1038-00009 · Client 1038 · Employment

employee-matters-integration-memo.docx DOCUMENT M&A / Corporate

48 / 83 ← → ✕

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

TO: Elena Vasquez-Bright, General Counsel, Cascade Retail Holdings Inc. Theodore "Ted" Langford, SVP, Corporate Development, Cascade Retail Holdings Inc.

FROM: Harrison Wexford, Derek Okonkwo, and Tiffany Rosenthal, Calderwood & Harkness LLP

DATE: May 18, 2025

RE: Employee Benefit Plan Assumption and Integration Considerations — Acquisition of NovaMart Global Inc.

MATTER: Cascade Retail Holdings Inc. — Acquisition of NovaMart Global Inc.

Right-click to update Table of Contents

I. Executive Summary

This memorandum analyzes the employee benefit plan integration considerations, workforce transition issues, and compliance obligations arising from Cascade Retail Holdings Inc.'s ("Cascade" or the "Buyer") proposed acquisition of one hundred percent (100%) of the outstanding capital stock of NovaMart Global Inc. ("NovaMart" or the "Company") for an aggregate purchase price of $1,200,000,000 (One Billion Two Hundred Million Dollars), pursuant to the Stock Purchase Agreement dated May 20, 2025 (the "SPA"). This memorandum is intended to serve as a comprehensive guide for Cascade's management, integration team, and internal counsel as they navigate the employee-related aspects of this transaction from signing through closing and into the post-closing integration period.

Transaction Structure. The transaction is structured as a stock purchase governed by Delaware law. Upon consummation of the closing, NovaMart will become a wholly owned subsidiary of Cascade. Because this is a stock acquisition—as opposed to an asset acquisition—NovaMart will continue as a separate legal entity, and its approximately 2,400 employees will remain employees of NovaMart immediately following the closing. These employees are distributed across fourteen (14) fulfillment centers located in nine states—California (3 facilities), New Jersey (2 facilities), Georgia (2 facilities), Ohio (1 facility), Illinois (1 facility), Pennsylvania (1 facility), Tennessee (1 facility), Florida (2 facilities), and Washington (1 facility)—as well as NovaMart's corporate headquarters at 1100 Congress Avenue, Suite 800, Austin, Texas 78701.

Continuity of Employment. Because the transaction is structured as a stock purchase, no automatic termination-and-rehire event occurs at the closing. NovaMart's existing employer-employee relationships continue without interruption, and NovaMart's employment agreements, offer letters, employee handbooks, workplace policies, and benefit plans remain in full force and effect. However, Cascade will need to plan for the eventual harmonization of NovaMart's benefit plans with Cascade's existing benefit programs and must ensure compliance with all applicable federal, state, and local employment laws throughout the integration period.

Key Areas Addressed. This memorandum addresses the following principal areas of concern:

• Compliance with the federal Worker Adjustment and Retraining Notification Act ("WARN Act") and analogous state "mini-WARN" statutes in each state where NovaMart operates;

• Transition and integration of NovaMart's 401(k) defined contribution retirement plan;

• Health and welfare plan integration, including Affordable Care Act ("ACA") compliance, deductible/out-of-pocket crediting, and flexible spending account ("FSA") treatment;

• Paid time off ("PTO") and vacation accrual obligations, including state-law payout requirements and working capital implications;

• COBRA continuation coverage obligations before, during, and after the closing;

• ERISA compliance considerations, including controlled group analysis, fiduciary transitions, and plan document updates;

• NovaMart stock option plan treatment, including tax implications for option holders and IRC Section 409A compliance;

• Payroll tax and employment tax matters, including successor employer status and multi-state compliance;

• Directors' and officers' liability insurance tail coverage;

• Implementation of the $18,000,000 key employee retention pool;

• Non-competition and restrictive covenant integration considerations; and

• A comprehensive summary of recommended action items and timelines.

SPA Provisions. This memorandum references and should be read in conjunction with the following provisions of the SPA: Article VI (pre-closing covenants), including Section 6.01 (interim operating covenants regarding employee matters and benefit plan modifications); Article VIII (conditions to closing); and the employee-related representations and warranties set forth in Article III. We have reviewed these provisions in detail and have incorporated their requirements into our analysis and recommendations below.

Coordination with Advisors. We are coordinating with Whitmore & Paige LLP (Sandra Chiu, Engagement Partner) on benefit plan actuarial and accounting matters, including the treatment of accrued PTO liabilities in the working capital calculation, 401(k) plan valuations, and ACA reporting coordination. We are also coordinating internally with Sylvia Hartwell in Calderwood & Harkness's Tax Department on stock option cash-out withholding calculations, retention bonus tax treatment, and payroll tax integration matters.

II. Transaction Structure — Employment Law Implications

A. Stock Purchase — Continuity of Employment

In a stock purchase transaction, the target company—here, NovaMart—continues as a separate legal entity after the closing. The buyer acquires ownership of the target's stock, but the target's corporate existence, contracts, obligations, and relationships remain intact. This stands in contrast to an asset purchase, where the buyer acquires specified assets and assumes specified liabilities, and the seller's employees are typically terminated and then offered new employment by the buyer.

Because NovaMart will continue as a legal entity and as a wholly owned subsidiary of Cascade following the closing, all employer-employee relationships between NovaMart and its approximately 2,400 employees will remain in effect without interruption. No employee of NovaMart will experience a termination of employment or a break in service as a result of the closing itself. This continuity of employment has several important implications:

• All existing employment agreements, offer letters, and at-will employment arrangements between NovaMart and its employees remain binding and enforceable according to their terms, unless and until affirmatively modified by the post-closing NovaMart/Cascade management team in accordance with applicable law.

• NovaMart's employee handbooks, workplace policies, codes of conduct, and internal operating procedures remain in effect. Cascade should review these materials during the integration planning process to identify any inconsistencies with Cascade's own policies and to develop a timeline for harmonization.

• If NovaMart were party to any collective bargaining agreements ("CBAs") with labor unions, those CBAs would transfer by operation of law and remain binding on NovaMart in its capacity as the employer. Our diligence review did not identify any CBAs currently in effect, nor did we identify any pending union organizing activities or unfair labor practice charges. Nonetheless, Cascade should remain alert to any labor-related developments during the interim period between signing and closing.

• Employee seniority, tenure, and service history with NovaMart are preserved. This continuity is particularly important for benefit plan eligibility, vesting, and accrual purposes, as discussed in Sections IV through VI below.

B. Implications for Employee Benefits

NovaMart's existing benefit plans—including group health insurance (medical, dental, and vision), life insurance, short-term and long-term disability coverage, the NovaMart 401(k) Plan, the NovaMart stock option plan, NovaMart's PTO/vacation accrual policy, and NovaMart's flexible spending account arrangements—remain sponsored by NovaMart after the closing. Cascade, as the new parent company, has no legal obligation to immediately integrate NovaMart employees into Cascade's benefit plans. The plans continue in effect under their existing terms, with NovaMart serving as plan sponsor and employer.

However, Cascade will likely desire to harmonize NovaMart's benefit programs with Cascade's existing benefit plans within a reasonable transition period. Industry practice for post-acquisition benefit plan integration typically ranges from six (6) to twelve (12) months following closing, though the specific timeline will depend on a number of factors, including the relative complexity of the respective plan designs, the availability of open enrollment windows, the need for nondiscrimination testing coordination, and the administrative capabilities of the parties' respective benefits platforms and payroll providers.

It is important to note that Section 6.01 of the SPA (Interim Operating Covenants) restricts NovaMart from materially modifying its benefit plans during the period between signing (May 20, 2025) and closing without Cascade's prior written consent. This restriction is designed to preserve the status quo with respect to employee benefits and to prevent NovaMart from increasing its benefit-related liabilities or making changes that could complicate integration planning. Specifically, NovaMart may not, without Cascade's prior written consent, (i) increase compensation or benefits for any employee other than in the ordinary course of business consistent with past practice, (ii) enter into, modify, or terminate any employment agreement or benefit plan, (iii) grant any equity awards or acceleration of vesting, or (iv) hire or terminate employees outside the ordinary course of business. Cascade's integration team should monitor compliance with these covenants throughout the interim period.

C. Post-Closing Employment Agreements and Retention Arrangements

The transaction contemplates specific post-closing employment and retention arrangements for certain key NovaMart executives and employees, as follows:

Julian Reeves — Post-Closing Employment Agreement. Mr. Reeves, currently serving as NovaMart's Chief Executive Officer, will enter into a three (3)-year post-closing employment agreement with Cascade (or a designated Cascade subsidiary) to be executed concurrently with the closing. The material terms of Mr. Reeves' employment agreement include an annual base salary of $625,000, a target annual performance bonus of seventy-five percent (75%) of base salary (i.e., $468,750 at target), and an equity grant of 150,000 restricted shares of Cascade common stock (Nasdaq: CRHI) vesting ratably over three (3) years. Mr. Reeves' employment agreement also contains customary restrictive covenants, including non-competition, non-solicitation, and confidentiality provisions, as well as severance and change-of-control protections. The specific terms of Mr. Reeves' employment agreement are addressed in a separate memorandum.

Priya Narasimhan — Post-Closing Employment Agreement. Ms. Narasimhan, currently serving as NovaMart's Chief Technology Officer, will enter into a three (3)-year post-closing employment agreement with Cascade (or a designated Cascade subsidiary) to be executed concurrently with the closing. The material terms of Ms. Narasimhan's employment agreement include an annual base salary of $575,000, a target annual performance bonus of seventy percent (70%) of base salary (i.e., $402,500 at target), and an equity grant of 125,000 restricted shares of Cascade common stock vesting ratably over three (3) years. Like Mr. Reeves' agreement, Ms. Narasimhan's agreement contains customary restrictive covenants and severance protections.

Key Employee Retention Pool. In addition to the individual employment agreements with Mr. Reeves and Ms. Narasimhan, the SPA provides for a key employee retention pool in the aggregate amount of $18,000,000 (Eighteen Million Dollars). This pool is intended to incentivize the continued employment of other critical NovaMart employees during the integration period. The retention pool is structured as follows: fifty percent (50%), or $9,000,000, is payable at the closing, and the remaining fifty percent (50%), or $9,000,000, is payable on the first anniversary of the closing, in each case subject to the recipient's continued employment with NovaMart or Cascade through the applicable payment date. The implementation of the retention pool is discussed in greater detail in Section XII below.

These post-closing employment and retention arrangements are separate from, and in addition to, NovaMart's existing benefit plan obligations. They represent distinct contractual commitments of Cascade and should be treated accordingly for budgeting, accounting, and tax purposes.

III. WARN Act Compliance

A. Federal WARN Act (Worker Adjustment and Retraining Notification Act)

The federal Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101–2109 (the "WARN Act"), requires employers with 100 or more full-time employees to provide at least sixty (60) calendar days' advance written notice before ordering a "plant closing" or "mass layoff." The WARN Act's notice requirements apply to the affected employees, their collective bargaining representatives (if any), the state dislocated worker unit, and the chief elected official of the unit of local government in which the affected facility is located.

The key statutory terms are defined as follows:

• Plant Closing: The permanent or temporary shutdown of a "single site of employment," or one or more "facilities" or "operating units" within a single site of employment, resulting in an employment loss for fifty (50) or more full-time employees during any thirty (30)-day period. 29 U.S.C. § 2101(a)(2).

• Mass Layoff: A reduction in force at a single site of employment that (i) affects 500 or more full-time employees, or (ii) affects 50 to 499 full-time employees if those employees constitute at least thirty-three percent (33%) of the active, full-time workforce at that site. 29 U.S.C. § 2101(a)(3).

• Employment Loss: A termination of employment (other than for cause, voluntary departure, or retirement), a layoff exceeding six (6) months, or a reduction in hours of work of more than fifty percent (50%) during each month of any six (6)-month period. 29 U.S.C. § 2101(a)(6).

