Exhibit 10.12


 


Execution Copy


 


STOCK PURCHASE AGREEMENT


 


among


 


 


L-3 COMMUNICATIONS CORPORATION,


 


Investor,


 


 


and


 


 


INNOVATIVE MICRO TECHNOLOGY,
INC.,


 


 


the Company


 


 


Dated as of September 3,
2003


 


THE OFFER AND SALE OF THE SECURITIES OFFERED HEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR QUALIFIED UNDER ANY STATE OR NON-U.S. SECURITIES LAWS.  THE 
SECURITIES ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTIONS
AFFORDED BY REGULATION D PROMULGATED UNDER THE SECURITIES ACT.  THE SECURITIES MAY NOT BE TRANSFERRED OR
RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE SECURITIES ACT AND
APPLICABLE STATE AND NON-U.S. SECURITIES LAWS, UNLESS AN EXEMPTION FROM
REGISTRATION AND QUALIFICATION UNDER THE SECURITIES ACT AND SUCH LAWS IS THEN
AVAILABLE.


 


THIS AGREEMENT HAS NOT BEEN FILED WITH OR REVIEWED OR
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY THE ATTORNEY GENERAL
OR SECURITIES AGENCY OF ANY STATE OR NON-U.S. JURISDICTION.  NONE OF THE FOREGOING HAS PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFERING OR THE SECURITIES.  ANY REPRESENTATION TO THE CONTRARY IS
ILLEGAL.


 





















 


TABLE OF CONTENTS


 


	
  ARTICLE I DEFINITIONS

  	
   

  
	
  Section 1.1 Definition of Certain
  Terms

  	
   

  
	
  Section 1.2 Construction

  	
   

  
	
   

  	
   

  
	
  ARTICLE II SALE AND PURCHASE OF THE
  SHARES

  	
   

  
	
  Section 2.1 Purchase and Sale of
  Common Stock and Warrants

  	
   

  
	
  Section 2.2 Place and Date

  	
   

  
	
  Section 2.3 Payment and Delivery

  	
   

  
	
   

  	
   

  
	
  ARTICLE III REPRESENTATIONS AND
  WARRANTIES OF THE COMPANY

  	
   

  
	
  Section 3.1 Corporate Status

  	
   

  
	
  Section 3.2 Authorization, etc.

  	
   

  
	
  Section 3.3 Capital Stock of the
  Company

  	
   

  
	
  Section 3.4 No Conflicts, etc.

  	
   

  
	
  Section 3.5 Financial Statements

  	
   

  
	
  Section 3.6 Absence of Undisclosed
  Liabilities

  	
   

  
	
  Section 3.7 Taxes

  	
   

  
	
  Section 3.8 Absence of Changes

  	
   

  
	
  Section 3.9 Litigation

  	
   

  
	
  Section 3.10 Compliance with Laws;
  Governmental Approvals and Consents

  	
   

  
	
  Section 3.11 Assets

  	
   

  
	
  Section 3.12 Contracts

  	
   

  
	
  Section 3.13 Product Warranties

  	
   

  
	
  Section 3.14 Intellectual Property

  	
   

  
	
  Section 3.15 Insurance

  	
   

  
	
  Section 3.16 Environmental Matters

  	
   

  
	
  Section 3.17 Employees, Labor Matters

  	
   

  
	
  Section 3.18 Investor’s Percentage
  Ownership

  	
   

  
	
  Section 3.19 Brokers, Finders, etc.

  	
   

  
	
  Section 3.20 Dealings with Affiliates

  	
   

  
	
  Section 3.21 Disclosure

  	
   

  
	
  Section 3.22 This section intentionally
  omitted

  	
   

  
	
  Section 3.23 Territorial Restrictions

  	
   

  
	
  Section 3.24 Effect of Transaction

  	
   

  
	
  Section 3.25 Antitakeover Provisions

  	
   

  
	
  Section 3.26 No Retention Agreements

  	
   

  
	
  Section 3.27 Real Property Holding
  Company

  	
   

  
	
  Section 3.28 Government Contracts

  	
   

  
	
  Section 3.29 Affiliated Group
  Liability

  	
   

  
	
  Section 3.30 Invention and Secrecy
  Agreements

  	
   

  
	
  Section 3.31 Registration Rights

  	
   

  
	
  Section 3.32 Officers, Directors and
  Shareholders

  	
   

  
	
  Section 3.33 No Intervention

  	
   

  



 


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  ARTICLE IV REPRESENTATIONS AND
  WARRANTIES OF INVESTOR

  	
   

  
	
  Section 4.1 Corporate Status

  	
   

  
	
  Section 4.2 Authorization

  	
   

  
	
  Section 4.3 No Conflicts, etc.

  	
   

  
	
  Section 4.4 Litigation

  	
   

  
	
  Section 4.5 Brokers, Finders, etc.

  	
   

  
	
  Section 4.6 Purchase Entirely for Own
  Account

  	
   

  
	
  Section 4.7 Investment Experience

  	
   

  
	
  Section 4.8 Disclosure of Information

  	
   

  
	
  Section 4.9 Accredited Investor

  	
   

  
	
  Section 4.10 Restricted Securities

  	
   

  
	
   

  	
   

  
	
  ARTICLE V COVENANTS

  	
   

  
	
  Section 5.1 Covenants of the Company

  	
   

  
	
  Section 5.2 Covenants of Investor

  	
   

  
	
  Section 5.3 Legends

  	
   

  
	
  Section 5.4 Removal of Legends

  	
   

  
	
  Section 5.5 Further Restriction on
  Transfer

  	
   

  
	
   

  	
   

  
	
  ARTICLE VI CONDITIONS PRECEDENT

  	
   

  
	
  Section 6.1 Conditions to Obligations
  of Each Party

  	
   

  
	
  Section 6.2 Conditions to Obligations
  of Investor

  	
   

  
	
  Section 6.3 Conditions to Obligations
  of Company

  	
   

  
	
   

  	
   

  
	
  ARTICLE VII ANTI-DILUTION RIGHTS

  	
   

  
	
  Section 7.1 Anti-Dilution Right

  	
   

  
	
   

  	
   

  
	
  ARTICLE VIII TERMINATION

  	
   

  
	
  Section 8.1 Termination

  	
   

  
	
  Section 8.2 Effect of Termination

  	
   

  
	
   

  	
   

  
	
  ARTICLE IX INDEMINIFICATION

  	
   

  
	
  Section 9.1 By Company

  	
   

  
	
  Section 9.2 By Investor

  	
   

  
	
  Section 9.3 Indemnification Procedures

  	
   

  
	
  Section 9.4 Expiration of
  Representations and Warranties, etc.

  	
   

  
	
  Section 9.5 Set-Off

  	
   

  
	
   

  	
   

  
	
  ARTICLE X REGISTRATION RIGHTS

  	
   

  
	
  Section 10.1 Definitions

  	
   

  
	
  Section 10.2 Demand Registration
  Rights

  	
   

  
	
  Section 10.3 Expenses of Demand
  Registration

  	
   

  
	
  Section 10.4 Form S-3 Registration
  Rights

  	
   

  
	
  Section 10.5 Company Registration

  	
   

  
	
  Section 10.6 Expenses of Company
  Registration Rights

  	
   

  
	
  Section 10.7 Indemnification

  	
   

  
	
  Section 10.8 Reports Under Securities
  Exchange Act of 1934

  	
   

  
	
  Section 10.9 Assignment of
  Registration Rights

  	
   

  



 


ii





















 


	
  Section 10.10 Subsequent Registration
  Rights

  	
   

  
	
  Section 10.11 Market Stand-Off
  Agreement

  	
   

  
	
  Section 10.12 Amendment of
  Registration Rights

  	
   

  
	
   

  	
   

  
	
  ARTICLE XI MISCELLANEOUS

  	
   

  
	
  Section 11.1 Expenses

  	
   

  
	
  Section 11.2 Severability

  	
   

  
	
  Section 11.3 Notices

  	
   

  
	
  Section 11.4 Attorneys’ Fees

  	
   

  
	
  Section 11.5 Liability for Transfer
  Taxes

  	
   

  
	
  Section 11.6 Headings

  	
   

  
	
  Section 11.7 Entire Agreement

  	
   

  
	
  Section 11.8 Counterparts

  	
   

  
	
  Section 11.9 Governing Law

  	
   

  
	
  Section 11.10 Binding Effect

  	
   

  
	
  Section 11.11 No Third Party
  Beneficiaries

  	
   

  
	
  Section 11.12 Amendment, Waivers, etc.

  	
   

  
	
  Section 11.13 Company Acknowledgment

  	
   

  
	
  Section 11.14 Company Acknowledgment

  	
   

  
	
  Section 11.15 Titles and Subtitles.

  	
   

  



 


iii





















 


This STOCK PURCHASE AGREEMENT is made as of September 3,
2003, between L-3 Communications Corporation, a Delaware corporation (“Investor”)
and Innovative Micro Technology, Inc., a Delaware corporation (the “Company”).


 


R
E  C  I  T  A  L  S :


 


A.                                   The Company is in the business of developing and
supplying micro-electronic machines (MEMs) technology and operating a
fully-equipped and functional wafer fabricating facility on a foundry basis.


 


B.                                     Upon the terms and subject to the conditions set forth
herein, Investor wishes to purchase (i) 467,500 shares of common
stock, $0.0001 par value per share, of the Company (the “Shares”)
and (ii) a warrant to purchase up to an additional 83,500 shares of Common
Stock at a purchase price of $5.35 per share and a warrant to purchase up to an
additional 350,000 shares of Common Stock at a purchase price of $7.29 per
share, such warrants in the forms attached hereto as Exhibit A (the “Warrants”).


 


C.                                     The Company wishes to sell the Shares and the Warrants
to Investor.


 


D.                                    Capitalized terms have the meanings
assigned to them in Article I.


 


NOW, THEREFORE, in consideration of the foregoing
facts and the mutual covenants, representations and warranties made herein and
other good and valuable consideration, the receipt and sufficiency of which
hereby are acknowledged, the parties hereto agree as follows:


 


ARTICLE I

DEFINITIONS


 


Section 1.1                                      Definition
of Certain Terms.


 


The terms defined in this Section 1.1,
whenever used in this Agreement, shall have the respective meanings indicated
below for all purposes of this Agreement.


 


“Affiliate”: 
of a Person means a Person that directly or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, the Person or a member of such Person’s immediate family.


 


“Agreement”: 
means this Stock Purchase Agreement (including the Exhibits and the
Schedules as provided herein), as the same from time to time may be amended,
supplemented, modified or waived.


 


“Applicable Law”:  means all applicable provisions of all
(i) constitutions, treaties, statutes, laws (including the common law),
rules, regulations, ordinances, codes or orders of any Governmental Authority,
(ii) Governmental Approvals, and (iii) orders, decisions,
injunctions, judgments, awards and decrees of or agreements with any
Governmental Authority.


 


“Anti-Dilution Shares”:  has the meaning set forth in Section 7.1.


 


1





















 


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


 


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


 


“Code”: 
means the Internal Revenue Code of 1986, as amended.


 


“Common Stock”: 
means the common stock, par value $0.0001 of the Company, and also shall
include any securities issued or issuable with respect to the Common Stock, by
way of a stock dividend, stock split, combination of shares, recapitalization,
restructuring, merger, consolidation or other reorganization of the Company.


 


“Company”: 
has the meaning set forth in the first paragraph of this Agreement.


 


“Company Indemnitees”:  has the meaning set forth in Section 9.2.


 


“Company Threshold Amount”:  has the meaning set forth in Section 9.1(b).


 


“Competitive Product”:  has the meaning set forth in Section 5.1(l).


 


“Consent”: 
means any consent, approval, authorization, stipulation, waiver, permit,
grant, franchise, concession, agreement, license, exemption or order of,
registration, certificate, declaration or filing with, or report or notice to,
any Person, including any Governmental Authority.


 


“Contracts”: 
has the meaning set forth in Section 3.12(a).


 


“Control” (including the terms “controlled
by” and “under common control with”) means the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract or otherwise.


 


“Debt”: 
means, as to any Person, all obligations for payment of principal,
interest, penalties and collection costs thereof, with respect to money
borrowed, incurred or assumed (including guarantees), and other similar
obligations in the nature of a borrowing by which such Person will be obligated
to pay.


 


“$” or “dollars”:  means lawful money of the United States of
America.


 


“Environmental Laws”:  means all Applicable Laws relating to the
protection of the environment, to human health and safety, or to any emission,
discharge, generation, processing, storage, holding, abatement, existence,
Release, threatened Release, arranging for the disposal or transportation of
any Hazardous Substances.


 


“Environmental Liabilities and Costs”:  means all Losses:  (a) relating to the alleged presence of
Hazardous Substances, including claims for diminution of property value,
personal injury or property damages; (b) imposed by, under or pursuant to
Environmental Laws, including all fees, disbursements and expenses of counsel,
court costs and expert witness fees, based on, arising out of or otherwise in
respect of (i) the ownership or operation of the Company or Real


 


2





















 


Property, by Company, and (ii) the environmental
conditions existing on the Closing Date on, under, above, or about any Real
Property owned, leased or operated by Company.


 


“ERISA”: 
means the Employee Retirement Income Security Act of 1974, as amended.


 


“Exchange Act”: 
means the Securities Exchange Act of 1934, as amended.


 


“Financial Statements”:  has the meaning set forth in Section 3.5.


 


“GAAP”: 
means United States generally accepted accounting principles.


 


“Governmental Approval”:  means any Consent of, with or to any
Governmental Authority.


 


“Governmental Authority”:  means any nation or government, any state or
other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including any government authority, agency, department, board,
commission or instrumentality of the United States, any State of the United
States or any political subdivision thereof, and any tribunal or arbitrator(s)
of competent jurisdiction, and any self-regulatory organization.


 


“Government Bid”:  means any offer to sell made by the Company
prior to the Closing Date which, if accepted, would result or may result in a
Government Contract.


