Exhibit 10.1

The attached copy of the merger agreement has been included to provide the
reader with information regarding its terms. It is not intended to provide any
other factual information about SunPower or PowerLight. The merger agreement
contains representations and warranties that SunPower and PowerLight made to one
another in the context and at the time of the signing of the merger agreement.
The assertions embodied in those representations and warranties are qualified by
information in confidential disclosure letters that SunPower and PowerLight
exchanged in connection with signing the merger agreement. The disclosure
letters do contain information that modifies, qualifies and creates exceptions
to the representations and warranties set forth in the attached merger
agreement. Accordingly, you should not rely on the representations and
warranties as characterizations of the actual state of facts, since they are
modified by the underlying disclosure letters and were made as of the time the
merger agreement was signed. Information concerning the subject matter of the
representations and warranties may have changed since the date of the agreement.

 

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AGREEMENT AND PLAN OF MERGER

BY AND AMONG

SUNPOWER CORPORATION,

PLUTO ACQUISITION COMPANY LLC,

POWERLIGHT CORPORATION

AND

THOMAS L. DINWOODIE,

AS SHAREHOLDERS’ REPRESENTATIVE

NOVEMBER 15, 2006

 

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TABLE OF CONTENTS

 

          Page ARTICLE 1   

THE MERGER

   1

1.1

  

The Merger

   1

1.2

  

The Closing

   2

1.3

  

Effects of the Merger

   2

1.4

  

Effects on Capital Stock

   2

1.5

  

Exchange of Certificates

   5

1.6

  

Fractional Shares

   6

1.7

  

Dissenting Shares

   7

ARTICLE 2

  

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

   7

2.1

  

Organization, Standing and Power

   7

2.2

  

Capital Structure

   8

2.3

  

Authority; Noncontravention

   9

2.4

  

Financial Statements

   10

2.5

  

Absence of Certain Changes; Undisclosed Liabilities

   10

2.6

  

Litigation

   11

2.7

  

Restrictions on Business Activities

   11

2.8

  

Intellectual Property

   11

2.9

  

Taxes

   14

2.10

  

Employee Benefit Plans

   17

2.11

  

Employee Matters

   19

2.12

  

Related Party Transactions

   20

2.13

  

Insurance

   20

2.14

  

Compliance With Laws

   21

2.15

  

Minute Books

   21

2.16

  

Brokers’ and Finders’ Fees

   21

2.17

  

Vote Required

   21

2.18

  

Board Approval

   21

2.19

  

Customers

   22

2.20

  

Suppliers

   22

2.21

  

Material Contracts

   22

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TABLE OF CONTENTS

(continued)

 

          Page

2.22

  

Title of Properties; Absence of Encumbrances

   24

2.23

  

Warranties; Defects, Returns, Recalls, Indemnities

   24

2.24

  

Environmental

   25

2.25

  

Licenses and Permits

   26

2.26

  

Inventories

   26

2.27

  

Disclosure

   26

ARTICLE 3

  

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

   27

3.1

  

Organization, Standing and Power

   27

3.2

  

Capital Structure

   27

3.3

  

Authority; Noncontravention

   28

3.4

  

SEC Documents; Financial Statements

   29

3.5

  

No Material Adverse Change

   29

3.6

  

Litigation

   30

3.7

  

Available Funds

   30

3.8

  

Board Approval

   30

3.9

  

Brokers’ and Finders’ Fees

   30

3.10

  

Reorganization

   30

3.11

  

Intellectual Property

   30

3.12

  

Disclosure

   31

ARTICLE 4

  

COVENANTS AND OTHER AGREEMENTS

   31

4.1

  

Conduct of Business of the Company and its Subsidiaries

   31

4.2

  

Restrictions on Conduct of Business of the Company and its Subsidiaries

   32

4.3

  

Conduct of Business of Parent and its Subsidiaries

   35

4.4

  

No Solicitation

   35

4.5

  

Securities Laws Matters

   37

4.6

  

Solicitation of Shareholders

   39

4.7

  

Access to Information

   39

4.8

  

Confidentiality

   39

4.9

  

Public Disclosure

   39

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TABLE OF CONTENTS

(continued)

 

          Page

4.10

  

Consents; Cooperation

   40

4.11

  

Legal Requirements

   41

4.12

  

Treatment as Reorganization

   41

4.13

  

Bonus Plan

   41

4.14

  

Assumption of Options

   42

4.15

  

Spreadsheet

   44

4.16

  

Expenses

   44

4.17

  

Section 280G Matters

   45

4.18

  

Affiliate Agreements

   45

4.19

  

D&O Insurance

   46

4.20

  

Obligations of Merger Sub

   46

4.21

  

Further Assurances

   46

4.22

  

Employee Benefits Matters

   46

4.23

  

SAS 100 Review and Year-End Audit

   46

ARTICLE 5

  

CONDITIONS TO THE MERGER

   47

5.1

  

Conditions to Obligations of Each Party to Effect the Merger

   47

5.2

  

Additional Conditions to Obligations of the Company

   47

5.3

  

Additional Conditions to the Obligations of Parent and Merger Sub

   48

ARTICLE 6

  

TERMINATION, AMENDMENT AND WAIVER

   50

6.1

  

Termination

   50

6.2

  

Effect of Termination

   50

6.3

  

Amendment

   51

6.4

  

Extension; Waiver

   51

ARTICLE 7

  

ESCROW FUND AND INDEMNIFICATION

   52

7.1

  

Indemnification by Indemnifying Shareholders

   52

7.2

  

Limitations on Indemnification

   52

7.3

  

Claims Procedure

   54

7.4

  

Objections to Claims

   54

7.5

  

Resolution of Objections to Claims

   55

7.6

  

Payment of Claims

   55

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TABLE OF CONTENTS

(continued)

 

          Page

7.7

  

Escrow Fund Releases

   57

7.8

  

Third-Party Claims

   57

7.9

  

Shareholders’ Representative

   59

7.10

  

Actions of the Shareholders’ Representative

   60

ARTICLE 8

  

GENERAL PROVISIONS

   63

8.1

  

Survival of Representations and Warranties

   63

8.2

  

Notices

   64

8.3

  

Interpretation

   65

8.4

  

Definitions

   66

8.5

  

Counterparts

   70

8.6

  

Entire Agreement; No Third Party Beneficiaries

   70

8.7

  

Assignment

   71

8.8

  

Severability

   71

8.9

  

Failure or Indulgence Not Waiver; Remedies Cumulative

   71

8.10

  

GOVERNING LAW

   71

8.11

  

Binding Arbitration

   71

8.12

  

Jurisdiction; Venue

   72

8.13

  

Enforcement

   72    * * * * *   

Exhibit A

  

Form of Support Agreement

   A-1

Exhibit B

  

Form of Noncompetition Agreement

   B-1

Exhibit C

  

Form of Equity Restriction Agreement

   C-1

Exhibit D

  

Form of Supply Agreement

   D-1

Exhibit E-1

  

Form of Cash Escrow Agreement

   E-1-1

Exhibit E-2

  

Form of Stock Escrow Agreement

   E-2-1

Exhibit F-1

  

Form of Letter of Transmittal

   F-1-1

Exhibit F-2

  

Form of Option Letter of Transmittal

   F-2-1

Exhibit G-1

  

Tax Representations of the Company

   G-1-1

Exhibit G-2

  

Tax Representations of Parent and Merger Sub

   G-2-1

Exhibit H

  

Form of Excess Parachute Payment Waiver

   H-1

Exhibit I

  

Form of Affiliate Agreement

   I-1

Exhibit J

  

Closing Deliveries

   J-1

Exhibit K

  

Matters to be Covered in Jones Day Opinion

   K-1

Exhibit L

  

Matters to be Covered in Shearman Opinion

   L-1

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER, dated as of November 15, 2006 (this
“Agreement”), is by and among SunPower Corporation, a Delaware corporation
(“Parent”), Pluto Acquisition Company LLC, a Delaware limited liability company
and a direct wholly owned subsidiary of Parent (“Merger Sub”), PowerLight
Corporation, a California corporation (the “Company”), and Thomas L. Dinwoodie,
as a representative of the Company Shareholders (as defined in Section 8.4) (the
“Shareholders’ Representative”).

BACKGROUND

A. The board of directors of each of the Company and Parent and the sole member
of Merger Sub have determined that it would be advisable and in the best
interests of their respective stockholders or members, as applicable, for Parent
to acquire the Company by means of the merger of the Company with and into
Merger Sub (the “Merger”), all on the terms and subject to the conditions set
forth in this Agreement, and, in furtherance thereof, have approved this
Agreement and the transactions contemplated by this Agreement.

B. In order to induce Parent to enter into this Agreement, concurrently with the
execution and delivery of this Agreement, certain Company Shareholders are
executing and delivering Support Agreements in the form attached hereto as
Exhibit A (each, a “Support Agreement”), and certain key employees of the
Company are executing and delivering binding Noncompetition Agreements in the
form attached hereto as Exhibit B.

D. In order to induce Parent to enter into this Agreement, concurrently with the
execution and delivery of this Agreement, certain employees of the Company are
executing and delivering Equity Restriction Agreements in substantially the form
attached hereto as Exhibit C (each, an “Equity Restriction Agreement”).

E. In order to induce the Company to enter into this Agreement, concurrently
with the execution and delivery of this Agreement, Parent is executing and
delivering a binding Supply Agreement in the form attached hereto as Exhibit D
(the “Supply Agreement”).

F. The Company and Parent intend that the Merger will qualify as a
“reorganization” under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the “Code”).

AGREEMENT

In consideration of the representations, warranties, covenants and other
agreements in this Agreement, the parties hereto, intending to be legally bound,
agree as follows:

ARTICLE 1

THE MERGER

1.1 The Merger. Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Limited Liability Company Act of the State
of Delaware (the “DLLCA”) and the General Corporation Law of the State of
California (the

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“CGCL”), the Company shall be merged with and into Merger Sub at the effective
time of the Merger (the “Effective Time”), which shall be the time of Closing
(as defined in Section 1.2) unless otherwise agreed by both parties as set forth
in the certificate of merger, in a form reasonably acceptable to Parent and the
Company (the “Certificate of Merger”), to be filed with the Secretary of State
of the State of Delaware (the “Delaware Secretary”), the agreement of merger, in
a form reasonably acceptable to Parent and the Company (the “Agreement of
Merger”), to be filed with the Secretary of State of the State of California
(the “California Secretary”) and the certificate of merger, in a form reasonably
acceptable to Parent and the Company (the “CA Certificate of Merger”), to be
filed with the California Secretary if, as and when the Closing occurs. Merger
Sub shall be the surviving company (sometimes referred to as the “Surviving
Company”) in the Merger and shall succeed to and assume all the rights and
obligations of the Company in accordance with the DLLCA and the CGCL.

1.2 The Closing. The closing of the transactions contemplated by this Agreement
(the “Closing”) shall take place as soon as practicable after the satisfaction
or waiver of each of the conditions set forth in ARTICLE 5 or at such other time
as the parties agree in writing. The Closing shall take place at the offices of
Jones Day, 1755 Embarcadero Road, Palo Alto, California, or at such other
location as the parties agree. The date on which the Closing actually occurs is
herein referred to as the “Closing Date.”

1.3 Effects of the Merger.

(a) At the Effective Time, the effect of the Merger shall be as provided in this
Agreement, the Certificate of Merger, the Agreement of Merger, the CA
Certificate of Merger and the applicable provisions of the DLLCA and the CGCL.

(b) At the Effective Time, the certificate of formation of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the certificate of
formation of the Surviving Company until thereafter amended as provided by the
DLLCA and such certificate of formation; provided, however, that, at the
Effective Time, the certificate of formation of the Surviving Company shall be
amended so that the name of the Surviving Company shall be “PowerLight LLC.”

(c) At the Effective Time, the operating agreement of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the operating agreement of the
Surviving Company until thereafter amended as provided by the DLLCA, the
certificate of formation of the Surviving Company and such operating agreement.

(d) At the Effective Time, the officers of Merger Sub, as constituted
immediately prior to the Effective Time, shall be the officers of the Surviving
Company, for so long as provided under the DLLCA, the certificate of formation
of the Surviving Company and the operating agreement of the Surviving Company.

1.4 Effects on Capital Stock. As of the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Parent, the Company or the
holders of any of the following securities, the following shall occur:

(a) Each share of capital stock of the Company (the “Company Capital Stock”)
that is owned by the Company, Parent, Merger Sub or any of their respective
Subsidiaries shall automatically be canceled and shall cease to exist, and no
consideration shall be delivered or deliverable in exchange therefore.

 

2

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(b) Each issued and outstanding share of Company Capital Stock (other than
shares to be canceled in accordance with Section 1.4(a) and Dissenting Shares
(as defined in Section 1.7(a)) shall be converted into the right to receive the
consideration specified and allocated in this Section 1.4 (the “Merger
Consideration”). As of the Effective Time, all such shares of Company Capital
Stock shall no longer be outstanding and shall automatically be canceled and
shall cease to exist, and each holder of a certificate formerly representing any
such shares of Company Capital Stock (the “Certificates”) shall cease to have
any rights with respect thereto, except the right to receive the Merger
Consideration as allocated in this Section 1.4 upon surrender of such
Certificate in accordance with Section 1.5.

(i) Upon the Closing, Parent shall issue and/or deliver to the Exchange Agent
(as defined in Section 1.5), in the aggregate, on account of all shares of
Company Capital Stock outstanding immediately prior to the Closing (other than
shares to be cancelled in accordance with Section 1.4(a) and Dissenting Shares)
and all rights (including options (other than options assumed pursuant to
Section 4.14) and warrants) to acquire shares of Company Capital Stock
outstanding immediately prior to the Closing (A) $130,000,000 in cash, minus an
amount equal to 40% of any Excess Transaction Expenses (as defined in Section
4.16) (the “Cash Consideration”); and (B) a number of shares of Class A common
stock, par value $0.001 per share, of Parent (the “Parent Common Stock”) equal
to (1) $195,000,000, minus an amount equal to 60% of Excess Transaction Expenses
divided by (2) the Parent Common Stock Price, with cash in lieu of fractional
interests in accordance with Section 1.6, as applicable (the “Stock
Consideration”). The “Parent Common Stock Price” shall mean the Average Parent
Trading Price; provided, however, that (1) if the Average Parent Trading Price
is less than $31.312, then the Parent Common Stock Price shall be deemed to be
$31.312, or (2) if the Average Parent Trading Price is greater than $34.608,
then the Parent Common Stock Price shall be deemed to be $34.608. The “Average
Parent Trading Price” shall be the average volume weighted average price of the
Parent Common Stock (as reported, absent manifest error, on Nasdaq.com) for the
twenty consecutive trading days ending on and including the trading day that is
immediately preceding the day on which the Closing occurs. A portion of the Cash
Consideration and Stock Consideration otherwise payable to the Indemnifying
Shareholders in the Merger equal to an aggregate of $48,750,000 (the “Aggregate
Escrow Amount”) shall be deposited at the Closing with U.S. Bank National
Association, as escrow agent (the “Escrow Agent”), in accordance with a Cash
Escrow Agreement, dated as of the Closing Date, substantially in the form of
Exhibit E-1 with such changes as reasonably required by the Escrow Agent (the
“Cash Escrow Agreement”), by and among the Parent, the Escrow Agent and the
Shareholders’ Representative, with respect to such portion of the Cash
Consideration, and the Stock Escrow Agreement, dated as of the Closing Date,
substantially in the form of Exhibit E-2 with such changes as reasonably
required by the Escrow Agent (the “Stock Escrow Agreement,” and together with
the Cash Escrow Agreement, the “Escrow Agreements”), by and among the Parent,
the Escrow Agent and the Shareholders’ Representative with respect to such
portion of the Stock Consideration. The Escrow Fund (as defined in Section 8.4)
will be held and distributed in accordance with the terms of the Escrow
Agreements and ARTICLE 7 of this Agreement. The

 

3

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percentage of the Aggregate Escrow Amount which must be contributed by each
Indemnifying Shareholder shall be equal to the Indemnification Percentage (as
defined in Section 7.1). No later than two business days prior to the Closing
Date, the Indemnifying Shareholders shall deliver a notice signed by each
Indemnifying Shareholder (the “Escrow Allocation Notice”) to Parent stating the
amount (as a percentage of each Indemnifying Shareholder’s portion of the
Aggregate Escrow Amount) of the Cash Consideration and Stock Consideration which
should be deposited into the Cash Escrow Fund and the Stock Escrow Fund,
respectively, at the Closing, to fund each Indemnifying Shareholder’s portion of
the Aggregate Escrow Amount, and Parent shall deposit the amounts based on the
Escrow Allocation Notice into the Cash Escrow Fund and the Stock Escrow Fund, as
the case may be, provided that if Parent does not receive an Escrow Allocation
Notice from the Indemnifying Shareholders two business days prior to the Closing
Date, Parent shall fund each Indemnifying Shareholder’s portion of the Aggregate
Escrow Amount such that 40% of such amount shall be funded with a portion of the
Cash Consideration and the remainder with a portion of the Stock Consideration,
in each case which would otherwise have been payable to each Indemnifying
Shareholder. Notwithstanding the foregoing, at least 40% of the Aggregate Escrow
Amount must consist of Cash Consideration. The final percentages of the
Aggregate Escrow Amount consisting of Cash Consideration and Stock Consideration
shall be referred to as the “Cash Escrow Percentage” and the “Stock Escrow
Percentage,” respectively. For purposes of this Section 1.4(b), the Stock
Consideration shall be valued in accordance with Section 7.2(e).

(ii) The Merger Consideration shall be allocated as follows: Each share of
Company Common Stock outstanding immediately prior to the Effective Time shall
be converted into the right to receive, and shall become exchangeable for:

(A) The Cash Amount; and

(B) The Stock Amount.

For purposes of this Section 1.4(b)(ii), 40% of each share of Company Common
Stock shall be converted into the right to receive and shall become exchangeable
for the Cash Amount and 60% of each share of Company Common Stock shall be
converted into the right to receive and shall become exchangeable for the Stock
Amount.

(c) If there is a stock split, reverse stock split, stock dividend (including
any dividend or distribution of securities convertible into capital stock),
reorganization, reclassification, combination, recapitalization or other like
change with respect to shares of Company Capital Stock or Parent Common Stock
occurring after the date of this Agreement and before the Effective Time, all
references in this Agreement to specified numbers of shares of any class or
series affected thereby, and all calculations provided for that are based upon
numbers of shares of any class or series (or trading prices therefore) affected
thereby, shall be equitably adjusted to the extent necessary to provide the
parties the same economic effect as contemplated by this Agreement prior to such
stock split, reverse stock split, stock dividend, reorganization,
reclassification, combination, recapitalization or other like change.

 

4

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1.5 Exchange of Certificates.

(a) At or prior to the Closing, Parent shall enter into an agreement with
Computershare Trust Company, N.A. (or such other bank or trust company in the
United States as may be designated by Parent, the “Exchange Agent”), which shall
provide that Parent shall, upon the Closing, deliver to the Exchange Agent
(i) the shares of Parent Common Stock and cash necessary for the payment of the
Merger Consideration pursuant to Section 1.1 and the cash consideration
necessary for the payment to holders of vested Company Options pursuant to
Section 4.14(a)(i)(A). Parent shall pay the fees and expenses of the Exchange
Agent.

(b) As soon as reasonably practicable after the Closing, Parent shall cause the
Exchange Agent to deliver or mail to each holder of record of a Certificate
(i) a letter of transmittal substantially in the form attached hereto as Exhibit
F-1 with such changes as the Exchange Agent shall reasonably request (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent and the
Company may reasonably specify) and (ii) instructions for use in surrendering
Certificates in exchange for consideration specified and allocated in
Section 1.4. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall receive in exchange therefore the Merger Consideration
for which the shares formerly held by such holder are to be exchanged in
accordance with Section 1.4 (less any shares of Parent Common Stock deposited in
the Stock Escrow Fund and/or cash deposited into the Cash Escrow Fund), and the
certificates so surrendered shall be canceled. If a transfer of ownership of
shares of Company Capital Stock represented by a Certificate has not been
registered in the Company’s transfer records, payment may be made to a Person
other than the Person in whose name the Certificate so surrendered is registered
if such Certificate is properly endorsed or otherwise be in proper form for
transfer and the Person requesting such issuance shall pay any transfer or other
Tax (as defined in Section 2.9(a)) required by reason of the payment to a Person
other than the registered holder of such Certificate or establish to the
satisfaction of Parent that such Tax has been paid or is not applicable. Other
than interest earned that becomes part of the Cash Escrow Fund, no interest
shall be paid or will accrue on the cash payable to holders of Certificates in
accordance with the provisions of this ARTICLE 1.

(c) As soon as reasonably practicable after the Closing, Parent shall cause the
Exchange Agent to deliver or mail to each holder of record of a Company Option
of which a portion is vested as of immediately prior to the Effective Time (i) a
letter of transmittal substantially in the form attached hereto as Exhibit F-2
with such changes as the Exchange Agent shall reasonably request (an “Option
Letter of Transmittal”) and (ii) instructions for use in submitting the Option
Letter of Transmittal in exchange for the cash consideration specified in
Section 4.14(a)(i)(A). No interest shall be paid or will accrue on the cash
payable to holders of Company Options in accordance with the provisions of this
ARTICLE 1.

(d) All shares of Parent Common Stock issued and all cash paid upon the
surrender of Certificates in accordance with the terms of this ARTICLE 1
(including shares of Parent Common Stock deposited into the Stock Escrow Fund
and cash deposited into the Cash Escrow Fund) shall be deemed to have been paid
in full satisfaction of all rights pertaining to the shares of Company Capital

 

5

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Stock represented by such certificates, and there shall be no further
registration of transfers on the stock transfer books of the Surviving Company
of the shares of Company Capital Stock which were outstanding immediately prior
to the Closing. If, after the Effective Time, Certificates are presented to the
Surviving Company or the Exchange Agent for any reason, they shall be canceled
and exchanged as provided in this ARTICLE 1, except as otherwise provided by
law.

(e) None of Parent, the Surviving Company or the Exchange Agent shall be liable
to any Person in respect of any cash delivered to a public official in
accordance with any applicable abandoned property, escheat or similar law. If
any Certificate shall not have been surrendered, or any Option Letter of
Transmittal shall not have been delivered, immediately prior to the date on
which any amounts payable in accordance with this ARTICLE 1 would otherwise
escheat to or become the property of any Governmental Entity (as defined in
Section 2.3), any such amounts shall, to the extent permitted by applicable law,
become the property of the Surviving Company, free and clear of all claims or
interest of any Person previously entitled thereto.

(f) If any Certificate shall have been lost, stolen or destroyed, upon the
execution and delivery to the Exchange Agent by the holder of record of such
Certificate of such additional documentation that the Exchange Agent may
reasonably request, the payment to the Exchange Agent by such holder of any
indemnity/surety bond in such amount as required by the Exchange Agent and the
payment to the Exchange Agent by such holder of any handling or other fee
required by the Exchange Agent, the Exchange Agent shall issue in exchange for
such lost, stolen or destroyed Certificate the applicable Merger Consideration
with respect thereto in accordance with Section 1.5.

(g) The Surviving Company or the Exchange Agent shall be entitled to deduct and
withhold from amounts otherwise payable in accordance with this Agreement to any
former holder of shares of Company Capital Stock or Company Options such amounts
as the Surviving Company or the Exchange Agent reasonably believes is required
to be deducted and withheld with respect to the making of such payment under the
Code or any provision of state, local or foreign Tax law. To the extent that
amounts are so withheld and paid over to the appropriate taxing authority by the
Surviving Company or the Exchange Agent, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Company Capital Stock or Company Options in respect of which such
deduction and withholding was made by the Surviving Company or the Exchange
Agent.

1.6 Fractional Shares. No fraction of a share of Parent Common Stock will be
issued in connection with the Merger, and in lieu thereof each holder of shares
of Company Capital Stock who would otherwise be entitled to a fraction of a
share of Parent Common Stock (after aggregating all fractional shares of Parent
Common Stock to be received by such holder) shall receive from Parent an amount
of cash equal to such fraction of a share multiplied by the Parent Common Stock
Price.

 

6

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1.7 Dissenting Shares.

(a) Notwithstanding anything in this Agreement to the contrary and unless
otherwise provided by applicable law, shares of Company Capital Stock that are
issued and outstanding immediately prior to the Effective Time and that are
owned by shareholders who have properly perfected their dissenter’s rights in
accordance with the provisions of applicable law (“Dissenting Shares”) shall not
be converted into the right to receive the Merger Consideration, unless and
until such shareholders shall have failed to perfect or shall have effectively
withdrawn or lost their right of payment under applicable law, but, instead, the
holders thereof shall be entitled to payment of the fair value of such
Dissenting Shares in accordance with the applicable provisions of law. If any
such holder shall have failed to perfect or shall have effectively withdrawn or
lost such dissenter’s rights, each share of Company Capital Stock held by such
shareholder shall thereupon be deemed to have been converted into the right to
receive and become exchangeable for, at the Effective Time, the Merger
Consideration specified and allocated in Section 1.4.

