**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 HEREBYHAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIESACT”), OR QUALIFIED UNDER ANY STATE OR NON-U.S. SECURITIES LAWS.  THE SECURITIES ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTIONSAFFORDED BY REGULATION D PROMULGATED UNDER THE SECURITIES ACT.  THE SECURITIES MAY NOT BE TRANSFERRED ORRESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE SECURITIES ACT ANDAPPLICABLE STATE AND NON-U.S. SECURITIES LAWS, UNLESS AN EXEMPTION FROMREGISTRATION AND QUALIFICATION UNDER THE SECURITIES ACT AND SUCH LAWS IS THENAVAILABLE.

 

THIS AGREEMENT HAS NOT BEEN FILED WITH OR REVIEWED ORAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY THE ATTORNEY GENERALOR SECURITIES AGENCY OF ANY STATE OR NON-U.S. JURISDICTION.  NONE OF THE FOREGOING HAS PASSED UPON ORENDORSED THE MERITS OF THIS OFFERING OR THE SECURITIES.  ANY REPRESENTATION TO THE CONTRARY ISILLEGAL.

 

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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                 |   |

 

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| 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.             |   |

 

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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”).

 

RECITALS :

 

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

 

B.                                     Upon the terms and subject to the conditions set forthherein, Investor wishes to purchase (i) 467,500 shares of commonstock, $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 CommonStock at a purchase price of $5.35 per share and a warrant to purchase up to anadditional 350,000 shares of Common Stock at a purchase price of $7.29 pershare, such warrants in the forms attached hereto as Exhibit A (the “Warrants”).

 

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

 

D.                                    Capitalized terms have the meaningsassigned to them in Article I.

 

NOW, THEREFORE, in consideration of the foregoingfacts and the mutual covenants, representations and warranties made herein andother good and valuable consideration, the receipt and sufficiency of whichhereby are acknowledged, the parties hereto agree as follows:

 

ARTICLE IDEFINITIONS

 

Section 1.1                                      Definitionof Certain Terms.

 

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

 

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

 

“Agreement”: means this Stock Purchase Agreement (including the Exhibits and theSchedules 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 anyGovernmental Authority.

 

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

 

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“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 shallinclude any securities issued or issuable with respect to the Common Stock, byway 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 “controlledby” and “under common control with”) means the possession, direct orindirect, of the power to direct or cause the direction of the management andpolicies of a person, whether through the ownership of voting securities, bycontract or otherwise.

 

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

 

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

 

“Environmental Laws”:  means all Applicable Laws relating to theprotection 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 ofany Hazardous Substances.

 

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

 

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Property, by Company, and (ii) the environmentalconditions existing on the Closing Date on, under, above, or about any RealProperty 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 anyGovernmental Authority.

 

“Governmental Authority”:  means any nation or government, any state orother political subdivision thereof, any entity exercising executive,legislative, judicial, regulatory or administrative functions of or pertainingto government, including any government authority, agency, department, board,commission or instrumentality of the United States, any State of the UnitedStates 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 Companyprior to the Closing Date which, if accepted, would result or may result in aGovernment 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, changeorder, Government Bid or other arrangement of any kind, between the Company and(i) any Governmental Authority, (ii) any prime contractor of aGovernmental Authority in its capacity as a prime contractor, or (iii) anysubcontractor with respect to any contract of a type described inclauses (i) or (ii) above.

 

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

 

“include,” “includes” and “including”:  shall be construed as if followed by thephrase “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 otherindications of origin, sponsorship or affiliation, together with the goodwillassociated therewith (whether the

 

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foregoing are registered or unregistered);registrations thereof in any jurisdiction and applications to register any ofthe foregoing in any jurisdiction, and any extension, modification or renewalof any such registration or application; (b) any and all inventions,developments, improvements, discoveries, know how, concepts and ideas, whetherpatentable or not in any jurisdiction; (c) any and all patents,revalidations, industrial designs, industrial models and utility models, patentapplications (including reissues, continuations, divisions,continuations-in-part and extensions) and patent disclosures; (d) any andall mask works and other semiconductor chip rights and registrations thereof;(e) any and all non-public information, trade secrets and proprietary orconfidential information and rights in any jurisdiction to limit the use ordisclosure thereof by any Person; (f) any and all writings and otherworks, whether copyrighted, copyrightable or not in any jurisdiction, suchworks including computer programs and software (including source code, objectcode, data and databases); (g) any and all copyrights, copyrightregistrations and applications for registration of copyrights in anyjurisdiction, and any renewals or extensions thereof; (h) any and allother intellectual property or proprietary rights; (i) any and allagreements, licenses, immunities, covenants not to sue and the like relatingany of to the foregoing; and (j) any and all claims or causes of actionarising out of or related to any infringement or misappropriation of any of theforegoing.

 

“Inventories”: means all inventories of raw materials, work in process, finishedproducts, goods, spare parts, replacement and component parts, and office andother 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 orPeter 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 andoccupancy 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, titledefect, title retention agreement, voting trust agreement, interest, equity,option, lien, right of first refusal, charge or other restriction orlimitation.

 

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

 

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“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, GovernmentalAuthority 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 movingof any materials through, into or upon, any land, soil, surface water, groundwater or air, or otherwise entering into the environment.

 

“Reorganization Plan”:  means the Third Amended Plan ofReorganization 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 Sharesand 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 thehead of this Agreement, and also shall include any securities issued orissuable with respect thereto, by way of a stock dividend, stock split,combination of shares, recapitalization, restructuring, merger, consolidationor other reorganization of the Company.

 

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

 

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

 

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“Tax Return”: means any return, report, declaration, form, claim for refund orinformation return or statement relating to Taxes, including any schedule orattachment 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, grossreceipts, 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 ofthe Code), real property, personal property, ad valorem, intangibles, rent,occupancy, license, occupational, employment, unemployment insurance, socialsecurity, disability, workers’ compensation, payroll, health care, withholding,estimated or other similar tax, duty or other governmental charge or assessmentor deficiencies thereof, and including any interest, penalties or additions totax attributable to the foregoing.

 

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

 

“Treasury Regulations”:  means the regulations prescribed pursuant tothe 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 thisAgreement.

 

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

 

Section 1.2                                      Construction.

 

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

 

ARTICLE IISALE 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 toInvestor:  (1) the Shares; and(2) the Warrants, for an aggregate purchase price of Two Million FiveHundred Thousand Dollars ($2,500,000) (the “Purchase Price”).

 

Section 2.2                                      Place and Date.

 

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

 

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Section 2.3                                      Payment andDelivery.

 

At the Closing, Investor shall deliver the PurchasePrice by wire transfer in immediately available funds to the account designatedby the Company, against delivery by the Company of certificates evidencing theShares and the certificates representing the Warrants.

 

ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The Company represents and warrants to Investor asfollows:

 

Section 3.1                                      Corporate Status.

 

(a)                                  The Company is a corporation dulyorganized, validly existing and in good standing under the laws of the State ofDelaware, with full corporate power and authority to carry on its business andto own or lease and to operate its properties as and in the places where itsbusiness is conducted and such properties are owned, leased or operated.  The Company is duly qualified or licensed todo business and is in good standing in any jurisdiction where the character ofits properties owned or leased or the nature of its activities would require itto be so qualified or registered, except where the failure to do so would nothave a Material Adverse Effect on the Company.