 


“Government Contract”:  means any prime contract, subcontract,
teaming agreement or arrangement, joint venture, basic ordering agreement,
pricing agreement, letter contract, purchase order, delivery order, change
order, Government Bid or other arrangement of any kind, between the Company and
(i) any Governmental Authority, (ii) any prime contractor of a
Governmental Authority in its capacity as a prime contractor, or (iii) any
subcontractor with respect to any contract of a type described in
clauses (i) or (ii) above.


 


“Hazardous Substances”:  means any substance that:  (i) requires investigation, removal or
remediation under any Environmental Law, or is defined, listed or identified as
a “hazardous waste,” “hazardous material,” “toxic substance,” “contaminant,” “pollutant,”
“oil” or “hazardous substance” thereunder; or (ii) is toxic, explosive,
corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or
otherwise hazardous and is regulated as such by any Governmental Authority or
Environmental Law.


 


“include,” “includes” and “including”:  shall be construed as if followed by the
phrase “without being limited to.”


 


“Indemnified Party”:  has the meaning set forth in Section 9.3.


 


“Indemnifying Party”:  has the meaning set forth in Section 9.3.


 


“Intellectual Property”:  means: 
(a) any and all trademarks, service marks, brand names,
certification marks, trade dress, assumed names, trade names, logos and other
indications of origin, sponsorship or affiliation, together with the goodwill
associated therewith (whether the


 


3





















 


foregoing are registered or unregistered);
registrations thereof in any jurisdiction and applications to register any of
the foregoing in any jurisdiction, and any extension, modification or renewal
of any such registration or application; (b) any and all inventions,
developments, improvements, discoveries, know how, concepts and ideas, whether
patentable or not in any jurisdiction; (c) any and all patents,
revalidations, industrial designs, industrial models and utility models, patent
applications (including reissues, continuations, divisions,
continuations-in-part and extensions) and patent disclosures; (d) any and
all mask works and other semiconductor chip rights and registrations thereof;
(e) any and all non-public information, trade secrets and proprietary or
confidential information and rights in any jurisdiction to limit the use or
disclosure thereof by any Person; (f) any and all writings and other
works, whether copyrighted, copyrightable or not in any jurisdiction, such
works including computer programs and software (including source code, object
code, data and databases); (g) any and all copyrights, copyright
registrations and applications for registration of copyrights in any
jurisdiction, and any renewals or extensions thereof; (h) any and all
other intellectual property or proprietary rights; (i) any and all
agreements, licenses, immunities, covenants not to sue and the like relating
any of to the foregoing; and (j) any and all claims or causes of action
arising out of or related to any infringement or misappropriation of any of the
foregoing.


 


“Inventories”: 
means all inventories of raw materials, work in process, finished
products, goods, spare parts, replacement and component parts, and office and
other supplies (whether on hand, in-transit or on order).


 


“Investor”: 
has the meaning set forth in the first paragraph of this Agreement.


 


“Investor Indemnitees”:  has the meaning set forth in Section 9.1.


 


“Investor’s Threshold Amount”:  has the meaning set forth in Section 9.2.


 


“IRS”: 
means the United States Internal Revenue Service.


 


“Knowledge”: 
as to the Company, means the actual knowledge of John Foster or
Peter Altavilla after due inquiry.


 


“Leased Real Property”:  means all space leased pursuant to the Leases.


 


“Leases”: 
means the real property leases, subleases, use agreements, licenses and
occupancy agreements pursuant to which the Company is the lessee, sublessee,
user, licensee or occupant.


 


“Lien”: 
means any mortgage, pledge, hypothecation, right of others, claim,
security interest, encumbrance, lease, sublease, license, occupancy agreement,
adverse claim or interest, easement, covenant, encroachment, burden, title
defect, title retention agreement, voting trust agreement, interest, equity,
option, lien, right of first refusal, charge or other restriction or
limitation.


 


“Losses”:  has the meaning set forth in Section 9.1.


 


4





















 


“Material Adverse Effect”:  means any event, circumstance, occurrence,
fact, condition, change or effect that is materially adverse to the business,
operations, results of operations, financial condition, prospects, properties,
assets or liabilities of the Company.


 


“Military Market”:  has the meaning set forth in Section 5.1(l).


 


“New Securities”:  has the meaning set forth in Section 7.2.


 


“Notice”: 
has the meaning set forth in Section 13.3.


 


“Permitted Liens”:  has the meaning set forth in Section 3.11.


 


“Percentage Equity”:  has the meaning set forth in Section 7.1.


 


“Person”: 
means any natural person, firm, partnership, association, corporation,
company, limited liability company, trust, business trust, Governmental
Authority or other entity.


 


“Preferred Stock”:  has the meaning set forth in Section 3.3(a).


 


“Purchase Price”:  has the meaning set forth in Section 2.1.


 


“Registrable Securities”:  has the meaning set forth in Section 10.1(c).


 


“Registration Expenses”:  has the meaning set forth in Section 10.1(g).


 


“Release”: 
means any releasing, disposing, discharging, injecting, spilling,
leaking, leaching, pumping, dumping, emitting, escaping, emptying, seeping,
dispersal, migration, transporting, placing and the like, including the moving
of any materials through, into or upon, any land, soil, surface water, ground
water or air, or otherwise entering into the environment.


 


“Reorganization Plan”:  means the Third Amended Plan of
Reorganization under Chapter 11 of the Bankruptcy Code, dated as of September 34,
2001.


 


“SEC”: 
means the United States Securities and Exchange Commission.


 


“Securities” means, collectively, the Shares
and the Warrants.


 


“Securities Act”:  means the Securities Act of 1933, as amended.


 


“Shares”: 
has the meaning set forth in paragraph B of the recitals at the
head of this Agreement, and also shall include any securities issued or
issuable with respect thereto, by way of a stock dividend, stock split,
combination of shares, recapitalization, restructuring, merger, consolidation
or other reorganization of the Company.


 


“Subsidiary”: 
means each corporation or other Person in which a Person owns or
controls, directly or indirectly, capital stock or other equity interests
representing at least 50% of the outstanding voting stock or other equity
interests.


 


“Tangible Property”:  has the meaning set forth in Section 3.11(b).


 


5





















 


“Tax Return”: 
means any return, report, declaration, form, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.


 


“Taxes”: 
means any federal, state, provincial, local or foreign income,
alternative, minimum, accumulated earnings, personal holding company,
franchise, capital stock, net worth, capital, profits, windfall profits, gross
receipts, value added, sales, use, goods and services, excise, customs duties,
transfer, conveyance, mortgage, registration, stamp, documentary, recording,
premium, severance, environmental (including taxes under Section 59A of
the Code), real property, personal property, ad valorem, intangibles, rent,
occupancy, license, occupational, employment, unemployment insurance, social
security, disability, workers’ compensation, payroll, health care, withholding,
estimated or other similar tax, duty or other governmental charge or assessment
or deficiencies thereof, and including any interest, penalties or additions to
tax attributable to the foregoing.


 


“Transfer Taxes”:  has the meaning set forth in Section 13.5.


 


“Treasury Regulations”:  means the regulations prescribed pursuant to
the Code.


 


“2002 Year End Audited Balance Sheet”:  has the meaning set forth in Section 3.5.


 


“Warrants”: 
has the meaning set forth in recital B at the head of this
Agreement.


 


“Warrant Shares”:  has the meaning set forth in Section 10.1.


 


Section 1.2                                      Construction.


 


All references herein to a Section, Article, Exhibit
or Schedule are to a Section, Article, Exhibit or Schedule of or to
this Agreement, unless otherwise indicated.


 


ARTICLE II

SALE AND PURCHASE OF THE SHARES


 


Section 2.1 
Purchase and Sale of Common Stock and Warrants.


 


Subject to the terms and conditions of this Agreement,
at the Closing, Investor agrees to purchase, and the Company agrees to sell to
Investor:  (1) the Shares; and
(2) the Warrants, for an aggregate purchase price of Two Million Five
Hundred Thousand Dollars ($2,500,000) (the “Purchase Price”).


 


Section 2.2                                      Place and Date.


 


The closing of the sale and purchase of the Shares and
Warrants (the “Closing”) shall take place at 10:00 A.M. local time
on September 3, 2003, or such other time and place upon which the parties
may agree.  The day on which the Closing
actually occurs is herein sometimes referred to as the “Closing Date.”


 


6





















 


 


Section 2.3                                      Payment and
Delivery.


 


At the Closing, Investor shall deliver the Purchase
Price by wire transfer in immediately available funds to the account designated
by the Company, against delivery by the Company of certificates evidencing the
Shares and the certificates representing the Warrants.


 


ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY


 


The Company represents and warrants to Investor as
follows:


 


Section 3.1                                      Corporate Status.


 


(a)                                  The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to carry on its business and
to own or lease and to operate its properties as and in the places where its
business is conducted and such properties are owned, leased or operated.  The Company is duly qualified or licensed to
do business and is in good standing in any jurisdiction where the character of
its properties owned or leased or the nature of its activities would require it
to be so qualified or registered, except where the failure to do so would not
have a Material Adverse Effect on the Company.


 


(b)                                 The Company has delivered to Investor
true, complete and correct copies of the Company’s certificate of incorporation
and by-laws, as amended and in effect on the date hereof and on the Closing
Date.  The Company is not in violation of
its certificate of incorporation or by-laws. 
The stock books of the Company that have been made available to Investor
for its inspection are true, correct and complete.  The minute books of the Company, as
previously made available to Investor, contain accurate records of all meetings
of and resolutions of, or written consents by, the stockholders or Board of
Directors of the Company since November 16, 2001.


 


Section 3.2  Authorization, etc.


 


The Company has all requisite power and authority
(corporate or otherwise) to execute and deliver this Agreement, to perform
fully its obligations hereunder and to consummate the transactions contemplated
hereby.  The execution and delivery by
the Company of this Agreement, and the consummation of the transactions
contemplated hereby, have been duly authorized by all requisite corporate
action of the Company. The Company has duly executed and delivered this
Agreement.  This Agreement is a legal,
valid and binding obligation of the Company, enforceable against it in
accordance with its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors’ rights and to general principles of equity.


 


Section 3.3  Capital Stock of the Company.


 


(a)  Immediately
prior to the Closing, the authorized capital stock of the Company is 27,500,000
shares, consisting of:


 


(i)                                     Common Stock. 
25,000,000 shares of common stock, $0.0001 par value per share, of
which zero shares are issued and outstanding.  The Company will issue no more


 


7





















 


than 446,270 shares of Common Stock in 2003 pursuant
to the settlement agreements with four professional organizations.


 


(ii)                                  Preferred Stock. 
2,500,000 shares of preferred stock, par value $0.0001 per share
(the “Preferred Stock”), of which zero shares are issued and
outstanding.


 


(iii)                               Other Securities.  Employee
options to acquire from the Company an aggregate of 1,664,897 shares of
capital stock at an average exercise per share of $5.09.  Warrants to acquire from the Company an
aggregate of 867,000 shares of capital stock at an average exercise price of
$6.92.  In addition, the Company will buy
back its issued Convertible Notes in a principal amount of $4,136,918, which
are convertible into Common Stock at a price of $8.20 per share.  Further, the Company has issued reciprocal
warrants and calls with a term ending November 16, 2004 at exercise prices
of $20.00 and above, the exercise of which will have no net effect on the
Company’s outstanding capital stock.  The
Company has granted 500,000 restricted common shares under the 2001 Stock
Incentive Plan at an exercise price of $0.0001 per share.


 


No Common Stock constitutes treasury stock.  No other capital stock is authorized.


 


(b)                                 All the issued and outstanding shares of
the Company are validly issued, fully paid and nonassessable and have been
issued in substantial compliance with all material Applicable Laws.


 


(c)                                  Except as provided in Section 3.3(a),
there are no outstanding subscriptions, options, rights, warrants, stock-based
or stock-related awards, convertible, exercisable or exchangeable securities,
or other agreements or commitments obligating the Company to issue, grant,
award, purchase, acquire, sell or transfer any shares of the Company’s capital
stock of any class, or other securities of the Company (including any agreement
or commitment obligating the Company to enter into any employee compensation
arrangement based on any valuation or transaction price of, or change of
ownership in, shares of its capital stock), and the Company shall not issue,
grant, award, purchase, acquire, sell or transfer such capital stock or other
securities prior to the Closing.  There
are no voting trusts, proxies or other agreements or understandings to which
the Company is a party with respect to the voting of capital stock.


 


(d)                                 When issued to Investor against payment
in full of the Purchase Price, the Shares will be validly issued, fully paid
and non-assessable, and the Warrants will represent the rights they purport to
represent.


 


(e)                                  The Company does not own, directly or
indirectly, any interest or investment (whether in equity or debt) in any
Person.


 


Section 3.4                                      No Conflicts, etc.


 


The execution, delivery and performance of this
Agreement, and the consummation of the transaction contemplated hereby, do not
and will not conflict with or result in a violation of or a default under (with
or without the giving of notice or the lapse of time or both), or result in the
acceleration of or give rise in any party the right to terminate, modify or
cancel under, or result in the loss of any rights, privileges, options or
alternatives under, or result in the creation


 


8





















 


of any Lien on any of the properties or assets of the
Company under (i) the certificate of incorporation or by-laws of the
Company, (ii) any Applicable Law applicable to the Company or any of its
properties or assets, or (iii) any Contract to which the Company is a
party or by which the Company or any of its property is bound.  Except for securities notice filings that
will have been made prior to Closing or that will be made by the Company promptly
after Closing, no Governmental Approval or other Consent is required to be
obtained or made by the Company in connection with the execution and delivery
of this Agreement or the consummation of the transaction contemplated hereby.


 


Section 3.5                                      Financial
Statements.


