EXHIBIT 10.1

 
EMPLOYMENT AGREEMENT
 
THIS EMPLOYMENT AGREEMENT (the “Agreement”), made as of this 30th day of July
2007, is entered into by Nestor, Inc. a Delaware corporation (the “Company”),
and Clarence A. Davis (the “Employee”).
 
The Company desires to employ the Employee, and the Employee desires to be
employed by the Company.  In consideration of the mutual covenants and promises
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the parties to this
Agreement, the parties agree as follows:
 
1.           Term of Employment.  The Company hereby agrees to employ the
Employee, and the Employee hereby accepts employment with the Company, upon the
terms set forth in this Agreement, for the period commencing on the date hereof
(the “Commencement Date”) and ending on July 31, 2008 (such period, the “Initial
Employment Period” and as it may be extended, the “Employment Period”), unless
sooner terminated in accordance with the provisions of Section 4.  On July 31,
2008, if not previously terminated, this Agreement shall automatically renew and
the Employment Period be extended until July 31, 2009 unless the Company shall
elect not to so extend the Employment Period and shall have given written notice
to the Employee of such election on or before May 1, 2008.
 
2.           Title; Capacity.  The Employee shall serve as Chief Executive
Officer or in such other position as the Company’s Board of Directors (the
“Board”) may determine from time to time.  The Employee shall be based at the
Company’s headquarters in Rhode Island or at such place or places in the
continental United States as the Board and the Employee shall mutually
determine.  The Employee shall be subject to the supervision of, and shall have
such authority as is delegated to the Employee by, the Board or the Chief
Executive Officer of the Company.
 
The Employee hereby accepts such employment and agrees to undertake the duties
and responsibilities inherent in such position and such other duties and
responsibilities as the Board shall from time to time reasonably assign to the
Employee, provided that such duties and responsibilities are generally
consistent with Employee’s experience and customary duties and responsibilities
of a chief executive officer of a similarly situated company.  The Employee
agrees to devote such business time, attention and energies consistent with his
past practice to the business and interests of the Company during the Employment
Period as he deems reasonably necessary to the accomplishment to his
duties.  The Employee agrees to abide by the reasonable rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.
 
3.           Compensation and Benefits.
 
3.1           Salary.  The Company shall pay the Employee, in periodic
installments in accordance with the Company’s customary payroll practices, an
annual base salary $360,000.  Such salary shall be subject to increase but not
decrease thereafter as determined by the Board and shall be reviewed at least
annually by the Board.
 
3.2           Bonus.  The Compensation Committee, in its sole discretion, may
award the Employee a bonus or bonuses during the term hereof.
 

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3.3           Equity Incentive.
 
(a)           The Company shall, upon the execution hereof, grant to the
Employee an option to purchase 500,000 shares of the common stock of the Company
(“Common Stock”).  To the extent permitted by the Internal Revenue Code, said
options shall be incentive stock options.  Said options shall be granted at the
fair market value and expire on the eighth anniversary of their grant.  Said
options shall vest as follows:
 
Number of Shares
Vesting Date
166,667
Immediate
166,667
January 30, 2008
166,666
July 30, 2008

 
Such grants shall provide that after a Change in Control Event (as defined in
Schedule A hereto), all restrictions on the exercise thereof shall lift and such
options shall vest and become exercisable immediately.  In addition, upon (a)
the termination by the Company of the Employee’s employment, unless such
termination is for Cause (as defined in Section 4.2) or (b) the resignation of
Employee for Good Reason (as defined in Section 4.3), all restrictions on the
exercise shall lift and such options shall vest and become exercisable
immediately.
 
3.4           Fringe Benefits; Vacation   The Employee shall be entitled to
participate in all bonus and benefit programs that the Company establishes and
makes available to its employees, if any, to the extent that Employee’s
position, tenure, salary, age, health and other qualifications make him eligible
to participate.  The Employee shall be entitled to four weeks vacation annually,
accruing in accordance with the Company’s policies and procedures.
 
3.5           Reimbursement of Expenses.  The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, in accordance with
policies and procedures, and subject to limitations, adopted by the Company from
time to time.
 
3.6           Withholding.  All salary, bonus and other compensation payable to
the Employee shall be subject to applicable withholding taxes.
 
