) any provision of the Articles of Incorporation or Bylaws of Target, as amended; or (b) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target or any of its properties or assets, except in the case of clause (b), for such conflicts, violations, defaults, rights of termination, cancellation or acceleration as could not individually or in the aggregate, reasonably be expected to have a Target Material Adverse Effect. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality (“ Governmental Entity ”) is required by or with respect to Target or its Subsidiaries in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (a) the filing of the Agreement of Merger and the Certificate of Merger, together with the required officers’ certificates as provided in Section 2.2; (b) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the securities laws of any foreign country; and (d) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, could not be reasonably expected to have a Target Material Adverse Effect and could not reasonably be expected to prevent, or materially alter or delay, any of the transactions contemplated by this Agreement.

 

3.3 Governmental Authorization . Target has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (a) pursuant to which Target currently operates or holds any interest in any of its properties; or (b) that is required for the operation of the business of Target or the holding of any such interest and all of such authorizations are in full force and effect, with respect to paragraphs (a) and (b) in each case.

 

3.4 Financial Statements .

 

(a) Target has delivered to Acquiror its unaudited financial statements for each of the fiscal years ended December 31, 2004, December 31, 2003, and December 31, 2002, respectively, and its unaudited financial statements (balance sheet, statement of operations and statement of cash flows) on a consolidated basis as at and for the six-month period ended June 30, 2005 (collectively, the “ Target Financial Statements ”). The Target Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby. The Target Financial Statements fairly present in all material respects the consolidated financial condition, operating results and cash flow of Target as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments and the absence of footnotes in the case of the unaudited Target Financial Statements.

 

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(b) Target is not party to or otherwise involved in any “off-balance sheet arrangements” (as defined in Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).

 

3.5 Capitalization .

 

(a) The authorized capital of Target consists of 80,610,000 authorized shares of capital stock, consisting of: 59,000,000 shares of Target Common Stock authorized, of which 8,981,529 shares are issued and outstanding; and 21,610,000 shares of Target Preferred Stock authorized, of which 4,000,000 shares are designated as Series A Convertible Preferred Stock and 4,000,000 shares are issued and outstanding, 4,000,000 shares are designated as Series B Convertible Preferred Stock and 4,000,000 shares are issued and outstanding, 4,000,000 shares are designated as Series C Convertible Preferred Stock and 4,000,000 shares are issued and outstanding and 9,610,000 shares are designated as Series D Convertible Preferred Stock and 7,610,000 shares are issued and outstanding. All outstanding shares of Target Common Stock and Target Preferred Stock are duly authorized, validly issued, fully paid and non-assessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, or arising under applicable federal state or local securities laws. As of the date of this Agreement, there are no outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from Target of any shares of its Capital Stock, except for: (i) options to purchase 6,980,423 shares of Common Stock outstanding under the Company’s 2000 Stock Option Plan (the “ Target Option Plan ”), under which there were 8,700,000 shares of Target Common Stock reserved for issuance, 1,681,529 shares have previously been exercised and 38,018 shares are reserved for future option grants; and (ii) a Warrant to purchase 160,000 shares of Series D Convertible Preferred Stock at $1.00 per share to the party set forth on Schedule 3 . 5(a) (the “ Target Warrant ”) issued and outstanding. Target has delivered to Acquiror true and complete copies of each form of agreement and Target Option Plan evidencing each Target Option. All of the information contained in Schedule 2 . 6(e) is accurate and complete as of the date of this Agreement. Section 3.5(a) of the Target Disclosure Schedule sets forth as of the date of this Agreement the name of each Warrant holder, the class and series and number of shares of Target Capital Stock subject to each Warrant and the applicable exercise price for each Warrant. Target has delivered to Acquiror a true and complete copy of the Target Warrant, and all arrangements regarding the Target Warrant has been reduced to writing by Target. Except for the rights created pursuant to this Agreement and the rights disclosed in the preceding sentences, there are no other options, warrants, calls, rights, commitments or agreements of any character to which Target is a party or by which it is bound, obligating Target to issue, deliver, sell, repurchase or redeem or cause to be issued, delivered, sold, repurchased or redeemed, any shares of Target Capital Stock or obligating Target to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement, except for the impending Series D investment referred to in Section 7.2(r), for which an amendment to Target’s Amended and Restated Articles will be duly and validly filed to increase the authorized number of shares of Preferred Stock and Series D Convertible Preferred Stock so as to be enable Target to complete such investment. All shares of Target Common Stock issuable upon conversion of the Target Preferred Stock or upon exercise of the Target Options described in this Section 3.5(a), and all shares of Target Capital Stock issuable upon exercise of the Target Warrant described in this Section 3.5(a), will be, when issued pursuant to the respective terms of such Target Preferred Stock, Target Options or the Target Warrant, duly authorized, validly issued, fully paid and nonassessable. There are no other contracts, commitments or agreements relating to voting, purchase or sale of Target Capital Stock (i) between or among Target and any of the Shareholders; and (ii) to Target’s Knowledge, between or among any of the Shareholders. All shares of outstanding Target Common Stock and Target Preferred Stock and rights to acquire Target Capital Stock were issued in compliance in all material respects with all applicable federal and state securities laws. All shares of outstanding Target Capital Stock issued to international shareholders domiciled outside the United States was effected in compliance with, and remain in compliance with, Regulation S as promulgated under the Securities Act, and Target has no Knowledge of any violation related thereto.