 


The Company has delivered to Investor (a) the
audited balance sheet and the statements of income, cash flows and stockholders’
equity of the Company for the year ended September 28, 2002 (the “2002
Year End Audited Balance Sheet”), and the unaudited interim balance sheet and statements
of income, cash flows and stockholders’ equity of the Company for the quarter
ended June 28, 2003 (collectively, the “Financial Statements”).  The Financial Statements have been prepared
in accordance with GAAP consistently applied and fairly present the financial
condition and results of operations of the Company as at and for the periods
specified therein.


 


Section 3.6                                      Absence of
Undisclosed Liabilities.


 


The Company has no debts, claims, liabilities or
obligations of any nature, whether known or unknown, absolute, accrued,
contingent or otherwise and whether due or to become due, asserted or
unasserted, constituting a Material Adverse Effect, except (a) as set
forth on Schedule 3.6.  Schedule of
Liabilities, (b) to the extent disclosed or reserved against in the 2002 Year
End Audited Balance Sheet, and (c) for non-material liabilities
and obligations that were incurred after September 28, 2002 in the
ordinary course of business consistent (in amount and kind) with past practice.


 


Section 3.7                                      Taxes.


 


(a)                                  The Company has duly and timely filed all
Tax Returns with respect to Taxes required to be filed on or before the Closing
Date.  All such tax returns are true,
complete and correct.  All other taxes
owed by the Company (whether or not shown on any Tax Return) have been duly and
timely paid.  The Company has not
extended or otherwise waived the benefit of any applicable statute of
limitations or agreed to any extension of time with respect to a Tax assessment
or deficiency.


 


(b)                                 The Company has withheld all required
amounts in respect of Taxes from its employees, agents, contractors and
nonresidents and, to the extent required, has remitted such amounts to the
proper agencies.


 


(c)                                  There is no dispute or claim concerning
any Tax Liability of the Company either (i) claimed or raised by any
Governmental Authority in writing, or (ii) as to which any Company or any
of the directors and officers (and employees responsible for Tax matters) of
the Company has knowledge based upon personal contact with any agent of such
Governmental Authority.  Company has
delivered to Investor correct and complete copies of all federal, state, local
and


 


9





















 


foreign income Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by the Company since
the date of the formation of the Company.


 


(d)                                 The Company is not a “foreign person”
within the meaning of Section 1445(b)(2) of the Code.


 


Section 3.8                                      Absence of
Changes.


 


Except as set forth in Schedule 3.8, since September 28,
2002, the Company has not:


 


(a)                                  suffered any Material Adverse Effect or
obtained knowledge of any event that might reasonably be expected to cause the
Company to suffer a Material Adverse Effect in the future;


 


(b)                                 incurred, assumed, guaranteed or
discharged any additional, material obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, or any additional
indebtedness (including any Debt) beyond that already listed and outstanding prior
to September 28, 2002, except current liabilities for trade or business
obligations incurred in connection with the purchase of goods or services in
the ordinary course of business consistent (in amount and kind) with prior
practice;


 


(c)                                  mortgaged, pledged or subjected to any
other Lien, any property, business or assets, tangible or intangible;


 


(d)                                 sold, transferred, leased to others or
otherwise disposed of any material assets, except for production of the Company
sold in the ordinary course of business (consistent with past practice), or
canceled or compromised any debt or claim, or waived or released any right of
substantial value;


 


(e)                                  received any notice
of termination of any Contract;


 


(f)                                    suffered any damage, destruction or loss
(whether or not covered by insurance), in any case or in the aggregate, in
excess of $50,000;


 


(g)                                 transferred or granted any rights under,
or entered into any settlement regarding the breach or infringement of, any
Intellectual Property, or modified any existing rights with respect thereto;


 


(h)                                 made any material change in the rate of
compensation, commission, bonus or other direct or indirect remuneration
payable, or paid or agreed or orally promised to pay, conditionally or
otherwise, any bonus, incentive, retention or other compensation, retirement,
welfare, fringe or severance benefit or vacation pay, to or in respect of any
employee, distributor or agent of the Company;


 


(i)                                     made any change in the accounting or
auditing methods, practices or principles of the Company;


 


10





















 


(j)                                     encountered any labor union organizing
activity, had any actual or threatened employee strikes, work stoppages,
slowdowns or lockouts, or had any material change in its relations with its
employees, distributors, agents, customers or suppliers;


 


(k)                                  entered into any material transaction or
Contract other than in the ordinary course of business, or paid or agreed to
pay any legal, accounting, brokerage, finder’s fee, Taxes or other expenses in
connection with, or incurred any severance pay obligations by reason of, this
Agreement or the transactions contemplated hereby;


 


(l)                                     made any material grant of credit to any
customer or distributor on terms or in amounts materially more favorable than
in the ordinary course of business;


 


(m)                               amended its charter or by-laws or merged
with or into or consolidated with any other Person, subdivided, combined or in
any way reclassified any shares of its capital stock or changed or agreed to
change in any manner the rights of its outstanding capital stock or the
character of its business;


 


(n)                                 made any declaration of, or set aside or
paid, any dividend or other distribution (whether in cash, stock or other
property) with respect to the capital stock of the Company, or issued, pledged
or sold any shares of capital stock of the Company, or any other securities or
rights, convertible into or exchangeable for or conferring the right to
purchase shares of capital stock of the Company (or entered into any agreement,
arrangement or other understanding to do the same) or directly or indirectly
purchased, redeemed, retired or otherwise acquired any shares of capital stock
of the Company or other securities convertible into, exchangeable for or
conferring the right to purchase shares of capital stock of the Company (or
entered into any agreement, arrangement or other understanding to do the same);
or


 


(o)                                 taken any action or omitted to take any
action that would result in the occurrence of any of the foregoing.


 


Section 3.9                                      Litigation.


 


(a)                                  Other than as disclosed on Schedule 3.9(a),
there is no action, claim, demand, suit, proceeding, arbitration, grievance,
citation, summons, subpoena, inquiry or investigation, civil, criminal,
regulatory or otherwise, in law or in equity, pending and served or, to the
Knowledge of the Company, threatened against or relating to the Company seeking
unspecified damages, damages in excess of $50,000 or any injunctive or other
equitable relief except for any unresolved claims that are not material in connection
with the Company’s bankruptcy.


 


(b)                                 Except as set forth on Schedule 3.9,
there are no material judgments unsatisfied against the Company or consent
decrees or injunctions to which the Company is subject.


 


(c)                                  There is no action, claim, suit or proceeding
pending, or to the Company’s knowledge, threatened, by or against or affecting
the Company in connection with or relating to the transactions contemplated by
this Agreement or of any action taken or to be taken in connection herewith or
the consummation of the transactions contemplated hereby.


 


11





















 


(d)                                 Since November 16, 2001 and to the
Knowledge of the Company, during the past five years, there have been no
product liability claims, suits, actions or proceedings involving the Company
or relating to products or services manufactured, sold or provided by the
Company.


 


Section 3.10                                Compliance with Laws; Governmental Approvals and
Consents.


 


(a)                                  The Company has complied in all material
respects with all Applicable Laws applicable to the Company.


 


(b)                                 No Governmental Approvals and other
Consents are necessary for, or otherwise material to, the conduct of the
business of the Company, except as has been obtained.


 


Section 3.11                                Assets.


 


(a)                                  Schedule 3.11(a) sets forth a
complete list of the real property owned by the Company.


 


(b)                                 Leases.  (a)  The Leases are in full force and effect and
constitute legal and binding obligations of the Company and the other parties
thereto, enforceable according to their terms, (b) the Company is not in
default under any of the Leases, (c) to the Knowledge of the Company, no other
party to any of the Leases is in default thereunder, and (d) there exist no
conditions which, with notice or lapse of time, or both, would constitute a default
under any of the Leases.


 


(b)                                 Title to Assets. 
Except for the liens set forth on Schedule 3.11(c) (the “Permitted
Liens”), the Company has good and valid title to all of its assets and
interests in assets, whether real, personal, mixed, tangible, and intangible,
and to the knowledge of the Company all the assets and interests in the assets
of the Company are free of any Liens.


 


(c)                                  Business.  The assets
owned by the Company are sufficient for the continued conduct of the business
by the Company after the Closing as such business has been conducted in the
past.


 


Section 3.12                                Contracts.


 


(a)                                  Schedule 3.12 sets forth a list of all agreements,
contracts, commitments, orders, licenses, leases (including the Leases) and
other instruments and arrangements (whether written or oral) (the “Contracts”)
material to the business or properties of the Company to which the Company is a
party, or under which any of its property is bound and all Contracts are in
full force and effect.


 


(b)                                 The Company has delivered or made
available to Investor true, complete and correct copies of all Contracts,
together with all amendments thereto.


 


(c)                                  To the knowledge of the Company, there
does not exist under any Contract any event of default or event or condition
that, after notice or lapse of time or both, would constitute a violation,
breach or event of default thereunder by any party to any of the
Contracts.  Each Contract is a legal,
valid, binding and enforceable obligation of the Company and, to the


 


12





















 


knowledge of the Company, the other parties thereto,
subject, as to enforceability, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors’ rights
and general principles of equity.


 


Section 3.13                                Product Warranties.  Except as set
forth on Schedule 3.13, (i) there are no warranties express or
implied, written or oral, with respect to the products or services of the
Company, and there are no pending or, to the knowledge of the Company,
threatened, claims with respect to any such warranty; (ii) during the past five
years, the Company has not had a claim against it for a product it has
warranted and does not reserve for such warranty claims; and (iii) the Company
has no Knowledge of any facts that might lead to an increase in warranty claims
in the future.


 


Section 3.14                                Intellectual
Property.


 


All Intellectual Property used by the Company either
is owned by the Company or used pursuant to a valid license which is not
terminable due to any breach or noncompliance by the Company and which shall
not be adversely affected by the transactions contemplated herein.  None of the Intellectual Property owned by
the Company is subject to any other Lien in favor of any third party and the
Company owns all right, title and interest therein and thereto.


 


(a)                                  No claims with respect to any
Intellectual Property have been asserted or threatened by any Person
(i) against the Company, or (ii) against any other Person based on
its permitted use of any of the Company’s Intellectual Property which, if
determined adversely, could have a material adverse effect on the Company.  No permitted use of any of the Company’s
Intellectual Property by any Person violates the Intellectual Property of any
other Person and no valid grounds exist for any bona  fide claims
against the Company or any such Person with respect to any Intellectual
Property.  Without limiting the
generality of the foregoing, no Person ever employed or otherwise engaged by
the Company has asserted or threatened any claim against the Company relating
to any Intellectual Property.  All
granted and issued patents, copyright registrations, and registered trademarks
and service marks and all copyrights held by the Company are valid, enforceable
and subsisting.  To the knowledge of the
Company, there has not been, nor is there presently, any unauthorized use,
infringement or misappropriation of any of its Intellectual Property by any
Person.  The Company has the full right
to possess, use, copy, distribute, display, transfer and license all
Intellectual Property material to its business or otherwise necessary to its
business as presently conducted.


 


(b)                                 No Intellectual Property of the Company
is subject to any outstanding order, award, decision, injunction, judgment,
decree, stipulation or agreement in any manner restricting the transfer, use,
enforcement or licensing thereof by the Company.  The Company has not entered into any
agreement to indemnify any other Person against any charge of infringement of
any Intellectual Property.  The Company
has not entered into any agreement granting any third party the right to bring
infringement actions with respect to, or otherwise to enforce rights with
respect to, any Intellectual Property. 
The Company has the exclusive right to file, prosecute and maintain all
applications and registrations with respect to the Intellectual Property.


 


(c)                                  The Company has taken all reasonable and
necessary steps to protect its Intellectual Property and its rights thereunder,
and no such rights to Intellectual Property have


 


13





















 


been lost or to the knowledge of the Company are in
jeopardy of being lost.  The Company has
paid all fees, annuities and all other payments which have heretofore become
due to any governmental or regional authority with respect to its Intellectual
Property and has taken all steps reasonable and necessary to prosecute and
maintain the same.


 


(d)                                 The Company has not transferred its title
in or to any copy of any computer program or software.  No computer program or software has been
supplied by the Company to any Person except pursuant to a binding license
prohibiting further distribution and disclosure.  All source code for all computer programs and
software is in the sole possession of the Company and has been maintained
strictly confidential.  The Company has
no obligation to afford any Person access to any source code for any computer
program.


 


(e)                                  Except through binding licenses or
sublicensing agreement, the Company has not transferred its title in or to any
Intellectual Property.  Except as
disclosed on Schedule 3.13(e), no Intellectual Property has been
supplied by the Company to any Person except pursuant to a binding license
prohibiting further distribution and disclosure.


 


(f)                                    No current or former employee,
independent contractor or consultant has any interest in any Intellectual
Property of the Company.


 


Section 3.15                                Insurance.


 


Schedule 3.15 contains a true, complete and correct list of all
insurance policies maintained by the Company and no notice of cancellation,
termination, or reduction of coverage, and no notice of intention to cancel,
terminate or reduce coverage, has been received.  The Company has given Investor access to
true, complete and correct copies of all such policies together with all riders
and amendments thereto.


 


Such policies are in full force and effect, and all
premiums due thereon have been paid.


 


Section 3.16                                Environmental Matters.


 


(a)                                  Compliance with Environmental Law. 
Except as described on Schedule 3.15(a) or where failure to comply
would not have a Material Adverse Effect, the Company is and has been in
compliance with all applicable Environmental Laws and, to the knowledge of the
Company, no violation by the Company is being alleged of any applicable
Environmental Law.


 


(b)                                 Other Environmental Matters. 
Except as described on Schedule 3.15(b) and where such action or
condition would not cause a Material Adverse Effect, the Company has not caused
or taken any action that resulted in, and the Company is not subject to, any
liability or obligation relating to (i) the environmental conditions on,
under, or about the Leased Real Property or other properties or assets owned,
leased, operated or used by the Company, including the air, soil and
groundwater conditions at such properties, or (ii) the use, management,
handling, transport, treatment, generation, storage, disposal or Release of any
Hazardous Substances by the Company.


 


(c)                                  No Hazardous Substances. 
The Company has purchased, stored or used no Hazardous Substances other
than those associated with normal operations.


