Exhibit 10.1

AGREEMENT AND PLAN OF MERGER

by and among

AMBERWAVE SYSTEMS CORPORATION,

as Parent,

AONEX ACQUISITION CORPORATION,

as Merger Sub,

AONEX TECHNOLOGIES, INC.

as the Company

and

THE STOCKHOLDERS WHO EXECUTE THE SIGNATURE PAGES HERETO,

as the Stockholders

May 5, 2008

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TABLE OF CONTENTS

 

1.

   The Merger.    1   

1.1

   The Merger.    1   

1.2

   Effective Time.    1   

1.3

   Effects of the Merger.    2   

1.4

   Articles of Incorporation and By-Laws of the Surviving Corporation.    2   

1.5

   Directors and Officers.    2   

1.6

   Merger Consideration; Effects on Capital Stock of the Company and Merger Sub.
   2   

1.7

   Dissenting Shares.    5   

1.8

   Approval of the Stockholders.    5   

1.9

   Closing.    5   

1.10

   Conditions to Closing; Deliveries at Closing.    6   

1.11

   Transfer Taxes.    7   

1.12

   Earnout Payment Provisions.    7

2.

   Representations and Warranties of the Company.    8   

2.1

   Existence; Good Standing; Authority.    8    2.2    Capitalization.    9   

2.3

   Subsidiaries.    9   

2.4

   No Conflict.    9   

2.5

   Financial Statements.    10   

2.6

   Absence of Certain Changes.    10   

2.7

   Litigation.    12   

2.8

   Taxes.    12   

2.9

   Employee Benefit Plans.    14   

2.10

   Real and Personal Property.    14   

2.11

   Labor and Employment Matters.    15   

2.12

   Contracts and Commitments.    15   

2.13

   Intellectual Property Matters.    16   

2.14

   Environmental Matters.    17   

2.15

   Insurance Coverage.    18   

2.16

   Brokers.    18   

2.17

   Compliance with Laws.    18   

2.18

   Transferability of Assets.    18   

2.19

   Absence of Undisclosed Liabilities.    18   

2.20

   Affiliate Transactions.    19   

2.21

   Illegal Payments.    19

3.

   Representations and Warranties of Parent and Merger Sub.    19   

3.1

   Existence; Good Standing; Authority.    19   

3.2

   No Conflict.    19   

3.3

   Consents and Approvals.    20   

3.4

   Litigation.    20   

3.5

   Brokers.    20

 

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4.    Certain Covenants of Parent, the Company and the Stockholders.    20   
4.1    Further Action.    20    4.2    Press Releases.    20    4.3   
Responsibility for Filing Tax Returns.    20    4.4    Cooperation on Tax
Matters; Tax Claims.    21    4.5    Company Derivative Securities.    22 5.   
Survival of Representations and Warranties; Indemnification.    22    5.1   
Survival; Risk Allocation.    22    5.2    Indemnification by the Preferred
Holder.    22    5.3    Indemnification by Parent.    25    5.4    Payments.   
26    5.5    Treatment of Indemnity Payments.    27    5.6    Remedies
Exclusive.    27 6.    General Provisions.    27    6.1    Notices.    27    6.2
   Fees and Expenses.    28    6.3    Certain Definitions.    28    6.4   
Interpretation.    30    6.5    Counterparts; Delivery by Facsimile or
Electronic Mail.    31    6.6    Amendments and Waivers.    31    6.7    Entire
Agreement; Severability.    31    6.8    Captions.    32    6.9    Third Party
Beneficiaries.    32    6.10    Governing Law.    32    6.11    Assignment.   
32    6.12    Release.    32    6.13    Confidentiality.    33    6.14   
Transitional Assistance.    33    6.15    Remedies.    33    6.16    Dispute
Resolution.    33    6.17    Consent to Jurisdiction.    34

 

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                                              EXHIBITS

Exhibit A

   Articles of Incorporation of Merger Sub

Exhibit B

   By-Laws of Merger Sub

Exhibit C

   Certificate of Acknowledgement

Exhibit D

   Form of Olson Consulting Agreement

Exhibit E

   Form of Pinnington Offer Letter

Exhibit F

   Form of FIRPTA Certificate

Exhibit G-1

   Form of Parent Press Release

Exhibit G-2

   Form of Preferred Holder Press Release   
                                         SCHEDULES

Schedule 1.10(b)(ii)

   Consents

Schedule 2.1

   Jurisdictions

Schedule 2.2

   Capitalization

Schedule 2.4(b)

   Conflicts

Schedule 2.5

   Financial Statements

Schedule 2.7

   Litigation

Schedule 2.8

   Taxes

Schedule 2.8(l)

   Excess Parachute Payments

Schedule 2.10(a)

   Leases

Schedule 2.11(a)

   Compliance with Employment Laws

Schedule 2.12(a)

   Contracts and Commitments

Schedule 2.12(b)

   Contract Exceptions

Schedule 2.13

   Intellectual Property

Schedule 2.15

   Insurance

Schedule 2.19

   Undisclosed Liabilities

Schedule 3.2

   Parent Conflicts

Schedule 3.3(a)

   Parent Government Consents

Schedule 3.3(b)

   Parent Third-Party Consents

 

iii

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AGREEMENT AND PLAN OF MERGER

This Agreement and Plan of Merger (the “Agreement”) is made and entered as of
May 5, 2008, by and among AmberWave Systems Corporation, a Delaware corporation
(“Parent”), Aonex Acquisition Corporation, a California corporation (the “Merger
Sub”), Aonex Technologies, Inc., a California corporation (the “Company”) and
Arrowhead Research Corporation, a California corporation (the “Preferred
Holder”).

WHEREAS, the Preferred Holder is the holder of the Company’s Series A Preferred
Stock, par value $0.001 per share (the “Series A Preferred Stock”) and the
Company’s Series B Preferred Stock, par value $0.001 per share (the “Series B
Preferred Stock” and, collectively, with the Series A Preferred Stock, the
“Preferred Stock”), and the other Stockholders (the “Common Holders,” and
together with the Preferred Holder, the “Stockholders”) are holders of the
Company’s Common Stock, par value $0.001 per share (the “Common Stock”);

WHEREAS, Merger Sub is a newly formed wholly-owned subsidiary of Parent that was
formed for the purpose of acquiring the Company’s business by means of the
merger of Merger Sub with and into the Company (the “Merger”) in accordance with
the applicable provisions of the California General Corporation Law (the
“CGCL”), and upon the terms and subject to the conditions set forth herein;

WHEREAS, the Board of Directors of Parent has determined that the Merger is
desirable to, and in the best interests of, Parent and its stockholders, and has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement;

WHEREAS, the Board of Directors of the Company has determined that the Merger is
desirable to, and in the best interests of, the Company and its shareholders,
has approved this Agreement, the Merger and the other transactions contemplated
by this Agreement and has approved and recommended that the shareholders of the
Company adopt this Agreement and approve the Merger; and

WHEREAS, the requisite Stockholders of the Company have approved the Merger and
have approved and adopted this Agreement.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:

1. The Merger.

1.1 The Merger. Upon the terms and subject to the conditions of this Agreement,
and in accordance with the applicable provisions of the CGCL, at the Effective
Time (as defined below), Merger Sub shall be merged with and into the Company.
Following the Merger, the separate corporate existence of Merger Sub shall
cease, and the Company shall continue as the surviving corporation (sometimes
hereinafter referred to as the “Surviving Corporation”), and shall continue to
be governed by the laws of the State of California. The parties hereby intend
that the Merger be treated as a taxable transaction for state and federal income
tax purposes and shall report the transaction in a manner consistent therewith.

1.2 Effective Time. As promptly as practicable after the satisfaction or waiver
of the conditions set forth in Section 1.10 hereof, the Company and Merger Sub
shall cause to be filed an Agreement of Merger (the “Agreement of Merger”) with
the Secretary of State of the State of California, in such form as required by,
and executed in accordance with, the relevant provisions of the CGCL, and the
parties shall take such other and further actions and make all other filings or
recordings as may be

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required by applicable law to make the Merger effective. The date and time the
Merger becomes effective in accordance with applicable law is referred to herein
as the “Effective Time.”

1.3 Effects of the Merger. The Merger shall have the effects set forth herein,
in the Agreement of Merger and in the CGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and Merger Sub shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation.

1.4 Articles of Incorporation and By-Laws of the Surviving Corporation. At the
Effective Time, the articles of incorporation of the Company shall be amended to
be identical to the articles of incorporation of Merger Sub attached hereto as
Exhibit A (other than the name of the corporation, which shall be Aonex
Technologies, Inc.), and such articles of incorporation, as so amended, shall be
the articles of incorporation of the Surviving Corporation until thereafter
amended as provided therein or in accordance with applicable law. At the
Effective Time, the by-laws of the Company shall be amended to be identical to
the by-laws of Merger Sub attached hereto as Exhibit B, and such by-laws, as so
amended, shall be the by-laws of the Surviving Corporation until thereafter
amended in accordance with the provisions thereof and applicable law.

1.5 Directors and Officers. The directors of Merger Sub immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation and
shall hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal in accordance with
applicable law and the Surviving Corporation’s Articles of Incorporation and
By-Laws. The officers of Merger Sub immediately prior to the Effective Time
shall be the initial officers of the Surviving Corporation and shall hold office
until their respective successors are duly elected and qualified, or their
earlier death, resignation or removal.

1.6 Merger Consideration; Effects on Capital Stock of the Company and Merger
Sub.

(a) Consideration to Stockholders. In connection with the Merger, the
Stockholders shall have the right to receive from Parent the amounts set forth
below (the “Merger Consideration”):

(i) At the Closing, Parent shall pay to (A) the Stockholders an amount equal to
$450,000, minus (1) the Company Transaction Expenses, and (2) $15,625.31 (which
is the Trade Payable Deficit set forth on Section 2.5.1 of the Disclosure
Schedule), and (B) the payees of the Company Transaction Expenses, an amount
equal to such payee’s portion of the Company Transaction Expenses;

(ii) Within five (5) business days of Parent’s completion of a Successful
Laminate Substrate Production at its facilities, Parent shall pay to the
Stockholders an amount equal to $500,000;

(iii) For each agreement that Parent enters into with any customer during the
twenty-four (24) month period following the Closing Date (each a “Customer
Agreement”), Parent shall pay to the Stockholders an amount equal to $500,000;
provided, that (A) Parent’s aggregate payments under this Section 1.6(a)(iii)
shall not exceed $2,000,000, (B) the Customer Agreement includes provisions
pursuant to which Parent provides to a customer (1) Layer Transfer Services of
at least 1,000 two-inch equivalent wafers per month for at least six
(6) consecutive months, (2) Laminate Substrates at a volume of at least 500
two-inch substrate equivalents per month for at least six (6) consecutive
months, or (3) a license to Parent’s intellectual property in order to perform
or have performed Layer Transfer Services, provided

 

Agreement and Plan of Merger – Page 2

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such license results in total payments to Parent of at least $1,000,000 during
the first two years that such license is in effect, (C) Parent shall use its
good faith efforts to enter into the Customer Agreements described in this
Section 1.6(a)(iii) as soon as reasonably practicable and consistent with the
minimum levels described in this subsection; and (D) Parent will notify the
Stockholders in writing promptly upon execution of any Customer Agreement;

(iv) During the period beginning on the Closing Date and ending forty-two
(42) months following the payment pursuant to Section 1.6(a)(ii) associated with
Successful Laminate Substrate Production, Parent shall pay to the Stockholders,
on a quarterly basis, (A) twenty percent (20%) of the Cash Gross Margin
Contribution received by Parent or its subsidiaries from its customers during
such period for the sale of Laminate Substrates, Layer Transfer Services or
devices employing Company’s Intellectual Property Assets and (B) thirty-five
percent (35%) of the revenues (including, but not limited to, up front fees and
royalties) from the licensing or sale of the Company’s Intellectual Property
Assets received by Parent from its customers during such period; provided, that
(1) Parent’s aggregate payments under this Section 1.6(a)(iv) shall not exceed
$7,000,000, (2) amounts due and payable pursuant to this Section 1.6(a)(iv)
shall be determined within twenty (20) business days of the end of each of
Parent’s fiscal quarters and paid within ten (10) business days thereafter,
(3) Parent shall have the right to adjust any payments made based upon the
results of Parent’s annual audit, and (4) the Preferred Holder shall be entitled
to a reasonable audit right to assess the accuracy of Parent’s payments;
provided that such audit shall take place following Parent’s annual audit and
the Preferred Holder shall only be entitled to conduct one audit in any twelve
(12) month period (provided, however, that if such audit reveals an underpayment
of (a) five percent (5%) or more, Parent shall pay the parties’ reasonable costs
associated with such audit, or (b) less than five percent (5%), the Preferred
Holder shall pay the parties’ reasonable costs associated with such audit); and

(v) During the ten (10) year period beginning on the Closing Date, royalty
payments (the “Royalty Payments”), payable on a quarterly basis, equal to
one-half of one percent (0.5%) of the revenues associated with the sale of any
product incorporating the Company’s Intellectual Property Assets for solar
applications or the license of Company’s Intellectual Property Assets for solar
applications, provided that (1) amounts due and payable pursuant to this
Section 1.6(a)(v) shall be determined within twenty (20) business days of the
end of each of Parent’s fiscal quarters and paid within ten (10) business days
thereafter, (2) Parent shall have the right to adjust any payments made based
upon the results of Parent’s annual audit, and (3) the Stockholders shall be
entitled to a reasonable audit right to assess the accuracy of Parent’s
payments; provided that such audit shall take place following Parent’s annual
audit and the Stockholders shall only be entitled to conduct one audit in any
twelve (12) month period (provided, however, that if such audit reveals an
underpayment of (a) five percent (5%) or more, Parent shall pay the parties’
reasonable costs associated with such audit, or (b) less than five percent (5%),
the Preferred Holder shall pay the parties’ reasonable costs associated with
such audit).