 

(b)                                 The Company has delivered to Investortrue, complete and correct copies of the Company’s certificate of incorporationand by-laws, as amended and in effect on the date hereof and on the ClosingDate.  The Company is not in violation ofits certificate of incorporation or by-laws. The stock books of the Company that have been made available to Investorfor its inspection are true, correct and complete.  The minute books of the Company, aspreviously made available to Investor, contain accurate records of all meetingsof and resolutions of, or written consents by, the stockholders or Board ofDirectors 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 performfully its obligations hereunder and to consummate the transactions contemplatedhereby.  The execution and delivery bythe Company of this Agreement, and the consummation of the transactionscontemplated hereby, have been duly authorized by all requisite corporateaction of the Company. The Company has duly executed and delivered thisAgreement.  This Agreement is a legal,valid and binding obligation of the Company, enforceable against it inaccordance with its terms, subject, as to enforceability, to bankruptcy,insolvency, reorganization and other laws of general applicability relating toor affecting creditors’ rights and to general principles of equity.

 

Section 3.3  Capital Stock of the Company.

 

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

 

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

 

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than 446,270 shares of Common Stock in 2003 pursuantto 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 andoutstanding.

 

(iii)                               Other Securities.  Employeeoptions to acquire from the Company an aggregate of 1,664,897 shares ofcapital stock at an average exercise per share of $5.09.  Warrants to acquire from the Company anaggregate of 867,000 shares of capital stock at an average exercise price of$6.92.  In addition, the Company will buyback its issued Convertible Notes in a principal amount of $4,136,918, whichare convertible into Common Stock at a price of $8.20 per share.  Further, the Company has issued reciprocalwarrants and calls with a term ending November 16, 2004 at exercise pricesof $20.00 and above, the exercise of which will have no net effect on theCompany’s outstanding capital stock.  TheCompany has granted 500,000 restricted common shares under the 2001 StockIncentive 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 ofthe Company are validly issued, fully paid and nonassessable and have beenissued 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-basedor 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 capitalstock of any class, or other securities of the Company (including any agreementor commitment obligating the Company to enter into any employee compensationarrangement based on any valuation or transaction price of, or change ofownership in, shares of its capital stock), and the Company shall not issue,grant, award, purchase, acquire, sell or transfer such capital stock or othersecurities prior to the Closing.  Thereare no voting trusts, proxies or other agreements or understandings to whichthe Company is a party with respect to the voting of capital stock.

 

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

 

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

 

Section 3.4                                      No Conflicts, etc.

 

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

 

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

 

Section 3.5                                      FinancialStatements.

 

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

 

Section 3.6                                      Absence ofUndisclosed Liabilities.

 

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

 

Section 3.7                                      Taxes.

 

(a)                                  The Company has duly and timely filed allTax Returns with respect to Taxes required to be filed on or before the ClosingDate.  All such tax returns are true,complete and correct.  All other taxesowed by the Company (whether or not shown on any Tax Return) have been duly andtimely paid.  The Company has notextended or otherwise waived the benefit of any applicable statute oflimitations or agreed to any extension of time with respect to a Tax assessmentor deficiency.

 

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

 

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

 

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foreign income Tax Returns, examination reports, andstatements of deficiencies assessed against or agreed to by the Company sincethe 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 ofChanges.

 

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

 

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

 

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

 

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

 

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

 

(e)                                  received any noticeof termination of any Contract;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(n)                                 made any declaration of, or set aside orpaid, any dividend or other distribution (whether in cash, stock or otherproperty) with respect to the capital stock of the Company, or issued, pledgedor sold any shares of capital stock of the Company, or any other securities orrights, convertible into or exchangeable for or conferring the right topurchase shares of capital stock of the Company (or entered into any agreement,arrangement or other understanding to do the same) or directly or indirectlypurchased, redeemed, retired or otherwise acquired any shares of capital stockof the Company or other securities convertible into, exchangeable for orconferring the right to purchase shares of capital stock of the Company (orentered into any agreement, arrangement or other understanding to do the same);or

 

(o)                                 taken any action or omitted to take anyaction 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 theKnowledge of the Company, threatened against or relating to the Company seekingunspecified damages, damages in excess of $50,000 or any injunctive or otherequitable relief except for any unresolved claims that are not material in connectionwith the Company’s bankruptcy.

 

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

 

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

 

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(d)                                 Since November 16, 2001 and to theKnowledge of the Company, during the past five years, there have been noproduct liability claims, suits, actions or proceedings involving the Companyor relating to products or services manufactured, sold or provided by theCompany.

 

Section 3.10                                Compliance with Laws; Governmental Approvals andConsents.

 

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

 

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

 

Section 3.11                                Assets.

 

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

 

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

 

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

 

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

 

Section 3.12                                Contracts.

 

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

 

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

 

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

 

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

 

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

 

Section 3.14                                IntellectualProperty.

 

All Intellectual Property used by the Company eitheris owned by the Company or used pursuant to a valid license which is notterminable due to any breach or noncompliance by the Company and which shallnot be adversely affected by the transactions contemplated herein.  None of the Intellectual Property owned bythe Company is subject to any other Lien in favor of any third party and theCompany owns all right, title and interest therein and thereto.

 

(a)                                  No claims with respect to anyIntellectual Property have been asserted or threatened by any Person(i) against the Company, or (ii) against any other Person based onits permitted use of any of the Company’s Intellectual Property which, ifdetermined adversely, could have a material adverse effect on the Company.  No permitted use of any of the Company’sIntellectual Property by any Person violates the Intellectual Property of anyother Person and no valid grounds exist for any bonafide claimsagainst the Company or any such Person with respect to any IntellectualProperty.  Without limiting thegenerality of the foregoing, no Person ever employed or otherwise engaged bythe Company has asserted or threatened any claim against the Company relatingto any Intellectual Property.  Allgranted and issued patents, copyright registrations, and registered trademarksand service marks and all copyrights held by the Company are valid, enforceableand subsisting.  To the knowledge of theCompany, there has not been, nor is there presently, any unauthorized use,infringement or misappropriation of any of its Intellectual Property by anyPerson.  The Company has the full rightto possess, use, copy, distribute, display, transfer and license allIntellectual Property material to its business or otherwise necessary to itsbusiness as presently conducted.

 

(b)                                 No Intellectual Property of the Companyis 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 anyagreement to indemnify any other Person against any charge of infringement ofany Intellectual Property.  The Companyhas not entered into any agreement granting any third party the right to bringinfringement actions with respect to, or otherwise to enforce rights withrespect to, any Intellectual Property. The Company has the exclusive right to file, prosecute and maintain allapplications and registrations with respect to the Intellectual Property.

 

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

 

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been lost or to the knowledge of the Company are injeopardy of being lost.  The Company haspaid all fees, annuities and all other payments which have heretofore becomedue to any governmental or regional authority with respect to its IntellectualProperty and has taken all steps reasonable and necessary to prosecute andmaintain the same.

 

(d)                                 The Company has not transferred its titlein or to any copy of any computer program or software.  No computer program or software has beensupplied by the Company to any Person except pursuant to a binding licenseprohibiting further distribution and disclosure.  All source code for all computer programs andsoftware is in the sole possession of the Company and has been maintainedstrictly confidential.  The Company hasno obligation to afford any Person access to any source code for any computerprogram.

 

(e)                                  Except through binding licenses orsublicensing agreement, the Company has not transferred its title in or to anyIntellectual Property.  Except asdisclosed on Schedule 3.13(e), no Intellectual Property has beensupplied by the Company to any Person except pursuant to a binding licenseprohibiting further distribution and disclosure.

 

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

 

Section 3.15                                Insurance.

 

Schedule 3.15 contains a true, complete and correct list of allinsurance 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 totrue, complete and correct copies of all such policies together with all ridersand amendments thereto.