4.           Termination of Employment Period.  The employment of the Employee
by the Company pursuant to this Agreement shall terminate upon the occurrence of
any of the following:
 
4.1           Expiration of the Employment Period;
 

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4.2           At the election of the Company, for Cause (as defined below),
immediately upon written notice by the Company to the Employee, which notice
shall identify the Cause upon which the termination is based.  For the purposes
of this Section 4.2, “Cause” shall mean (a) a good faith finding by the
Company’s Board of Directors that (i) the Employee has failed in any material
respect to perform his reasonably assigned duties for the Company and has failed
to remedy such failure within 10 days following written notice from the Company
to the Employee notifying him of such failure, or (ii) the Employee has engaged
in dishonesty, gross negligence or misconduct with respect to the Company, or
(b) the conviction of the Employee of, or the entry of a pleading of guilty or
nolo contendere by the Employee to, any crime involving dishonesty or any
felony;
 
4.3           At the election of the Employee, for Good Reason (as defined
below), immediately upon written notice by the Employee to the Company, which
notice shall identify the Good Reason upon which the termination is based.  For
the purposes of this Section 4.3, “Good Reason” for termination shall mean (i) a
material adverse change in the Employee’s authority, duties or compensation
without the prior written consent of the Employee, (ii) a material breach by the
Company of the terms of this Agreement, which breach is not remedied by the
Company within 10 days following written notice from the Employee to the Company
notifying it of such breach (iii) any requirement imposed by Section 307 of the
Sarbanes-Oxley Act or any rule promulgated thereunder, or (iv) a requirement by
the Company that the Employee must relocate his residence for any reason.
 
4.4           Upon the death or disability of the Employee.  As used in this
Agreement, the term “disability” shall mean the inability of the Employee, due
to a physical or mental disability, for a period of 90 days, whether
consecutive, during any 360-day period to perform the services contemplated
under this Agreement, with or without reasonable accommodation as that term is
defined under state or federal law.  A determination of disability shall be made
by a physician satisfactory to both the Employee and the Company, providedthat
if the Employee and the Company do not agree on a physician, the Employee and
the Company shall each select a physician and these two together shall select a
third physician, whose determination as to disability shall be binding on all
parties;
 
4.5           At the election of either party, upon not less than 30 days’ prior
written notice of termination.
 
5.           Effect of Termination.
 
5.1           At-Will Employment.  If the Employment Period expires pursuant to
Section 1 hereof, then, unless the Company notifies the Employee to the
contrary, the Employee shall continue his employment on an at-will basis
following the expiration of the Employment Period.  Such at-will employment
relationship may be terminated by either party at any time and shall not be
governed by the terms of this Agreement.
 

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5.2           Payments Upon Termination.
 
(a)           In the event the Employee’s employment is terminated pursuant to
Section 4.1, Section 4.2 or by the Employee pursuant to Section 4.5, the Company
shall pay to the Employee the compensation and benefits otherwise payable to him
under Section 3 through the last day of his actual employment by the Company.
 
(b)           In the event the Employee’s employment is terminated by the
Employee pursuant to Section 4.3 or by the Company pursuant to Section 4.5, the
Company shall continue to pay to the Employee his salary as in effect on the
date of termination and continue to provide to the Employee the other benefits
owed to him under Section 3.4 (to the extent such benefits can be provided to
non-employees, or to the extent such benefits cannot be provided to
non-employees, then the cash equivalent thereof) until the date one year after
the date of termination and for the purposes of the vesting of options to
purchase common stock granted to the Employee pursuant to Section 3.3, the
Employee shall be deemed to be employed by the Company until the date three
years after the date of termination.  The payment to the Employee of the amounts
payable under this Section 5.2(b) (i) shall be contingent upon the execution by
the Employee of a release in a form reasonably acceptable to the Company and
(ii) shall constitute the sole remedy of the Employee in the event of a
termination of the Employee’s employment in the circumstances set forth in this
Section 5.2(b).
 
(c)           In the event the Employee’s employment is terminated pursuant to
Section 4.4, the Company shall continue to pay to the Employee (or his estate)
his salary as in effect on the date of termination and the amount of the annual
bonus paid to him for the fiscal year immediately preceding the date of
termination (payable in annualized monthly installments) and, if such
termination was on account of disability, continue to provide to the Employee
the other benefits owed to him under Section 3.4 (to the extent such benefits
can be provided to non-employees, or to the extent such benefits cannot be
provided to non-employees, then the cash equivalent thereof) until the date one
year after the date of termination and for the purposes of the vesting of
options to purchase common stock granted to the Employee pursuant to Section
3.3, the Employee shall be deemed to be employed by the Company until the date
one year after the date of termination.  The amounts payable to the Employee
under this Section 5.2(c) shall be reduced by the aggregate amount of all
insurance proceeds paid to the Employee or his beneficiaries pursuant to
insurance policies paid for by the Company.
 