Threshold Analysis for NovaMart. NovaMart has approximately 2,400 total employees distributed across its Austin, Texas headquarters and fourteen (14) fulfillment centers in nine states. Each fulfillment center and the headquarters constitutes a separate "single site of employment" for purposes of the WARN Act. The WARN Act analysis must therefore be conducted on a site-by-site basis. Based on the headcount information provided during diligence, the approximate employee distribution across NovaMart's facilities is as follows:

Given that each facility employs between approximately 110 and 310 employees, a plant closing at any single facility would trigger WARN Act notice requirements (since the affected employee count would exceed 50 at each location). A mass layoff at a single facility would be triggered if 500 or more employees are affected (which would not occur at any individual facility) or if 50 to 499 employees are affected and constitute at least 33% of the active full-time workforce at that site (which would be triggered at each facility if 50 or more employees are laid off, given that 50 employees would constitute at least 33% of the workforce at all facilities except possibly the Austin headquarters).

Current Workforce Reduction Plans. As of the date of this memorandum, Cascade has not indicated plans for immediate post-closing workforce reductions. However, if any consolidation of fulfillment center operations, facility closures, or significant headcount reductions are contemplated within the first six (6) months following closing, Cascade must assess its WARN Act obligations on a site-by-site basis well in advance and provide the required sixty (60)-day written notice before implementing any such changes. We strongly recommend that any workforce reduction decisions be reviewed by outside employment counsel before they are communicated to employees or implemented.

Aggregation Rules. The WARN Act contains an important aggregation provision. Employment losses that occur during any ninety (90)-day period at a single site of employment are aggregated to determine whether WARN Act thresholds have been met, even if no single layoff action independently triggers the statutory thresholds. 29 U.S.C. § 2102(d). This means that if Cascade implements multiple rounds of smaller reductions at a single facility within a 90-day window—each of which individually falls below the 50-employee threshold—the aggregate total may nonetheless trigger WARN Act obligations. Cascade's integration team should maintain a careful log of all employment separations at each facility post-closing and should flag any situation in which cumulative separations within a rolling 90-day period approach the applicable thresholds.

Penalties for Non-Compliance. An employer that violates the WARN Act is liable to each affected employee for up to sixty (60) days' back pay and benefits (calculated at the employee's average regular rate of pay for the last three years of employment, or the employee's final regular rate of pay, whichever is higher). In addition, an employer that fails to provide timely notice to the appropriate unit of local government is subject to a civil penalty of up to $500 per day of violation, up to a maximum of $30,000. 29 U.S.C. § 2104. These penalties can be substantial in the context of a facility closure or large-scale layoff.

B. State "Mini-WARN" Acts

Several of the states in which NovaMart operates have enacted state-level WARN Act equivalents (commonly referred to as "mini-WARN" statutes) that impose additional or more stringent requirements than the federal WARN Act. These state laws may feature lower employee thresholds, longer notice periods, broader definitions of covered events, or mandatory severance obligations. The following is a summary of the key state mini-WARN requirements applicable to NovaMart's operations:

California (3 Fulfillment Centers — Stockton, Ontario, Tracy). California's version of the WARN Act, codified at California Labor Code Sections 1400–1408 ("Cal-WARN"), requires covered employers to provide sixty (60) days' advance written notice before ordering a "mass layoff," "relocation," or "termination" affecting fifty (50) or more employees at a "covered establishment" during any thirty (30)-day period. Cal-WARN differs from the federal WARN Act in several important respects. First, Cal-WARN has no minimum employer size threshold—it applies to any employer that owns and operates a "covered establishment" (i.e., any industrial or commercial facility or part thereof). Second, Cal-WARN's definition of "covered establishment" is broader than the federal "single site of employment." Third, Cal-WARN includes "relocation" of a covered establishment as a triggering event, which the federal WARN Act does not. Given that NovaMart operates three fulfillment centers in California, Cal-WARN compliance is a critical concern for any post-closing workforce changes in the state.

New Jersey (2 Fulfillment Centers — Edison, Cranbury). New Jersey's WARN Act, N.J. Stat. Ann. §§ 34:21-1 to 34:21-7 ("NJ WARN"), imposes more stringent requirements than the federal WARN Act. NJ WARN requires ninety (90) days' advance written notice—thirty days longer than the federal requirement—before a mass layoff or transfer of operations affecting fifty (50) or more full-time employees at an establishment. In addition, NJ WARN mandates that the employer provide severance pay to each affected employee in an amount equal to one (1) week of pay for each full year of employment with the employer. This severance pay obligation is mandatory and is not contingent on the existence of a pre-existing severance plan or policy. The combination of the extended notice period and mandatory severance makes New Jersey one of the most employee-protective jurisdictions in the country for purposes of WARN compliance.

Illinois (1 Fulfillment Center — Joliet). The Illinois Worker Adjustment and Retraining Notification Act, 820 ILCS 65/1 et seq. ("Illinois WARN"), closely parallels the federal WARN Act in its coverage thresholds and notice periods. However, Illinois WARN imposes additional notification requirements, including the obligation to notify the Illinois Department of Commerce and Economic Opportunity of any planned mass layoff or plant closing. The notice must include specific information about the affected employees, the expected date of the layoff or closing, and the reasons for the action.

Tennessee (1 Fulfillment Center — Lebanon). The Tennessee Plant Closing and Reduction in Operations Act, Tenn. Code Ann. §§ 50-1-601 to 50-1-604, requires employers to provide advance notice before a permanent shutdown, partial shutdown, or reduction in operations affecting fifty (50) or more employees at a facility. The notice must be provided to the Commissioner of Labor and Workforce Development and to the affected employees. While Tennessee's statute is less prescriptive than some other states' mini-WARN laws, compliance remains necessary for any workforce changes at the Lebanon fulfillment center.

Georgia, Ohio, Pennsylvania, Florida, and Washington. We have reviewed the employment laws of each of these states for mini-WARN equivalents and other notice or severance obligations. Georgia, Ohio, Pennsylvania, and Florida do not have comprehensive mini-WARN statutes comparable to those in California, New Jersey, or Illinois, though each state may impose other notice or reporting obligations in connection with significant layoffs or facility closures (e.g., reporting to the state unemployment agency). Washington State has adopted the Washington Industrial Insurance Act and related statutes but does not currently have a comprehensive mini-WARN statute with lower thresholds than the federal WARN Act. However, Washington does require employers to provide notice of certain plant closings to the Employment Security Department. A detailed state-by-state matrix of WARN Act and mini-WARN requirements for each of NovaMart's operating states is attached hereto as Exhibit B.

Recommendation. Before implementing any post-closing workforce changes at any NovaMart facility, Cascade should conduct a thorough state-by-state analysis for each affected facility and should provide the longest applicable notice period required under either federal or state law. We recommend that Cascade maintain a comprehensive WARN compliance calendar that tracks all employee separations on a facility-by-facility basis and that flags potential aggregation issues. Any contemplated workforce reductions should be reviewed by Calderwood & Harkness's employment law team at least ninety (90) days in advance of the planned effective date.

C. Pre-Closing WARN Considerations

Under SPA Section 6.01 (Interim Operating Covenants), NovaMart is restricted from terminating employees outside the ordinary course of business without Cascade's prior written consent during the period between signing and closing. This restriction serves the dual purpose of preserving the status quo and ensuring that Cascade is aware of and approves any workforce changes that could affect the value of the business or create post-closing liabilities.

From a WARN Act perspective, this interim period presents an additional risk. Under the WARN Act's ninety (90)-day aggregation rule, pre-closing terminations by NovaMart may be combined with post-closing terminations by Cascade (or by NovaMart at Cascade's direction) for purposes of determining whether WARN thresholds have been met at any single site of employment. This "lookback" aggregation applies regardless of whether the pre-closing and post-closing terminations are part of a single plan or are independently motivated.

Recommendation. Cascade should coordinate closely with NovaMart's management and human resources team regarding any pre-closing terminations, even those that occur in the ordinary course of business. NovaMart should provide Cascade with real-time reporting of all employee separations at each facility during the interim period, and Cascade should maintain detailed records of these separations for purposes of conducting a WARN aggregation analysis prior to implementing any post-closing workforce changes.

IV. 401(k) Plan Transition

A. NovaMart's Existing 401(k) Plan

NovaMart sponsors a 401(k) defined contribution retirement plan (the "NovaMart 401(k) Plan") covering its eligible employees. Based on our review of the plan documents and related materials provided during the benefits due diligence process, the NovaMart 401(k) Plan has the following key features:

• Eligibility: Employees are eligible to participate in the plan upon completion of a specified eligibility period (typically 30 to 90 days of service, with participation beginning on the first day of the month following satisfaction of the eligibility requirement).

• Employee Contributions: The plan permits both pre-tax elective deferrals and designated Roth contributions, subject to the applicable annual limits under IRC Section 402(g) (currently $23,500 for 2025, with an additional $7,500 catch-up contribution for participants aged 50 and over).

• Employer Matching Contributions: NovaMart makes employer matching contributions pursuant to a formula specified in the plan document. The specific match formula and vesting schedule for employer contributions are set forth in the plan's adoption agreement and were reviewed during diligence.

• Participant-Directed Investments: Participants direct the investment of their individual account balances among a menu of investment options selected by the plan's investment committee.

• Administration: The plan is administered by a third-party recordkeeper that provides recordkeeping, compliance testing, and participant services.

• IRS Determination Letter: The plan has received a favorable determination letter from the Internal Revenue Service (or, alternatively, is maintained on a pre-approved plan document with respect to which a current opinion or advisory letter has been issued). This provides reasonable assurance that the plan's form complies with the applicable qualification requirements of IRC Section 401(a).

As of the closing, the NovaMart 401(k) Plan will remain in effect and will continue to be sponsored by NovaMart in its capacity as a wholly owned subsidiary of Cascade. No plan amendments or participant communications are required solely as a result of the change of ownership of NovaMart's stock.

B. Integration Options

Cascade has three principal options for addressing the NovaMart 401(k) Plan during the post-closing integration period:

Option 1: Maintain NovaMart 401(k) Plan as a Separate Plan. Under this approach, NovaMart would continue to sponsor its own 401(k) plan as a Cascade subsidiary. This is the simplest short-term option and avoids the immediate compliance and integration risks associated with a plan merger or termination. However, maintaining two separate 401(k) plans within a single controlled group increases ongoing administrative costs, requires separate nondiscrimination testing (though on a controlled group basis), and may create employee relations issues if the two plans offer different benefits.

Option 2: Merge NovaMart 401(k) Plan into Cascade's 401(k) Plan. Under this approach, the NovaMart 401(k) Plan would be merged into Cascade's existing 401(k) plan in a plan-to-plan merger. A plan merger must comply with the requirements of IRC Section 401(a)(12) and ERISA Section 208, which provide that each participant in the merged plan must be entitled to receive a benefit immediately after the merger that is at least equal to the benefit the participant would have been entitled to receive immediately before the merger (assuming the plan had been terminated at that point). The merger process requires amendments to both plans, an updated favorable determination letter (or reliance on pre-approved plan provisions), participant notices, and coordination with the plans' recordkeepers and trustees. A plan merger typically takes several months to implement from a legal and administrative perspective.

Option 3: Terminate NovaMart 401(k) Plan and Roll Over. Under this approach, NovaMart would terminate its 401(k) plan, and participant account balances would be distributed to participants (or rolled over into Cascade's plan or individual retirement accounts). Plan termination triggers mandatory full vesting of all participant accounts under IRC Section 411(d)(3), regardless of the participant's actual years of service. This approach is more disruptive than a plan merger and may result in tax consequences for participants who do not timely roll over their distributions. It also requires a determination letter filing with the IRS (or reliance on a pre-approved plan termination process) and careful attention to the distribution and rollover procedures.

Recommended Approach. We recommend that Cascade maintain the NovaMart 401(k) Plan as a separate plan for a transition period of approximately six (6) to twelve (12) months following the closing, during which time Cascade's benefits team can evaluate the compatibility of the two plans' designs and investment lineups and can prepare for a plan merger. At the conclusion of the transition period, and assuming the plan designs are compatible or can be harmonized through appropriate amendments, Cascade should pursue a plan-to-plan merger of the NovaMart 401(k) Plan into Cascade's 401(k) Plan. This approach avoids operational disruption at closing, provides adequate time for plan design harmonization, and achieves the long-term goal of a single unified retirement plan for all Cascade employees.