Any payments made pursuant to subsections (a)(ii)-(v) above may hereinafter be
referred to as “Earnout Payments.” The Earnout Payments shall be made in
accordance with the liquidation preferences set forth in the articles of
incorporation of the Company, including the Certificate of Determination with
respect to the Series A Preferred Stock and the Certificate of Determination
with respect to the Series B Preferred Stock. Any payments made by Parent in
accordance with this Section 1.6 shall be made as follows: (A) first, to the
Preferred Holder with respect to the Preferred Holder’s shares of Series B
Preferred Stock as of immediately prior to the Effective Time until such time as
the Preferred Holder has received an amount equal to $1,298,000; (B) second, to
the Preferred Holder with

 

Agreement and Plan of Merger – Page 3

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respect to the Preferred Holder’s shares of Series A Preferred Stock as of
immediately prior to the Effective Time until such time as the Preferred Holder
has received an amount equal to $5,000,000 and (C) third, to the Preferred
Holder and the Common Stock Holders on a Pro Rata Basis; provided, however, that
notwithstanding anything contained in this Agreement to the contrary, no
payments shall be made by Parent to any Stockholder unless and until Parent
receives from such Stockholder an executed Certificate of Acknowledgement with
respect to each such payment in substantially the form attached hereto as
Exhibit C (the “Certificate of Acknowledgement”).

Notwithstanding the foregoing, in no event shall the aggregate payments made by
Parent to the Stockholders pursuant to Sections 1.6(a)(i)-(iv) exceed
$7,950,000. For the avoidance of doubt, any Royalty Payments made by Parent to
the Stockholders shall not be subject to the $7,950,000 cap.

(b) Acceleration of Payment of Merger Consideration.

(i) Upon the occurrence of a Company Sale Event, any acquirer of, or successor
to, Parent shall assume all remaining obligations of Parent to make payments to
the Stockholders under Sections 1.6(a)(i)-(v) (for the avoidance of doubt, an
exclusive licensee shall not be considered an acquirer or successor and Parent
shall continue to be obligated to make payments to the Stockholders under
Sections 1.6(a)(i)-(v)); provided, however, that if such Company Sale Event
results in aggregate proceeds payable to Parent or its stockholders in excess of
$10,000,000, Parent shall, upon the closing of such Company Sale Event, pay to
the Stockholders an amount equal to the sum of (A) the difference between
(i) $7,950,000, less (ii) the aggregate amount of all payments made by Parent to
the Stockholders or the payees of the Company Transaction Expenses pursuant to
Sections 1.6(a)(i)-(v) plus (B) one percent (1.0%) of the aggregate proceeds
payable to Parent in excess of $10,000,000 (the “Accelerated Payment Amount”),
and neither Parent nor an acquirer or successor or assign of Parent shall
thereafter have any further obligations to make any payments to the Stockholders
pursuant to this Agreement.

(ii) At any time after the Closing Date, Parent may, in its sole discretion, pay
to the Stockholders the Accelerated Payment Amount, and Parent shall thereafter
have no further obligations to make any payments to the Stockholders pursuant to
Sections 1.6(a)(i)-(iv).

(c) Imputed Interest. Parent and the Preferred Holder acknowledge that a portion
of the payments made under Section 1.6(a) and 1.6(b) shall be reportable as
imputed interest under Section 483 or 1274 of the Code.

(d) Conversion of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of the Company, Merger Sub, or any security
holder of the Company or Merger Sub:

(i) Each share of Common Stock and Preferred Stock that is issued and
outstanding immediately prior to the Effective Time shall no longer be
outstanding and shall automatically be canceled and shall cease to exist, and
each holder of a certificate or certificates representing any such shares shall
cease to have any rights with respect thereto, except that the Stockholders
shall have the right to receive the Merger Consideration upon surrender of such
certificate or certificates in accordance with Section 1.10 hereof, without
interest; and

(ii) Each share of common stock, $0.01 par value per share, of Merger Sub (the
“Merger Sub Common Stock”) issued and outstanding immediately prior to the
Effective Time shall be converted into one (1) validly issued, fully paid and
non-assessable share of

 

Agreement and Plan of Merger – Page 4

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common stock, $0.01 par value per share, of the Surviving Corporation (the
“Surviving Corporation Common Stock”), and shall constitute the only outstanding
shares of capital stock of the Surviving Corporation. Each certificate that,
immediately prior to the Effective Time, represented issued and outstanding
shares of Merger Sub Common Stock shall, from and after the Effective Time,
automatically and without the necessity of presenting the same for exchange,
represent the shares of the Surviving Corporation capital stock into which such
shares have been converted pursuant to the terms hereof; provided, however, that
the record holder thereof shall receive, upon surrender of any such certificate,
a certificate representing the shares of Surviving Corporation Common Stock into
which the shares of Merger Sub Common Stock formerly represented thereby shall
have been converted pursuant to the terms hereof.

1.7 Dissenting Shares.

(a) Notwithstanding any provision of this Agreement to the contrary, any shares
of capital stock of the Company held by a holder who has demanded and perfected
appraisal rights for such shares in accordance with the CGCL and who, as of the
Effective Time, has not effectively withdrawn or lost such appraisal rights
(“Dissenting Shares”) shall not be converted into or represent a right to
receive the Merger Consideration pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by the CGCL.

(b) Notwithstanding the provisions of subsection (a) above, if any holder of
shares of the capital stock of the Company who demands appraisal rights for such
shares under the CGCL shall effectively withdraw or lose (through failure to
perfect or otherwise) the right to appraisal rights, then, as of the later of
(i) the Effective Time or (ii) the occurrence of such event, such holder’s
shares shall automatically be converted into and represent only the right to
receive the Merger Consideration as provided in Section 1.6, without interest
thereon, upon surrender of the certificate representing such shares.

(c) The Company shall give Parent (i) prompt notice of its receipt of any
written demands for dissenters’ rights for any shares of capital stock of the
Company, withdrawals of such demands, and any other instruments relating to the
Merger served pursuant to the CGCL and received by the Company and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
demands for appraisal rights under the CGCL. The Company shall not, except with
the prior written consent of Parent or as may be required under applicable law,
voluntarily make any payment with respect to any demands for appraisal rights
for the capital stock of the Company or offer to settle or settle any such
demands.

1.8 Approval of the Stockholders. On or prior to the execution of this
Agreement, all of the Company’s stockholders shall have approved and adopted
this Agreement and the transactions contemplated hereby by written consent (the
“Written Consent”) as provided by the CGCL, the Company’s articles of
incorporation and its by-laws.

1.9 Closing. The closing of the Merger (the “Closing”) shall be held at the
offices of Goodwin Procter LLP, Exchange Place, Boston, Massachusetts, within
one (1) Business Day after all conditions to closing contained in Section 1.10
have been satisfied or waived. The date on which the Closing actually occurs is
sometimes referred to herein as the “Closing Date.” At the Closing, Parent,
Merger Sub and the Company shall cause the Agreement of Merger to be filed with
the Secretary of State of the State of California, in accordance with the
relevant provisions of the CGCL (the time of filing with the Secretary of State
of the State of California of such filing or such later time as may be agreed to
by Parent and the Company in writing (and set forth in the Agreement of Merger)
being referred to herein as the “Effective Time”).

 

Agreement and Plan of Merger – Page 5

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1.10 Conditions to Closing; Deliveries at Closing.

(a) The obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated hereby shall be subject to the following conditions:

(i) Sean Olson shall have entered into a consulting services agreement with
Parent in substantially the form attached hereto as Exhibit D (the “Olson
Consulting Agreement”);

(ii) Tom Pinnington shall have accepted the Company’s offer of continued
employment pursuant to the terms of the offer letter attached hereto as Exhibit
E (the “Pinnington Offer Letter”);

(iii) Harry Atwater shall have joined the advisory board of Parent;

(iv) the Written Consent shall have been obtained;

(v) the Company shall have terminated any Tax allocation or Tax sharing
agreements to which the Company is a party, and the Company shall have no
liability under such agreements following the Closing; and

(vi) the Company shall have no outstanding debt other than the Trade Payable
Deficit set forth on Section 2.5.1 of the Disclosure Schedule.

(b) At the Closing, the Preferred Holder or the Company, as applicable, will
deliver or cause to be delivered to Parent each of the following:

(i) copies of this Agreement and each other Transaction Document to which such
Stockholder or the Company, as applicable, is a party, executed by such
Stockholder or the Company, as applicable;

(ii) copies of the authorizations, orders, approvals, releases, filings and
consents of the third-parties set forth on Section 1.10(b)(ii) of the Disclosure
Schedules, all on terms and conditions reasonably satisfactory to Parent;

(iii) a certificate dated as of the Closing Date affirming that shares of the
Company’s stock do not constitute United States real property interests within
the meaning of Section 897(c) of the Code. Such certificate is intended to
comply with the withholding exemption provided in Treasury Regulations
Section 1.1445-2(c) and shall be substantially in the form provided in Exhibit F
hereto;

(iv) a certificate of the Secretary of the Company certifying (i) the Articles
of Incorporation of the Company, (ii) the bylaws of the Company,
(iii) resolutions of the Board of Directors of Company and the Stockholders
approving this Agreement and the Merger and the transactions contemplated by
this Agreement, and (iv) the names of the officers of the Company authorized to
sign this Agreement and the instruments or certificates to be delivered pursuant
to this Agreement by the Company or any of its officers, together with the true
signatures of such officers;

 

Agreement and Plan of Merger – Page 6

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(v) a certificate from the Secretary of State of the State of California that
the Company is in good standing in the State of California;

(vi) a Certificate of Acknowledgement;

(vii) a certificate confirming all Company Transaction Expenses are being paid
at Closing pursuant to Section 1.6(a)(ii) (the “Company Transaction Expense
Certificate”); and

(viii) such other documents reasonably requested by Parent.

(c) At the Closing, Parent will deliver or cause to be delivered the following:

(i) to the Preferred Holder, the amount to be paid to the Preferred Holder at
the Closing pursuant to the Section 1.6(a)(i);

(ii) to each payee of Company Transaction Expenses, an amount equal to such
payee’s portion of all such Company Transaction Expenses, with the result that
following the Closing the Company shall have no further obligations or
continuing Liabilities with respect to such payee;

(iii) to the Company and the Preferred Holder, copies of this Agreement and each
other Transaction Document to which Parent is a party, executed by Parent; and

(iv) a certificate of the Secretary of Parent and Merger Sub certifying (i) the
certificate of incorporation of Parent and the articles of incorporation of
Merger Sub, (ii) the bylaws of Parent and Merger Sub, (iii) resolutions of the
Board of Directors of Parent and Merger Sub approving the Transaction Documents
and the Merger and the transactions contemplated by the Transaction Documents,
and (iv) the names of the officers of Parent and Merger Sub authorized to sign
the applicable Transaction Documents and the instruments or certificates to be
delivered pursuant to the applicable Transaction Documents by Parent or Merger
Sub or any of its respective officers, together with the true signatures of such
officers.

(d) The payments pursuant to Section 1.6 shall be made by wire transfer of
immediately available funds to the accounts set forth in written instructions
provided by the recipients.

1.11 Transfer Taxes. The Stockholders shall be liable for and shall hold the
Company and the Parent harmless against one-half of any transfer, value added,
excise, stock transfer, stamp, recording, registration and any similar taxes
that become payable in connection with the Merger and the transactions
contemplated hereby, and the applicable parties shall file such applications and
documents as shall permit any such tax to be assessed and paid on or prior to
the Closing Date in accordance with any available pre-sale filing procedure.

1.12 Earnout Payment Provisions. Parent hereby covenants and agrees that from
the Effective Time through the date that is forty-two (42) months after the
Closing Date:

(a) Parent shall act in good faith in the operation of the Company’s business
and the commercialization of the Company Intellectual Property; and

(b) Parent will use good faith reasonable efforts to enter into contracts and
perform

 

Agreement and Plan of Merger – Page 7

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services in a timely manner.

2. Representations and Warranties of the Company. As a material inducement to
Parent to enter into and perform its obligations under this Agreement, the
Company hereby represents and warrants to Parent that, except as otherwise set
forth in the disclosure schedule dated as of the date hereof and delivered to
Parent herewith (the “Disclosure Schedule”) (which disclosure shall provide an
exception to or otherwise qualify the representations and warranties of the
Company contained in the section of this Agreement corresponding by number to
such disclosure and the other representations and warranties herein to the
extent such disclosure is readily apparent on its face to be applicable to such
other representations and warranties):

2.1 Existence; Good Standing; Authority.

(a) The Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of California. The Company has all
requisite corporate power and authority to own, operate, lease and encumber its
properties and carry on its business as currently conducted. The Company is duly
licensed or qualified to do business as a foreign corporation under the laws of
each other jurisdiction in which the character of its properties or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so licensed or qualified has not had or is not reasonably likely
to have a material adverse effect on the Company. The Company has delivered to
Parent correct and complete copies of the articles of incorporation and bylaws
(or equivalent organizational or governing documents) of the Company, in each
case as amended to date. The minute books (containing the records of meetings of
the shareholders, the board of directors, and any committees thereof (or
equivalent governing bodies)), the stock certificate books (or their
equivalent), and the stock record books (or their equivalent for non-corporate
entities) for the Company are correct in all material respects. The Company is
not in default under or in violation of any provision of its articles of
incorporation or bylaws (or similar governing or formation documents).