5.3           Survival.  The provisions of Sections 5.2, 6 and 7 shall survive
the termination of this Agreement.
 
6.           Non-Competition and Non-Solicitation.
 
6.1           Restricted Activities.  While the Employee is employed by the
Company and for a period of one year after the termination or cessation of such
employment for any reason, the Employee will not directly or indirectly:
 

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(a)           Engage in any business or enterprise (whether as owner, partner,
officer, director, employee, consultant, investor, lender or otherwise, except
as the holder of not more than 1% of the outstanding stock of a publicly-held
company) that develops, manufactures, markets, licenses, sells or provides any
product or service that competes with any product or service developed,
manufactured, marketed, licensed, sold or provided, or planned to be developed,
manufactured, marketed, licensed, sold or provided, by the Company while the
Employee was employed by the Company; or
 
(b)           Either alone or in association with others (i) solicit, or permit
any organization directly or indirectly controlled by the Employee to solicit,
any employee of the Company to leave the employ of the Company, or (ii) solicit
for employment or permit any organization directly or indirectly controlled by
the Employee to solicit for any person who was employed by the Company at any
time during the term the Employee’s employment with the Company; provided, that
this clause (ii) shall not apply to the solicitation, hiring or engagement of
any individual whose employment with the Company has been terminated for a
period of six months or longer.
 
6.2           Extension.  If the Employee violates the provisions of Section
6.1, the Employee shall continue to be bound by the restrictions set forth in
Section 6.1 until a period of two years has expired without any violation of
such provisions.
 
6.3           Interpretation.  If any restriction set forth in Section 6.1 is
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.
 
6.4           Equitable Remedies.  The restrictions contained in this Section 6
are necessary for the protection of the business and goodwill of the Company and
are considered by the Employee to be reasonable for such purpose.  The Employee
agrees that any breach of this Section 6 is likely to cause the Company
substantial and irrevocable damage which is difficult to measure.  Therefore, in
the event of any such breach or threatened breach, the Employee agrees that the
Company, in addition to such other remedies which may be available, shall have
the right to obtain an injunction from a court restraining such a breach or
threatened breach and the right to specific performance of the provisions of
this Section 6 and the Employee hereby waives the adequacy of a remedy at law as
a defense to such relief.
 

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7.           Proprietary Information and Developments.
 
7.1           Proprietary Information.
 
(a)           The Employee agrees that all information, whether or not in
writing, of a private, secret or confidential nature concerning the Company’s
business, business relationships or financial affairs (collectively,
“Proprietary Information”) is and shall be the exclusive property of the
Company.  By way of illustration, but not limitation, Proprietary Information
may include inventions, products, processes, methods, techniques, formulas,
compositions, compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer programs, customer and supplier
lists, and contacts at or knowledge of customers or prospective customers of the
Company.  The Employee will not disclose any Proprietary Information to any
person or entity other than employees of the Company or use the same for any
purposes (other than in the performance of his duties as an employee of the
Company) without written approval by an officer of the Company, either during or
after his employment with the Company, unless and until such Proprietary
Information has become public knowledge without fault by the Employee.
 
(b)           The Employee agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings, or
other written, photographic, or other tangible material containing Proprietary
Information, whether created by the Employee or others, which shall come into
his custody or possession, shall be and are the exclusive property of the
Company to be used by the Employee only in the performance of his duties for the
Company.  All such materials or copies thereof and all tangible property of the
Company in the custody or possession of the Employee shall be delivered to the
Company, upon the earlier of (i) a request by the Company or (ii) termination of
his employment.  After such delivery, the Employee shall not retain any such
materials or copies thereof or any such tangible property.
 
(c)           The Employee agrees that his obligation not to disclose or to use
information and materials of the types set forth in paragraphs (a) and (b)
above, and his obligation to return materials and tangible property, set forth
in paragraph (b) above, also extends to such types of information, materials and
tangible property of customers of the Company or suppliers to the Company or
other third parties who may have disclosed or entrusted the same to the Company
or to the Employee.
 
7.2           Developments.
 
(a)           The Employee will make full and prompt disclosure to the Company
of all inventions, improvements, discoveries, methods, developments, software,
and works of authorship, whether patentable or not, which are created, made,
conceived or reduced to practice by him or under his direction or jointly with
others during his employment by the Company, whether or not during normal
working hours or on the premises of the Company (all of which are collectively
referred to in this Agreement as “Developments”).
 