C. Key Compliance Considerations

Several compliance issues must be addressed in connection with the 401(k) plan transition, regardless of which integration option Cascade ultimately selects:

Service Crediting. The SPA's employee benefit provisions require Cascade to credit NovaMart employees' prior service with NovaMart for purposes of eligibility and vesting under Cascade's benefit plans, to the extent that NovaMart employees are eventually transitioned to Cascade's plans. In the context of the 401(k) plan, this means that when NovaMart employees become participants in Cascade's 401(k) plan (whether through a plan merger or otherwise), their years of service with NovaMart must be recognized for purposes of satisfying eligibility requirements and for determining their vested percentage in employer contributions under Cascade's plan. Cascade's plan documents should be reviewed and, if necessary, amended to accommodate this service crediting obligation.

Employer Match Harmonization. If NovaMart's employer matching contribution formula differs from Cascade's formula, the integration of the two plans will require careful consideration of how to transition participants from one match formula to the other. In a plan merger, the surviving plan may need to accommodate the NovaMart match formula for a specified transition period, or the match formulas may need to be harmonized prior to the merger. Any reduction in the employer match for NovaMart employees could have negative employee relations consequences and should be communicated to affected employees in advance.

Nondiscrimination Testing. Following the closing, NovaMart and Cascade will be members of the same controlled group for purposes of IRC Sections 414(b) and (c). As a result, the 401(k) plans maintained by both entities must satisfy the nondiscrimination testing requirements on a controlled group basis, including the actual deferral percentage ("ADP") test under IRC Section 401(k)(3), the actual contribution percentage ("ACP") test under IRC Section 401(m)(2), and the coverage requirements under IRC Section 410(b). These testing obligations apply beginning with the plan year that includes the closing date. Cascade's recordkeeper and benefits counsel should be alerted promptly to the acquisition so that the appropriate testing protocols can be established. Failure to satisfy nondiscrimination testing on a controlled group basis could result in plan disqualification.

Blackout Period Notice. If a plan merger or other transition event requires a temporary restriction on participants' ability to direct investments, obtain loans, or request distributions from their accounts, a "blackout period" may be imposed. Under ERISA Section 101(i) and the related Department of Labor regulations at 29 C.F.R. § 2520.101-3, the plan administrator must provide at least thirty (30) days' advance written notice to affected participants and beneficiaries before the beginning of any blackout period. The notice must describe the reasons for the blackout, the expected beginning and ending dates, and the types of transactions that will be restricted. Additionally, during a blackout period, company insiders (directors and executive officers) are subject to the trading restrictions imposed by Section 306 of the Sarbanes-Oxley Act of 2002, which prohibits the acquisition or transfer of equity securities acquired in connection with service as a director or executive officer during a pension plan blackout period.

Fiduciary Obligations. Throughout the transition period, Cascade must ensure proper fiduciary oversight of both plans. The plan fiduciaries have a duty of loyalty and prudence under ERISA Section 404(a)(1), and the transition must be managed in the best interests of plan participants and beneficiaries. If the governance structure of the NovaMart 401(k) Plan changes as a result of the acquisition (e.g., new members are appointed to the plan's investment committee or administrative committee), appropriate resolutions should be adopted and documented.

V. Health and Welfare Plan Integration

A. NovaMart's Existing Health and Welfare Plans

NovaMart sponsors a comprehensive suite of group health and welfare benefit plans for its employees and their eligible dependents. Based on our diligence review, NovaMart's health and welfare plans include the following:

• Group medical insurance (including one or more plan options, potentially including a preferred provider organization ("PPO") plan and a high-deductible health plan ("HDHP") with an associated health savings account ("HSA") option);

• Group dental insurance;

• Group vision insurance;

• Group life insurance and accidental death and dismemberment ("AD&D") coverage;

• Short-term disability ("STD") insurance;

• Long-term disability ("LTD") insurance;

• Health care flexible spending account ("Health FSA");

• Dependent care flexible spending account ("DCFSA"); and

• To the extent NovaMart offers an HSA-eligible HDHP, associated health savings accounts for enrolled employees.

Approximately 2,400 NovaMart employees and their dependents are eligible for and/or enrolled in these plans. The plans are provided through a combination of fully insured and self-insured arrangements, as detailed in the diligence materials. A summary of NovaMart's health and welfare plans, including carrier/administrator information, plan year, and funding arrangements, is attached hereto as Exhibit A.

B. Post-Closing Integration Approach

Following the closing, NovaMart's existing health and welfare plans will remain in effect, with NovaMart continuing to serve as the plan sponsor. Cascade will have the option, but not the immediate obligation, to integrate NovaMart employees into Cascade's health and welfare plans at a later date.

From an administrative and compliance standpoint, the optimal time to transition NovaMart employees to Cascade's health and welfare plans is at the beginning of Cascade's next open enrollment period, which would coincide with the start of the next plan year. A mid-year transition—while technically possible—creates significant administrative complexity, including the need to coordinate enrollment systems, manage dual carrier/administrator relationships, address deductible and out-of-pocket crediting (discussed below), reconcile claims data, and ensure accurate ACA reporting. A mid-year transition also introduces the risk of gaps in coverage and employee confusion.

Recommendation. We recommend that Cascade maintain NovaMart's health and welfare plans through the end of the current plan year, and then transition NovaMart employees to Cascade's plans at the beginning of the following plan year, during Cascade's regular open enrollment period. This approach minimizes administrative disruption, reduces compliance risk, and provides Cascade with adequate time to develop employee communications and enrollment materials.

C. Affordable Care Act (ACA) Compliance

Following the closing, NovaMart and Cascade will constitute a single "applicable large employer" under the ACA's employer shared responsibility provisions (IRC Section 4980H) by virtue of their membership in the same controlled group under IRC Sections 414(b) and (c). As a single applicable large employer, the combined entity must offer minimum essential coverage that is affordable and provides minimum value to all full-time employees (i.e., employees averaging 30 or more hours of service per week) and their dependents.

Cascade must ensure that there is no gap in minimum essential coverage for NovaMart employees during the transition period. Because NovaMart's existing health plans will remain in effect post-closing, this requirement should be satisfied without interruption. However, if NovaMart's plans are terminated or modified in a manner that results in a gap in coverage, Cascade could be exposed to employer shared responsibility penalties under IRC Section 4980H(a) (the "sledgehammer" penalty for failing to offer coverage to substantially all full-time employees) or IRC Section 4980H(b) (the "tack hammer" penalty for offering coverage that is unaffordable or fails to provide minimum value).

With respect to ACA reporting, Forms 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) and 1095-C (Employer-Provided Health Insurance Offer and Coverage) for the year that includes the closing must be prepared to reflect the change in controlled group status. Depending on the timing of the closing and the respective plan years, this may require coordination between NovaMart's and Cascade's benefits administrators to ensure accurate and consistent reporting. We are coordinating with Sandra Chiu at Whitmore & Paige LLP on the specific ACA reporting requirements.

D. Deductible and Out-of-Pocket Credit

If NovaMart employees are transitioned to Cascade's health plan during the middle of a plan year, a significant practical issue arises with respect to deductibles and out-of-pocket maximums. Under NovaMart's current health plan, employees and their covered dependents may have already accumulated charges toward their annual deductible and out-of-pocket maximum for the current plan year. If these employees are enrolled in Cascade's health plan without any credit for amounts previously applied under the NovaMart plan, they would effectively be required to start over—potentially resulting in significantly higher out-of-pocket costs for the transition year.

Recommendation. Amounts already applied toward NovaMart plan deductibles and out-of-pocket maximums should be credited under Cascade's plan to the extent NovaMart employees transition mid-year. This approach is consistent with best practices for post-acquisition plan integration, promotes employee goodwill, and may be required by the employee benefit covenants in the SPA (which generally obligate Cascade to provide comparable benefits during the transition period). Cascade should coordinate with its health plan insurer or third-party administrator to establish a process for receiving and applying deductible/out-of-pocket credit data from NovaMart's plan administrator.

E. Flexible Spending Accounts (FSAs)

NovaMart's flexible spending account arrangements—including its Health FSA and Dependent Care FSA—present unique challenges in the context of a mid-year plan transition. Under the general "use it or lose it" rule applicable to FSAs under IRC Section 125, any amounts remaining in an employee's FSA account at the end of the plan year (or the end of any applicable grace period or carryover provision) are forfeited. If NovaMart's FSA plan is terminated or if employees transition to Cascade's FSA plan mid-year, employees could be at risk of forfeiting unused balances, which would likely generate significant employee dissatisfaction and could give rise to claims under state consumer protection or wage payment laws.

Recommendation. Cascade should either (i) maintain NovaMart's FSA plans through the end of the current plan year, allowing employees to use their existing elections and balances according to the existing plan terms, or (ii) arrange for NovaMart employees' existing FSA balances and elections to be continued or assumed under Cascade's FSA plan for the remainder of the plan year. The latter option requires careful coordination between the two plans' administrators and may require amendments to Cascade's cafeteria plan. In either case, Cascade should communicate clearly with employees about their FSA balances and the applicable deadlines for submitting claims.

VI. PTO/Vacation Accrual Obligations

A. NovaMart's PTO Policy

NovaMart maintains a paid time off ("PTO") policy (or, alternatively, a separate vacation accrual policy) for its employees. Based on our review of NovaMart's employee handbook and PTO policy documents provided during the employment and benefits due diligence process, NovaMart's PTO policy has the following general features:

• Employees accrue PTO based on a combination of tenure with the company and position/level within the organization. Employees with longer tenure generally accrue PTO at a higher rate.

• The policy imposes an accrual cap, beyond which employees cease to accrue additional PTO until they use some of their existing balance, bringing their balance below the cap.

• The policy includes a "use it or lose it" feature for any PTO that is not used by the end of the calendar year (or the applicable policy year), except where applicable state law prohibits the forfeiture of accrued, unused PTO.

Accrued but unused PTO represents a compensable liability of the employer. Post-closing, NovaMart (and, indirectly, Cascade as NovaMart's parent company) will be obligated to honor all accrued PTO balances in accordance with the terms of the PTO policy and applicable state law. This obligation applies regardless of whether any workforce reductions are implemented; it is a standing obligation that runs with the employment relationship.

B. State Law Requirements

The treatment of accrued, unused PTO and vacation at the time of an employee's separation from employment varies significantly from state to state. Several of the states in which NovaMart operates impose mandatory payout requirements or restrict the employer's ability to implement "use it or lose it" policies. The following is a summary of the key state-law requirements applicable to NovaMart's operations:

California (3 Fulfillment Centers — Stockton, Ontario, Tracy). California law treats accrued vacation as earned wages that vest as they accrue. Cal. Lab. Code § 227.3. Accrued, unused vacation must be paid out upon termination of employment (whether voluntary or involuntary), and employers may not implement a pure forfeiture or "use it or lose it" policy. However, California law does permit employers to impose a reasonable accrual cap (sometimes referred to as a "ceiling" on accrual), under which employees cease to accrue additional vacation once they reach the cap and begin accruing again only after they use some of their banked time, thereby reducing their balance below the cap. This is distinguished from a forfeiture provision because the employee does not lose any previously accrued time; they simply stop accruing new time until they use some. The distinction between a permissible accrual cap and an impermissible forfeiture policy is an important one under California law, and NovaMart's policy should be reviewed to confirm compliance.

Illinois (1 Fulfillment Center — Joliet). Under the Illinois Wage Payment and Collection Act, 820 ILCS 115/5, accrued vacation is treated as wages that must be paid to the employee upon separation from employment. Employers may not impose a forfeiture policy for vacation time that has already been earned. Illinois law provides narrow exceptions for certain policy designs (e.g., front-loaded PTO policies), but the general rule requires payout of all accrued, unused vacation upon termination.