(b) The Company shall give Parent (i) prompt notice of any objections filed in
accordance with applicable law received by the Company, withdrawals of such
objections and any other instruments served in connection with such objections
in accordance with applicable law and received by the Company or its
representatives, and (ii) the opportunity to direct all negotiations and
proceedings with respect to objections under applicable law consistent with the
Company’s obligations thereunder; provided that the Company shall have the right
to participate in such negotiations and proceedings. The Company shall not,
except with the prior written consent of Parent, (A) voluntarily make any
payment or statement against interest with respect to any such objection,
(B) offer to settle or settle any such objection, or (C) waive any failure by a
former shareholder of the Company to timely deliver a written objection or to
perform any other act perfecting appraisal rights in accordance with applicable
law.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Subject to the exceptions set forth in the Company Disclosure Letter (as defined
in Section 8.4), the Company represents and warrants to Parent and Merger Sub as
follows:

2.1 Organization, Standing and Power. Each of the Company and each of its
Subsidiaries (as defined in Section 8.4) is a company duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
as set forth opposite the name of the Company and each of its Subsidiaries in
Section 2.1 of the Company Disclosure Letter. Each of the Company and each of
its Subsidiaries has the corporate power to own, lease and operate its
properties and to conduct its business as now being conducted and is duly
qualified to do business and is in good standing in each jurisdiction set forth
opposite the name of the Company and each of its Subsidiaries in Section 2.1 of
the Company Disclosure Letter. Neither the Company nor any of its Subsidiaries
is in violation of any of the provisions of its organizational documents.
Section 2.1 of the Company Disclosure Letter sets forth a list of the Company’s
officers and directors. Other than the entities listed on Section 2.1 of the
Company Disclosure Letter, the Company does not (and has not) directly or
indirectly own any equity or similar interest in, or any interest convertible or
exchangeable or exercisable for, any equity or similar interest in, any Person
(as defined in Section 8.4). Section 2.1 of the Company Disclosure Letter sets

 

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forth a true, correct and complete list of each of the Company’s Subsidiaries
indicating (i) its officers and directors, and (ii) the record owners of all of
its issued and outstanding shares of capital stock. All of the outstanding
capital stock of each of the Company’s Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable. There are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to which
any of the Company’s Subsidiaries is a party or by which it is bound obligating
any of the Company’s Subsidiaries to issue, deliver, sell, repurchase or redeem,
or cause to be issued, sold, repurchased or redeemed, any shares of the capital
stock of such Subsidiary or obligating such Subsidiary to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such option, warrant, call right, commitment or agreement. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to any of the Company’s
Subsidiaries.

2.2 Capital Structure.

(a) The authorized capital stock of the Company consists of 30,000,000 shares of
Company Common Stock and 15,000,000 shares of Company Preferred Stock, of which
810,810 shares have been designated as “Series A Preferred Stock,” 1,516,302.80
shares have been designated as “Series B Preferred Stock” and 3,750,000 shares
have been designated as “Series C Preferred Stock.” There are issued and
outstanding 11,454,316 shares of Company Common Stock and 810,810 shares of the
Company’s “Series A Preferred Stock,” 1,516,302.80 shares of the Company’s
“Series B Preferred Stock” and 2,280,548.02 shares of the Company’s “Series C
Preferred Stock” as of the date hereof. There are not outstanding any
adjustments made or required to be made to the conversion rates applicable to
Company Preferred Stock set forth in Company’s Amended and Restated Articles of
Incorporation (the “Articles of Incorporation”). There are no declared or
accrued but unpaid dividends with respect to any shares of Company Common Stock
or Company Preferred Stock. Each share of Company Preferred Stock is convertible
into Company Common Stock on a one-to-one basis. There are no other issued and
outstanding shares of Company Capital Stock as of the date hereof.
Section 2.2(a) of the Company Disclosure Letter sets forth a true, correct and
complete list (with names and addresses) of (i) all of the Company’s security
holders as of the date hereof, the number of shares, warrants, options or other
rights owned and the total number of shares of Company Common Stock reserved
under the Company’s Common Stock Option and Common Stock Purchase Plan (the
“Company Stock Plan”), (ii) any Persons with rights to acquire Company
securities (including all holders of outstanding Company Options, whether or not
granted under the Company Stock Plan, the exercise or vesting schedule, exercise
price, and tax status of such options under Section 422 of the Code) pursuant to
any agreement to which the Company is a party, and (iii) any Persons, to the
knowledge of the Company, with rights to acquire Company securities pursuant to
any agreement to which the Company is not a party, in each case, as of the date
hereof. All issued and outstanding shares of Company Capital Stock are duly
authorized, validly issued, fully paid and non-assessable and are free of any
liens, charges, claims, encumbrances, preemptive rights, rights of first refusal
and “put” or “call” rights created by statute, the Company’s organizational
documents or any agreement to which the Company is a party or by which it is
bound. Except for (A) outstanding Company Options to purchase 3,544,800 shares
of Company Common Stock under the Company Stock Plan and 2,249,524 outstanding
non-plan options for a total of 5,794,324

 

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Company Options outstanding, (B) outstanding Company Common Stock Warrants to
purchase 310,439 shares of Company Common Stock, and outstanding Company Series
C Warrants to purchase 342,082 shares of Series C Preferred Stock, and
(C) outstanding Company Preferred Stock, there are no options, warrants, calls,
rights, commitments or (written or oral) contracts, agreements, instruments,
arrangements, understandings, commitments or undertakings, including leases,
licenses, guarantees, sublicenses and subcontracts (each, a “Contract”), to
which the Company is a party, or by which it is bound, obligating the Company to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, after the date hereof any shares of Company
Capital Stock and/or Company Options or obligating the Company to grant, extend,
accelerate the vesting and/or waive any repurchase rights of, change the price
of or otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement. Except as set forth in Section 2.2 of the Company
Disclosure Letter, there are no Contracts relating to voting, purchase or sale
of any Company Capital Stock (1) between or among the Company and any of its
security holders, other than written contracts granting the Company the right to
purchase shares in connection with the termination of employment or service, and
(2) to the Company’s knowledge, between or among any of the Company’s security
holders. All outstanding Company securities were issued in compliance with all
applicable federal and state securities laws.

(b) Except for the Company Stock Plan, the Company has never adopted or
maintained any stock option plan or other plan providing for equity compensation
of any Person. The Company has reserved as of the date hereof 7,243,240 shares
of Company Common Stock for issuance to employees and directors of, and
consultants to the Company, upon the exercise of options granted under the
Company Stock Plan, of which 1,694,200 shares are issuable, as of the date
hereof, upon the exercise of outstanding, unexercised, vested options. The
Company Shareholders have properly approved the Company Stock Plan and the
grants made thereunder.

2.3 Authority; Noncontravention.

(a) The Company has all requisite corporate power and authority to enter into
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly executed and delivered by the Company and assuming due
authorization, execution and delivery by the other parties hereto constitutes
the valid and binding obligation of the Company enforceable against the Company
in accordance with its terms, subject to the effect of (i) applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to rights of creditors generally, and (ii) rules of
law and equity governing specific performance, injunctive relief and other
equitable remedies.

(b) The execution and delivery of this Agreement by the Company does not, and
the consummation of the transactions contemplated hereby will not, (i) result in
the creation of a lien on any properties or assets of the Company or any of its
Subsidiaries, or (ii) conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation, renegotiation or acceleration of any
obligation or loss of any benefit under, or require any consent, approval or
waiver from any Person in accordance with, (A) any provision of the
organizational documents of the Company or any

 

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of its Subsidiaries, or (B) any Material Contract, permit, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
any of its Subsidiaries or any of their respective properties or assets. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any government, any court, tribunal, arbitrator, administrative
agency, commission or other governmental official, authority or instrumentality,
in each case whether domestic or foreign, any stock exchange or similar
self-regulatory organization or any quasi-governmental or private body
exercising any regulatory, taxing or other governmental or quasi-governmental
authority (each a “Governmental Entity”) is required by or with respect to the
Company or any of its Subsidiaries in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby,
except for (w) the filing of the Certificate of Merger, the Agreement of Merger
and the CA Certificate of Merger, (x) such filings as may be required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and any
required foreign antitrust filing, (y) applicable requirements if any, of the
Exchange Act, state securities or “blue sky” laws (the “Blue Sky Laws”), and
(z) the approval by the Securities and Exchange Commission (the “SEC”).

2.4 Financial Statements. The Company has delivered to Parent its consolidated
financial statements audited by Ernst & Young as at and for the years ended
December 31, 2003, 2004 and 2005 and its unaudited consolidated financial
statements as at and for the nine-month period ended September 30, 2006
(including, in each case, balance sheets, statements of operations and
statements of cash flows) (collectively, the “Financial Statements”). The
Financial Statements (a) have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”) applied on a consistent basis
throughout the periods indicated (except as may be indicated in the notes
thereto or, in the case of the unaudited financial statements, as permitted by
GAAP), and (b) present fairly, in all material respects, the consolidated
financial condition and results of operations and cash flows of the Company and
each of its Subsidiaries as of the dates, and for the periods, indicated
therein, except as otherwise noted therein (subject, in the case of interim
period financial statements, to normal recurring year-end audit adjustments,
none of which, individually or in the aggregate, are material). There has been
no change in Company accounting policies since December 31, 2005 (the “Company
Balance Sheet Date”), except as described in the Financial Statements or
required by GAAP.

2.5 Absence of Certain Changes; Undisclosed Liabilities.

(a) Since September 30, 2006 and until the date of this Agreement, the Company
and each of its Subsidiaries has conducted its business only in the ordinary
course of business, and there has not occurred: (i) any change, event or
condition (whether or not covered by insurance) that, individually or in the
aggregate with any other changes, events and conditions, has resulted in, or
could reasonably be expected to result in, a Material Adverse Effect on the
Company, or (ii) any action that, if taken after the date of this Agreement,
would constitute a breach of the covenants set forth in Section 4.2.

(b) Neither the Company nor any of its Subsidiaries has any obligations or
liabilities of any nature, whether matured or unmatured, fixed or contingent
(whether or not required to be reflected in the Financial Statements in
accordance with GAAP) other

 

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than (i) those set forth or adequately provided for in the balance sheet as of
September 30, 2006 included in the Financial Statements (the “September 30
Balance Sheet”), (ii) those incurred in the conduct of Company’s business since
the date of the September 30 Balance Sheet (the “September 30 Balance Sheet
Date”) in the ordinary course of business, and (iii) those incurred pursuant to
the terms of Contracts disclosed in the Company Disclosure Letter or incurred
pursuant to the terms of Contracts that are not required to be disclosed in the
Company Disclosure Letter, provided, in each case specified in clause (iii),
that the Company is not in breach of any such Contracts.

2.6 Litigation. There is no private or governmental action, suit, proceeding,
claim, arbitration or investigation pending before any Governmental Entity or
arbitrator, or, to the knowledge of the Company, threatened against the Company
or any of its Subsidiaries or any of their respective assets or properties,
including any Company IP Rights (as defined in Section 2.8(a)), or any of their
respective officers or directors (in their capacities as such). There is no
judgment, decree or order against the Company or any of its Subsidiaries, any of
their respective assets or properties, or, to the knowledge of the Company, any
of their respective directors or officers (in their capacities as such), that
could reasonably be expected to prevent, enjoin, or materially alter or delay
any of the transactions contemplated by this Agreement, or that, individually or
in the aggregate with any such other judgments, decrees and orders, could
reasonably be expected to have a Material Adverse Effect on the Company.

2.7 Restrictions on Business Activities. There is no Contract (including
covenants not to compete), judgment, injunction, order or decree binding upon
the Company or any of its Subsidiaries that has or could reasonably be expected
to have, whether before or after consummation of the Merger, the effect of
prohibiting or impairing any Company IP Right, any current or future business
practice of the Company or any of its Subsidiaries, any acquisition of property
(tangible or intangible) by the Company or any of its Subsidiaries or the
conduct of business by the Company or any of its Subsidiaries, in each case, as
currently conducted or as proposed to be conducted by the Company or any of its
Subsidiaries. Without limiting the generality of the foregoing, neither the
Company nor any of its Subsidiaries has entered into any customer or other
similar Contract that includes a “most favored pricing” or similar clause
restricting or otherwise impacting the right of the Company or any of its
Subsidiaries to sell Company Product or Service (as defined in Section 2.8(c))
in any manner or terms under which the Company or any of its Subsidiaries is
restricted from selling, licensing or otherwise distributing any of their
respective technology or products to, or from providing services to, customers
or potential customers or any class of customers, in any geographic area, during
any period of time or in any segment of the market.

2.8 Intellectual Property.

(a) The Company or one of its Subsidiaries (i) owns, or (ii) to the knowledge of
the Company, has the valid right or license to use and possess all Intellectual
Property (as defined below) used in the conduct of the business of the Company
and its Subsidiaries as currently conducted (the “Company IP Rights”), and such
Company IP Rights are sufficient for such conduct of Company’s business as
currently conducted.

 

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(b) Except as set forth in Section 2.8(b)(i) of the Company Disclosure Letter,
neither the execution, delivery and performance of this Agreement nor the
consummation of the Merger and the other transactions contemplated by this
Agreement will materially impair the rights of the Company or the Surviving
Company in any Company IP Right or portion thereof. Except as set forth in
Section 2.8(b)(ii) of the Company Disclosure Letter, neither the Company nor any
of its Subsidiaries is paying any royalties, honoraria, fees or other payments
to any third person (other than salaries payable to employees and independent
contractors not contingent on or related to use of their work product) as a
result of the ownership, use, possession, license-in, sale, marketing,
advertising or disposition of any Company IP Rights, and none shall become
payable as a result of the consummation of the transactions contemplated by this
Agreement.

(c) Section 2.8(c) of the Company Disclosure Letter (A) sets forth a list of
each of the products and services currently produced, manufactured, marketed,
licensed, sold, furnished or distributed by the Company or any of its
Subsidiaries (each a “Company Product or Service”), and (B) identifies, for each
such Company Product or Service, whether the Company or Subsidiary provides
support or maintenance for such Company Product or Service. Neither the
operation of the Company’s and the Subsidiaries’ business as currently conducted
(including the use, development, manufacture, marketing, license, sale or
furnishing of any Company Product or Service) does not (i) violate any Contract
between the Company or any of its Subsidiaries and any third party, or
(ii) infringe or misappropriate any Intellectual Property right of any third
party. Except as set forth in Section 2.8(c) of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries has received any written notice
(or, to the knowledge of the Company, any oral notice) asserting that any
Company IP Right or the proposed use, sale, license or disposition of any
Company Product or Service conflicts with or infringes, or would conflict with
or infringe, the Intellectual Property or other rights of any third party, and
neither the Company nor any of its Subsidiaries has received any written notice
(or, to the knowledge of the Company, any oral notice) from any third party
offering a license under any such third party Intellectual Property or other
right to avoid litigation or other claims.

(d) To the knowledge of the Company and except as set forth in Section 2.8(d) of
the Company Disclosure Letter, no current or former employee, consultant or
independent contractor of the Company or any of its Subsidiaries: (i) is in
material violation of any term or covenant of any employment contract, patent
disclosure agreement, invention assignment agreement, nondisclosure agreement,
noncompetition agreement or any other Contract with any third party by virtue of
such employee’s, consultant’s or independent contractor’s being employed by, or
performing services for, the Company or any of its Subsidiaries or using Trade
Secrets or other Intellectual Property of others without permission; (ii) has
developed any technology, Software or other copyrightable, patentable or
otherwise proprietary work for the Company or any of its Subsidiaries that is
subject to any Contract under which such employee, consultant or independent
contractor has assigned or otherwise granted to any third party any Intellectual
Property or other right in or to such technology, Software or other
copyrightable, patentable or otherwise proprietary work; (iii) has failed to
execute and deliver to the Company an enforceable Contract regarding the
protection of such Trade Secrets and other Intellectual Property rights (and in
the case of Trade Secrets and other Intellectual Property rights of the
Company’s customers and business partners, to the extent required by such
customers and business partners); or (iv) has failed to deliver an enforceable
written Contract assigning the rights to such employee’s, consultant’s or
independent contractor’s contributions to the Company IP Rights

 

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that may be owned by such Persons or that the Company does not otherwise own by
operation of law. To the knowledge of the Company, neither the employment of any
employee of the Company or any of its Subsidiaries, nor the use by the Company
or any of its Subsidiaries of the services of any consultant or independent
contractor subjects the Company or any of its Subsidiaries to any obligation to
any third party for improperly soliciting such employee, consultant or
independent contractor to work for the Company or such Subsidiary, whether such
obligation is contractual or otherwise. To the knowledge of the Company, no
third party has or will have any “moral rights” or rights to terminate any
assignment or license with respect to the Company IP.

(e) The Company and its Subsidiaries have taken all reasonable steps consistent
with industry standard practices to (i) protect, preserve and maintain the
secrecy and confidentiality of Trade Secrets in the Company IP Rights, and
(ii) preserve and maintain all of the Company’s and its Subsidiaries’
proprietary rights included among Company-Owned IP Rights. To the knowledge of
the Company and except as set forth in Section 2.8(e) of the Company Disclosure
Letter, no current or former employee, officer, director, consultant or
independent contractor of the Company or any of its Subsidiaries has any right,
license, claim or interest whatsoever in or with respect to any Company-Owned IP
Rights.

(f) Section 2.8(f)(i) of the Company Disclosure Letter contains a true and
complete list of (i) all worldwide registrations made by or on behalf of the
Company of any Patents, Copyrights, Trademarks or Domain Names with any
Governmental Entity, including Domain Name registries, (ii) all applications
filed by the Company to secure its interest in Company IP Rights, including all
Patents, Copyrights and Trademarks, and, where applicable, the jurisdiction in
which each of the items of Company IP Rights has been applied for, filed, issued
or registered, and (iii) all inter parties proceedings or actions before any
court or tribunal (including the United States Patent and Trademark Office or
equivalent authority anywhere else in the world) related to any of Company IP
Rights and to which the Company is a party. To the knowledge of the Company, all
registered Patents, Copyrights, Trademarks and Domain Names held by the Company
are valid, enforceable and subsisting, and the Company is the record owner
thereof. All necessary registration, maintenance and renewal fees in connection
with such Company-Owned IP Rights (and Company-Licensed IP Rights in which the
Company has a contractual right or obligation to pay registration, maintenance
and renewal fees) have been paid and all necessary documents and articles in
connection with such Company IP have been filed with the relevant patent,
copyright, trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
Company-Owned IP Rights (and Company-Licensed IP Rights in which the Company has
a contractual right or obligation to pay registration, maintenance and renewal
fees). Except as set forth in Section 2.8(f)(ii) of the Company Disclosure
Letter, there are no actions that must be taken by Company or any of its
Subsidiaries within 180 days of the Closing Date, including the payment of any
registration, maintenance or renewal fees or the filing of any documents,
applications or articles for the purpose of maintaining, perfecting or
preserving or renewing any such Company-Owned IP Rights (and Company-Licensed IP
Rights in which the Company has a contractual right or obligation to pay
registration, maintenance and renewal fees).

(g) The Company owns all right, title and interest in and to all Company-Owned
IP Rights free and clear of any and all liens, claims, charges, security
interests, mortgages, easements, covenants, pledges, licenses, options,
preemptive rights, rights of

 

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first refusal or first offer, proxies, levies, voting trusts or agreements, or
other adverse claims or restrictions on title or transfer of any nature
whatsoever (“Encumbrances”), other than licenses and rights listed in
Section 2.8(g)(i) of Company Disclosure Letter. To the knowledge of the Company,
the Company’s and its Subsidiaries’ right to use the Company-Licensed IP is
subject only to the terms and conditions of the licenses listed in Section
2.8(g)(ii) of the Company Disclosure Letter.

(h) Except as set forth in Section 2.8(i) of the Company Disclosure Letter, to
the knowledge of the Company, there is no unauthorized use, disclosure,
infringement or misappropriation of any Company-Owned IP Rights by any third
party, including any employee or former employee of the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries has agreed to
indemnify any Person for any infringement of any Intellectual Property of any
third party by any Company Product or Service that has been sold, licensed to
third parties, leased to third parties, supplied, marketed, distributed or
provided by the Company or any of its Subsidiaries.

(i) To the knowledge of the Company and except as set forth in Section 2.8(m) of
the Company Disclosure Letter, no Governmental Entity, university, college or
other educational institution or research center has any right to (other than
license rights for internal purposes), ownership of or right to royalties for
Company-Owned IP Rights.

(j) To the knowledge of the Company, the Company and its Subsidiaries has been
and is in compliance with the Export Administration Act of 1979, as amended, and
all regulations promulgated thereunder.

(k) In each case in which Company of any of its Subsidiaries has acquired
ownership of Intellectual Property from any third party (other than current or
former employees, independent contractors or consultants), Company or
Subsidiary, as the case may be, has obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Intellectual Property
(including the right to seek past and future damages with respect thereto) to
the Company or any of its Subsidiaries and, to the extent necessary under
applicable laws, the Company or applicable Subsidiaries have recorded each such
assignment with the relevant Governmental Entities.

(l) Except as set forth in Section 2.8(l) of the Company Disclosure Letter, none
of the Company-Owned IP Rights has been adjudicated invalid or unenforceable, in
whole or in part, and, to the knowledge of the Company, the Company-Owned IP
Rights are valid and enforceable. No Company-Owned IP Right is subject to any
outstanding injunction, judgment, order, decree, ruling, charge, settlement or
other disposition of any dispute regarding any Company IP.

2.9 Taxes.

(a) “Tax” means (i) any net income, alternative or add-on minimum tax, gross
income, gross receipts, sales, use, ad valorem, transfer, franchise, profits,
license, withholding, estimated, payroll, employment, excise, severance, stamp,
occupation, premium, property, environmental or windfall profit tax, custom duty
or other tax, governmental fee or other like assessment or

 

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charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Governmental Entity
responsible for the imposition of any such tax (domestic or foreign) (each, a
“Tax Authority”), (ii) any liability for the payment of any amounts of the type
described in clause (i) of this sentence as a result of being a member of an
Affiliated, consolidated, combined, unitary or aggregate group for any Taxable
period, and (iii) any liability for the payment of any amounts of the type
described in clause (i) or (ii) of this sentence as a result of being a
transferee of or successor to any Person or as a result of any express or
implied obligation to indemnify any other Person. “Tax Return” means any return,
statement, report or form (including estimated tax returns and reports,
withholding tax returns and reports and information returns and reports)
required to be filed with respect to Taxes.

(b) The Company and each of its Subsidiaries, and any consolidated, combined,
unitary or aggregate group for Tax purposes of which the Company or any of its
Subsidiaries is or has been a member, have properly completed and timely filed
all Tax Returns required to be filed by them. All such Tax Returns are true and
correct in all material respects and have been completed in accordance with
applicable law (it being understood in this regard that no representation is
being made as to the amount of any net operating losses of the Company or any
Subsidiary) and the Company and each of its Subsidiaries have paid or withheld
and paid to the appropriate Tax Authority all Taxes due (whether or not shown to
be due on such Tax Returns).

(c) The September 30 Balance Sheet reflects all unpaid Taxes of the Company
and/or any of its Subsidiaries for periods (or portions of periods) through the
September 30 Balance Sheet Date. Neither the Company nor any of its Subsidiaries
has any liability for unpaid Taxes accruing after the September 30 Balance Sheet
Date except for Taxes arising in the ordinary course of business subsequent to
the September 30 Balance Sheet Date.

(d) There is (i) no claim for Taxes being asserted against the Company or any of
its Subsidiaries that has resulted in a lien against the property of the Company
or any of its Subsidiaries, and there is no such lien for Taxes outstanding,
other than liens for Taxes not yet due and payable, (ii) no audit of any Tax
Return of the Company or any of its Subsidiaries being conducted by a Tax
Authority and no notice of any such audit being commenced that has been received
by the Company or any of its Subsidiaries, and (iii) no extension of any statute
of limitations on the assessment of any Taxes granted by the Company or any of
its Subsidiaries currently in effect. Neither the Company nor any of its
Subsidiaries has been informed by any jurisdiction that the jurisdiction
believes that such entity was required to file any Tax Return that was not
filed.

(e) Neither the Company nor any of its Subsidiaries has (i) been or will be
required to include any material adjustment in Taxable income for any Tax period
(or portion thereof) in accordance with Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger,
(ii) filed any disclosures under Section 6662 or comparable provisions of state,
local or foreign law to prevent the imposition of penalties with respect to any
Tax reporting position taken on any Tax Return, (iii) engaged in a “reportable
transaction,” as set forth in Treasury Regulation Section 1.6011-4(b), (iv) ever
been a member of a consolidated, combined, unitary or aggregate group of which

 

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the Company was not the ultimate parent company, (v) been the “distributing
corporation” or the “controlled corporation” (in each case, within the meaning
of Section 355(a)(1) of the Code) with respect to a transaction described in
Section 355 of the Code (A) within the two-year period ending as of the date of
this Agreement, or (B) in a distribution that could otherwise constitute part of
a “plan” or “series of related transactions” (within the meaning of
Section 355(e) of the Code) that includes the transactions contemplated by this
Agreement, (vi) ever been a “United States real property holding corporation”
within the meaning of Section 897 of the Code, (vii) any actual or potential
liability under Treasury Regulations Section 1.1502-6 (or any comparable or
similar provision of federal, state, local or foreign law), as a transferee or
successor, in accordance with any contractual obligation, or otherwise for any
Taxes of any person other than the Company or any of its Subsidiaries, or
(viii) taken or agreed to take any action not provided for in this Agreement
(nor does the Company or any of its Subsidiaries have knowledge of any fact or
circumstance not specified or provided for in this Agreement) that would prevent
the Merger from qualifying as a “reorganization” within the meaning of
Section 368(a) of the Code.

(f) Neither the Company nor any of its Subsidiaries is a party to or bound by
any Tax sharing or Tax allocation agreement with any party other than the
Company or any Subsidiary of the Company, nor does the Company or any of its
Subsidiaries have any liability or potential liability to another party under
any such agreement.

(g) Each of the Company and each of its Subsidiaries has withheld or collected
and paid over to the appropriate Tax Authorities (or are properly holding for
such timely payment) all Taxes required by law to be withheld or collected.

(h) Neither the Company nor any of its Subsidiaries will be required to include
any item of income in, or exclude any item of deduction from, taxable income for
any period (or any portion thereof) ending after the Closing Date as a result of
any: (i) installment sale or other open transaction disposition made on or prior
to the Closing Date, (ii) prepaid amount received on or prior to the Closing
Date, (iii) closing agreement described in Section 7121 of the Code or any
corresponding provision of state or foreign law executed on or prior to the
Closing Date, or (iv) change in method of accounting to a taxable period ending
on or prior to the Closing Date.

(i) Section 2.9(i) of the Company Disclosure Letter lists all income, franchise
and similar Tax Returns (federal, state, local and foreign) filed with respect
to each of the Company and its Subsidiaries for taxable periods ended on or
after January 1, 2002, indicates the most recent income, franchise or similar
Tax Return for each relevant jurisdiction for which an audit has been completed
or the statute of limitations has lapsed and indicates all Tax Returns that
currently are the subject of audit.