 

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(b) With respect to each Shareholder, Section 3.5(b) of the Target Disclosure Schedule sets forth as of the date of this Agreement the number of shares of Target Common Stock and Target Preferred Stock that each shareholder holds of record (specifically listing the number of shares of Target Common Stock any Target Preferred Stock owned by such Shareholder is convertible into), and the address and state of residence of such Shareholder, which address and state of resident is as set forth in the books and records of Target.

 

(c) All of the information contained in the Closing Payment Schedule and the Closing Option Schedule will be accurate and complete immediately prior to the Effective Time of Merger I. The allocation of the Merger Consideration as set forth in the Closing Payment Schedule complies and is in accordance with the Target Articles of Incorporation and the California Law.

 

(d) None of the outstanding shares of Target Capital Stock is entitled or subject to any preemptive right, right of participation or similar right. Other than the rights created pursuant to this Agreement, none of the outstanding shares of Target Capital Stock is subject to any right of first refusal or similar right in favor of the Target or any other Person. There is no contract or agreement of Target (other than this Agreement) relating to the voting or registration of, or restricting any Person from purchasing, selling, pledging or otherwise disposing of (or granting any option or similar right with respect to), any shares of Target Capital Stock.

 

3.6 Absence of Certain Changes . Since December 31, 2004 (the “ Target Balance Sheet Date ”), Target has conducted its business in the ordinary course consistent with past practice and there has not occurred (a) any change, event or condition (whether or not covered by insurance) that has resulted in, or would reasonably be expected to result in, a Target Material Adverse Effect; (b) any acquisition, sale or transfer of any material asset of Target other than in the ordinary course of business and consistent with past practice; (c) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Target or any revaluation by Target of any of its assets; (d) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of Target or any direct or indirect redemption, purchase or other acquisition by Target of any of its shares of Target Capital Stock; (e) any Material Contract entered into by Target, other than in the ordinary course of business or listed on the Target Disclosure Schedule, or any material amendment or termination (other than expiration in accordance with its terms) of, or default under, any Material Contract to which Target is a party or by which it is bound; (f) any amendment or change to the Articles of Incorporation or Bylaws of Target; (g) any increase in or modification of the compensation or benefits payable or to become payable by Target to any of its directors or employees, other than in the ordinary course of business and in amounts consistent with Target’s past business practices; or (h) any arrangement, commitment or agreement by Target to do any of the things described in the preceding clauses (a) through (g) (other than negotiations with Acquiror and its Representatives regarding the transactions contemplated by this Agreement). At the Effective Time of Merger I, there will be no accrued but unpaid dividends on shares of Target Capital Stock.

 

3.7 Absence of Undisclosed Liabilities . Target does not have any material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (a) those set forth or adequately provided for in the balance sheet of Target included in the Target Financial Statements prepared in accordance with GAAP applied on a consistent basis with Target’s historical accounting practices as of the Target Balance Sheet Date (the “ Target Balance Sheet ”); (b) those incurred in the ordinary course of business and not required to be set forth in the Target Balance Sheet under GAAP; (c) those incurred in the ordinary course of business since the Target Balance Sheet Date and consistent

 

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with past practice; and (d) those incurred in connection with the execution of this Agreement; and (e) those that are otherwise expressly disclosed (or within any materiality threshold contained in any other representation) in this Section 3.7 of the Target Disclosure Schedule.