Other States. The treatment of accrued PTO upon termination varies across the remaining states in which NovaMart operates:

• Texas (Headquarters — Austin): Texas law does not require employers to pay out accrued vacation upon termination unless the employer's written policy or employment agreement creates such an obligation. However, if NovaMart's PTO policy provides for payout at termination, the employer is bound by that commitment under the Texas Payday Act.

• New Jersey (2 Fulfillment Centers — Edison, Cranbury): New Jersey law does not have a specific statute mandating vacation payout upon termination, but the New Jersey Wage and Hour Law and associated regulations generally require employers to pay all wages due at the time of termination, which may include accrued vacation if the employer's policy provides for it.

• Georgia (2 Fulfillment Centers — Savannah, Atlanta): Georgia does not have a specific vacation payout statute. The obligation to pay accrued vacation at termination depends on the employer's policy.

• Ohio (1 Fulfillment Center — Columbus): Ohio law does not mandate vacation payout upon termination, absent a policy or agreement to the contrary.

• Pennsylvania (1 Fulfillment Center — Carlisle): Pennsylvania does not have a statute specifically requiring vacation payout upon termination. The employer's policy controls.

• Tennessee (1 Fulfillment Center — Lebanon): Tennessee does not mandate vacation payout upon termination. The employer's policy governs.

• Florida (2 Fulfillment Centers — Jacksonville, Tampa): Florida does not have a statute requiring vacation payout upon termination. The employer's policy controls.

• Washington (1 Fulfillment Center — Kent): Washington law does not specifically require vacation payout upon termination, though the Washington Department of Labor & Industries has taken the position that accrued, unused vacation is a form of wages that must be paid at termination if the employer's policy provides for accrual.

A comprehensive state-by-state summary of PTO accrual laws is attached hereto as Exhibit D.

Even in the absence of workforce reductions, if NovaMart's PTO policy is modified or eliminated after the closing—for example, as part of a transition to Cascade's PTO policy—accrued PTO balances may need to be paid out under the applicable state law before the transition is implemented. Cascade should obtain legal advice before making any changes to NovaMart's PTO policy in states that impose mandatory payout requirements.

C. Working Capital Impact

Accrued but unused PTO represents a current liability on NovaMart's balance sheet and is typically included as a component of the working capital calculation in a stock purchase transaction. Under the SPA, the net working capital target for the transaction is set at $78,500,000, with a collar of $5,000,000 (meaning that no purchase price adjustment will be made for deviations from the target that fall within the range of $73,500,000 to $83,500,000). Deviations outside the collar will result in a dollar-for-dollar adjustment to the purchase price.

NovaMart's accrued PTO obligation should be included as a current liability in the Estimated Closing Statement and in the final Working Capital calculation. We recommend that Calderwood & Harkness and Whitmore & Paige LLP (Sandra Chiu) confirm the treatment of accrued PTO in the Working Capital Methodology Agreement, including the methodology for calculating the accrued liability (e.g., based on each employee's current rate of pay and accrued but unused hours as of the closing date), and ensure that the Estimated Closing Statement accurately reflects this obligation. Any disagreement over the treatment or valuation of accrued PTO could result in a post-closing working capital dispute, and it is therefore important to reach agreement on the methodology before closing.

D. Policy Harmonization

Post-closing, Cascade will need to evaluate the compatibility of NovaMart's PTO accrual policy with Cascade's own PTO or vacation policy. If the policies differ materially—for example, in accrual rates, caps, carryover provisions, or payout-at-termination terms—Cascade will need to determine whether to (i) maintain NovaMart's existing PTO policy for a transition period, (ii) immediately adopt Cascade's PTO policy for NovaMart employees (while crediting prior accruals), or (iii) implement a hybrid approach that bridges the two policies over time.

Recommendation. We recommend that Cascade maintain NovaMart's existing PTO policy for at least six (6) months following the closing, during which time Cascade can evaluate the differences between the two policies, develop a harmonization plan, and prepare employee communications. Any changes to NovaMart's PTO policy should be preceded by a compliance review to ensure that the changes do not violate applicable state laws (particularly in California and Illinois) and should be communicated to employees with adequate advance notice.

VII. COBRA Continuation Coverage

A. Overview of COBRA Obligations

The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), requires employers that maintain group health plans and that had twenty (20) or more employees on more than fifty percent (50%) of the employer's typical business days in the preceding calendar year to offer continuation of group health plan coverage to employees and their qualified beneficiaries following a "qualifying event." COBRA continuation coverage must generally be offered for a period of eighteen (18) months following a qualifying event attributable to an employee's termination of employment (other than for gross misconduct) or reduction in hours, and for thirty-six (36) months following a qualifying event attributable to the employee's death, divorce, dependent child's loss of dependent status, or the employee's entitlement to Medicare.

NovaMart, with approximately 2,400 employees, is unquestionably a COBRA-covered employer. NovaMart's group health plans—including its medical, dental, and vision plans—are subject to COBRA's requirements, and NovaMart must comply with all applicable notice, election, and administration obligations.

B. Change of Control as a Qualifying Event

A threshold question in any acquisition is whether the transaction itself constitutes a "qualifying event" under COBRA. In a stock purchase, the answer is no. Because NovaMart continues as a legal entity and as the employer of record, and because NovaMart's group health plans remain in effect following the closing, the change of ownership of NovaMart's stock does not trigger a qualifying event for COBRA purposes. No employee experiences a termination of employment, a reduction in hours, or any other event that would qualify as a COBRA qualifying event solely as a result of the stock purchase.

However, it is important to note that if any NovaMart employees are terminated following the closing—whether as a result of redundancy, restructuring, performance-related issues, or any other reason—each such termination will constitute a qualifying event under COBRA, and the terminated employee (and his or her qualified beneficiaries) will be entitled to COBRA continuation coverage under NovaMart's group health plans (or, if NovaMart's plans have been transitioned into Cascade's plans by that time, under Cascade's successor plans).

C. Pre-Closing COBRA Obligations

During the period between signing and closing, NovaMart must continue to comply with all of its existing COBRA obligations. This includes, without limitation:

• Providing timely COBRA qualifying event notices to employees and qualified beneficiaries who experience a qualifying event during the interim period;

• Maintaining COBRA continuation coverage for all individuals who are currently enrolled in COBRA coverage as of the signing date;

• Processing COBRA elections and premium payments in a timely manner; and

• Complying with all COBRA notice requirements, including initial COBRA notices for newly eligible employees and general COBRA election notices for qualifying events.

Recommendation. As part of its bring-down diligence prior to closing, Cascade should confirm that NovaMart is current on all COBRA notices and administration. Specifically, Cascade should request a list of all individuals currently receiving COBRA continuation coverage under NovaMart's group health plans, the expiration dates of their coverage periods, and confirmation that all required notices have been timely provided. Any deficiencies in NovaMart's COBRA compliance could result in excise tax penalties under IRC Section 4980B and potential litigation risk.

D. Post-Closing COBRA Administration

If NovaMart's group health plans are terminated or merged into Cascade's health plans at any point following the closing, NovaMart must ensure that COBRA continuation coverage obligations are satisfied under the successor plan. Specifically:

• Qualified beneficiaries who are receiving COBRA continuation coverage under NovaMart's plans at the time of the plan transition must be offered continuation coverage under the successor plan on terms that are no less favorable than the coverage they were receiving under the NovaMart plan.

• If Cascade consolidates or eliminates certain NovaMart plan options (e.g., if NovaMart offered a PPO plan that is not available under Cascade's plan lineup), COBRA beneficiaries must be offered comparable plan options under Cascade's plans.

• A plan transition or merger cannot be used as a mechanism to avoid or curtail COBRA obligations. The COBRA coverage period for each qualified beneficiary continues to run from the date of the original qualifying event, regardless of any plan transition.

• NovaMart must provide timely notice to COBRA-qualified beneficiaries of any changes to the plan (including a transition to Cascade's plans) that affect their coverage options, premiums, or coverage terms.

E. State Continuation Coverage ("Mini-COBRA")

Several states have enacted state-level continuation coverage laws (commonly referred to as "mini-COBRA" laws) that supplement or extend the federal COBRA requirements. While NovaMart exceeds the 20-employee threshold for federal COBRA, certain state mini-COBRA laws may impose additional obligations:

California (Cal-COBRA). California's continuation coverage law, Cal. Ins. Code §§ 10128.50–10128.59, extends COBRA-like continuation coverage for up to thirty-six (36) months for individuals whose federal COBRA coverage has been exhausted after eighteen (18) months. Cal-COBRA coverage is available to qualifying individuals who were covered under a group health plan maintained by a California employer and who exhaust their federal COBRA coverage period. Cascade should ensure that NovaMart's COBRA administrator is aware of and compliant with Cal-COBRA obligations for employees at the three California fulfillment centers.

Other states where NovaMart operates may have mini-COBRA laws that apply to employers with fewer than 20 employees (which would not apply to NovaMart itself but could apply to any small Cascade subsidiaries within the controlled group) or that provide other supplemental protections. These state requirements should be reviewed on a state-by-state basis.

VIII. ERISA Compliance Considerations

A. Controlled Group Analysis

Upon consummation of the closing, NovaMart will become a member of Cascade's controlled group of corporations under IRC Sections 414(b) and (c), and, if applicable, the affiliated service group rules under IRC Section 414(m). The controlled group rules are critical for purposes of ERISA and Internal Revenue Code compliance because they require that all employee benefit plans maintained by members of the controlled group be tested on an aggregate basis for purposes of:

• Coverage testing under IRC Section 410(b): Each qualified retirement plan must cover a sufficient percentage of the employer's non-highly compensated employees (relative to the percentage of highly compensated employees covered) when tested on a controlled group basis.

• Nondiscrimination testing under IRC Section 401(a)(4): Contributions and/or benefits under each qualified retirement plan must not discriminate in favor of highly compensated employees when tested on a controlled group basis.

• Minimum participation requirements under IRC Section 401(a)(26): Each qualified defined benefit plan must benefit the lesser of 50 employees or 40% of all employees in the controlled group.

• ACA employer shared responsibility: The combined controlled group is treated as a single "applicable large employer" for purposes of the ACA employer mandate under IRC Section 4980H.

The combined controlled group will include all Cascade subsidiaries and all NovaMart entities. Cascade's benefits counsel and recordkeeper should be notified of the acquisition promptly so that the appropriate controlled group testing protocols can be established for the plan year that includes the closing date.

B. Fiduciary Transition

Following the closing, Cascade's ERISA compliance and benefits management team should assume fiduciary oversight of NovaMart's employee benefit plans. This transition involves several steps:

• Identification and review of current NovaMart plan fiduciaries, including named plan administrators, plan trustees, investment committee members, and any other individuals or entities exercising fiduciary authority over NovaMart's plans.

• Determination of whether existing NovaMart plan fiduciaries will continue in their roles, be replaced by Cascade-designated fiduciaries, or be supplemented by additional Cascade personnel.

• Adoption of board or committee resolutions, as appropriate, to effectuate changes in fiduciary appointments.

• Coordination with NovaMart's current plan service providers (recordkeeper, third-party administrator, custodian, investment managers) to ensure continuity of plan administration during the transition.

• Review of NovaMart's existing fiduciary liability insurance and fidelity bond coverage (as required by ERISA Section 412) to ensure that coverage remains adequate during and after the transition.

C. Benefit Plan Document Updates

Following the closing, NovaMart's employee benefit plan documents should be amended to reflect, as applicable:

• Any change in the identity of the plan sponsor (if NovaMart's plans are eventually assumed or adopted by Cascade);

• Updated fiduciary designations (plan administrator, trustee, investment committee);

• Any modifications to plan terms resulting from the integration process; and

• Changes in the plan's administrative service providers (recordkeeper, third-party administrator, etc.).

