AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PRO-STARS, INC.,
APPLIED SPECTRUM TECHNOLOGIES, INC.,
AND
APSP ACQUISITION, INC.
DATED AS OF MAY 16, 2006
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made and entered into as of this 16th
day of May, 2006, by and among Pro-Stars, Inc., a Nevada corporation
("Company"), Applied Spectrum Technologies, Inc., a Delaware corporation
("Parent"), and APSP Acquisition, Inc., a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2) and in accordance with the General Corporation Law of
the State of Delaware (the "DGCL") and the General Corporation Law of the State
of Nevada (the "NGCL"), Parent and Company intend to enter into a business
combination transaction by means of a merger between Merger Sub and the Company
in which the Company will merge with Merger Sub and be the surviving entity,
through an exchange of all the issued and outstanding shares of capital stock of
the Company for shares of preferred stock of the Parent.
B. The Board of Directors of the Company, Parent and Merger Sub have
determined that the Merger (as defined in Section 1.1) is fair to, and in the
best interests of, their respective companies and their respective stockholders.
C. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
D. KI Equity Partners III, LLC, a Delaware limited liability company ("KI
Equity") owns the majority of the outstanding shares of common stock of Parent.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the DGCL and NGCL, Merger Sub shall be merged with and
into the Company (the "Merger"), the separate corporate existence of Merger Sub
shall cease and the Company shall continue as the surviving corporation. The
Company as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation." The Merger is hereinafter sometimes
referred to as the "Transaction."
1.2 Effective Time; Closing. Subject to the conditions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing with the
Secretary of State of the States of Delaware and Nevada in accordance with the
relevant provisions of the DGCL and NGCL a certificate and/or articles of merger
(the "Certificate of Merger") (the time of such filing with the Secretary of
State of the States of Delaware and Nevada, or such later time as may be agreed
in writing by the Company and Parent and specified in the Certificate of Merger,
being the "Effective Time") as soon as practicable on or after the Closing Date
(as herein defined). The term "Agreement" as used herein refers to this
Agreement and Plan of Merger, as the same may be amended from time to time, and
all schedules hereto (including the Company Schedules and Parent Schedules).
Unless this Agreement shall have been terminated pursuant to Section 8.1, the
closing of the Merger (the "Closing") shall take place at the offices of ▇▇▇▇▇ &
▇▇▇▇▇▇▇, LLP, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇ at a time
and date to be specified by the parties, which shall be no later than the third
business day after the satisfaction or waiver of the conditions set forth in
Article VI, or at such other time, date and location as the parties hereto agree
in writing (the "Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of the
DGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of the
Company shall be the Certificate of Incorporation of the Surviving Corporation
until thereafter amended as provided by law and such Certificate of
Incorporation of the Surviving Corporation.
(b) The Bylaws of the Company shall be the Bylaws of the Surviving
Corporation.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of the Company immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of the Company immediately prior to the Effective Time.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and this Agreement and
without any action on the part of Merger Sub, the Company or the holders of any
of the following securities, the following shall occur:
(a) Conversion of Company Common Stock. Each share of common stock,
par value $0.001 per share, of the Company (the "Company Common Stock") issued
and outstanding immediately prior to the Effective Time will be automatically
converted into the right to receive on the Closing Date 0.043656 shares of
Series A Convertible Preferred Stock, par value $0.001 per share, of Parent
("Series A Preferred Stock") (the "Preferred Exchange Ratio") upon surrender of
the certificate representing such share of Company Common Stock in the manner
provided in Section 1.7 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the manner
provided in Section 1.9). If any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are subject to a
repurchase option, risk of forfeiture or other condition under any applicable
restricted stock purchase agreement or other agreement with the Company, then
the shares of Series A Preferred Stock issued in exchange for such shares of
Company Common Stock will also be unvested or subject to the same repurchase
option, risk of forfeiture or other condition, and the certificates representing
such shares of Series A Preferred Stock may accordingly be marked with
appropriate legends. The Company shall take all action that may be necessary to
ensure that, from and after the Effective Time, Parent is entitled to exercise
any such repurchase option or other right set forth in any such restricted stock
purchase agreement or other agreement.
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(b) Assumption of Company Stock Options. At the Closing, each
outstanding option to purchase shares of Company Common Stock (each, a "Company
Stock Option"), whether or not vested, shall be assumed by Parent. Each Company
Stock Option so assumed by Parent under this Agreement will continue to have,
and be subject to, the same terms and conditions of such Company Stock Option
immediately prior to the Closing (including, without limitation, any repurchase
rights or vesting provisions and provisions regarding the acceleration of
vesting on certain transactions, other than the transactions contemplated by
this Agreement), except that (i) each Company Stock Option will be exercisable
(or will become exercisable in accordance with its terms) for that number of
whole shares of common stock, no par value per share, of Parent ("Parent Common
Stock") equal to the product of the number of shares of Company Common Stock
that were issuable upon exercise of such Company Stock Option immediately prior
to the Closing multiplied by 4.39879 ("Option Exchange Ratio"), rounded up to
the nearest whole number of shares of Parent Common Stock, and (ii) the per
share exercise price for the shares of Parent Common Stock issuable upon
exercise of such assumed Company Stock Option will be equal to the quotient
determined by dividing the exercise price per share of Company Common Stock at
which such Company Stock Option was exercisable immediately prior to the Closing
by the Option Exchange Ratio, rounded down to the nearest whole cent. Each
Company Stock Option after assumption by Parent and as modified by the
adjustments set forth in (i) and (ii) of this subparagraph (b) shall be referred
to as "New Parent Stock Option."
(c) Assumption of Company Stock Warrants. At the Closing, each
outstanding warrant to purchase shares of Company Common Stock (each, a "Company
Stock Warrant") shall be assumed by Parent and will continue to have, and be
subject to, the same terms and conditions of such Company Stock Warrants
immediately prior to the Closing, except that (i) such Company Stock Warrant
will be exercisable (or will become exercisable in accordance with its terms)
for that number of shares of Parent Common Stock equal to the product of the
number of shares of Company Common Stock that were issuable upon exercise of
such Company Stock Warrant immediately prior to the Closing multiplied by the
Option Exchange Ratio, rounded up to the nearest whole number of shares of
Parent Common Stock, and (ii) the per share exercise price for the shares of
Parent Common Stock issuable upon exercise of such assumed Company Stock Warrant
will be equal to the quotient determined by dividing the exercise price per
share of Company Common Stock at which such Company Stock Warrant was
exercisable immediately prior to the Closing by the Option Exchange Ratio,
rounded down to the nearest whole cent. Each Company Stock Warrant after
assumption by Parent and as modified by the adjustments set forth in (i) and
(ii) of this subparagraph (c) shall be referred to as "New Parent Stock
Warrant."
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(d) Further Actions Regarding Options and Warrants. Prior to the
Closing Date, the Company agrees to take all necessary steps to effectuate the
foregoing provisions of Sections 1.6(b) and (c), including obtaining all
necessary consents and releases, if any, from the holders of Company Stock
Options and Company Common Stock Warrants.
(e) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock held by the Company or owned by Merger Sub, Parent or any direct or
indirect wholly-owned subsidiary of the Company or of Parent immediately prior
to the Effective Time shall be canceled and extinguished without any conversion
or payment in respect thereof.
(f) Capital Stock of Merger Sub. Each share of common stock, par
value $0.001 per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into one
validly issued, fully paid and nonassessable share of common stock, par value
$0.001 per share, of the Surviving Corporation. Each certificate evidencing
ownership of shares of Merger Sub Common Stock shall evidence ownership of such
shares of capital stock of the Surviving Corporation.
(g) Adjustments to Exchange Ratios. The Exchange Ratios (as defined
below) shall be adjusted to reflect appropriately the effect of any stock split,
reverse stock split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock or Company Common Stock),
extraordinary cash dividends, reorganization, recapitalization,
reclassification, combination, exchange of shares or other like change with
respect to Parent Common Stock, Company Common Stock, Company Preferred Stock
(or any options or warrants with respect to the foregoing) occurring on or after
the date hereof and prior to the Effective Time.