(j) None of the assets of the Company or any of its Subsidiaries (i) is property
that is required to be treated as being owned by any other person in accordance
with the provisions of former Section 168(f)(8) of the Internal Revenue Code of
1954, or (ii) is “tax-exempt use property” within the meaning of Section 168(h)
of the Code.

 

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2.10 Employee Benefit Plans.

(a) Section 2.10(a) of the Company Disclosure Letter sets forth a complete list
of (i) all “employee benefit plans,” as defined in Section 3(3) of ERISA (as
defined in Section 8.4), (ii) all other currently effective severance pay,
salary continuation, bonus, incentive, stock option, retirement, pension, profit
sharing or deferred compensation plans, Contracts, programs, funds or
arrangements of any kind, and (iii) all other employee benefit plans, Contracts,
programs, funds or arrangements (whether written or oral, qualified or
nonqualified, funded or unfunded, foreign or domestic, currently effective or
terminated) and any trust, escrow or similar Contract related thereto, whether
or not funded, in respect of any present or former employees, directors,
officers, shareholders, consultants or independent contractors of the Company or
any of its Subsidiaries (all of the above being hereinafter individually or
collectively referred to as “Employee Plan” or “Employee Plans,” respectively).
The Company has no liability with respect to any plan, arrangement or practice
of the type described in the preceding sentence other than the Employee Plans.

(b) Copies of the following materials have been delivered or made available to
Parent: (i) all current and prior (but only to the extent that the Company has
any obligations thereunder) plan documents for each Employee Plan or, in the
case of an unwritten Employee Plan, a written description thereof, (ii) all
determination letters from the Internal Revenue Service (“IRS”) with respect to
any of the Employee Plans, (iii) all current and prior summary plan
descriptions, summaries of material modifications, annual reports, and summary
annual reports with respect to any of the Employee Plans, and (iv) all current
and prior (but only to the extent that the Company has obligations thereunder)
trust agreements, insurance contracts, and other documents relating to the
funding or payment of benefits under any Employee Plan.

(c) Each Employee Plan has been maintained, operated and administered in all
material respect in compliance with its terms and any related documents or
agreements and in compliance in all material respects with all applicable laws.
There have been no prohibited transactions or breaches of any of the duties
imposed on “fiduciaries” (within the meaning of Section 3(21) of ERISA) by ERISA
with respect to the Employee Plans that could result in any liability or excise
tax under ERISA or the Code being imposed on the Company.

(d) Each Employee Plan intended to be qualified under Section 401(a) of the Code
and has been determined by the IRS to be so qualified, and each trust created
thereunder has been determined by the IRS to be exempt from tax under the
provisions of Section 501(a) of the Code, and nothing has occurred since the
date of any such determination that could reasonably be expected to give the IRS
grounds to revoke such determination.

(e) Neither the Company nor any of its Subsidiaries currently has, and at no
time in the past has had, an obligation to contribute to a “defined benefit
plan” as defined in Section 3(35) of ERISA, a pension plan subject to the
funding standards of Section 302 of ERISA or Section 412 of the Code, a
“multiemployer plan” as defined in Section 3(37) of ERISA or Section 414(f) of
the Code or a “multiple employer plan” within the meaning of Section 210(a) of
ERISA or Section 413(c) of the Code.

 

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(f) No Employee Plan is or at any time was funded through a “welfare benefit
fund” as defined in Section 419(e) of the Code, and no benefits under any
Employee Plan are or at any time have been provided through a voluntary
employees’ beneficiary association (within the meaning of subsection 501(c)(9)
of the Code) or a supplemental unemployment benefit plan (within the meaning of
Section 501(c)(17) of the Code).

(g) All contributions, transfers and payments in respect of any Employee Plan,
other than transfers incident to an incentive stock option plan within the
meaning of Section 422 of the Code, have been or are fully deductible under the
Code.

(h) There is no pending or, to the knowledge of the Company, threatened
assessment, complaint, proceeding, or investigation of any kind in any court or
government agency with respect to any Employee Plan (other than routine claims
for benefits), nor, to the knowledge of the Company, is there any basis that
could reasonably be expected to give rise to one.

(i) All (i) insurance premiums required to be paid with respect to,
(ii) benefits, expenses, and other amounts due and payable under, and
(iii) contributions, transfers, or payments required to be made to, any Employee
Plan prior to the Closing Date will have been paid or made on or before their
due dates.

(j) With respect to any insurance policy providing funding for benefits under
any Employee Plan, (i) there is no liability of the Company or any of its
Subsidiaries in the nature of a retroactive rate adjustment, loss sharing
arrangement, or other actual or contingent liability, nor would there be any
such liability if such insurance policy was terminated on or after the date
hereof, and (ii) no insurance company issuing any such policy is in
receivership, conservatorship, liquidation or similar proceeding and, to the
knowledge of the Company, no such proceedings with respect to any insurer are
imminent.

(k) No Employee Plan provides benefits, including, without limitation, death or
medical benefits, beyond termination of service or retirement other than
(i) coverage mandated by law, or (ii) death or retirement benefits under any
Employee Plan that is intended to be qualified under Section 401(a) of the Code.

(l) The Company and its Subsidiaries have reserved all rights necessary to amend
or terminate each of the Employee Plans without the consent of any other person.

(m) No Employee Plan provides benefits to any individual who is not a current or
former employee of the Company or any of its Subsidiaries, or the dependents or
other beneficiaries of any such current or former employee.

(n) Except for the Company’s Subsidiaries, no other entity or trade or business
is, or at any time within the past six years has been, treated, together with
the Company, as a single employer under Section 414 of the Code or as a
controlled group under Section 4001 of ERISA.

(o) Except as set forth in Section 2.10(o) of the Company Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will, alone or in connection with any other
event, (i)

 

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result in any material payment (including severance, unemployment compensation
or golden parachute) becoming due under any Employee Plan, (ii) materially
increase any compensation or benefits (including severance, deferred
compensation and equity benefits) otherwise payable under any Employee Plan,
(iii) result in the acceleration of the time of payment or vesting of any such
benefits to any material extent, or (iv) result in the forgiveness in whole or
in part of any outstanding loans made by the Company or any of its Subsidiaries
to any Person. Except as set forth in Section 2.10(o) of the Company Disclosure
Letter, no benefit or payment under any Employee Plan that is “contingent”
(within the meaning of Section 280G(b)(2)(i) of the Code) on this Agreement or
the transactions contemplated by this Agreement will, either independently or
when aggregated with all other amounts payable to any individual, constitute a
“parachute payment” (as defined under Section 280G(b)(2) of the Code). Each
“nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of
the Code) has been operated since January 1, 2005 in good faith compliance with
Section 409A of the Code and regulatory guidance promulgated thereunder
(collectively, “Section 409A”). No nonqualified deferred compensation plan has
been “materially modified” (within meaning of Section 409A) at any time after
October 3, 2004.

(p) The term “Foreign Plan” shall mean any Employee Plan that is maintained
outside of the United States. Each Foreign Plan complies with all applicable law
(including, without limitation, applicable law regarding the form, funding and
operation of the Foreign Plan) in all material respects. The Financial
Statements accurately reflect the Foreign Plan liabilities and accruals for
contributions required to be paid to the Foreign Plans, if any, in accordance
with applicable generally accepted accounting principles consistently applied.
All contributions required to have been made to all Foreign Plans as of the
Closing will have been made as of the Closing. There are no actions, suits or
claims pending or, to the best of the Company’s knowledge, threatened with
respect to the Foreign Plans (other than routine claims for benefits). There
have not occurred, nor are there continuing any transactions or breaches of
fiduciary duty under applicable law with respect to any Foreign Plan which could
have a material adverse effect on (i) any Foreign Plan, or (ii) the condition of
the Company or any member of the Controlled Group.

2.11 Employee Matters.

(a) Neither the Company nor any of its Subsidiaries is liable for any payment to
any trust or other fund or to any Governmental Entity, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for employees (other than routine payments to be made in the normal
course of business and consistently with past practice). There are no pending
claims against the Company and/or any of its Subsidiaries under any workers
compensation plan or policy or for long term disability.

(b) Neither the Company nor any of its Subsidiaries is a party to or bound by
any collective bargaining agreement, neutrality agreement, card-check agreement
or other labor union contract, no collective bargaining agreement, neutrality
agreement, card-check agreement or other labor union contract is being
negotiated by the Company or any of its Subsidiaries and neither the Company nor
any of its Subsidiaries has any duty to bargain with any labor organization.
Neither the Company nor any of its Subsidiaries is aware of any activities or
proceedings of any labor union or to organize their respective employees. To the
knowledge

 

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of the Company, there is no labor dispute, threatened strike or work stoppage
against the Company or any of its Subsidiaries pending or threatened which may
interfere with the respective business activities of the Company or any of its
Subsidiaries.

(c) Section 2.11(c) of the Company Disclosure Letter is a true, correct and
complete list of the names, positions and rates of compensation of all officers,
directors, and employees (permanent, temporary or otherwise) of the Company and
each of its Subsidiaries showing each such person’s name, position, status as
exempt/non-exempt, bonuses and fringe benefits for the current fiscal year and
the most recently completed fiscal year. No employee of the Company or any of
its Subsidiaries has given notice to the Company or any of its Subsidiaries, nor
is the Company otherwise aware, that any such employee intends to terminate his
or her employment with the Company, any of its Subsidiaries or the Surviving
Corporation. The employment of each of the employees of the Company or any of
its Subsidiaries is “at will” and neither the Company nor any of its
Subsidiaries has any obligation to provide any particular form or period of
notice prior to terminating the employment of any of their respective employees.

(d) Except as described on Section 2.11(d) of the Company Disclosure Letter, all
current U.S. Employees of the Company and its Subsidiaries are, and all former
U.S. Employees of the Company and its Subsidiaries whose employment terminated,
voluntarily or involuntarily, within three years prior to the date of this
Agreement, were legally authorized to work in the United States. Except as
described on Section 2.11(d) of the Company Disclosure Letter, the Company has
completed and retained the necessary employment verification paperwork under the
Immigration Reform and Control Act of 1986 (“IRCA”) for the employees hired
prior to the date of this Agreement, and the Company has complied with
anti-discrimination provisions of the IRCA. Further, at all times prior to the
date of this Agreement, the Company was in material compliance with both the
employment verification provisions (including without limitation the paperwork
and documentation requirements) and the anti-discrimination provisions of IRCA.

2.12 Related Party Transactions. Except as set forth in Section 2.12 of the
Company Disclosure Letter, no officer or director or, to the knowledge of the
Company, any Company Shareholder (nor, to the knowledge of the Company, any
immediate family member of any of such Persons; any trust, partnership or
company in which any of such Persons has or has had an interest; or any
Affiliated investment fund of any director), has or has had, since January 1,
2005, directly or indirectly, any financial interest in (a) any Person that
furnished or sold, or furnishes or sells, services, products or technology that
the Company or any of its Subsidiaries furnishes or sells, or proposes to
furnish or sell, (b) any Person that purchases from or sells or furnishes to the
Company or any of its Subsidiaries, any goods or services, or (c) any Contract
to which the Company or any of its Subsidiaries is a party, provided, however,
that ownership of no more than one percent (1%) of the outstanding voting stock
of a publicly traded company shall not be deemed to be an “financial interest in
any Person” for purposes of this Section 2.12.

2.13 Insurance. Section 2.13 of the Company Disclosure Letter is a true, correct
and complete listing of all policies of insurance and bonds currently in effect
and issued at the request or for the benefit of the Company or any of its
Subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the

 

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underwriters of such policies or bonds. The Company and each of its Subsidiaries
is in compliance with the terms of such policies and bonds. The Company has no
knowledge of any threatened termination of, or premium increase in an amount
greater than 20% of the current annual premium paid with respect to, any of such
policies.

2.14 Compliance With Laws. Each of the Company and each of its Subsidiaries has
complied in all material respects with, is not in material violation of, and has
not received any notices of material violation with respect to, any federal,
state, local or foreign statute, law, regulation or permit or license issued
under such law with respect to the ownership or operation of its business or the
lease of the Real Property.

2.15 Minute Books. The minute books of the Company and each of its Subsidiaries
made available to Parent contain a complete and accurate summary of all meetings
of directors and shareholders or actions by written consent since the time of
incorporation of the Company and its Subsidiaries.

2.16 Brokers’ and Finders’ Fees. Except for the fees payable to Morgan Stanley &
Co., the Company has not incurred, nor will it incur, directly or indirectly,
any liability for brokerage or finders’ fees or agents’ commissions or
investment bankers’ fees or any similar charges in connection with this
Agreement or any transaction contemplated hereby.

2.17 Vote Required. The affirmative votes of the holders of shares of Company
Capital Stock representing (a) a majority of the combined voting power of all
Company Common Stock and Company Preferred Stock issued and outstanding on the
record date set for the meeting of the Company Shareholders to adopt this
Agreement and approve the Merger (the “Company Shareholders Meeting”) or any
consent solicitation conducted in lieu thereof, with each class and series of
Company Capital Stock voting together as a single class, (b) a majority of the
outstanding shares of Company Common Stock issued and outstanding on the record
date set for the Company Shareholders Meeting or any consent solicitation
conducted in lieu thereof, (c) a majority of the voting power of the Company’s
Preferred Stock issued and outstanding on the record date set for the Company
Shareholders Meeting or any consent solicitation conducted in lieu thereof, and
(d) a majority of the voting power of all shares of the Company’s Series B
Preferred Stock and Series C Preferred Stock issued and outstanding on the
record date set for the Company Shareholders Meeting or any consent solicitation
conducted in lieu thereof, with each such series of Company Preferred Stock
voting together as a single class ((a), (b), (c) and (d) together, the “Required
Vote”), are the only votes of the holders of Company Capital Stock necessary to
adopt this Agreement and approve the Merger. The Company Shareholders
representing the Required Vote have executed binding Support Agreements.

2.18 Board Approval. The Company’s board of directors, by resolutions duly
adopted (and not thereafter modified or rescinded) by unanimous vote (with no
abstentions) at a meeting duly called and held, has (a) approved this Agreement,
and, to the extent applicable, the documents to be entered into in connection
herewith, and the Merger, (b) determined that this Agreement and the terms and
conditions of the Merger are fair, just, reasonable, equitable, advisable and in
the best interests of the Company and its shareholders, and (c) directed that
the approval of this Agreement and the Merger be submitted to the Company
Shareholders for consideration and recommended that all of the Company
Shareholders adopt this Agreement and approve the Merger.

 

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2.19 Customers. Section 2.19 of the Company Disclosure Letter sets forth a true,
correct and complete list of the top 20 customers of the Company and its
Subsidiaries (the “Customers”), based upon the approximate total sales to
customers during fiscal year 2005 and for the nine months ended September 30,
2006. Except as set forth in Section 2.19 of the Company Disclosure Letter,
since September 30, 2006, (a) no Customer has terminated its Contract with the
Company or its Subsidiaries (other than pursuant to the lapse of the term
provided therein) or, to the knowledge of the Company, threatened to do so, in
advance of the completion of the photovoltaic project contemplated thereby,
(b) no Customer has requested a reduction in project size under any Contract
with the Company or any of its Subsidiaries, and (c) neither the Company nor any
of its Subsidiaries is involved in any action, dispute or controversy with any
Customer.

2.20 Suppliers. Section 2.20 of the Company Disclosure Letter sets forth a true,
correct and complete list of the 10 largest suppliers to the Company and its
Subsidiaries in terms of sales and purchases for fiscal year 2005 and for the
nine months ended September 30, 2006 (the “Suppliers”), showing the approximate
total sales to the Company and its Subsidiaries from each such Supplier during
each such period. Except as set forth in Section 2.20 of the Company Disclosure
Letter, or as may occur following the announcement of this Agreement and the
transactions contemplated hereunder, since September 30, 2006, (a) none of the
Suppliers has terminated its relationship with the Company or any of its
Subsidiaries or reduced in the 12-month period ended September 30, 2006 its
sales to the Company or any of its Subsidiaries by more than ten percent
compared to the previous 12-month period ended September 30, 2005 or has
threatened to do so, (b) no Supplier has indicated to an officer of the Company
such Supplier’s inability to perform any services required to be performed by it
under its contract with the Company or any of its Subsidiaries, and (c) neither
the Company nor any of its Subsidiaries is involved in any action, dispute or
controversy with any Supplier. Section 2.20 of the Company Disclosure Letter
lists all significant goods or services necessary for the conduct of the
business of the Company and its Subsidiaries with respect to which alternative
sources of supply are not readily available on comparable terms and conditions
(including all significant goods and services for which there is only one
reasonably available source).

2.21 Material Contracts. Section 2.21 of the Company Disclosure Letter lists
each of the following Contracts to which the Company or any of its Subsidiaries
is currently a party or by which the Company or any of its Subsidiaries is
currently bound (each, a “Material Contract”):

(a) each advertising, agency, manufacturer’s representative, joint marketing,
joint development and joint venture Contract involving annual consideration of
more than $100,000 (including royalty payments);

(b) the top eight supply Contracts, excluding purchase orders;

 

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(c) each value added reseller, reseller or third-party sales affiliate Contract
that cannot be terminated upon 30 days’ notice without penalty or payment;

(d) the top 15 customer Contracts based on revenues to the Company involving
photovoltaic projects not completed prior to the date hereof;

(e) each trust indenture, mortgage, promissory note, loan agreement or other
Contract for the borrowing of money, any currency exchange, commodities or other
hedging arrangement or any leasing transaction requiring lease payments in
excess of $25,000 annually of the type required to be capitalized in accordance
with GAAP;

(f) each Contract for capital expenditure in excess of $50,000 individually or
$500,000 in the aggregate;

(g) each Contract in accordance with which the Company or any of its
Subsidiaries is a lessor or lessee of any machinery, equipment, motor vehicles,
office furniture, fixtures or other personal property requiring rental payments
in excess of $50,000 annually;

(h) each license or other Contract providing rights to, or based upon, any
Company IP, other than non-exclusive licenses in connection with the sale of
inventory or provision of services in the ordinary course of business;

(i) each Contract with any Person with whom the Company or any of its
Subsidiaries does not deal at arm’s length, other than those Contracts listed in
Section 2.10(a) of the Company Disclosure Letter;

(j) each agreement of guarantee, support, indemnification, assumption or
endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness
of any other Person (other than a Subsidiary of the Company);

(k) each government grants Contract for which the research and development work
undertaken thereunder is still continuing or under which the Company or any of
its Subsidiaries continue to have obligations;

(l) each Contract relating to the disposition or acquisition of assets or any
interest in any business enterprise outside the ordinary course of the Company’s
business; or

(m) each Contract requiring payment of royalties, payment as a result of and
upon consummation of the transactions contemplated hereby, or payment of an
“earn-out.”

All Material Contracts are in executed written form, and the Company or the
applicable Subsidiary has performed all of the obligations required to be
performed by it and is entitled to all benefits under, and, to the Company’s
knowledge, is not alleged to be in default in respect of, any Material Contract.
Each of the Material Contracts is in full force and effect, and the Company, or
the applicable Subsidiary, and to the knowledge of the Company, any other party
to each Material Contract, are not in default of any Material Contract as of the
date here. Following the Effective Time, the Surviving Company and each of its
Subsidiaries will be permitted to exercise all of their rights under the
Material Contracts without the payment of any additional amounts of
consideration

 

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other than ongoing fees, royalties or payments that the Company and any of its
Subsidiaries would otherwise be required to pay in accordance with the terms of
such Contracts had the transactions contemplated by this Agreement not occurred.

2.22 Title of Properties; Absence of Encumbrances.

(a) Neither the Company nor any of its Subsidiaries owns any real property, nor
has either the Company or any of its Subsidiaries ever owned any real property
within the past five years. Section 2.22 of the Company Disclosure Letter
constitutes a complete and correct list of all real properties currently (and,
with respect solely to manufacturing facilities, within the past five years)
leased or used by the Company or its Subsidiaries.

(b) The Company has made available to Parent true, complete and correct copies
of all documents (including any amendments thereto) evidencing the leasehold
interest of the Company or any of its Subsidiaries in the Real Property (the
“Leases”). All of the Leases are valid and in full force and effect as to the
Company and, to the Company’s knowledge, as to third parties thereto. Neither
the Company nor any of its Subsidiaries nor, to the knowledge of the Company,
any other Person, is in default under any of the Leases, no notice of an alleged
default has been received by the Company, and no event has occurred; which, with
the giving of notice or the passage of time or both, would constitute a default
by the Company or any of its Subsidiaries or, to the knowledge of the Company,
any other Person, under any of the Leases.

(c) Each of the Company and each of its Subsidiaries enjoys peaceful and
undisturbed possession under all of its Leases, and neither the Company nor any
of its Subsidiaries have leased or sublet, as lessor or sublessor, and no third
party is in possession of, all or any portion of the Real Property.

(d) The structures, improvements and fixtures at or upon the Real Property have
to date been reasonably maintained and are in good operating condition for their
intended use.

(e) Each of the Company and each of its Subsidiaries has good and marketable
title to, or, in the case of leased properties and assets, marketable leasehold
interests in, all of its tangible properties and assets, real, personal and
mixed (excluding Intellectual Property), used or held for use in its business,
free and clear of any Encumbrances, except (i) as reflected in the September 30
Balance Sheet, (ii) liens for Taxes not yet due and payable, (iii) inchoate
mechanic’s and materialmen’s liens for construction in progress, (iv) workmen’s,
repairmen’s, warehousemen’s and carriers’ liens arising in the ordinary course
of business, and (v) all matters of record, liens and other imperfections of
title and encumbrances, if any, which do not detract materially from the value
or materially prevent the present use of the property subject thereto or
affected thereby.

2.23 Warranties; Defects, Returns, Recalls, Indemnities. The Company does not
provide any guaranty, warranty or other indemnity for the Company Products or
Services, beyond the applicable standard terms and conditions of sale or lease
for a period greater than five years including any liability as a result of
field and epidemic failures. Each of the Company’s Products or Services,

 

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other than any components of such products or services related to such
components, in each case, provided by third parties, has complied with and
conforms to all applicable federal, state, local or foreign laws and
regulations, contractual commitments and all applicable warranties, and neither
the Company nor any of its Subsidiaries has any liability (and there is no basis
for any present or future action, suit, proceeding or investigation giving rise
to any liability) for replacement or repair thereof or other damages in
connection therewith. Neither the Company nor any of its Subsidiaries has any
liability for product returns other than those arising under its warranty
obligations provided in the ordinary course of business. To the Company’s
knowledge, there are no threatened claims for (a) product returns, (b) warranty
obligations, or (c) product services other than in the ordinary course of
business. The Company has established reserves for all product returns, warranty
obligations or product services on the Financial Statements that are adequate
under and in accordance with GAAP and, based on the Company’s past experience,
sufficient to cover all such claims. The Company has no knowledge of any
presently existing circumstances that would constitute a valid basis for any
voluntary or governmental recall of any product sold or distributed by the
Company or any of its Subsidiaries. There is no pending or, to the knowledge of
the Company, threatened recall or investigation of any Company Product or
Service, and, to the knowledge of the Company, there is no presently existing
basis for any such recall or investigation.

2.24 Environmental. Except as set forth in Section 2.24 of the Company
Disclosure Letter:

(a) None of the Company or any of its Subsidiaries is in violation of any
Environmental Laws (as defined in Section 8.4), and none of the Company or any
of its Subsidiaries for the past five years has been in violation of any
Environmental Laws, which current or past violation, when aggregated with each
other current and past violation, has resulted or would result in a liability to
the Company or any of its Subsidiaries in an amount in excess of $250,000; there
has been no Release (as defined in Section 8.4) at any of the Real Property or,
during the period of its ownership or lease thereof, on any real property
formerly owned or leased by the Company or any of its Subsidiaries that is
required to be reported, investigated, assessed, cleaned up or remediated by the
Company or any of its Subsidiaries pursuant to Environmental Law; and the
Company and its Subsidiaries have all material permits, licenses and other
authorizations required under any Environmental Law, and the Company and its
Subsidiaries are in material compliance with such permits, licenses and other
authorizations.

(b) To the Company’s knowledge, there is no asbestos nor any asbestos-containing
materials used in, applied to or incorporated in any building, structure or
other form of improvement on the Real Property that requires abatement or
encapsulation under any Environmental Law. Neither the Company nor any of its
Subsidiaries sells or has sold any product containing asbestos or that utilizes
or incorporates asbestos-containing materials in any way.

(c) Except as has been completely resolved prior to the date of this Agreement
without any future or continuing obligations, the Company and its Subsidiaries
have not (i) entered into or been subject to any consent decree, compliance
order or administrative order, issued pursuant to Environmental Law, with
respect to the Real Property or formerly owned, leased or operated

 

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real property or any facilities or operations thereon, (ii) received written
notice under the citizen suit provisions of any Environmental Law,
(iii) received any request for information, notice, demand letter,
administrative inquiry or complaint or claim, in each case in writing, with
respect to any Environmental Condition (as defined in Section 8.4) or with
respect to the presence of, Release from or exposure to Hazardous Materials (as
defined in Section 8.4) used at the Real Property or in any product sold or
distributed by the Company or any Subsidiary, or (iv) been subject to or
threatened with any governmental or citizen enforcement action with respect to
any Environmental Law.

(d) The Company and its Subsidiaries have not assumed, undertaken or otherwise
become subject to any material liability of any other Person relating to or
arising from any Environmental Law, either pursuant to any Contract or in
connection with any predecessor of the Company or any of its Subsidiaries.

(e) The Company has delivered to Parent copies of all environmental site
assessment reports, environmental compliance audits, asbestos surveys and other
material environmental documents in its possession or reasonable control
concerning Environmental Conditions, including, without limitation, material
documents regarding any Release or disposal of Hazardous Materials at, upon or
from the Real Property or formerly owned, leased or operated real property, and
environmental agency inspection reports and material correspondence.

2.25 Licenses and Permits. The Company and its Subsidiaries have all material
Permits necessary or required for the conduct of the business of the Company and
its Subsidiaries. The Company and its Subsidiaries are in material compliance
with the terms of such Permits, and there is no pending or, to the Company’s
knowledge, threatened termination, expiration or revocation of such permits.