In addition, NovaMart's summary plan descriptions ("SPDs") must be updated and distributed to plan participants within the time frames required by ERISA. Under ERISA Section 104(b)(1) and the

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
TO: Elena Vasquez-Bright, General Counsel, Cascade Retail Holdings Inc. Theodore "Ted" Langford, SVP, Corporate Development, Cascade Retail Holdings Inc.
FROM: Harrison Wexford, Derek Okonkwo, and Tiffany Rosenthal, Calderwood & Harkness LLP
DATE: May 18, 2025
RE: Employee Benefit Plan Assumption and Integration Considerations — Acquisition of NovaMart Global Inc.
MATTER: Cascade Retail Holdings Inc. — Acquisition of NovaMart Global Inc.
Right-click to update Table of Contents
I. Executive Summary
This memorandum analyzes the employee benefit plan integration considerations, workforce transition issues, and compliance obligations arising from Cascade Retail Holdings Inc.'s ("Cascade" or the "Buyer") proposed acquisition of one hundred percent (100%) of the outstanding capital stock of NovaMart Global Inc. ("NovaMart" or the "Company") for an aggregate purchase price of $1,200,000,000 (One Billion Two Hundred Million Dollars), pursuant to the Stock Purchase Agreement dated May 20, 2025 (the "SPA"). This memorandum is intended to serve as a comprehensive guide for Cascade's management, integration team, and internal counsel as they navigate the employee-related aspects of this transaction from signing through closing and into the post-closing integration period.
Transaction Structure. The transaction is structured as a stock purchase governed by Delaware law. Upon consummation of the closing, NovaMart will become a wholly owned subsidiary of Cascade. Because this is a stock acquisition—as opposed to an asset acquisition—NovaMart will continue as a separate legal entity, and its approximately 2,400 employees will remain employees of NovaMart immediately following the closing. These employees are distributed across fourteen (14) fulfillment centers located in nine states—California (3 facilities), New Jersey (2 facilities), Georgia (2 facilities), Ohio (1 facility), Illinois (1 facility), Pennsylvania (1 facility), Tennessee (1 facility), Florida (2 facilities), and Washington (1 facility)—as well as NovaMart's corporate headquarters at 1100 Congress Avenue, Suite 800, Austin, Texas 78701.
Continuity of Employment. Because the transaction is structured as a stock purchase, no automatic termination-and-rehire event occurs at the closing. NovaMart's existing employer-employee relationships continue without interruption, and NovaMart's employment agreements, offer letters, employee handbooks, workplace policies, and benefit plans remain in full force and effect. However, Cascade will need to plan for the eventual harmonization of NovaMart's benefit plans with Cascade's existing benefit programs and must ensure compliance with all applicable federal, state, and local employment laws throughout the integration period.
Key Areas Addressed. This memorandum addresses the following principal areas of concern:
• Compliance with the federal Worker Adjustment and Retraining Notification Act ("WARN Act") and analogous state "mini-WARN" statutes in each state where NovaMart operates;
• Transition and integration of NovaMart's 401(k) defined contribution retirement plan;
• Health and welfare plan integration, including Affordable Care Act ("ACA") compliance, deductible/out-of-pocket crediting, and flexible spending account ("FSA") treatment;
• Paid time off ("PTO") and vacation accrual obligations, including state-law payout requirements and working capital implications;
• COBRA continuation coverage obligations before, during, and after the closing;
• ERISA compliance considerations, including controlled group analysis, fiduciary transitions, and plan document updates;
• NovaMart stock option plan treatment, including tax implications for option holders and IRC Section 409A compliance;
• Payroll tax and employment tax matters, including successor employer status and multi-state compliance;
• Directors' and officers' liability insurance tail coverage;
• Implementation of the $18,000,000 key employee retention pool;
• Non-competition and restrictive covenant integration considerations; and
• A comprehensive summary of recommended action items and timelines.
SPA Provisions. This memorandum references and should be read in conjunction with the following provisions of the SPA: Article VI (pre-closing covenants), including Section 6.01 (interim operating covenants regarding employee matters and benefit plan modifications); Article VIII (conditions to closing); and the employee-related representations and warranties set forth in Article III. We have reviewed these provisions in detail and have incorporated their requirements into our analysis and recommendations below.
Coordination with Advisors. We are coordinating with Whitmore & Paige LLP (Sandra Chiu, Engagement Partner) on benefit plan actuarial and accounting matters, including the treatment of accrued PTO liabilities in the working capital calculation, 401(k) plan valuations, and ACA reporting coordination. We are also coordinating internally with Sylvia Hartwell in Calderwood & Harkness's Tax Department on stock option cash-out withholding calculations, retention bonus tax treatment, and payroll tax integration matters.
II. Transaction Structure — Employment Law Implications
A. Stock Purchase — Continuity of Employment
In a stock purchase transaction, the target company—here, NovaMart—continues as a separate legal entity after the closing. The buyer acquires ownership of the target's stock, but the target's corporate existence, contracts, obligations, and relationships remain intact. This stands in contrast to an asset purchase, where the buyer acquires specified assets and assumes specified liabilities, and the seller's employees are typically terminated and then offered new employment by the buyer.
Because NovaMart will continue as a legal entity and as a wholly owned subsidiary of Cascade following the closing, all employer-employee relationships between NovaMart and its approximately 2,400 employees will remain in effect without interruption. No employee of NovaMart will experience a termination of employment or a break in service as a result of the closing itself. This continuity of employment has several important implications:
• All existing employment agreements, offer letters, and at-will employment arrangements between NovaMart and its employees remain binding and enforceable according to their terms, unless and until affirmatively modified by the post-closing NovaMart/Cascade management team in accordance with applicable law.
• NovaMart's employee handbooks, workplace policies, codes of conduct, and internal operating procedures remain in effect. Cascade should review these materials during the integration planning process to identify any inconsistencies with Cascade's own policies and to develop a timeline for harmonization.
• If NovaMart were party to any collective bargaining agreements ("CBAs") with labor unions, those CBAs would transfer by operation of law and remain binding on NovaMart in its capacity as the employer. Our diligence review did not identify any CBAs currently in effect, nor did we identify any pending union organizing activities or unfair labor practice charges. Nonetheless, Cascade should remain alert to any labor-related developments during the interim period between signing and closing.
• Employee seniority, tenure, and service history with NovaMart are preserved. This continuity is particularly important for benefit plan eligibility, vesting, and accrual purposes, as discussed in Sections IV through VI below.
B. Implications for Employee Benefits
NovaMart's existing benefit plans—including group health insurance (medical, dental, and vision), life insurance, short-term and long-term disability coverage, the NovaMart 401(k) Plan, the NovaMart stock option plan, NovaMart's PTO/vacation accrual policy, and NovaMart's flexible spending account arrangements—remain sponsored by NovaMart after the closing. Cascade, as the new parent company, has no legal obligation to immediately integrate NovaMart employees into Cascade's benefit plans. The plans continue in effect under their existing terms, with NovaMart serving as plan sponsor and employer.
However, Cascade will likely desire to harmonize NovaMart's benefit programs with Cascade's existing benefit plans within a reasonable transition period. Industry practice for post-acquisition benefit plan integration typically ranges from six (6) to twelve (12) months following closing, though the specific timeline will depend on a number of factors, including the relative complexity of the respective plan designs, the availability of open enrollment windows, the need for nondiscrimination testing coordination, and the administrative capabilities of the parties' respective benefits platforms and payroll providers.
It is important to note that Section 6.01 of the SPA (Interim Operating Covenants) restricts NovaMart from materially modifying its benefit plans during the period between signing (May 20, 2025) and closing without Cascade's prior written consent. This restriction is designed to preserve the status quo with respect to employee benefits and to prevent NovaMart from increasing its benefit-related liabilities or making changes that could complicate integration planning. Specifically, NovaMart may not, without Cascade's prior written consent, (i) increase compensation or benefits for any employee other than in the ordinary course of business consistent with past practice, (ii) enter into, modify, or terminate any employment agreement or benefit plan, (iii) grant any equity awards or acceleration of vesting, or (iv) hire or terminate employees outside the ordinary course of business. Cascade's integration team should monitor compliance with these covenants throughout the interim period.
C. Post-Closing Employment Agreements and Retention Arrangements
The transaction contemplates specific post-closing employment and retention arrangements for certain key NovaMart executives and employees, as follows:
Julian Reeves — Post-Closing Employment Agreement. Mr. Reeves, currently serving as NovaMart's Chief Executive Officer, will enter into a three (3)-year post-closing employment agreement with Cascade (or a designated Cascade subsidiary) to be executed concurrently with the closing. The material terms of Mr. Reeves' employment agreement include an annual base salary of $625,000, a target annual performance bonus of seventy-five percent (75%) of base salary (i.e., $468,750 at target), and an equity grant of 150,000 restricted shares of Cascade common stock (Nasdaq: CRHI) vesting ratably over three (3) years. Mr. Reeves' employment agreement also contains customary restrictive covenants, including non-competition, non-solicitation, and confidentiality provisions, as well as severance and change-of-control protections. The specific terms of Mr. Reeves' employment agreement are addressed in a separate memorandum.
Priya Narasimhan — Post-Closing Employment Agreement. Ms. Narasimhan, currently serving as NovaMart's Chief Technology Officer, will enter into a three (3)-year post-closing employment agreement with Cascade (or a designated Cascade subsidiary) to be executed concurrently with the closing. The material terms of Ms. Narasimhan's employment agreement include an annual base salary of $575,000, a target annual performance bonus of seventy percent (70%) of base salary (i.e., $402,500 at target), and an equity grant of 125,000 restricted shares of Cascade common stock vesting ratably over three (3) years. Like Mr. Reeves' agreement, Ms. Narasimhan's agreement contains customary restrictive covenants and severance protections.
Key Employee Retention Pool. In addition to the individual employment agreements with Mr. Reeves and Ms. Narasimhan, the SPA provides for a key employee retention pool in the aggregate amount of $18,000,000 (Eighteen Million Dollars). This pool is intended to incentivize the continued employment of other critical NovaMart employees during the integration period. The retention pool is structured as follows: fifty percent (50%), or $9,000,000, is payable at the closing, and the remaining fifty percent (50%), or $9,000,000, is payable on the first anniversary of the closing, in each case subject to the recipient's continued employment with NovaMart or Cascade through the applicable payment date. The implementation of the retention pool is discussed in greater detail in Section XII below.
These post-closing employment and retention arrangements are separate from, and in addition to, NovaMart's existing benefit plan obligations. They represent distinct contractual commitments of Cascade and should be treated accordingly for budgeting, accounting, and tax purposes.
III. WARN Act Compliance
A. Federal WARN Act (Worker Adjustment and Retraining Notification Act)
The federal Worker Adjustment and Retraining Notification Act, 29 U.S.C. §§ 2101–2109 (the "WARN Act"), requires employers with 100 or more full-time employees to provide at least sixty (60) calendar days' advance written notice before ordering a "plant closing" or "mass layoff." The WARN Act's notice requirements apply to the affected employees, their collective bargaining representatives (if any), the state dislocated worker unit, and the chief elected official of the unit of local government in which the affected facility is located.
The key statutory terms are defined as follows:
• Plant Closing: The permanent or temporary shutdown of a "single site of employment," or one or more "facilities" or "operating units" within a single site of employment, resulting in an employment loss for fifty (50) or more full-time employees during any thirty (30)-day period. 29 U.S.C. § 2101(a)(2).
• Mass Layoff: A reduction in force at a single site of employment that (i) affects 500 or more full-time employees, or (ii) affects 50 to 499 full-time employees if those employees constitute at least thirty-three percent (33%) of the active, full-time workforce at that site. 29 U.S.C. § 2101(a)(3).
• Employment Loss: A termination of employment (other than for cause, voluntary departure, or retirement), a layoff exceeding six (6) months, or a reduction in hours of work of more than fifty percent (50%) during each month of any six (6)-month period. 29 U.S.C. § 2101(a)(6).
Threshold Analysis for NovaMart. NovaMart has approximately 2,400 total employees distributed across its Austin, Texas headquarters and fourteen (14) fulfillment centers in nine states. Each fulfillment center and the headquarters constitutes a separate "single site of employment" for purposes of the WARN Act. The WARN Act analysis must therefore be conducted on a site-by-site basis. Based on the headcount information provided during diligence, the approximate employee distribution across NovaMart's facilities is as follows:
Given that each facility employs between approximately 110 and 310 employees, a plant closing at any single facility would trigger WARN Act notice requirements (since the affected employee count would exceed 50 at each location). A mass layoff at a single facility would be triggered if 500 or more employees are affected (which would not occur at any individual facility) or if 50 to 499 employees are affected and constitute at least 33% of the active full-time workforce at that site (which would be triggered at each facility if 50 or more employees are laid off, given that 50 employees would constitute at least 33% of the workforce at all facilities except possibly the Austin headquarters).
Current Workforce Reduction Plans. As of the date of this memorandum, Cascade has not indicated plans for immediate post-closing workforce reductions. However, if any consolidation of fulfillment center operations, facility closures, or significant headcount reductions are contemplated within the first six (6) months following closing, Cascade must assess its WARN Act obligations on a site-by-site basis well in advance and provide the required sixty (60)-day written notice before implementing any such changes. We strongly recommend that any workforce reduction decisions be reviewed by outside employment counsel before they are communicated to employees or implemented.
Aggregation Rules. The WARN Act contains an important aggregation provision. Employment losses that occur during any ninety (90)-day period at a single site of employment are aggregated to determine whether WARN Act thresholds have been met, even if no single layoff action independently triggers the statutory thresholds. 29 U.S.C. § 2102(d). This means that if Cascade implements multiple rounds of smaller reductions at a single facility within a 90-day window—each of which individually falls below the 50-employee threshold—the aggregate total may nonetheless trigger WARN Act obligations. Cascade's integration team should maintain a careful log of all employment separations at each facility post-closing and should flag any situation in which cumulative separations within a rolling 90-day period approach the applicable thresholds.
Penalties for Non-Compliance. An employer that violates the WARN Act is liable to each affected employee for up to sixty (60) days' back pay and benefits (calculated at the employee's average regular rate of pay for the last three years of employment, or the employee's final regular rate of pay, whichever is higher). In addition, an employer that fails to provide timely notice to the appropriate unit of local government is subject to a civil penalty of up to $500 per day of violation, up to a maximum of $30,000. 29 U.S.C. § 2104. These penalties can be substantial in the context of a facility closure or large-scale layoff.
B. State "Mini-WARN" Acts
Several of the states in which NovaMart operates have enacted state-level WARN Act equivalents (commonly referred to as "mini-WARN" statutes) that impose additional or more stringent requirements than the federal WARN Act. These state laws may feature lower employee thresholds, longer notice periods, broader definitions of covered events, or mandatory severance obligations. The following is a summary of the key state mini-WARN requirements applicable to NovaMart's operations:
California (3 Fulfillment Centers — Stockton, Ontario, Tracy). California's version of the WARN Act, codified at California Labor Code Sections 1400–1408 ("Cal-WARN"), requires covered employers to provide sixty (60) days' advance written notice before ordering a "mass layoff," "relocation," or "termination" affecting fifty (50) or more employees at a "covered establishment" during any thirty (30)-day period. Cal-WARN differs from the federal WARN Act in several important respects. First, Cal-WARN has no minimum employer size threshold—it applies to any employer that owns and operates a "covered establishment" (i.e., any industrial or commercial facility or part thereof). Second, Cal-WARN's definition of "covered establishment" is broader than the federal "single site of employment." Third, Cal-WARN includes "relocation" of a covered establishment as a triggering event, which the federal WARN Act does not. Given that NovaMart operates three fulfillment centers in California, Cal-WARN compliance is a critical concern for any post-closing workforce changes in the state.
New Jersey (2 Fulfillment Centers — Edison, Cranbury). New Jersey's WARN Act, N.J. Stat. Ann. §§ 34:21-1 to 34:21-7 ("NJ WARN"), imposes more stringent requirements than the federal WARN Act. NJ WARN requires ninety (90) days' advance written notice—thirty days longer than the federal requirement—before a mass layoff or transfer of operations affecting fifty (50) or more full-time employees at an establishment. In addition, NJ WARN mandates that the employer provide severance pay to each affected employee in an amount equal to one (1) week of pay for each full year of employment with the employer. This severance pay obligation is mandatory and is not contingent on the existence of a pre-existing severance plan or policy. The combination of the extended notice period and mandatory severance makes New Jersey one of the most employee-protective jurisdictions in the country for purposes of WARN compliance.
Illinois (1 Fulfillment Center — Joliet). The Illinois Worker Adjustment and Retraining Notification Act, 820 ILCS 65/1 et seq. ("Illinois WARN"), closely parallels the federal WARN Act in its coverage thresholds and notice periods. However, Illinois WARN imposes additional notification requirements, including the obligation to notify the Illinois Department of Commerce and Economic Opportunity of any planned mass layoff or plant closing. The notice must include specific information about the affected employees, the expected date of the layoff or closing, and the reasons for the action.
Tennessee (1 Fulfillment Center — Lebanon). The Tennessee Plant Closing and Reduction in Operations Act, Tenn. Code Ann. §§ 50-1-601 to 50-1-604, requires employers to provide advance notice before a permanent shutdown, partial shutdown, or reduction in operations affecting fifty (50) or more employees at a facility. The notice must be provided to the Commissioner of Labor and Workforce Development and to the affected employees. While Tennessee's statute is less prescriptive than some other states' mini-WARN laws, compliance remains necessary for any workforce changes at the Lebanon fulfillment center.
Georgia, Ohio, Pennsylvania, Florida, and Washington. We have reviewed the employment laws of each of these states for mini-WARN equivalents and other notice or severance obligations. Georgia, Ohio, Pennsylvania, and Florida do not have comprehensive mini-WARN statutes comparable to those in California, New Jersey, or Illinois, though each state may impose other notice or reporting obligations in connection with significant layoffs or facility closures (e.g., reporting to the state unemployment agency). Washington State has adopted the Washington Industrial Insurance Act and related statutes but does not currently have a comprehensive mini-WARN statute with lower thresholds than the federal WARN Act. However, Washington does require employers to provide notice of certain plant closings to the Employment Security Department. A detailed state-by-state matrix of WARN Act and mini-WARN requirements for each of NovaMart's operating states is attached hereto as Exhibit B.
Recommendation. Before implementing any post-closing workforce changes at any NovaMart facility, Cascade should conduct a thorough state-by-state analysis for each affected facility and should provide the longest applicable notice period required under either federal or state law. We recommend that Cascade maintain a comprehensive WARN compliance calendar that tracks all employee separations on a facility-by-facility basis and that flags potential aggregation issues. Any contemplated workforce reductions should be reviewed by Calderwood & Harkness's employment law team at least ninety (90) days in advance of the planned effective date.
C. Pre-Closing WARN Considerations
Under SPA Section 6.01 (Interim Operating Covenants), NovaMart is restricted from terminating employees outside the ordinary course of business without Cascade's prior written consent during the period between signing and closing. This restriction serves the dual purpose of preserving the status quo and ensuring that Cascade is aware of and approves any workforce changes that could affect the value of the business or create post-closing liabilities.
From a WARN Act perspective, this interim period presents an additional risk. Under the WARN Act's ninety (90)-day aggregation rule, pre-closing terminations by NovaMart may be combined with post-closing terminations by Cascade (or by NovaMart at Cascade's direction) for purposes of determining whether WARN thresholds have been met at any single site of employment. This "lookback" aggregation applies regardless of whether the pre-closing and post-closing terminations are part of a single plan or are independently motivated.
Recommendation. Cascade should coordinate closely with NovaMart's management and human resources team regarding any pre-closing terminations, even those that occur in the ordinary course of business. NovaMart should provide Cascade with real-time reporting of all employee separations at each facility during the interim period, and Cascade should maintain detailed records of these separations for purposes of conducting a WARN aggregation analysis prior to implementing any post-closing workforce changes.
IV. 401(k) Plan Transition
A. NovaMart's Existing 401(k) Plan
NovaMart sponsors a 401(k) defined contribution retirement plan (the "NovaMart 401(k) Plan") covering its eligible employees. Based on our review of the plan documents and related materials provided during the benefits due diligence process, the NovaMart 401(k) Plan has the following key features:
• Eligibility: Employees are eligible to participate in the plan upon completion of a specified eligibility period (typically 30 to 90 days of service, with participation beginning on the first day of the month following satisfaction of the eligibility requirement).
• Employee Contributions: The plan permits both pre-tax elective deferrals and designated Roth contributions, subject to the applicable annual limits under IRC Section 402(g) (currently $23,500 for 2025, with an additional $7,500 catch-up contribution for participants aged 50 and over).
• Employer Matching Contributions: NovaMart makes employer matching contributions pursuant to a formula specified in the plan document. The specific match formula and vesting schedule for employer contributions are set forth in the plan's adoption agreement and were reviewed during diligence.
• Participant-Directed Investments: Participants direct the investment of their individual account balances among a menu of investment options selected by the plan's investment committee.
• Administration: The plan is administered by a third-party recordkeeper that provides recordkeeping, compliance testing, and participant services.
• IRS Determination Letter: The plan has received a favorable determination letter from the Internal Revenue Service (or, alternatively, is maintained on a pre-approved plan document with respect to which a current opinion or advisory letter has been issued). This provides reasonable assurance that the plan's form complies with the applicable qualification requirements of IRC Section 401(a).
As of the closing, the NovaMart 401(k) Plan will remain in effect and will continue to be sponsored by NovaMart in its capacity as a wholly owned subsidiary of Cascade. No plan amendments or participant communications are required solely as a result of the change of ownership of NovaMart's stock.
B. Integration Options
Cascade has three principal options for addressing the NovaMart 401(k) Plan during the post-closing integration period:
Option 1: Maintain NovaMart 401(k) Plan as a Separate Plan. Under this approach, NovaMart would continue to sponsor its own 401(k) plan as a Cascade subsidiary. This is the simplest short-term option and avoids the immediate compliance and integration risks associated with a plan merger or termination. However, maintaining two separate 401(k) plans within a single controlled group increases ongoing administrative costs, requires separate nondiscrimination testing (though on a controlled group basis), and may create employee relations issues if the two plans offer different benefits.
Option 2: Merge NovaMart 401(k) Plan into Cascade's 401(k) Plan. Under this approach, the NovaMart 401(k) Plan would be merged into Cascade's existing 401(k) plan in a plan-to-plan merger. A plan merger must comply with the requirements of IRC Section 401(a)(12) and ERISA Section 208, which provide that each participant in the merged plan must be entitled to receive a benefit immediately after the merger that is at least equal to the benefit the participant would have been entitled to receive immediately before the merger (assuming the plan had been terminated at that point). The merger process requires amendments to both plans, an updated favorable determination letter (or reliance on pre-approved plan provisions), participant notices, and coordination with the plans' recordkeepers and trustees. A plan merger typically takes several months to implement from a legal and administrative perspective.
Option 3: Terminate NovaMart 401(k) Plan and Roll Over. Under this approach, NovaMart would terminate its 401(k) plan, and participant account balances would be distributed to participants (or rolled over into Cascade's plan or individual retirement accounts). Plan termination triggers mandatory full vesting of all participant accounts under IRC Section 411(d)(3), regardless of the participant's actual years of service. This approach is more disruptive than a plan merger and may result in tax consequences for participants who do not timely roll over their distributions. It also requires a determination letter filing with the IRS (or reliance on a pre-approved plan termination process) and careful attention to the distribution and rollover procedures.
Recommended Approach. We recommend that Cascade maintain the NovaMart 401(k) Plan as a separate plan for a transition period of approximately six (6) to twelve (12) months following the closing, during which time Cascade's benefits team can evaluate the compatibility of the two plans' designs and investment lineups and can prepare for a plan merger. At the conclusion of the transition period, and assuming the plan designs are compatible or can be harmonized through appropriate amendments, Cascade should pursue a plan-to-plan merger of the NovaMart 401(k) Plan into Cascade's 401(k) Plan. This approach avoids operational disruption at closing, provides adequate time for plan design harmonization, and achieves the long-term goal of a single unified retirement plan for all Cascade employees.