The Preferred Exchange Ratio and Option Exchange Ratio (collectively, the
"Exchange Ratios") set forth above are calculated assuming the issuance by
Parent of shares of Series A Preferred Stock or Parent Common Stock to investors
in the Equity Financing (as defined in Section 6.1 (k)) with aggregate gross
proceeds of $15,000,000 and based on a Pre-Money Value (as defined in Section
6.1 (k)) of $22,000,000. In the event the aggregate gross proceeds is less than
or exceeds $15,000,000 and/or the Pre-Money Value is less than or exceeds
$22,000,000, the Exchange Ratios shall be adjusted such that the holders of the
Series A Preferred Stock (excluding investors in the event Series A Preferred
Stock is issued under the Equity Offering), the New Parent Stock Options and New
Parent Stock Warrants shall, in the aggregate, immediately after the closing of
the Merger and the Equity Financing shall hold X% of Parent Common Stock on a
fully diluted and as-converted basis. For purposes of this Agreement, X% shall
be equal to the following:
X% = 97% - ((N/(N+Y))
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Where: N = Aggregate gross proceeds from the Series A Preferred
Stock or Parent Common Stock issued in Equity Financing.
Y = The actual Pre-Money Value in the Equity Financing.
For purposes of the foregoing calculation, (i) there shall be
excluded from such calculation any New Parent Stock Option or New Parent Stock
Warrant which has an exercise price that is equal to or more than the price per
share of the Parent Common Stock or the Series A Preferred Stock (on an as
converted basis) sold in the Equity Financing, and (ii) to the extent that any
New Parent Stock Option or New Parent Stock Warrant has an exercise price that
is less than the price per share of the Parent Common Stock or the Series A
Preferred Stock (on an as converted basis) sold in the Equity Financing, then
such New Parent Stock Option or New Parent Stock Warrant shall be included in
such calculation but only to the extent and in the amount of shares that such
option or warrant would be exercisable for in a cashless, net exercise.
(h) Fractional Shares. Fractional shares of Series A Preferred Stock
will be issued by virtue of the Merger (rounded to the second decimal point).
1.7 Surrender of Certificates.
(a) Exchange Agent. Parent or such other agent or agents as Parent
may appoint shall be designated by the parties hereto to act as the exchange
agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Series A Preferred Stock. Promptly after the
Effective Time, and in no event more than three (3) business days thereafter,
Parent shall make available for exchange in accordance with this Article I, the
shares of Series A Preferred Stock issuable pursuant to Section 1.6 in exchange
for outstanding shares of Company Common Stock and any dividends or
distributions to which holders of such shares may be entitled pursuant to
Section 1.7(d).
(c) Exchange Procedures. Promptly after the Effective Time, and in
no event more than ten (10) business days thereafter, Parent shall mail to each
holder of record (as of the Effective Time) of a certificate or certificates
(the "Certificates"), which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock whose shares were converted into the
right to receive shares of Series A Preferred Stock pursuant to Section 1.6: (i)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Series A Preferred Stock and any
dividends or other distributions pursuant to Section 1.7(d), and (ii) an
investment representation letter containing such warranties, representations and
agreements by holder as set forth in Section 1.12. Upon surrender of
Certificates for cancellation to Parent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal and investment
representation letter, duly completed and validly executed in accordance with
the instructions thereto, the holders of such Certificates shall be entitled to
receive in exchange therefor certificates representing the number of shares of
Series A Preferred Stock into which their shares of Company Common Stock were
converted into the right to receive at the Effective Time and any dividends or
distributions payable pursuant to Section 1.7(d), and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates will be deemed from and after the Effective Time, to evidence only
the right to receive the applicable number of shares of Series A Preferred Stock
(or Common Stock issuable upon conversion of Series A Preferred Stock) issuable
pursuant to Section 1.6.
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(d) Distributions With Respect to Unexchanged Shares. No dividends
or other distributions declared or made after the date of this Agreement with
respect to Series A Preferred Stock (or Parent Common Stock issuable upon
conversion of Series A Preferred Stock) with a record date after the Effective
Time will be paid to the holders of any unsurrendered Certificates with respect
to the shares of Series A Preferred Stock (or Parent Common Stock issuable upon
conversion of Series A Preferred Stock) to be issued upon surrender thereof
until the holders of record of such Certificates shall surrender such
Certificates. Subject to applicable law, following surrender of any such
Certificates with a properly completed letter of transmittal and investment
representation letter, Parent shall promptly deliver to the record holders
thereof, without interest, certificates representing shares of Series A
Preferred Stock issued in exchange therefor (or Parent Common Stock issuable
upon conversion of Series A Preferred Stock) and the amount of any such
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such shares.
(e) Transfers of Ownership. If certificates representing shares of
Series A Preferred Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of certificates
representing shares of Series A Preferred Stock in any name other than that of
the registered holder of the Certificates surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
(f) Required Withholding. Each of Parent, any agents appointed by
Parent and the Surviving Corporation shall be entitled to deduct and withhold
from any consideration payable or otherwise deliverable pursuant to this
Agreement to any holder or former holder of Company Common Stock such amounts as
are required to be deducted or withheld therefrom under the Code or under any
provision of state, local or foreign tax law or under any other applicable legal
requirement. To the extent such amounts are so deducted or withheld, such
amounts shall be treated for all purposes under this Agreement as having been
paid to the person to whom such amounts would otherwise have been paid.
(g) Termination of Exchange Agent Funding. Series A Preferred Stock
(or Parent Common Stock issuable upon conversion of Series A Preferred Stock)
held by the Exchange Agent (other than Parent) which have not been delivered to
holders of Certificates within six months after the Effective Time shall
promptly be paid or delivered, as appropriate, to Parent, and thereafter holders
of Certificates who have not theretofore complied with the exchange procedures
outlined in and contemplated by this Section 1.7 shall thereafter look only to
Parent (subject to abandoned property, escheat and similar laws) only as general
creditors thereof for their claim for shares of Series A Preferred Stock (or
Parent Common Stock issuable upon conversion of Series A Preferred Stock) and
any dividends or distributions pursuant to Section 1.7(d) with respect to such
shares to which they are entitled.
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(h) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, neither the Exchange Agent, Parent, the Surviving Corporation, the
Company nor any party hereto shall be liable to a holder of shares of Series A
Preferred Stock (or Parent Common Stock issuable upon conversion of Series A
Preferred Stock) or Company Common Stock for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Series A Preferred Stock issued in accordance with the terms hereof shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Company
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Series A Preferred Stock (or Parent Common Stock
issuable upon conversion of Series A Preferred Stock) which the shares of
Company Common Stock formerly represented by such Certificates were converted
into the right to receive pursuant to Section 1.6 and any dividends or
distributions payable pursuant to Section 1.7(d); provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance of such
certificates representing shares of Series A Preferred Stock (or Parent Common
Stock issuable upon conversion of Series A Preferred Stock) and other
distributions, require the owner of such lost, stolen or destroyed Certificates
to deliver a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against Parent, the Surviving Corporation or the
Exchange Agent with respect to the Certificates alleged to have been lost,
stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company and Merger Sub, the officers and directors of Company
and Merger Sub will take all such lawful and necessary action.
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1.12 Investment Representation. All shares of Series A Preferred Stock
issued in accordance with the terms hereof (including Parent Common Stock
issuable upon conversion of Series A Preferred Stock) shall, when issued, be
restricted shares and may not be sold, transferred or otherwise disposed of by
the holders thereof without registration under the Securities Act of 1933, as
amended ("Securities Act") or an available exemption from registration under the
Securities Act. The certificates representing the shares of Series A Preferred
Stock issued in accordance with the terms hereof (including Parent Common Stock
issuable upon conversion of Series A Preferred Stock) will contain the
appropriate restrictive legends, and the Parent shall issue appropriate
stop-transfer instructions to the Exchange Agent with respect to such shares of
Series A Preferred Stock (including Parent Common Stock issuable upon conversion
of Series A Preferred Stock). Except for the representation made in Section
1.12(c)(i) regarding "accredited investor" status, as to which up to 35 holders
may be permitted to not make such representation, each holder of record (as of
the Effective Time) of Certificates, which immediately prior to the Effective
Time represented outstanding shares of Company Common Stock whose shares were
converted into the right to receive shares of Series A Preferred Stock pursuant
to Section 1.6, shall provide an investment representation letter containing,
among other things, the following:
(a) Each holder has and shall transfer, good and marketable title to
the shares of Company Common Stock owned by such holder, free and clear of all
liens, claims, charges, encumbrances, pledges, mortgages, security interests,
options, rights to acquire, proxies, voting trusts or similar agreements,
restrictions on transfer or adverse claims of any nature whatsoever ("Liens").
(b) Each holder is acquiring the shares of Series A Preferred Stock
(including Parent Common Stock issuable upon conversion of Series A Preferred
Stock) for investment for holder's own account and not as a nominee or agent,
and not with a view to the resale or distribution of any part thereof, and such
holders have no present intention of selling, granting any participation in, or
otherwise distributing the same. Each holder further represents that he does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participation to such person or to any third person,
with respect to any of the shares of Series A Preferred Stock (including Parent
Common Stock issuable upon conversion of Series A Preferred Stock).