(b) The Company has the corporate power and authority to execute and deliver
this Agreement and each of the other Transaction Documents to which it is a
party and to perform its obligations hereunder and thereunder. The execution and
delivery of this Agreement and the other Transaction Documents to which the
Company is a party, the performance by the Company of its obligations hereunder
and thereunder and the consummation of the Merger and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
corporate action on the part of the Company. No other proceedings on the part of
the Company are necessary to approve and authorize the execution and delivery of
this Agreement or the other Transaction Documents to which the Company is a
party and the consummation of the Merger and the transactions contemplated
hereby and thereby. This Agreement and all other Transaction Documents to which
the Company is a party have been duly executed and delivered by the Company and,
assuming the due authorization, execution and delivery of this Agreement and all
other Transaction Documents to which the Company is a party by each party hereto
and thereto other than the Company, constitute valid and binding obligations of
the Company, enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors’ rights generally
and by general equitable principles.

(c) The affirmative vote or consent in writing of (a) the holders of a majority
of the Preferred Stock, voting as a single class, (b) the holders of a majority
of the shares of the Common Stock, voting as a single class, and (c) the holders
of a majority of the outstanding shares of the Company’s capital stock, voting
as a single class (the “Requisite Stockholder Approval”), to approve this
Agreement, the Merger and the other transactions contemplated by this Agreement,
is the only vote or written consent of the holders of any class or series of the
Company’s capital stock necessary to approve this Agreement,

 

Agreement and Plan of Merger – Page 8

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the Merger, and the other transactions contemplated by this Agreement. By and
through the execution and delivery to the Company of the Written Consent, the
Company has complied with all applicable provisions of the articles of
incorporation and the by-laws of the Company as well as the CGCL in obtaining
the stockholders’ approval of the Merger.

2.2 Capitalization.

(a) The total authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, of which 1,528,354 shares are issued and outstanding as
of the date hereof, and 5,000,000 shares of Preferred Stock, of which 1,000,000
shares are designated Series A Preferred Stock, 1,000,000 of which are issued
and outstanding as of the date hereof, and of which 3,000,000 shares are
designated Series B Preferred Stock, 2,966,805 shares of which are issued and
outstanding as of the date hereof. All of the issued and outstanding shares of
Common Stock and Preferred Stock have been duly authorized and validly issued
and are fully paid and nonassessable and were not issued in violation of the
preemptive rights of any Person or any applicable law. The name as well as the
number and class of shares of capital stock of the Company held by each
Stockholder and the portion of the Merger Consideration to be received by each
Stockholder is set forth on Section 2.2 of the Disclosure Schedule.

(b) Other than as set forth on Section 2.2 of the Disclosure Schedule, the
Company has no outstanding subscriptions, options, warrants, rights, calls,
commitments, conversion rights, rights of exchange, agreements, arrangements or
commitments of any kind, contingent or otherwise, for or relating to the
issuance or sale of, any shares of the Company’s capital stock or other equity
interests of the Company (the “Company Derivative Securities”). The Company has
no obligation to purchase, redeem, or otherwise acquire any of its shares of
capital stock or other equity interests of the Company and there are no
outstanding or authorized stock appreciation, phantom stock, stock plans or
similar rights with respect to the Company or the shares of the Company’s
capital stock or other equity interests of the Company. There are no preemptive
rights, rights of first refusal, put or call rights or obligations or
anti-dilution rights with respect to the issuance, sale or redemption of the
shares of the Company’s capital stock or other equity interests of the Company,
and, there are no agreements to which the Company is a party relating to the
voting or restricting the transfer of shares of the Company’s capital stock or
other equity interests of the Company.

(c) Any payments made by Parent pursuant Section 1.6 shall be made pursuant to
the provisions of the Company’s articles of incorporation, which provide that
payments be made as follows: (A) first, to the Preferred Holder with respect to
the Preferred Holder’s shares of Series B Preferred Stock as of immediately
prior to the Effective Time until such time as the Preferred Holder has received
an amount equal to $1,298,000; (B) second, to the Preferred Holder with respect
to the Preferred Holder’s shares of Series A Preferred Stock as of immediately
prior to the Effective Time until such time as the Preferred Holder has received
an amount equal to $5,000,000 and (C) third, to the Preferred Holder and the
Common Stock Holders on a Pro Rata Basis.

2.3 Subsidiaries. The Company does not have and never has had any subsidiaries
or any ownership or equity interest in or control of (direct or indirect) any
other Person.

2.4 No Conflict.

(a) Neither the execution and delivery by the Company of this Agreement and the
other Transaction Documents to which the Company is a party, nor the
consummation by the Company of the transactions in accordance with the terms
hereof and thereof, (i) conflicts with or results in a breach of any provisions
of the Company’s articles of incorporation or bylaws or other organizational
documents,

 

Agreement and Plan of Merger – Page 9

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or (ii) will result in the creation of any Encumbrance upon any of the assets or
properties owned or used by the Company (including the Company’s Intellectual
Property Assets).

(b) Except as set forth on Section 2.4(b) of the Disclosure Schedule, the
execution and delivery by the Company of this Agreement and the other
Transaction Documents to which the Company is a party and the consummation by
the Company of the transactions in accordance with the terms hereof and thereof
(i) will not violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default), or give rise to any right of termination,
cancellation or acceleration that would have under (A) any of the terms,
conditions or provisions of any Company Contract (as defined below), (B) any
law, statute, rule or regulation to which the Company is subject, or (C) any
judgment, order or decree to which the Company is subject, or (ii) result in
(A) the release, disclosure, or delivery of any of the Company’s Intellectual
Property Assets by or to any escrow agent or other Person, or (B) the grant,
assignment or transfer to any Person of any license or other right or interest
to any of the Company’s Intellectual Property Assets.

2.5 Financial Statements. The following financial statements (the “Financial
Statements”) are attached hereto as Section 2.5 of the Disclosure Schedule:

(a) Unaudited consolidated balance sheets of the Company as of December 31, 2006
and 2007 (the latter, the “2007 Balance Sheet”), and the related unaudited
consolidated statements of income, stockholders’ equity and cash flows for each
of the respective years then ended;

(b) Unaudited consolidated balance sheet of the Company as of February 29, 2008
(the “Base Balance Sheet”), and the related unaudited consolidated statements of
income for the two (2) months then ended.

(c) The Company Transaction Expense Certificate reflects all Company Transaction
Expenses.

Subject to the absence of footnotes and year-end audit adjustments with respect
to any unaudited Financial Statements, to the Company’s knowledge, the Financial
Statements (i) have been prepared in accordance with GAAP and (ii) present
fairly in all material respects the consolidated financial condition and results
of operations of the Company as of the respective dates of, and for the
respective periods presented in, such Financial Statements; and

(d) As of the Closing, the Company shall have no outstanding indebtedness other
than the Trade Payable Deficit set forth on Section 2.5.1 of the Disclosure
Schedule.

2.6 Absence of Certain Changes. Except as expressly contemplated by this
Agreement, since the date of the Base Balance Sheet, the Company has operated
only in the Ordinary Course of Business and there has not been any:

(a) change in the Company’s authorized or issued shares of capital stock or
membership interests, as applicable; grant of any option, right to purchase or
similar right regarding the capital stock or membership interests of the
Company; purchase, redemption, retirement, or other acquisition by the Company
of any such capital stock or membership interests; or declaration or payment of
any dividend or other distribution or payment in respect of the capital stock or
membership interests of the Company;

(b) grant or promise of any bonus, or increase in salaries or other
compensation, by the Company, to any of their respective directors, officers,
managers, employees, sales representatives,

 

Agreement and Plan of Merger – Page 10

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consultants, former employees or Insiders (as defined herein) except for bonus
awards, increases in salaries or other compensation made in the Ordinary Course
of Business, or grant or promise of any material increase in any employee
benefit plan or arrangement, or amendment or termination of any existing
employee benefit plan or arrangement (other than an amendment required by law),
or adoption of any new material employee benefit plan or arrangement;

(c) theft of, damage to or destruction or loss in excess of $25,000 for any
occurrence or $50,000 in the aggregate of any tangible asset or tangible
property of the Company, whether or not covered by insurance;

(d) incurrence by the Company of indebtedness;

(e) material change in the accounting methods or principles used by the Company,
other than write-downs or write-offs in the value of assets as required by GAAP;

(f) sale, lease, assignment or transfer (including, without limitation,
transfers to any Insider or Stockholder) of any of its tangible or intangible
material assets (including material Intellectual Property Assets) (except for
sales of inventory in the Ordinary Course of Business to unaffiliated third
Persons on an arm’s length basis), or disclosure of any confidential information
(other than pursuant to agreements requiring the Person to whom the disclosure
was made to maintain the confidentiality of, and preserving all rights of the
Company in, such confidential information);

(g) waiver, cancellation, compromise or release of any individual rights or
claims with a value in excess of $25,000, whether or not in the Ordinary Course
of Business;

(h) (i) entry into, amendment or termination of any Company Contract other than
in the Ordinary Course of Business, (ii) entry into any other transaction
involving amounts in excess of $25,000, other than in the Ordinary Course of
Business, or (iii) material change in any business practice;

(i) change in the conduct of its cash management customs and practices
(including, without limitation, with respect to maintenance of working capital
balances and inventory levels, collection of accounts receivable, payment of
accounts payable, accrued Liabilities and other Liabilities and credit
policies);

(j) capital expenditure of more than $25,000 or commitment therefor;

(k) loans or advances to, or guarantees for the benefit of, any Persons, other
than (i) advances to employees for travel and business expenses in the Ordinary
Course of Business which do not exceed $5,000 in the aggregate or (ii) in
connection with the purchase or sale of products, ingredients, packaging, raw
materials and finished products in the Ordinary Course of Business;

(l) change or authorization of any change in its articles of incorporation or
by-laws;

(m) institution or settlement of any claim (excluding accounts payable) or
lawsuit for an amount involving in excess of $25,000 or involving equitable or
injunctive relief;

(n) acquisition of any other business or Person (or any significant portion or
division thereof), whether by merger, consolidation or reorganization or by
purchase of its assets or stock;

 

Agreement and Plan of Merger – Page 11

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(o) sale, assignment, transfer, abandonment or permitted lapse of any of the
Company’s Intellectual Property Assets or other intangible assets, or grant of
any license or sublicense to any Person of any rights under or with respect to
any Company’s Intellectual Property Assets, other than in the Ordinary Course of
Business; or

(p) commitment or agreement by the Company to any of the foregoing.

2.7 Litigation. There is no litigation or governmental or administrative
proceeding or investigation pending or, to the Company’s knowledge, threatened
in writing against the Company or affecting the properties or assets of the
Company, or, as to matters related to the Company, against any officer,
director, stockholder or key employee of the Company in their respective
capacities in such positions. Section 2.7 of the Disclosure Schedule includes a
description of all litigation, claims, proceedings or, to the Company’s
knowledge, investigations involving the Company or any of its officers,
directors, stockholders or key employees in connection with the business of the
Company occurring, arising or existing during the past three (3) years. The
Company is not subject to any outstanding order, judgment or decree issued by
any Governmental Authority or, to the Company’s knowledge, any arbitrator. This
Section 2.7 does not apply to any matters with respect to the Company’s
Intellectual Property Assets.

2.8 Taxes. Except as set forth on Section 2.8 of the Disclosure Schedule:

(a) The Company has timely filed all income and other Tax Returns required to be
filed by the Company, taking into account any extension of time to file, and all
such Tax Returns are true, correct and complete in all respects;

(b) All Taxes due and payable before the date hereof by the Company have been
paid, unless such Taxes are being contested in good faith and for which adequate
reserves have been accounted for in accordance with GAAP;

(c) Neither the Internal Revenue Service (the “IRS”) nor any other Governmental
Authority has asserted or assessed in writing any deficiency or claim for any
material amount of additional Taxes;

(d) To the Company’s knowledge, no federal, state, local or foreign audits or
other administrative proceedings or court proceedings are pending as of the date
of this Agreement with regard to any Taxes or Tax Returns of the Company and the
Company has not received a written notice prior to the date of this Agreement of
any actual or threatened audits or proceedings or is otherwise aware of any such
audits or proceedings;

(e) The Company has properly withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any shareholder,
employee, creditor, independent contractor or other third party;

(f) The Company is not a party to or bound by any Tax allocation or Tax sharing
agreement with any person other than the Company or the Preferred Holder;

(g) The Company (i) has never been a member of an Affiliated Group filing a
consolidated federal income Tax Return (other than a group the common parent of
which was the Preferred Holder) and (ii) has no Liability under Treasury
Regulation Section 1.1502-6 for the Taxes of

 

Agreement and Plan of Merger – Page 12

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any other Person (or any similar provision of state, local, or foreign law), as
a transferee or successor, by Contract, or otherwise;

(h) The Company has not received written notice of any claim by a taxing
authority in a jurisdiction where the Company does not file Tax Returns that the
Company is or may be subject to taxation in such jurisdiction;

(i) The Company has not consented to extend the time, or is the beneficiary of
any extension of time, in which any Tax may be assessed or collected by any
taxing authority;

(j) There are no liens for Taxes (other than for Taxes not yet due and payable)
upon the assets of the Company;

(k) The Company will not be required to include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period (or
portion thereof) ending after the Closing Date as a result of any (i) change in
method of accounting for a taxable period ending on or prior to the Closing Date
under Code § 481(c) (or any corresponding or similar provision of state, local
or foreign income Tax law); (ii) “closing agreement” as described in Code § 7121
(or any corresponding or similar provision of state, local or foreign income Tax
law); (iii) deferred intercompany gain or any excess loss account described in
Treasury Regulations under Code § 1502 (or any corresponding or similar
provision of state, local or foreign income Tax law); (iv) installment sale made
prior to the Closing Date; or (v) prepaid amount received on or prior to the
Closing Date;

(l) The Company is not a party to any Contract, arrangement or plan that has
resulted or would result, separately or in the aggregate, in the payment of any
“excess parachute payment” within the meaning of Code § 280G (or any
corresponding provision of state, local or foreign income Tax law);

(m) The Company has not constituted either a “distributing corporation” or a
“controlled corporation” (within the meaning of Section 355(a)(1)(A) of the
Code) in a distribution of stock to which Section 355 of the Code (or so much of
Section 356 of the Code as relates to Section 355 of the Code) applies and which
occurred within two years of the date of this Agreement;

(n) The Company has made available to Parent correct and complete copies of
(i) all of its Tax Returns filed within the past five (5) years, (ii) all audit
reports, letter rulings, technical advice memoranda and similar documents issued
by the IRS or any other Governmental Authority within the past five (5) years
relating to the federal, state, local or foreign Taxes due from or with respect
to the Company, and (iii) any closing letters or agreements entered into by the
Company with the IRS or any other Governmental Authority within the past three
(3) years with respect to Taxes; and

(o) The Company is not and has not been a party to a “reportable transaction” as
defined in Treasury Regulations Section 1.6011-4(b).