 

Such policies are in full force and effect, and allpremiums 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 complywould not have a Material Adverse Effect, the Company is and has been incompliance with all applicable Environmental Laws and, to the knowledge of theCompany, no violation by the Company is being alleged of any applicableEnvironmental Law.

 

(b)                                 Other Environmental Matters. Except as described on Schedule 3.15(b) and where such action orcondition would not cause a Material Adverse Effect, the Company has not causedor taken any action that resulted in, and the Company is not subject to, anyliability 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 andgroundwater conditions at such properties, or (ii) the use, management,handling, transport, treatment, generation, storage, disposal or Release of anyHazardous Substances by the Company.

 

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

 

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(d)                                 No Proceedings. The Company has not received notice or other communication concerningany alleged liability for Environmental Liabilities and Costs in connectionwith 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 toany Leased Real Property.

 

Section 3.17                                Employees, LaborMatters, etc.

 

The Company is not a party to or bound by anycollective bargaining agreement and there are no labor unions or other organizationsrepresenting, purporting to represent or attempting to represent any employeesof the Company.  To the knowledge of theCompany, there has not occurred or been threatened any material strike,slowdown, picketing, work stoppage, concerted refusal to work overtime or othersimilar labor activity with respect to any employees of the Company.  The Company has no knowledge of any labordisputes currently subject to any grievance procedure, arbitration or litigationor any representation petition pending or threatened with respect to anyemployee of the Company.  The Company hasno knowledge that any officer or key employee, or that any group of keyemployees, intends to terminate their employment with the Company, nor does theCompany have a present intention to terminate the employment of any of theforegoing.

 

Except as described in Schedule 3.17, theemployment of all employees of the Company is terminable at will, with orwithout cause, and without the Company thereby incurring liability for severanceor 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 afully diluted basis, treating all outstanding options, warrants and convertiblesecurities as exercised, shall be fourteen and twenty-nine one-hundredthspercent (14.29%).

 

Section 3.19                                Brokers, Finders, etc.

 

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

 

Section 3.20                                Dealings withAffiliates.

 

Schedule 3.20 sets forth a complete list (including the parties) ofall contracts, arrangements or other agreements (written or oral) involving anannual receipt or expenditure of $10,000 or more between the Company and anyshareholder of the Company, any partnership, corporation or other entity ownedand/or operated by any shareholder of the Company or any relative(s) of anyshareholder of the Company or any Affiliates known to the Company to be now ineffect.  The Company heretofore hasdelivered or made available to Investor true and complete copies (or a detailedsummary in the case of an oral agreement) of each such contract, arrangement orother agreement.

 

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Section 3.21                                Disclosure.  Norepresentation or warranty of Company in this Agreement or in any certificateor instrument delivered by Company in accordance with the terms hereof containsany untrue statement of a material fact or omits any statement of a materialfact necessary in order to make the statements contained herein or therein, inlight of the circumstances in which they were made, not misleading.

 

Section 3.22                                This section wasintentionally omitted.

 

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

 

Section 3.24                                Effect of Transaction.

 

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

 

Section 3.25                                AntitakeoverProvisions.

 

No “fair price”, “moratorium”, “control shareacquisition” or other form of antitakeover statute, regulation, charterprovision or contract is applicable to the purchase of the Shares by Investoror any of the other transactions contemplated by this Agreement.

 

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

 

Section 3.27                                Real Property HoldingCompany.

 

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

 

Section 3.28                                Government Contracts.  Except as setforth on Schedule 3.28:

 

(a)                                  the Company is not a party to anyGovernment Contracts.

 

(b)                                 (i) to the Company’s Knowledge, none of the Company’s employees, consultantsor agents is (or during the last five years has been) under administrative,civil or criminal investigation, indictment or information by any GovernmentalAuthority; (ii) there is not pending any audit or investigation of the Company,its officers, employees or representatives nor within the last five years hasthere been any audit or investigation of the Company, officers, employees orrepresentatives resulting in a material adverse finding with respect to anyalleged irregularity, misstatement or omission arising under or relating to anyGovernment 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 anynon-U.S. government with respect to any alleged irregularity, misstatement oromission arising under or relating to a Government Contract or Government

 

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

 

(c)                                  there are (i) no outstanding claimsagainst the Company, either by the U.S. Government or any non-U.S. Governmentor by any prime contractor, subcontractor, vendor or other third party arisingunder or relating to any Government Contract or Government Bid, and (ii) nodisputes between the Company and the U.S. Government or any non-U.S. Governmentunder the Contract Disputes Act or any other Federal statute or between theCompany and any prime contractor, subcontractor or vendor arising under orrelating to any such Government Contract or Government Bid.  There are no facts that could reasonably beexpected to result in a claim or dispute under clause (i) or (ii) of theimmediately preceding sentence.

 

(d)                                 neither the Company nor, to the Company’sKnowledge, any of its employees, consultants or agents is (or during the lastfive 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) thesubject of a finding of non-responsibility or ineligibility for U.S. Governmentor non-U.S. government contracting.  TheCompany has conducted its operations in compliance with all requirements of allmaterial laws pertaining to all Government Contracts and Government Bids.

 

Section 3.29                                Affiliated GroupLiability.

 

The Company (a) has not been a member of anaffiliated group filing a consolidated income tax return; and (b) has noliability 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 orregulation), as a transferee or successor, by contract, or otherwise.

 

Section 3.30                                Inventionand Secrecy Agreements.

 

Each employee and consultant of the Company hasexecuted a form of employee’s or consultant’s invention and proprietaryinformation agreement, as the case may be, substantially the same as one of theforms provided to Investor.  The companyis not aware that any employees or consultants are in violation thereof, andthe Company will use its commercially reasonable efforts to prevent any suchviolation.

 

Section 3.31                                RegistrationRights.

 

Except as set forth in Schedule 3.31, the Companyhas not granted or agreed to grant any registration rights, includingpiggy-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 atJune 28, 2003, which list is complete, and which has not changed sincethen except as set forth in Schedule 3.32.

 

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Section 3.33                                NoIntervention.

 

The Company has not received notice that any thirdparty has taken any action which prevents or may prevent the Company fromcontinuing its operations or from further developing the technologycontemplated by this Agreement.

 

ARTICLE IVREPRESENTATIONS AND WARRANTIES OF INVESTOR

 

The Investor represents and warrants to the Company asfollows:

 

Section 4.1                                      CorporateStatus.

 

The Investor is a corporation duly organized, validlyexisting 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 toexecute and deliver this Agreement, to perform fully its obligations hereunder,and to consummate the transactions contemplated hereby.  The execution and delivery by Investor ofthis 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 deliveredthis Agreement.  This Agreement is alegal, valid and binding obligation of Investor, enforceable against it inaccordance with its terms, subject, as to enforceability, to bankruptcy,insolvency, reorganization and other laws of general applicability relating toor affecting creditors’ rights and to general principles of equity.

 

Section 4.3                                      NoConflicts, etc.

 

The execution, delivery and performance by Investor ofthis 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 orwithout the giving of notice or the lapse of time or both) (i) thecertificate of incorporation or by-laws of Investor, or (ii) any contract,agreement or other instrument applicable to Investor or any of its propertiesor assets, except for violations and defaults that, individually and in theaggregate, have not and shall not materially impair the ability of Investor toperform 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 inconnection with or relating to the transactions contemplated by this Agreementor of any action taken or to be taken in connection herewith or theconsummation of the transactions contemplated hereby.

 

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Section 4.5                                      Brokers, Finders,etc.

 

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

 

Section 4.6                                      Purchase Entirelyfor Own Account.

 

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

 

Section 4.7                                      InvestmentExperience.

 

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

 

Section 4.8                                      Disclosure ofInformation.