(c) Each holder understands that shares of Series A Preferred Stock
(including Parent Common Stock issuable upon conversion of Series A Preferred
Stock) are not registered under the Securities Act, that the issuance of shares
of Series A Preferred Stock (including Parent Common Stock issuable upon
conversion of Series A Preferred Stock) is intended to be exempt from
registration under the Securities Act pursuant to Section 4(2) thereof, and that
Parent's reliance on such exemption is predicated on the holder's
representations set forth herein. Each holder represents and warrants that: (i)
he is an "accredited investor" as that term is defined in Rule 501(a) of
Regulation D under the Act, (ii) he can bear the economic risk of his respective
investments, and (iii) he possesses such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks of
the investment in shares of Series A Preferred Stock (including Parent Common
Stock issuable upon conversion of Series A Preferred Stock).
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(d) Holders acknowledge that neither the SEC, nor the securities
regulatory body of any state has received, considered or passed upon the
accuracy or adequacy of the information and representations made in this
Agreement.
(e) Holders acknowledge that they have carefully reviewed such
information as each of them deemed necessary to evaluate an investment in shares
of Series A Preferred Stock (including Parent Common Stock issuable upon
conversion of Series A Preferred Stock). To the full satisfaction of each
holder, he has been furnished all materials that he has requested relating to
Parent and the issuance of shares of Series A Preferred Stock hereunder
(including Parent Common Stock issuable upon conversion of Series A Preferred
Stock), and each holder has been afforded the opportunity to ask questions of
Parent's representatives to obtain any information necessary to verify the
accuracy of any representations or information made or given to the holders.
Notwithstanding the foregoing, nothing herein shall derogate from or otherwise
modify the representations and warranties of Parent set forth in this Agreement,
on which each of the holders has relied in making an exchange of his shares of
Series A Preferred Stock.
(f) Each holder understands that shares of Series A Preferred Stock
(including Parent Common Stock issuable upon conversion of Series A Preferred
Stock) may not be sold, transferred, or otherwise disposed of without
registration under the Securities Act or an exemption therefrom, and that in the
absence of an effective registration statement covering shares of Series A
Preferred Stock (including Parent Common Stock issuable upon conversion of
Series A Preferred Stock) or any available exemption from registration under the
Securities Act, the shares of Series A Preferred Stock (including Parent Common
Stock issuable upon conversion of Series A Preferred Stock) may have to be held
indefinitely. Each holder further acknowledges that shares of Series A Preferred
Stock (including Parent Common Stock issuable upon conversion of Series A
Preferred Stock) may not be sold pursuant to Rule 144 promulgated under the
Securities Act unless all of the conditions of Rule 144 are satisfied
(including, without limitation, Parent's compliance with the reporting
requirements under the Exchange Act).
(g) The representations, warranties and agreements of each holder
contained in the investment representation letter shall survive the Closing of
the Transaction.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Except as disclosed on the schedules prepared by the Company to be
delivered to the Parent (the "Company Schedules"), the Company hereby represents
and warrants to, and covenants with, Parent and Merger Sub, as follows:
2.1 Organization and Qualification.
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(a) The Company is a corporation duly incorporated or organized,
validly existing and in good standing under the laws of the State of Nevada and
has the requisite corporate power and authority to own, lease and operate its
assets and properties and to carry on its business as it is now being or
currently planned by the Company to be conducted. The Company is in possession
of all franchises, grants, authorizations, licenses, permits, easements,
consents, certificates, approvals and orders ("Approvals") necessary to own,
lease and operate the properties it purports to own, operate or lease and to
carry on its business as it is now being or currently planned by the Company to
be conducted, except where the failure to have such Approvals could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect (as defined in Section 10.2 (b)) on the Company. Complete and
correct copies of the certificate of incorporation or organization and by-laws
(or other comparable governing instruments with different names) (collectively
referred to herein as "Company Charter Documents") of the Company, as amended
and currently in effect, have been heretofore delivered to Parent. The Company
is not in violation of any of the provisions of the Company Charter Documents.
(b) The Company is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary, except for such
failures to be so duly qualified or licensed and in good standing that could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company.
(c) The minute books of the Company contain true, complete and
accurate records of all meetings and consents in lieu of meetings of its Board
of Directors (and any committees thereof), similar governing bodies and
stockholders ("Corporate Records"), since the time of the Company's
organization. Copies of such Corporate Records of the Company have been
heretofore delivered to Parent.
(d) The stock transfer and ownership records of the Company contain
true, complete and accurate records of the stock ownership as of the date of
such records and the transfers involving the capital stock of the Company since
the time of the Company's organization. Copies of such Stock Records of the
Company have been heretofore delivered to Parent.
2.2 Subsidiaries. Set forth in Schedule 2.2 hereto is a true and complete
list of all Subsidiaries of the Company, stating, with respect to each
Subsidiary, its jurisdiction of incorporation or organization, date of
incorporation or organization, capitalization and equity ownership. Each
Subsidiary is duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its businesses as they are now being
conducted, and each Subsidiary is qualified to do business as a foreign
corporation in any other jurisdiction in which is so required to be qualified.
All of the outstanding shares of capital stock or equity interests of each
Subsidiary have been duly and validly authorized and issued, are fully paid and
non-assessable, have not been issued in violation of any preemptive or other
right of stockholders (or any other Person) or of any Legal Requirements, and
are owned beneficially and of record by the Company as specified on Schedule
2.2, free and clear of any Lien. No Subsidiary is in violation of any of the
provisions of its Charter Documents.
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Except as described in Schedule 2.2 hereto, neither the Company nor any
Subsidiary owns, directly or indirectly, any ownership, equity, profits or
voting interest in any Person (other than the Company or the Subsidiaries) or
has any agreement or commitment to purchase any such interest, and the Company
and its Subsidiaries have not agreed and are not obligated to make nor are bound
by any written, oral or other agreement, contract, subcontract, lease, binding
understanding, instrument, note, option, warranty, purchase order, license,
sublicense, insurance policy, benefit plan, commitment or undertaking of any
nature, as of the date hereof or any date hereafter, under which any of them may
be obligated to make any future investment in or capital contribution to any
other entity.
For purposes of this Agreement, (i) the term "Subsidiary" shall mean any
Person in which the Company or any Subsidiary directly or indirectly, owns
beneficially securities or interests representing more than 50% of (x) the
aggregate equity or profit interests, or (y) the combined voting power of voting
interests ordinarily entitled to vote for management or otherwise, and (ii) the
term "Person" shall mean and include an individual, a corporation, a partnership
(general or limited), a joint venture, an association, a limited liability
company, a trust or any other organization or entity, including a government or
political subdivision or an agency or instrumentality thereof.
2.3 Capitalization.
(a) The authorized capital stock of the Company consists of
100,000,000 shares of common stock, par value $0.001 per share ("Company Common
Stock") and 10,000,000 shares of preferred stock, par value of $0.001 per share
("Company Preferred Stock"). Except as disclosed on Schedule 2.3, at the close
of business on the business day prior to the date hereof, (i) 22,906,350 shares
of Company Common Stock were issued and outstanding, all of which are validly
issued, fully paid and nonassessable (such number excludes the 1,000,000 shares
of Common Stock held in treasury by the Company which shall be canceled by the
Company prior to Closing), (ii) no shares of Company Preferred Stock were issued
and outstanding, (iii) 4,325,000 shares of Company Common Stock were reserved
for issuance upon the exercise of outstanding Company Stock Options granted to
employees of the Company each with an exercise price of $1.00 per share, and
(iv) 2,377,550 shares of Company Common Stock were reserved for issuance upon
the exercise of outstanding Company Stock Warrants each with an exercise price
of $1.00, except for warrants issued to Liolios Group, Inc. to purchase up to an
aggregate of 200,000 shares of Company Common Stock, 100,000 of which have an
exercise price of 110% of the per share price of the Parent Common Stock or the
Series A Preferred Stock (on an as converted basis) sold in the Equity Financing
and 100,000 of which have an exercise price of 120% of the per share price of
the Parent Common Stock or the Series A Preferred Stock (on an as converted
basis) sold in the Equity Financing, and (v) no shares of Company Common Stock
were reserved for issuance upon the conversion of Company Preferred Stock or any
outstanding convertible notes, debentures or securities ("Convertible
Securities"). All shares of Company Common Stock subject to issuance as
aforesaid, upon issuance on the terms and conditions specified in the instrument
pursuant to which they are issuable, will be duly authorized, validly issued,
fully paid and nonassessable. Except as described in Schedule 2.3 hereto, there
are no commitments or agreements of any character to which the Company is bound
obligating the Company to accelerate the vesting of any Company Stock Option or
Company Stock Warrant as a result of the Transaction. All outstanding shares of
Company Common Stock and all outstanding Company Stock Options and Company Stock
Warrants have been issued and granted in compliance with (i) all applicable
securities laws and (in all material respects) other applicable laws and
regulations, and (ii) all requirements set forth in any applicable Contracts.