 

3.8 Litigation .

 

(a) There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any Governmental Entity, foreign or domestic, or, to the Knowledge of Target, explicitly threatened against Target or any of its properties or any of its officers or directors (in their capacities as such).

 

(b) There is no proceeding pending or, to Target’s Knowledge, explicitly threatened, nor has any claim or demand been made that (i) challenges the right, title or interest of Target in, to or under the IP Rights in which Target has (or purports to have) any right, title or interest, or the validity, enforceability or claim construction of any Patent Rights comprising such IP Rights, or (ii) alleges infringement, contributory infringement, inducement to infringe, misappropriation or unlawful use by Target of IP Rights of any other Person.

 

(c) There is no judgment, decree or order against Target or, to the Knowledge of Target, any of its directors or officers (in their capacities as such), that (i) restricts in any manner the use, transfer or licensing of any IP Rights in which Target has (or claims to have) any right, title or interest; (ii) could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or (iii) that could reasonably be expected to have a Target Material Adverse Effect.

 

(d) All litigation to which Target is a party (or, to the Knowledge of Target, to which Target has been explicitly threatened to become a party) is described in Section 3.8 of the Target Disclosure Schedule.

 

3.9 Restrictions on Business Activities . There is no agreement, judgment, injunction, order or decree binding upon Target that has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of Target, any acquisition of property by Target or the conduct of business of Target as currently conducted or as currently proposed to be conducted by Target.

 

3.10 Intellectual Property .

 

(a) For purposes of this Agreement, the following terms shall be defined as follows:

 

(i) “IP Rights ” means any and all of the following in any country: (A) Copyrights, Patent Rights, Trademark Rights, domain names and domain name registrations for all URL registrations for Internet websites (“ Domain Names ”), moral rights, trade secrets, know how rights, technology, ideas, inventions, designs, proprietary information, manufacturing and operating specifications, formulae, technical data, computer programs, hardware, software, processes and other intellectual property rights and intangible assets; and (B) the right (whether at law, in equity by contract or otherwise) to use or otherwise exploit any of the foregoing.

 

(ii) “ Copyrights ” means all copyrights and copyrightable works, including all rights of authorship, use, publication, reproduction, distribution, performance, transformation, moral rights and rights of ownership of copyrightable works and all rights to register and obtain renewals and extensions of registrations, together with all other interests accruing by reason of international copyright treaties.

 

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(iii) “ Patent Rights ” means all issued patents and pending patent applications (which for purposes of this Agreement shall include, without limitation, utility patents, design patents, certificates of invention and applications for certificates of invention and related priority rights) in any country, including, without limitation, all provisional applications, substitutions, continuations, continuations-in-part, divisions, renewals, reissues, re-examinations and extensions thereof.

 

(iv) “ Trademark Rights ” means all trademarks, registered trademarks, applications for registration of trademarks, service marks, registered service marks, applications for registration of service marks, trade names, registered trade names and applications for registrations of trade names.

 

(v) “ Public Software ” shall mean (A) any version of the GNU General Public License (the “ GPL ”), (B) any version of the GNU Lesser Public License (formerly known as the GNU Library Public License) (the “ LGPL ”), (C) any license that satisfies Version 1.9 of the Open Source Definition of the Open Source Initiative, (D) any other license of any computer program that requires source code of the computer program to be made generally available to the public or requires any distribution of source code by licensees of the computer program or any derivative work of or work derived from the computer program, (E) any other license of any computer program (or part thereof) (the “first computer program”) if that license requires, as a condition of that license or any right under it, that a modified version of the first computer program or another computer program that is based, in whole or in part, on the first computer program, be licensed to all third parties or the public either implied, royalty-free.

 

(b) Part 1 of Section 3.10(b) of the Target Disclosure Schedule lists all of the Patent Rights, the Domain Names, and the Trademark Rights owned by Target, setting forth in each case the jurisdictions in which patents have been issued, patent applications have been filed, trademarks or domain names have been registered, and trademark applications have been filed.

 

(c) Except as set forth in Section 3.10(c) of the Target Disclosure Schedule, Target does not jointly own, license or claim any right, title or interest with any other Person in or to any IP Rights.