(p) For the purposes of this Agreement:

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

 

Agreement and Plan of Merger – Page 13

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(ii) “Tax” or “Taxes” shall mean any and all federal, state, local or foreign
income, gross receipts, capital gains, franchise, alternative or add-on minimum,
estimated, sales, use, goods and services, transfer, registration, value added,
excise, natural resources, severance, stamp, occupation, premium, windfall
profit, environmental, customs, duties, real property, personal property,
capital stock, social security, unemployment, employment, disability, payroll,
license, employee or other withholding, contributions or other tax, charges,
fees, levies or other assessments, of any kind whatsoever, imposed by the IRS or
any taxing authority, and such term shall include any interest whether paid or
received, fines, penalties or additional amounts attributable to, or imposed
upon, or with respect to, any such taxes, charges, fees, levies or other
assessments.

(iii) “Tax Returns” shall mean any report, declaration, return, claim for
refund, information return, document or other filing and amendments thereto
(including any related or supporting schedules, statements or information)
supplied or required to be supplied to any taxing authority or jurisdiction
(foreign or domestic) in connection with the determination, assessment or
collection of Taxes of any party or the administration of any laws, regulations
or administrative requirements relating to any Taxes.

2.9 Employee Benefit Plans. (a) Each Benefit Plan and any related trust intended
to be qualified under Section 401(a) and 501(a) of the Code, utilizes a
prototype plan that has received a favorable opinion letter from the IRS on the
form of such plan and, to the Company’s knowledge, no events have occurred that
would adversely affect such qualified status; (b) each Benefit Plan has been
maintained and operated substantially in accordance with its terms and the
requirements of applicable law, including, without limitation, ERISA and the
Code; (c) none of the Benefit Plans is subject to Title IV of ERISA or is a
multiemployer plan within the meaning of Section 3(37) of ERISA; (d) none of the
Benefit Plans provide post-employment health, life or other welfare benefits for
former employees of the Company other than as required under Section 4980B of
the Code or any similar applicable law; and (e) there do not exist any pending
or, to the Company’s knowledge, threatened claims, suits, actions, disputes,
audits or investigations (other than routine claims for benefits) with respect
to any Benefit Plan. For purposes of this Agreement, “Benefit Plan” shall mean
any employee benefit plan (within the meaning of Section 3(3) of ERISA) and all
material bonus, stock option, incentive, deferred compensation, supplemental
retirement or other benefits plans or arrangements and all material employment,
severance or termination agreements with respect to which the Company has any
material obligation and which is maintained, or sponsored by the Company for the
benefit of any current or former employee of the Company.

2.10 Real and Personal Property.

(a) The Company does not own any real property. All leases relating to the real
properties leased by the Company (the “Leased Real Property”) are identified on
Section 2.10(a) of the Disclosure Schedule (the “Leases”) and true and complete
copies thereof have been provided to Parent. Each of said Leases is in full
force and effect. The Leased Real Property constitutes all of the real property
used or occupied by the Company. Neither the Company nor, to the Company’s
knowledge, any other party to a Lease is in default in complying with any
material provisions of any Lease, and no condition or event or fact exists
which, with notice, lapse of time or both, would reasonably be expected to
constitute a default thereunder on the part of the Company nor, to the Company’s
knowledge, any other party to a Lease. As of the Closing, all payments due and
payable by the Company as of the Closing under any Lease have been paid in full
by the Company.

 

Agreement and Plan of Merger – Page 14

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(b) The Company has good, valid and marketable title to, or a valid leasehold
interest in, all of the tangible personal property and assets used by the
Company in connection with the operation of its business, free and clear of any
Encumbrances, except for (i) Encumbrances reflected in the Financial Statements,
(ii) landlord’s, mechanic’s, carrier’s, workmen’s, repairmen’s or other similar
statutory liens arising or incurred in the Ordinary Course of Business,
(iii) Encumbrances for current Taxes or other governmental charges, assessments
or levies not yet due and payable and (iv) other Encumbrances arising in the
Ordinary Course of Business and not incurred in connection with the borrowing of
money (collectively, “Permitted Encumbrances”).

2.11 Labor and Employment Matters.

(a) Except as set forth on Section 2.11(a) of the Disclosure Schedule, the
Company is in compliance in all material respects with all applicable federal
and state laws respecting employment and employment practices, terms and
conditions of employment, and wages and hours, including, but not limited to
Title VII of the Civil Rights Act of 1964, as amended, the Equal Pay Act of
1967, as amended, the Age Discrimination in Employment Act of 1967, as amended,
the Americans with Disabilities Act, as amended, the Immigration Reform Control
Act of 1986, as amended, and the related rules and regulations adopted by those
federal agencies responsible for the administration of such laws, and there are
no arrearages in the payment of wages. The Company has never implemented any
plant closing or mass layoff of employees as those terms are defined in the
Worker Adjustment Retraining and Notification Act of 1988, as amended, or any
similar state or local law or regulation, and no layoffs that could implicate
such laws or regulations are currently contemplated.

(b) The Company has not recognized or is a party to or otherwise bound by any
collective bargaining agreement, Contract or other agreement or understanding
with a labor union or labor organization.

(c) The Company is not a party to any employment, severance or consulting
agreements with any director, officer, manager, consultant or employee pursuant
to which there are any outstanding obligations as of the date of this Agreement.

(d) To the Company’s knowledge, no employee of the Company is subject to any
noncompete, nondisclosure, confidentiality, employment, consulting or similar
Contract in conflict with the current business activities of the Company. The
Company has paid or made adequate provision to pay all wages and other
compensation and all other amounts due and payable to each of their respective
employees or former employees.

(e) The Company is not party to any agreement which would reasonably be expected
to require the Company to pay any additional compensation, bonuses (including,
without limitation, any retention bonuses) or other amounts as a result, in
whole or in part, of the execution and delivery of this Agreement or the other
Transaction Documents to which the Company is a party or the consummation of the
Merger and the transactions contemplated hereby or thereby, to any employee or
former employee of the Company.

2.12 Contracts and Commitments.

(a) Section 2.12(a) of the Disclosure Schedule or Section 2.13 of the Disclosure
Schedule, lists all material Contracts or related agreements to which the
Company is party.

 

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(b) The Contracts required to be disclosed on Section 2.12(a) of the Disclosure
Schedule and Section 2.13 of the Disclosure Schedule attached hereto are
referred to herein as the “Company Contracts”. The Company has provided to
Parent true and correct copies of each written Company Contract, together with
all amendments, waivers and other changes thereto. (i) No Company Contract has
been canceled or, to the Company’s knowledge, breached by the other party
thereto, (ii) the Company is not in default under or in material breach of any
Company Contract, nor, to the Company’s knowledge, is any other party in default
under or material breach of a Company Contract, and no event or condition has
occurred or arisen which with the passage of time or the giving of notice or
both would result in a default or breach thereunder by the Company and
(iii) each Company Contract is valid and binding on the Company, and to the
Company’s knowledge, the other parties thereto, subject to applicable
bankruptcy, insolvency, reorganization, or moratorium or other similar laws
relating to creditors’ rights generally and to general principles of equity. The
Company has not received any notice or threat from any other party to breach or
terminate a Company Contract within the past five (5) years.

2.13 Intellectual Property Matters

(a) Section 2.13 of the Disclosure Schedule contains a complete and accurate
list of all Patents owned by or licensed to the Company (“Company Patents”),
Marks owned by or licensed to the Company (“Company Marks”) and Copyrights owned
by the Company (“Company Copyrights”), including each jurisdiction in which
Company Patents, Company Marks and Company Copyrights have been filed or
registered and all applicable serial or registration numbers. Except as set
forth on Section 2.13 of the Disclosure Schedule:

(i) The Company is not now nor has it ever been a member or promoter of, or a
contributor to, any industry standards body or similar organization that could
require or obligate it to grant or offer to any other Person any license or
right to any of the Company’s Intellectual Property Assets;

(ii) With regard to any patents or pending patents existing as of the date of
this Agreement, the Company has not knowingly submitted to the U.S. Patent
Office false material information;

(iii) To the Company’s knowledge, there are no pending or threatened claims in
writing against the Company or any of its employees alleging that any of the
operations of the Company’s business, any activity by the Company, or any
Company product infringes on or violates (or in the past infringed or violated)
the rights of others in or to any Intellectual Property Assets (“Third Party
Rights”) or constitutes a misappropriation of (or in the past constituted a
misappropriation of) any Intellectual Property Assets of any Person or that any
of the Company’s Intellectual Property Assets is invalid or unenforceable, nor,
to the Company’s knowledge, is there any interference, opposition, reissue,
reexamination or other proceeding of any nature pending or threatened, in which
the scope, validity and/or enforceability of any of the Company’s Intellectual
Property Assets is being, has been or could reasonably be expected to be
contested or challenged;

(iv) No current activity by the Company constitutes a misappropriation of (or in
the past constituted a misappropriation of) any trade secrets of any Person;

(v) The Company is not bound by any Contract to indemnify, defend, hold harmless
or reimburse any other Person with respect to any intellectual property
infringement, misappropriation or similar claim;

 

Agreement and Plan of Merger – Page 16

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(vi) All former and current employees, consultants and contractors of the
Company with technical responsibilities or involved in the creation of the
Company’s Intellectual Property Assets have executed written instruments with
the Company that irrevocably assign to the Company all rights, title and
interest to any inventions, improvements, discoveries, writings or other works
of authorship, or information relating to the Company’s business of the Company
or any of the products or services being researched, developed, manufactured or
sold by the Company or which may be used with any such products or services;

(1) no employee, consultant or contractor of the Company has any claim, right
(whether or not currently exercisable) or interest to or in any of the Company’s
Intellectual Property Assets;

(2) no employee or independent contractor of the Company is: (A) bound by or
otherwise subject to any contract restricting him or her from performing his or
her duties for the Company; or (B) in breach of any contract with any former
employer or other Person concerning intellectual property rights or
confidentiality;

(3) no funding, facilities or personnel of any governmental body were used,
directly or indirectly, to develop or create, in whole or in part, any of the
Company’s Intellectual Property Assets; and

(vii) The Company has not assigned, sold, exclusively licensed or otherwise
transferred, or agreed to assign, sell, exclusively license or otherwise
transfer, ownership of any of the Intellectual Property Assets currently owned
by the Company as of the date of this Agreement to any entity or person.

2.14 Environmental Matters.

(a) To the Company’s knowledge, the Company is in compliance in all material
respects with Environmental Laws.

(b) The Company has not received any written claim, demand, complaint, notice of
potential responsibility, or other written notice regarding any violation of
Environmental Laws or any Liabilities, relating to the Company or their
respective facilities arising under Environmental Laws, and, to the Company’s
knowledge, there is no civil, administrative, or criminal enforcement proceeding
pending or threatened against the Company under any Environmental Laws.

(c) To the Company’s knowledge, no Hazardous Materials have been released or
disposed of by the Company on any of their respective leased properties as a
result of their respective operations in violation of Environmental Laws.

(d) For purposes of this Agreement:

(i) “Environmental Laws” means all applicable federal, state and local statutes,
regulations, rules, bylaws and ordinances relating to pollution or protection of
the environment, including, but not limited to, the Federal Water Pollution
Control Act (33 U.S.C. §1251 et seq.), Resources Conservation and Recovery Act
(42 U.S.C. §6901 et. seq.), Safe Drinking Water Act (42 U.S.C. §3000(f) et.
seq.), Toxic Substances Control Act (15 U.S.C. §2601 et seq.), Clean Air Act (42
U.S.C. §7401 et. seq.), Comprehensive Environmental

 

Agreement and Plan of Merger – Page 17

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Response, Compensation and Liability Act (42 U.S.C. §9601 et seq.), and similar
state and local enactments.