The Company has heretofore delivered to Parent true, complete an accurate forms
of the Company Stock Options and Company Stock Warrants.
11
(b) Except as set forth in Schedule 2.3 hereto or in this Section
2.3, there are no equity securities, partnership interests or similar ownership
interests of any class of any equity security of the Company, or any securities
exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests, issued, reserved for
issuance or outstanding. Except as set forth in Schedule 2.3 hereof or Section
2.3 hereof, there are no subscriptions, options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which the
Company is a party or by which it is bound obligating the Company to issue,
deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem
or otherwise acquire, or cause the repurchase, redemption or acquisition of, any
shares of capital stock, partnership interests or similar ownership interests of
the Company or obligating the Company to grant, extend, accelerate the vesting
of or enter into any such subscription, option, warrant, equity security, call,
right, commitment or agreement.
(c) Except as contemplated by this Agreement and except as set forth
in Schedule 2.3 hereto, there are no registration rights, and there is no voting
trust, proxy, rights plan, anti-takeover plan or other agreement or
understanding to which the Company is a party or by which the Company is bound
with respect to any equity security of any class of the Company.
2.4 Authority Relative to this Agreement. The Company has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and, to consummate the transactions
contemplated hereby (including the Transaction). The execution and delivery of
this Agreement and the consummation by the Company of the transactions
contemplated hereby (including the Transaction) have been duly and validly
authorized by all necessary corporate action on the part of the Company
(including the approval by its Board of Directors), and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby, other than the approval
of this Agreement and the Transaction by a majority of the Company's
stockholders. This Agreement has been duly and validly executed and delivered by
the Company and, assuming the due authorization, execution and delivery thereof
by the other parties hereto, constitutes the legal and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
may be limited by bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity and public policy.
2.5 No Conflict; Required Filings and Consents.
12
(a) The execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company shall not, (i)
conflict with or violate the Company Charter Documents, (ii) subject to
obtaining the adoption of this Agreement and the Transaction by the stockholders
of the Company, conflict with or violate any Legal Requirements, or (iii) result
in any breach of or constitute a default (or an event that with notice or lapse
of time or both would become a default) under, or materially impair the
Company's rights or alter the rights or obligations of any third party under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of the Company pursuant to, any Contracts, except, with
respect to clauses (ii) or (iii), for any such conflicts, violations, breaches,
defaults or other occurrences that would not, individually and in the aggregate,
have a Material Adverse Effect on the Company.
(b) The execution and delivery of this Agreement by the Company does
not, and the performance of their obligations hereunder will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any court, administrative agency, commission, governmental or regulatory
authority, domestic or foreign (a "Governmental Entity"), except (i) for
applicable requirements, if any, of the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), state securities laws ("Blue Sky
Laws"), and the rules and regulations thereunder, and appropriate documents with
the relevant authorities of other jurisdictions in which the Company is
qualified to do business, and (ii) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on the Company or, after the Closing, the Parent, or
prevent consummation of the Transaction or otherwise prevent the parties hereto
from performing their obligations under this Agreement.
2.6 Compliance. To the knowledge of the Company, it has complied with and
is not in violation of any Legal Requirements with respect to the conduct of its
business, or the ownership or operation of its business, except for failures to
comply or violations which, individually or in the aggregate, have not had and
are not reasonably likely to have a Material Adverse Effect on the Company. To
the Company's knowledge, the businesses and activities of the Company have not
been and are not being conducted in violation of any Legal Requirements and the
Company is not in default or violation of any term, condition or provision of
any applicable Company Charter Documents or Contracts. Except as set forth on
Schedule 2.6, to the Company's knowledge, no written notice of non-compliance
with any Legal Requirements has been received by the Company (and the Company
has no knowledge of any such notice delivered to any other Person). The Company
is not in violation of any term of any contract or covenant relating to
employment, patents, proprietary information disclosure, non-competition or
non-solicitation.
2.7 Financial Statements.
(a) The Company has provided to Parent a correct and complete copy
of the audited financial statements (including, in each case, any related notes
thereto) of the Company and its Subsidiaries for the fiscal years ended December
31, 2004 and 2005, prepared in accordance with the published rules and
regulations of any applicable Governmental Entity and with generally accepted
accounting principles of the United States ("U.S. GAAP") applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
thereto) and audited in accordance with the auditing standards of the Public
Company Accounting Oversight Board ("PCAOB") by an independent accountant
registered with PCAOB, and such statements fairly present in all material
respects the financial position of the Company and its Subsidiaries, on a
consolidated basis, at the respective dates thereof and the results of its
operations and cash flows for the periods indicated, and each does not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
13
(b) The unaudited financial statements to be provided by the Company
to Parent prior to the Closing will be a complete copy of the unaudited
financial statements (including, in each case, any related notes thereto) of the
Company and its Subsidiaries for the three-month period ended March 31, 2005 and
2006, which statements will be prepared in accordance with U.S. GAAP applied on
a consistent basis throughout the period involved (except as may be indicated in
the notes thereto), will be reviewed by an independent accountant registered
with PCAOB, and such statements will fairly present in all material respects the
financial position of the Company and its Subsidiaries at the dates thereof and
the results of its operations and cash flows for the periods indicated, except
that the unaudited interim financial statements will be subject to normal
adjustments which are not expected to have a Material Adverse Effect on the
Company. The audited financial statements described in Section 2.7(a) and the
unaudited financial statements described in this Section 2.7(b) are collectively
referred to herein as the "U.S. GAAP Financial Statements."
(c) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2.8 No Undisclosed Liabilities. Except as set forth in Schedule 2.8
hereto, the Company and its Subsidiaries have no liabilities individually in
excess of $25,000 and in the aggregate in excess of $50,000 (absolute, accrued,
contingent or otherwise) of a nature required to be disclosed on a balance sheet
or in the related notes to the financial statements prepared in accordance with
U.S. GAAP which are, individually or in the aggregate, material to the business,
results of operations or financial condition of the Company and its
Subsidiaries, except: (i) liabilities provided for in or otherwise disclosed in
the audited consolidated balance sheets of the Company and its Subsidiaries as
of December 31, 2005 prepared in accordance with U.S. GAAP, which have been
delivered to Parent, and (ii) such liabilities arising in the ordinary course of
the business of the Company and its Subsidiaries since December 31, 2005, none
of which would have a Material Adverse Effect on the Company.
14
2.9 Absence of Certain Changes or Events. Except as set forth in Schedule
2.9 hereto and except for the Transactions, since December 31, 2005, there has
not been: (i) any Material Adverse Effect on the Company and its Subsidiaries,
(ii) any declaration, setting aside or payment of any dividend on, or other
distribution (whether in cash, stock or property) in respect of, any of the
Company's stock, or any purchase, redemption or other acquisition by the Company
of any of the Company's capital stock or any other securities of the Company or
any options, warrants, calls or rights to acquire any such shares or other
securities, (iii) any split, combination or reclassification of any of the
Company's capital stock, (iv) any granting by the Company or its Subsidiaries of
any increase in compensation or fringe benefits, except for normal increases of
cash compensation in the ordinary course of business consistent with past
practice, or any payment by the Company or its Subsidiaries of any bonus, except
for bonuses made in the ordinary course of business consistent with past
practice, or any granting by the Company or its Subsidiaries of any increase in
severance or termination pay or any entry by the Company or its Subsidiaries
into any currently effective employment, severance, termination or
indemnification agreement or any agreement the benefits of which are contingent
or the terms of which are materially altered upon the occurrence of a
transaction involving the Company of the nature contemplated hereby, (v) entry
by the Company or its Subsidiaries into any licensing or other agreement with
regard to the acquisition or disposition of any Intellectual Property (as
defined in Section 3.20 hereof) other than licenses in the ordinary course of
business consistent with past practice or any amendment or consent with respect
to any licensing agreement filed or required to be filed by the Company or its
Subsidiaries with respect to any Governmental Entity, (vi) any material change
by the Company in its accounting methods, principles or practices, (vii) any
change in the auditors of the Company, (vii) any issuance of capital stock of
the Company or any other securities of the Company or any options, warrants,
calls or rights to acquire any such shares or other securities, or (viii) any
revaluation by the Company or its Subsidiaries of any of their respective
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable or any sale of assets of
the Company or its Subsidiaries other than in the ordinary course of business.