 


14





















 


(d)                                 No Proceedings. 
The Company has not received notice or other communication concerning
any alleged liability for Environmental Liabilities and Costs in connection
with any Leased Real Property, and, to 
the Company’s knowledge, there exists no writ, injunction, decree,
order, judgment, lawsuit, claim, proceeding, citation, directive, or summons,
pending or threatened, relating to any environmental matters with respect to
any Leased Real Property.


 


Section 3.17                                Employees, Labor
Matters, etc.


 


The Company is not a party to or bound by any
collective bargaining agreement and there are no labor unions or other organizations
representing, purporting to represent or attempting to represent any employees
of the Company.  To the knowledge of the
Company, there has not occurred or been threatened any material strike,
slowdown, picketing, work stoppage, concerted refusal to work overtime or other
similar labor activity with respect to any employees of the Company.  The Company has no knowledge of any labor
disputes currently subject to any grievance procedure, arbitration or litigation
or any representation petition pending or threatened with respect to any
employee of the Company.  The Company has
no knowledge that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing.


 


Except as described in Schedule 3.17, the
employment of all employees of the Company is terminable at will, with or
without cause, and without the Company thereby incurring liability for severance
or otherwise.


 


Section 3.18                                Investor’s Percentage Ownership. Immediately following the Closing,
Investor’s fully diluted ownership interest in the Company’s capital stock on a
fully diluted basis, treating all outstanding options, warrants and convertible
securities as exercised, shall be fourteen and twenty-nine one-hundredths
percent (14.29%).


 


Section 3.19                                Brokers, Finders, etc.


 


All negotiations relating to this Agreement and the
transactions contemplated hereby have been carried on without the participation
of any Person acting on behalf of the Company in such manner as to give rise to
any valid claim against Investor for any brokerage or finder’s commission, fee
or similar compensation.


 


Section 3.20                                Dealings with
Affiliates.


 


Schedule 3.20 sets forth a complete list (including the parties) of
all contracts, arrangements or other agreements (written or oral) involving an
annual receipt or expenditure of $10,000 or more between the Company and any
shareholder of the Company, any partnership, corporation or other entity owned
and/or operated by any shareholder of the Company or any relative(s) of any
shareholder of the Company or any Affiliates known to the Company to be now in
effect.  The Company heretofore has
delivered or made available to Investor true and complete copies (or a detailed
summary in the case of an oral agreement) of each such contract, arrangement or
other agreement.


 


15





















 


Section 3.21                                Disclosure.  No
representation or warranty of Company in this Agreement or in any certificate
or instrument delivered by Company in accordance with the terms hereof contains
any untrue statement of a material fact or omits any statement of a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances in which they were made, not misleading.


 


Section 3.22                                This section was
intentionally omitted.


 


Section 3.23                                Territorial Restrictions. The Company is not restricted by any
agreement or understanding with any other Person from carrying on its business
anywhere in the world.


 


Section 3.24                                Effect of Transaction.


 


No creditor, employee, consultant or customer or other
Person having a business relationship with the Company has informed the Company
that such Person intends to change the relationship because of the purchase and
sale of the Shares, nor does the Company have knowledge of any such intent.


 


Section 3.25                                Antitakeover
Provisions.


 


No “fair price”, “moratorium”, “control share
acquisition” or other form of antitakeover statute, regulation, charter
provision or contract is applicable to the purchase of the Shares by Investor
or any of the other transactions contemplated by this Agreement.


 


Section 3.26                                No Retention Agreements.  Except as set
forth on Schedule 3.26, there are no retention agreements,
severance agreements, change of control agreements and similar arrangements to
which the Company, on the one hand, and any employee, consultant or other
Person, on the other hand, are a party.


 


Section 3.27                                Real Property Holding
Company.


 


The Company is not a real property holding company
within the meaning of Section 897 of the Code.


 


Section 3.28                                Government Contracts.  Except as set
forth on Schedule 3.28:


 


(a)                                  the Company is not a party to any
Government Contracts.


 


(b)                                 (i) 
to the Company’s Knowledge, none of the Company’s employees, consultants
or agents is (or during the last five years has been) under administrative,
civil or criminal investigation, indictment or information by any Governmental
Authority; (ii) there is not pending any audit or investigation of the Company,
its officers, employees or representatives nor within the last five years has
there been any audit or investigation of the Company, officers, employees or
representatives resulting in a material adverse finding with respect to any
alleged irregularity, misstatement or omission arising under or relating to any
Government Contract or Government Bid; and (iii) during the last five years,
the Company has not made any voluntary disclosure to the U.S. Government or any
non-U.S. government with respect to any alleged irregularity, misstatement or
omission arising under or relating to a Government Contract or Government


 


16





















 


Bid. The Company has not had any irregularities,
misstatements or omissions arising under or relating to any Government Contract
or Government Bid that has led or is expected to lead, either before or after
the Closing Date, to any of the consequences set forth in clause (i) or (ii) of
the immediately preceding sentence or any other material damage, penalty
assessment, recoupment of payment or disallowance of cost.


 


(c)                                  there are (i) no outstanding claims
against the Company, either by the U.S. Government or any non-U.S. Government
or by any prime contractor, subcontractor, vendor or other third party arising
under or relating to any Government Contract or Government Bid, and (ii) no
disputes between the Company and the U.S. Government or any non-U.S. Government
under the Contract Disputes Act or any other Federal statute or between the
Company and any prime contractor, subcontractor or vendor arising under or
relating to any such Government Contract or Government Bid.  There are no facts that could reasonably be
expected to result in a claim or dispute under clause (i) or (ii) of the
immediately preceding sentence.


 


(d)                                 neither the Company nor, to the Company’s
Knowledge, any of its employees, consultants or agents is (or during the last
five years has been) suspended or debarred from doing business with the U.S.
Government or any non-U.S. government or is (or during such period was) the
subject of a finding of non-responsibility or ineligibility for U.S. Government
or non-U.S. government contracting.  The
Company has conducted its operations in compliance with all requirements of all
material laws pertaining to all Government Contracts and Government Bids.


 


Section 3.29                                Affiliated Group
Liability.


 


The Company (a) has not been a member of an
affiliated group filing a consolidated income tax return; and (b) has no
liability for the Taxes of any person under Treasury Regulations section 1.1502-6(a)
(or any analogous or similar provision of any state, local or foreign law or
regulation), as a transferee or successor, by contract, or otherwise.


 


Section 3.30                                Invention
and Secrecy Agreements.


 


Each employee and consultant of the Company has
executed a form of employee’s or consultant’s invention and proprietary
information agreement, as the case may be, substantially the same as one of the
forms provided to Investor.  The company
is not aware that any employees or consultants are in violation thereof, and
the Company will use its commercially reasonable efforts to prevent any such
violation.


 


Section 3.31                                Registration
Rights.


 


Except as set forth in Schedule 3.31, the Company
has not granted or agreed to grant any registration rights, including
piggy-back rights, to any person or entity.


 


Section 3.32                                Officers,
Directors and Shareholders.


 


The Company has delivered a list of officers,
directors, shareholders (and their respective shareholdings), of the Company at
June 28, 2003, which list is complete, and which has not changed since
then except as set forth in Schedule 3.32.


 


17





















 


Section 3.33                                No
Intervention.


 


The Company has not received notice that any third
party has taken any action which prevents or may prevent the Company from
continuing its operations or from further developing the technology
contemplated by this Agreement.


 


ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF INVESTOR


 


The Investor represents and warrants to the Company as
follows:


 


Section 4.1                                      Corporate
Status.


 


The Investor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.


 


Section 4.2                                      Authorization,
etc.


 


The Investor has the corporate power and authority to
execute and deliver this Agreement, to perform fully its obligations hereunder,
and to consummate the transactions contemplated hereby.  The execution and delivery by Investor of
this Agreement, and the consummation of the transactions contemplated hereby,
have been duly authorized by all requisite corporate action of Investor.  The Investor has duly executed and delivered
this Agreement.  This Agreement is a
legal, valid and binding obligation of Investor, enforceable against it in
accordance with its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors’ rights and to general principles of equity.


 


Section 4.3                                      No
Conflicts, etc.


 


The execution, delivery and performance by Investor of
this Agreement, and the consummation of the transactions contemplated hereby,
do not and will not conflict with or result in a violation of or under (with or
without the giving of notice or the lapse of time or both) (i) the
certificate of incorporation or by-laws of Investor, or (ii) any contract,
agreement or other instrument applicable to Investor or any of its properties
or assets, except for violations and defaults that, individually and in the
aggregate, have not and shall not materially impair the ability of Investor to
perform its obligations under this Agreement.


 


Section 4.4                                      Litigation.


 


There is no action, claim, suit or proceeding pending,
or to Investor’s knowledge threatened by or against or affecting Investor in
connection with or relating to the transactions contemplated by this Agreement
or of any action taken or to be taken in connection herewith or the
consummation of the transactions contemplated hereby.


 


18





















 


Section 4.5                                      Brokers, Finders,
etc.


 


All negotiations relating to this Agreement and the
transactions contemplated hereby have been carried on without the participation
of any Person acting on behalf of Investor in such manner as to give rise to
any valid claim against Company for any brokerage or finder’s commission, fee
or similar compensation.


 


Section 4.6                                      Purchase Entirely
for Own Account.


 


The Securities will be acquired for investment for
Investor’s own account, not as nominee or agent, and not with a view to the
resale or distribution of any part thereof, and Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same.


 


Section 4.7                                      Investment
Experience.


 


The Investor is an investor in companies in the
development stage, can bear the economic risk of total loss its investment and
has such knowledge and experience in financial or business matters that it is
capable of fending for itself and evaluating the merits and risks of the
investment in the Securities.


 


Section 4.8                                      Disclosure of
Information.


 


The Investor believes it has received all the
information it considers necessary or appropriate for deciding whether to
purchase the Securities.  The Investor
further represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Securities and the business, properties, prospects and financial condition
of the Company.


 


Section 4.9                                      Accredited
Investor.


 


The Investor is a corporation not formed for the
specific purpose of acquiring the Securities, with total assets in excess of
$5,000,000, and accordingly is an “accredited investor” within the meaning of
Rule 501 of Regulation D under the Securities Act, as presently in
effect.


 


Section 4.10                                Restricted Securities.


 


The Investor understands that the Securities are
characterized as “restricted securities” under the federal securities laws,
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering, and that under such laws and applicable
regulations such securities may be resold without registration under the
Securities Act only in certain limited circumstances.  In this connection Investor represents that
it is familiar with Rule 144 promulgated under the Securities Act, as
presently in effect, and understands the resale limitations imposed thereby and
by the Securities Act, and that it is able, without materially impairing its
financial condition, to hold the Securities for an indefinite period of time.


 


19





















 


ARTICLE V

COVENANTS


 


Section 5.1                                      Covenants of the
Company.


 


(a)                                  Public Announcements. 
Except as required by Applicable Law (in which case the nature of the
announcement shall be described to Investor and Investor shall be allowed
reasonable time to comment prior to dissemination to the public), the Company
shall not make any public announcement in respect of this Agreement or the
transactions contemplated hereby without the prior written consent of Investor,
which consent shall not be unreasonably withheld.


 


(b)                                 Access and Information. 
The Company shall permit authorized representatives of Investor to visit
and inspect any of the properties of the Company, including its books of
account (and to make copies thereof and take extracts therefrom), and to
discuss its affairs, finances and accounts with its officers, administrative
employees and independent accountants, all at such reasonable times and as
often as may be reasonably requested; provided, however, that
Investor agrees to treat as confidential all the information so provided and
designated by the Company as confidential, and not to use such information in
any way reasonably foreseeable to be detrimental to the Company.  Investor further agrees that it shall
disclose such information only to directors, officers, employees and
representatives of Investor who need to know such information for the purpose
of evaluating the performance and financial condition of the Company and
assisting Investor in the performance of its fiduciary duties.  Investor agrees that such directors,
officers, employees and representatives shall be informed by Investor of the confidential
nature of such information, that they shall be directed by Investor to treat
such information confidentially, and Investor shall be responsible for any
breach of confidentiality by such directors, officers, employees or
representatives, up to a maximum aggregate liability that shall not exceed
Investor’s profit derived from such disclosure.


 


Notwithstanding the foregoing, if Investor or its
directors, officers, employees or representatives is legally compelled to
disclose information disclosed under this Section 5.1(b), Investor will
provide the Company with prompt notice so that the Company may seek a
protective order or other appropriate remedy or waive compliance with this Section 5.1(b).  If such protective order or other remedy is
not obtained, or if the Company waives compliance with the provisions of this Section 5.1(b)
in writing, Investor shall be permitted to disclose such information pursuant
thereto, but only such information as it is advised is legally required.  The requirement of confidential treatment in
this Section 5.1(b) shall not apply to information which:  (1) becomes generally available to the public
other than as a result of a disclosure by Investor, (2) was available on a
non-confidential basis prior to its disclosure to Investor; (3) was received
from a third party without similar restriction or without breach of this
Agreement; (4) was independently developed by Investor; or (5) was furnished to
a third party by the Company without a restriction on the third party’s rights.


 


(c)                                  Further Actions. 
As promptly as practicable, the Company shall:


 


(i)                                     use commercially reasonable efforts to
take all actions and to do all things necessary to consummate the transactions
contemplated hereby by the Closing Date;


 


(ii)                                  file or supply, or cause to be filed or
supplied, all applications, notifications and information required to be filed
or supplied by it pursuant to Applicable Law in connection with the Agreement,
the sale and transfer of the Securities pursuant to the Agreement and the
consummation of the other transactions contemplated hereby;


 


20





















 


(iii)                               use commercially reasonable efforts to obtain, or
cause to be obtained, all Consents (including all Governmental Approvals and
any Consents required under any Contract) necessary to be obtained by it in
order to consummate the sale and issuance of the Securities pursuant to this
Agreement.