(ii) “Hazardous Materials” means and includes any hazardous waste, hazardous
material, hazardous substance, petroleum product, toxic substance, pollutant or
contaminant, as defined or regulated under any Environmental Law.

(e) The representations and warranties set forth in this Section 2.14 shall
constitute the only representations and warranties by the Company with respect
to environmental matters.

2.15 Insurance Coverage. Section 2.15 of the Disclosure Schedule contains an
accurate summary of the insurance policies currently maintained by the Company.
There are currently no claims pending against the Company under any insurance
policies currently in effect and covering the property, business or employees of
the Company, and all premiums due and payable with respect to the policies
maintained by the Company have been paid to date. To the Company’s knowledge,
there is no threatened termination of any such policies or arrangements.

2.16 Brokers. The Company has not incurred or become liable for any broker’s
commission or finder’s fee relating to or in connection with the Merger and the
transactions contemplated by this Agreement.

2.17 Compliance with Laws. To the Company’s knowledge, the Company has all
franchises, authorizations, approvals, orders, consents, licenses, certificates,
permits, registrations, qualifications or other rights and privileges
(collectively “Permits”) necessary to conduct its business as it is presently
conducted or proposed to be conducted and all such Permits are valid and in full
force and effect. No Permit is subject to termination as a result of the
execution of this Agreement or consummation of the transactions contemplated
hereby. To the Company’s knowledge, the Company is in compliance with all
applicable statutes, ordinances, orders, rules and regulations promulgated by
any U.S. federal, state, municipal, non-U.S. or other governmental authority,
which apply to the conduct of its business. The Company has never entered into
or been subject to any judgment, consent decree, compliance order or
administrative order with respect to any aspect of the business, affairs,
properties or assets of the Company or received any request for information,
notice, demand letter, administrative inquiry or formal or informal complaint or
claim from any regulatory agency with respect to any aspect of the business,
affairs, properties or assets of the Company.

2.18 Transferability of Assets. Immediately following the consummation of the
Merger and the transactions contemplated by this Agreement, the Company will
own, license or otherwise have a valid right to use all the assets used by it in
operating its business in substantially the same manner as such business was
operated immediately prior to the consummation of the Merger and the
transactions contemplated by this Agreement. This Section 2.18 does not apply to
any matters with respect to Intellectual Property Assets.

2.19 Absence of Undisclosed Liabilities. The Company does not have any Liability
arising out of transactions entered into prior to the Closing, or any action or
inaction prior to the Closing, or any state of facts existing prior to the
Closing, with respect to or based upon transactions or events occurring before
the Closing, except (a) Liabilities under Company Contracts (but not Liabilities
for breaches thereof by the Company), (b) Liabilities reflected or reserved for
in the Financial Statements or disclosed in the notes thereto, (c) Liabilities
which have been incurred since the date of the Base Balance Sheet in the
Ordinary Course of Business (none of which is a Liability for breach of Contract
by the Company, breach of warranty or tort) and (d) Liabilities disclosed on
Section 2.19 of the Disclosure Schedule.

 

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2.20 Affiliate Transactions. No officer, director, shareholder or, to the
Company’s knowledge, other Affiliate of the Company or, to the Company’s
knowledge, any individual related by blood, marriage or adoption to any such
Person or, to the Company’s knowledge, any entity in which any such Person owns
any beneficial interest (collectively, the “Insiders”), is a party to any
Company Contract or transaction with the Company or which pertains to the
business of the Company or has any interest in any property, real or personal or
mixed, tangible or intangible, used in or pertaining to the business of the
Company.

2.21 Illegal Payments. Neither the Company nor, to the Company’s knowledge, any
Person affiliated with the Company has ever offered, made or received on behalf
of the Company any illegal payment or contribution of any kind, directly or
indirectly, including, without limitation, payments, gifts or gratuities, to any
person, entity, or United States or foreign national, state or local government
officials, employees or agents or candidates therefore or other persons.

3. Representations and Warranties of Parent and Merger Sub. As a material
inducement to the Company to enter into and perform its obligations under this
Agreement, Parent and Merger Sub, on a joint and several basis, hereby represent
and warrant to the Company that:

3.1 Existence; Good Standing; Authority.

(a) Parent is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware. Merger Sub is also a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California. Parent and Merger Sub are duly licensed or
qualified to do business as a foreign corporation under the laws of each other
jurisdiction in which the character of its properties or in which the
transaction of its business makes such qualification necessary, except where the
failure to be so licensed or qualified would has not had or is not reasonably
likely to have a material adverse effect on the ability of Parent or Merger Sub
to perform its obligations under this Agreement. Parent and Merger Sub have all
requisite corporate power and authority to own, operate, lease and encumber its
properties and carry on its business as currently conducted.

(b) Parent and Merger Sub have the corporate power and authority to execute and
deliver this Agreement and each of the other Transaction Documents to which they
are parties and to perform their respective obligations hereunder and
thereunder. The execution and delivery of this Agreement and the other
Transaction Documents to which Parent and Merger Sub are parties, the
performance by Parent and Merger Sub of their respective obligations hereunder
and thereunder and the consummation of the Merger and the transactions
contemplated hereby and thereby have been duly authorized by all requisite
corporate action on the part of Parent and Merger Sub. No other proceedings on
the part of the Parent or Merger Sub are necessary to approve and authorize the
execution and delivery of this Agreement or the other Transaction Documents to
which the Parent and Merger Sub are parties and the consummation of the Merger
the transactions contemplated hereby and thereby. This Agreement and all other
Transaction Documents to which Parent and Merger Sub are parties have been duly
executed and delivered by Parent and Merger Sub and constitute valid and binding
obligations of Parent and Merger Sub, respectively, enforceable against Parent
and Merger Sub in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors’ rights generally and by general
equitable principles.

3.2 No Conflict. Neither the execution and delivery by Parent and Merger Sub of
this Agreement and the other Transaction Documents to which Parent and Merger
Sub are parties, nor the consummation by Parent and Merger Sub of the
transactions in accordance with the terms hereof and thereof, conflicts with or
results in a breach of any provisions of Parent’s or Merger Sub’s certificate of

 

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incorporation or articles of incorporation, as applicable, or by-laws or other
organizational documents. Except as set forth on Section 3.2 of the Disclosure
Schedule, the execution and delivery by Parent and Merger Sub of this Agreement
and the other Transaction Documents to which Parent and Merger Sub are parties,
and the consummation by Parent and Merger Sub of the transactions in accordance
with the terms hereof and thereof, will not violate, or conflict with, or result
in a breach of any provision of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under any of
the terms, conditions or provisions of (i) any Contract to which Parent or
Merger Sub is a party or by which Parent, Merger Sub or any of their respective
properties is bound, (ii) any law, statute, rule or regulation to which Parent
or Merger Sub is subject, or (iii) any judgment, order or decree to which Parent
or Merger Sub is subject.

3.3 Consents and Approvals.

(a) Except as set forth on Section 3.3(a) of the Disclosure Schedules, the
execution, delivery and performance of this Agreement and the other Transaction
Documents to which Parent or Merger Sub is a party by Parent or Merger Sub will
not require any consent, approval, authorization or other action by, or filing
with or notification to, any Governmental Authority.

(b) Except as set forth on Section 3.3(b) of the Disclosure Schedules, the
execution, delivery and performance of this Agreement and the other Transaction
Documents to which Parent or Merger Sub is a party by Parent or Merger Sub will
not require any third-party consents, approvals, authorizations or actions.

3.4 Litigation. There are no actions, suits, proceedings or orders pending or,
to Parent’s or Merger Sub’s knowledge, threatened against or affecting Parent or
Merger Sub at law or in equity, or before or by any Governmental Authority which
would adversely affect Parent’s or Merger Sub’s performance under this Agreement
and the other Transaction Documents to which Parent and Merger Sub are parties
or the consummation of the Merger and the transactions contemplated hereby or
thereby.

3.5 Brokers. Parent and Merger Sub have not incurred or become liable for any
broker’s commission or finder’s fee relating to or in connection with this
Agreement, the Merger or the transactions contemplated hereby.

4. Certain Covenants of Parent, the Company and the Stockholders.

4.1 Further Action. The parties shall execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement expeditiously
the Merger and the transactions contemplated by this Agreement.

4.2 Press Releases. After the Closing, Parent and the Preferred Holder shall
each issue their own press release regarding the Merger and the transactions
contemplated by this Agreement in substantially the forms mutually agreed upon
by the parties and attached hereto as Exhibit G-1 (the “Parent Press Release”)
and Exhibit G-2 (the “Preferred Holder Press Release”).

4.3 Responsibility for Filing Tax Returns.

(a) The Preferred Holder shall include the income of the Company (including, in
the case of the Preferred Holder’s consolidated federal income Tax Return, any
deferred items triggered into income by Treasury Regulations Section 1.1502-13
and any excess loss account taken into income under

 

Agreement and Plan of Merger – Page 20

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Treasury Regulations Section 1.1502-19) on the consolidated, unitary or combined
income Tax Returns of the Preferred Holder for all relevant taxable periods
through the end of the Closing Date.

(b) Parent shall prepare or cause to be prepared and file or cause to be filed
all Tax Returns for the Company that are filed after the Closing Date (other
than any Tax Returns described in Section 4.3(a)). With respect to such Tax
Returns for all taxable periods beginning before the Closing Date, Parent shall
permit the Preferred Holder to review and comment on each such Tax Return prior
to filing and shall make such revisions to such Tax Returns as are reasonably
requested by the Preferred Holder, and Parent shall not file any such Tax
Returns without the written consent of the Preferred Holder, which consent shall
not be unreasonably withheld, conditioned or delayed.

4.4 Cooperation on Tax Matters; Tax Claims.

(a) Parent, the Company and the Preferred Holder shall cooperate fully, as and
to the extent reasonably requested by the other party, in connection with the
filing of Tax Returns pursuant to this Agreement and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other party’s request) the provision of records and
information that are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. The Company and the Preferred Holder agree (A) to retain all books
and records with respect to Tax matters pertinent to the Company relating to any
taxable period beginning before the Closing Date until the expiration of the
statute of limitations (and, to the extent notified by Parent or the Preferred
Holder, any extensions thereof) of the respective taxable periods, and to abide
by all record retention agreements entered into with any taxing authority, and
(B) to give the other party reasonable written notice prior to transferring,
destroying or discarding any such books and records and, if the other party so
requests, the Company or the Preferred Holder, as the case may be, shall allow
the other party to take possession of such books and records. Parent and the
Preferred Holder further agree, upon request, to use their commercially
reasonable efforts to obtain any certificate or other document from any
Governmental Authority or any other Person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including, but not limited
to, with respect to the transactions contemplated hereby).

(b) If, subsequent to the Closing, any of Parent, the Company or the Preferred
Holder receives notice of a claim by any Governmental Authority that, if
successful, might result in an indemnity payment pursuant to Article 5 with
respect to Taxes (a “Tax Claim”), then within fifteen (15) days after receipt of
such notice, Parent, the Company or the Preferred Holder, as the case may be,
shall give written notice of such Tax Claim to the other parties. The Preferred
Holder shall have the right to control the conduct and resolution of any Tax
Claim relating to a Pre-Closing Tax Period; provided that the Preferred Holder
and Parent shall jointly control the conduct and resolution of any Tax Claim
relating to a Straddle Period; and provided further that the Preferred Holder
shall not resolve any Tax Claim in a manner that would reasonably be expected to
have an adverse impact on Parent or the Company without Parent’s consent, which
shall not be unreasonably withheld, conditioned or delayed. If the Preferred
Holder has the right to control the conduct and resolution of any Tax Claim but
elects in writing not to do so, Parent shall have the right to control the
conduct and resolution of such Tax Claim; provided, however, that Parent shall
keep the Preferred Holder informed of all developments on a timely basis and
Parent shall not resolve such Tax Claim in a manner that could reasonably be
expected to have an adverse impact on the Preferred Holder’s indemnification
obligations under this Agreement without the Preferred Holder’s written consent,
which consent shall not be unreasonably withheld, conditioned or delayed. Each
party shall bear its own costs for participating in any proceeding relating to
any Tax Claim.

 

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4.5 Company Derivative Securities. The Preferred Holder shall have fourteen
(14) days after the Closing to retire, extinguish and otherwise terminate any
Company Derivative Security that is not retired, extinguished or otherwise
terminated as of the Closing Date. Thereafter, Parent shall have the sole and
exclusive right to retire, extinguish and otherwise terminate each such Company
Derivative Security and the Preferred Holder shall cooperate in good faith as
Parent pursues the retirement, extinguishment and termination of the Company
Derivative Securities. The costs of the retirement, extinguishment and
termination of the Company Derivative Securities shall be borne by the Preferred
Holder in accordance with Article 5.

5. Survival of Representations and Warranties; Indemnification

5.1 Survival; Risk Allocation.

(a) Survival of Representations, Warranties, Covenants and Agreements. All
representations, warranties, covenants and agreements set forth in this
Agreement, the Transaction Documents or in any certificate delivered at the
Closing shall survive the Closing Date. Notwithstanding the foregoing, no party
shall be entitled to recover for any Loss pursuant to this Article 5 unless
written notice of a claim thereof is delivered to the other Parties prior to the
Applicable Limitation Date (if any). The “Applicable Limitation Date” for the
representations and warranties set forth in Article 2 and Article 3 shall be the
date forty-two (42) months from the Closing Date.