 

The Investor believes it has received all theinformation it considers necessary or appropriate for deciding whether topurchase the Securities.  The Investorfurther represents that it has had an opportunity to ask questions and receiveanswers from the Company regarding the terms and conditions of the offering ofthe Securities and the business, properties, prospects and financial conditionof the Company.

 

Section 4.9                                      AccreditedInvestor.

 

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

 

Section 4.10                                Restricted Securities.

 

The Investor understands that the Securities arecharacterized as “restricted securities” under the federal securities laws,inasmuch as they are being acquired from the Company in a transaction notinvolving a public offering, and that under such laws and applicableregulations such securities may be resold without registration under theSecurities Act only in certain limited circumstances.  In this connection Investor represents thatit is familiar with Rule 144 promulgated under the Securities Act, aspresently in effect, and understands the resale limitations imposed thereby andby the Securities Act, and that it is able, without materially impairing itsfinancial condition, to hold the Securities for an indefinite period of time.

 

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ARTICLE VCOVENANTS

 

Section 5.1                                      Covenants of theCompany.

 

(a)                                  Public Announcements. Except as required by Applicable Law (in which case the nature of theannouncement shall be described to Investor and Investor shall be allowedreasonable time to comment prior to dissemination to the public), the Companyshall not make any public announcement in respect of this Agreement or thetransactions 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 visitand inspect any of the properties of the Company, including its books ofaccount (and to make copies thereof and take extracts therefrom), and todiscuss its affairs, finances and accounts with its officers, administrativeemployees and independent accountants, all at such reasonable times and asoften as may be reasonably requested; provided, however, thatInvestor agrees to treat as confidential all the information so provided anddesignated by the Company as confidential, and not to use such information inany way reasonably foreseeable to be detrimental to the Company.  Investor further agrees that it shalldisclose such information only to directors, officers, employees andrepresentatives of Investor who need to know such information for the purposeof evaluating the performance and financial condition of the Company andassisting Investor in the performance of its fiduciary duties.  Investor agrees that such directors,officers, employees and representatives shall be informed by Investor of the confidentialnature of such information, that they shall be directed by Investor to treatsuch information confidentially, and Investor shall be responsible for anybreach of confidentiality by such directors, officers, employees orrepresentatives, up to a maximum aggregate liability that shall not exceedInvestor’s profit derived from such disclosure.

 

Notwithstanding the foregoing, if Investor or itsdirectors, officers, employees or representatives is legally compelled todisclose information disclosed under this Section 5.1(b), Investor willprovide the Company with prompt notice so that the Company may seek aprotective order or other appropriate remedy or waive compliance with this Section 5.1(b).  If such protective order or other remedy isnot 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 pursuantthereto, but only such information as it is advised is legally required.  The requirement of confidential treatment inthis Section 5.1(b) shall not apply to information which:  (1) becomes generally available to the publicother than as a result of a disclosure by Investor, (2) was available on anon-confidential basis prior to its disclosure to Investor; (3) was receivedfrom a third party without similar restriction or without breach of thisAgreement; (4) was independently developed by Investor; or (5) was furnished toa 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 totake all actions and to do all things necessary to consummate the transactionscontemplated hereby by the Closing Date;

 

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

 

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(iii)                               use commercially reasonable efforts to obtain, orcause to be obtained, all Consents (including all Governmental Approvals andany Consents required under any Contract) necessary to be obtained by it inorder to consummate the sale and issuance of the Securities pursuant to thisAgreement.

 

(c)                                  Further Assurances. Following the Closing, the Company shall, from time to time, execute anddeliver such additional instruments, documents, conveyances or assurances andtake such other actions as shall be necessary, or otherwise reasonablyrequested by Investor, to confirm and assure the rights and obligationsprovided for in this Agreement and render effective the consummation of thetransactions contemplated hereby.

 

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

 

(1) as soon aspracticable in fiscal year 2003,  and inany event within 90 days after the end of each fiscal year beginning in fiscalyear 2004 of the Company, an income statement for such fiscal year, a balancesheet 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 inaccordance with generally accepted accounting principles (“GAAP”), and auditedand certified by independent public accountants of nationally recognizedstanding selected by the Company;

 

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

 

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

 

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

 

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

 

(e)                                  Intentionally leftblank.

 

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

 

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

 

(g)                                 Board Participation. Immediately following the Closing and for as long as Investor owns atleast 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/orappointed to the Company’s Board of Directors one member designated by Investorand (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’sBoard of Directors fully informed of any and all substantive discussions withpotential acquirers of all or part of the share capital of the Company or allor substantially all of its assets.  Suchrepresentative(s) will be informed of such substantive discussions as soon asthey commence or as soon as reasonably practicable thereafter.

 

(i)                                     Preferred Customer. The Investor and Investor’s affiliates shall be a preferred customer ofthe Company and shall be provided priority access to and use of the Company’sproducts 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 nohigher than the lowest price charged to any other customer of the Company forsimilar products and services.

 

(j)                                     Military Market Exclusivity. The Company grants Investor a right of first refusal to exclusivelyexploit and sell the Company’s technology to the Military Market for anyproduct or application that Investor believes, and can demonstrate, wouldcompete with any Investor product or application (a “Competitive Product”).  Should the Company be approached by a thirdparty with a proposal to collaborate on a Competitive Product, Investor shallautomatically forfeit its right of exclusivity if:  (i) it decides not to initiate productdevelopment work with the Company on such Competitive Product within one yearof receiving written notice from the Company of such third party proposal; or(ii) if Investor provides the Company with a written waiver of itsexclusivity right for such Competition Product any time after receiving writtennotice from the Company of such third party proposal.  With respect to any other Military Marketapplication that is not a Competitive Product, the Company and Investor willdiscuss collaboration on a good faith basis prior to the Company concluding anagreement to go forward with any other partner. For the purpose of this agreement the term “Military Market” will meanall 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 GuardForces, and foreign equivalents of any of the foregoing.  The term “Military Market” will not includeResearch and Development contracts given by government agencies such as DARPA,DTRA, NIH, NSF and others. The term “Military Market” shall include, interalia, sales or licensing of the Company’s technology, or products thatincorporate such, to any suppliers, resellers or contractors using said Companytechnology in products for distribution to any domestic or foreign armedservice or intelligence agency.

 

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Section 5.2                                      Covenants ofInvestor.

 

(a)                                  Public Announcements. Except as required by Applicable Law (in which case the nature of theannouncement shall be described to Company and the Company shall be allowedreasonable time to comment prior to dissemination to the public), Investorshall not, and shall not permit its Affiliates to, make any public announcementin respect of this Agreement or the transactions contemplated hereby withoutthe prior written consent of the Company.

 

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

 

(c)                                  Further Assurances. Following the Closing, Investor shall, from time to time, execute anddeliver such additional instruments, documents, conveyances or assurances andtake such other actions as shall be necessary, or otherwise reasonablyrequested by the Company, to confirm and assure the rights and obligationsprovided for in this Agreement and render effective the consummation of the transactionscontemplated hereby.

 

Section 5.3                                      Legends.

 

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

 

(a)                                  The following legendunder the Securities Act:

 

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

 

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

 

Section 5.4                                      Removal ofLegends.

 

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

 

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

 

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

 

ARTICLE VICONDITIONS PRECEDENT

 

Section 6.1                                      Conditions toObligations of Each Party.