 

(d) No current or former officer, manager, director, shareholder, predecessor-in-interest, member, employee, consultant or independent contractor of Target has any right, title or interest in, to or under any material IP Rights in which Target has (or purports to have) any right, title or interest that has not been exclusively and irrevocably assigned or otherwise transferred to Target.

 

(e) No third Person has in writing challenged or has threatened to challenge, nor is there any proceeding pending or threatened, nor has any written claim or demand been made that challenges the right, title or interest of Target in, to or under the IP Rights in which Target has (or purports to have) any right, title or interest, or the legality, validity, enforceability of such IP Rights or the claim construction of any Patent Rights comprising such IP Rights, nor, to the Knowledge of Target, are there any facts which could give rise to any such challenge, provided that the foregoing shall not apply to general Patent notices or invitations to license patents that target may receive from third parties from time to time.

 

(f) Section 3.10(f) of the Target Disclosure Schedule lists all written contracts, agreements, licenses and other arrangements under which Target has acquired any right, title or interest in, under or to any IP Rights (including without limitation Public Software) and/or under which Target is the beneficiary of any covenant not to assert IP Rights, other than nonexclusive licenses that are available to the public generally or in the industry and were obtained by Target in the ordinary course of business for no more than $10,000.

 

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(g) Except as set forth in Part 1 of Section 3.10(g) of the Target Disclosure Schedule, no third Person has asserted or threatened a written claim or demand against Target, nor, to the Knowledge of Target, are there any facts which would constitute valid grounds for a claim or demand, which would adversely affect the ownership rights of Target to or under (i) any of the IP Rights in which Target has (or purports to have) any right, title or interest, or (ii) any contract, agreement, license or and other arrangement under which Target claims any right, title or interest under any IP Rights. Except as set forth in Part 2 of Section 3.10(g) of the Target Disclosure Schedule, no third Person has asserted or threatened a claim against Target or any Person, nor, to the Knowledge of Target, has any such claim been asserted or threatened against any such Person, which would adversely affect the ownership rights of Target to or under (i) any of the IP Rights in which Target has (or purports to have) any right, title or interest, or (ii) any contract, agreement, license or and other arrangement under which Target claims any right, title or interest under any IP Rights.

 

(h) Except as set forth in Section 3.10(h) of the Target Disclosure Schedule, all Patent Rights, domain names and registered Trademark Rights in which Target has (or purports to have) any right, title or interest have been duly filed or registered (as applicable) with the applicable Governmental Authorities, and maintained, including the submission of all necessary filings and fees in accordance with the legal and administrative requirements or the appropriate jurisdictions, and have not lapsed, expired or been abandoned. Except as set forth in Section 3.10(h) of the Target Disclosure Schedule, (i) all Patent Rights in which Target has (or purports to have) any right, title or interest, disclose patentable subject matter, have been prosecuted in good faith and are in good standing, (ii) there are no inventorship challenges to any such Patent Rights, (iii) no interference been declared or provoked relating to any such Patent Rights, (iv) no opposition proceedings have been commenced in any jurisdictions which such procedures are available, (v) all issued patents comprising such Patent Rights are valid and enforceable, and (vi) to the extent corrected or remedied as of the date hereof\, all maintenance and annual fees have been fully paid, and all fees paid during prosecution and after issuance of any patent have been paid in the correct entity status amounts, with respect to such Patent Rights. Except as set forth in Section 3.10(h) of the Target Disclosure Schedule, to Target’s knowledge, there does not exist any material fact with respect to any Patent Rights in which Target has (or purports to have) any right, title or interest that would render any patents included in such Patent Rights invalid or unenforceable. Except as set forth in Section 3.10(h) of the Target Disclosure Schedule, to Target’s knowledge, there does not exist any material fact with respect to the Trademark Rights in which Target has (or purports to have) any right, title or interest that would (i) preclude the issuance of any trademarks from trademark applications included in such Trademark Rights, or (ii) render any trademarks included in such Trademark Rights invalid or unenforceable.

 

(i) Except as set forth in Section 3.10(i) of the Target Disclosure Schedule, (i) Target has not entered into any covenant not to compete or contract, agreement or other arrangement limiting its ability to transact business in any market, field or geographical area or with any Person, and (ii) Target is not subject to any contract, agreement or other arrangement that restricts the use, transfer, delivery or licensing of IP Rights in which Target has (or purports to have) any right, title or interest (or any tangible embodiment thereof).