(b) Special Rule For Fraud. Notwithstanding anything in this Article 5 to the
contrary, in the event of fraud, any party hereto which suffers any Loss by
reason thereof shall be entitled to seek recovery therefore from the Person or
Persons who perpetrated such fraud without regard to any limitation set forth in
this Agreement (whether a temporal limitation, a dollar limitation or
otherwise).

(c) Risk Allocation. The representations, warranties, covenants and agreements
made herein, as modified by the Disclosure Schedules, together with the
indemnification provisions herein, are intended among other things to allocate
the economic cost and the risks inherent in the Merger and the transactions
contemplated hereby between the parties hereto and, accordingly, a party hereto
shall be entitled to the indemnification or other remedies provided in this
Agreement by reason of any breach of any such representation, warranty, covenant
or agreement, as modified by the Disclosure Schedules, by another party hereto,
subject to the limitations set forth in this Agreement, notwithstanding whether
any employee, representative or agent of the party hereto seeking to enforce a
remedy knew or had reason to know of such breach and regardless of any
investigation by such party hereto.

5.2 Indemnification by the Preferred Holder.

(a) Subject to the other terms and conditions of this Agreement, the Preferred
Holder shall indemnify the Parent Parties against and hold the Parent Parties
harmless from all Losses which any such Parent Party may suffer, sustain or
become subject to, as a result of, in connection with or by virtue of (i) any
misrepresentation or the breach of any representation or warranty of the Company
contained in this Agreement or any exhibit or schedule hereto or any certificate
delivered at the Closing by the Company to Parent in connection with the Merger
and the transactions contemplated hereby (which breach shall be determined for
purposes of this Article 5 without regard to any qualification by terms such as
“material” or “material adverse effect” contained in such representation or
warranty); (ii) (A) any Tax of the Company for any taxable period ending on or
before the Closing Date and, with respect to any Straddle Period, for the
portion through the end of the Closing Date (each such period, a “Pre-Closing
Tax Period”), (B) any Tax of any member of an Affiliated Group of which the
Company (or any of its respective predecessors) is or was a member on or prior
to the Closing Date, including pursuant to Treasury Regulations Section 1.1502-6
or any similar state, local, or foreign law or regulation, and (C)

 

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any Tax of any Person (other than the Company) imposed on the Company as a
transferee or successor, by Contract or pursuant to any law, rule, or
regulation, which Taxes relate to an event or transaction occurring before the
Closing; (iii) any indebtedness of the Company existing before the Closing which
is not fully discharged at Closing; (iv) any material breach of any covenant or
agreement of the Company contained in this Agreement or any exhibit or schedule
hereto or any certificate delivered at the Closing by or on behalf of the
Company to Parent in connection with the Merger and the transactions
contemplated hereby; (v) any appraisal or similar actions with respect to the
Common Stock; and (vi) the retirement, extinguishment, purchase or other
cancellation of any Company Derivative Securities or any claims related thereto
by holders of Company Derivative Securities. For purposes of clause (ii) above,
in the case of any taxable period that includes (but does not end on) the
Closing Date (a “Straddle Period”), the amount of any Taxes based on or measured
by income or receipts of the Company for a Straddle Period which relate to the
Pre-Closing Tax Period shall be determined based on an interim closing of the
books as of the close of business on the Closing Date (and for such purpose, the
taxable period of any partnership or other pass-through entity in which the
Company holds a beneficial interest shall be deemed to terminate at such time)
and the amount of other Taxes of the Company for a Straddle Period which relate
to the Pre-Closing Tax Period shall be deemed to be the amount of such Tax for
the entire taxable period multiplied by a fraction the numerator of which is the
number of days in the taxable period ending on the Closing Date and the
denominator of which is the number of days in such Straddle Period.

(b) The indemnification obligations of the Preferred Holder pursuant to this
Article 5 shall be limited as follows:

(i) The Preferred Holder shall not have any Liability to the Parent Parties
under Section 5.2(a)(i) unless the aggregate amount of all Losses incurred by
the Parent Parties under such Sections for which the Preferred Holder would, but
for this Section 5.2(b)(i), be liable exceeds on a cumulative basis $25,000 (the
“Basket”), and then only to the extent of the amount of Losses in excess of the
Basket; provided, however, that the Basket shall not apply to a breach of any
Fundamental Representation.

(ii) The Preferred Holder shall not have any Liability to the Parent Parties
under Section 5.2(a)(i) to the extent the aggregate amount of all Losses
indemnified by the Preferred Holder under those Sections exceeds the sum of the
Merger Consideration (A) paid to the Preferred Holder and the payees of Company
Transaction Expenses pursuant to Sections 1.6(a)(i)-(v) and (B) otherwise
payable to the Preferred Holder as Earnout Payments pursuant to achievement of
the terms contained in Section 1.6(a) of this Agreement but for Parent’s
utilization of the Set Off Right (the “Cap”).

(iii) The Preferred Holder shall not have any Liability to the Parent Parties
under Section 5.2(a) unless a Parent Party gives written notice demanding
indemnification with respect thereto to the Preferred Holder on or before the
Applicable Limitation Date (if any), it being agreed that if such demand for
indemnification is timely made, the relevant representations, warranties,
covenants and agreements shall survive with respect to the claims for
indemnification set forth in such notice until such matter is resolved.

(iv) No Liability under this Article 5 shall attach to the Preferred Holder
under this Agreement in respect of any claim:

(A) to the extent that such claim relates to any Loss for which any of any
Indemnified Person collects a recovery from any third party, but only to the
extent of collections actually received (net of any costs of collection);
provided, however, that Parent shall have no obligation to seek recovery from
any third party; or

 

Agreement and Plan of Merger – Page 23

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(B) to the extent that such claim is in respect of a Liability (including any
Tax Liability) that was paid or satisfied at or prior to the Closing.

(v) If a Parent Party has a claim for indemnification under Section 5.2(a)(i)
and Section 5.2(a)(ii) for a similar Tax Loss such Parent Party may only recover
once for such Loss.

(c) Payments by the Preferred Holder pursuant to Section 5.2(a) shall be further
limited to the amount of any Liability or damage that remains after deducting
therefrom any insurance proceeds and any indemnity, contribution or other
similar payment actually received by the Parent Parties from any third party
with respect thereto (net of deductibles and costs of collection and
enforcement); provided, however, that Parent shall have no obligation to seek to
recover any insurance, indemnity, contribution or other similar payment from any
third party. If any Parent Party actually receives any amounts under applicable
insurance policies, or from any other Person alleged to be responsible for any
Losses, subsequent to an indemnification payment by the Preferred Holder, then
the Parent Party shall promptly reimburse the Preferred Holder for any payment
actually made or expense incurred by the Preferred Holder in connection with
providing such indemnification payment up to the actual amount received by the
applicable Parent Party, net of any unindemnified expenses incurred by such
Parent Party in collecting such amount. If the Preferred Holder recovers any
amounts under insurance policies or from indemnitors or contributors pursuant to
the assignment of the rights of a Parent Party hereunder, then the Preferred
Holder shall first use such amounts to pay any expenses incurred by the
Preferred Holder in connection with pursuing such amounts and to reimburse
itself for any indemnification payment actually made by the Preferred Holder to
Parent Parties and shall provide any amounts remaining to Parent.

(d) Parent shall give the Preferred Holder written notice of any claim,
assertion, event or proceeding by or in respect of a third party as to which any
Parent Party may request indemnification hereunder or as to which the Basket may
be applied as soon as is practicable and in any event within thirty (30) days of
the time that a Parent Party actually learns of such claim, assertion, event or
proceeding, describing in reasonable detail the claim, the amount thereof (if
known) and the basis thereof; provided, however, that the failure to so notify
the Preferred Holder shall not affect the rights of the Parent Parties to
indemnification hereunder except to the extent that the Preferred Holder is
actually prejudiced by such failure. The Preferred Holder may participate in and
control the defense of any third party claim at its own expense, so long as the
Preferred Holder gives written notice to the Parent Parties accepting full
responsibility for indemnification with respect to such claim or proceeding
within fifteen (15) days of the receipt of notice from Parent. If the Preferred
Holder elects to assume the defense of any such claim or proceeding, the
Preferred Holder shall consult with Parent for the purpose of allowing Parent to
participate in such defense, but in such case the expenses of Parent shall be
paid by Parent, unless (i) the employment thereof has been specifically
authorized by the Preferred Holder in writing or (ii) the Preferred Holder has
been advised in writing by counsel that a reasonable likelihood exists of a
conflict of interest between the Preferred Holder, on the one hand, and Parent,
on the other hand. Parent shall provide and shall cause the Company to provide,
as applicable, the Preferred Holder and its counsel with reasonable access to
its records and personnel relating to any such claim, assertion, event or
proceeding during normal business hours and upon advance written notice and
shall otherwise cooperate with the Preferred Holder in the defense or settlement
thereof, and the Preferred Holder shall reimburse Parent for all its reasonable
out-of-pocket expenses in connection therewith. Parent shall not pay, or permit
to be paid, any part of any claim or demand arising from such asserted liability
unless the Preferred Holder consents in writing in advance to such payment. The
Preferred Holder shall obtain the prior written consent of Parent before
entering into any settlement of any third party claim, if the settlement does
not expressly release the applicable Parent Parties from all Liabilities and
obligations with respect to such third party claim or the settlement imposes
injunctive or other equitable relief against such Parent Parties. If the
Preferred Holder does not elect or fails to defend or if, after commencing or

 

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undertaking any such defense, the Preferred Holder fails to prosecute or
withdraws from such defense, Parent shall have the right to undertake the
defense or settlement thereof, at the Preferred Holder’s expense. In such case,
Parent shall keep the Preferred Holder reasonably apprised of the status of the
claim, liability or expense and any resulting suit, proceeding or enforcement
action, shall furnish the Preferred Holder with all documents and information
that the Preferred Holder may reasonably request and Parent shall consult with
the Preferred Holder prior to acting on major matters, including settlement
discussions. In the event of any conflict between the provisions of this
Section 5.2(d) and the provisions of Section 4.4(b) with respect to any Tax
Claim, the provisions of Section 4.4(b) shall be controlling.

(e) Anything herein to the contrary notwithstanding, no breach of any
representation, warranty, covenant or agreement contained herein shall give rise
to any right on the part of Parent, after the consummation of the Merger and the
transactions contemplated hereby, to rescind this Agreement or any of the Merger
and the transactions contemplated hereby.

(f) Any Liability for indemnification under Section 5.2(a) shall be determined
without duplication of recovery by reason of the state of facts giving rise to
such Liability constituting a breach of more than one representation, warranty,
covenant or agreement.

(g) Any claim by a Parent Party seeking indemnification from the Preferred
Holder pursuant to this Section 5.2 shall be made by Parent on behalf of such
Parent Party and no Parent Party (other than Parent) shall be entitled to
enforce any rights or claims pursuant to this Section 5.2.

5.3 Indemnification by Parent.

(a) Subject to the other terms and conditions of this Agreement, Parent shall
indemnify the Preferred Holder Parties against and hold them harmless from all
Losses which any the Preferred Holder Party may suffer, sustain or become
subject to, as a result of, in connection with or by virtue of (i) any
misrepresentation or the breach of any representation or warranty of Parent
contained in this Agreement or any exhibit or schedule hereto or any certificate
delivered at the Closing by or on behalf of Parent to the Preferred Holder in
connection with the Merger and the transactions contemplated hereby (which
breach shall be determined for purposes of this Article 5 without regard to any
qualification by terms such as “material” or “material adverse effect” contained
in such representation or warranty), and (ii) any breach of any covenant or
agreement of Parent contained in this Agreement or any exhibit or schedule
hereto or any certificate delivered at the Closing by or on behalf of it to the
Preferred Holder in connection with the Merger and the transactions contemplated
hereby.

(b) Parent shall not have any Liability to the Preferred Holder Parties under
Section 5.3(a)(i) unless the aggregate amount of all such Losses incurred by the
Preferred Holder Parties for which Parent would, but for this Section 5.3(b), be
liable exceeds, on a cumulative basis, the Basket, and then only to the extent
of the amount of Losses in excess of the Basket; provided, however, that the
Basket shall not apply to a breach of any Fundamental Representation. Parent
shall not have any Liability to the Preferred Holder Parties under
Section 5.3(a)(i) to the extent the aggregate amount of indemnifiable Losses
under that Section exceeds the Cap.

(c) Parent shall not have any Liability to the Preferred Holder Parties under
Section 5.3(a) unless the Preferred Holder gives written notice demanding
indemnification with respect thereto to Parent on or prior to the Applicable
Limitation Date (if any), it being agreed that if such demand for
indemnification is timely made, the relevant representations and warranties,
covenants and agreements shall survive with respect to the claims for
indemnification set forth in such notice until such matter is resolved.