2.26 Inventories. The inventories of the Company are of a quality and quantity
useable and saleable in the normal and ordinary course of business, subject to
appropriate and adequate allowances reflected on the Financial Statements for
obsolete, excess, slow-moving, lower of cost or market and other reserves
required under GAAP. Such allowances have been calculated in accordance with
GAAP and in a manner consistent with the past practice of the Company. None of
the Company’s inventory is held on consignment, or otherwise, by third parties.

2.27 Disclosure. None of the information supplied or to be supplied by or on
behalf of the Company or any of its Subsidiaries for inclusion or incorporation
by reference in the Proxy Statement (as defined in Section 4.5(b)) will, at the
time that the Proxy Statement is mailed to the stockholders of the Company, at
the time of the Company Stockholders’ Meeting or as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. None of the information supplied or to be supplied by or on behalf
of the Company or any of its Subsidiaries for inclusion or incorporation by
reference in the Registration Statement (as defined in Section 4.5(a)) will, at
the time that the Registration Statement is filed with the SEC or at the time it
becomes effective under the Securities Act of 1933, as amended (the “Securities
Act”), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements

 

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therein not misleading. Notwithstanding the foregoing, no representation or
warranty is made by the Company with respect to statements made or incorporated
by reference in the Proxy Statement or the Registration Statement based on
information supplied by or on behalf of Parent for inclusion or incorporation by
reference in the Proxy Statement or Registration Statement.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

Subject to the exceptions set forth in the Parent Disclosure Letter (which
exceptions shall be deemed to be representations and warranties hereunder),
Parent and Merger Sub represent and warrant to the Company as follows:

3.1 Organization, Standing and Power.

(a) Parent is duly organized, validly existing and in good standing under the
laws of the State of Delaware, and Merger Sub is duly organized, validly
existing and in good standing as a limited liability company under the laws of
the State of Delaware. Neither Parent nor Merger Sub is in violation of any of
the provisions of its organizational documents. Merger Sub was formed by Parent
to effect the Merger and, since its date of formation, Merger Sub has not owned
any assets or engaged in any activities other than in connection with the
transactions contemplated hereby.

(b) Each of Parent and Merger Sub has the power to own, lease and operate its
properties and to conduct its business as now being conducted and is duly
qualified to do business and is in good standing in each jurisdiction where the
failure to be so qualified and in good standing, individually or in the
aggregate with any such other failures, would reasonably be expected to have a
Material Adverse Effect on Parent or Merger Sub.

3.2 Capital Structure.

(a) The authorized capital stock of Parent consists of 375,000,000 shares of the
common stock of Parent, par value $0.001 per share, of which 217,500,000 shares
are designated as “Class A Common Stock” and 157,500,000 shares are designated
as “Class B Common Stock,” and 10,042,490 shares of Parent Preferred Stock. As
of October 2, 2006, 52,033,287 shares of Parent’s “Class A Common Stock,”
17,173,166 shares of Parent’s “Class B Common Stock” and 10 Merger Sub Units
were outstanding. All shares of Parent Capital Stock and all Merger Sub Units
have been duly authorized, and all issued and outstanding shares of Parent
Capital Stock and Merger Sub Units have been validly issued and are fully paid
and nonassessable. As of October 2, 2006, there was an aggregate of 288,801
shares of Parent Common Stock available for issuance to employees and directors
of, and consultants to Parent under Parent’s 2005 Stock Incentive Plan (the
“Parent Stock Plan”). As of October 2, 2006, 1,983,144 shares of Parent Common
Stock were issuable upon the exercise of outstanding, unexercised, vested
options, including options issued under the Parent Stock Plan, options issued
under Parent’s 1996 Stock Incentive Plan and non-plan options. Except for the
options exercisable for Parent Common Stock described in this Section 3.2(a),
and except for those Contracts described in or filed as exhibits to the Parent
SEC Documents (as defined in Section 3.4), as of the date hereof, there are no
Contracts to which Parent is a party, or by which it is bound,

 

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obligating Parent to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of any Parent
Capital Stock and/or options exercisable for Parent Capital Stock or obligating
Parent to grant, extend, accelerate the vesting and/or repurchase rights of,
change the price of, or otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement. All outstanding Parent securities and all
outstanding Merger Sub securities were issued in compliance with all applicable
federal and state securities laws. Parent directly owns 100% of the outstanding
membership interests in Merger Sub.

(b) The shares of Parent to be issued in accordance with this Agreement will,
upon such issuance, be duly authorized, validly issued, fully paid and
non-assessable, free of any Encumbrances and not subject to any preemptive
rights or rights of first refusal created by statute, the organizational
documents of Parent or Merger Sub or any Contract to which Parent or Merger Sub
is a party or is bound.

3.3 Authority; Noncontravention.

(a) Each of Parent and Merger Sub has all requisite power and authority to enter
into this Agreement, to perform its obligations hereunder and consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate or limited liability company action, as
the case may be, on the part of Parent and Merger Sub. This Agreement has been
duly executed and delivered by Parent and Merger Sub and, assuming due
authorization, execution and delivery by the Company and the Shareholders’
Representative, constitutes the valid and binding obligation of Parent and
Merger Sub enforceable against Parent and Merger Sub, as applicable, in
accordance with its terms, subject to the effect of (a) applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to rights of creditors generally, and (b) rules of law and
equity governing specific performance, injunctive relief and other equitable
remedies.

(b) The execution and delivery of this Agreement by Parent and Merger Sub does
not, and the consummation of the transactions contemplated hereby will not,
(i) result in the creation of a lien on the properties or assets of Parent or
Merger Sub, (ii) conflict with, or result in any violation of, or default under
(with or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, renegotiation or acceleration of any obligation or
loss of any benefit under, or require any consent, approval or waiver from any
Person in accordance with, (a) any provision of the organizational documents of
Parent or Merger Sub, or (b) any contract, permit, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or Merger Sub
or any of their respective properties or assets, except, in each case, as would
not have a Material Adverse Effect on Parent. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to Parent and Merger Sub in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (A) the filing of the Certificate
of Merger, the Agreement of Merger and the CA Certificate of Merger, (B) such
filings as may be required under the HSR Act and any required foreign antitrust
filing, (C) applicable requirements if any, of the Securities Act, the Exchange
Act, state securities or the Blue Sky Laws, and (D) approval by the SEC in
connection with the Registration Statement and the Parent Information Statement
(as defined in Section 4.13(b)).

 

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3.4 SEC Documents; Financial Statements. Parent has filed all forms, reports and
documents required to be filed by it with the SEC since November 17, 2005 until
the date of this Agreement (collectively, the “Parent SEC Documents”) and has
made available to the Company a true and complete copy of all of the Parent SEC
Documents. Parent will file all forms, reports and documents required to be
filed by it with the SEC after the date hereof and before the Closing Date. As
of their respective filing dates, each Parent SEC Document complied (and each
document to be filed with the SEC by Parent after the date hereof and before the
Closing Date (“Subsequent SEC Documents”) will comply) in all material respects
with the requirements of the Securities Exchange Act of 1934 (the “Exchange
Act”) or the Securities Act, as applicable, and each Parent SEC Document, as of
its respective filing date and taken together with all other Parent SEC
Documents filed prior to such date, did not contain (and each Subsequent SEC
Document will not, as of its filing date and taken together with the Parent SEC
Documents and Subsequent SEC Documents filed prior to such date, will not
contain) any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading, except to the extent corrected in a subsequently filed Parent SEC
Document or Subsequent SEC Document, and to the extent based on information
(financial or otherwise) provided by the Company or any of its shareholders.
Parent has timely filed and made available to the Company all certifications and
statements required by (a) Rule 13a-14 or Rule 15d-14 under the Exchange Act, or
(b) Section 906 of the Sarbanes-Oxley Act of 2002 with respect to any Parent SEC
Document. Parent maintains disclosure controls and procedures required by Rule
13a-15 or Rule 15d-15 under the Exchange Act; such controls and procedures are
effective to ensure that all material information concerning Parent and its
Subsidiaries is made known on a timely basis to the individuals responsible for
the preparation of Parent SEC Documents and other public disclosure documents.
The Parent SEC Documents contain an audited consolidated balance sheet of Parent
as of December 31, 2005 and the related audited consolidated statements of
income and cash flow for the year then ended and Parent’s unaudited consolidated
balance sheet as of September 30, 2006 (the “Parent Balance Sheet”) and the
related unaudited consolidated statements of income and cash flow for the
three-month and nine-month periods then ended (collectively, the “Parent
Financials”). The Parent Financials (i) have been prepared in accordance with
GAAP applied on a consistent basis throughout the periods indicated (except as
may be indicated in the notes thereto or, in the case of the unaudited financial
statements, as permitted by GAAP), and (ii) present fairly, in all material
respects, the consolidated financial condition and results of operations and
cash flows of Parent and each of its Subsidiaries as of the dates, and for the
periods, indicated therein, except as otherwise noted therein (subject, in the
case of interim period financial statements, to normal recurring year-end audit
adjustments, none of which, individually or in the aggregate, are material).
There has been no change in Parent accounting policies since September 30, 2006,
except as described in the notes to the Parent Financials or required by GAAP.

3.5 No Material Adverse Change. Since September 30, 2006 and until the date of
this Agreement, Parent and each of its Subsidiaries has conducted its business
only in the ordinary course of business and there has not occurred: (a) any
change, event or condition (whether or not covered by insurance) that,
individually or in the aggregate with any other changes, events and conditions,

 

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has resulted in, or could reasonably be expected to result in, a Material
Adverse Effect on Parent, (b) any amendment or change in the Certificate of
Incorporation or bylaws of Parent, or (c) any damage to, destruction or loss of
any assets of Parent (whether or not covered by insurance) that has had a
Material Adverse Effect on Parent.

3.6 Litigation. There is no private or governmental action, suit, proceeding,
claim, arbitration or investigation pending before any Governmental Entity or
arbitrator, to the knowledge of Parent, threatened against Parent or any of its
Subsidiaries or any of their respective assets or properties or any of their
respective officers or directors (in their capacity as such) that could
reasonably be expected to prevent, enjoin or materially alter or delay any of
the transactions contemplated by this Agreement, or that individually or in the
aggregate with any such other action, suit, proceeding, claim, arbitration or
investigation, could reasonably be expected to have a Material Adverse Effect on
Parent. There is no judgment, decree or order against Parent or any of its
Subsidiaries, any of their respective assets or properties, or, to the knowledge
of Parent, any of their respective directors or officers (in their capacity as
such) that could reasonably be expected to prevent, enjoin, or materially alter
or delay any of the transactions contemplated by this Agreement, or that,
individually or in the aggregate with any such other action, suit, proceeding,
claim, arbitration or investigation, could reasonably be expected to have a
Material Adverse Effect on Parent.

3.7 Available Funds. Parent has, and shall have at the Closing, sufficient funds
on hand to permit Parent to perform all of its obligations under this Agreement
and to consummate the transactions contemplated by this Agreement.

3.8 Board Approval. The Board of Directors of Parent, by resolutions duly
adopted (and not thereafter modified or rescinded) by unanimous vote (with no
abstentions) at a meeting duly called and held, has (a) approved this Agreement
and the Merger, and (b) determined that this Agreement and the terms and
conditions of the Merger are fair, just, reasonable, equitable, advisable and in
the best interest of Parent and its stockholders. No vote of Parent’s
stockholders is required in order to consummate the transactions contemplated by
this Agreement, other than as contemplated by Section 4.13.

3.9 Brokers’ and Finders’ Fees. Except for fees payable to Lehman Brothers,
neither Parent nor Merger Sub has incurred, nor will they incur, directly or
indirectly, any liability for brokerage or finders’ fees or agents’ commissions
or investment bankers’ fees or any similar charges in connection with this
Agreement or any transaction contemplated hereby.

3.10 Reorganization. Neither Parent nor any of its Subsidiaries has taken or
agreed to take any action not provided for in this Agreement (nor does Parent or
any of its Subsidiaries have knowledge of any fact or circumstance not specified
or provided for in this Agreement) that would prevent the Merger from qualifying
as a “reorganization” within the meaning of Section 368(a) of the Code.

3.11 Intellectual Property. Parent and its Subsidiaries own or otherwise have
the right to use all material trademarks, trade names, know-how, patents,
copyrights, trade secrets, confidential information and other material
intellectual property rights (collectively “Intellectual Property Rights”)
necessary to conduct the business now operated by them. To the Parent’s
knowledge,

 

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the business now operated by Parent and its Subsidiaries does not infringe or
misappropriate any third party intellectual property rights and neither Parent
nor any of its Subsidiaries has received any written notice of infringement of,
misappropriation of, or conflict with (including invitations to license) the
asserted intellectual property rights of third parties.

3.12 Disclosure. None of the information supplied or to be supplied by or on
behalf of Parent or any of its Subsidiaries for inclusion or incorporation by
reference in the Proxy Statement will, at the time that the Proxy Statement is
mailed to the stockholders of the Company, at the time of the Company
Stockholders’ Meeting or as of the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by or on behalf of Parent or any of its
Subsidiaries for inclusion or incorporation by reference in the Registration
Statement will, at the time that the Registration Statement is filed with the
SEC or at the time it becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading. Notwithstanding the foregoing, no representation or warranty is made
by Parent with respect to statements made or incorporated by reference in the
Proxy Statement or the Registration Statement based on information supplied by
or on behalf of the Company for inclusion or incorporation by reference in the
Proxy Statement or Registration Statement.

ARTICLE 4

COVENANTS AND OTHER AGREEMENTS

4.1 Conduct of Business of the Company and its Subsidiaries. During the period
from the date hereof and continuing until the earlier of the termination of this
Agreement and the Effective Time:

(a) The Company shall, and shall cause each of its Subsidiaries to, use its
commercially reasonable efforts to conduct its business in the ordinary course
of business (except to the extent expressly provided otherwise in this Agreement
or as consented to in writing by Parent);

(b) The Company shall, and shall cause each of its Subsidiaries to, (i) pay all
of its debts and Taxes when due, subject to good faith disputes over such debts
or Taxes, and (ii) pay or perform its other obligations when due;

(c) The Company shall, and shall cause each of its Subsidiaries to, use its
commercially reasonable efforts to preserve intact its present business
organizations, keep available the services of its present officers and key
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it;

 

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(d) The Company shall promptly notify Parent of any change, occurrence or event,
which, individually or in the aggregate with any other changes, occurrences and
events, is reasonably likely to cause any of the conditions to closing set forth
in ARTICLE 5 not to be satisfied; and

(e) The Company shall, and shall cause each of its Subsidiaries to, use its
commercially reasonable efforts to assure that each Contract entered into by the
Company or any of its Subsidiaries on or after the date hereof will not require
the procurement of any consent, waiver or notation or provide for any material
change in the obligations of any party in connection with, or terminate as a
result of the consummation of, the transactions contemplated by this Agreement.

4.2 Restrictions on Conduct of Business of the Company and its Subsidiaries.
Without limiting the generality or effect of the provisions of Section 4.1,
during the period from the date hereof and continuing until the earlier of the
termination of this Agreement and the Effective Time, the Company shall not, and
shall cause each of its Subsidiaries not to, do, cause or permit any of the
following (except to the extent expressly provided otherwise in this Agreement
or as expressly consented to in writing by Parent):

(a) Cause or permit any amendments to its organizational documents;

(b) Declare or pay any dividends on or make any other distributions (whether in
cash, stock or property) in respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, except the issuance of shares of Company Common
Stock upon the conversion of Company Preferred Stock issued and outstanding on
the date hereof, or repurchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
non-employee directors and consultants in accordance with agreements existing at
the date hereof providing for the repurchase of shares in connection with any
termination of service;

(c) Except as set forth in Section 4.2(c) of the Company Disclosure Letter,
accelerate, amend or change the period of exercisability or vesting of options
or other rights granted under its stock plans or the vesting of the securities
purchased or purchasable under such options or other rights, amend or change any
other terms of such options or rights or authorize cash payments in exchange for
any options or other rights granted under any of such plans or the securities
purchased or purchasable under those options or rights or waive or amend the
right of repurchase applicable to any outstanding shares of Company Capital
Stock;

(d) Except as set forth in Section 4.2(d) of the Company Disclosure Letter and
except for Contracts for sale of the Company’s Products or Services entered into
in the ordinary course of business (including standard warranty provisions and
pricing), enter into any Contract that would have constituted a Material
Contract had it been in effect as of the date hereof or violate, amend or
otherwise modify or waive any of the material terms of any of its Material
Contracts;

 

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(e) Issue or grant any securities or agree to issue or grant any securities
other than (i) the issuance of shares of Company Common Stock upon the
conversion of Company Preferred Stock issued and outstanding on the date hereof,
(ii) the issuance of shares of Company Common Stock in accordance with the
exercise of stock options, warrants or other rights outstanding on the date
hereof, and (iii) the issuance of options to purchase additional shares of
Company Common Stock between the date hereof and the Closing in accordance with
the Company Stock Plan; provided that such options (A) are issued in the
ordinary course of business at exercise prices at least equal to the fair market
value of Company Common Stock on the date of grant, (B) provide for no
acceleration of vesting, and (C) vest in accordance with Parent’s standard
vesting schedule;

(f) Except for the hiring of those individuals listed in Section 4.2(f) of the
Company Disclosure Letter in consultation with Parent, hire any net additional
employees compared to the date hereof, consultants or independent contractors or
enter into, or extend the term of, any employment or consulting agreement with
any Person;

(g) Make any loans or advances to, or any investments in or capital
contributions to, or forgive or discharge in whole or in part any outstanding
loans or advances of, any Person (other than any Subsidiary of the Company);

(h) Transfer or license to any Person any rights to any Company IP (other than
in the ordinary course of business in connection with the sale of Company
Products or Services);

(i) Except as set forth in Section 4.2(i) of the Company Disclosure Letter,
enter into or amend any agreement in accordance with which any other party is
granted exclusive marketing or other exclusive rights of any type or scope with
respect to any Company Products or Services;

(j) Sell, lease, license or otherwise dispose of or encumber any of its
properties or assets, other than sales of Company Products or Services in the
ordinary course of business, in excess of $100,000 in the aggregate;

(k) Except as set forth in Section 4.2(k) of the Company Disclosure Letter,
incur any indebtedness for borrowed money in excess of $50,000 in the aggregate
or guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;

(l) Except as set forth in Section 4.2(l) of the Company Disclosure Letter,
enter into any operating lease requiring lease payments in excess of $50,000
annually;

(m) Pay, discharge or satisfy, in an amount in excess of $50,000 in any one case
or $250,000 in the aggregate, any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise) arising otherwise than
in the ordinary course of business and not in violation of this Agreement),
other than the payment, discharge or satisfaction of liabilities reflected or
reserved against in the Financial Statements;

 

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(n) Except as set forth in Section 4.2(n) of the Company Disclosure Letter, make
any capital expenditures or commitments, capital additions or capital
improvements in excess of $50,000 in any one case or $100,000 in the aggregate;

(o) Except as set forth in Section 4.2(o) of the Company Disclosure Letter,
materially reduce the amount of any insurance coverage provided by existing
insurance policies;

(p) Adopt or amend any employee or compensation benefit plan, including any
stock purchase, stock issuance or stock option plan, or amend any compensation,
benefit, entitlement, grant or award provided or made under any such plan,
except in each case as required under ERISA or as necessary to maintain the
qualified status of such plan under the Code, or pay any special bonus or
special remuneration to any employee or non-employee director or increase the
salaries or wage rates of its employees, or add any new non-employee members to
the board of directors of Company or any Subsidiary;

(q) Except in connection with the hiring of those individuals listed in
Section 4.2(f) of the Company Disclosure Letter in consultation with Parent,
enter into any employment contract (other than the Company’s or any of its
Subsidiaries’ standard offer letter attached hereto as Schedule 4.2(q)) or,
unless required by applicable law, any collective bargaining agreement;

(r) Grant any severance or termination pay to any Person, except payments made
in accordance with written agreements existing on the date hereof and
arrangements existing on the date hereof and described in Section 2.10 of the
Company Disclosure Letter, or amend or modify any existing severance or
termination agreement with any Person;

(s) Commence a lawsuit other than (i) for the routine collection of bills,
(ii) in such cases where it in good faith determines that failure to commence
suit would result in the material impairment of a valuable aspect of its
business, provided that it consults with Parent prior to the filing of such a
suit, or (iii) for a breach of this Agreement;

(t) Acquire or agree to acquire by merging or consolidating with, or by
purchasing the assets of, or by any other manner, any business or any company,
partnership, association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its and its Subsidiaries’ business, taken
as a whole;

(u) Make or change any material election in respect of Taxes, adopt or change
any accounting method in respect of Taxes, file any amendment to a material Tax
Return, enter into any Tax-related closing agreement, settle any claim or
assessment in respect of Taxes, or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes;

(v) Enter into any Contract or transaction in which any officer or non-employee
director of the Company or any of its Subsidiaries (or any member of the
immediate family of such officer or director) has an interest under
circumstances that would require disclosure under Item 404 of Regulation S-K if
the Company or any of its Subsidiaries were subject to the reporting
requirements of Section 13(a) of the Exchange Act; and

 

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(w) Take or agree in writing or otherwise to take, any of the actions described
in the foregoing clauses of this Section 4.2, or any action which could
reasonably be expected to result in the failure of the condition set forth in
Section 5.3(a) or prevent the Company from performing or cause the Company not
to perform one or more covenant required hereunder to be performed by the
Company.

Parent shall respond to any request by the Company to take any of the actions
listed above in this Section 4.2 within a commercially reasonable period of
time, but, in any event, within five business days of such request.

4.3 Conduct of Business of Parent and its Subsidiaries. During the period from
the date hereof and continuing until the earlier of the termination of this
Agreement and the Effective Time, (a) Parent shall promptly notify the Company
of any change, occurrence or event, which, individually or in the aggregate,
with any other changes, occurrences and events, is reasonably likely to cause
any of the conditions to closing set forth in ARTICLE 5 not to be satisfied;
(b) Parent shall not, and shall cause each of its Subsidiaries not to, take or
agree in writing or otherwise to take, any action which could reasonably be
expected to result in the failure of the condition set forth in Section 5.2(a)
or prevent Parent or Merger Sub from performing or cause Parent or Merger Sub
not to perform one or more covenants required hereunder to be performed by
Parent or Merger Sub; and (c) Parent will not issue in any financing transaction
(i) Parent Common Stock (or any equity security convertible into Parent Common
Stock) at a price less than any customary discount to market, or (ii) any debt
securities convertible into Parent Common Stock (A) except at a premium to
market, and (B) on terms and conditions customary for convertible debt
offerings; provided, however, that the aggregate proceeds to Parent from one or
more financing transactions pursuant to clause (c)(i) and clause (c)(ii) prior
to the Closing Date shall not exceed $150,000,000.

4.4 No Solicitation.

(a) From the date hereof until termination of this Agreement pursuant to its
terms, the Company shall not and each shall cause its officers, directors,
employees, financial advisors, representatives, agents, Subsidiaries and
Affiliates not to, directly or indirectly: (i) solicit, knowingly facilitate or
knowingly encourage any inquiry, proposal or offer from any Person (other than
Parent or Merger Sub) in respect of an Acquisition Transaction; (ii) participate
in any discussions or negotiations or enter into any agreement with, or provide
any non-public information to, any person (other than Parent or Merger Sub) in
respect of an Acquisition Transaction; or (iii) accept any proposal or offer
from any Person (other than Parent or Merger Sub) in respect of an Acquisition
Transaction. Upon execution of this Agreement, the Company shall immediately
cease and cause to be terminated any existing direct or indirect discussions
with any Person (other than Parent or Merger Sub) that are in respect of an
Acquisition Transaction. The Company shall promptly (and in no event later than
48 hours after receipt thereof) notify Parent of any proposal or offer
concerning an Acquisition Transaction, or any request for information from a
Person in respect of an Acquisition Transaction (including the identity of the
Person making or submitting such proposal, offer or request, and the material
terms thereof) that is received by the Company or any Affiliate or
representative of the Company. The Company shall keep Parent informed on a
reasonably current basis (and, in any event, with 48 hours) of the status and
details of any material modifications to any such proposal, offer or request.

 

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“Acquisition Transaction” means any transaction involving: (x) the sale,
license, disposition or acquisition of all or a substantial portion (excluding
sales of inventory or the provision of services in the ordinary course of
business) of the business or assets of the Company or any of its Subsidiaries;
(y) the issuance, disposition or acquisition of (A) any capital stock or other
equity security of the Company (other than Company Capital Stock issued upon
exercise of Company Options or Company Warrants or conversion of Company
Preferred Stock), (B) any option, call, warrant or right (whether or not
immediately exercisable) to acquire any capital stock or other equity security
of the Company (other than Company Options issued in the ordinary cause of
business under the Company Stock Plan), or (C) any security, instrument or
obligation that is or may become convertible into or exchangeable for any
capital stock or other equity security of the Company; in each of clauses
(A) through (C), representing in the aggregate 10% or more of the voting power
of the Company; or (z) any merger, consolidation, share exchange, business
combination, reorganization, recapitalization or similar transaction involving
the Company that if consummated would result in any Person (other than Parent)
beneficially owning 10% or more of any class of equity securities of the
Company.