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(b)           The Employee agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all his right, title
and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications.  However, this
paragraph (b) shall not apply to Developments which do not relate to the
business or research and development conducted or planned to be conducted by the
Company at the time such Development is created, made, conceived or reduced to
practice and which are made and conceived by the Employee not during normal
working hours, not on the Company’s premises and not using the Company’s tools,
devices, equipment or Proprietary Information.  The Employee understands that,
to the extent this Agreement shall be construed in accordance with the laws of
any state which precludes a requirement in an employee agreement to assign
certain classes of inventions made by an employee, this paragraph (b) shall be
interpreted not to apply to any invention which a court rules and/or the Company
agrees falls within such classes.  The Employee also hereby waives all claims to
moral rights in any Developments.
 
(c)           The Employee agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights, patents and other
intellectual property rights (both in the United States and foreign countries)
relating to Developments.  The Employee shall sign all papers, including,
without limitation, copyright applications, patent applications, declarations,
oaths, formal assignments, assignments of priority rights, and powers of
attorney, which the Company may deem necessary or desirable in order to protect
its rights and interests in any Development.  The Employee further agrees that
if the Company is unable, after reasonable effort, to secure the signature of
the Employee on any such papers, any executive officer of the Company shall be
entitled to execute any such papers as the agent and the attorney-in-fact of the
Employee, and the Employee hereby irrevocably designates and appoints each
executive officer of the Company as his agent and attorney-in-fact to execute
any such papers on his behalf, and to take any and all actions as the Company
may deem necessary or desirable in order to protect its rights and interests in
any Development, under the conditions described in this sentence.
 
7.3           United States Government Obligations.  The Employee acknowledges
that the Company from time to time may have agreements with other parties or
with the United States Government, or agencies thereof, which impose obligations
or restrictions on the Company regarding inventions made during the course of
work under such agreements or regarding the confidential nature of such
work.  The Employee agrees to be bound by all such obligations and restrictions
which are made known to the Employee and to take all appropriate action
necessary to discharge the obligations of the Company under such agreements.
 
7.4           Equitable Remedies.  The restrictions contained in this Section 7
are necessary for the protection of the business and goodwill of the Company and
are considered by the Employee to be reasonable for such purpose.  The Employee
agrees that any breach of this Section 7 is likely to cause the Company
substantial and irrevocable damage which is difficult to measure.  Therefore, in
the event of any such breach or threatened breach, the Employee agrees that the
Company, in addition to such other remedies which may be available, shall have
the right to obtain an injunction from a court restraining such a breach or
threatened breach and the right to specific performance of the provisions of
this Section 7 and the Employee hereby waives the adequacy of a remedy at law as
a defense to such relief.
 

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8.           Other Agreements.  The Employee represents that his performance of
all the terms of this Agreement and the performance of his duties as an employee
of the Company do not and will not breach any agreement with any prior employer
or other party to which the Employee is a party (including without limitation
any nondisclosure or non-competition agreement).  Any agreement to which the
Employee is a party relating to nondisclosure, non-competition or
non-solicitation of employees or customers is listed on Schedule B attached
hereto.
 
9.           Miscellaneous.
 
9.1           Notices.  Any notices delivered under this Agreement shall be
deemed duly delivered four business days after it is sent by registered or
certified mail, return receipt requested, postage prepaid, or one business day
after it is sent for next-business day delivery via a reputable nationwide
overnight courier service, in each case to the address of the recipient set
forth in the introductory paragraph hereto.  Either party may change the address
to which notices are to be delivered by giving notice of such change to the
other party in the manner set forth in this Section 9.1.
 
9.2           Pronouns.  Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
 
9.3           Entire Agreement.  This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings
(including all consulting or other agreements to which the Company and the
Employee are parties), whether written or oral, relating to the subject matter
of this Agreement; provided, however, that it is acknowledged and agreed by the
Company and the Employee that stock option grants made by the Company to the
Employee prior to the date hereof are not superseded hereby and each such grant
remains in full force and effect in accordance with its terms.
 
9.4           Amendment.  This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Employee.
 
9.5           Governing Law.  This Agreement shall be governed by and construed
in accordance with the laws of the State of Rhode Island (without reference to
the conflicts of laws provisions thereof).  Any action, suit or other legal
proceeding arising under or relating to any provision of this Agreement shall be
commenced only in a court of the State of Rhode Island (or, if appropriate, a
federal court located within Rhode Island), and the Company and the Employee
each consents to the jurisdiction of such a court.  The Company and the Employee
each hereby irrevocably waive any right to a trial by jury in any action, suit
or other legal proceeding arising under or relating to any provision of this
Agreement.
 