 

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(d) The Preferred Holder shall give Parent written notice of any claim,
assertion, event or proceeding by or in respect of a third party as to which any
Preferred Holder Party may request indemnification hereunder or as to which the
Basket may be applied as soon as is practicable and in any event within thirty
(30) days of the time that the Preferred Holder actually learns of such claim,
assertion, event or proceeding, describing in reasonable detail the claim, the
amount thereof (if known) and the basis thereof; provided, however, that the
failure to so notify Parent shall not affect the rights of the Preferred Holder
Parties to indemnification hereunder except to the extent that Parent is
actually prejudiced by such failure. Parent shall have the right to direct,
through counsel of its own choosing, the defense or settlement of any such claim
or proceeding brought by a third party at Parent’s own expense, so long as
Parent gives written notice to the Preferred Holder Parties accepting full
responsibility for indemnification with respect to such claim or proceeding
within fifteen (15) days of the receipt of notice from the Preferred Holder. If
Parent elects to assume the defense of any such claim or proceeding, Parent
shall consult with the Preferred Holder for the purpose of allowing the
Preferred Holder to participate in such defense, but in such case the expenses
of the Preferred Holder shall be paid by the Preferred Holder, unless (i) the
employment thereof has been specifically authorized by Parent in writing or
(ii) Parent has been advised by counsel that a reasonable likelihood exists of a
conflict of interest between the Preferred Holder, on the one hand, and Parent,
on the other hand. The Preferred Holder shall reasonably cooperate with Parent
in the defense or settlement thereof, and Parent shall reimburse the Preferred
Holder for all the reasonable out-of-pocket expenses of the Preferred Holder in
connection therewith. The Preferred Holder shall not pay, or permit to be paid,
any part of any claim or demand arising from such asserted liability unless
Parent consents in writing in advance to such payment. Parent shall obtain the
prior written consent of the Preferred Holder before entering into any
settlement of any third party claim if the settlement does not expressly release
the applicable Preferred Holder Parties from all Liabilities and obligations
with respect to such third party claim or the settlement imposes injunctive or
other equitable relief against the Preferred Holder Parties. If Parent does not
elect or fails to defend or if, after commencing or undertaking any such
defense, Parent fails to prosecute or withdraws from such defense, the Preferred
Holder shall have the right to undertake the defense or settlement thereof, at
Parent’s expense. In such case, the Preferred Holder shall keep Parent
reasonably apprised of the status of the claim, liability or expense and any
resulting suit, proceeding or enforcement action, shall furnish Parent with all
documents and information that Parent may reasonably request and the Preferred
Holder shall consult with Parent prior to acting on major matters, including
settlement discussions. In addition, Parent shall at all times have the right to
participate in such defense at its own expense directly or through counsel.

5.4 Payments. Subject to the other provisions of this Article 5, the
indemnifying party shall pay the indemnified party in immediately available
funds promptly after the indemnified party provides the indemnifying party with
written notice of a claim hereunder and the parties finally resolve any disputes
relating to such claim. With respect to any claim, assertion, event or
proceeding as to which an indemnified party may request indemnification
hereunder, the indemnified party shall give the indemnifying party written
notice of such claim, which notice shall be accompanied by such back up or
supporting documentation as is reasonably available to the indemnified party in
connection with such claim, including the amount thereof (if known) and the
basis thereof. If requested by the indemnifying party, the indemnified party
shall make its employees, directors, officers and representatives reasonably
available, during normal business hours and on advance written notice and at the
sole cost and expense of the indemnifying party, to the indemnifying party to
discuss, and to engage in good faith negotiations of, such claim, assertion for
a period not to exceed thirty (30) days, during which thirty (30) day period the
indemnified party agrees not to commence any proceeding or otherwise enforce its
rights (except for such equitable remedies to which the indemnified party may be
otherwise entitled) under this Article 5. A Parent Party’s claims for
indemnification pursuant to Section 5.2 may be satisfied, in such Parent Party’s
sole discretion, (a) by reducing and setting off against any amounts owed by
Parent to the Preferred Holder under Section 1.6 (the “Set Off Right”), (b) by
proceeding directly against the Preferred Holder,

 

Agreement and Plan of Merger – Page 26

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or (c) any combination of the foregoing. Notwithstanding the foregoing, a Parent
Party may only pursue payment for indemnification under Section 5.2(a)(vi)
pursuant to the Set Off Right.

5.5 Treatment of Indemnity Payments. All payments made by the Preferred Holder
or Parent, as the case may be, to or for the benefit of the other parties
pursuant to this Article 5 shall be treated as adjustments to the Merger
Consideration for tax purposes, and such agreed treatment shall govern for
purposes of this Agreement.

5.6 Remedies Exclusive. From and after the Closing, other than in the case of
fraud, the rights of the parties to indemnification relating to this Agreement
or the Merger and the transactions contemplated hereby shall be strictly limited
to those contained in this Article 5, and such indemnification rights shall be
the exclusive remedies of the parties hereto subsequent to the Closing with
respect to any matter in any way relating to this Agreement or arising in
connection herewith, except for such equitable remedies to which such other
parties may be otherwise entitled, including the ability to apply to any court
of competent jurisdiction for specific performance or injunctive relief. Except
as provided in this Article 5, to the maximum extent permitted by law, the
parties hereby waive all other rights and remedies with respect to any matter in
any way relating to this Agreement or arising in connection herewith, whether
under any laws, at common law or otherwise. Except as provided in this Article
5, no claim, action or remedy shall be brought or maintained by any party hereto
against any other party, and no recourse shall be brought or granted against any
of them, by virtue of or based upon any alleged misstatement or omission
respecting an inaccuracy in or breach of any of the representations, warranties
or covenants of any of the parties hereto set forth or contained in this
Agreement, except to the extent that the same shall have been the result of
fraud by such party, in which case the other parties hereto shall have, in
addition to the remedies set forth in this Article 5, such equitable remedies to
which such other parties may be otherwise entitled, including the ability to
apply to any court of competent jurisdiction for specific performance or
injunctive relief.

6. General Provisions

6.1 Notices. All notices, requests, claims, demands and other communications
under this Agreement will be in writing and will be deemed given if properly
addressed (i) if delivered personally, on the day of delivery; (ii) if delivered
by facsimile (with acknowledgment of a complete transmission), on the day of
delivery if sent during normal business hours, or on the day after delivery if
sent after normal business hours, or (iii) if delivered by registered or
certified mail (return receipt requested) or by first class mail, five
(5) business days after mailing. Notices shall be deemed to be properly
addressed to any Party hereto if addressed to the following addresses (or at
such other address for a Party as shall be specified by like notice):

If to the Preferred Holder, to:

Arrowhead Research Corporation

201 South Lake Avenue, Suite 703

Pasadena, CA 91101

Facsimile: (626) 304-3401

Attn: John C. Miller

If to Parent or to the Company following the Effective Time, to:

AmberWave Systems Corporation

13 Garabedian Dr.

Salem, NH 03079

 

Agreement and Plan of Merger – Page 27

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Fax: (603) 870-8607

Attn: Richard Faubert and Bryan Lord

with copies (which shall not constitute notice) to:

Goodwin Procter LLP

53 State Street

Boston, Massachusetts 02109

Telecopy: (617) 523-1231

Attn: Kenneth J. Gordon, Esq.

6.2 Fees and Expenses. Except as provided otherwise herein, each of Parent, on
the one hand, and the Stockholders (on behalf of the Company and the
Stockholders), on the other hand, shall bear its own expenses in connection with
the negotiation and the consummation of the Merger and the transactions
contemplated by this Agreement.

6.3 Certain Definitions. For purposes of this Agreement:

(a) An “Affiliate” of any Person means another Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person.

(b) “Business Day” means any day of the year, other than a Saturday, Sunday or
any day on which major banks are closed for business in Boston, Massachusetts

(c) “Cash Gross Margin Contribution” means the gross margin contribution,
excluding depreciation or amortization.

(d) “Code” means the Internal Revenue Code of 1986, as amended from time to
time.

(e) “Company’s knowledge”, “knowledge of the Company” or words of similar import
means the actual knowledge of Sean Olson, John Miller, Bruce Stewart, Chris
Anzalone, Jane Davidson and Paul McDonnell.

(f) “Company Sale Event” means in one or a series of related transactions,
(i) the sale, exclusive license (where such term of exclusivity is for a term of
thirty-two (32) months or more) or other disposition of all or substantially all
of the assets of the Surviving Corporation, (ii) the sale or other disposition
of all of the issued and outstanding stock of the Surviving Corporation,
(iii) the merger or consolidation of the Surviving Corporation with or into
another entity in which all of the issued and outstanding stock of the Surviving
Corporation is converted into or exchanged for cash, securities of another
entity, or other property; provided, that, in each case, the Company’s
Intellectual Property Assets, as in existence on the date hereof, constitute all
or substantially all of the assets sold or licensed exclusively, as the case may
be, by Parent in such Company Sale Event. For the avoidance of doubt, none of
the following shall be a Company Sale Event:

(A) the sale or other disposition of all or substantially all of the assets of
the Parent, so long as the buyer in such sale agrees to assume the rights and
obligations of the Parent under this Agreement;

(B) the sale or other disposition of all of the issued and outstanding stock of
the Parent;

 

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(C) the merger or consolidation of the Parent with or into another entity in
which all of the issued and outstanding stock of the Parent is converted into or
exchanged for cash, securities of another entity, or other property; or

(D) any merger of the Surviving Corporation with and into the Parent or any
subsidiary of Parent, or the reincorporation of the Surviving Corporation to be
domiciled in another jurisdiction.

(g) “Company Transaction Expenses” means all fees, costs and expenses, including
fees, costs and disbursements payable to legal counsel or other representatives
or consultants, of the Company (but only to the extent incurred on or prior to
the Closing Date) and the Stockholders in connection with the negotiation and
consummation of the Merger and the transactions contemplated by this Agreement
and any other Transaction Document; provided, however, that any such items that
have been paid before the Closing shall not constitute Company Transaction
Expenses.

(h) “Contract” means any contract, license, sublicense, mortgage, purchase
order, indenture, loan agreement, lease, sublease, agreement or instrument or
any binding commitment to enter into any of the foregoing (in each case, whether
written or oral) to which a Person is a party or by which any of its assets are
bound.

(i) “Fundamental Representations” mean, with respect to the Company, the
representations and warranties set forth in Section 2.1 (Existence; Good
Standing; Authority), Section 2.2 (Capitalization), Section 2.3 (Subsidiaries),
Sections 2.5(c) and 2.5(d) (Financial Statements), Section 2.16 (Brokers), and,
with respect to Parent and Merger Sub, the representations and warranties set
forth in Section 3.1 (Existence; Good Standing; Authority) or Section 3.5
(Brokers).

(j) “GAAP” means U.S. generally accepted accounting principles, consistently
applied.

(k) “Intellectual Property Assets” means: (A) patents, patent applications,
patent rights, and inventions and discoveries and invention disclosures (whether
or not patented) (collectively, “Patents”); (B) trade names, trade dress, logos,
packaging design, slogans, Internet domain names, registered and unregistered
trademarks and service marks and related registrations and applications for
registration (collectively, “Marks”); (C) copyrights in both published and
unpublished works, including without limitation all compilations, databases and
computer programs, manuals and other documentation and all copyright
registrations and applications, and all derivatives, translations,
localizations, adaptations and combinations of the above, whether or not
registered or sought to be registered (collectively, “Copyrights”);
(D) know-how, trade secrets, confidential or proprietary information, research
in progress, algorithms, data, designs, processes, formulae, drawings,
schematics, blueprints, flow charts, models, strategies, prototypes, techniques,
testing procedures and testing results (collectively, “Trade Secrets”);
(E) other intellectual property rights and/or proprietary rights relating to any
of the foregoing; and (F) goodwill, franchises, licenses, permits, consents,
approvals, immunities, covenants not to sue and claims of infringement against
third parties.

(l) “Laminate Substrate” means a laminate substrate produced using the Company’s
Patents.

(m) “Layer Transfer Services” means layer transfer services covered by the
Company’s Patents or using the Company’s Intellectual Property Assets.

(n) “Liability” means any liability, debt, obligation, deficiency, Tax, penalty,
assessment, fine, claim, cause of action or other liability of any kind or
nature whatsoever, whether

 

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asserted or unasserted, absolute or contingent, known or unknown, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become due and
regardless of when asserted.

(o) “Loss(es)” of a Person means any loss, Liability, demand, claim, action,
cause of action, cost, damage, deficiency, Tax, penalty, fine or expense,
whether or not arising out of third party claims (including, without limitation,
interest, penalties, reasonable attorneys’, accountants’ and other
professionals’ fees and expenses, court costs and all reasonable amounts paid in
investigation, defense or settlement of any of the foregoing) actually suffered
or incurred by such Person; provided, however, that Losses shall be determined
for purposes of Article 5 without regard for any qualification by terms such as
“material” or “Material Adverse Effect” contained in any representation or
warranty.

(p) “Ordinary Course of Business” means the ordinary course of business
consistent with past custom and practice.

(q) “Parent Parties” means Parent, the Surviving Corporation and each of their
respective officers, directors, managers, members, employees, agents and
permitted successors and permitted assigns.

(r) “Person” means an individual, corporation, partnership, limited liability
company, joint venture, association, trust, unincorporated organization or other
entity.

(s) “Preferred Holder Parties” means the Preferred Holder and its respective
officers, directors, managers, members, employees, agents and permitted
successors and assigns.

(t) “Pro Rata Basis,” with respect to each Stockholder, means the quotient
obtained by dividing (x) the number of shares of Series B Preferred Stock or
Common Stock held by such Stockholder, as applicable, by (y) the aggregate
number of shares of Series B Preferred Stock and Common Stock held by all
Stockholders as of immediately prior to the Effective Time.

(u) A “Successful Laminate Substrate Production” occurs when, for a minimum of
three bulk GaN 2” donor wafers, Parent is able to demonstrate at least five
(5) consecutive transfers from each to 2” poly AlN wafers, followed by GaN epi,
where in the aggregate at least ninety-five percent (95%) of the film area after
epi is of quality comparable to the donor wafers’ quality.

(v) “Trade Payable Deficit” means the excess of (i) the Company’s trade payables
as of the Closing Date, over (ii) the sum of (x) the Company’s trade receivables
as of the Closing Date, plus (y) the Company’s pre-paid expenses as of the
Closing Date.