 


(c)                                  Further Assurances. 
Following the Closing, the Company shall, from time to time, execute and
deliver such additional instruments, documents, conveyances or assurances and
take such other actions as shall be necessary, or otherwise reasonably
requested by Investor, to confirm and assure the rights and obligations
provided for in this Agreement and render effective the consummation of the
transactions contemplated hereby.


 


(d)                                 Delivery of Financial Statements. If the Company does not comply with the
periodic reporting requirements of Section 15(d) of the Securities
Exchange Act, the Company shall deliver to Investor the following:


 


(1) as soon as
practicable in fiscal year 2003,  and in
any event within 90 days after the end of each fiscal year beginning in fiscal
year 2004 of the Company, an income statement for such fiscal year, a balance
sheet of the Company as of the end of such year, and a cash flow statement,
such year-end financial reports to be in reasonable detail, prepared in
accordance with generally accepted accounting principles (“GAAP”), and audited
and certified by independent public accountants of nationally recognized
standing selected by the Company;


 


(2) within
forty-five (45) days after the end of each quarter, an unaudited statement of
operations, cash flow analysis and balance sheet for and as of the end of such
quarter, in reasonable detail; such quarterly statements shall also compare
actual performance to budget and to the prior year’s comparable period;


 


(3) on a
monthly basis, a copy of any materials prepared and distributed to the Board of
Directors of the Company in connection with Board meetings;


 


(4) within 60
days after the close of each fiscal year, a comprehensive operating budget for
the next fiscal year forecasting the Company’s revenues, expenses and cash
position, prepared on a quarterly basis, including balance sheets and cash flow
statements for such quarters and, as soon as prepared, any other budgets or
revised budgets prepared by the Company; and


 


(5) with
reasonable promptness, such other information and data with respect to the
Company as Investor may from time to time reasonably request; provided,
however, that the Company shall not be obligated pursuant to this clause (f) to
provide any information which it reasonably considers to be a trade secret, or
similar confidential information.


 


(e)                                  Intentionally left
blank.


 


(f)                                    No Obligation to Provide Further Funds. 
After payment in full of the Purchase Price, the Company acknowledges
that neither Investor nor any of its affiliates shall have any further
obligation to invest in or provide additional funds to the Company.  Any investments


 


21










 













 


made in or funds provided to the Company by Investor
or any of its affiliates following the payment of the Purchase Price shall be
made or provided, if it all, at Investor’s sole discretion and on terms
acceptable to Investor in its sole discretion, provided that investments made
at Investor’s discretion on exercise of the Warrants shall be made on the terms
set forth in the relevant Warrant.


 


(g)                                 Board Participation. 
Immediately following the Closing and for as long as Investor owns at
least 250,000 shares of Common Stock or a 3% equity interest in the Company,
(i) the Company shall use its best efforts to cause to be elected and/or
appointed to the Company’s Board of Directors one member designated by Investor
and (ii) the Company’s Board of Directors shall consist of a maximum of seven
(7) members.


 


(h)                                 Future Acquisition Discussions. 
The Company agrees to keep Investor’s representative(s) on the Company’s
Board of Directors fully informed of any and all substantive discussions with
potential acquirers of all or part of the share capital of the Company or all
or substantially all of its assets.  Such
representative(s) will be informed of such substantive discussions as soon as
they commence or as soon as reasonably practicable thereafter.


 


(i)                                     Preferred Customer. 
The Investor and Investor’s affiliates shall be a preferred customer of
the Company and shall be provided priority access to and use of the Company’s
products and services hereafter. 
Moreover, the Company agrees that the price (including all discounts)
charged to Investor for such products and services and access shall be no
higher than the lowest price charged to any other customer of the Company for
similar products and services.


 


(j)                                     Military Market Exclusivity. 
The Company grants Investor a right of first refusal to exclusively
exploit and sell the Company’s technology to the Military Market for any
product or application that Investor believes, and can demonstrate, would
compete with any Investor product or application (a “Competitive Product”).  Should the Company be approached by a third
party with a proposal to collaborate on a Competitive Product, Investor shall
automatically forfeit its right of exclusivity if:  (i) it decides not to initiate product
development work with the Company on such Competitive Product within one year
of receiving written notice from the Company of such third party proposal; or
(ii) if Investor provides the Company with a written waiver of its
exclusivity right for such Competition Product any time after receiving written
notice from the Company of such third party proposal.  With respect to any other Military Market
application that is not a Competitive Product, the Company and Investor will
discuss collaboration on a good faith basis prior to the Company concluding an
agreement to go forward with any other partner. 
For the purpose of this agreement the term “Military Market” will mean
all domestic and foreign armed services and intelligence agencies, including,
but not limited to, the Army, Navy, Air Force, Marines, Coast Guard,
U.S. Reserve Forces, CIA, DIA, NSA, and all the State National Guard
Forces, and foreign equivalents of any of the foregoing.  The term “Military Market” will not include
Research and Development contracts given by government agencies such as DARPA,
DTRA, NIH, NSF and others. The term “Military Market” shall include, inter
alia, sales or licensing of the Company’s technology, or products that
incorporate such, to any suppliers, resellers or contractors using said Company
technology in products for distribution to any domestic or foreign armed
service or intelligence agency.


 


22





















 


Section 5.2                                      Covenants of
Investor.


 


(a)                                  Public Announcements. 
Except as required by Applicable Law (in which case the nature of the
announcement shall be described to Company and the Company shall be allowed
reasonable time to comment prior to dissemination to the public), Investor
shall not, and shall not permit its Affiliates to, make any public announcement
in respect of this Agreement or the transactions contemplated hereby without
the prior written consent of the Company.


 


(b)                                 Pre-Closing Actions. 
As promptly as practicable, Investor shall use commercially reasonable
efforts to take all actions and to do all things necessary, proper or advisable
to consummate the transactions contemplated hereby by each Closing Date.


 


(c)                                  Further Assurances. 
Following the Closing, Investor shall, from time to time, execute and
deliver such additional instruments, documents, conveyances or assurances and
take such other actions as shall be necessary, or otherwise reasonably
requested by the Company, to confirm and assure the rights and obligations
provided for in this Agreement and render effective the consummation of the transactions
contemplated hereby.


 


Section 5.3                                      Legends.


 


To the extent applicable, each certificate or other
document evidencing any of the Shares or any of the Warrant Shares shall be
endorsed with legends substantially as set forth below, and Investor covenants
that, except to the extent such restrictions are waived by the Company or the
legends may be removed under Section 5.4, Investor shall not transfer
Securities without complying with the restrictions on transfer described in the
legends endorsed thereon:


 


(a)                                  The following legend
under the Securities Act:


 


“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE
REGISTRATION THEREOF UNDER THE ACT OR COMPLIANCE WITH RULE 144 PROMULGATED
UNDER THE ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.”


 


(b)                                 If required by the authorities of any
state in connection with the issuance or sale of the Shares, or the Warrant
Shares, the legend required by such state authority.


 


Section 5.4                                      Removal of
Legends.


 


(a)                                  Any legend endorsed on a certificate
pursuant to Section 5.3(a) hereof shall be removed (i) if the Shares,
Warrant Shares or Warrants represented by such certificate shall have been
effectively registered under the Securities Act or otherwise lawfully sold in a
public transaction, (ii) if such shares may be transferred in compliance
with Rule 144(k) promulgated under the Securities Act, or (iii) if
the holder of such shares shall have provided the Company with an opinion of
counsel, in form and substance acceptable to the Company and from attorneys
reasonably acceptable to the Company, stating that a public sale, transfer or
assignment of such Shares may be made without registration.


 


23





















 


(b)                                 Any legend endorsed on a certificate
pursuant to Section 5.3(b) hereof shall be removed if the Company receives
an order of the appropriate state authority authorizing such removal or if the
holder of the Common Stock issuable upon conversion thereof provides the
Company with an opinion of counsel, in form and substance acceptable to the
Company and from attorneys reasonably acceptable to the Company, stating that
such legend may be removed.


 


Section 5.5                                      Further Restriction on Transfer.  Unless and
until the legends described in Section 5.4 may be removed, Investor
further covenants not to make any disposition of the Securities until the
transferee agrees to be bound by Sections 5.3, 5.4 and 5.5.


 


ARTICLE VI

CONDITIONS PRECEDENT


 


Section 6.1                                      Conditions to
Obligations of Each Party.


 


The obligations of the parties to consummate the transactions
contemplated hereby at the Closing shall be subject to the fulfillment on or
prior to the Closing Date of the following conditions:


 


(a)                                  No Injunction, etc. 
Consummation of the transactions contemplated hereby shall not have been
restrained, enjoined or otherwise prohibited by any Applicable Law, including
any order, injunction, decree or judgment of any court or other Governmental
Authority.  No court or other
Governmental Authority shall have determined that any Applicable Law makes
illegal the consummation of the transactions contemplated hereby, and no
proceeding with respect to the application of any such Applicable Law to such
effect shall be pending.


 


(b)                                 Government Approvals. 
All requisite governmental approvals and authorizations necessary for
the consummations of the transactions contemplated hereby shall have been duly
issued or granted and all applicable waiting periods shall have expired or
otherwise been terminated.


 


Section 6.2                                      Conditions to
Obligations of Investor.


 


The obligations of Investor to consummate the
transactions contemplated hereby at each Closing shall be subject to the
fulfillment (or waiver by Investor) on or prior to the Closing Date of the
following additional conditions:


 


(a)                                  Representations; Performance. 
Each of the representations and warranties of Company contained in this
Agreement shall be true and correct in all material respects, in each case on
the date hereof and at and as of the Closing Date, as though made on and as of
the Closing Date. The Company shall have duly performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be performed or complied with by it prior to or on the
Closing Date.


 


(b)                                 Consents.  The Company
shall have obtained and shall have delivered to Investor copies of all
Governmental Approvals and Consents required to be obtained by the Company in
connection with the execution and delivery of the Agreement and the
consummation of the transactions contemplated hereby.


 


24





















 


(c)                                  Corporate Proceedings. 
All corporate and other proceedings of the Company in connection with
this Agreement and the transactions contemplated hereby, and all documents and
instruments incident thereto, shall be reasonably satisfactory in form and
substance to Investor and its counsel, and Investor and its counsel shall have
received all such documents and instruments, or copies thereof, certified if
requested, as may be reasonably requested at least 48 hours prior to the
Closing.


 


(d)                                 Certificate of Status. 
The Investor shall have received copies of (i) the Certificate of
incorporation, as amended through the Closing Date, of the Company, certified
as of a recent date by the Secretary of State of the State of Delaware,
(ii) a certificate of good standing for the Company from the Secretary of
State of the State of Delaware, as of a recent date, and (iii) a copy of
the by-laws of the Company, as in effect on the Closing Date, certified by the
Secretary of the Company.


 


(e)                                  Certificates for Shares. 
The Company shall have delivered to Investor certificates representing
the Shares, registered in the name of Investor, duly executed by the Company.


 


(f)                                    No Material Adverse Change. 
Except as set forth in Schedule 3.8, since September 28, 2002,
there shall not have occurred any Material Adverse Effect, or any event or
condition that might reasonably be expected to cause a Material Adverse Effect
to occur in the future.


 


(g)                                 Officer’s Certificate. 
The Company shall have delivered to Investor a certificate, dated the
Closing Date and signed by its chief executive officer, in the form of
Exhibit B hereto to the effect of Section 6.2(a) and Section 6.2(b)
and certifying the fulfillment of the other conditions precedent.


 


(h)                                 Legal Investment. 
At the time of such Closing, the purchase of the Common Stock and
Warrants by Investor shall be legally permitted by all laws and regulations to
which Investor and the Company are subject.


 


(i)                                     No Government Intervention. 
The Company shall not have received notice that any Governmental
Authority has taken, or intends to take, any action which prevents, or would
prevent, the Company from continuing its operations or from further developing
the MEMS technology contemplated by this Agreement.


 


(j)                                     Board of Directors. 
For so long as Investor holds at least 250,000 shares of Common Stock or
a greater than 3% equity interest in the Company, the Company’s Board of
Directors shall consist of a maximum of seven (7) duly elected or appointed members.  One of these members shall be designated by
Investor as set forth in Section 5.1(i).


 


Section 6.3                                      Conditions to
Obligations of Company.


 


The obligation of Company to deliver the Shares and
the Warrants and to consummate the transactions contemplated hereby at the
Closing shall be subject to the fulfillment (or waiver by the Company), on or
prior to the Closing Date, of the following additional conditions:


 


(a)                                  Payment of Consideration. 
The delivery in full of the Purchase Price.


 


25





















 


(b)                                 Representations; Performance. 
Each of the representations and warranties of Investor contained in this
Agreement shall be true and correct in each case on the date hereof and at and
as of the Closing Date as though made on and as of the Closing Date.  The Investor shall have duly performed and
complied in all material respects with all agreements and conditions required
by this Agreement to be performed or complied with by it prior to or on the
Closing Date.  The Investor shall have
delivered to Company a certificate, dated the Closing Date and signed by its
duly authorized officer, to the foregoing effect.


 


(c)                                  Corporate Proceedings. 
All corporate proceedings of Investor in connection with this Agreement
and the transactions contemplated hereby, and all documents and instruments
incident thereto, shall be reasonably satisfactory in form and substance to the
Company, and its counsel, and the Company and its counsel shall have received
all such documents and instruments, or copies thereof, certified if requested,
as may be reasonably requested.


 


ARTICLE VII

ANTI-DILUTION RIGHTS


 


Section 7.1                                      Anti-Dilution
Right.