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9.6           Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which, or into which, the Company may be
merged or which may succeed to the Company’s assets or business, provided,
however, that the obligations of the Employee are personal and shall not be
assigned by him.  Notwithstanding the foregoing, if the Company is merged with
or into a third party which is engaged in multiple lines of business, or if a
third party engaged in multiple lines of business succeeds to the Company’s
assets or business, then for purposes of Section 6.1(a), the term “Company”
shall mean and refer to the business of the Company as it existed immediately
prior to such event and as it subsequently develops and not to the third party’s
other businesses.
 
9.7           Waivers.  No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other
right.  A waiver or consent given by the Company on any one occasion shall be
effective only in that instance and shall not be construed as a bar or waiver of
any right on any other occasion.
 
9.8           Captions.  The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
 
9.9           Severability.  In case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
 
THE EMPLOYEE ACKNOWLEDGES THAT HE/SHE HAS CAREFULLY READ THIS AGREEMENT AND
UNDERSTANDS AND AGREES TO ALL OF THE PROVISIONS IN THIS AGREEMENT.
 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.
 

 
NESTOR, INC.
   
By:
/s/ Nigel P. Hebborn
 
Nigel P. Hebborn
 
Chief Financial Officer
         
EMPLOYEE
     
/s/ Clarence A. Davis
 
Clarence A. Davis

 

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SCHEDULE A
 
Change in Control Definition
 
A “Change in Control Event” shall mean:
 
 
(i)
the acquisition by an individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership
of any capital stock of the Company if, after such acquisition, such Person
beneficially owns (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) 30% or more of either (x) the then-outstanding shares of common
stock of the Company (the “Outstanding Company Common Stock”) or (y) the
combined voting power of the then-outstanding securities of the Company entitled
to vote generally in the election of directors (the “Outstanding Company Voting
Securities”); provided, however, that for purposes of this subsection (i), the
following acquisitions shall not constitute a Change in Control Event: (A) any
acquisition directly from the Company (excluding an acquisition pursuant to the
exercise, conversion or exchange of any security exercisable for, convertible
into or exchangeable for common stock or voting securities of the Company,
unless the Person exercising, converting or exchanging such security acquired
such security directly from the Company or an underwriter or agent of the
Company), (B) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company, or (C) any acquisition by any corporation pursuant to a Business
Combination (as defined below) which complies with clauses (x) and (y)  of
subsection (iii) of this definition; or

 
 
(ii)
such time as the Continuing Directors (as defined below) do not constitute a
majority of the Board (or, if applicable, the Board of Directors of a successor
corporation to the Company), where the term “Continuing Director” means at any
date a member of the Board (x) who was a member of the Board on the date hereof
or (y) who was nominated or elected subsequent to such date by at least a
majority of the directors who were Continuing Directors at the time of such
nomination or election or whose election to the Board was recommended or
endorsed by at least a majority of the directors who were Continuing Directors
at the time of such nomination or election; provided, however, that there shall
be excluded from this clause (y) any individual whose initial assumption of
office occurred as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents, by or on behalf of a person other than the
Board; or

 

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(iii)
the consummation of a merger, consolidation, reorganization, recapitalization or
share exchange involving the Company or a sale or other disposition of all or
substantially all of the assets of the Company (a “Business Combination”),
unless, immediately following such Business Combination, each of the following
two conditions is satisfied: (x) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of the
then-outstanding shares of common stock and the combined voting power of the
then-outstanding securities entitled to vote generally in the election of
directors, respectively, of the resulting or acquiring corporation in such
Business Combination (which shall include, without limitation, a corporation
which as a result of such transaction owns the Company or substantially all of
the Company’s assets either directly or through one or more subsidiaries) (such
resulting or acquiring corporation is referred to herein as the “Acquiring
Corporation”) in substantially the same proportions as their ownership of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
respectively, immediately prior to such Business Combination and (y) no Person
(excluding Exempt Persons, the Acquiring Corporation or any employee benefit
plan (or related trust) maintained or sponsored by the Company or by the
Acquiring Corporation) beneficially owns, directly or indirectly, 30% or more of
the then-outstanding shares of common stock of the Acquiring Corporation, or of
the combined voting power of the then-outstanding securities of such corporation
entitled to vote generally in the election of directors (except to the extent
that such ownership existed prior to the Business Combination).

 

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SCHEDULE B
 
Prior Agreements
 

 
None.
 

 

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