(b) Notwithstanding anything to the contrary set forth in this Agreement, if the
Company receives an Acquisition Proposal after the date of this Agreement and
prior to receipt of a vote of the Company Shareholders adopting this Agreement
and approving the Merger, the Company shall be permitted (i) to engage in
discussions and negotiations with, and provide nonpublic information or data to,
the Person making the Acquisition Proposal or (ii) recommend approval of the
Acquisition Proposal to the shareholders of the Company or withdraw or modify in
an adverse manner the Company Board Recommendation, if and only to the extent
that, (A) in any case as is referred to in clauses (i) and (ii), the Company has
entered into a nondisclosure agreement with the Person making the Acquisition
Proposal having provisions that are no less favorable to the Company and no less
restrictive on such Person than those contained in the Confidentiality
Agreement, (B) the Company Board has determined in good faith (after
consultation with its independent outside legal counsel (who may be the
Company’s regularly engaged outside legal counsel) and a nationally recognized
financial advisor) that the Acquisition Proposal, if accepted, (x) in the case
of clause (i) above, would more likely than not constitute a Superior Proposal
(as hereinafter defined in this Section 4.4(b)), (y) in the case of clause
(ii) above, if consummated, would constitute a Superior Proposal, and (z) in the
case of clauses (i) and (ii) above, that the failure to engage in discussions
and negotiations with respect to such Acquisition Proposal or to recommend
approval of the Acquisition Proposal to the Company Shareholders or withdraw or
modify in an adverse manner the Company Board Recommendation, as the case may
be, would constitute a breach of its fiduciary duties to the Company
Shareholders under applicable law, and (C) in any case as is referred to in
clause (ii) above, the Company has provided to Parent five business days’ prior
written notice that the Company Board intends to withdraw or modify in an
adverse manner the Company Board Recommendation and specifying the material
terms and conditions of the pending Superior Proposal and identifying the Person
or Persons making such Superior Proposal. For purposes of this Agreement,
“Acquisition Proposal” means a bona fide written proposal that did not result
from a breach of Section 4.4(a) proposing a transaction involving: (x) the sale,
disposition or acquisition of business or assets of the Company that in the
aggregate contributed (90%) or more of the Company’s revenue over the prior
twelve months; (y) the issuance, disposition or acquisition of (A) any capital
stock or other equity security of the Company (other than Company Capital Stock
issued to upon exercise of Company Options or Company Warrants or

 

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conversion of Company Preferred Stock), (B) any option, call, warrant or right
(whether or not immediately exercisable) to acquire any capital stock or other
equity security of the Company (other than Company Options issued in the
ordinary course of business under the Company Stock Plan), or (C) any security,
instrument or obligation that is or may become convertible into or exchangeable
for any capital stock or other equity security of the Company; in each of
clauses (A) through (C), representing in the aggregate 50% or more of the voting
power of the Company; or (z) any merger, consolidation, share exchange, business
combination, reorganization, recapitalization or similar transaction involving
the Company. For purposes of this Agreement, “Superior Proposal” means any
Acquisition Proposal that the Company Board determines in good faith (after
(i) consultation with its independent outside legal counsel (who may be the
Company’s regularly engaged outside legal counsel) and a nationally recognized
financial advisor and (ii) taking into account all of the terms and conditions
of the Acquisition Proposal and this Agreement, including (A) the likelihood
that the transactions contemplated by the Acquisition Proposal will close in a
timely manner, and (B) the extent to which the financing for the transactions
contemplated by the Acquisition Proposal, to the extent required, is committed
or is capable of being obtained on the terms proposed) is more favorable to
Company’s shareholders than the Merger.

4.5 Securities Laws Matters.

(a) Each of Parent, Merger Sub and the Company shall use commercially reasonable
efforts to cause the Stock Consideration to be registered on a registration
statement on Form S-4 with the SEC (the “Registration Statement”).

(b) Parent shall prepare, and the Company shall reasonably cooperate in such
preparation, and Parent shall file with the SEC, as soon as practicable after
the execution of this Agreement, the Registration Statement, which shall include
the consent solicitation or proxy statement/prospectus to be sent to the Company
Shareholders in connection with the Company Shareholders Meeting or any consent
solicitation conducted in lieu thereof (as amended or supplemented, the “Proxy
Statement”), and Parent shall use commercially reasonable efforts to cause the
Registration Statement to become effective as soon thereafter as practicable.

(c) Each of Parent and Merger Sub shall use commercially reasonable efforts to
cause the Registration Statement and the Company shall use commercially
reasonable efforts to cause the Proxy Statement to comply with all applicable
requirements of federal and state securities laws.

(d) Each of Parent (for itself and Merger Sub) and the Company shall provide
promptly to the other such information concerning its business and financial
statements and affairs as (i) in the reasonable judgment of the providing party
or its counsel, may be required or appropriate for inclusion in the Registration
Statement, the Proxy Statement, or in any amendments or supplements thereto, or
(ii) such other party may reasonably request, and to cause its counsel, auditors
and other representatives to cooperate with the other party’s counsel, auditors
and other representatives in the preparation of the Registration Statement and
the Proxy Statement.

 

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(e) Subject to the provisions of Section 4.4, the Proxy Statement shall include
the unqualified recommendation of the Company’s board of directors (the “Company
Board”) in favor of adoption of this Agreement and approval of the Merger and
the unanimous recommendation of the Company Board (the “Company Board
Recommendation”) that the terms and conditions of the Merger and this Agreement
are fair, just, reasonable, equitable, advisable and in the best interests of
the Company and its shareholders. Subject to the provisions of Section 4.4, the
Company Board Recommendation shall not be withdrawn or modified in a manner
adverse to Parent, and no resolution by the Company Board or any committee
thereof to withdraw or modify the Company Board Recommendation in a manner
adverse to Parent shall be adopted or proposed.

(f) Each of Parent (for itself and Merger Sub) and the Company shall notify the
other promptly of the receipt of any comments from the SEC or its staff and of
any request by the SEC or its staff or any other government officials for
amendments or supplements to the Registration Statement or the Proxy Statement
or any other filing or for additional information and shall provide the other
with copies of all correspondence between such party or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Registration
Statement or the Proxy Statement or other filing. Each of Parent and the Company
will respond promptly to any comments from the SEC and will use commercially
reasonable efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as practicable after such filing.

(g) The Company shall promptly advise Parent, and Parent shall promptly advise
the Company, in writing if at any time prior to the Effective Time either the
Company or Parent shall obtain knowledge of any facts that might make it
necessary or appropriate to amend or supplement the Registration Statement or
the Proxy Statement, in order to make the statements contained or incorporated
by reference therein not misleading or to comply with applicable law, and the
Company and Parent shall cooperate in delivering any such amendment or
supplement to all the holders of the Company Common Stock and/or filing any such
amendment or supplement with the SEC or its staff and/or any other government
officials.

(h) Parent shall promptly prepare and submit to Nasdaq a listing application
covering the shares of Parent Common Stock to be issued in the Merger and
pursuant to Company Options after the Effective Time, and shall use its
reasonable best efforts to obtain, prior to the Effective Time, approval for the
quotation of such Parent Common Stock, subject to official notice of issuance to
Nasdaq, and the Company shall cooperate such respect to such quotation.

(i) As soon as practicable after the date hereof, each of Parent and the Company
shall make all other filings required to be made by it with respect to the
Merger and the transactions contemplated hereby under the Securities Act, the
Exchange Act and applicable Blue Sky Laws and the rules and regulations
thereunder.

(j) As soon as practicable after the Registration Statement is declared
effective by the SEC, the Company shall deliver the Proxy Statement to all
holders of the Company Common Stock, the Company Warrants and/or the Company
Options.

 

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4.6 Solicitation of Shareholders. The Company shall take all action necessary in
accordance with the CGCL, the Articles of Incorporation and the Company’s bylaws
to call, convene and hold the Company Shareholders Meeting or to secure the
written consent of its shareholders adopting this Agreement and approving the
Merger as soon as practicable after the date that the Registration Statement is
declared effective by the SEC and, in any event, no later than ten business days
after such date. If the Company calls a Company Shareholders Meeting, then the
Company shall consult with Parent regarding the date of the Company Shareholders
Meeting and shall not postpone or adjourn (other than for the absence of a
quorum) the Company Shareholders Meeting without the prior written consent of
Parent. The Company shall solicit from shareholders of the Company proxies or
consents to be voted on the adoption of this Agreement and the approval of the
Merger and, subject to the provisions of Section 4.4, shall take all other
action necessary or advisable to secure the vote or consent of the Company
Shareholders required to effect the transactions contemplated by this Agreement.

4.7 Access to Information.

(a) Until the earlier of the termination of this Agreement and the Effective
Time, (i) the Company shall afford Parent and its accountants, counsel and other
representatives, reasonable access during normal business hours to (A) all of
the Company’s and each of its Subsidiaries’ properties, books, contracts,
commitments and records, and (B) all other information concerning the business,
properties and personnel of the Company or any of its Subsidiaries as Parent may
reasonably request, and (ii) the Company shall provide to Parent and its
accountants, counsel and other representatives true, correct and complete copies
of internal financial statements promptly upon request.

(b) Subject to compliance with applicable law, until the earlier of the
termination of this Agreement and the Effective Time, the Company shall confer
from time to time as requested by Parent with one or more representatives of
Parent to discuss any material changes or developments in the operational
matters of the Company and each of its Subsidiaries and the general status of
the ongoing business and operations of the Company and each of its Subsidiaries.

(c) No information or knowledge obtained in any investigation in accordance with
this Section 4.7 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties
hereto to consummate the Merger.

4.8 Confidentiality. The parties acknowledge that Parent and Company have
previously executed a non-disclosure agreement dated as of February 9, 2006 (the
“Confidentiality Agreement”), which shall continue in full force and effect in
accordance with its terms.

4.9 Public Disclosure. Prior to the Effective Time, neither Parent nor the
Company shall issue any press release or otherwise make any public statement
with respect to the Merger, this Agreement or any material transaction involving
Parent or the Company without the consent of the other, except as may be
required by law, under this Agreement or any listing agreement with a national
securities exchange. With respect to the initial press release announcing the
Merger and this Agreement, the parties have agreed to the text of the press
release and will announce the Merger and this Agreement.

 

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4.10 Consents; Cooperation.

(a) Each of Parent, Merger Sub and the Company shall promptly after the
execution of this Agreement apply for or otherwise seek, and use its reasonable
best efforts to obtain, all consents and approvals required to be obtained by it
for the consummation of the Merger. Without limiting the generality or effect of
the foregoing, each of Parent, Merger Sub and the Company shall, as soon as
practicable, and in any event no later than 15 business days from the date of
this Agreement, make any initial filings required under the HSR Act. In
addition, Parent will use its reasonable best efforts to cause Cypress
Semiconductor Corporation, a Delaware corporation (“Cypress”), to make, as soon
as practicable, and in any event no later than 15 business days from the date of
this Agreement, any initial filings required under the HSR Act. The parties
hereto shall consult and cooperate with one another, and consider in good faith
the views of one another, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with proceedings
under or relating to the HSR Act or any other federal or state antitrust or fair
trade law.

(b) Each of Parent, Merger Sub and the Company shall use commercially reasonable
efforts to resolve, and in Parent’s case, use its commercially reasonable
efforts to cause Cypress to resolve, such objections, if any, as may be asserted
by any Governmental Entity with respect to the transactions contemplated by this
Agreement under the HSR Act or any other federal, state or foreign statutes,
rules, regulations, orders or decrees that are designed to prohibit, restrict or
regulate actions having the purpose or effect of monopolization or restraint of
trade (collectively, “Antitrust Laws”). Neither Parent, nor Cypress, nor the
Company shall have any obligation to litigate or contest any administrative or
judicial action or proceeding or any Order beyond the earlier of (i) the
Termination Date, and (ii) the date of a ruling preliminarily enjoining the
Merger issued by a court of competent jurisdiction. Each of Parent and the
Company shall use commercially reasonable efforts to take, and, in Parent’s
case, use its commercially reasonable efforts to cause Cypress to take, such
action as may be required to cause the expiration of the notice periods under
the HSR Act or other Antitrust Laws with respect to such transactions as
promptly as possible after the execution of this Agreement. Parent and the
Company shall take, and, in Parent’s case, use its commercially reasonable
efforts to cause Cypress to take, any and all of the following actions to the
extent necessary to obtain the approval of any Governmental Entity with
jurisdiction over the enforcement of any applicable laws regarding the
transactions contemplated hereby: (A) entering into negotiations, (B) providing
information required by law or governmental regulation, and (C) substantially
complying with any second request for information in accordance with the
Antitrust Laws.

(c) In no event will Parent or Cypress be obligated to (i) divest any of their
or any of their respective subsidiaries’ businesses, product lines or assets, or
to agree to any divestiture of the Company’s businesses, product lines or
assets, or (ii) take or agree to take any other action or agree to any
limitation that individually or in the aggregate could reasonably be expected to
have a Material Adverse Effect on the Surviving Company after the Effective
Time. Neither the Company nor any of its Subsidiaries shall be required to
(A) divest any of their respective businesses, product lines or assets, or
(B) to take or agree to take any other action or

 

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agree to any limitation that individually or in the aggregate could reasonably
be expected to have a Material Adverse Effect on the Company.

4.11 Legal Requirements. Each of Parent, Merger Sub and the Company shall, and
shall cause its Subsidiaries, if any, to, (a) take commercially reasonable
actions necessary to comply promptly with all legal requirements which may be
imposed on it with respect to the consummation of the transactions contemplated
by this Agreement, (b) promptly cooperate with and furnish information to any
party hereto necessary in connection with any such requirements imposed upon
such other party in connection with the consummation of the transactions
contemplated by this Agreement, and (c) take commercially reasonable actions
necessary to obtain (and shall cooperate with the other parties hereto in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any Governmental Entity, required to
be obtained or made in connection with the taking of any action contemplated by
this Agreement.

4.12 Treatment as Reorganization. This Agreement is intended to constitute a
“plan of reorganization” within the meaning of section 1.368-2(g) of the income
tax regulations promulgated under the Code. Prior to the Effective Time, each of
Parent, Merger Sub and the Company will use its commercially reasonable efforts,
and each party agrees to cooperate with the other parties and to provide to the
other parties such information and documentation as may be necessary, proper or
advisable, to cause the Merger to qualify, and will not knowingly take any
action not provided for or contemplated in this Agreement that would cause the
Merger to fail to qualify, as a reorganization within the meaning of
Section 368(a) of the Code. Each of Parent, Merger Sub and the Company will use
commercially reasonable efforts to make the representations to Jones Day and
Shearman & Sterling LLP (“Shearman”), as applicable, substantially in the form
attached hereto as Exhibit G-1 and Exhibit G-2, respectively.

4.13 Bonus Plan.

(a) Parent agrees to issue a number of shares of restricted stock (“RSs”) equal
to the Stock Pool to eligible Company employees in accordance with Schedule
4.13. The “Stock Pool” shall be a number of shares of Parent Common Stock equal
to $7,500,000 divided by the Average Parent Trading Price. Parent, in
consultation with the Company, shall issue the remaining unallocated portion of
the Stock Pool to current employees of the Company or future employees involved
in the business of the Company. The RSs to be issued in accordance with this
Section 4.13 shall vest annually over a four-year period at a rate of 25% per
year from the Closing Date. Parent shall make initial grants from the Stock Pool
promptly after the Closing, but in no event later than five business days after
the Closing Date; provided, however, that in the event that the number of shares
of Parent Common Stock available under the Parent Stock Plan is inadequate to
make all of the initial grants, Parent shall make the initial grants from the
Stock Pool on a pro rata basis to each Company employee entitled thereto up to
the number of shares of Parent Common Stock then available under the Parent
Stock Plan, promptly after the Closing, but in no event later than five business
days thereafter, and shall make the remainder of the initial grants from the
Stock Pool to each Company employee entitled thereto promptly after the
effectiveness of the Parent Stock Plan Amendment, but in no event later than two
business days thereafter.

 

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(b) As soon as practicable after the filing of the Registration Statement, and
in any event within five business days thereafter, Parent shall prepare and file
with the SEC a preliminary information statement (the “Parent Information
Statement”) to be sent to the stockholders of Parent relating to the action by
written consent approving and adopting the Parent Stock Plan Amendment. The
Company shall provide promptly to Parent such information concerning its
business and affairs as, in the reasonable judgment of the Company or its
counsel, may be required or appropriate for inclusion in the Parent Information
Statement, or in any amendments or supplements thereto. Parent shall notify the
Company of the receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff or any other governmental officials for
amendments or supplements to the Parent Information Statement or any other
filing or for additional information and shall provide the Company with copies
of all correspondence between parent or any of its representatives, on the one
hand, and the SEC or its staff or any other governmental officials, on the other
hand, with respect to the Parent Information Statement. Parent shall use its
commercially reasonable efforts to respond to any comments or requests from the
SEC, its staff or any other governmental official as promptly as practicable
after receipt thereof. Upon the later of (i) five calendar days after the date
that the Parent Information Statement is filed with the SEC, and (ii) five
calendar days after the date that Parent shall have responded to all comments
and requests for additional information from the SEC or its staff with respect
to the Parent Information Statement and the SEC has indicated to Parent that its
comments and requests have been resolved, Parent shall deliver the Parent
Information Statement to the stockholders of Parent in accordance with
applicable law.

4.14 Assumption of Options.

(a) At the Closing, the Company Stock Plan and each Company Option under the
Company Stock Plan that is unexpired, unexercised and outstanding immediately
prior to the Effective Time shall, on the terms and subject to the conditions
set forth in this Agreement, be assumed by Parent. Each such option so assumed
by Parent under this Agreement shall continue to have, and be subject to, the
same terms and conditions (including, if applicable, the terms and conditions
set forth in the Company Stock Plan and the applicable stock option agreement)
as are in effect immediately prior to the Closing, except that:

(i) The portion of each such Company Option that is vested as of immediately
prior to the Effective Time (after giving effect to acceleration provisions
triggered as a result of the Merger) shall:

(A) Entitle its holder to receive, in accordance with Section 1.6, an amount of
cash equal to (i) the product of the Cash Amount multiplied by the number of
shares of Company Common Stock that were issuable upon exercise of such vested
portion immediately prior to the Effective Time minus (ii) the product of
(x) the aggregate exercise price for the shares of Company Common Stock that
were issuable upon exercise of such vested portion immediately prior to the
Effective Time, and (y) the quotient of the Option Stock Amount divided by the
Common Exchange Ratio; and

(B) From and after such assumption, (i) be exercisable for that number of whole
shares of Parent Common Stock (rounded down to the nearest whole number of
shares of Parent Common Stock) equal to the product of (1) the number of shares
of Company Common Stock that were issuable upon exercise of such vested portion
immediately prior to the Effective Time,

 

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multiplied by (2) the Stock Amount, and (ii) have a per share exercise price for
the shares of Parent Common Stock issuable upon exercise of such assumed vested
portion equal to the quotient (rounded up to the nearest whole cent) obtained by
dividing (1) the product of (x) the exercise price per share of Company Common
Stock at which such vested portion was exercisable immediately prior to the
Effective Time multiplied by (y) the quotient of the Stock Amount divided by the
Common Exchange Ratio, divided by (2) the Stock Amount; and

(ii) The portion of each such Company Option that is not vested as of
immediately prior to the Effective Time (after giving effect to acceleration
provisions triggered as a result of the Merger) (i) shall be exercisable for
that number of whole shares of Parent Common Stock (rounded down to the nearest
whole number of shares of Parent Common Stock) equal to the product of (A) of
the number of shares of Company Common Stock that were issuable upon exercise of
such unvested portion immediately prior to the Effective Time, and (B) the
Common Exchange Ratio, and (ii) the per share exercise price for the shares of
Parent Common Stock issuable upon exercise of such assumed unvested portion
shall be equal to the quotient (rounded up to the nearest whole cent) obtained
by dividing (A) the exercise price per share of Company Common Stock at which
such unvested portion was exercisable immediately prior to the Effective Time by
(B) the Common Exchange Ratio.

(iii) For purposes of this Section 4.14:

(A) The “Common Exchange Ratio” shall mean an amount equal to the sum of the
Stock Amount and the Option Stock Amount.

(B) The “Option Stock Amount” means a number of shares (or a fraction of a
share) of Parent Common Stock equal to the Cash Amount divided by the fair
market value of one share of Parent Common Stock as of the Closing based on the
average volume weighted average price of the Parent Common Stock (as reported,
absent manifest error, on Nasdaq.com) for the five consecutive trading days
ending and including the trading day that is immediately preceding the day on
which the Closing occurs.

(iv) Consistent with the terms of the Company Stock Plan and the documents
governing the outstanding options under such plan, the Merger shall not
terminate any of the outstanding options under the Company Stock Plan or
accelerate the exercisability or vesting of such options or the shares of Parent
Common Stock that shall be subject to those options upon Parent’s assumption of
the options in the Merger. It is the intention of the parties that the options
so assumed by Parent hereunder qualify, to the maximum extent permissible,
following the Effective Time as “incentive stock options” as defined in
Section 422 of the Code to the extent such options qualified as incentive stock
options prior to the Effective Time. It is the intention of the parties that the
adjustments provided herein shall be effected in a manner which is consistent
with Sections 409A and 424 of the Code.

(b) No more than 30 days following (i) in the case of holders of options of
which a portion is vested immediately prior to the Effective Time, the delivery
of an Option Letter of Transmittal to the Exchange Agent in accordance with
Section 1.5(c), and (ii) in the case of holders of options of which no portion
is vested immediately prior to the Effective Time, the Closing, Parent shall

 

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issue to each Person who immediately prior to the Effective Time was a holder of
an outstanding option under the Company Stock Plan a document evidencing the
foregoing assumption of such option by Parent, and indicating the number of
shares of Parent Common Stock for which such option is exercisable, the exercise
price(s) for each share of such Parent Common Stock, each calculated in
accordance with Section 4.14(a). Such document shall be final and binding on
each holder of an assumed option.

(c) At or before the Effective Time, Parent shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Parent Common
Stock for delivery upon exercise of Company Options assumed in accordance with
this Section 4.14. As soon as reasonably practicable after the Effective Time,
and, in no event, within five business days after the Effective Time, Parent
shall, to the extent permitted under applicable law, file a registration
statement on Form S-8 (or any successor or other appropriate forms) with respect
to the shares of Parent Common Stock subject to any Company Options.

4.15 Spreadsheet. The Company shall prepare and deliver to Parent, at or prior
to the Closing, a spreadsheet or spreadsheets in form reasonably acceptable to
Parent and the Exchange Agent, which spreadsheet shall be dated as of the
Closing Date and shall set forth, as of the Closing Date, all factual
information relating to holders of Company Capital Stock, Company Options and
Company Warrants reasonably requested by Parent and the Exchange Agent,
including (a) the names of all shareholders, optionholders and warrantholders of
the Company and their respective addresses, (b) the number and kind of shares of
Company Capital Stock held by, or subject to the Company Options or Company
Warrants held by, such Persons and, in the case of shares, the respective
certificate numbers, (c) the number of shares of Parent Common Stock (or options
or warrants to purchase Parent Common Stock) and cash issuable to each holder of
Company Capital Stock, Company Options or Company Warrants (provided that Parent
and the Company will work together to determine the allocation of Merger
Consideration to the Company’s securityholders), (d) the interest of each
Indemnifying Shareholder in the Cash Escrow Fund and Stock Escrow Fund, (e) the
post-Closing vesting arrangements with respect to Company Options, and (f) the
exercise price per share in effect for each Company Option and Company Warrant
immediately prior to the Closing Date (the “Spreadsheet”).

4.16 Expenses. At least two business days prior to Closing, the Company shall
deliver to Parent a final estimate of all legal and investment banking fees and
expenses of the Company (including any expenses incurred by the Company)
incurred since December 31, 2005 in connection with this Agreement and
transactions contemplated hereby and in connection with any potential initial
public offering of the Company in excess of $1,000,000 (the “Excess Transaction
Expenses”) to be used in calculating the Merger Consideration in accordance with
Section 1.4. Subject to Section 7.6(d), Parent shall be entitled to recover 40%
of any Excess Transaction Expenses not previously deducted from the Merger
Consideration at the Closing starting with dollar one, and disregarding the
Indemnification Threshold provided for in Section 7.2(a), from the Cash Escrow
Fund, pursuant to ARTICLE 7, and 60% of any Excess Transaction Expenses not
previously deducted from the Merger Consideration at the Closing starting with
dollar one, and disregarding the Indemnification Threshold provided for in
Section 7.2(a), from the Stock Escrow Fund, pursuant to ARTICLE 7. Subject to
the foregoing, all costs and expenses (“Transaction Expenses”) incurred in
connection with this Agreement and the transactions contemplated hereby
(including the fees and expenses of its advisers, accountants and legal counsel)
shall be paid by the party incurring such expense.

 

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4.17 Section 280G Matters.

(a) The Company shall obtain and deliver to Parent, prior to the initiation of
the procedure described in Section 4.17(b), an excess parachute payment waiver,
in substantially the form attached hereto as Exhibit H, from each Person whom
the Company reasonably believes is, with respect to the Company, any Subsidiary
of the Company and/or any ERISA Affiliate of the Company, a “disqualified
individual” (within the meaning of Section 280G of the Code and the regulations
promulgated thereunder), as determined immediately prior to the initiation of
the procedure described in Section 4.17(b), and who might otherwise have,
receive or have the right or entitlement to receive an excess parachute payment
under Section 280G of the Code as a result of (i) the accelerated vesting of
such Person’s Company Options or unvested Company Capital Stock in connection
with the Merger and/or the termination of employment or service with the
Company, Parent or any of their Subsidiaries following the Merger, (ii) any
severance payments or other benefits or payments in connection with the Merger
and/or the termination of employment or service with the Company, Parent or any
of their Subsidiaries following the Merger, and/or (iii) the receipt of any
Company Options or Company Capital Stock within the 12-month period ending on
the date on which the Effective Time occurs, in accordance with which each such
Person shall agree to waive any and all right or entitlement to the accelerated
vesting, payments, benefits, options and stock referred to in clauses (i),
(ii) and (iii) unless the requisite shareholder approval of such accelerated
vesting, payments, benefits, options and stock is obtained in accordance with
Section 4.17(b).

(b) The Company shall use its reasonable best efforts to obtain the approval by
such number of Company Shareholders as is required by the terms of
Section 280G(b)(5)(B) of the Code so as to render the parachute payment
provisions of Section 280G of the Code inapplicable to any and all payments
and/or benefits provided in accordance with agreements, contracts or
arrangements that, in the absence of the executed Excess Parachute Payment
Waivers by the Persons described in Section 4.17(a), might otherwise result,
separately or in the aggregate, in such payment being considered a “parachute
payment,” in a manner which satisfies all applicable requirements of such
Section 280G(b)(5)(B) of the Code and the Treasury Regulations thereunder,
including Q-7 of Section 1.280G-1 of such Treasury Regulations.