2.10 Litigation. Except as disclosed in Schedule 2.10 hereto, there are no
claims, suits, actions or proceedings pending or, to the knowledge of the
Company or its Subsidiaries, threatened against the Company or its Subsidiaries,
before any court, governmental department, commission, agency, instrumentality
or authority, or any arbitrator that seeks to restrain or enjoin the
consummation of the transactions contemplated by this Agreement or which could
reasonably be expected, either singularly or in the aggregate with all such
claims, actions or proceedings, to have a Material Adverse Effect on the Company
or have a Material Adverse Effect on the ability of the parties hereto to
consummate the Transaction.
2.11 Employee Benefit Plans.
15
(a) All employee compensation, incentive, fringe or benefit plans,
programs, policies, commitments or other arrangements (whether or not set forth
in a written document) covering any active or former employee, director or
consultant of the Company, or any trade or business (whether or not
incorporated) which is under common control with the Company, with respect to
which the Company has liability (collectively, the "Plans") has been maintained
and administered in all material respects in compliance with its terms and with
the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Plans, and all liabilities with respect
to the Plans have been properly reflected in the financial statements of the
Company. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of Plan activities) has been brought, or to the
knowledge of the Company is threatened, against or with respect to any such
Plan. There are no audits, inquiries or proceedings pending or, to the knowledge
of the Company, threatened by any governmental agency with respect to any Plans.
All contributions, reserves or premium payments required to be made or accrued
as of the date hereof to the Plans have been timely made or accrued. the Company
does not have any plan or commitment to establish any new Plan, to modify any
Plan (except to the extent required by law or to conform any such Plan to the
requirements of any applicable law, in each case as previously disclosed to
Parent in writing, or as required by this Agreement), or to enter into any new
Plan. Each Plan can be amended, terminated or otherwise discontinued after the
Closing in accordance with its terms, without liability to Parent Company (other
than ordinary administration expenses and expenses for benefits accrued but not
yet paid).
(b) Except as disclosed on Schedule 2.11 hereto or in Section 2.11,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any stockholder, director or employee of the Company under any
Plan or otherwise, (ii) materially increase any benefits otherwise payable under
any Plan, or (iii) result in the acceleration of the time of payment or vesting
of any such benefits.
2.12 Labor Matters. Except as disclosed in Schedule 2.12 hereto, the
Company and its Subsidiaries are not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by the
Company or its Subsidiaries nor does the Company know of any activities or
proceedings of any labor union to organize any such employees.
2.13 Restrictions on Business Activities. Except as disclosed on Schedule
2.13 hereto, to the Company's knowledge, there is no agreement, commitment,
judgment, injunction, order or decree binding upon the Company or its
Subsidiaries or to which the Company or its Subsidiaries is a party which has or
could reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of the Company or its Subsidiaries, any
acquisition of property by the Company or its Subsidiaries or the conduct of
business by the Company or its Subsidiaries as currently conducted other than
such effects, individually or in the aggregate, which have not have and could
not reasonably be expected to have a Material Adverse Effect on the Company.
2.14 Title to Property.
(a) All real property owned by the Company or its Subsidiaries
(including improvements and fixtures thereon, easements and rights of way) (the
"Real Property") is shown or reflected on the audited consolidated balance
sheets of the Company as of December 31, 2005 prepared in accordance with U.S.
GAAP. The Company or its Subsidiaries has good, valid and marketable fee simple
title to the Real Property, and except as set forth in the audited consolidated
financial statements of the Company as of December 31, 2005 prepared in
accordance with U.S. GAAP or on Schedule 2.14 hereto, all of the Real Property
is held free and clear of (i) all leases, licenses and other rights to occupy or
use the Real Property and (ii) all Liens, rights of way, easements,
restrictions, exceptions, variances, reservations, covenants or other title
defects or limitations of any kind, other than liens for taxes not yet due and
payable and such liens or other imperfections of title, if any, as do not
materially detract from the value of or materially interfere with the present
use of the property affected thereby. Schedule 2.14 hereto is a list of all
options or other contracts under which the Company has a right to acquire any
interest in real property.
16
(b) All leases of real property held by the Company or its
Subsidiaries and all personal property and other property and assets of the
Company or its Subsidiaries (other than Real Property) owned, used or held for
use in connection with the business of the Company or its Subsidiaries (the
"Personal Property") are shown or reflected on the audited consolidated balance
sheets of the Company as of December 31, 2005 prepared in accordance with U.S.
GAAP. The Company or its Subsidiaries owns and has good and marketable title to
the Personal Property, and all such assets and properties are in each case held
free and clear of all Liens, except for Liens disclosed in the audited
consolidated financial statements of the Company as of December 31, 2005
prepared in accordance with U.S. GAAP or in Schedule 2.14 hereto, none of which
Liens has or will have, individually or in the aggregate, a Material Adverse
Effect on such property or on the present or contemplated use of such property
in the businesses of the Company.
(c) Except as set forth on Schedule 2.14, all leases pursuant to
which the Company or its Subsidiaries leases from others material real or
personal property are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing material default
or event of default of the Company or its Subsidiaries or, to the Company's
knowledge, any other party (or any event which with notice or lapse of time, or
both, would constitute a material default), except where the lack of such
validity and effectiveness or the existence of such default or event of default
could not reasonably be expected to have a Material Adverse Effect on the
Company.
2.15 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or "Taxes" refers to any and all federal, state, local and foreign taxes,
including, without limitation, gross receipts, income, profits, sales, use,
occupation, value added, ad valorem, transfer, franchise, withholding, payroll,
recapture, employment, excise and property taxes, assessments, governmental
charges and duties together with all interest, penalties and additions imposed
with respect to any such amounts and any obligations under any agreements or
arrangements with any other person with respect to any such amounts and
including any liability of a predecessor entity for any such amounts.
(b) Tax Returns and Audits. Except as set forth in Schedule 2.15
hereto:
(i) The Company and its Subsidiaries have timely filed all
federal, state, local and foreign returns, estimates, information statements and
reports relating to Taxes ("Returns") required to be filed by them with any Tax
authority prior to the date hereof, except such Returns which are not material
to the Company or its Subsidiaries. All such Returns are true, correct and
complete in all material respects. The Company and its Subsidiaries have paid
all Taxes shown to be due on such Returns.
17
(ii) All Taxes that the Company or its Subsidiaries is
required by law to withhold or collect have been duly withheld or collected, and
have been timely paid over to the proper governmental authorities to the extent
due and payable.
(iii) The Company and its Subsidiaries have not been
delinquent in the payment of any material Tax nor is there any material Tax
deficiency outstanding, proposed or assessed against them, nor have they
executed any unexpired waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the
Company or its Subsidiaries by any Tax authority is presently in progress, nor
has the Company or its Subsidiaries been notified of any request for such an
audit or other examination.
(v) No adjustment relating to any Returns filed by the Company
or its Subsidiaries has been proposed in writing, formally or informally, by any
Tax authority to the Company or its Subsidiaries or any representative thereof.
(vi) The Company and its Subsidiaries have no liability for
any material unpaid Taxes which have not been accrued for or reserved on the
Company's consolidated balance sheets included in the audited financial
statements for the most recent fiscal year ended, whether asserted or
unasserted, contingent or otherwise, which is material to the Company, other
than any liability for unpaid Taxes that may have accrued since the end of the
most recent fiscal year in connection with the operation of the business in the
ordinary course of business, none of which is material to the business, results
of operations or financial condition of the Company.
(vii) The Company and its Subsidiaries have not taken any
action and does not know of any fact, agreement, plan or other circumstance that
is reasonably likely to prevent the Transaction from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
2.16 Environmental Matters. Except as disclosed in Schedule 2.16
hereto and except for such matters that, individually or in the aggregate, are
not reasonably likely to have a Material Adverse Effect on the Company, to the
Company's knowledge: (i) the Company and its Subsidiaries have complied with all
applicable Environmental Laws; (ii) the properties currently owned or operated
by the Company and its Subsidiaries (including soils, groundwater, surface
water, buildings or other structures) are not contaminated with any Hazardous
Substances; (iii) the properties formerly owned or operated by the Company or
its Subsidiaries were not contaminated with Hazardous Substances during the
period of ownership or operation by the Company or its Subsidiaries; (iv) the
Company and its Subsidiaries are not subject to liability for any Hazardous
Substance disposal or contamination on any third party property; (v) the Company
and its Subsidiaries have not been associated with any release or threat of
release of any Hazardous Substance; (vi) the Company and its Subsidiaries have
not received any notice, demand, letter, claim or request for information
alleging that the Company and its Subsidiaries may be in violation of or liable
under any Environmental Law; and (vii) the Company and its Subsidiaries are not
subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or subject to any indemnity or other agreement with any
third party relating to liability under any Environmental Law or relating to
Hazardous Substances.