 

The obligations of the parties to consummate the transactionscontemplated hereby at the Closing shall be subject to the fulfillment on orprior to the Closing Date of the following conditions:

 

(a)                                  No Injunction, etc. Consummation of the transactions contemplated hereby shall not have beenrestrained, enjoined or otherwise prohibited by any Applicable Law, includingany order, injunction, decree or judgment of any court or other GovernmentalAuthority.  No court or otherGovernmental Authority shall have determined that any Applicable Law makesillegal the consummation of the transactions contemplated hereby, and noproceeding with respect to the application of any such Applicable Law to sucheffect shall be pending.

 

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

 

Section 6.2                                      Conditions toObligations of Investor.

 

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

 

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

 

(b)                                 Consents.  The Companyshall have obtained and shall have delivered to Investor copies of allGovernmental Approvals and Consents required to be obtained by the Company inconnection with the execution and delivery of the Agreement and theconsummation of the transactions contemplated hereby.

 

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(c)                                  Corporate Proceedings. All corporate and other proceedings of the Company in connection withthis Agreement and the transactions contemplated hereby, and all documents andinstruments incident thereto, shall be reasonably satisfactory in form andsubstance to Investor and its counsel, and Investor and its counsel shall havereceived all such documents and instruments, or copies thereof, certified ifrequested, as may be reasonably requested at least 48 hours prior to theClosing.

 

(d)                                 Certificate of Status. The Investor shall have received copies of (i) the Certificate ofincorporation, as amended through the Closing Date, of the Company, certifiedas 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 ofState of the State of Delaware, as of a recent date, and (iii) a copy ofthe by-laws of the Company, as in effect on the Closing Date, certified by theSecretary of the Company.

 

(e)                                  Certificates for Shares. The Company shall have delivered to Investor certificates representingthe 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 orcondition that might reasonably be expected to cause a Material Adverse Effectto occur in the future.

 

(g)                                 Officer’s Certificate. The Company shall have delivered to Investor a certificate, dated theClosing Date and signed by its chief executive officer, in the form ofExhibit 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 andWarrants by Investor shall be legally permitted by all laws and regulations towhich Investor and the Company are subject.

 

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

 

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

 

Section 6.3                                      Conditions toObligations of Company.

 

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

 

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

 

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

 

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

 

ARTICLE VIIANTI-DILUTION RIGHTS

 

Section 7.1                                      Anti-DilutionRight.

 

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

 

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

 

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

 

(ii)                                  a stock dividend or securities issuedupon any subdivision of shares of common stock, or any other right received ona pro rata basis by the holder of the Shares along with other holders of CommonStock;

 

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(iii)                               securities issued solely in consideration for theacquisition (whether by merger or otherwise) by the Company or any of itssubsidiaries of all or substantially all of the stock or assets of any otherbusiness; or

 

(iv)                              securities issued upon an exercise of anyoption, warrant, convertible securities, or other right currently outstandingand set forth in Section 3.1 or issued hereafter pursuant to the2001 Stock Incentive Plan or other plan approved by Investor and the Board ofDirectors, provided that upon conversion of any amount of the Company’snotes 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 andthe amount of debt released on such conversion shall be deemed the price ofsuch New Securities;

 

(b)                                 If the Company plans, proposes ordetermines to issue New Securities, the Company shall give Investorthirty (30) calendar days advance written notice of such issuancedescribing the type of New Securities, the price, and the general terms uponwhich 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 purchaseall or a portion of its Anti-Dilution Shares for the price and upon the generalterms specified in the notice by giving written notice to the Company andstating therein the quantity of Anti-Dilution Shares to be purchased.  If Investor exercises its anti-dilutionrights under this Section 7 to purchase Anti-Dilution Shares, the Companyshall issue such Anti-Dilution Shares to Investor at the time of the issuanceof the New Securities.  In no event shallthe Company issue New Securities without giving Investor thirty (30)calendar days’ advance written notice, unless Investor waives such noticerequirement in a writing signed by one or more of the Company’s Directorselected by Investor.

 

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

 

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

 

ARTICLE VIIITERMINATION

 

Section 8.1                                      Termination.

 

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

 

(a)                                  by the writtenagreement of Investor and the Company;

 

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(b)                                 by Company or Investor by written noticeto the other party if the Closing shall not have been consummated pursuanthereto 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, andprovided further that the failure by either party to close on such date shallnot of itself be a breach of this Agreement.

 

(c)                                  by Investor by written notice to theCompany if (i) the representations and warranties of the Company shall nothave been true and correct as of the date when made, or (ii) if any of theconditions set forth in Section 6.1 or 6.2 shall not havebeen, 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 orcomply with any of the covenants, agreements or conditions hereof to beperformed or complied with by it prior to the Closing; or

 

(d)                                 by the Company by written notice toInvestor if (i) the representations and warranties of Investor shall nothave 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 6.3shall not have been, or if it becomes apparent that any of such conditions willnot 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 performor comply with any of the covenants, agreements or conditions hereof to beperformed or complied with by it prior to the Closing.

 

Section 8.2                                      Effect ofTermination.

 

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

 

ARTICLE IXINDEMNIFICATION

 

Section 9.1                                      ByCompany.

 

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 theClosing, the Company) (collectively, the “Investor Indemnitees”), fromand 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 orotherwise and whether or not resulting from third party claims), includingout-of-pocket expenses, court costs, consulting fees, expert witness fees andreasonable attorneys’ fees incurred in the investigation or defense of any ofthe same or in asserting any of their respective rights hereunder(collectively, “Losses”), resulting from or arising out of:

 

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(a)                                  any misrepresentation or breach of anywarranty of Company or the Company contained in this Agreement; provided,however, that, for purposes of this Article IX,  in determining whether any suchmisrepresentation or breach occurred, any dollar amount thresholds, materialityqualifiers and Material Adverse Effect qualifiers contained in anyrepresentation or warranty herein shall be disregarded; providedfurther,however, that no claim for indemnification under this clause (a) may bemade after the third anniversary of the Closing Date, excepting only that anyclaim 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 adate 30 days from and after the expiration of the period of the applicablestatute of limitations, or (ii) Section 3.3 may be made at any time;

 

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

 

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

 

Section 9.2                                      ByInvestor.

 

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

 

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

 

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

 

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

 

Section 9.3                                      IndemnificationProcedures.

 

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

 

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imputed or implied knowledge of any claim as to whichindemnity may be sought, and the Indemnified Party shall permit theIndemnifying Party (at the expense of such Indemnifying Party) to assume thedefense of any third party claim or any litigation with a third party resultingtherefrom; provided, however, that (i) the counsel for theIndemnifying Party who shall conduct the defense of such claim or litigationshall be subject to the approval of the Indemnified Party (which approval shallnot be unreasonably withheld or delayed), (ii) the Indemnified Party mayparticipate in such defense at such Indemnified Party’s expense, and(iii) the omission by any Indemnified Party to give notice as providedherein shall not relieve the Indemnifying Party of its indemnificationobligation under this Agreement except and only to the extent that suchIndemnifying Party is actually and materially damaged as a result of suchfailure to give notice.  Except with theprior consent of the Indemnified Party, no Indemnifying Party, in the defenseof any such claim or litigation, shall consent to entry of any judgment orenter into any settlement that provides for injunctive or other nonmonetaryrelief affecting the Indemnified Party or that does not include as anunconditional term thereof the giving by each claimant or plaintiff to suchIndemnified Party of a general release from all liability with respect to suchclaim or litigation.  If the IndemnifiedParty shall in good faith determine that the conduct of the defense of anyclaim subject to indemnification hereunder or any proposed settlement of anysuch claim by the Indemnifying Party might be expected to affect adversely theIndemnified Party’s Tax liability or the ability of Investor to conduct itsbusiness, or that the Indemnified Party may have available to it one or moredefenses or counterclaims that are inconsistent with one or more of those thatmay be available to the Indemnifying Party in respect of such claim or anylitigation relating thereto, the Indemnified Party shall have the right at alltimes to take over and assume control over the defense, settlement,negotiations or litigation relating to any such claim at the sole cost of theIndemnifying Party; provided, however, that if the IndemnifiedParty does so take over and assume control, the Indemnified Party shall notsettle 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 thedefense of any matter as above provided, the Indemnified Party shall have thefull right to defend against any such claim or demand at the sole cost of theIndemnifying Party and shall be entitled to settle or agree to pay in full suchclaim or demand.  In any event, theIndemnifying Party and the Indemnified Party shall reasonably cooperate in the defenseof any claim or litigation subject to this Article IX and therecords of each shall be reasonably available to the other with respect to suchdefense.