4.18 Affiliate Agreements. Schedule 4.18 sets forth a list of the Company
Shareholders who may be deemed to be, in the Company’s reasonable judgment on
the date hereof, affiliates of the Company within the meaning of Rule 145
promulgated under the Securities Act (each a “Company Affiliate”). Parent will
be entitled to place appropriate legends with respect to the restrictions
imposed by Rule 145 promulgated under the Securities Act on the certificates
evidencing any Parent Common Stock to be received by a Company Affiliate
pursuant to the terms of this Agreement, and, in the reasonable judgment of
Parent, to issue appropriate stop transfer instruments to the transfer agent for
the Parent Common Stock. In addition, each Company Shareholder that is a Company
Affiliate shall sign and deliver an Affiliate Agreement in substantially the
form attached hereto as Exhibit I to Parent at Closing.

 

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4.19 D&O Insurance. Prior to the Closing, the Company shall have purchased a
six-year tail policy for its D&O Insurance.

4.20 Obligations of Merger Sub. Subject to the terms of this Agreement, Parent
shall take all action necessary to cause Merger Sub to perform its obligations
under this Agreement and to consummate the merger on the terms and subject to
the conditions set forth in this Agreement.

4.21 Further Assurances. On the terms and subject to the conditions set forth in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts, and shall cooperate with each other party hereto, to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
appropriate or desirable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated hereby, including the satisfaction of the respective conditions set
forth in ARTICLE 5. Without limiting the generality or effect of the foregoing
and subject to the terms of this Agreement, in the event an injunction or other
order preventing the consummation of the Merger shall have been issued by a
court of competent jurisdiction, each party hereto shall its use reasonable best
efforts to have such injunction or other order lifted. Each party hereto, at the
reasonable request of the other party hereto, shall execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or reasonably desirable for effecting completely the consummation of
the Merger and the other transactions contemplated hereby.

4.22 Employee Benefits Matters. Employees of the Company or any Subsidiary of
the Company shall receive credit for purposes of eligibility to participate and
vesting (but not for benefit accruals) under any employee benefit plan, program
or arrangement established or maintained by the Company or any of its
Subsidiaries for service accrued or deemed accrued prior to the Closing with the
Company or any Subsidiary of the Company; provided, however, that such crediting
of service shall not operate to duplicate any benefit or the funding of any such
benefit. In addition, Parent shall waive, or cause to be waived, any limitations
on benefits relating to any pre-existing conditions to the same extent such
limitations are waived under any comparable plan of Parent or its Subsidiaries
and recognize, for purposes of annual deductible and out-of-pocket limits under
its medical and dental plans, deductible and out-of-pocket expenses paid by
employees of the Company and its Subsidiaries in the calendar year in which the
Closing occurs.

4.23 SAS 100 Review and Year-End Audit. As promptly as practicable after the
date hereof, the Company will cause its external accountants complete their
review under Statement on Auditing Standards No. 100 of the Company’s interim
financial statements for each period for which such statements are required to
be included, or are included, in the Registration Statement or any other filing
of Parent with the SEC, including financial statements as of and for the
nine-month period ended September 30, 2006. As promptly as practicable after
December 31, 2006, the Company will begin preparing and, when reasonably
appropriate, cause its external accountants to audit the financial statements of
the Company as of and for the year ended December 31, 2006.

 

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ARTICLE 5

CONDITIONS TO THE MERGER

5.1 Conditions to Obligations of Each Party to Effect the Merger. The respective
obligations of each party to consummate the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Closing of each of the
following conditions, which to the maximum extent permitted by law may be waived
in a written agreement of the Company and Parent (for itself or Merger Sub)
(each such condition is solely for the benefit of the parties hereto and may be
waived without notice, liability or obligation to any Person):

(a) Shareholder Approval. This Agreement shall have been adopted and the Merger
shall have been approved by the requisite vote or written consent of the Company
Shareholders under applicable law and the Articles of Incorporation.

(b) No Injunctions or Restraints; Illegality. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by a Governmental Entity seeking any of the foregoing be
pending. No action taken by any Governmental Entity, and no statute, rule,
regulation or order shall have been enacted, entered or enforced, which makes
the consummation of the transactions contemplated by this Agreement illegal.

(c) Antitrust Approvals. All applicable waiting periods under the HSR Act or
required foreign antitrust laws shall have expired or been terminated.

(d) Governmental Approvals. The Registration Statement shall have been declared
effective by the SEC, and no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, shall have been initiated or threatened by the SEC.

(e) Nasdaq Quotation. The shares of Parent Common Stock to be issued in the
Merger shall have been authorized for quotation on Nasdaq, subject to office
notice of issuance.

5.2 Additional Conditions to Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated hereby shall be subject to
the satisfaction at or prior to the Closing of each of the following conditions,
any of which may be waived, in writing, by the Company (each such condition is
solely for the benefit of the Company and may be waived in its sole discretion
without notice, liability or obligation to any Person):

(a) Representations, Warranties and Covenants. Each of the representations and
warranties made by each of Parent and Merger Sub in this Agreement shall be true
and correct (without giving effect to any limitations as to materiality or
Material Adverse Effect as set forth therein), in each case as of the date of
this Agreement and at and as of the Closing Date as if made on that date (except
in any case that representations and warranties that expressly speak as of a
specified date or time need only be true and correct as of such specified date
or time), except where the failure of such representation to be so true and
correct (without giving effect

 

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to any limitations as to materiality or Material Adverse Effect as set forth
therein) would not have a Material Adverse Effect on Parent. Each of Parent and
Merger Sub hall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be performed
and complied with by it at or prior to the Closing.

(b) Receipt of Closing Deliveries. The Company shall have received each of the
agreements, instruments and other documents required to have been delivered to
the Company at or prior to the Closing as set forth in Exhibit J.

(c) Tax Opinion. The Company shall have received the opinion of Shearman,
counsel to the Company, dated the Closing Date, to the effect that, on the basis
of the facts, representations and assumptions set forth in such opinion, the
Merger will qualify as a reorganization within the meaning of Section 368(a) of
the Code, and each of Parent and the Company will be treated as a party to the
reorganization within the meaning of Section 368(b) of the Code. In rendering
such opinion, Shearman may require and rely on customary representations and
covenants, including those in Exhibit G-1 and Exhibit G-2, reasonably
satisfactory in form and substance to Shearman.

(d) No Material Adverse Change. There shall not have occurred any event or
condition of any character that has had or is reasonably likely to have a
Material Adverse Effect on Parent since the date of this Agreement.

5.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Closing of each
of the following conditions, any of which may be waived, in writing, by Parent
(each such condition is solely for the benefit of Parent and Merger Sub and may
be waived by Parent in its sole discretion without notice, liability or
obligation to any Person):

(a) Representations, Warranties and Covenants. Each of the representations and
warranties made by the Company in this Agreement shall be true and correct
(without giving effect to any limitations as to materiality or Material Adverse
Effect as set forth therein), in each case as of the date of this Agreement and
at and as of the Closing Date as if made on that date (except in any case that
representations and warranties that expressly speak as of a specified date or
time need only be true and correct as of such specified date or time), except
where the failure of such representation to be so true and correct (without
giving effect to any limitations as to materiality or Material Adverse Effect as
set forth therein) would not have a Material Adverse Effect on the Company. The
Company shall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be performed
and complied with by it at or prior to the Closing.

(b) Receipt of Closing Deliveries. Parent and Merger Sub shall have received
each of the agreements, instruments and other documents required to have been
delivered to Parent and Merger Sub at or prior to the Closing as set forth in
Exhibit J.

(c) Tax Opinion. Parent shall have received the opinion of Jones Day, counsel to
Parent, dated the Closing Date, to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinion, the Merger will
qualify as a

 

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reorganization within the meaning of Section 368(a) of the Code, and each of
Parent and the Company will be treated as a party to the reorganization within
the meaning of Section 368(b) of the Code. In rendering such opinion, Jones Day
may require and rely on customary representations and covenants, including those
in Exhibit G-1 and Exhibit G-2, reasonably satisfactory in form and substance to
Jones Day.

(d) Injunctions or Restraints on Conduct of Business. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint provision limiting
or restricting Parent’s ownership, conduct or operation of the business of the
Company and/or any Subsidiary of the Company, following the Effective Time shall
be in effect, nor shall any suit, investigation, request for additional
information, action or proceeding before any Governmental Entity seeking any of
the foregoing, seeking to obtain from Parent or the Company or any of their
respective Affiliates in connection with the Merger any damages, or seeking any
other relief that following the Merger, in the sole judgment of Parent, could
reasonably be expected to materially limit or restrict the ability of the
Surviving Company and/or its Subsidiaries to own and conduct both (i) the assets
and businesses owned and conducted by Parent and/or its Subsidiaries prior to
the Merger, and (ii) the assets and businesses owned and conducted by the
Company and/or each Subsidiary of the Company prior to the Merger, be pending or
threatened.

(e) Section 280G Shareholder Approval. Any agreements, contracts or arrangements
that may result, separately or in the aggregate, in the payment of any amount or
the provision of any benefit that would not be deductible by reason of
Section 280G of the Code shall have been approved by such number of shareholders
of the Company as is required by the terms of Section 280G in order for such
payments and benefits not to be deemed parachute payments under Section 280G of
the Code, with such approval to be obtained in a manner which satisfies all
applicable requirements of Section 280G(b)(5)(B) of the Code and the proposed
Treasury Regulations thereunder, including Q-7 of Section 1.280G-1 of such
proposed Treasury Regulations, and, in the absence of such shareholder approval,
none of those payments or benefits shall be paid or provided, in accordance with
the waivers of those payments and benefits to be executed by the affected
individuals in accordance with Section 4.17.

(f) No Material Adverse Change. There shall not have occurred any event or
condition of any character that has had or is reasonably likely to have a
Material Adverse Effect on the Company since the date of this Agreement.

(g) Vote of Company Shareholders. At least 95% of the Company Shareholders shall
have voted to adopt this Agreement and approve the Merger.

(h) Company Preferred Stock. Each share of Company Preferred Stock shall have
been converted into shares of Company Common Stock in accordance with Section 5
of the Amended and Restated Articles of Incorporation of the Company.

(i) Company Warrants. Each of the Company Warrants shall have been exercised or
terminated.

 

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(j) Amended Articles of Incorporation. Article Third, Section 4.5(a)(i) of the
Articles of Incorporation shall have been amended to permit the Company to value
the shares of Parent Common Stock to be issued to Company Shareholders in the
Merger in accordance with the provisions of this Agreement.

ARTICLE 6

TERMINATION, AMENDMENT AND WAIVER

6.1 Termination. At any time prior to the Effective Time, whether before or
after adoption of this Agreement and approval of the Merger by the Company
Shareholders, this Agreement may be terminated:

(a) by mutual written consent duly authorized by the respective boards of
directors of Parent (or a committee thereof) and the Company;

(b) by either Parent or the Company, if the Closing shall not have occurred on
or before April 30, 2006 (the “Termination Date”); provided, however, that the
right to terminate this Agreement under this Section 6.1(b) shall not be
available to any party whose breach of this Agreement has resulted in the
failure of the Closing to occur on or before the Termination Date;

(c) by either the Company or Parent, if any permanent injunction or other order
of a court or other competent Government Entity preventing the consummation of
the transactions contemplated by this Agreement shall have become final and
nonappealable;

(d) by Parent, if the Company shall have breached any representation, warranty
or covenant contained herein and (i) such breach shall not have been cured
within 30 days after receipt by the Company of written notice of such breach
(provided, however, that no such cure period shall be available or applicable to
any such breach which by its nature cannot be cured) and (ii) if not cured at or
prior to the Closing, such breach would result in the failure of any of the
conditions set forth in Section 5.1 or Section 5.3(a) or (f) to be satisfied
(provided, however, that the termination right under Section 6.1(d) shall not be
available to Parent if Parent is at that time in material breach of this
Agreement); and

(e) by the Company, if Parent or Merger Sub shall have breached any
representation, warranty or covenant contained herein and (i) such breach shall
not have been cured within 30 days after receipt by Parent of written notice of
such breach (provided, however, that no such cure period shall be available or
applicable to any such breach which by its nature cannot be cured) and (ii) if
not cured at or prior to the Closing, such breach would result in the failure of
any of the conditions set forth in Section 5.1 or Section 5.2(a) or (d) to be
satisfied; provided, however, that the right to terminate this Agreement under
this Section 6.1(e) shall not be available to the Company if the Company is at
that time in material breach of this Agreement).

6.2 Effect of Termination. If this Agreement is terminated in accordance with
Section 6.1, this Agreement shall forthwith become void and there shall be no
liability or obligation on the part of Parent, Merger Sub or the Company or
their respective officers, directors, shareholders or Affiliates; and provided,
however, that each party hereto shall remain liable for any breaches of

 

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this Agreement prior to its termination; and provided, further, that the
Confidentiality Agreement and the provisions of Sections 4.16 and 6.2 and
ARTICLE 8 (but excluding Section 8.1) shall remain in full force and effect and
survive any termination of this Agreement.

6.3 Amendment. Subject to the provisions of applicable law, Parent and the
Company may amend this Agreement at any time in accordance with an instrument in
writing signed on behalf of each such party, and such amendment shall be binding
on each party hereto; provided, however, that an amendment made subsequent to
adoption of this Agreement and approval of the Merger by the Company
Shareholders shall not (a) alter or change the amount or kind of consideration
to be received on conversion of the Company Capital Stock in the Merger in
accordance with Section 1.4, or (b) alter or change any of the terms or
conditions of this Agreement if such alteration or change would materially and
adversely affect the holders of Company Capital Stock. Subject to the provisions
of applicable law, Parent and the Shareholders’ Representative (on behalf of all
of the Company Shareholders immediately prior to the Closing) may cause this
Agreement to be amended at any time after the Effective Time by execution of an
instrument in writing signed on behalf of Parent and the Shareholders’
Representative (on behalf of all of the shareholders of the Company immediately
prior to the Effective Time); provided, however, that any amendment made in
accordance with this sentence shall not (i) alter or change the amount or kind
of consideration to be received in exchange for Company Capital Stock in
accordance with Section 1.1 or Section 1.4 or (ii) alter or change any of the
terms or conditions of this Agreement if such alteration or change would
materially and adversely affect the shareholders of the Company immediately
prior to the Closing.

6.4 Extension; Waiver. Any party hereto may, to the extent legally allowed,
(a) extend the time for the performance of any of the obligations or other acts
of the other parties, (b) waive any inaccuracies in the representations and
warranties made to such party herein or in any document delivered pursuant
hereto, and (c) waive compliance with any of the agreements or conditions for
the benefit of such party contained herein. At any time after the Effective
Time, the Shareholders’ Representative and Parent may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other, (ii) waive any inaccuracies in the representations and
warranties made to Parent (in the case of a waiver by Parent) or made to the
Company (in the case of a waiver by the Shareholders’ Representative) herein or
in any document delivered pursuant hereto, and (iii) waive compliance with any
of the agreements or conditions for the benefit of Parent or Merger Sub (in the
case of a waiver by Parent) or made to the Company (in the case of a waiver by
the Shareholders’ Representative); provided, however, that any such extension or
waiver made in accordance with this sentence shall not (i) materially alter or
change the amount or kind of consideration to be received on conversion of the
Company Capital Stock in accordance with Section 1.4 or (ii) materially
adversely affect the Company Shareholders immediately prior to the Effective
Time. Any agreement on the part of a party hereto or the Shareholders’
Representative to any such extension or waiver shall be valid only if set forth
in an instrument in writing signed on behalf of such party. Without limiting the
generality or effect of the preceding sentence, no delay in exercising any right
under this Agreement shall constitute a waiver of such right, and no waiver of
any breach or default shall be deemed a waiver of any other breach or default of
the same or any other provision in this Agreement.

 

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ARTICLE 7

ESCROW FUND AND INDEMNIFICATION

7.1 Indemnification by Indemnifying Shareholders. Subject to the limitations set
forth in this ARTICLE 7, the Indemnifying Shareholders, severally but not
jointly, agree to indemnify and hold harmless Parent and the Surviving Company
and their respective officers, directors, agents and employees, Subsidiaries,
directors and employees of Subsidiaries, and each Person, if any, who controls
or may control Parent and the Surviving Company within the meaning of the
Securities Act (each of the foregoing, an “Indemnified Person”) from and against
any and all losses, liabilities, damages, claims, suits, settlements,
liabilities, royalties, costs and expenses, including costs of investigation,
settlement and defense and reasonable legal fees, court costs and any interest
costs or penalties (collectively, “Losses”), arising out of, related to or
otherwise by virtue of (a) any breach of any representation or warranty made by
the Company in this Agreement or any certificate required to be delivered at
Closing to Parent or Merger Sub in accordance with Section 5.3(b), (b) any
breach of or default in connection with any of the covenants or agreements made
by the Company in this Agreement, (c) any appraisal or similar action with
respect to shares of Company Capital Stock (provided, that Losses arising under
this Section 7.1(c) shall equal (i) the excess of any consideration awarded in
any appraisal action over (ii) the value as of the Closing of the Merger
Consideration allocable to the former Company Shareholders whose shares of
Company Capital Stock were the subject of such appraisal action), (d) any Excess
Transaction Expenses not previously deducted from the Merger Consideration at
Closing, (e) the items set forth on Schedule 7.1(e), and (f) the items set forth
on Schedule 7.1(f). In determining (A) whether any representation or warranty
(other than the representations and warranties contained in Sections 2.4, 2.5(a)
and 2.27) was inaccurate or breached, or (B) the amount of any Losses in respect
of any inaccuracy in or any breach of any representation and warranty, any
materiality or Material Adverse Effect qualification contained in such
representation or warranty will in all respects be ignored. The parties agree
that any Losses under this Section 7.1 shall be recoverable by an Indemnified
Person (y) to the extent that cash remains in the Cash Escrow Fund or shares of
Parent Common Stock remain in the Stock Escrow Fund, from the Cash Escrow Fund
and Stock Escrow Fund, or (z) to the extent that no cash remains in the Cash
Escrow Fund and no shares of Parent Common Stock remain in the Stock Escrow
Fund, from the Indemnifying Shareholders in accordance with and subject to the
limitations set forth in the provisions of this ARTICLE 7. The proportion of
Losses for which each Indemnifying Shareholder shall be responsible under this
ARTICLE 7 shall be based on the “Indemnification Percentage” set forth next to
such Indemnifying Shareholder’s name on Schedule 7.1.

7.2 Limitations on Indemnification.

(a) The Indemnified Persons are not entitled to indemnification in respect of
any claim under Section 7.1(a) (i) unless such claim (which may be aggregated
with (A) all related claims, and (B) all claims arising out of the same facts
and circumstances) involves Losses in excess of $50,000, and (ii) unless and
until Losses in accordance with Section 7.1(a) have been incurred, paid or
properly accrued in an aggregate amount greater than $2,434,000 (the
“Indemnification Threshold”); provided that for the purpose of determining
whether the Indemnification Threshold has been exceeded, claims (when aggregated
with (A) all related claims, and (B) all claims arising out of the same facts
and circumstances) involving Losses of $50,000 or less shall be excluded.
Notwithstanding

 

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the foregoing, the Indemnified Persons shall be entitled to recover for, and the
limitations set forth in the preceding sentence shall not apply to, any Losses
with respect to any breach of any of the Excluded Representations (as defined in
Section 8.1). Once the Indemnification Threshold has been exceeded, the
Indemnified Persons shall be entitled to recover all Losses in excess of the
Indemnification Threshold.

(b)

(i) The Indemnifying Shareholders are liable for Losses under Section 7.1 of up
to an aggregate maximum amount of (A) $48,750,000 prior to the first anniversary
of the Closing Date, (B) $24,375,000 (less the aggregate amount of Losses in
excess of $24,375,000 actually paid at any time to the Indemnified Persons)
between the first anniversary of the Closing Date and the second anniversary of
the Closing Date, (C) $15,000,000 (less the aggregate amount of Losses in excess
of $33,750,000 actually paid at any time to the Indemnified Persons) between the
second anniversary of the Closing Date and the third anniversary of the Closing
Date, (D) $10,000,000 (less the aggregate amount of Losses in excess of
$38,750,000 actually paid at any time to the Indemnified Persons) between the
third anniversary of the Closing Date and the fourth anniversary of the Closing
Date, and (E) $5,000,000 (less the aggregate amount of Losses in excess of
$43,750,000 actually paid at any time to the Indemnified Persons) between the
fourth anniversary of the Closing Date and the fifth anniversary of the Closing
Date (as adjusted, the “Cap”). Notwithstanding any other provision of this
Agreement, any pending claim made hereunder shall only be subject to the Cap in
effect at the time such claim was made and no pending unresolved or unsatisfied
claim for Losses shall be limited in any manner by any annual adjustment of the
Cap.

(ii) Notwithstanding any other provision of this Agreement, the Indemnifying
Shareholders will not be liable for Losses in respect of claims arising under
Section 7.1(e) (“Section 7.1(e) Claims”) in excess of (A) $30,000,000 prior to
the first anniversary of the Closing Date, and (B) $20,000,000 (less the
aggregate amount of Losses in respect of Section 7.1(e) Claims in excess of
$10,000,000 actually paid at any time to the Indemnified Persons) between the
first anniversary of the Closing Date and the second anniversary of the Closing
Date (the “Special Cap”). Notwithstanding any other provision of this Agreement,
any pending claim made hereunder shall only be subject to the Special Cap in
effect at the time such claim was made and no pending unresolved or unsatisfied
claim for Losses shall be limited in any manner by any annual adjustment of the
Special Cap.

(iii) Notwithstanding anything to the contrary contained in this Agreement,
except in cases of fraud or intentional misrepresentation, the maximum aggregate
liability of any Indemnifying Shareholder for Losses under Sections 7.1 (other
Losses arising out of any breach of or inaccuracy in any Excluded
Representation) shall be limited to such Indemnifying Shareholder’s pro rata
share of the Cash Escrow Fund and the Stock Escrow Fund.

(c) No Indemnifying Shareholder shall have any right of contribution, right of
indemnity or other right or remedy against Parent or the Surviving Company in
connection with any indemnification obligation or any other liability to which
such Indemnifying Shareholder may become subject under or in connection with
this Agreement.

 

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(d) Parent and Merger Sub agree and acknowledge that, except in the case of
fraud or intentional misrepresentation or the failure of Parent, the Company or
any of their Subsidiaries to pay the Merger Consideration, the remedies provided
in this ARTICLE 7 and in ARTICLE 7A shall after the Effective Time, be the sole
and exclusive remedy available to the parties hereto for any claim or cause of
action arising out of, in connection with or under this Agreement or the
transactions contemplated herein.

(e) For purposes of this ARTICLE 7, each share of Parent Common Stock shall at
all times be valued at the Parent Common Stock Price.

7.3 Claims Procedure. As soon as reasonably practicable after Parent becomes
aware of any claim that might result in a Loss that the Indemnified Persons have
under Section 7.1, Parent shall deliver to the Shareholders’ Representative (and
if cash remains in the Cash Escrow Fund or shares of Parent Common Stock remain
in the Stock Escrow Fund to the Escrow Agent) a certificate signed by any
officer of Parent (an “Officer’s Certificate”):

(a) stating that an Indemnified Person has incurred, paid or properly accrued,
or reasonably anticipates that it may incur, pay or properly accrue, Losses;

(b) stating the amount of such Losses (which, in the case of Losses not yet
incurred, paid or properly accrued, may be the maximum amount in good faith
anticipated to be incurred, paid or properly accrued); and

(c) specifying in reasonable detail (based upon the information then possessed
by Parent) the individual items of such Losses included in the amount so stated
and the nature of the claim to which such Losses are related.

No delay in or failure to give an Officer’s Certificate by Parent to the
Shareholders’ Representative or the Escrow Agent pursuant to this Section 7.3
will adversely affect any of the other rights or remedies that Parent has under
this Agreement or alter or relieve the Indemnifying Shareholders of their
obligations to indemnify the Indemnified Persons, except and to the extent that
such delay or failure has materially prejudiced the Indemnifying Shareholders
and provided that any claim made in such Officer’s Certificate pursuant to
(i) Section 7.1(a) must be delivered during the applicable survival period of
the relevant representation or warranty as provided in Section 8.1,
(ii) Sections 7.1(b), 7.1(d) and 7.1(f) must be delivered no later than the
first anniversary of the Closing Date, (iii) Section 7.1(c) must be delivered no
later than the second anniversary of the Closing Date, and (iv) Section 7.1(e)
must be delivered no later than the fifth anniversary of the Closing Date.

7.4 Objections to Claims. The Shareholders’ Representative may object to any
claim set forth in such Officer’s Certificate by delivering written notice to
Parent (and if cash remains in the Cash Escrow Fund or shares of Parent Common
Stock remain in the Stock Escrow Fund, to the Escrow Agent) of the Shareholder
Representative’s objection (an “Objection Notice”). Such Objection Notice must
describe the grounds for such objection in reasonable detail. If an Objection
Notice is not delivered by the Shareholders’ Representative to Parent within 30
days after delivery by Parent of the Officer’s Certificate (the “Objection
Period”), such failure to so object shall be an irrevocable acknowledgment by
the Shareholders’ Representative that the Indemnified Persons are entitled to
indemnification under Section 7.1 for the full amount of the Losses set forth in
such Officer’s Certificate.

 

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7.5 Resolution of Objections to Claims. If the Shareholders’ Representative
shall object in writing to any claim or claims by Parent made in any Officer’s
Certificate, Parent shall have thirty days after its receipt of the Objection
Notice to respond in a written statement to such objection (such 30-day period,
the “Response Period”).

(a) If after the expiration of the Response Period there remains a dispute as to
any claims, the Shareholders’ Representative and Parent shall attempt in good
faith for twenty days thereafter to agree upon the rights of the respective
parties with respect to each of such claims.

(b) If no such agreement can be reached after good faith negotiation, the
Shareholders’ Representative and a senior representative of Parent shall meet
within ten days of the expiration of such 20-day period and negotiate in good
faith for one day with an impartial mediator in San Francisco, California.

(c) If no agreement can be reached after good faith mediation, the arbitration
provisions of Section 8.11 shall be followed and the decision of the arbitrator
regarding such claim shall be binding and conclusive upon the parties to this
Agreement.