18
(b) As used in this Agreement, the term "Environmental Law" means
any federal, state, local or foreign law, regulation, order, decree, permit,
authorization, opinion, common law or agency requirement relating to: (A) the
protection, investigation or restoration of the environment, health and safety,
or natural resources; (B) the handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or (C) noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property.
(c) As used in this Agreement, the term "Hazardous Substance" means
any substance that is: (i) listed, classified or regulated pursuant to any
Environmental Law; (ii) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (iii) any other substance which is the
subject of regulatory action by any Governmental Entity pursuant to any
Environmental Law.
2.17 Brokers; Third Party Expenses. Except for the placement agreement
entered into, or to be entered into, by and between the Company and ▇▇▇▇ Capital
appointing ▇▇▇▇ Capital as the exclusive placement agent for the Company under
the Equity Financing ("Placement Agreement"), which Placement Agreement shall be
assumed by Parent immediately following the Closing, and except as set forth in
Schedule 2.17, the Company and its Subsidiaries have not incurred, nor will they
incur, directly or indirectly, any liability for brokerage, finders' fees,
agent's commissions or any similar charges in connection with this Agreement or
any transactions contemplated hereby, nor will the Company, its Subsidiaries or
Parent be required to issue any shares of common stock, options, warrants or
other securities of either the Company, its Subsidiaries or Parent to any third
party as result of this Transaction due to the provisions of any agreement
entered into by the Company or its Subsidiaries relating to brokerage, finders'
fees, agent's commissions or similar agreements.
2.18 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"Intellectual Property" shall mean any or all of the following and all
worldwide common law and statutory rights in, arising out of, or
associated therewith: (i) patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof ("Patents"); (ii) inventions (whether
patentable or not), invention disclosures, formulations, delivery methods,
improvements, trade secrets, proprietary information, know how,
technology, technical data and customer lists, and all documentation
relating to any of the foregoing; (iii) copyrights, copyrights
registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) domain names, uniform
resource locators ("URLs") and other names and locators associated with
the Internet ("Domain Names"); (v) formulations and delivery methods and
any registrations, approvals and applications therefor; (vi) trade names,
logos, common law trademarks and service marks, trademark and service ▇▇▇▇
registrations and applications therefor (collectively, "Trademarks");
(vii) all databases and data collections and all rights therein; (viii)
all moral and economic rights of authors and inventors, however
denominated, and (ix) any similar or equivalent rights to any of the
foregoing (as applicable).
19
"Company Intellectual Property" shall mean any Intellectual Property that
is owned by, or exclusively licensed to, the Company or its Subsidiaries.
"Registered Intellectual Property" means all Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued, filed with, or recorded by any private, state, government
or other legal authority.
"Company Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, the Company or
its Subsidiaries.
"Company Products" means all products (including formulations and delivery
methods with respect thereto) used, licensed, owned, sold, marketed or in
development by the Company or its Subsidiaries.
(a) Except as disclosed on Schedule 2.18, to the Company's
knowledge, Company Intellectual Property or Company Product is not subject to
any material proceeding or outstanding decree, order, judgment, contract,
license, agreement or stipulation restricting in any manner the use, transfer or
licensing thereof by the Company or its Subsidiaries, or which may affect the
validity, use or enforceability of such Company Intellectual Property or Company
Product, which in any such case could reasonably be expected to have a Material
Adverse Effect on the Company.
(b) Except as disclosed on Schedule 2.18 hereto, the Company or its
Subsidiaries owns and has good and exclusive title to each material item of
Company Intellectual Property owned by it free and clear of any Liens (excluding
non-exclusive licenses and related restrictions granted in the ordinary course);
and the Company or its Subsidiaries is the exclusive owner of all material
registered Trademarks used in connection with the operation or conduct of the
business of the Company or its Subsidiaries including the sale of any products
by the Company or its Subsidiaries.
(c) The operation of the business of the Company and its
Subsidiaries as such business currently is conducted, including (i) the design,
delivery method, formulation, development, manufacture, distribution,
reproduction, marketing or sale of the products or services of the Company and
its Subsidiaries (including Company Products) and (ii) the use of any product,
device or process of the Company or its Subsidiaries, to the Company's knowledge
and except as could not reasonably be expected to have a Material Adverse
Effect, has not and does not and will not infringe or misappropriate the
Intellectual Property of any third party or constitute unfair competition or
trade practices under the laws of any jurisdiction.
20
2.19 Agreements, Contracts and Commitments. (a) Schedule 2.19 hereto sets
forth a complete and accurate list of all Material Contracts (as hereinafter
defined), specifying the parties thereto. For purposes of this Agreement, (i)
the term "Contracts" shall mean all contracts, agreements, leases, mortgages,
indentures, note, bond, liens, license, permit, franchise, purchase orders,
sales orders, arbitration awards, judgments, decrees, orders, documents,
instruments, understandings and commitments, or other instrument or obligation
(including without limitation outstanding offers or proposals) of any kind,
whether written or oral, to which the Company or its Subsidiaries is a party or
by or to which any of the properties or assets of the Company or its
Subsidiaries may be bound, subject or affected (including without limitation
notes or other instruments payable to the Company or its Subsidiaries) and (ii)
the term "Material Contracts" shall mean (x) each Contract (I) providing for
payments (past, present or future) to the Company or its Subsidiaries in excess
of $50,000 in the aggregate or (II) under which or in respect of which the
Company or its Subsidiaries presently has any liability or obligation of any
nature whatsoever (absolute, contingent or otherwise) in excess of $50,000, (y)
each Contract which otherwise is or may be material to the businesses,
operations, assets, condition (financial or otherwise) or prospects of the
Company or its Subsidiaries and (z) without limitation of subclause (x) or
subclause (y), each of the following Contracts:
(i) any mortgage, indenture, note, installment obligation or
other instrument, agreement or arrangement for or relating to any borrowing of
money by or from the Company or its Subsidiaries, or any officer, director or 5%
or more stockholder ("Insider") of the Company or its Subsidiaries;
(ii) any guaranty, direct or indirect, by the Company or its
Subsidiaries or any Insider of the Company or its Subsidiaries of any obligation
for borrowings, or otherwise, excluding endorsements made for collection in the
ordinary course of business;
(iii) any Contract made other than in the ordinary course of
business or (x) providing for the grant to any preferential rights to purchase
or lease any asset of the Company or its Subsidiaries or (y) providing for any
right (exclusive or non-exclusive) to sell or distribute, or otherwise relating
to the sale or distribution of, any product or service of the Company or its
Subsidiaries;
(iv) any obligation to register any shares of the capital
stock or other securities of the Company or its Subsidiaries with any
Governmental Entity;
(v) any obligation to make payments, contingent or otherwise,
arising out of the prior acquisition of the business, assets or stock of other
Persons;
(vi) any collective bargaining agreement with any labor union;
(vii) any lease or similar arrangement for the use by the
Company or its Subsidiaries of personal property;
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(viii) any Contract granting or purporting to grant, or
otherwise in any way relating to, any mineral rights or any other interest
(including, without limitation, a leasehold interest) in real property; and
(ix) any Contract to which any Insider of the Company or its
Subsidiaries is a party.
(b) Each Contract was entered into at arms' length and in the
ordinary course, is in full force and effect and is valid and binding upon and
enforceable against each of the parties thereto. True, correct and complete
copies of all Material Contracts (or written summaries in the case of oral
Material Contracts) and of all outstanding offers or proposals of the Company or
its Subsidiaries have been heretofore delivered to Parent. Nothing in this
Agreement or any Schedule hereto shall be construed as a determination by the
Company or any of its Subsidiaries that any Contract or agreement is "material"
within the meaning of Item 601 of Regulation S-B promulgated under the
Securities Act.
(c) Except as set forth in Schedule 2.19, neither the Company nor
its Subsidiaries nor to the best of the Company's knowledge any other party
thereto is in breach of or in default under, and no event has occurred which
with notice or lapse of time or both would become a breach of or default under,
any Contract, and no party to any Contract has given any written notice of any
claim of any such breach, default or event, which, individually or in the
aggregate, are reasonably likely to have a Material Adverse Effect on the
Company. Each agreement, contract or commitment to which the Company or its
Subsidiaries is a party or by which they are bound that has not expired by its
terms is in full force and effect, except where such failure to be in full force
and effect is not reasonably likely to have a Material Adverse Effect on the
Company.