 

(j) Target has taken commercially reasonable and customary measures and precautions necessary to protect and maintain the confidentiality of all IP Rights in which Target has (or purports to have) any right, title or interest and otherwise to maintain and protect the full value of all such IP Rights. Except as set forth in Section 3.10(j) of the Target Disclosure Schedule, Target has not granted, licensed, conveyed or permitted to any third Person, pursuant to any written contract, understanding, agreement, license or other arrangement, any license or option to purchase or acquire any license or other right, title or interest in, to or under (i) any IP Rights in which Target has (or purports to have) any right, title or interest (or any tangible embodiment thereof), or (ii) any future IP Rights (or any

 

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tangible embodiment thereof) to be developed in the future from IP Rights in which Target has (or purports to have) any right, title or interest. Without limiting the foregoing, except as set forth in Section 3.10(j) of the Target Disclosure Schedule, Target has not granted, licensed, conveyed or permitted to any third Person pursuant to any written contract, agreement, license or other arrangement, any license or other right, title or interest in, to or under any current or future IP Rights in which Target has (or purports to have) any right, title or interest in or related to any software, software object code, software source code, application specific integrated circuit cores or other integrated circuit cores, including without limitation any license or other right, title or interest to sell, offer for sale, import, directly or indirectly, any products incorporating or based upon such source code or cores, other than sales to or on behalf of Target. Target has not disclosed any material trade secrets owned by Target to a third Person without having the recipient thereof execute a written agreement regarding the non-disclosure and non-use thereof. Target is not a party to any written contract, agreement, understanding, or other arrangement to have any Patent Rights in which Target has (or purports to have) any right, title or interest or any future Patent Rights included in or otherwise subject to any patent pool.

 

(k) There are no outstanding obligations to pay any license fees, royalties or other amounts or provide other consideration to any other Person in connection with any IP Rights in which Target has (or purports to have) any right, title or interest (or any tangible embodiment thereof).

 

(l) Except as disclosed in Schedule 3 . 10(f) , Target owns all right, title and interest to all of the IP Rights in the circuitry found in its 818A, 818S, and 838 products, in addition to the other IP Rights that are necessary to enable Target to conduct its business as conducted on the date of this Agreement. Target is the sole and exclusive owner of and has good and marketable title to, or possesses legally enforceable rights to use, all IP Rights free of any “IP Encumbrance” (as defined below) used or currently proposed to be used in the business of Target as conducted on the date of this Agreement. With respect to any Patent Rights in which Target has (or purports to have) any right, title or interest other than ownership thereof, Target is the exclusive licensee of such Patent Rights. For purposes of the foregoing, the term “ IP Encumbrance ” shall mean any and all security interests, liens, claims, equitable interests, preemptive rights, rights of first refusal or similar restrictions or rights including, without limitation, the right to purchase or obtain a license, options, pledges, charges, technology escrows, hypothecations, prior assignments, title retention agreements, security agreements, licenses, covenants not to sue/assert or any other encumbrances of any kind, whether accrued, absolute, contingent or otherwise.

 

(m) Except as set forth in Section 3.10(m) of the Target Disclosure Schedule, (i) to the Knowledge of Target, the conduct of Target’s business as conducted prior to and on the Closing Date, and the making, using, offering for sale, selling or importing of current or currently planned products or technology does not infringe, constitute contributory infringement, inducement to infringe, misappropriation or unlawful use of IP Rights of any other Person, and (ii) without regard to the Knowledge of Target, Target has not received any notice or other communication asserting or claiming any of the foregoing.

 

(n) Except as set forth in Section 3.10(n) of the Target Disclosure Schedule, to the Knowledge of Target, (i) no IP Rights in which Target has (or purports to have) any right, title or interest have been infringed or misappropriated by any third Person, and (ii) there is no unauthorized use, disclosure or misappropriation of any IP Rights in which Target has (or purports to have) any right, title or interest by any current or former officer, manager, director, stockholder, member, employee, consultant or independent contractor of Target.

 

(o) Except as set forth in Section 3.10(o) of the Target Disclosure Schedule, Target has not entered into any written contract, agreement, license or other arrangement to indemnify any other Person against any charge of infringement of any IP Rights (other than evaluation development platform

 

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or consulting services agreements entered into by Target with potential solution providers (“ EDP Agreements ”), which are in standard forms of Target, copies of which have been provided to Acquiror). Except as set forth in Section 3.10(o) of the Target Disclosure Schedule, there are no royalties, fees or other amounts payable by Target to any Person by reason of and with respect to the ownership, use, sale or disposition of IP Rights.