7.6 Payment of Claims.

(a) If no Objection Notice is delivered by the Shareholders’ Representative
within the Objection Period:

(i) If cash is then remaining in the Cash Escrow Fund or shares of Parent Common
Stock are then remaining in the Stock Escrow Fund (excluding cash and shares
retained for pending claims), on the 31st day following the Escrow Agent’s
receipt of an Officer’s Certificate, the Escrow Agent shall release to Parent as
soon as practicable out of the Cash Escrow Fund cash, in accordance with the
Cash Escrow Agreement, having a value, in the aggregate, equal to the Cash
Escrow Percentage of such Losses, and out of the Stock Escrow Fund shares of
Parent Common Stock, in accordance with the Escrow Agreement, having a value, in
the aggregate, equal to the Stock Escrow Percentage of such Losses (subject to
the limitations set forth in Section 7.2(b) and Section 7.6(d)); provided,
however, that, to the extent that such Losses have not then been incurred or
paid by such Indemnified Person, Parent (on behalf of itself or any other
Indemnified Person) shall not be so entitled to receive, and the Escrow Agent
shall not deliver shares or funds in respect thereof unless and until such
Losses are actually incurred or paid by such Indemnified Person.

(ii) If no cash is then remaining in the Cash Escrow Fund and no shares of
Parent Common Stock are then remaining in the Stock Escrow Fund (excluding cash
and shares retained for pending claims) and the indemnifiable Loss does not
arise out of, relate to or otherwise by virtue of the cases enumerated in
Section 7.1(a) (other than any breach of or inaccuracy in any Excluded
Representation), (b) or (e), on the 31st day following the Shareholders’
Representative’s receipt of an Officer’s Certificate, Parent shall deliver a
written notice to each Indemnifying Shareholder of such Indemnifying
Shareholder’s obligation under this Agreement

 

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to pay to Parent the amount of the Losses set forth in the Officer’s Certificate
(the “Payment Notice”), and each Indemnifying Shareholder shall pay the amount
of such Losses to Parent within 10 business days of receipt of such notice. In
addition, Parent shall be entitled to place “stop transfer” restrictions on the
shares of Parent Common Stock held by any Indemnifying Shareholder who fails to
make such payment to Parent within 15 business days after receipt by such
Indemnifying Shareholder of a Payment Notice.

(b) If an Objection Notice is delivered by the Shareholders’ Representative
within the Objection Period, and if cash is then remaining in the Cash Escrow
Fund or shares of Parent Common Stock are then remaining in the Stock Escrow
Fund (excluding cash and shares retained for pending claims):

(i) If an agreement between Parent and the Shareholders’ Representative is
reached in accordance with Section 7.5(a), the Shareholders’ Representative and
Parent shall each execute a memorandum setting forth their agreement, which
shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to
rely on any such memorandum and shall distribute from the Cash Escrow Fund cash,
in accordance with the Cash Escrow Agreement, having a value, in the aggregate,
equal to the Cash Escrow Percentage of the aggregate amount of Losses agreed to
in such memorandum and from the Stock Escrow Fund shares of Parent Common Stock,
in accordance with the Stock Escrow Agreement, having a value, in the aggregate,
equal to the Stock Escrow Percentage of the aggregate amount of Losses agreed to
in such memorandum (subject to the limitations set forth in Section 7.2(b) and
Section 7.6(d)).

(ii) If an agreement is reached through mediation in accordance with
Section 7.5(b), the Shareholders’ Representative and Parent shall each execute a
memorandum setting forth their agreement, which shall be furnished to the Escrow
Agent. The Escrow Agent shall be entitled to rely on any such memorandum and
shall distribute from the Cash Escrow Fund cash, in accordance with the Cash
Escrow Agreement, having a value, in the aggregate, equal to the Cash Escrow
Percentage of the amount of Losses agreed to in such memorandum and from the
Stock Escrow Fund shares of Parent Common Stock, in accordance with the Stock
Escrow Agreement, having a value, in the aggregate, equal to the Stock Escrow
Percentage of the amount of Losses agreed to in such memorandum (subject to the
limitations set forth in Section 7.2(b) and Section 7.6(d)).

(iii) If a determination is made through arbitration in accordance with
Section 7.5(c), the Escrow Agent shall be entitled to act in accordance with the
decision of the arbitrator, and make or withhold payments out of the Cash Escrow
Fund and Stock Escrow Fund in accordance therewith; provided that the Escrow
Agent shall distribute from the Cash Escrow Fund cash, in accordance with the
Cash Escrow Agreement, having a value, in the aggregate, equal to the Cash
Escrow Percentage of the amount of Losses agreed to in such memorandum and from
the Stock Escrow Fund shares of Parent Common Stock, in accordance with the
Stock Escrow Agreement, having a value, in the aggregate, equal to the Stock
Escrow Percentage of the amount of Losses agreed to in such memorandum (subject
to the limitations set forth in Section 7.2(b) and Section 7.6(d)).

 

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(c) If an Objection Notice is delivered by the Shareholders’ Representative
within the Objection Period and if no cash is then remaining in the Cash Escrow
Fund and no shares of Parent Common Stock are then remaining in the Stock Escrow
Fund (excluding cash and shares retained for pending claims) if an agreement or
determination is reached in accordance with Section 7.5(a), 7.5(b) or 7.5(c),
Parent shall deliver a Payment Notice to each Indemnifying Shareholder, and each
Indemnifying Shareholder shall pay the amount of the Losses agreed to by Parent
and the Shareholders’ Representative to Parent within 10 business days of
receipt of such Payment Notice. In addition, Parent shall be entitled to place
“stop transfer” restrictions on the shares of Parent Common Stock held by any
Indemnifying Shareholder who fails to make such payment to Parent within 15
business days after receipt by such Indemnifying Shareholder of a Payment
Notice.

(d) Notwithstanding the foregoing provisions, in lieu of releasing any shares of
Parent Common Stock from the Stock Escrow Fund in order to satisfy any
Indemnified Person’s Loss, an Indemnifying Shareholder may elect to pay the
portion of such Loss which would have otherwise been satisfied with the shares
of Parent Common Stock by delivering (or causing the Shareholders’
Representative to deliver) to the Escrow Agent an amount in cash equal to such
difference by wire transfer. The Escrow Agent shall deliver such cash to the
Indemnified Person and shall promptly transfer to the Shareholders’
Representative, on behalf of such Indemnifying Shareholder, such Indemnifying
Shareholder’s pro rata portion of the number of shares of Parent Common Stock
otherwise to be transferred to the Indemnified Person pursuant to this
Section 7.6.

7.7 Escrow Fund Releases. On each anniversary of the Closing Date, the amount of
cash in the Cash Escrow Fund and the number of shares of Parent Common Stock
(valued in accordance with Section 7.2(e)) held in the Stock Escrow Fund in the
aggregate in excess of the then-applicable Cap, if any, for such anniversary of
the Closing Date, less the aggregate amount of any unresolved or unsatisfied
claims for Losses specified in any Officer’s Certificate delivered to the
Shareholders’ Representative and the Escrow Agent prior to such anniversary of
the Closing Date in accordance with the applicable provisions of this Agreement
(an “Interim Release Amount”), shall be released to the Indemnifying
Shareholders as provided herein. On the fifth anniversary of the Closing Date,
the remainder of the Cash Escrow Fund and the Stock Escrow Fund not subject to
unresolved or unsatisfied claims specified in any Officer’s Certificate
delivered to the Shareholders’ Representative and the Escrow Agent prior to the
fifth anniversary of the Closing Date (such amount and each Interim Release
Amount, a “Release Amount”) shall be released to the Indemnifying Shareholders
as provided herein. Forty percent of any Release Amount shall be released from
the Cash Escrow Fund, and 60% of any Release Amount shall be released from the
Stock Escrow Fund.

7.8 Third-Party Claims. If Parent becomes aware of a third-party claim that
Parent believes may result in a claim for indemnification in accordance with
Section 7.1 by or on behalf of an Indemnified Person, Parent shall promptly
notify the Shareholders’ Representative of such third-party claim and provide
the Shareholders’ Representative the opportunity to direct, through counsel of
its own choosing (who shall be reasonably acceptable to Parent), at its own
cost, the defense or settlement of such claim; provided, however, that (a) the
claim or proceeding solely seeks (and continues to seek) monetary damages;
(b) Parent reasonably determines in good faith that there is no reasonable
likelihood that such claim will cause the Indemnified Persons to suffer

 

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Losses in excess of the amount held in the Cash Escrow Fund and the Stock Escrow
Fund from time to time during the pendency of the claim, excluding any amount
subject to any other claim; and (c) the Shareholders’ Representative agrees in
writing on behalf of all Indemnifying Shareholders that the Indemnifying
Shareholders will be liable for any amounts paid in resolution or settlement of
the claim regardless of the limitations set forth in ARTICLE 7 (the conditions
set forth in clauses (a) through (c) are, collectively, the “Litigation
Conditions”). If the Litigation Conditions are met and the Shareholders’
Representative elects to assume the defense of any such claim or proceeding, the
Shareholders’ Representative shall allow the Indemnified Persons to participate
in such defense, but in such case the expenses of the Indemnified Persons shall
be paid by the Indemnified Persons. An Indemnified Person shall provide the
Shareholders’ Representative and counsel with reasonable access to its records
and personnel relating to any such claim, assertion, event or proceeding during
normal business hours and shall otherwise cooperate with the Shareholders’
Representative in the defense or settlement thereof, and the Indemnified Persons
shall be reimbursed for all of their reasonable out-of-pocket expenses in
connection therewith. If the Shareholders’ Representative elects to direct the
defense of any such claim or proceeding, the Indemnified Persons shall not pay,
or permit to be paid, any part of any claim or demand arising from such asserted
liability unless (i) the Shareholders’ Representative consents in writing to
such payment, (ii) the Shareholders’ Representative withdraws from the defense
of such asserted liability and Parent undertakes the defense or settlement of
such claim or proceeding and settles such claim or proceeding in accordance with
this Section 7.8 unless a final judgment from which no appeal may be taken by or
on behalf of the Indemnifying Shareholders is entered against Indemnified
Persons for such liability. If the Shareholders’ Representative fails to defend
or if, after commencing or undertaking any such defense, the Shareholders’
Representative fails to prosecute or withdraws from such defense, or if any of
the Litigation Conditions cease to be met, Parent shall have the right to
undertake the defense or settlement thereof, and retain counsel, reasonably
satisfactory to the Shareholders’ Representative, at the Indemnifying
Shareholders’ expense; provided, however, that the Indemnifying Shareholders
shall not be required to pay the fees and expenses of more than one counsel for
the Indemnified Persons in any single action, except to the extent that two or
more such Indemnified Persons shall have conflicting interests in the outcome of
such action and, without the consent of the Shareholders’ Representative in
writing, no settlement of any such claim with third-party claimants shall be
determinative of the amount of Losses relating to such matter (but in no event
shall the amount of Losses exceed the aggregate of the actual cost incurred by
the Indemnified Persons in defending such claim and the amount of such
settlement). If the Shareholders’ Representative consents to any such
settlement, neither the Shareholders’ Representative nor any Indemnifying
Shareholder shall have any power or authority to object to the amount or
validity of any claim by or on behalf of any Indemnified Person for indemnity
with respect to such settlement. Notwithstanding any other provision of this
Agreement, any costs and expenses of defense and investigation, including court
costs and reasonable attorneys fees incurred or suffered by the Indemnified
Persons in connection with the defense of any such third party claim, whether or
not it is determined that there was a breach or inaccuracy of a representation
or warranty or any other matter specified in Section 7.1 as a basis for
indemnification under this Agreement, shall constitute Losses subject to
indemnities under Section 7.1.

 

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7.9 Shareholders’ Representative.

(a) Each of the Indemnifying Shareholders hereby appoints Thomas L. Dinwoodie as
its agent and attorney-in-fact as the Shareholders’ Representative for and on
behalf of the Indemnifying Shareholders to: (i) give and receive notices and
communications to or from Parent (on behalf of himself or any other Indemnified
Person) and/or the Escrow Agent relating to this Agreement, the Escrow
Agreements or any of the transactions and other matters contemplated hereby or
thereby, (ii) authorize deliveries to Parent of cash or shares from the Cash
Escrow Fund or the Stock Escrow Fund, as the case may be, in satisfaction of
claims asserted by Parent (on behalf of itself or any other Indemnified Person,
including by not objecting to such claims) pursuant to ARTICLE 7, (iii) object
to such claims in accordance with Section 7.4, (iv) consent or agree to,
negotiate, enter into settlements and compromises of, and demand mediation and
arbitration and comply with orders of courts and awards of arbitrators with
respect to, such claims, except for claims for indemnification made directly
against the Indemnifying Shareholders, (v) bind such Indemnifying Shareholder to
the contract referenced in Section 7.8(c) pursuant to which the Shareholders’
Representative agrees on behalf of all Indemnifying Shareholders that the
Indemnifying Shareholders will be liable for any amounts paid in resolution or
settlement of a third-party claim, the defense or settlement of which is
controlled by the Shareholders’ Representative in accordance with Section 7.8,
regardless of the limitations set forth in this ARTICLE 7, (vi) Indemnifying
Shareholder to take all actions necessary or appropriate in the judgment of the
Shareholders’ Representative for the accomplishment of the foregoing or that are
specifically mandated by the terms of this Agreement, in each case without
having to seek or obtain the consent of any Person under any circumstance, and
(vii) act as expressly set forth in this Agreement. The Shareholders’
Representative shall be the sole and exclusive means of asserting or addressing
any of the above, and no former shareholder shall have any right to act on its
own behalf with respect to any such matters, other than any claim or dispute
against the Shareholders’ Representative. The Person serving as the
Shareholders’ Representative may be replaced from time to time by the holders of
a majority in interest of the shares held immediately prior to the Effective
Time by the Indemnifying Shareholders upon not less than ten days’ prior written
notice to Parent. No bond shall be required of the Shareholders’ Representative,
and the Shareholders’ Representative shall receive no compensation for his
services. Notices or communications to or from the Shareholders’ Representative
shall constitute notice to or from each of the Indemnifying Shareholders.

(b) The Shareholders’ Representative shall not be liable to any Indemnifying
Shareholder for any act done or omitted hereunder as the Shareholders’
Representative while acting in good faith, and any act done or omitted in
accordance with the advice of counsel or other expert shall be conclusive
evidence of such good faith. The Indemnifying Shareholders shall severally
indemnify the Shareholders’ Representative and hold him harmless against any
loss, liability or expense incurred without gross negligence or bad faith on the
part of the Shareholders’ Representative and arising out of or in connection
with the acceptance or administration of his duties hereunder. The Shareholders’
Representative may consult with legal counsel, independent public accountants
and other experts selected by it and shall be reimbursed by the Indemnifying
Shareholders for the reasonable fees and expenses of such counsel, accountants
and other expects and any other cost and expenses incurred by the Shareholders’
Representative.

 

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(c) The Shareholders’ Representative shall have reasonable access to information
about the Company and the reasonable assistance of the Company’s former officers
and employees for purposes of performing his duties and exercising its rights
hereunder, provided that the Shareholders’ Representative shall treat
confidentially and not disclose any nonpublic information from or about the
Company to anyone (except on a need to know basis to individuals who agree to
treat such information confidentially).

7.10 Actions of the Shareholders’ Representative. Any notice or communication
given or received by, and any decision, action, failure to act within a
designated period of time, agreement, consent, settlement, resolution or
instruction of, the Shareholders’ Representative that is within the scope of the
Shareholders’ Representative’s authority under this ARTICLE 7 shall constitute a
notice or communication to or by, or a decision, action, failure to act within a
designated period of time, agreement, consent, settlement, resolution or
instruction of all Indemnifying Shareholders shall be final, binding and
conclusive upon each such Indemnifying Shareholder; and Parent, Merger Sub, each
Indemnified Person and the Escrow Agent shall be entitled to rely upon any such
notice, communication, decision, action, failure to act within a designated
period of time, agreement, consent, settlement, resolution or instruction as
being a notice or communication to or by, or a decision, action, failure to act
within a designated period of time, agreement, consent, settlement, resolution
or instruction of, each and every such Indemnifying Shareholder. Except for
their gross negligence and willful misconduct, each Indemnified Person and the
Escrow Agent are unconditionally and irrevocably relieved from any liability to
any person for any acts done by them in accordance with any such notice,
communication, decision, action, failure to act within a designated period of
time, agreement, consent or instruction of the Shareholders’ Representative.

ARTICLE 7A

INDEMNIFICATION

7A.1 Indemnification of Company Indemnified Persons. Subject to the limitations
set forth in this ARTICLE 7A, Parent agrees to indemnify and hold harmless the
Company Shareholders immediately prior to the Effective Time and their
respective officers, directors, agents and employees, Subsidiaries, directors
and employees of Subsidiaries, and each Person, if any, who controls or may
control any of the Company Shareholders immediately prior to the Effective Time
within the meaning of the Securities Act (each of the foregoing, a “Company
Indemnified Person”) from and against any and all Losses arising out of, related
to or otherwise by virtue of (a) any breach of any representation or warranty
made by Parent or Merger Sub in this Agreement or any certificate required to be
delivered at Closing to the Company in accordance with Section 5.2(b), or
(b) any breach of or default in connection with any of the covenants or
agreements made by Parent or Merger Sub in this Agreement. In determining
(A) whether any representation or warranty (other than the representations and
warranties contained in Sections 3.1(a), 3.3(b), 3.4, 3.5, 3.6 and 3.12) was
inaccurate or breached, or (B) the amount of any Losses in respect of any
inaccuracy in or any breach of any representation and warranty, any materiality
or Material Adverse Effect qualification contained in such representation or
warranty will in all respects be ignored. The parties agree that any Losses
under this Section 7A.1 shall be recoverable by a Company Indemnified Person
from Parent in accordance with and subject to the limitations set forth in the
provisions of this ARTICLE 7A.

 

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7A.2 Limitations on Indemnification.

(a) The Company Indemnified Persons are not entitled to indemnification in
respect of any claim under Section 7A.1(a) (i) unless such claim (which may be
aggregated with (A) all related claims, and (B) all claims arising out of the
same facts and circumstances) involves Losses in excess of $50,000, and
(ii) unless and until Losses in accordance with Section 7A.1 (a) have been
incurred, paid or properly accrued in an aggregate amount greater than
$2,500,000 (the “Parent Indemnification Threshold”); provided that for the
purpose of determining whether the Parent Indemnification Threshold has been
exceeded, claims (when aggregated with (A) all related claims, and (B) all
claims arising out of the same facts and circumstances) involving Losses of
$50,000 or less shall be excluded. Notwithstanding the foregoing, the Company
Indemnified Persons shall be entitled to recover for, and the limitations set
forth in the preceding sentence shall not apply to, any Losses with respect to
any breach of any representation or warranty made by Parent or Merger Sub in
Sections 3.1, 3.2 or 3.3. Once the Parent Indemnification Threshold has been
exceeded, the Company Indemnified Persons shall be entitled to recover all
Losses in excess of the Parent Indemnification Threshold.

(b) Parent is liable for Losses under Section 7.1A up to an aggregate maximum
amount of $48,750,000 prior to the first anniversary of the Closing Date and
$24,375,000 (less the aggregate amount of Losses in excess of $24,375,000
actually paid at any time to any Company Indemnified Party) between the first
anniversary of the Closing Date and the second anniversary of the Closing Date
(as adjusted, the “Parent Cap”); provided that no Losses arising out of,
relating to or otherwise by virtue of any breach of or inaccuracy in any of the
representations and warranties contained in Sections 3.1, 3.2 or 3.3 shall be
subject to the Parent Cap. Notwithstanding anything to the contrary contained
herein, except in cases of fraud or intentional misrepresentation, the maximum
aggregate amount of indemnifiable Losses arising out of, relating to or
otherwise by virtue of the causes enumerated in Sections 7A.1(a) or (b) (other
than any breach of or inaccuracy in any of the representations or warranties
contained in Sections 3.1, 3.2 or 3.3) that may be recovered from Parent shall
be limited to the amount of the applicable Parent Cap. Notwithstanding any other
provision of this Agreement, any pending claim made hereunder shall only be
subject to the Parent Cap in effect at the time such claim was made and no
pending unresolved or unsatisfied claim for Losses shall be limited in any
manner by any annual adjustment of the Parent Cap.

(c) The Company agrees and acknowledges that, except in the case of fraud or
intentional misrepresentation or the failure of Parent to pay the Merger
Consideration, the remedies provided in ARTICLE 7 and this ARTICLE 7A shall
after the Effective Time, be the sole and exclusive remedy available to the
parties hereto for any claim or cause of action arising out of, in connection
with or under this Agreement or the transactions contemplated herein.

7A.3 Claims Procedure. As soon as reasonably practicable after any Company
Indemnified Person becomes aware of any claim that might result in a Loss that
such Company Indemnified Person has under Section 7A.1, Shareholders’
Representative shall deliver to Parent a certificate signed by the Shareholders’
Representative (a “Shareholders’ Representative Certificate”):

(a) stating that a Company Indemnified Person has incurred, paid or properly
accrued, or reasonably anticipates that it may incur, pay or properly accrue,
Losses;

 

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(b) stating the amount of such Losses (which, in the case of Losses not yet
incurred, paid or properly accrued, may be the maximum amount in good faith
anticipated to be incurred, paid or properly accrued); and

(c) specifying in reasonable detail (based upon the information then possessed
by such Company Indemnified Person) the individual items of such Losses included
in the amount so stated and the nature of the claim to which such Losses are
related.

No delay in or failure to give a Shareholders’ Representative Certificate by the
Shareholders’ Representative to Parent pursuant to this Section 7A.3 will
adversely affect any of the other rights or remedies that the Company
Indemnified Persons have under this Agreement or alter or relieve Parent of its
obligations to indemnify the Company Indemnified Persons, except and to the
extent that such delay or failure has materially prejudiced Parent, and provided
that any claim made in such Shareholders’ Representative Certificate pursuant to
Section 7A.1(a) is delivered during the applicable survival period of the
relevant representation or warranty as provided in Section 8.1 and that any
claim made in such Shareholders’ Representative Certificate pursuant to
Section 7A.1(b) is delivered no later than the first anniversary of the Closing
Date.

7A.4 Objections to Claims. Parent may object to any claim set forth in such
Shareholders’ Representative Certificate by delivering written notice to the
Shareholders’ Representative of Parent’s objection (a “Parent Objection
Notice”). Such Parent Objection Notice must describe the grounds for such
objection in reasonable detail. If a Parent Objection Notice is not delivered by
Parent to the Shareholders’ Representative within 30 days after delivery by the
Shareholders’ Representative of the Shareholders’ Representative Certificate
(the “Parent Objection Period”), such failure to so object shall be an
irrevocable acknowledgment by Parent that the applicable Company Indemnified
Person(s) are entitled to indemnification under Section 7.1A for the full amount
of the Losses set forth in such Shareholders’ Representative Certificate.

7A.5 Resolution of Objections to Claims. If Parent shall object in writing to
any claim or claims by the Shareholders’ Representative made in any
Shareholders’ Representative Certificate, the Shareholders’ Representative shall
have thirty days after its receipt of the Parent Objection Notice to respond in
a written statement to such objection (such 30-day period, the “Shareholders’
Representative Response Period”).

(a) If after the expiration of the Shareholders’ Representative Response Period
there remains a dispute as to any claims, Parent and the Shareholders’
Representative shall attempt in good faith for 20 days thereafter to agree upon
the rights of the respective parties with respect to each of such claims.

(b) If no such agreement can be reached after good faith negotiation, a senior
representative of Parent and the Shareholders’ Representative shall meet within
ten days of the expiration of such 20-day period and negotiate in good faith for
one day with an impartial mediator in San Francisco, California.

 

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(c) If no agreement can be reached after good faith mediation, the arbitration
provisions of Section 8.11 shall be followed and the decision of the arbitrator
regarding such claim shall be binding and conclusive upon the parties to the
Agreement.

7A.6 Payment of Claims.

(a) If no Parent Objection Notice is delivered by Parent within the Parent
Objection Period, Parent shall deliver the amount of such Losses to the
Shareholders’ Representative (on behalf of the applicable Company Indemnified
Person(s)) within 10 business days of the expiration of the Parent Objection
Period.

(b) If a Parent Objection Notice is delivered by Parent within the Parent
Objection:

(i) If an agreement between the Shareholders’ Representative and Parent is
reached in accordance with Section 7A.4(a), Parent shall deliver the amount of
the Losses agreed to by Parent and the Shareholders’ Representative to the
Shareholders’ Representative (on behalf of the applicable Company Indemnified
Person(s)) within 10 business days of the date of such agreement.

(ii) If an agreement is reached through mediation in accordance with
Section 7A.5(b), Parent shall deliver the amount of the Losses agreed to by
Parent and the Shareholders’ Representative to the Shareholders’ Representative
(on behalf of the applicable Company Indemnified Person(s)) within 10 business
days of the date of such agreement.

If a determination is made through arbitration in accordance with
Section 7A.5(c), Parent shall deliver the amount of the Losses set forth in the
final decision of the arbitration to the Shareholders’ Representative (on behalf
of the applicable Company Indemnified Person(s)) within 10 business days of the
date of such decision.

ARTICLE 8

GENERAL PROVISIONS

8.1 Survival of Representations and Warranties. The representations and
warranties made by the Company in this Agreement or any certificate required to
be delivered at Closing to Parent or Merger Sub in accordance with
Section 5.3(b) shall survive the Closing and remain in full force and effect
until the first anniversary of the Closing Date. Notwithstanding the preceding
sentence, the representations and warranties made by the Company in Section 2.9
and Section 2.24 shall survive until the second anniversary of the Effective
Time, and the representations and warranties made by the Company in Section 2.1,
Section 2.2 and Section 2.3(a) shall survive indefinitely. Notwithstanding any
other provision of this Agreement, no right to indemnification in accordance
with ARTICLE 7 in respect of any claim based upon any misrepresentation or
breach of a representation or warranty that is set forth in an Officer’s
Certificate delivered to the Escrow Agent prior to the expiration of such
representation and warranty shall be affected by the expiration of such
representations and warranties. The representations and warranties made by
Parent and Merger Sub in this Agreement or in any certificate required to be
delivered at the Closing to the Company in accordance with Section 5.2(b) shall
survive the Closing and remain in full force and effect until the first
anniversary of the Closing Date. Notwithstanding the preceding sentence, the
representations and warranties made by Parent and the Merger Sub in
Sections 3.1, 3.2, and 3.3(a) shall survive indefinitely.