 

(b)                                 Non-Third Party Claims. With respect to any claim for indemnification hereunder which does notinvolve a third party claim, the Indemnified Party will give the IndemnifyingParty written notice of such claim.  TheIndemnifying Party may acknowledge and agree by notice to the Indemnified Partyin writing to satisfy such claim within 20 days of receipt of notice ofsuch claim from the Indemnified Party. If the Indemnifying Party shall dispute such claim, the IndemnifyingParty shall provide written notice of such dispute to the Indemnified Partywithin such 20-day period, setting forth in reasonable detail the basis of suchdispute.  Upon receipt of notice of anysuch dispute, the Indemnified Party and the Indemnifying Party shall usecommercially reasonable efforts to resolve such dispute within 30 days of thedate such notice of dispute is received. If the Indemnifying Party shall fail to provide written notice to theIndemnified Party within 20 days of receipt of notice from the IndemnifiedParty that the Indemnifying Party either acknowledges and agrees to pay suchclaim or disputes such claim, the Indemnifying Party shall be deemed to haveacknowledged and agreed to pay such claim in full and to have waived any rightto dispute such claim.  Once (a) theIndemnifying Party has

 

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

 

Section 9.4                                      Expiration of Representations and Warranties, etc.  Allrepresentations and warranties contained in this Agreement shall survive theClosing for a period of three years; provided, however, that therepresentations and warranties stated in Sections 3.7, 3.11(a),3.11(c), and 3.16 shall survive the Closing for the applicablestatute of limitations; providedfurther, however, that therepresentations and warranties contained in Section 3.3 shallsurvive indefinitely.

 

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

 

ARTICLE XREGISTRATION 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 statementor similar document in compliance with the Securities Act, and the declarationor ordering of effectiveness of such registration statement or document;

 

(b)                                 The term “Warrant Shares” shall mean theCommon 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 CommonStock of the Company issued or issuable in respect on the Conversion Shares orother securities issued or issuable pursuant to the conversion of the Warrantsupon any stock split, stock dividend, recapitalization, or similar event, orany Common Stock otherwise issued or issuable with respect to the Warrants; provided,however, that shares of Common Stock or other securities shall only betreated 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 publicdistribution or a public securities transaction, whether in a registeredoffering, Rule 144 transaction or otherwise, or (2) sold or areavailable for sale in the opinion of counsel to the Company in a transaction

 

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

 

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

 

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

 

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

 

(g)                                 “Registration Expenses” shall meanall expenses, except Selling Expenses, incurred by the Company in complyingwith Sections 10.2, 10.4 and 10.5 hereof, including, without limitation, allregistration, 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 suchregistration (but excluding the compensation of regular employees of theCompany which shall be paid in any event by the Company) and the reasonablefees and disbursements of one counsel for all Holders in the event of oneexercise 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 10.4hereof; and

 

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

 

Section 10.2  Demand Registrations Rights.

 

(a)                                  If at any time after the Company’sinitial registered underwritten public offering, the Company shall receive awritten request (specifying that it is being made pursuant to this Section 10.2)from Investor that the Company file a registration statement or similardocument under the Securities Act covering the registration of the lesser of(i) at least ten percent (10%) of Investor’s then outstandingRegistrable Securities (or securities that are convertible into RegistrableSecurities) or (ii) Registrable Securities the expected price to thepublic of which exceeds $2,000,000, then the Company shall promptly notify allother Holders of such request and shall use its best efforts to cause allRegistrable Securities that such Holders have requested be registered inaccordance with this Section 10.2 to be registered under the SecuritiesAct.  Notwithstanding the foregoing,(a) the Company shall not be obligated to effect a registration pursuantto this Section 10.2 during the period starting with the datesixty (60) days prior to the

 

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

 

(b)                                 If the registration requested is for aregistered public offering involving an underwriting, the Company shall soindicate in the notice given pursuant to Section 10.2(a).  In such event the right of any Holder toregistration pursuant to this Section 10.2 shall be conditioned upon suchHolder’s agreeing to participate in such underwriting and in the inclusion ofsuch Holder’s Registrable Securities in the underwriting to the extent providedherein.  All Holders proposing todistribute their securities through such underwriting shall (together with theCompany and the other holders distributing their securities through suchunderwriting) enter into an underwriting agreement in customary form with theunderwriter or underwriters selected for such underwriting by the Company or byInvestor exercising any demand registration rights.  Notwithstanding any other provisions of this Section 10.2,if the underwriter determines that marketing factors require a limitation ofthe number of shares to be underwritten, the underwriter may exclude some orall Registrable Securities or other securities from such registration andunderwriting (hereinafter an “Underwriter Cutback”).  In the event of an Underwriter Cutback, theCompany shall so advise all Holders and the other holders distributing theirsecurities through such underwriting, and the number of Registrable Securitiesand other securities that may be included in the registration and underwritingshall be allocated among all holders thereof (including those holders who areexercising their demand registration rights) on the basis that the holders whoare not Holders shall be cut back before any cutback of Holders.  If the limitation determined by theunderwriter requires a cutback of the Holders, then the number of shares thatmay be included in the registration and underwriting shall be allocated among allHolders in proportion, as nearly as practicable, to the respective amounts ofsecurities entitled to inclusion in such registration held by such Holders atthe time of filing the registration statement. In the event of an Underwriter Cutback, holders of securities withrespect to which registration rights have been granted pursuant to Section 10.10hereof shall be treated as Holders for purposes of any cutbacks.  If any Holder disapproves of the terms of anysuch underwriting, such Holder may elect to withdraw therefrom by writtennotice to the Company and the underwriter. If shares are so withdrawn from the registration, the Company shall thenoffer to all persons who have retained the right to include securities in theregistration the right to include additional securities in the registration inan aggregate amount equal to the number of shares so withdrawn, with suchshares to be allocated among the persons requesting additional inclusion prorata according to the

 

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

 

(c)                                  Notwithstanding anything to the contraryset forth herein, any registration requested by Investor pursuant to this Section 10.2shall not be deemed to have been effected (and, therefore, not requested forpurposes of this Section 10.2), (i) unless it has become effective, providedthat a registration which does not become effective after the Companyhas filed a registration statement with respect thereto solely by reason of therefusal to proceed by Investor (other than a refusal to proceed based upon theadvice of counsel relating to a matter with respect to the Company) shall bedeemed to have been effected by the Company at request of Investor unlessInvestor shall have elected to pay all registration expenses in connection withsuch registration; (ii) if after it has become effective such registrationis interfered with by any stop order, injunction or other order or requirementof the SEC or other governmental agency or court for any reason other than amisrepresentation or an omission by Investor and, as a result thereof, thesecurities requested to be registered cannot be completely distributed inaccordance with the plan of distribution set forth in the related registrationstatement or (iii) if the closing pursuant to the purchase agreement orunderwriting agreement entered into in connection with such registration doesnot occur.  Any registration effectedpursuant to Section 10.5 shall not be deemed to have been requested by arequesting holder for purposes of this Section 10.2

 

Section 10.3                                Expenses of DemandRegistration.