 

(p) All current and former officers and employees of Target have executed and delivered to Target an agreement (containing no exceptions or exclusions from the scope of its coverage) regarding the protection of proprietary information and the assignment to Target of any IP Rights arising from services performed for Target by such Persons, the form of which has been supplied to Acquiror. All current and former consultants and independent contractors to Target have executed and delivered to Target an agreement in the form provided to Acquiror or its counsel (containing no exceptions or exclusions from the scope of its coverage) regarding the protection of proprietary information and the assignment to Target of any IP Rights arising from services performed for Target by such Persons. To the Knowledge of Target, no employee or independent contractor of Target is in violation of any term of any patent disclosure agreement or employment contract or any other contract or agreement relating to the relationship of any such employee or independent contractor with Target.

 

(q) Neither the execution, delivery or performance of this Agreement or any ancillary agreement contemplated hereby nor the consummation of the Merger or any of the transactions contemplated by this Agreement will contravene, conflict with or result in any limitation on the Acquiror’s right, title or interest in or to any IP Rights.

 

(r) Except as set forth in Section 3.10(r) of the Target Disclosure Schedule, no Public Software forms part of any software included in any product of Target, and no Public Software was or is used in connection with the development of any such software or is incorporated into, in whole or in part, or has been distributed with, in whole or in part, any such software, in either case, in a manner that would require Target’s own products to be distributed pursuant to the terms of the applicable licensee for the Public Software.

 

(s) No funding, facilities or personnel of any Governmental Entity were used, directly or indirectly, to develop or create, in whole or in part, any IP Rights in which Target has (or purports to have) any right, title or interest in a manner that would entitle such Governmental Entity to use or license such IP Rights or to compel Target to license such IP Rights.

 

(t) Target is not and has never been a member or promoter of, a contributor to, or made any commitments to or regarding any patent pool, industry standards body, industry and other trade associations or similar organization that could require or obligate Target to grant or offer to any other Person any license or right to any IP Rights in which Target has (or purports to have) any right, title or interest or in which Target obtains any right, title or interest after the Closing Date.

 

(u) To the Knowledge of the Principal Shareholders, Target’s IP Rights (i) do not infringe or misappropriate the IP Rights of any third party, and (ii) all of Target’s IP Rights associated with those items listed on Section 3.10(b) of the Target Disclosure Schedule were independently developed and are owned by Target.

 

(v) Target is not a party to any written contract, agreement, understanding, or other arrangement and has not made any commitments to sell or deploy Target’s products or technology other than general commercial contracts, agreements and understandings entered into by Target in the ordinary course. Target has not agreed to finance the sale of any of its products or technology.

 

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3.11 Product Production . As of the date hereof, Target has secured a design win at Samsung through its distributor Sanyo for the use of Target’s products or devices in Samsung’s production of its Miniket Mega 4-in-1 memory based camcorder, which has reached production status within Samsung.

 

3.12 Interested Party Transactions . Target is not indebted to any director, officer, employee or agent of Target (except for amounts due as normal salaries and bonuses and in reimbursement of expenses incurred in the ordinary course of business), and no such Person is indebted to Target. There have been no transactions since January 1, 2003 that would require disclosure if Target were subject to disclosure under Item 404 of Regulation S-K under the Securities Act of 1933, as amended (the “ Securities Act ”). Target has never licensed any IP Rights to any shareholder and has no obligation (contingent or otherwise) to license any IP Rights to a shareholder in the future (the exception of which shall not need to be disclosed if Target has disclosed pursuant to Section 3.10 of the Target Disclosure Schedule).

 

3.13 Minute Books . The minute books of Target, copies of which have been delivered to Acquiror or its legal Representatives, contain a materially complete and accurate summary of all meetings of directors and shareholders or actions by written consent since the time of incorporation of Target through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects.

 

3.14 Complete Copies of Key Materials . Target has delivered true and complete copies of and/or specifically identified each document that is responsive to the due diligence request lists previously supplied to Target by Acquiror.

 

3.15 Material Contracts .

 

(a) Section 3.15(