C. Key Compliance Considerations
Several compliance issues must be addressed in connection with the 401(k) plan transition, regardless of which integration option Cascade ultimately selects:
Service Crediting. The SPA's employee benefit provisions require Cascade to credit NovaMart employees' prior service with NovaMart for purposes of eligibility and vesting under Cascade's benefit plans, to the extent that NovaMart employees are eventually transitioned to Cascade's plans. In the context of the 401(k) plan, this means that when NovaMart employees become participants in Cascade's 401(k) plan (whether through a plan merger or otherwise), their years of service with NovaMart must be recognized for purposes of satisfying eligibility requirements and for determining their vested percentage in employer contributions under Cascade's plan. Cascade's plan documents should be reviewed and, if necessary, amended to accommodate this service crediting obligation.
Employer Match Harmonization. If NovaMart's employer matching contribution formula differs from Cascade's formula, the integration of the two plans will require careful consideration of how to transition participants from one match formula to the other. In a plan merger, the surviving plan may need to accommodate the NovaMart match formula for a specified transition period, or the match formulas may need to be harmonized prior to the merger. Any reduction in the employer match for NovaMart employees could have negative employee relations consequences and should be communicated to affected employees in advance.
Nondiscrimination Testing. Following the closing, NovaMart and Cascade will be members of the same controlled group for purposes of IRC Sections 414(b) and (c). As a result, the 401(k) plans maintained by both entities must satisfy the nondiscrimination testing requirements on a controlled group basis, including the actual deferral percentage ("ADP") test under IRC Section 401(k)(3), the actual contribution percentage ("ACP") test under IRC Section 401(m)(2), and the coverage requirements under IRC Section 410(b). These testing obligations apply beginning with the plan year that includes the closing date. Cascade's recordkeeper and benefits counsel should be alerted promptly to the acquisition so that the appropriate testing protocols can be established. Failure to satisfy nondiscrimination testing on a controlled group basis could result in plan disqualification.
Blackout Period Notice. If a plan merger or other transition event requires a temporary restriction on participants' ability to direct investments, obtain loans, or request distributions from their accounts, a "blackout period" may be imposed. Under ERISA Section 101(i) and the related Department of Labor regulations at 29 C.F.R. § 2520.101-3, the plan administrator must provide at least thirty (30) days' advance written notice to affected participants and beneficiaries before the beginning of any blackout period. The notice must describe the reasons for the blackout, the expected beginning and ending dates, and the types of transactions that will be restricted. Additionally, during a blackout period, company insiders (directors and executive officers) are subject to the trading restrictions imposed by Section 306 of the Sarbanes-Oxley Act of 2002, which prohibits the acquisition or transfer of equity securities acquired in connection with service as a director or executive officer during a pension plan blackout period.
Fiduciary Obligations. Throughout the transition period, Cascade must ensure proper fiduciary oversight of both plans. The plan fiduciaries have a duty of loyalty and prudence under ERISA Section 404(a)(1), and the transition must be managed in the best interests of plan participants and beneficiaries. If the governance structure of the NovaMart 401(k) Plan changes as a result of the acquisition (e.g., new members are appointed to the plan's investment committee or administrative committee), appropriate resolutions should be adopted and documented.
V. Health and Welfare Plan Integration
A. NovaMart's Existing Health and Welfare Plans
NovaMart sponsors a comprehensive suite of group health and welfare benefit plans for its employees and their eligible dependents. Based on our diligence review, NovaMart's health and welfare plans include the following:
• Group medical insurance (including one or more plan options, potentially including a preferred provider organization ("PPO") plan and a high-deductible health plan ("HDHP") with an associated health savings account ("HSA") option);
• Group dental insurance;
• Group vision insurance;
• Group life insurance and accidental death and dismemberment ("AD&D") coverage;
• Short-term disability ("STD") insurance;
• Long-term disability ("LTD") insurance;
• Health care flexible spending account ("Health FSA");
• Dependent care flexible spending account ("DCFSA"); and
• To the extent NovaMart offers an HSA-eligible HDHP, associated health savings accounts for enrolled employees.
Approximately 2,400 NovaMart employees and their dependents are eligible for and/or enrolled in these plans. The plans are provided through a combination of fully insured and self-insured arrangements, as detailed in the diligence materials. A summary of NovaMart's health and welfare plans, including carrier/administrator information, plan year, and funding arrangements, is attached hereto as Exhibit A.
B. Post-Closing Integration Approach
Following the closing, NovaMart's existing health and welfare plans will remain in effect, with NovaMart continuing to serve as the plan sponsor. Cascade will have the option, but not the immediate obligation, to integrate NovaMart employees into Cascade's health and welfare plans at a later date.
From an administrative and compliance standpoint, the optimal time to transition NovaMart employees to Cascade's health and welfare plans is at the beginning of Cascade's next open enrollment period, which would coincide with the start of the next plan year. A mid-year transition—while technically possible—creates significant administrative complexity, including the need to coordinate enrollment systems, manage dual carrier/administrator relationships, address deductible and out-of-pocket crediting (discussed below), reconcile claims data, and ensure accurate ACA reporting. A mid-year transition also introduces the risk of gaps in coverage and employee confusion.
Recommendation. We recommend that Cascade maintain NovaMart's health and welfare plans through the end of the current plan year, and then transition NovaMart employees to Cascade's plans at the beginning of the following plan year, during Cascade's regular open enrollment period. This approach minimizes administrative disruption, reduces compliance risk, and provides Cascade with adequate time to develop employee communications and enrollment materials.
C. Affordable Care Act (ACA) Compliance
Following the closing, NovaMart and Cascade will constitute a single "applicable large employer" under the ACA's employer shared responsibility provisions (IRC Section 4980H) by virtue of their membership in the same controlled group under IRC Sections 414(b) and (c). As a single applicable large employer, the combined entity must offer minimum essential coverage that is affordable and provides minimum value to all full-time employees (i.e., employees averaging 30 or more hours of service per week) and their dependents.
Cascade must ensure that there is no gap in minimum essential coverage for NovaMart employees during the transition period. Because NovaMart's existing health plans will remain in effect post-closing, this requirement should be satisfied without interruption. However, if NovaMart's plans are terminated or modified in a manner that results in a gap in coverage, Cascade could be exposed to employer shared responsibility penalties under IRC Section 4980H(a) (the "sledgehammer" penalty for failing to offer coverage to substantially all full-time employees) or IRC Section 4980H(b) (the "tack hammer" penalty for offering coverage that is unaffordable or fails to provide minimum value).
With respect to ACA reporting, Forms 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) and 1095-C (Employer-Provided Health Insurance Offer and Coverage) for the year that includes the closing must be prepared to reflect the change in controlled group status. Depending on the timing of the closing and the respective plan years, this may require coordination between NovaMart's and Cascade's benefits administrators to ensure accurate and consistent reporting. We are coordinating with Sandra Chiu at Whitmore & Paige LLP on the specific ACA reporting requirements.
D. Deductible and Out-of-Pocket Credit
If NovaMart employees are transitioned to Cascade's health plan during the middle of a plan year, a significant practical issue arises with respect to deductibles and out-of-pocket maximums. Under NovaMart's current health plan, employees and their covered dependents may have already accumulated charges toward their annual deductible and out-of-pocket maximum for the current plan year. If these employees are enrolled in Cascade's health plan without any credit for amounts previously applied under the NovaMart plan, they would effectively be required to start over—potentially resulting in significantly higher out-of-pocket costs for the transition year.
Recommendation. Amounts already applied toward NovaMart plan deductibles and out-of-pocket maximums should be credited under Cascade's plan to the extent NovaMart employees transition mid-year. This approach is consistent with best practices for post-acquisition plan integration, promotes employee goodwill, and may be required by the employee benefit covenants in the SPA (which generally obligate Cascade to provide comparable benefits during the transition period). Cascade should coordinate with its health plan insurer or third-party administrator to establish a process for receiving and applying deductible/out-of-pocket credit data from NovaMart's plan administrator.
E. Flexible Spending Accounts (FSAs)
NovaMart's flexible spending account arrangements—including its Health FSA and Dependent Care FSA—present unique challenges in the context of a mid-year plan transition. Under the general "use it or lose it" rule applicable to FSAs under IRC Section 125, any amounts remaining in an employee's FSA account at the end of the plan year (or the end of any applicable grace period or carryover provision) are forfeited. If NovaMart's FSA plan is terminated or if employees transition to Cascade's FSA plan mid-year, employees could be at risk of forfeiting unused balances, which would likely generate significant employee dissatisfaction and could give rise to claims under state consumer protection or wage payment laws.
Recommendation. Cascade should either (i) maintain NovaMart's FSA plans through the end of the current plan year, allowing employees to use their existing elections and balances according to the existing plan terms, or (ii) arrange for NovaMart employees' existing FSA balances and elections to be continued or assumed under Cascade's FSA plan for the remainder of the plan year. The latter option requires careful coordination between the two plans' administrators and may require amendments to Cascade's cafeteria plan. In either case, Cascade should communicate clearly with employees about their FSA balances and the applicable deadlines for submitting claims.
VI. PTO/Vacation Accrual Obligations
A. NovaMart's PTO Policy
NovaMart maintains a paid time off ("PTO") policy (or, alternatively, a separate vacation accrual policy) for its employees. Based on our review of NovaMart's employee handbook and PTO policy documents provided during the employment and benefits due diligence process, NovaMart's PTO policy has the following general features:
• Employees accrue PTO based on a combination of tenure with the company and position/level within the organization. Employees with longer tenure generally accrue PTO at a higher rate.
• The policy imposes an accrual cap, beyond which employees cease to accrue additional PTO until they use some of their existing balance, bringing their balance below the cap.
• The policy includes a "use it or lose it" feature for any PTO that is not used by the end of the calendar year (or the applicable policy year), except where applicable state law prohibits the forfeiture of accrued, unused PTO.
Accrued but unused PTO represents a compensable liability of the employer. Post-closing, NovaMart (and, indirectly, Cascade as NovaMart's parent company) will be obligated to honor all accrued PTO balances in accordance with the terms of the PTO policy and applicable state law. This obligation applies regardless of whether any workforce reductions are implemented; it is a standing obligation that runs with the employment relationship.
B. State Law Requirements
The treatment of accrued, unused PTO and vacation at the time of an employee's separation from employment varies significantly from state to state. Several of the states in which NovaMart operates impose mandatory payout requirements or restrict the employer's ability to implement "use it or lose it" policies. The following is a summary of the key state-law requirements applicable to NovaMart's operations:
California (3 Fulfillment Centers — Stockton, Ontario, Tracy). California law treats accrued vacation as earned wages that vest as they accrue. Cal. Lab. Code § 227.3. Accrued, unused vacation must be paid out upon termination of employment (whether voluntary or involuntary), and employers may not implement a pure forfeiture or "use it or lose it" policy. However, California law does permit employers to impose a reasonable accrual cap (sometimes referred to as a "ceiling" on accrual), under which employees cease to accrue additional vacation once they reach the cap and begin accruing again only after they use some of their banked time, thereby reducing their balance below the cap. This is distinguished from a forfeiture provision because the employee does not lose any previously accrued time; they simply stop accruing new time until they use some. The distinction between a permissible accrual cap and an impermissible forfeiture policy is an important one under California law, and NovaMart's policy should be reviewed to confirm compliance.
Illinois (1 Fulfillment Center — Joliet). Under the Illinois Wage Payment and Collection Act, 820 ILCS 115/5, accrued vacation is treated as wages that must be paid to the employee upon separation from employment. Employers may not impose a forfeiture policy for vacation time that has already been earned. Illinois law provides narrow exceptions for certain policy designs (e.g., front-loaded PTO policies), but the general rule requires payout of all accrued, unused vacation upon termination.