 

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8.2 Notices. All notices and other communications hereunder shall be in writing
and shall be deemed given when delivered personally, one business day after
having been dispatched by a nationally recognized overnight courier service or
when sent via facsimile (with acknowledgement of complete transmission) to the
parties hereto at the following address (or at such other addresses for a party
as shall be specified by like notice):

 

  (i) if to Parent or Merger Sub, to:

SunPower Corporation

3939 North First Street

San Jose, California 95134

Attention: Emmanuel Hernandez

Facsimile No.: 408.739.7713

Telephone No.: 408.240.5500

with a copy (which shall not constitute notice) to:

Jones Day

2882 Sand Hill Road, Suite 240

Menlo Park, California 94025

Attention: Daniel R. Mitz

                 Sean M. McAvoy

Facsimile No.: 650.739.3900

Telephone No.: 650.739.3939

after January 5, 2007, to:

Jones Day

1755 Embarcadero Road

Palo Alto, California 94303

Attention: Daniel R. Mitz

                 Sean M. McAvoy

Facsimile No.: 650.739.3900

Telephone No.: 650.739.3939

 

  (ii) if to the Company, to:

PowerLight Corporation

2954 San Pablo Avenue

Berkeley, California 94702

Attention: Thomas L. Dinwoodie

Facsimile No.: 510.540.0552

Telephone No.: 510.540.0550

 

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with a copy (which shall not constitute notice) to:

Shearman & Sterling LLP

525 Market

Street San Francisco, California 94105

Attention: John D. Wilson

Facsimile No.: 415.616.1199

Telephone No.: 415.616.1100

 

  (iii) if to the Shareholders’ Representative, to:

Thomas L. Dinwoodie

934 Kingston Avenue

Piedmont, California 94611

Facsimile No.: 510.540.0552

Telephone No.: 510.868-1227

with a copy (which shall not constitute notice) to:

Shearman & Sterling LLP

525 Market Street

San Francisco, California 94105

Attention: John D. Wilson

Facsimile No.: 415.616.1199

Telephone No.: 415.616.1215

8.3 Interpretation. When a reference is made in this Agreement to a section or
article, such reference shall be to a section or article of this Agreement,
unless otherwise clearly indicated to the contrary. A section excludes its
correlative “A” section unless the “A” is specifically stated. Whenever the
words “include,” “includes” or “including” are used in this Agreement, they
shall be deemed to be followed by the words “without limitation.” The words
“hereof,” “herein” and “herewith” and words of similar import shall, unless
otherwise stated, be construed to refer to this Agreement as a whole and not to
any particular provision of this Agreement, and annex, article, section,
paragraph, exhibit and schedule references are references to the annex,
articles, sections, paragraphs, exhibits and schedules of this Agreement, unless
otherwise specified. The plural of any defined term shall have a meaning
correlative to such defined term and words denoting any gender shall include all
genders and the neuter. Where a word or phrase is defined herein, each of its
other grammatical forms shall have a corresponding meaning. Any reference to a
party to this Agreement or any other agreement or document contemplated hereby
shall include such party’s successors and permitted assigns. A reference to any
legislation or to any provision of any legislation shall include any
modification, amendment, re-enactment thereof, any legislative provision
substituted therefore and all rules, regulations and statutory instruments
issued or related to such legislation. The headings and captions in this
Agreement are for reference only and shall not be used in the construction or
interpretation of this Agreement. The parties have participated jointly in the
negotiation and drafting of this Agreement. If any ambiguity or question of
intent or interpretation arises, this Agreement 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 provision
of this Agreement. No prior draft of this

 

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Agreement nor any course of performance or course of dealing shall be used in
the interpretation or construction of this Agreement. No parole evidence shall
be introduced in the construction or interpretation of this Agreement unless the
ambiguity or uncertainty in issue is plainly discernable from a reading of this
Agreement without consideration of any extrinsic evidence. Although the same or
similar subject matters may be addressed in different provisions of this
Agreement, the parties intend that, except as reasonably apparent on the face of
the Agreement or as expressly provided in this Agreement, each such provision
shall be read separately, be given independent significance and not be construed
as limiting any other provision of this Agreement (whether or not more general
or more specific in scope, substance or content). The doctrine of election of
remedies shall not apply in constructing or interpreting the remedies provisions
of this Agreement or the equitable power of a court considering this Agreement
or the transactions contemplated hereby.

8.4 Definitions.

For purposes of this Agreement:

(a) an “Affiliate,” when used with reference to 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) “Basis” shall mean any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act or transaction that could form the basis for any
specified consequence;

(c) “business day” means any day on which banks are not required or authorized
to be closed in San Francisco, California;

(d) “Cash Amount” means an amount of cash equal to the Cash Consideration
divided by the Company Participating Capitalization;

(e) “Cash Escrow Fund” means the fund in which the Cash Escrow Amount is held;

(f) “Company Capital Stock” means the Company Common Stock and the Company
Preferred Stock;

(g) “Company Common Stock” means the common stock of the Company par value
$0.0001 per share;

(h) “Company Common Stock Warrants” means all warrants exercisable for Company
Common Stock;

(i) “Company Disclosure Letter” means a letter, prepared and delivered by the
Company to Parent pursuant to this Agreement that sets forth the exceptions to
the representations, warranties and covenants of the Company contained herein.
The Company Disclosure Letter shall be arranged in sections and subsections
corresponding to the sections and subsections in this

 

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Agreement. The disclosure of any matter in any section or subsection of the
Company Disclosure Letter shall also disclose such matter for other sections and
subsections of the Company Disclosure Letter to the extent (and only to the
extent) that the disclosure sets forth facts in sufficient detail so that the
relevance of such disclosure for such other sections or subsections is
reasonably apparent to a reader;

(j) “Company-Licensed IP Rights” means Company IP Rights that are not
Company-Owned IP Rights;

(k) “Company Options” means all options exercisable for Company Capital Stock;

(l) “Company-Owned IP Rights” means Company IP Rights that are owned by the
Company or any of its Subsidiaries;

(m) “Company Participating Capitalization” means, as of immediately prior to the
Effective Time, the aggregate number of outstanding shares of Company Common
Stock (including all (i) shares of Company Common Stock issuable upon conversion
of all shares of Company Preferred Stock, and (ii) shares of Company Common
Stock issuable upon exercise of (A) all unexercised Company Options, whether
vested or unvested, and (B) all Company Warrants;

(n) “Company Preferred Stock” means the preferred stock of the Company par value
$0.0001 consisting of Company’s Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock;

(o) “Company Series C Warrants” means all warrants exercisable for Company’s
Series C Preferred Stock;

(p) “Company Shareholders” means the holders of Company Capital Stock
immediately prior to the Closing;

(q) “Company Warrants” means all Company Common Stock Warrants and all Company
Series C Warrants;

(r) “Environment” means soil, surface waters, groundwater, land, stream
sediments, surface or subsurface strata, ambient air and indoor air;

(s) “Environmental Condition” means any condition of the Environment with
respect to the Real Property, with respect to any real property previously
owned, leased or operated by the Company or any of its Subsidiaries to the
extent such condition of the Environment existed at the real property at the
time of such ownership, lease or operation, or with respect to any other real
property at which any Hazardous Material generated by the operation of the
business of the Company or any of its Subsidiaries prior to the Closing Date has
been treated, stored or disposed of or has otherwise come to be located, which
violates any Environmental Law, or even though not violative of any
Environmental Law, nevertheless results in any Release, or threat of Release,
damage, loss, cost, expense, claim, demand or order relating to any
Environmental Law or Release;

 

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(t) “Environmental Law” means any foreign, federal, state or local law,
regulation, rule, ordinance or common law relating to the health, as such
relates to exposure to Hazardous Materials, or to the protection of the
Environment, Releases of Hazardous Materials into the Environment, workplace
safety as such relates to exposure to Hazardous Materials, or injury to persons
relating to exposure to Hazardous Materials;

(u) “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended;

(v) “Escrow Fund” shall mean the Cash Escrow Fund and the Stock Escrow Fund,
collectively.

(w) “Excluded Representations” means the representations and warranties made by
the Company in Sections 2.1, 2.2, 2.3 and 2.9

(x) “Hazardous Material” means any substance, waste or material defined in or
regulated as toxic, hazardous, radioactive or as a pollutant or a contaminant
under any Environmental Law, including petroleum or petroleum-containing
materials, leaded paints, toxic mold, asbestos and asbestos-containing
materials, silica sand and polychlorinated biphenyls;

(y) “Indemnifying Shareholders” means those Persons whose names are set forth on
Schedule 7.1;

(z) “Intellectual Property” means the rights associated with or arising out of
any of the following: (i) domestic and foreign patents and patent applications,
together with all reissuances, divisionals, continuations,
continuations-in-part, revisions, renewals, extensions, and reexaminations
thereof, and any identified invention disclosures (“Patents”); (ii) trade secret
rights and corresponding rights in confidential information and other non-public
information (whether or not patentable), including ideas, formulas,
compositions, inventor’s notes, discoveries and improvements, know-how,
manufacturing and production processes and techniques, testing information,
research and development information, inventions, invention disclosures,
unpatented blueprints, drawings, specifications, designs, plans, proposals and
technical data, business and marketing plans, market surveys, market know-how
and customer lists and information (“Trade Secrets”); (iii) all copyrights,
copyrightable works, rights in databases, data collections, “moral” rights, mask
works, copyright registrations and applications therefore and corresponding
rights in works of authorship (“Copyrights”); (iv) all trademarks, service
marks, logos, trade dress and trade names and domain names indicating the source
of goods or services, and other indicia of commercial source or origin (whether
registered, common law, statutory or otherwise), all registrations and
applications to register the foregoing anywhere in the world and all goodwill
associated therewith (“Trademarks”); (v) all computer software and code,
including assemblers, applets, compilers, source code, object code, development
tools, design tools, user interfaces and data, in any form or format, however
fixed (“Software”); and (vi) all Internet electronic addresses, uniform resource
locators and alphanumeric designations associated therewith and all
registrations for any of the foregoing (“Domain Names”);

(aa) “in the ordinary course of business,” with respect to any action, means
such action is:

(i) consistent with the recent past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person; and

 

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(ii) not required to be authorized by the board of directors of such Person;

(bb) any reference to a Person’s “knowledge” means the actual knowledge, after
due inquiry, of such Person’s executive officers; provided that with respect to
the Company, executive officers shall mean Thomas Dinwoodie, Daniel Shugar,
Howard Wenger, Michael Armsby and Bruce Ledesma;

(cc) any reference to an event, change, condition or effect being “material”
with respect to any Person means any event, change, condition or effect that is
material in relation to the condition (financial or otherwise), properties,
assets (including intangible assets), liabilities, business, operations or
results of operations of such Person and its Subsidiaries, taken as a whole;

(dd) a “Material Adverse Effect” with respect to any Person means any effect
that is materially adverse in relation to the condition (financial or
otherwise), properties, assets, liabilities, business, operations or results of
operations of such Person and its Subsidiaries, taken as a whole; provided,
however, that in no event shall any of the following be deemed, either alone or
in combination, to constitute, nor shall any of the following be taken into
account in determining whether there has been, a Material Adverse Effect on a
Person: (i) any effect that results from changes in general economic conditions
or changes in securities markets in general, (ii) any effect that results from
general changes in the industries in which such Person operates, (iii) any
actions (A) of photovoltaic cells or modual suppliers of the Company or any of
its Subsidiaries or (B) taken by, or losses of, employees, in each case to the
extent arising out of the public announcement or pendency of the transactions
contemplated by this Agreement, (iv) any effect that results from any action
taken pursuant to or in accordance with this Agreement or, with regard to the
Company, at the request of Parent, and with regard to Parent or Merger Sub, at
the request of the Company, or (v) any fees or expenses incurred in connection
with the transactions contemplated by this Agreement;

(ee) “Parent Capital Stock” means the Parent Common Stock and the Parent
Preferred Stock;

(ff) “Parent Disclosure Letter” means a letter prepared and delivered by Parent
to the Company pursuant to this Agreement that sets forth the exceptions to the
representations and warranties of Parent contained herein. The Parent Disclosure
Letter shall be arranged in sections and subsections corresponding to the
sections and subsections in this Agreement. The disclosure of any matter in any
section or subsection of the Parent Disclosure Letter shall also disclose such
matter for other sections and subsections of the Parent Disclosure Letter to the
extent (and only to the extent) that the disclosure sets forth facts in
sufficient detail so that the relevance of such disclosure for such other
sections or subsections is reasonably apparent to a reader;

 

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(gg) “Parent Preferred Stock” means the preferred stock of Parent par value
$0.001 per share;

(hh) “Parent Stock Plan Amendment” means the amendment to the Parent Stock Plan
to increase the number of shares reserved for issuance under such plan
sufficient for Parent to fulfill its obligations under Section 4.13.

(ii) “Permit” means any permit, license, approval, consent or authorization
issued by a Governmental Entity;

(jj) a “Person” means any individual, firm, corporation, partnership, company,
limited liability company, division, trust, joint venture, association,
Governmental Entity or other entity or organization;

(kk) “Real Property” means the real property listed or described on Section 2.22
of the Company Disclosure Letter, together with all buildings, structures,
improvements, and fixtures located on such real property, and all rights,
benefits, privileges, easements, rights-of-way, or rights of access benefiting,
belonging or pertaining to any part of such real property;

(ll) “Release” means any releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, migrating,
disposing or dumping of a Hazardous Material into the Environment (including,
without limitation, the abandonment or discarding of barrels, containers and
other closed receptacles containing any Hazardous Materials);

(mm) “Stock Amount” means a number of shares of Parent Common Stock equal to the
Stock Consideration divided by the Company Participating Capitalization;

(nn) “Stock Escrow Fund” means the fund in which the Stock Escrow Amount is
held;

(oo) a “Subsidiary” of any Person means another Person, an amount of the voting
securities, other voting ownership or voting partnership interests of which is
sufficient to elect at least 50% of its board of directors or other governing
body (or, if there are no such voting interests, 50% or more of the equity
interests of which) is owned directly or indirectly by such first Person;

(pp) “Vested Company Options” means the portion of all Company Options that is
or may become vested prior to the Closing.

8.5 Counterparts. This Agreement may be executed in one or more counterparts
(whether delivered by facsimile or otherwise), each of which shall be considered
one and the same instrument and shall become effective when one or more
counterparts have been signed by each of the parties hereto and delivered to the
other parties hereto; it being understood that all parties hereto need not sign
the same counterpart.

8.6 Entire Agreement; No Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements specifically referred to herein
or delivered pursuant hereto, including all the exhibits attached hereto, the
Company

 

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Disclosure Letter and the Parent Disclosure Letter, (a) constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof, except for the
Confidentiality Agreement, which shall continue in full force and effect, and
shall survive any termination of this Agreement, in accordance with its terms,
and (b) are not intended to confer, and shall not be construed as conferring,
upon any Person other than the parties hereto any rights or remedies hereunder
(except the provisions of ARTICLE 7 and ARTICLE 7A, which are intended to be for
the benefit of the persons covered thereby and may be enforced by such persons).

8.7 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties (whether by
operation of law or otherwise) without the prior written content of the other
parties, except to a wholly-owned Subsidiary of Parent. In no event shall such
assignment relieve Parent of its obligations hereunder. 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.

8.8 Severability. Any term or provision of this Agreement that is held by a
court of competent jurisdiction or arbitrator to be invalid, void or
unenforceable in any situation in any jurisdiction shall not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the invalid, void or unenforceable term or provision in any
other situation or in any other jurisdiction. If the final judgment of such
court or arbitrator declares that any term or provision hereof is invalid, void
or unenforceable, the parties agree to reduce the scope, duration, area or
applicability of the term or provision, to delete specific words or phrases, or
to replace any invalid, void or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
original intention of the invalid or unenforceable term or provision.

8.9 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay
on the part of either party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty or agreement herein, nor shall any single
or partial exercise of any such right preclude other or further exercise thereof
or of any other right. Except as otherwise provided herein all rights and
remedies existing under this Agreement are cumulative to, and not exclusive of,
any rights or remedies otherwise available.

8.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, IRRESPECTIVE
OF THE CHOICE OF LAWS PRINCIPLES OF THE STATE OF CALIFORNIA, AS TO ALL MATTERS,
INCLUDING MATTERS OF VALIDITY, CONSTRUCTION, EFFECT, ENFORCEABILITY, PERFORMANCE
AND REMEDIES.

8.11 Binding Arbitration. Except as provided in Sections 7.4, 7.5 and 8.12, from
and after the Effective Time, all disputes, controversies or claims (whether in
contract, tort or otherwise) arising out of, relating to or otherwise by virtue
of this Agreement,

 

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breach of this Agreement or the transactions contemplated by this Agreement
shall be resolved as follows:

(a) Any disputes shall be settled under the applicable rules of arbitration
(except as set forth below) of JAMS, Inc. (as amended from time to time, the
“JAMS Rules”) and as modified in this Section.

(b) The arbitration shall take place in San Francisco, California and shall be
the exclusive forum for resolving such disputes, controversies or claims. The
arbitrator shall have the power to order hearings and meetings to be held in
such place or places as he or she deems in the interests of reducing the total
cost to the parties of the arbitration.

(c) The arbitration shall be held before a single arbitrator. The arbitrator
shall have the power to order equitable remedies. The arbitrator may hear and
rule on dispositive motions as part of the arbitration proceeding (e.g. motions
for summary dispositions).

(d) The arbitrator may appoint an expert only with the consent of all of the
parties to the arbitration.

(e) The arbitrator’s fees and the administrative expenses of the arbitration
shall be paid equally by the parties. Each party to the arbitration shall pay
its own costs and expenses (including attorney’s fees) in connection with the
arbitration.

(f) The award rendered by the arbitrator shall be final and binding on the
parties. The award rendered by the arbitrator may be entered into any court
having jurisdiction, or application may be made to such court for judicial
acceptance of the award and an order of enforcement, as the case may be. Such
court proceeding shall disclose only the minimum amount of information
concerning the arbitration as is required to obtain such acceptance or order.

(g) Except as required by law, neither any party nor the arbitrator may disclose
the existence, content or results of an arbitration brought in accordance with
this Agreement.

(h) Each party to this Agreement hereby agrees that in connection with any such
action process may be served in the same manner as notices may be delivered
under Section 8.2 and irrevocably waives any defenses it may have to service in
such manner.

8.12 Jurisdiction; Venue. Notwithstanding anything to the contrary in this
Agreement, the sole jurisdiction, venue and dispute resolution procedure for all
disputes, controversies or claims (whether in contract, tort or otherwise)
arising out of, relating to or otherwise by virtue of prior to the Effective
Time, this Agreement, breach of this Agreement or the transactions contemplated
by this Agreement shall be the United States Federal Court for the Northern
District of California, and the parties to this Agreement hereby consent to the
jurisdiction of such court. Each of the parties agrees that process may be
served upon it in the manner specified in Section 8.2 and irrevocably waives and
covenants not to assert or plead any objection which it might otherwise have to
such jurisdiction and such process.

8.13 Enforcement. The parties agree that irreparable damage would occur if any
of the provisions of this Agreement were not performed in accordance with their
specific terms. Therefore, the parties shall be entitled to specific performance
of the terms hereof, this being in addition to any other remedy to which they
are entitled under this Agreement, at law or in equity.

[Signatures begin on the next page]

 

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Each of Parent, Merger Sub, the Company and the Shareholders’ Representative
have caused this Agreement to be executed and delivered as of the date first
written above.

 

SUNPOWER CORPORATION By:  

/s/ Thomas H. Werner

Name:   Thomas H. Werner Title:   Chief Executive Officer PLUTO ACQUISITION
COMPANY LLC By:  

/s/ Emmanuel T. Hernandez

Name:   Emmanuel T. Hernandez Title:   Chief Financial Officer POWERLIGHT
CORPORATION By:  

/s/ Thomas L. Dinwoodie

Name:   Thomas L. Dinwoodie Title:   Chief Executive Officer

THOMAS L. DINWOODIE,

AS SHAREHOLDERS’ REPRESENTATIVE

/s/ Thomas L. Dinwoodie

 

--------------------------------------------------------------------------------

Exhibit A

Form of Support Agreement

 

A-1

--------------------------------------------------------------------------------

Exhibit B

Form of Noncompetition Agreement

 

B-1

--------------------------------------------------------------------------------

Exhibit C

Form of Equity Restriction Agreement

 

C-1

--------------------------------------------------------------------------------

Exhibit D

Form of Supply Agreement

 

D-1

--------------------------------------------------------------------------------

Exhibit E-1

Form of Cash Escrow Agreement

 

E-1-1

--------------------------------------------------------------------------------

Exhibit E-2

Form of Stock Escrow Agreement

 

E-2-1

--------------------------------------------------------------------------------

Exhibit F-1

Form of Letter of Transmittal

 

F-1-1

--------------------------------------------------------------------------------

Exhibit F-2

Form of Option Letter of Transmittal

 

F-2-1

--------------------------------------------------------------------------------

Exhibit G-1

Tax Representations of the Company

 

G-1-1

--------------------------------------------------------------------------------

Exhibit G-2

Tax Representations of Parent and Merger Sub

 

G-2-1

--------------------------------------------------------------------------------

Exhibit H

Form of Excess Parachute Payment Waiver

 

H-1

--------------------------------------------------------------------------------

Exhibit I

Form of Affiliate Agreement

 

I-1

--------------------------------------------------------------------------------

Exhibit J

Closing Deliveries

Parent and Merger Sub Deliveries:

 

1. a certificate, dated as of the Closing Date, executed on behalf of Parent by
its Chief Executive Officer or Chief Financial Officer to the effect that each
of the conditions set forth in clauses (a) and (d) of Section 5.2 have been
satisfied;

 

2. a certificate, dated as of the Closing Date, executed on behalf of Merger Sub
by its Chief Executive Officer or Chief Financial Officer to the effect that
each of the conditions set forth in clauses (a) and (d) of Section 5.2 have been
satisfied;

 

3. a copy of each of the Cash Escrow Agreement and the Stock Escrow Agreement
duly executed by Parent and the Escrow Agent;

 

4. a certificate, dated as of the Closing Date, of the secretary of Parent,
attaching copies of its certificate of incorporation, bylaws and its board
resolutions approving the transactions contemplated by this Agreement;

 

5. a certificate of the secretary of Merger Sub, attaching certified copies of
its articles of formation, operating agreement and membership actions in
connection with the transactions contemplated by this Agreement;

 

6. a good standing certificate (including tax good standing) of Parent issued by
the Delaware Secretary and a good standing certificate of Merger Sub issued by
the Delaware Secretary, each dated within five days of the Closing Date;

 

7. a wire transfer and issuance of Parent Common Stock to the Exchange Agent;

 

8. a wire transfer and issuance of Parent Common Stock to the Escrow Agent;

 

9. an instruction letter to the transfer agent to issue shares, if applicable,
as requested by the Exchange Agent;

 

10. a representation letter to tax counsel as contemplated by Section 4.12;

 

11. executed wire receipt forms with respect to items 8 and 9 above;

 

12. an executed copy of the Certificate of Merger, the Agreement of Merger and
the CA Certificate of Merger and related officer’s certificates; and

 

13. a legal opinion from Jones Day, counsel to Parent and Merger Sub, covering
the matters set forth on Exhibit K.

 

J-1

--------------------------------------------------------------------------------

Company Deliveries:

 

1. a certificate, dated as of the Closing Date, executed on behalf of the
Company by its Chief Executive Officer or Chief Financial Officer to the effect
that each of the conditions set forth in clauses (a), (d) and (f) of Section 5.3
have been satisfied;

 

2. a certificate, dated as of the Closing Date, of the secretary of the Company,
attaching copies of its Articles of Incorporation, bylaws, stock ledger, board
of directors actions and shareholders’ actions in connection with the
transactions contemplated by this Agreement;

 

3. a good standing certificate for the Company issued by the California
Secretary and a tax good standing certificate for the Company issued by the
California Franchise Tax Board, each within five days of the Closing Date;

 

4. an executed copy of the Certificate of Merger, the Agreement of Merger and
the CA Certificate of Merger and related officer’s certificates;

 

5. a legal opinion from Shearman, counsel to the Company, covering the matters
set forth on Exhibit L;

 

6. evidence, reasonably satisfactory to Parent, that all shares of Company
Preferred Stock have been converted to Company Common Stock;

 

7. evidence, reasonably satisfactory to Parent, that all Company Warrants have
been terminated;

 

8. an executed waiver and termination of the Amended and Restated Shareholder
Agreement, dated as of April 26, 2005, by and among the Company and the
shareholders set forth therein in a form reasonably acceptable to Parent;

 

9. an executed waiver and termination of the Amended and Restated Registration
Rights Agreement, dated as of April 26, 2005, by and among the Company and the
shareholders set forth therein in a form reasonably acceptable to Parent;

 

10. a certificate of the Company’s Chief Financial Officer attaching the
Spreadsheet;

 

11. a FIRPTA Notification Letter, dated as of the Closing Date and executed by
the Company;

 

12. a notice to the Internal Revenue Service, in accordance with the
requirements of Treasury Regulation Section 1.897-2(h)(2), dated as of the
Closing Date, executed by the Company, together with written authorization for
the Surviving Company to deliver such notice form to the Internal Revenue
Service after the Effective Time;

 

13. evidence of the novation or consent to assignment, in form and substance
reasonably satisfactory to Parent) of any Person whose novation or consent to
assignment, as the case may be, may be required in connection with the
transactions contemplated by this Agreement under contracts listed or described
or that should have been listed or described on Section 5.2 of the Company
Disclosure Letter;

 

J-2

--------------------------------------------------------------------------------

14. an Excess Parachute Payment Waiver, duly executed by each Person described
in Section 4.17(a); and

 

15. a representation letter to tax counsel as contemplated by Section 4.12.

Shareholders’ Representative Deliveries:

 

1. an executed copy of each of the Cash Escrow Agreement and Stock Escrow
Agreement.

 

J-3

--------------------------------------------------------------------------------

Exhibit K

Matters to be Covered in Jones Day Opinion

 

K-1

--------------------------------------------------------------------------------

Exhibit L

Matters to be Covered in Shearman Opinion

 

M-1