 


The Company hereby grants to Investor the right to
purchase, upon the issuance by the Company of New Securities (as defined in
this Section 7) all or any portion of the “Anti-Dilution Shares” (as
defined in this Section 7).  The
Anti-dilution Shares are, with respect to Investor, that number of New
Securities being issued, the purchase of which will result in Investor having
the same Percentage Equity (as defined in this Section 7) in the Company
immediately after such issuance of New Securities as it had immediately prior
to such issuance of New Securities.  For
purposes of this anti-dilution right, Investor’s “Percentage Equity” in the
Company, to be calculated before or after each issuance of New Securities,
shall be the proportion that the number of shares of common stock (assuming the
conversion of all convertible securities and the exercise of all rights, options
and warrants) held by Investor at such time bears to the total number of
outstanding shares of common stock (assuming the conversion of all convertible
securities and the exercise of all rights, options and warrants) of the Company
at such time.  This anti-dilution right
shall be subject to the following provisions:


 


(a)                                  “New Securities” shall mean any common stock
or preferred stock or other equity security of the Company, whether now
authorized or not, and rights, options, or warrants to purchase said common
stock or preferred stock or other equity security, and securities of any type
whatsoever that are, or may become, convertible into said common stock or
preferred stock or other equity security; provided, however, that “New
Securities” does not include:


 


(i)                                     securities issued upon conversion of any
Preferred Stock into common stock;


 


(ii)                                  a stock dividend or securities issued
upon any subdivision of shares of common stock, or any other right received on
a pro rata basis by the holder of the Shares along with other holders of Common
Stock;


 


26





















 


(iii)                               securities issued solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
business; or


 


(iv)                              securities issued upon an exercise of any
option, warrant, convertible securities, or other right currently outstanding
and set forth in Section 3.1 or issued hereafter pursuant to the
2001 Stock Incentive Plan or other plan approved by Investor and the Board of
Directors, provided that upon conversion of any amount of the Company’s
notes that are convertible into an aggregate of 446,270 shares of Common Stock,
the Common Stock issued on such conversion shall be deemed New Securities and
the amount of debt released on such conversion shall be deemed the price of
such New Securities;


 


(b)                                 If the Company plans, proposes or
determines to issue New Securities, the Company shall give Investor
thirty (30) calendar days advance written notice of such issuance
describing the type of New Securities, the price, and the general terms upon
which the Company plans, proposes or determines to issue the same.  The Investor shall have twenty (20)
calendar days from the date of receipt of any such notice to agree to purchase
all or a portion of its Anti-Dilution Shares for the price and upon the general
terms specified in the notice by giving written notice to the Company and
stating therein the quantity of Anti-Dilution Shares to be purchased.  If Investor exercises its anti-dilution
rights under this Section 7 to purchase Anti-Dilution Shares, the Company
shall issue such Anti-Dilution Shares to Investor at the time of the issuance
of the New Securities.  In no event shall
the Company issue New Securities without giving Investor thirty (30)
calendar days’ advance written notice, unless Investor waives such notice
requirement in a writing signed by one or more of the Company’s Directors
elected by Investor.


 


(c)                                  In the event that Investor fails to
exercise its anti-dilution right within said twenty (20) day period, such
right shall be deemed to have been waived by Investor with respect to that
issuance of New Securities.


 


(d)                                 The anti-dilution right granted under
this Agreement shall expire upon, and be inapplicable to, (i) the first
closing of the first firmly underwritten public offering of common stock of the
Company after the date hereof that is made pursuant to a registration statement
filed with, and declared effective by, the SEC under the Securities Act,
covering the offer and sale of common stock to the public, or (ii) a
merger or consolidation of the Company with or into another corporation or
other entity or person, or any other corporate reorganization in which the
Company shall not be the continuing or surviving entity of such merger,
consolidation or reorganization.


 


ARTICLE VIII

TERMINATION


 


Section 8.1                                      Termination.


 


This Agreement may be terminated at any time prior to
the Closing Date:


 


(a)                                  by the written
agreement of Investor and the Company;


 


27





















 


(b)                                 by Company or Investor by written notice
to the other party if the Closing shall not have been consummated pursuant
hereto by 5:00 p.m. New York City time on September 30, 2003,
provided that the terminating party may not be in breach of this Agreement, and
provided further that the failure by either party to close on such date shall
not of itself be a breach of this Agreement.


 


(c)                                  by Investor by written notice to the
Company if (i) the representations and warranties of the Company shall not
have been true and correct as of the date when made, or (ii) if any of the
conditions set forth in Section 6.1 or 6.2 shall not have
been, or if it becomes apparent that any of such conditions will not be,
fulfilled by 5:00 p.m. New York City time on September 30, 2003,
unless such failure shall be due to the failure of Investor to perform or
comply with any of the covenants, agreements or conditions hereof to be
performed or complied with by it prior to the Closing; or


 


(d)                                 by the Company by written notice to
Investor if (i) the representations and warranties of Investor shall not
have been true and correct in all material respects as of the date when made,
or (ii) if any of the conditions set forth in Section 6.1 or 6.3
shall not have been, or if it becomes apparent that any of such conditions will
not be, fulfilled by 5:00 p.m. New York City time on September 30,
2003, unless such failure shall be due to the failure of the Company to perform
or comply with any of the covenants, agreements or conditions hereof to be
performed or complied with by it prior to the Closing.


 


Section 8.2                                      Effect of
Termination.


 


If this Agreement is terminated pursuant to the
provisions of Section 8.1, then this Agreement shall become void
and have no effect, without any liability to any Person in respect hereof or of
the transactions contemplated hereby on the part of any party hereto, or any of
its directors, officers, employees, agents, consultants, representatives,
advisers, stockholders or Affiliates, except as specified in Section 13.1
and except for any liability resulting from such party’s breach or default of
this Agreement.


 


ARTICLE IX

INDEMNIFICATION


 


Section 9.1                                      By
Company.


 


Subject to the terms and conditions of this Article IX,  the Company covenants and agrees to defend,
indemnify and hold harmless Investor, its officers, directors, employees,
agents, advisers, lenders, representatives and Affiliates (including, after the
Closing, the Company) (collectively, the “Investor Indemnitees”), from
and against, and pay or reimburse Investor Indemnitees for, any and all claims,
liabilities, obligations, losses, fines, costs, judgments, penalties,
proceedings, deficiencies or damages (whether absolute, accrued, conditional or
otherwise and whether or not resulting from third party claims), including
out-of-pocket expenses, court costs, consulting fees, expert witness fees and
reasonable attorneys’ fees incurred in the investigation or defense of any of
the same or in asserting any of their respective rights hereunder
(collectively, “Losses”), resulting from or arising out of:


 


28





















 


(a)                                  any misrepresentation or breach of any
warranty of Company or the Company contained in this Agreement; provided,
however, that, for purposes of this Article IX,  in determining whether any such
misrepresentation or breach occurred, any dollar amount thresholds, materiality
qualifiers and Material Adverse Effect qualifiers contained in any
representation or warranty herein shall be disregarded; provided  further,
however, that no claim for indemnification under this clause (a) may be
made after the third anniversary of the Closing Date, excepting only that any
claim for misrepresentation or breach of warranty under (i) Sections 3.7,
3.11(a), 3.11(c), and 3.16 may be made no later than a
date 30 days from and after the expiration of the period of the applicable
statute of limitations, or (ii) Section 3.3 may be made at any time;


 


(b)                                 any failure of the Company to perform any
covenant or agreement made or contained in this Agreement or fulfill any
obligation in respect thereof.


 


Company shall not be required to indemnify Investor
Indemnitees with respect to any claim for indemnification resulting from or
arising out of matters described in clause (a) above pursuant to this Section 9.1
unless and until the aggregate amount of all claims against Company exceeds
$50,000 (“Company’s Threshold Amount”), in which case Company shall be required
to indemnify Investor Indemnitees for the full amount of such claims, including
Company’s Threshold Amount, but only up to an aggregate amount of $2,500,000
for all claims.


 


Section 9.2                                      By
Investor.


 


Subject to the terms and condition of this Article IX,
Investor covenants and agrees to defend, indemnify and hold harmless Company
and each of its heirs, executors, administrators, distributees or legal
representatives (collectively, the “Company Indemnitees”), from and
against any and all Losses resulting from or arising out of:


 


(a)                                  any misrepresentation or breach of
warranty of Investor contained in this Agreement; provided, however,
that no claim for indemnification under this clause (a) may be made after
the third anniversary of the Closing Date; or


 


(b)                                 any failure of Investor to perform any
covenant or agreement made or contained in this Agreement or fulfill any other
obligation in respect thereof.


 


The Investor shall not be required to indemnify
Company Indemnitees with respect to any claim for indemnification resulting
from or arising out of matters described in clause (a) above pursuant to
this Section 9.2 unless and until the aggregate amount of all
claims against Investor exceeds $50,000 (“Investor’s Threshold Amount”),
in which case Investor shall be required to indemnify Company Indemnitees for
the full amount of such claims, including Investor’s Threshold Amount, but only
up to an aggregate amount of $500,000 for all claims.


 


Section 9.3                                      Indemnification
Procedures.


 


(a)                                  Third Party Claims.  In the case of any claim asserted by a third
party against a party entitled to indemnification under this Agreement (the “Indemnified
Party”), notice shall be given by the Indemnified Party to the party
required to provide indemnification (the “Indemnifying Party”) as soon
as practicable after such Indemnified Party has actual and not


 


29





















 


imputed or implied knowledge of any claim as to which
indemnity may be sought, and the Indemnified Party shall permit the
Indemnifying Party (at the expense of such Indemnifying Party) to assume the
defense of any third party claim or any litigation with a third party resulting
therefrom; provided, however, that (i) the counsel for the
Indemnifying Party who shall conduct the defense of such claim or litigation
shall be subject to the approval of the Indemnified Party (which approval shall
not be unreasonably withheld or delayed), (ii) the Indemnified Party may
participate in such defense at such Indemnified Party’s expense, and
(iii) the omission by any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its indemnification
obligation under this Agreement except and only to the extent that such
Indemnifying Party is actually and materially damaged as a result of such
failure to give notice.  Except with the
prior consent of the Indemnified Party, no Indemnifying Party, in the defense
of any such claim or litigation, shall consent to entry of any judgment or
enter into any settlement that provides for injunctive or other nonmonetary
relief affecting the Indemnified Party or that does not include as an
unconditional term thereof the giving by each claimant or plaintiff to such
Indemnified Party of a general release from all liability with respect to such
claim or litigation.  If the Indemnified
Party shall in good faith determine that the conduct of the defense of any
claim subject to indemnification hereunder or any proposed settlement of any
such claim by the Indemnifying Party might be expected to affect adversely the
Indemnified Party’s Tax liability or the ability of Investor to conduct its
business, or that the Indemnified Party may have available to it one or more
defenses or counterclaims that are inconsistent with one or more of those that
may be available to the Indemnifying Party in respect of such claim or any
litigation relating thereto, the Indemnified Party shall have the right at all
times to take over and assume control over the defense, settlement,
negotiations or litigation relating to any such claim at the sole cost of the
Indemnifying Party; provided, however, that if the Indemnified
Party does so take over and assume control, the Indemnified Party shall not
settle such claim or litigation without the consent of the Indemnifying Party,
such consent not to be unreasonably withheld or delayed.  If the Indemnifying Party does not accept the
defense of any matter as above provided, the Indemnified Party shall have the
full right to defend against any such claim or demand at the sole cost of the
Indemnifying Party and shall be entitled to settle or agree to pay in full such
claim or demand.  In any event, the
Indemnifying Party and the Indemnified Party shall reasonably cooperate in the defense
of any claim or litigation subject to this Article IX and the
records of each shall be reasonably available to the other with respect to such
defense.


 


(b)                                 Non-Third Party Claims. 
With respect to any claim for indemnification hereunder which does not
involve a third party claim, the Indemnified Party will give the Indemnifying
Party written notice of such claim.  The
Indemnifying Party may acknowledge and agree by notice to the Indemnified Party
in writing to satisfy such claim within 20 days of receipt of notice of
such claim from the Indemnified Party. 
If the Indemnifying Party shall dispute such claim, the Indemnifying
Party shall provide written notice of such dispute to the Indemnified Party
within such 20-day period, setting forth in reasonable detail the basis of such
dispute.  Upon receipt of notice of any
such dispute, the Indemnified Party and the Indemnifying Party shall use
commercially reasonable efforts to resolve such dispute within 30 days of the
date such notice of dispute is received. 
If the Indemnifying Party shall fail to provide written notice to the
Indemnified Party within 20 days of receipt of notice from the Indemnified
Party that the Indemnifying Party either acknowledges and agrees to pay such
claim or disputes such claim, the Indemnifying Party shall be deemed to have
acknowledged and agreed to pay such claim in full and to have waived any right
to dispute such claim.  Once (a) the
Indemnifying Party has


 


30





















 


acknowledged and agreed to pay any claim pursuant to
this Section 9.3, (b) any dispute under this Section 9.3 has
been resolved in favor of indemnification by mutual agreement of the
Indemnifying Party and the Indemnified Party, or (c) any dispute under
this Section 9.3 has been finally resolved in favor of indemnification by
order of a court of competent jurisdiction or other tribunal having
jurisdiction over such dispute, then the Indemnifying Party within 20 days
of the date of acknowledgement by the Indemnifying Party or final resolution in
favor of indemnification, as the case may be, to such account and in such
manner as is designated in writing by the Indemnified Party.


 


Section 9.4                                      Expiration of Representations and Warranties, etc.  All
representations and warranties contained in this Agreement shall survive the
Closing for a period of three years; provided, however, that the
representations and warranties stated in Sections 3.7, 3.11(a),
3.11(c), and 3.16 shall survive the Closing for the applicable
statute of limitations; provided  further, however, that the
representations and warranties contained in Section 3.3 shall
survive indefinitely.


 


Section 9.5                                      Set-Off.  If Company
shall be obligated to indemnify Investor or any other Investor Indemnitee
pursuant to Article IX, Investor shall be entitled, in addition to
any other right or remedy it may have, to exercise rights of set-off against
any amounts due and payable to Company hereunder or that may thereafter become
due and payable to Company hereunder (including amounts under Article II).


 


ARTICLE X

REGISTRATION RIGHTS


 


The Company covenants and agrees as follows:


 


Section 10.1                                Definitions.