Other States. The treatment of accrued PTO upon termination varies across the remaining states in which NovaMart operates:
• Texas (Headquarters — Austin): Texas law does not require employers to pay out accrued vacation upon termination unless the employer's written policy or employment agreement creates such an obligation. However, if NovaMart's PTO policy provides for payout at termination, the employer is bound by that commitment under the Texas Payday Act.
• New Jersey (2 Fulfillment Centers — Edison, Cranbury): New Jersey law does not have a specific statute mandating vacation payout upon termination, but the New Jersey Wage and Hour Law and associated regulations generally require employers to pay all wages due at the time of termination, which may include accrued vacation if the employer's policy provides for it.
• Georgia (2 Fulfillment Centers — Savannah, Atlanta): Georgia does not have a specific vacation payout statute. The obligation to pay accrued vacation at termination depends on the employer's policy.
• Ohio (1 Fulfillment Center — Columbus): Ohio law does not mandate vacation payout upon termination, absent a policy or agreement to the contrary.
• Pennsylvania (1 Fulfillment Center — Carlisle): Pennsylvania does not have a statute specifically requiring vacation payout upon termination. The employer's policy controls.
• Tennessee (1 Fulfillment Center — Lebanon): Tennessee does not mandate vacation payout upon termination. The employer's policy governs.
• Florida (2 Fulfillment Centers — Jacksonville, Tampa): Florida does not have a statute requiring vacation payout upon termination. The employer's policy controls.
• Washington (1 Fulfillment Center — Kent): Washington law does not specifically require vacation payout upon termination, though the Washington Department of Labor & Industries has taken the position that accrued, unused vacation is a form of wages that must be paid at termination if the employer's policy provides for accrual.
A comprehensive state-by-state summary of PTO accrual laws is attached hereto as Exhibit D.
Even in the absence of workforce reductions, if NovaMart's PTO policy is modified or eliminated after the closing—for example, as part of a transition to Cascade's PTO policy—accrued PTO balances may need to be paid out under the applicable state law before the transition is implemented. Cascade should obtain legal advice before making any changes to NovaMart's PTO policy in states that impose mandatory payout requirements.
C. Working Capital Impact
Accrued but unused PTO represents a current liability on NovaMart's balance sheet and is typically included as a component of the working capital calculation in a stock purchase transaction. Under the SPA, the net working capital target for the transaction is set at $78,500,000, with a collar of $5,000,000 (meaning that no purchase price adjustment will be made for deviations from the target that fall within the range of $73,500,000 to $83,500,000). Deviations outside the collar will result in a dollar-for-dollar adjustment to the purchase price.
NovaMart's accrued PTO obligation should be included as a current liability in the Estimated Closing Statement and in the final Working Capital calculation. We recommend that Calderwood & Harkness and Whitmore & Paige LLP (Sandra Chiu) confirm the treatment of accrued PTO in the Working Capital Methodology Agreement, including the methodology for calculating the accrued liability (e.g., based on each employee's current rate of pay and accrued but unused hours as of the closing date), and ensure that the Estimated Closing Statement accurately reflects this obligation. Any disagreement over the treatment or valuation of accrued PTO could result in a post-closing working capital dispute, and it is therefore important to reach agreement on the methodology before closing.
D. Policy Harmonization
Post-closing, Cascade will need to evaluate the compatibility of NovaMart's PTO accrual policy with Cascade's own PTO or vacation policy. If the policies differ materially—for example, in accrual rates, caps, carryover provisions, or payout-at-termination terms—Cascade will need to determine whether to (i) maintain NovaMart's existing PTO policy for a transition period, (ii) immediately adopt Cascade's PTO policy for NovaMart employees (while crediting prior accruals), or (iii) implement a hybrid approach that bridges the two policies over time.
Recommendation. We recommend that Cascade maintain NovaMart's existing PTO policy for at least six (6) months following the closing, during which time Cascade can evaluate the differences between the two policies, develop a harmonization plan, and prepare employee communications. Any changes to NovaMart's PTO policy should be preceded by a compliance review to ensure that the changes do not violate applicable state laws (particularly in California and Illinois) and should be communicated to employees with adequate advance notice.
VII. COBRA Continuation Coverage
A. Overview of COBRA Obligations
The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), requires employers that maintain group health plans and that had twenty (20) or more employees on more than fifty percent (50%) of the employer's typical business days in the preceding calendar year to offer continuation of group health plan coverage to employees and their qualified beneficiaries following a "qualifying event." COBRA continuation coverage must generally be offered for a period of eighteen (18) months following a qualifying event attributable to an employee's termination of employment (other than for gross misconduct) or reduction in hours, and for thirty-six (36) months following a qualifying event attributable to the employee's death, divorce, dependent child's loss of dependent status, or the employee's entitlement to Medicare.
NovaMart, with approximately 2,400 employees, is unquestionably a COBRA-covered employer. NovaMart's group health plans—including its medical, dental, and vision plans—are subject to COBRA's requirements, and NovaMart must comply with all applicable notice, election, and administration obligations.
B. Change of Control as a Qualifying Event
A threshold question in any acquisition is whether the transaction itself constitutes a "qualifying event" under COBRA. In a stock purchase, the answer is no. Because NovaMart continues as a legal entity and as the employer of record, and because NovaMart's group health plans remain in effect following the closing, the change of ownership of NovaMart's stock does not trigger a qualifying event for COBRA purposes. No employee experiences a termination of employment, a reduction in hours, or any other event that would qualify as a COBRA qualifying event solely as a result of the stock purchase.
However, it is important to note that if any NovaMart employees are terminated following the closing—whether as a result of redundancy, restructuring, performance-related issues, or any other reason—each such termination will constitute a qualifying event under COBRA, and the terminated employee (and his or her qualified beneficiaries) will be entitled to COBRA continuation coverage under NovaMart's group health plans (or, if NovaMart's plans have been transitioned into Cascade's plans by that time, under Cascade's successor plans).
C. Pre-Closing COBRA Obligations
During the period between signing and closing, NovaMart must continue to comply with all of its existing COBRA obligations. This includes, without limitation:
• Providing timely COBRA qualifying event notices to employees and qualified beneficiaries who experience a qualifying event during the interim period;
• Maintaining COBRA continuation coverage for all individuals who are currently enrolled in COBRA coverage as of the signing date;
• Processing COBRA elections and premium payments in a timely manner; and
• Complying with all COBRA notice requirements, including initial COBRA notices for newly eligible employees and general COBRA election notices for qualifying events.
Recommendation. As part of its bring-down diligence prior to closing, Cascade should confirm that NovaMart is current on all COBRA notices and administration. Specifically, Cascade should request a list of all individuals currently receiving COBRA continuation coverage under NovaMart's group health plans, the expiration dates of their coverage periods, and confirmation that all required notices have been timely provided. Any deficiencies in NovaMart's COBRA compliance could result in excise tax penalties under IRC Section 4980B and potential litigation risk.
D. Post-Closing COBRA Administration
If NovaMart's group health plans are terminated or merged into Cascade's health plans at any point following the closing, NovaMart must ensure that COBRA continuation coverage obligations are satisfied under the successor plan. Specifically:
• Qualified beneficiaries who are receiving COBRA continuation coverage under NovaMart's plans at the time of the plan transition must be offered continuation coverage under the successor plan on terms that are no less favorable than the coverage they were receiving under the NovaMart plan.
• If Cascade consolidates or eliminates certain NovaMart plan options (e.g., if NovaMart offered a PPO plan that is not available under Cascade's plan lineup), COBRA beneficiaries must be offered comparable plan options under Cascade's plans.
• A plan transition or merger cannot be used as a mechanism to avoid or curtail COBRA obligations. The COBRA coverage period for each qualified beneficiary continues to run from the date of the original qualifying event, regardless of any plan transition.
• NovaMart must provide timely notice to COBRA-qualified beneficiaries of any changes to the plan (including a transition to Cascade's plans) that affect their coverage options, premiums, or coverage terms.
E. State Continuation Coverage ("Mini-COBRA")
Several states have enacted state-level continuation coverage laws (commonly referred to as "mini-COBRA" laws) that supplement or extend the federal COBRA requirements. While NovaMart exceeds the 20-employee threshold for federal COBRA, certain state mini-COBRA laws may impose additional obligations:
California (Cal-COBRA). California's continuation coverage law, Cal. Ins. Code §§ 10128.50–10128.59, extends COBRA-like continuation coverage for up to thirty-six (36) months for individuals whose federal COBRA coverage has been exhausted after eighteen (18) months. Cal-COBRA coverage is available to qualifying individuals who were covered under a group health plan maintained by a California employer and who exhaust their federal COBRA coverage period. Cascade should ensure that NovaMart's COBRA administrator is aware of and compliant with Cal-COBRA obligations for employees at the three California fulfillment centers.
Other states where NovaMart operates may have mini-COBRA laws that apply to employers with fewer than 20 employees (which would not apply to NovaMart itself but could apply to any small Cascade subsidiaries within the controlled group) or that provide other supplemental protections. These state requirements should be reviewed on a state-by-state basis.
VIII. ERISA Compliance Considerations
A. Controlled Group Analysis
Upon consummation of the closing, NovaMart will become a member of Cascade's controlled group of corporations under IRC Sections 414(b) and (c), and, if applicable, the affiliated service group rules under IRC Section 414(m). The controlled group rules are critical for purposes of ERISA and Internal Revenue Code compliance because they require that all employee benefit plans maintained by members of the controlled group be tested on an aggregate basis for purposes of:
• Coverage testing under IRC Section 410(b): Each qualified retirement plan must cover a sufficient percentage of the employer's non-highly compensated employees (relative to the percentage of highly compensated employees covered) when tested on a controlled group basis.
• Nondiscrimination testing under IRC Section 401(a)(4): Contributions and/or benefits under each qualified retirement plan must not discriminate in favor of highly compensated employees when tested on a controlled group basis.
• Minimum participation requirements under IRC Section 401(a)(26): Each qualified defined benefit plan must benefit the lesser of 50 employees or 40% of all employees in the controlled group.
• ACA employer shared responsibility: The combined controlled group is treated as a single "applicable large employer" for purposes of the ACA employer mandate under IRC Section 4980H.
The combined controlled group will include all Cascade subsidiaries and all NovaMart entities. Cascade's benefits counsel and recordkeeper should be notified of the acquisition promptly so that the appropriate controlled group testing protocols can be established for the plan year that includes the closing date.
B. Fiduciary Transition
Following the closing, Cascade's ERISA compliance and benefits management team should assume fiduciary oversight of NovaMart's employee benefit plans. This transition involves several steps:
• Identification and review of current NovaMart plan fiduciaries, including named plan administrators, plan trustees, investment committee members, and any other individuals or entities exercising fiduciary authority over NovaMart's plans.
• Determination of whether existing NovaMart plan fiduciaries will continue in their roles, be replaced by Cascade-designated fiduciaries, or be supplemented by additional Cascade personnel.
• Adoption of board or committee resolutions, as appropriate, to effectuate changes in fiduciary appointments.
• Coordination with NovaMart's current plan service providers (recordkeeper, third-party administrator, custodian, investment managers) to ensure continuity of plan administration during the transition.
• Review of NovaMart's existing fiduciary liability insurance and fidelity bond coverage (as required by ERISA Section 412) to ensure that coverage remains adequate during and after the transition.
C. Benefit Plan Document Updates
Following the closing, NovaMart's employee benefit plan documents should be amended to reflect, as applicable:
• Any change in the identity of the plan sponsor (if NovaMart's plans are eventually assumed or adopted by Cascade);
• Updated fiduciary designations (plan administrator, trustee, investment committee);
• Any modifications to plan terms resulting from the integration process; and
• Changes in the plan's administrative service providers (recordkeeper, third-party administrator, etc.).
In addition, NovaMart's summary plan descriptions ("SPDs") must be updated and distributed to plan participants within the time frames required by ERISA. Under ERISA Section 104(b)(1) and the

MEMORANDUM

Record

Parties

Dates

Amounts