(w) “Transaction Documents” means this Agreement, the Olson Consulting
Agreement, the Pinnington Offer Letter and any other agreement contemplated
hereby or thereby to which the Company is a party.

6.4 Interpretation. When a reference is made in this Agreement to an Article,
Section, Schedule or Exhibit, such reference will be to an Article or Section
of, or a Schedule or Exhibit to, this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and will not affect in any way the meaning or interpretation of
this Agreement. Whenever the words “include”, “includes” or “including” are used
in this Agreement, they will be deemed to be followed by the words “without
limitation.” The words “hereof,” “herein” and “hereunder” and words of similar
import when used in this Agreement will refer to this Agreement as a whole and
not to any particular provision of this Agreement. All terms used herein with
initial capital letters have the meanings ascribed to them herein and all terms
defined in this Agreement will have such

 

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defined meanings when used in any certificate or other document made or
delivered pursuant hereto unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the plural
forms of such terms and to the masculine as well as to the feminine and neuter
genders of such term. Any agreement, instrument or statute defined or referred
to herein or in any agreement or instrument that is referred to herein means
such agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments incorporated
therein. References to a Person are also to its permitted successors and
assigns. The parties have participated jointly in the negotiation and drafting
of this Agreement and the other agreements, documents and instruments executed
and delivered in connection herewith with counsel sophisticated in investment
transactions. In the event an ambiguity or question of intent or interpretation
arises, this Agreement and the agreements, documents and instruments executed
and delivered in connection herewith shall be construed as if drafted jointly by
the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement and the agreements, documents and instruments executed and delivered
in connection herewith

6.5 Counterparts; Delivery by Facsimile or Electronic Mail. This Agreement and
any Transaction Documents, and any amendments hereto or thereto, may be executed
in one or more counterparts, all of which will be considered one and the same
agreement and will become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties. This Agreement
and any Transaction Document, and any amendments hereto or thereto, to the
extent signed and delivered by means of a facsimile machine or digital imaging
and electronic mail, shall be treated in all manner and respects as an original
contract and shall be considered to have the same binding legal effects as if it
were the original signed version thereof delivered in person. At the request of
any party hereto or to any such Transaction Document, each other party hereto or
thereto shall re-execute original forms thereof and deliver them to all other
parties. No party hereto or to any such Transaction Document shall raise the use
of a facsimile machine or digital imaging and electronic mail to deliver a
signature or the fact that any signature or contract was transmitted or
communicated through the use of a facsimile machine or digital imaging and
electronic mail as a defense to the formation of a contract and each such party
forever waives any such defense.

6.6 Amendments and Waivers. This Agreement may not be amended or modified, nor
may compliance with any condition or covenant set forth herein be waived, except
by a writing duly and validly executed by Parent, the Company and the Preferred
Holder, or in the case of a waiver, the party waiving compliance. No failure or
delay by any party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law. Waiver
of any term or condition of this Agreement by a party shall not be construed as
a waiver of any subsequent breach or waiver of the same term or condition by
such party, or a waiver of any other term or condition of this Agreement by such
party.

6.7 Entire Agreement; Severability. This Agreement (including the exhibits,
schedules, documents and instruments referred to herein) and the other
Transaction Documents constitute the entire agreement, and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter of this Agreement, including the letter agreement
between Parent and the Company dated as of February 6, 2008. If any term,
condition or other provision of this Agreement is found to be invalid, illegal
or incapable of being enforced by virtue of any rule of law, public policy or
court determination, all other terms, conditions and provisions of this
Agreement shall nevertheless remain in full force and effect.

 

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6.8 Captions. The captions herein are included for convenience of reference only
and shall be ignored in the construction or interpretation hereof.

6.9 Third Party Beneficiaries. Except as expressly provided in this Agreement,
each party hereto intends that this Agreement shall not benefit or create any
right or cause of action in or on behalf of any Person other than the parties
hereto.

6.10 Governing Law. All question concerning the construction, validity and
interpretation of this Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to the
conflict of law principles thereof.

6.11 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement may be assigned, in whole or in part, by
operation of law or otherwise by the parties hereto without the prior written
consent of the Company, the Preferred Holder and Parent. Any assignment in
violation of the preceding sentence will be void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
Notwithstanding the foregoing, without the prior written consent of any party
hereto, (a) each of the Company and Parent and their permitted assigns may at
any time, in their sole discretion, assign, in whole or in part, their rights
under this Agreement and the other Transaction Documents for collateral security
purposes to any lender providing financing to any of them or any of their
Affiliates, and (b) Parent may assign, in whole or in part, its rights and
obligations under this Agreement and the other Transaction Documents to any
acquirer of Parent and/or in connection with a Company Sale Event; provided
however, that if Parent seeks such assignment in connection with an acquisition
or a Company Sale Event, such acquirer agrees to assume the rights and
obligations of the Parent under this Agreement and the other Transaction
Documents, as the case may be.

6.12 Release. Effective upon the Closing, except with respect to a claim arising
out of this Agreement or the other Transaction Documents, the Stockholders on
behalf of themselves and their assigns and heirs hereby unconditionally and
irrevocably waive, release and forever discharge each of the Company and each of
its respective past and present directors, officers, employees, agents,
predecessors, successors, assigns, equityholders, partners, insurers, and
Affiliates from any and all Liabilities of any kind or nature whatsoever, in
each case whether absolute or contingent, liquidated or unliquidated, known or
unknown, and the Stockholders shall not seek to recover any amounts in
connection therewith or thereunder from the Company. Without limiting the
generality of the foregoing, the Stockholders waive all rights under California
Civil Code Section 1542, which provides:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE WHICH, IF
KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Such released Liabilities shall include, without limitation, any right to
recover against the Company for any indemnification claims made against or paid
by any Stockholder pursuant to Section 5. The Stockholders understand that this
is a full and final release of all claims, demands, causes of action and
Liabilities of any nature whatsoever, whether or not known, suspected or
claimed, that could have been asserted in any legal or equitable proceeding
against the Company, except as expressly set forth in this Section 6.12. Each
Stockholder represents that such Stockholder is not aware of any claim by such
Stockholder other than the claims that are waived, released and forever
discharged by this Section 6.12.

 

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6.13 Confidentiality. The Stockholders shall treat and hold as confidential any
information concerning the business and affairs of the Company that is not
already generally available to the public, including any notes, analyses,
compilations, studies, forecasts, interpretations or other documents that are
derived from, contain, reflect or are based upon any such information (the
“Confidential Information”), refrain from using any of the Confidential
Information, and deliver promptly to the Company, at the request and option of
the Company, all tangible embodiments (and all copies) of the Confidential
Information which are in such Person’s possession or under such Person’s
control. Notwithstanding the foregoing, Confidential Information shall not
include information that is (a) generally available to the public other than as
a result of a breach of this Section 6.13 or other act or omission of the
Stockholders or (b) rightfully received after the Closing Date from a third
party not under any obligation of confidentiality with respect to such
information. If any Stockholder is requested or required (by oral question or
request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, such Person shall notify the Company promptly of the
request or requirement so that the Company may seek an appropriate protective
order or waive compliance with the provisions of this Section 6.13. If, in the
absence of a protective order or the receipt of a waiver hereunder, a
Stockholder is, on the advice of counsel, compelled to disclose any Confidential
Information to any tribunal or else stand liable for contempt, it may disclose
the Confidential Information to the tribunal, provided that such disclosing
Person shall use its commercially reasonable efforts to obtain, at the request
and expense of the Company, an order or other assurance that confidential
treatment shall be accorded to such portion of the Confidential Information
required to be disclosed as the Company shall designate. Parent acknowledges
that the Preferred Holder will make such announcements and disclosures regarding
the transactions contemplated by this Agreement that it deems reasonably
necessary or advisable, including, for the avoidance of doubt but not limited
to, those disclosures required by applicable law or any national securities
exchange.

6.14 Transitional Assistance. The Stockholders shall not in any manner take any
action which is designed, intended or might reasonably be anticipated to have
the effect of discouraging customers, suppliers, vendors, service providers,
employees, lessors, licensors and other business relations of the Company from
maintaining the same business relationships with the Company following the
Closing as were maintained by such Persons prior to the Closing.

6.15 Remedies. Notwithstanding Section 6.16 and Section 6.17, it is specifically
understood and agreed that any breach of the provisions of this Agreement or any
other Transaction Document by any party hereto will result in irreparable injury
to the other parties hereto, that the remedy at law alone will be an inadequate
remedy for such breach, and that, in addition to any other remedies which they
may have, such other parties may enforce their respective rights by actions for
specific performance (to the extent permitted by law).

6.16 Dispute Resolution.

(a) All disputes, claims, or controversies arising out of or relating to this
Agreement, the Transaction Documents or any other agreement executed and
delivered pursuant to this Agreement or the negotiation, breach, validity or
performance hereof and thereof or the Merger and the transactions contemplated
hereby and thereby that are not resolved by mutual agreement shall be resolved
solely and exclusively by binding arbitration to be conducted before
J.A.M.S./Endispute, Inc. in Chicago, Illinois before a single arbitrator (the
“Arbitrator”). The parties understand and agree that this arbitration shall
apply equally to claims of fraud or fraud in the inducement.

 

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(b) The parties covenant and agree that the arbitration shall commence within
one hundred and eighty (180) days of the date on which a written demand for
arbitration is filed by any party hereto (the “Filing Date”). In connection with
the arbitration proceeding, the Arbitrator shall have the power to order the
production of documents by each party and any third-party witnesses. In
addition, each party may take up to three depositions as of right, and the
Arbitrator may in his or her discretion allow additional depositions upon good
cause shown by the moving party. However, the Arbitrator shall not have the
power to order the answering of interrogatories or the response to requests for
admission. In connection with any arbitration, each party shall provide to the
other, no later than seven (7) business days before the date of the arbitration,
the identity of all persons that may testify at the arbitration and a copy of
all documents that may be introduced at the arbitration or considered or used by
a party’s witnesses or experts. The Arbitrator’s decision and award shall be
made and delivered within one hundred and eighty (180) days of the Filing Date.
The Arbitrator’s decision shall set forth a reasoned basis for any award of
damages or finding of liability. The Arbitrator shall not have power to award
damages in excess of actual compensatory damages and shall not multiply actual
damages or award punitive damages or any other damages that are specifically
excluded under this Agreement, and each party hereby irrevocably waives any
claim to such damages.

(c) The parties covenant and agree that they will participate in the arbitration
in good faith and that they will, except as provided in Article 5 of this
Agreement, (i) bear their own attorneys’ fees, costs and expenses in connection
with the arbitration, and (ii) share equally in the fees and expenses charged by
the Arbitrator. Any party unsuccessfully refusing to comply with an order of the
Arbitrators shall be liable for costs and expenses, including attorneys’ fees,
incurred by the other party in enforcing the award. This Section 6.16 applies
equally to requests for temporary, preliminary or permanent injunctive relief,
except that in the case of temporary or preliminary injunctive relief any party
may proceed in court without prior arbitration for the purpose of avoiding
immediate and irreparable harm or to enforce its rights under any
non-competition covenants.

6.17 Consent to Jurisdiction. Except as provided in Sections 6.15 and 6.16(c),
each of the parties hereto irrevocably and unconditionally consents to the
jurisdiction of J.A.M.S./Endispute, Inc. to resolve all disputes, claims or
controversies arising out of or relating to this Agreement, the Transaction
Documents or any other agreement executed and delivered pursuant to this
Agreement or the negotiation, breach, validity or performance hereof and thereof
or the Merger and the transactions contemplated hereby and thereby, and further
consents to the sole and exclusive jurisdiction of the courts of Chicago,
Illinois for the purposes of enforcing the arbitration provisions of
Section 6.16 of this Agreement. Each party further irrevocably waives any
objection to proceeding before the Arbitrator based upon lack of personal
jurisdiction or to the laying of venue and further irrevocably and
unconditionally waives and agrees not to make a claim in any court that
arbitration before the Arbitrator has been brought in an inconvenient forum.
Each of the parties hereto hereby consents to service of process by registered
mail at the address to which notices are to be given. Each of the parties hereto
agrees that its or his submission to jurisdiction and its or his consent to
service of process by mail is made for the express benefit of the other parties
hereto.

[REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]

 

Agreement and Plan of Merger – Page 34

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of
Merger to be signed by their respective officers thereunto duly authorized, all
as of the date first written above.

 

COMPANY: AONEX TECHNOLOGIES, INC. By:  

/S/ Sean Olson

Name:   Sean Olson Title:   President PARENT:   AMBERWAVE SYSTEMS CORPORATION
By:  

/S/ Richard Faubert

Name:   Richard Faubert Title:   President and CEO MERGER SUB: AONEX ACQUISITION
CORPORATION By:  

/S/ Richard Faubert

Name:   Richard Faubert Title:   President and CEO PREFERRED HOLDER: ARROWHEAD
RESEARCH CORPORATION By:  

/S/ Christopher Anzalone

Name:   Christopher Anzalone Title:   President and CEO

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COMMON HOLDERS:

/S/ Harry Atwater

Harry Atwater

/S/ James Zahler

James Zahler

/S/ Anna Fontcuberta

Anna Fontcuberta

/S/ Sean Olson

Sean Olson

/S/ Charles Tsai

Charles Tsai

/S/ Art Ackerman

Art Ackerman

/S/ Corinne Ladous

Corinne Ladous

/S/ Tom Pinnington

Tom Pinnington