 

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

 

Section 10.4                                Form S-3 RegistrationRights.

 

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

 

(a)                                  The Company shall not be obligated tocause 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 planor to effect a business combination pursuant to SEC Rule 145);

 

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

 

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

 

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

 

(e)                                  The Company shall not be required toeffect a registration pursuant to this Section 10.4 more than three yearsafter the Company’s registered underwritten public offering or more than fourtimes at Company’s expense.

 

The Company shall give notice to all Holders of thereceipt of a request for registration pursuant to this Section 10.4 andshall provide a reasonable opportunity for other Holders to participate in theregistration.  Subject to the foregoing,the Company will use its best efforts to effect promptly any registrationrequested pursuant to this Section 10.4. Notwithstanding the foregoing, the Company shall not be obligated toeffect any such registration, qualification or compliance pursuant to this Section 10.4if the Company shall furnish to the Holders a certificate signed by thePresident of the Company stating that in the good faith judgment of the Boardof Directors of the Company it would be seriously detrimental to the Companyand its shareholders for such Form S-3 Registration to be effected at suchtime, in which event the Company shall have the right to defer the filing ofthe Form S-3 Registration Statement for a period of not more than 120 daysafter 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 oncein any 12-month period.

 

Section 10.5                                Company Registration.

 

(a)                                  If, at any time or from time to time, theCompany shall determine to register any of its securities, either for its ownaccount or the account of a security holder or holders exercising theirrespective demand registration rights, other than a registration(i) relating solely to employee benefit plans on Form S-8 or similarforms which may be promulgated in the future or (ii) relating solely to aSEC Rule 145 or similar transaction, the Company will promptly give to eachHolder written notice thereof (which shall include a list of the jurisdictionsin which the Company intends to attempt to qualify such securities under theapplicable blue sky or other state securities laws, and include in suchregistration (and any related qualification under blue sky laws or othercompliance), and in any underwriting involved therein, all RegistrableSecurities of such Holders as specified in a written request or requests madewithin 15 days after receipt of such written notice from the Company.

 

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

 

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Section 10.5(a).  In suchevent the right of any Holder to registration pursuant to this Section 10.5shall be conditioned upon such Holder’s agreeing to participate in suchunderwriting and in the inclusion of such Holder’s Registrable Securities inthe underwriting to the extent provided herein. All Holders proposing to distribute their securities through suchunderwriting shall (together with the Company and the other holdersdistributing their securities through such underwriting) enter into anunderwriting agreement in customary form with the underwriter or underwritersselected for such underwriting by the Company or by other holders exercisingdemand registration rights.  Notwithstanding any other provisions of this Section 10.5, if theunderwriter determines that marketing factors require a limitation of thenumber of shares to be underwritten, the underwriter may exclude some or allRegistrable Securities or other securities from such registration andunderwriting (hereinafter an “Underwriter Cutback”).  In the event of an Underwriter Cutback, theCompany shall so advise all Holders and the other holders distributing theirsecurities through such underwriting, and the number of Registrable Securitiesand other securities that may be included in the registration and underwritingshall be allocated among all Holders thereof (including those holders who areexercising their demand registration rights) on the basis that the holders whoare not Holders shall be cut back before any cutback of Holders.  If the limitation determined by theunderwriter requires a cutback of the Holders, then the number of shares thatmay be included in the Registration and underwriting shall be allocated amongall Holders in proportion, as nearly as practicable, to the respective amountsof securities entitled to inclusion in such registration held by such Holdersat the time of filing the registration statement.  In the event of an Underwriter Cutback,holders of securities with respect to which registration rights have beengranted pursuant to Section 10.10 hereof shall be treated as Holders forpurposes of any cutbacks.  If any Holderdisapproves of the terms of any such underwriting, such Holder may elect towithdraw therefrom by written notice to the Company and the underwriter.  Any securities excluded or withdrawn fromsuch underwriting shall be withdrawn from such registration.

 

Section 10.6                                Expenses of CompanyRegistration Rights.

 

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

 

Section 10.7                                Indemnification.

 

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

 

(a)                                  To the extent permitted by law, theCompany will indemnify and hold harmless each Holder, the officers, directors,partners and legal counsel of each Holder, any underwriter (as defined in theSecurities Act) for such Holder and each person, if any, who controls suchHolder or underwriter within the meaning Exchange Act, against any losses,claims, damages or liabilities (joint or several) to which they may becomesubject under the Securities Act, the Exchange Act or other federal or statelaw, 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 thefollowing statements, omissions or violations (collectively, a “Violation”):  (i) any untrue

 

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statement or alleged untrue statement of a materialfact contained in such registration statement, including any preliminaryprospectus or final prospectus contained therein or any amendments orsupplements thereto, (ii) the omission or alleged omission to statetherein a material fact required to be stated therein, or necessary to make thestatements therein not misleading, or (iii) any violation or allegedviolation by the Company of the Securities Act, the Exchange Act, any statesecurities law or any law; and the Company will reimburse each such Holder,officer, director, partner, legal counsel, underwriter or controlling personfor any legal or other expenses reasonably incurred by them in connection withinvestigating 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 theCompany (which consent shall not be unreasonably withheld), nor shall theCompany be liable in any such case for any such loss, claim, damage, liabilityor action to the extent that it arises out of or is based upon a Violationwhich occurs in reliance upon and in conformity with written informationfurnished expressly for use in connection with such registration by any suchHolder, officer, partner, director, underwriter, legal counsel or controllingperson; provided that such reimbursement shall be made on a monthly basiswithin ten (10) days after receipt of any invoice with respect to expensesreasonably incurred during the preceding calendar month.

 

(b)                                 To the extent permitted by law, eachselling Holder will indemnify and hold harmless the Company, each of itsdirectors, officers, its legal counsel, each person, if any, who controls the Companywithin the meaning of the Securities Act, any underwriter and any other Holderselling securities in such registration statement or any of such other Holder’sdirectors, legal counsel, or officers or any person who controls such otherHolder, against any losses, claims, damages or liabilities (joint or several)to which the Company or any such director, officer, legal counsel, controllingperson, or underwriter or controlling person, or such other Holder or director,officer, legal counsel or controlling person of such other Holder may becomesubject, under the Securities Act, the Exchange Act or other federal or statelaw, insofar as such losses, claims, damages or liabilities (or actions inrespect thereto) arise out of or are based upon any Violation, in each case tothe extent (and only to the extent) that such Violation occurs in reliance uponand in conformity with written information furnished by such Holder for use inconnection with such registration; and each such Holder will reimburse any legalor other expenses reasonably incurred by the Company or any such director,officer, legal counsel, or controlling person, underwriter or controllingperson of such Holder in connection with investigating or defending any suchloss, claim, damage, liability, or action; provided, however, that theindemnity agreement contained in this Section 10.7(b) shall not apply toamounts paid in settlement of any such loss, claim, damage, liability or actionif such settlement is effected without the consent of the indemnifying Holder,which consent shall not be unreasonably withheld; provided, that, in no eventshall any indemnity under this Section 10.7(b) exceed the gross proceedsfrom the offering received by such holder and provided that such reimbursementshall be made on a monthly basis within ten (10) days after the end ofeach calendar month with respect to expenses reasonably incurred during thepreceding calendar month.