 


For purposes of this Section 10:


 


(a)                                  The term “register,” “registered,” and “registration”
refer to a registration effected by preparing and filing a registration statement
or similar document in compliance with the Securities Act, and the declaration
or ordering of effectiveness of such registration statement or document;


 


(b)                                 The term “Warrant Shares” shall mean the
Common Stock issued or issuable upon exercise of the Warrants.


 


(c)                                  The term “ Registrable Securities” means
(i) the Shares; (ii) the Warrant Shares; and (iii) any Common
Stock of the Company issued or issuable in respect on the Conversion Shares or
other securities issued or issuable pursuant to the conversion of the Warrants
upon any stock split, stock dividend, recapitalization, or similar event, or
any Common Stock otherwise issued or issuable with respect to the Warrants; provided,
however, that shares of Common Stock or other securities shall only be
treated as Registrable Securities if and so long as they have not been
(1) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, whether in a registered
offering, Rule 144 transaction or otherwise, or (2) sold or are
available for sale in the opinion of counsel to the Company in a transaction


 


31





















 


exempt from the registration and prospectus delivery
requirements of the Securities Act so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale, excluding in all cases; provided however, that any Registrable
Securities sold by a person in a transaction in which his registration rights
are not assigned shall cease to be Registerable Securities;


 


(d)                                 The number of shares of “Registrable
Securities then outstanding” shall be determined by the number of shares of
Common Stock outstanding which are Registrable Securities, and the number of
shares of Common Stock issuable pursuant to then exercisable Warrants that are
exercisable for Registrable Securities;


 


(e)                                  The term “Holder” means any person owning
or having the right to acquire Registrable Securities or any assignee of a
Holder in accordance with Section 10.9 hereof;


 


(f)                                    The term “Form S-3” means such form
under the Securities Act as in effect on the date hereof or any registration
form under the Securities Act subsequently adopted by the SEC in lieu of
Form S-3 which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC;


 


(g)                                 “Registration Expenses” shall mean
all expenses, except Selling Expenses, incurred by the Company in complying
with Sections 10.2, 10.4 and 10.5 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company which shall be paid in any event by the Company) and the reasonable
fees and disbursements of one counsel for all Holders in the event of one
exercise of a requested registration provided for in Section 10.2 hereof,
in the event of two Company registrations pursuant to Section 10.5 hereof,
and for four Company registrations on Form S-3 pursuant to Section 10.4
hereof; and


 


(h)                                 “Selling Expenses”  shall mean all underwriting discounts,
selling commission and stock transfer taxes applicable to the securities
registered by the Holders and, except as set forth above, all fees and
disbursements of counsel for any Holder.


 


Section 10.2  Demand Registrations Rights.


 


(a)                                  If at any time after the Company’s
initial registered underwritten public offering, the Company shall receive a
written request (specifying that it is being made pursuant to this Section 10.2)
from Investor that the Company file a registration statement or similar
document under the Securities Act covering the registration of the lesser of
(i) at least ten percent (10%) of Investor’s then outstanding
Registrable Securities (or securities that are convertible into Registrable
Securities) or (ii) Registrable Securities the expected price to the
public of which exceeds $2,000,000, then the Company shall promptly notify all
other Holders of such request and shall use its best efforts to cause all
Registrable Securities that such Holders have requested be registered in
accordance with this Section 10.2 to be registered under the Securities
Act.  Notwithstanding the foregoing,
(a) the Company shall not be obligated to effect a registration pursuant
to this Section 10.2 during the period starting with the date
sixty (60) days prior to the


 


32





















 


Company’s estimated date of filing of, and ending on a
date sixty (60) days following the effective date of, a registration
statement pertaining to an underwritten public offering of the Company’s
securities, provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company’s estimate of the date of filing such registration statement
is made in good faith, and (b) if the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company or its shareholders for a registration
statement to be filed in the near future, then the Company’s obligation to use
its best efforts to file a registration statement shall be deferred for a
period not to exceed six (6) months; provided, however, that the Company
shall not obtain such a deferral more than once in any 12-month period.  The Company shall be obligated to effect only
two registrations pursuant to this Section 10.2. Any request for
registration under this Section 10.2 must be for a firmly underwritten
public offering to be managed by an underwriter or underwriters of recognized
national standing selected by Investor and reasonably acceptable to the
Company.


 


(b)                                 If the registration requested is for a
registered public offering involving an underwriting, the Company shall so
indicate in the notice given pursuant to Section 10.2(a).  In such event the right of any Holder to
registration pursuant to this Section 10.2 shall be conditioned upon such
Holder’s agreeing to participate in such underwriting and in the inclusion of
such Holder’s Registrable Securities in the underwriting to the extent provided
herein.  All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Company or by
Investor exercising any demand registration rights.  Notwithstanding any other provisions of this Section 10.2,
if the underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the underwriter may exclude some or
all Registrable Securities or other securities from such registration and
underwriting (hereinafter an “Underwriter Cutback”).  In the event of an Underwriter Cutback, the
Company shall so advise all Holders and the other holders distributing their
securities through such underwriting, and the number of Registrable Securities
and other securities that may be included in the registration and underwriting
shall be allocated among all holders thereof (including those holders who are
exercising their demand registration rights) on the basis that the holders who
are not Holders shall be cut back before any cutback of Holders.  If the limitation determined by the
underwriter requires a cutback of the Holders, then the number of shares that
may be included in the registration and underwriting shall be allocated among all
Holders in proportion, as nearly as practicable, to the respective amounts of
securities entitled to inclusion in such registration held by such Holders at
the time of filing the registration statement. 
In the event of an Underwriter Cutback, holders of securities with
respect to which registration rights have been granted pursuant to Section 10.10
hereof shall be treated as Holders for purposes of any cutbacks.  If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company and the underwriter. 
If shares are so withdrawn from the registration, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such
shares to be allocated among the persons requesting additional inclusion pro
rata according to the


 


33





















 


total amount of securities entitled to be included in
such registration owned by each person or in such other proportions as shall be
mutually agreed by such selling shareholders.


 


(c)                                  Notwithstanding anything to the contrary
set forth herein, any registration requested by Investor pursuant to this Section 10.2
shall not be deemed to have been effected (and, therefore, not requested for
purposes of this Section 10.2), (i) unless it has become effective, provided
that a registration which does not become effective after the Company
has filed a registration statement with respect thereto solely by reason of the
refusal to proceed by Investor (other than a refusal to proceed based upon the
advice of counsel relating to a matter with respect to the Company) shall be
deemed to have been effected by the Company at request of Investor unless
Investor shall have elected to pay all registration expenses in connection with
such registration; (ii) if after it has become effective such registration
is interfered with by any stop order, injunction or other order or requirement
of the SEC or other governmental agency or court for any reason other than a
misrepresentation or an omission by Investor and, as a result thereof, the
securities requested to be registered cannot be completely distributed in
accordance with the plan of distribution set forth in the related registration
statement or (iii) if the closing pursuant to the purchase agreement or
underwriting agreement entered into in connection with such registration does
not occur.  Any registration effected
pursuant to Section 10.5 shall not be deemed to have been requested by a
requesting holder for purposes of this Section 10.2


 


Section 10.3                                Expenses of Demand
Registration.


 


All Registration Expenses incurred in connection with
any registration, qualification, or compliance pursuant to Section 10.2
(exclusive of Selling Expenses, which shall be borne by the selling holders pro
rata based on the number of their shares registered) shall be borne by the Company.


 


Section 10.4                                Form S-3 Registration
Rights.


 


After the Company’s initial registered underwritten
public offering, the Company shall use its best efforts to qualify for
registration on Form S-3 (as used hereafter “Form S-3” shall include any
successor form to Form S-3), and to that end the Company shall use its best
efforts to comply with the reporting requirements of the Securities Exchange
Act of 1934, as amended (the “Securities Exchange Act”), within twelve (12)
months following the effective date of the first registration of any securities
of the Company for an underwritten registered public offering.  After the Company has qualified for the use
of Form S-3, and subject to the provisions of this Section 10.4, and the
market standoff in Section 10.10, each Holder shall have the right to
request registrations on Form S-3 (such requests shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended method of disposition of such shares by each such Holder), subject
only to the following limitations:


 


(a)                                  The Company shall not be obligated to
cause a registration on Form S-3 to become effective prior to one hundred fifty
(150) days following the effective date of a Company initiated registration
(other than a registration effected solely to qualify an employee benefit plan
or to effect a business combination pursuant to SEC Rule 145);


 


34





















 


(b)                                 The Company shall not be required to
effect a registration pursuant to this Section 10.4 unless the Holder or
Holders requesting such a registration propose to dispose of shares of
Registrable Securities having an aggregate disposition price (before deduction
of underwriting discounts and expenses of sale) of at least $500,000;


 


(c)                                  The Company shall not be required to
maintain and keep any such registration on Form S-3 effective for a period
exceeding one hundred and eighty (180) days from the effective date thereof;


 


(d)                                 The Company shall not be obligated to
cause a registration on Form S-3 if in the prior twelve-month period the
Company has caused a registration on Form S-3 to become effective; and


 


(e)                                  The Company shall not be required to
effect a registration pursuant to this Section 10.4 more than three years
after the Company’s registered underwritten public offering or more than four
times at Company’s expense.


 


The Company shall give notice to all Holders of the
receipt of a request for registration pursuant to this Section 10.4 and
shall provide a reasonable opportunity for other Holders to participate in the
registration.  Subject to the foregoing,
the Company will use its best efforts to effect promptly any registration
requested pursuant to this Section 10.4. 
Notwithstanding the foregoing, the Company shall not be obligated to
effect any such registration, qualification or compliance pursuant to this Section 10.4
if the Company shall furnish to the Holders a certificate signed by the
President of the Company stating that in the good faith judgment of the Board
of Directors of the Company it would be seriously detrimental to the Company
and its shareholders for such Form S-3 Registration to be effected at such
time, in which event the Company shall have the right to defer the filing of
the Form S-3 Registration Statement for a period of not more than 120 days
after receipt of the request of the Holder or Holders under this Section 9.4;
provided, however, that the Company shall not utilize this right more than once
in any 12-month period.


 


Section 10.5                                Company Registration.


 


(a)                                  If, at any time or from time to time, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders exercising their
respective demand registration rights, other than a registration
(i) relating solely to employee benefit plans on Form S-8 or similar
forms which may be promulgated in the future or (ii) relating solely to a
SEC Rule 145 or similar transaction, the Company will promptly give to each
Holder written notice thereof (which shall include a list of the jurisdictions
in which the Company intends to attempt to qualify such securities under the
applicable blue sky or other state securities laws, and include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all Registrable
Securities of such Holders as specified in a written request or requests made
within 15 days after receipt of such written notice from the Company.


 


(b)                                 If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so indicate in the notice given pursuant to


 


35





















 


Section 10.5(a).  In such
event the right of any Holder to registration pursuant to this Section 10.5
shall be conditioned upon such Holder’s agreeing to participate in such
underwriting and in the inclusion of such Holder’s Registrable Securities in
the underwriting to the extent provided herein. 
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company or by other holders exercising
demand registration rights.  
Notwithstanding any other provisions of this Section 10.5, if the
underwriter determines that marketing factors require a limitation of the
number of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities or other securities from such registration and
underwriting (hereinafter an “Underwriter Cutback”).  In the event of an Underwriter Cutback, the
Company shall so advise all Holders and the other holders distributing their
securities through such underwriting, and the number of Registrable Securities
and other securities that may be included in the registration and underwriting
shall be allocated among all Holders thereof (including those holders who are
exercising their demand registration rights) on the basis that the holders who
are not Holders shall be cut back before any cutback of Holders.  If the limitation determined by the
underwriter requires a cutback of the Holders, then the number of shares that
may be included in the Registration and underwriting shall be allocated among
all Holders in proportion, as nearly as practicable, to the respective amounts
of securities entitled to inclusion in such registration held by such Holders
at the time of filing the registration statement.  In the event of an Underwriter Cutback,
holders of securities with respect to which registration rights have been
granted pursuant to Section 10.10 hereof shall be treated as Holders for
purposes of any cutbacks.  If any Holder
disapproves of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter.  Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration.


 


Section 10.6                                Expenses of Company
Registration Rights.


 


All Registration Expenses incurred in connection with
any registration, qualification or compliance pursuant to Section 10.5
(exclusive of Selling Expenses including fees and expenses of any special
counsel to the selling holders, which shall be borne by the selling Holders pro
rata based on the number of their shares registered) shall be borne by the
Company.


 


Section 10.7                                Indemnification.


 


In the event any Registrable Securities are included
in a registration statement under this Section 10:


 


(a)                                  To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the officers, directors,
partners and legal counsel of each Holder, any underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning Exchange Act, against any losses,
claims, damages or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or state
law, rule or regulation insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively, a “Violation”):  (i) any untrue


 


36





















 


statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any law; and the Company will reimburse each such Holder,
officer, director, partner, legal counsel, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 10.7(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any such
Holder, officer, partner, director, underwriter, legal counsel or controlling
person; provided that such reimbursement shall be made on a monthly basis
within ten (10) days after receipt of any invoice with respect to expenses
reasonably incurred during the preceding calendar month.


 


(b)                                 To the extent permitted by law, each
selling Holder will indemnify and hold harmless the Company, each of its
directors, officers, its legal counsel, each person, if any, who controls the Company
within the meaning of the Securities Act, any underwriter and any other Holder
selling securities in such registration statement or any of such other Holder’s
directors, legal counsel, or officers or any person who controls such other
Holder, against any losses, claims, damages or liabilities (joint or several)
to which the Company or any such director, officer, legal counsel, controlling
person, or underwriter or controlling person, or such other Holder or director,
officer, legal counsel or controlling person of such other Holder may become
subject, under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder for use in
connection with such registration; and each such Holder will reimburse any legal
or other expenses reasonably incurred by the Company or any such director,
officer, legal counsel, or controlling person, underwriter or controlling
person of such Holder in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 10.7(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the indemnifying Holder,
which consent shall not be unreasonably withheld; provided, that, in no event
shall any indemnity under this Section 10.7(b) exceed the gross proceeds
from the offering received by such holder and provided that such reimbursement
shall be made on a monthly basis within ten (10) days after the end of
each calendar month with respect to expenses reasonably incurred during the
preceding calendar month.