2.20 Insurance. Schedule 2.20 sets forth the insurance policies and
fidelity bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors (collectively, the "Insurance Policies") of
the Company and its Subsidiaries.
2.21 Governmental Actions/Filings. The Company and its Subsidiaries have
been granted and hold, and have made, all Governmental Actions/Filings
(including, without limitation, the Governmental Actions/Filings required for
(i) emission or discharge of effluents and pollutants into the air and the water
and (ii) the manufacture and sale of all products manufactured and sold by it)
necessary to the conduct the business of the Company and its Subsidiaries as
presently conducted or used or held for use by the Company or its Subsidiaries,
all of which are listed in Schedule 2.21 hereto, and true, complete and correct
copies of which have heretofore been delivered to Parent. Each such Governmental
Action/Filing is in full force and effect and, expect as disclosed in Schedule
2.21 hereto, will not expire prior to December 31, 2006, and the Company and its
Subsidiaries are in compliance with all of its obligations with respect thereto.
No event has occurred and is continuing which requires or permits, or after
notice or lapse of time or both would require or permit, and consummation of the
transactions contemplated by this Agreement or any ancillary documents will not
require or permit (with or without notice or lapse of time, or both), any
modification or termination of any such Governmental Actions/Filings. Except as
set forth in Schedule 2.21, to the Company's knowledge, no Governmental
Action/Filing is necessary to be obtained, secured or made by the Company or its
Subsidiaries to enable it to continue to conduct its businesses and operations
and use its properties after the Closing in a manner which is consistent with
current practice.
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For purposes of this Agreement, the term "Governmental Action/Filing"
shall mean any franchise, license, certificate of compliance, authorization,
consent, order, permit, approval, consent or other action of, or any filing,
registration or qualification with, any federal, state, municipal, foreign or
other governmental, administrative or judicial body, agency or authority
including, without limitation the U.S. Food and Drug Administration.
2.22 Interested Party Transactions. Except as set forth in the Schedule
2.22 hereto, no employee, officer, director or Insider of the Company or its
Subsidiaries or a member of his or her immediate family is indebted to the
Company or its Subsidiaries, nor is the Company or its Subsidiaries indebted (or
committed to make loans or extend or guarantee credit) to any of them, other
than (i) for payment of salary for services rendered, (ii) reimbursement for
reasonable expenses incurred on behalf of the Company or its Subsidiaries, and
(iii) for other employee benefits made generally available to all employees.
Except as set forth in Schedule 2.22, to the Company's knowledge, none of such
individuals has any direct or indirect ownership interest in any Person with
whom the Company or any Subsidiary is affiliated or with whom the Company or any
Subsidiary has a contractual relationship, or any Person that competes with the
Company or any Subsidiary, except that each employee, Insider, officer or
director of the Company and its Subsidiaries and members of their respective
immediate families may own less than 5% of the outstanding stock in publicly
traded companies that may compete with the Company or its Subsidiaries. Except
as set forth in Schedule 2.22, to the knowledge of the Company, no officer,
director or Insider or any member of their immediate families is, directly or
indirectly, interested in any material contract with the Company or its
Subsidiaries (other than such contracts as relate to any such individual
ownership of capital stock or other securities of the Company or its
Subsidiaries).
2.23 Board Approval. The board of directors of the Company or similar
governing body (including any required committee or subgroup of thereof) has, as
of the date of this Agreement, unanimously approved, subject to the approval of
stockholders, this Agreement and the transactions contemplated hereby, and
resolved to seek the stockholders approval and adoption of this Agreement and
approval of the Transaction.
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2.24 Management. During the past five year period, to the Company's
knowledge, no current or former director, executive officer or Insider of the
Company or any Subsidiary has been the subject of: (a) a petition under the
Federal bankruptcy laws or any other insolvency or moratorium law or has a
receiver, fiscal agent or similar officer been appointed by a court for such
person, or any partnership in which such person was a general partner at or
within two years before the time of such filing, or any corporation or business
association of which such person was an executive officer at or within two years
before the time of such filing; (b) a conviction in a criminal proceeding or a
named subject of a pending criminal proceeding (excluding traffic violations
that do not relate to driving while intoxicated or driving under the influence);
(c) any order, judgment or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining any such person from, or otherwise limiting, the following activities:
(1) Acting as a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the United States Commodity Futures
Trading Commission or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank, savings
and loan association or insurance company, or engaging in or continuing any
conduct or practice in connection with such activity; (2) Engaging in any type
of business practice; or (3) Engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection with any
violation of Federal, state or other securities laws or commodities laws; (d)
any order, judgment or decree, not subsequently reversed, suspended or vacated,
of any Federal, state or local authority barring, suspending or otherwise
limiting for more than 60 days the right of any such person to engage in any
activity described in the preceding sub-paragraph, or to be associated with
persons engaged in any such activity; (e) a finding by a court of competent
jurisdiction in a civil action or by the U.S. Securities and Exchange Commission
(the "Commission") to have violated any securities law, regulation or decree and
the judgment in such civil action or finding by the Commission has not been
subsequently reversed, suspended or vacated; or (f) a finding by a court of
competent jurisdiction in a civil action or by the Commodity Futures Trading
Commission to have violated any federal commodities law, and the judgment in
such civil action or finding has not been subsequently reversed, suspended or
vacated.
2.25 Injunction. Neither the Company nor any of its Subsidiaries and
affiliates is or has been subject to any order, judgment, or decree of any court
of competent jurisdiction temporarily, preliminarily, or permanently enjoining
such person for failure to comply with Rule 503 under Regulation D
2.26 Representations and Warranties Complete. The representations and
warranties of the Company included in this Agreement and any list, statement,
document or information set forth in, or attached to, any Schedule provided
pursuant to this Agreement or delivered hereunder, are true and complete in all
material respects and do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading, under the circumstance under
which they were made.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as disclosed on the schedules prepared by the Parent to be
delivered to the Company (the "Parent Schedules") Parent represents and warrants
to, and covenants with, the Company, as follows:
3.1 Organization and Qualification.
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(a) Parent is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware and has the requisite
corporate power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being or currently planned
by Parent to be conducted. Parent is in possession of all Approvals necessary to
own, lease and operate the properties it purports to own, operate or lease and
to carry on its business as it is now being or currently planned by Parent to be
conducted, except where the failure to have such Approvals could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent. Complete and correct copies of the Parent Charter
Documents, as amended and currently in effect, have been heretofore delivered to
the Company. Parent is not in violation of any of the provisions of the Parent
Charter Documents.
(b) Parent is duly qualified or licensed to do business as a foreign
corporation and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its activities
makes such qualification or licensing necessary, except for such failures to be
so duly qualified or licensed and in good standing that could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect on
Parent.
3.2 Subsidiaries. Except for Merger Sub which is a wholly-owned subsidiary
of Parent, Parent has no Subsidiaries and does not own, directly or indirectly,
any ownership, equity, profits or voting interest in any Person or have any
agreement or commitment to purchase any such interest, and Parent has not agreed
and is not obligated to make nor is bound by any written, oral or other
agreement, contract, subcontract, lease, binding understanding, instrument,
note, option, warranty, purchase order, license, sublicense, insurance policy,
benefit plan, commitment or undertaking of any nature, as of the date hereof or
as may hereafter be in effect under which it may become obligated to make, any
future investment in or capital contribution to any other entity.
3.3 Capitalization.
(a) The authorized capital stock of Parent consists of: (i)
150,000,000 shares of common stock, par value $0.001 per share ("Parent Common
Stock") and (ii) 5,000,000 shares of preferred stock, par value $0.001 per share
("Parent Preferred Stock") of which 2,000,000 shares will be designated as
Series A Convertible Preferred Stock ("Series A Preferred Stock") pursuant to
the Certificate of Designations of Series A Preferred Stock attached hereto as
Exhibit A ("Certificate of Designations"). As of the close of business on the
business day immediately prior to the date hereof, Parent has: (i) 5,353,941
shares of Parent Common Stock issued and outstanding, (ii) no shares of Parent
Preferred Stock were issued and outstanding; (iii) no shares of Parent Common
Stock were reserved for issuance upon the exercise of outstanding options and
warrants to purchase Parent Common Stock ("Parent Warrants"); (iv) no shares of
Parent Preferred Stock were reserved for issuance to any party (other than the
issuances contemplated under this Agreement); and (v) no shares of Parent Common
Stock were reserved for issuance upon the conversion of Parent Preferred Stock
or any outstanding convertible notes, debentures or securities ("Convertible
Securities"). All outstanding shares of Parent Common Stock have been issued and
granted in compliance with (i) all applicable securities laws and (in all
material respects) other applicable laws and regulations, and (ii) all
requirements set forth in any applicable Contracts. Prior to Closing, there will
be an aggregate of 2,000,000 shares of authorized but unissued shares of Series
A Preferred Stock, which, subject to the approval of Parent's stockholders to
effect the Reverse Split, which in any case shall be required to have occurred
subsequent to the Closing ("Stockholder Approval"): (i) shall be convertible
into 201,520,408 shares of Parent Common Stock on a pre-Reverse Split basis,
based on a conversion rate of 100.760204 shares of Parent Common Stock on a
pre-Reverse Split basis for each share of Series A Preferred Stock, and (ii)
shall be convertible into 13,434,694 shares of Parent Common Stock on a
post-Reverse Split basis. The term "Reverse Split" is defined in Section 5.14
hereof. All outstanding shares of Parent Common Stock have been issued and
granted in compliance with (i) all applicable securities laws and (in all
material respects) other applicable laws and regulations, and (ii) all
requirements set forth in any applicable Contracts.