 

(c)                                  Promptly after receipt by an indemnifiedparty under this Section 10.7 of notice of the commencement of any action(including any governmental action), such indemnified party will, if a claim inrespect 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

 

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and the indemnifying party shall have the right toparticipate in, and, to the extent the indemnifying party so desires, jointlywith any other indemnifying party similarly noticed, to assume the defensethereof with counsel mutually satisfactory to the parties; provided, however,that an indemnified party shall have the right to retain its own counsel, withthe fees and expenses to be paid by the indemnifying party, if such indemnifiedparty is advised in writing by counsel (which writing shall be furnished to theindemnifying party) that representation of such indemnified party by thecounsel retained by the indemnifying party would be inappropriate due to actualor potential differing interests between such indemnifying party and any otherparty represented by such counsel in such proceeding.  The failure to deliver written notice to theindemnifying party within a reasonable time of the commencement of any suchaction, if prejudicial to its ability to defend such action, shall relieve suchindemnifying 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 willnot relieve it of any liability that it may have to any indemnifying partyotherwise than under this Section 10.7.

 

(d)                                 If the indemnification provided for inthis Section 10.7 is held by a court of competent jurisdiction to beunavailable to an indemnified party, then each indemnifying party, in lieu ofindemnifying such indemnified party thereunder, hereby agrees to contribute tothe amount paid or payable to such indemnified party in such proportion as isappropriate to reflect the relative fault of the indemnifying party on the onehand and of the indemnified party on the other. Notwithstanding the foregoing, the amount any Holder of RegistrableSecurities 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 bysuch Holder.

 

(e)                                  The obligations of the Company andHolders under this Section 10.7 shall survive the completion of anyoffering 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 thebenefits of Rule 144 promulgated under the Securities Act and any otherrule or regulation of the SEC that may at any time permit a Holder to sellsecurities of the Company to the public without registration or pursuant to aregistration on Form S-3, the Company agrees to:

 

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

 

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

 

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

 

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

 

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

 

Section 10.9                                Assignment ofRegistration Rights.

 

The rights to cause the Company to registerRegistrable Securities pursuant to this Section 10 may be assigned by aHolder 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 ofthe name and address of such transferee or assignee and the securities withrespect to which such registration rights are being assigned; and provided,further, that such assignment shall be effective only if immediately followingsuch transfer the further disposition of such securities by the transferee orassignee is restricted under the Securities Act.  If the Holder is a partnership and transfersor assigns its rights hereunder to any of its partners, such partners mayaggregate the number of Registrable Securities held by them for purposes ofmeeting the Five Hundred Thousand (500,000) share threshold set forth in this Section 10.9.

 

Section 10.10                          Subsequent RegistrationRights.

 

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

 

Section 10.11                          “Market Stand-Off” Agreement.

 

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

 

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

 

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

 

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

 

In order to enforce the foregoing covenant, theCompany may impose stop-transfer instructions with respect to the RegistrableSecurities of each Holder (and the shares or securities of every other personsubject to the foregoing restriction) until the end of such reasonable andcustomary period.

 

Section 10.12                          Amendment of RegistrationRights.

 

Any provision of this Section 10 may be amendedand the observance thereof may be waived (either generally or in a particularinstance and either retroactively or prospectively), only with the writtenconsent of the Company and the holders of at least a majority of theRegistrable Securities.  Any amendment orwaiver effected in accordance with this paragraph shall be binding upon eachholder of any securities purchased under this Agreement (including securitiesinto which such securities are convertible), each transferee or future holder ofall such securities, and the Company.

 

ARTICLE XIMISCELLANEOUS

 

Section 11.1                                Expenses.

 

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

 

Section 11.2                                Severability.

 

If any provision of this Agreement, including anyphrase, sentence, clause, Section or subsection is inoperative orunenforceable for any reason, such circumstances shall not have the effect ofrendering the provision in question inoperative or unenforceable in any othercase or circumstance, or of rendering any other provision or provisions hereincontained 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 thisAgreement (each, a “Notice”) shall be in writing and

 

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

 

(i)                  if to Investor, to:

 

L-3 Communications Corporation600 Third AvenueNew York, NY  10016Facsimile:  (212) 805-5494Attention:  Christopher C. Cambria, Esq.

 

(ii)               if to Company, to:

 

Innovative Micro Technology, Inc.75 Robin Hill Rd.Santa Barbara, CA  93117Facsimile:  805-967-2677Attention:  John Foster, President

 

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

 

Sheppard, Mullin, Richter & Hampton LLP333 S. Hope Street, 48th FloorLos Angeles, CA  90017Facsimile:  (213) 620-1398

 

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

 

Section 11.4                                Attorneys’Fees.

 

If any party hereto initiates any legal action arisingout of or in connection with this Agreement, the prevailing party shall beentitled to recover from the other party all reasonable attorneys’ fees, expertwitness fees and expenses incurred by the prevailing party in connectiontherewith.

 

Section 11.5                                Liability for TransferTaxes.

 

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

 

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Section 11.6                                Headings.

 

The headings contained in this Agreement are forpurposes of convenience only and shall not affect the meaning or interpretationof this Agreement.

 

Section 11.7                                Entire Agreement.

 

This Agreement (including the Schedules and Exhibitshereto) constitutes the entire agreement and supersedes all prior agreementsand understandings, both written and oral, between the parties with respect tothe subject matter hereof.

 

Section 11.8                                Counterparts.

 

This Agreement may be executed (including by facsimiletransmission) with counterpart signature pages or in several counterparts, eachof which shall be deemed an original and all of which shall together constituteone 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 ofthe State of New York without giving effect to the conflict of laws rulesthereof.  The Investor and the Companyhereby irrevocably submit to the jurisdiction of the courts of the State of NewYork, and the Federal courts of the United States of America located in theSouthern District of New York solely in respect of the interpretation andenforcement of the provisions of this Agreement and of the documents referredto in this Agreement, and hereby waive, and agree not to assert, as a defensein any action, suit or proceeding for the interpretation or enforcement hereofor 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 orthat the venue thereof may not be appropriate or that this Agreement or any ofsuch document may not be enforced in or by said courts, and the parties heretoirrevocably agree that all claims with respect to such action or proceedingshall be heard and determined in such a Delaware State or Federal court.  The Investor and the Company hereby consentto and grants any such court jurisdiction over the person of such parties andover the subject matter of any such dispute and agrees that mailing of processor other papers in connection with any such action or proceeding in the mannerprovided in Section 11.3, or in such other manner as may bepermitted by law, shall be valid and sufficient service thereof.

 

Section 11.10                          BindingEffect.

 

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

 

Section 11.11                          No Third Party Beneficiaries.

 

Except as provided in Article IX withrespect to indemnification of Indemnified Parties hereunder, nothing in thisAgreement shall confer any rights upon any Person other than the parties heretoand their respective heirs, legal representatives, successors and permittedassigns.

 

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Section 11.12                          Amendment; Waivers, etc.

 

No discharge of this Agreement, and no waiverhereunder, shall be valid or binding unless set forth in writing and dulyexecuted by the party against whom enforcement of the discharge or waiver issought.  Any such waiver shall constitutea waiver only with respect to the specific matter described in such writing andshall in no way impair the rights of the party granting such waiver in anyother respect or at any other time. Neither the waiver by any of the parties hereto of a breach of or adefault under any of the provisions of this Agreement, nor the failure by anyof the parties, on one or more occasions, to enforce any of the provisions ofthis Agreement or to exercise any right or privilege hereunder, shall beconstrued as a waiver of any other breach or default of a similar nature, or asa waiver of any of such provisions, rights or privileges hereunder.

 

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

 

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

 

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

 

*The next page is thesignature page.*

 

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IN WITNESS WHEREOF, the parties have duly executedthis 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 |
|        |                                               |  |  |  |

 

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| 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 |

 

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