 


(c)                                  Promptly after receipt by an indemnified
party under this Section 10.7 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section 10.7,
deliver to the indemnifying party a written notice of the commencement thereof


 


37





















 


and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if such indemnified
party is advised in writing by counsel (which writing shall be furnished to the
indemnifying party) that representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnifying party and any other
party represented by such counsel in such proceeding.  The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section 10.7,
but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnifying party
otherwise than under this Section 10.7.


 


(d)                                 If the indemnification provided for in
this Section 10.7 is held by a court of competent jurisdiction to be
unavailable to an indemnified party, then each indemnifying party, in lieu of
indemnifying such indemnified party thereunder, hereby agrees to contribute to
the amount paid or payable to such indemnified party in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other. 
Notwithstanding the foregoing, the amount any Holder of Registrable
Securities shall be obligated to contribute pursuant to this Section 10.7(d)
shall be limited to an amount equal to the offering price of the shares sold by
such Holder.


 


(e)                                  The obligations of the Company and
Holders under this Section 10.7 shall survive the completion of any
offering of Registrable Securities in a registration statement under this Section 10,
and otherwise.


 


Section 10.8                                Reports Under Securities Exchange Act of 1934.


 


With a view to making available to the Holders the
benefits of Rule 144 promulgated under the Securities Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:


 


(a)                                  make and keep public information
available, as those terms are understood and defined in Rule 144
promulgated under the Securities Act, at all times after 90 days after the
Closing;


 


(b)                                 take such action as is reasonably
necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities, such action to be taken as soon as practicable after
the end of the first fiscal year after the Closing;


 


(c)                                  file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act
and the Exchange Act; and


 


(d)                                 furnish to any holder, so long as the
holder owns any Registrable Securities, forthwith upon request (i) a
written statement by the Company that it has complied with the


 


38





















 


reporting requirements of SEC Rule 144, the
Securities Act and the Exchange Act (at any time after it has complied with
such reporting requirements), or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of
the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested in availing
any Holder of any rule or regulation of the SEC which permits the selling of
any such securities without registration or pursuant to such form.


 


Section 10.9                                Assignment of
Registration Rights.


 


The rights to cause the Company to register
Registrable Securities pursuant to this Section 10 may be assigned by a
Holder to a transferee or assignee who acquires at least Five Hundred Thousand
(500,000) shares of Registrable Securities; provided that the Company is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; and provided,
further, that such assignment shall be effective only if immediately following
such transfer the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act.  If the Holder is a partnership and transfers
or assigns its rights hereunder to any of its partners, such partners may
aggregate the number of Registrable Securities held by them for purposes of
meeting the Five Hundred Thousand (500,000) share threshold set forth in this Section 10.9.


 


Section 10.10                          Subsequent Registration
Rights.


 


From and after the date of this Agreement, the Company
shall not enter into any agreement granting any holder or prospective holder of
any securities of the Company registration rights with respect to such
securities (a “Registration Rights Agreement”) unless such new registration
rights, including standoff obligations, are on a pari passu basis with or are
subordinate to the registration rights granted to the Holders hereunder.  Each Holder hereby consents and agrees to the
modification of such Holder’s rights under this Section 10 consistent with
the foregoing and agrees to execute a registration rights agreement submitted
by the Company setting forth such modifications and not otherwise unfavorably
modifying the rights of such Holder.


 


Section 10.11                          “Market Stand-Off” Agreement.


 


Each holder hereby agrees that it shall not, to the
extent requested by the Company and an underwriter of Common Stock (or other
securities) of the Company, sell or otherwise transfer or dispose (other than
to donees who agree to be similarly bound) of any securities of the Company
(other than securities registered in the offering) whether or not acquired by
such Holder under this Agreement during a reasonably and customary period of
time not to exceed 180 days, as agreed to by the Company and the
underwriters, following the effective date of a registration statement of the
Company filed under the Securities Act; provided, however, that:


 


(a)                                  such agreement shall be applicable only
to the first such registration statement of the Company which covers shares (or
securities) to be sold on its behalf to the public in an underwritten offering;
and


 


39





















 


(b)                                 all officers and directors of the
Company, all other persons with registration rights (whether or not pursuant to
this Agreement) and all holders of at least 5% of the Company’s outstanding
stock and of an aggregate of 50% of the Company’s outstanding stock enter into
similar agreements; and


 


(c)                                  in the event the underwriter or the
Company releases any shareholder from the terms of such shareholder’s “market
stand-off” agreement prior to the expiration of the relevant period (not to
exceed 180 days) all of the Holders are released from the terms of this Section 10.11
or any other “market stand-off” agreement to which such holder is a party.


 


In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of each Holder (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such reasonable and
customary period.


 


Section 10.12                          Amendment of Registration
Rights.


 


Any provision of this Section 10 may be amended
and the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of at least a majority of the
Registrable Securities.  Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any securities purchased under this Agreement (including securities
into which such securities are convertible), each transferee or future holder of
all such securities, and the Company.


 


ARTICLE XI

MISCELLANEOUS


 


Section 11.1                                Expenses.


 


Except to the extent expressly provided otherwise in
this Agreement, the Company, on the one hand, and Investor, on the other hand,
shall bear their respective expenses, costs and fees (including attorneys’ and
auditors’ fees) in connection with the transactions contemplated hereby,
including the preparation, execution and delivery of this Agreement and
compliance herewith, whether or not the transactions contemplated hereby shall
be consummated.


 


Section 11.2                                Severability.


 


If any provision of this Agreement, including any
phrase, sentence, clause, Section or subsection is inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering the provision in question inoperative or unenforceable in any other
case or circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.


 


Section 11.3                                Notices.


 


All notices, requests, demands, approvals, consents,
waivers and other communications required or permitted to be given under this
Agreement (each, a “Notice”) shall be in writing and


 


40





















 


shall be (a) delivered personally,
(b) mailed by first-class mail or certified mail, return receipt
requested, postage prepaid, (c) sent by next-day or overnight mail or
delivery, or (d) sent by facsimile transmission, provided that a
confirmation statement is retained by sender.


 


(i)                  if to Investor, to:


 


L-3 Communications Corporation

600 Third Avenue

New York, NY  10016

Facsimile:  (212) 805-5494

Attention:  Christopher C. Cambria, Esq.


 


(ii)               if to Company, to:


 


Innovative Micro Technology, Inc.

75 Robin Hill Rd.

Santa Barbara, CA  93117

Facsimile:  805-967-2677

Attention:  John Foster, President


 


With a copy (which shall not comprise notice) to
James J. Slaby, Esq.


 


Sheppard, Mullin, Richter & Hampton LLP

333 S. Hope Street, 48th Floor

Los Angeles, CA  90017

Facsimile:  (213) 620-1398


 


or, in each case, at such other address as may be
specified in a Notice to the other party hereto.  All Notices shall be deemed effective and
given upon receipt.


 


Section 11.4                                Attorneys’
Fees.


 


If any party hereto initiates any legal action arising
out of or in connection with this Agreement, the prevailing party shall be
entitled to recover from the other party all reasonable attorneys’ fees, expert
witness fees and expenses incurred by the prevailing party in connection
therewith.


 


Section 11.5                                Liability for Transfer
Taxes.


 


Company shall be responsible for and pay in a timely
manner all sales, use, value added, documentary, stamp, gross receipts,
registration, transfer, conveyance, excise, recording, license and other
similar Taxes and fees (“Transfer Taxes”), arising out of or in
connection with or attributable to the transactions effected pursuant to this
Agreement.  Each party hereto shall
prepare and timely file all Tax Returns required to be filed in respect of Transfer
Taxes that are the primary responsibility of such party under applicable law; provided,
however, that such party’s preparation of any such Tax Returns shall be
subject to the other party’s approval, which approval shall not be withheld or
delayed unreasonably.


 


41





















 


Section 11.6                                Headings.


 


The headings contained in this Agreement are for
purposes of convenience only and shall not affect the meaning or interpretation
of this Agreement.


 


Section 11.7                                Entire Agreement.


 


This Agreement (including the Schedules and Exhibits
hereto) constitutes the entire agreement and supersedes all prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof.


 


Section 11.8                                Counterparts.


 


This Agreement may be executed (including by facsimile
transmission) with counterpart signature pages or in several counterparts, each
of which shall be deemed an original and all of which shall together constitute
one and the same instrument.


 


Section 11.9                                Governing Law, etc.


 


This Agreement shall be governed in all respects,
including as to validity, interpretation and effect, by the internal laws of
the State of New York without giving effect to the conflict of laws rules
thereof.  The Investor and the Company
hereby irrevocably submit to the jurisdiction of the courts of the State of New
York, and the Federal courts of the United States of America located in the
Southern District of New York solely in respect of the interpretation and
enforcement of the provisions of this Agreement and of the documents referred
to in this Agreement, and hereby waive, and agree not to assert, as a defense
in any action, suit or proceeding for the interpretation or enforcement hereof
or of any such document, that it is not subject thereto or that such action,
suit or proceeding may not be brought or is not maintainable in said courts or
that the venue thereof may not be appropriate or that this Agreement or any of
such document may not be enforced in or by said courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware State or Federal court.  The Investor and the Company hereby consent
to and grants any such court jurisdiction over the person of such parties and
over the subject matter of any such dispute and agrees that mailing of process
or other papers in connection with any such action or proceeding in the manner
provided in Section 11.3, or in such other manner as may be
permitted by law, shall be valid and sufficient service thereof.


 


Section 11.10                          Binding
Effect.


 


This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns.


 


Section 11.11                          No Third Party Beneficiaries.


 


Except as provided in Article IX with
respect to indemnification of Indemnified Parties hereunder, nothing in this
Agreement shall confer any rights upon any Person other than the parties hereto
and their respective heirs, legal representatives, successors and permitted
assigns.


 


42





















 


Section 11.12                          Amendment; Waivers, etc.


 


No discharge of this Agreement, and no waiver
hereunder, shall be valid or binding unless set forth in writing and duly
executed by the party against whom enforcement of the discharge or waiver is
sought.  Any such waiver shall constitute
a waiver only with respect to the specific matter described in such writing and
shall in no way impair the rights of the party granting such waiver in any
other respect or at any other time. 
Neither the waiver by any of the parties hereto of a breach of or a
default under any of the provisions of this Agreement, nor the failure by any
of the parties, on one or more occasions, to enforce any of the provisions of
this Agreement or to exercise any right or privilege hereunder, shall be
construed as a waiver of any other breach or default of a similar nature, or as
a waiver of any of such provisions, rights or privileges hereunder.


 


Section 11.13                          Company Acknowledgement.  Company acknowledges that the
representations and warranties contained in this Agreement and in any document
or instrument delivered to Investor pursuant hereto or in connection herewith
shall not be deemed waived or otherwise affected by any investigation by
Investor, its officers, directors, employees, counsel, accountants, advisors,
representatives and agents.


 


Section 11.14                          Investor Acknowledgement. 
Investor acknowledges that the representations and warranties contained
in this Agreement and in any document or instrument delivered to the Company
pursuant hereto or in connection herewith shall not be deemed waived or
otherwise affected by any investigation by the Company, its officers,
directors, employees, counsel, accountants, advisors, representatives and
agents.


 


Section 11.15                          Titles and Subtitles.   The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement.


 


The next page is the
signature page.


 


43





















 


IN WITNESS WHEREOF, the parties have duly executed
this Stock Purchase Agreement as of the date first above written.


 


	
   

  	
  Investor:

  
	
   

  	
   

  
	
   

  	
  L-3 COMMUNICATIONS CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/David Reilly

  	
   

  
	
   

  	
  Name: David Reilly

  
	
   

  	
  Title: Vice President

  
	
   

  	
   

  
	
   

  	
  Company:

  
	
   

  	
   

  
	
   

  	
  INNOVATIVE MICRO TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John Foster

  	
   

  
	
   

  	
  Name: John Foster

  
	
   

  	
  Title: President and Chief Executive
  Officer

  
					



 


44





















 


	
  EXHIBITS

  
	
   

  	
   

  
	
  Exhibit A

  	
  Forms of Warrant

  
	
  Exhibit B

  	
  Form of Officer’s Certificate

  
	
   

  	
   

  
	
  SCHEDULES

  
	
   

  	
   

  
	
  Schedule 3.6

  	
  Schedule of Liabilities

  
	
  Schedule 3.8

  	
  Material Adverse Changes

  
	
  Schedule 3.9(a)

  	
  Litigation

  
	
  Schedule 3.9(b)

  	
  Unsatisfied Judgments, Consent Decrees,
  Injunctions

  
	
  Schedule 3.11(a)

  	
  Real Property

  
	
  Schedule 3.11(c)

  	
  Permitted Liens

  
	
  Schedule 3.12

  	
  Contracts

  
	
  Schedule 3.13

  	
  Warranties

  
	
  Schedule 3.14(e)

  	
  Intellectual Property Supplied by the
  Company Without a Binding License

  
	
  Schedule 3.15

  	
  Insurance Policies

  
	
  Schedule 3.16(a)

  	
  Non-Compliance With Environmental Laws

  
	
  Schedule 3.16(b)

  	
  Other Environmental Matters

  
	
  Schedule 3.17

  	
  Exceptions to At-Will Employment

  
	
  Schedule 3.20

  	
  Dealings With Affiliates

  
	
  Schedule 3.26

  	
  Retention Agreements

  
	
  Schedule 3.28

  	
  Government Contracts

  
	
  Schedule 3.31

  	
  Registration Rights

  
	
  Schedule 3.32

  	
  Officers, Directors and Shareholders