25
(b) Except as contemplated by this Agreement, there is no commitment
by Parent to issue any shares of capital stock, subscriptions, warrants,
options, convertible securities, or other similar rights to purchase or receive
Parent securities or to distribute to the holders of any of its equity
securities any evidence of indebtedness, cash, or other assets. Parent is under
no obligation (contingent or otherwise) to purchase, redeem, or otherwise
acquire any of its equity or debt securities or any interest therein, and to
Parent's knowledge, there are no voting trusts or similar agreements,
stockholders' agreements, pledge agreements, buy-sell agreements, rights of
first refusal, preemptive rights, or proxies relating to any securities of
Parent or obligating Parent to grant, extend, accelerate the vesting of or enter
into any such subscription, option, warrant, equity security, call, right,
commitment or agreement. (c) Except as contemplated by this Agreement and except
as set forth in Schedule 3.3 hereto, there are no registration rights, and there
is no voting trust, proxy, rights plan, anti-takeover plan or other agreement or
understanding to which Parent is a party or by which it is bound with respect to
any equity security of any class of Parent.
3.4 Authority Relative to this Agreement. Parent has full corporate power
and authority to: (i) execute, deliver and perform this Agreement, and each
ancillary document which Parent has executed or delivered or is to execute or
deliver pursuant to this Agreement, and (ii) carry out Parent's obligations
hereunder and thereunder and, to consummate the transactions contemplated hereby
(including the Transaction). The execution and delivery of this Agreement and
the consummation by Parent of the transactions contemplated hereby (including
the Transaction) have been duly and validly authorized by all necessary
corporate action on the part of Parent (including the approval by its Board of
Directors), and no other corporate proceedings on the part of Parent are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Parent and, assuming the due authorization, execution and delivery
thereof by the other parties hereto, constitutes the legal and binding
obligation of Parent, enforceable against Parent in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and by
general principles of equity and public policy.
3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent does not,
and the performance of this Agreement by Parent shall not: (i) conflict with or
violate Parent Charter Documents, (ii) conflict with or violate any Legal
Requirements, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or materially impair Parent's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Parent pursuant to, any
Contracts, except, with respect to clauses (ii) or (iii), for any such
conflicts, violations, breaches, defaults or other occurrences that would not,
individually and in the aggregate, have a Material Adverse Effect on Parent.
26
(b) Except for: (i) the filing of the Certificate of Designations
with the appropriate authorities and pursuant to the laws of the State of
Delaware, (ii) the filing of the articles of merger with the appropriate
authorities and pursuant to the laws of the State of Delaware and the State of
Nevada, and (iii) the requirement to obtain the Stockholder Approval which in
any case shall be required to have occurred subsequent to the Closing, the
execution and delivery of this Agreement by Parent does not, and the performance
of its obligations hereunder will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Entity, except (i) for applicable requirements, if any, of the Securities Act,
the Exchange Act, Blue Sky Laws, and the rules and regulations thereunder, and
appropriate documents with the relevant authorities of other jurisdictions in
which Parent is qualified to do business, and (ii) where the failure to obtain
such consents, approvals, authorizations or permits, or to make such filings or
notifications, would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Parent, or prevent consummation of
the Transaction or otherwise prevent the parties hereto from performing their
obligations under this Agreement.
3.6 Compliance. To Parent's knowledge, Parent has complied with, is not in
violation of, any Legal Requirements with respect to the conduct of its
business, or the ownership or operation of its business, except for failures to
comply or violations which, individually or in the aggregate, have not had and
are not reasonably likely to have a Material Adverse Effect on Parent. To
Parent's knowledge, the businesses and activities of Parent have not been and
are not being conducted in violation of any Legal Requirements. Parent is not in
default or violation of any term, condition or provision of Parent Charter
Documents. Except as set forth on Schedule 3.6, to Parent's knowledge, no
written notice of non-compliance with any Legal Requirements has been received
by the Parent Company (and the Parent has no knowledge of any such notice
delivered to any other Person). The Parent is not in violation of any term of
any contract or covenant relating to employment, patents, proprietary
information disclosure, non-competition or non-solicitation.
3.7 SEC Filings; Financial Statements.
(a) Parent has made available to the Company each report,
registration statement and definitive proxy statement filed by Parent with the
SEC for the 36 months prior to the date of this Agreement (the "Parent SEC
Reports"), which, to Parent's knowledge, are all the forms, reports, statements
and documents required to be filed by Parent with the SEC for the 36 months
prior to the date of this Agreement. As of their respective dates (and with
respect to Parent SEC Reports filed prior to December 28, 2005, to the knowledge
of Parent), the Parent SEC Reports: (i) were prepared in accordance and complied
in all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Parent SEC Reports, and (ii) did not at the time
they were filed (and if amended or superseded by a filing prior to the date of
this Agreement then on the date of such filing and as so amended or superseded)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent set forth in the preceding sentence, Parent
makes no representation or warranty whatsoever concerning the Parent SEC Reports
as of any time other than the time they were filed.
27
(b) Each set of financial statements (including, in each case, any
related notes thereto) contained in Parent SEC Reports (and with respect to
financial statements (and notes thereto) contained in Parent SEC Reports filed
prior to December 28, 2005, to the knowledge of Parent), complied as to form in
all material respects with the published rules and regulations of the SEC with
respect thereto, was prepared in accordance with U.S. GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto or, in the case of unaudited statements, do not contain
footnotes as permitted by Form 10-QSB of the Exchange Act) and each fairly
presents in all material respects the financial position of Parent at the
respective dates thereof and the results of its operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal adjustments which were not or are not expected to
have a Material Adverse Effect on Parent taken as a whole.
(c) Parent has previously furnished to Company a complete and
correct copy of any amendments or modifications, which have not yet been filed
with the SEC but which are required to be filed, to agreements, documents or
other instruments which previously had been filed by Parent with the SEC
pursuant to the Securities Act or the Exchange Act, each of which are listed on
the Parent Schedules.
3.8 No Undisclosed Liabilities. Except as set forth in Schedule 3.8,
Parent has no liabilities (absolute, accrued, contingent or otherwise) of a
nature required to be disclosed on a balance sheet or in the related notes to
the financial statements prepared in accordance with U.S. GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Parent, except (i) liabilities provided for
in or otherwise disclosed in the most recent financial statements in the Parent
SEC Reports filed prior to the date hereof, (ii) liabilities incurred since
March 31, 2006 in the ordinary course of business, none of which would have a
Material Adverse Effect on Parent, and (iii) those liabilities and obligations
specifically set forth in Section 5.11.
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3.9 Absence of Certain Changes or Events. Except as set forth on Schedule
3.9 or as contemplated by this Agreement, and except as disclosed in the Parent
SEC Reports, since March 31, 2006, there has not been: (i) any Material Adverse
Effect on Parent, (ii) any declaration, setting aside or payment of any dividend
on, or other distribution (whether in cash, stock or property) in respect of,
any of Parent's capital stock, or any purchase, redemption or other acquisition
by Parent of any of Parent's capital stock or any other securities of Parent or
any options, warrants, calls or rights to acquire any such shares or other
securities, (iii) except for the Reverse Split contemplated following the
Closing, any split, combination or reclassification of any of Parent's capital
stock, (iv) any granting by Parent of any increase in compensation or fringe
benefits, except for normal increases of cash compensation in the ordinary
course of business consistent with past practice, or any payment by Parent of
any bonus, except for bonuses made in the ordinary course of business consistent
with past practice, or any granting by Parent of any increase in severance or
termination pay or any entry by Parent into any currently effective employment,
severance, termination or indemnification agreement or any agreement the
benefits of which are contingent or the terms of which are materially altered
upon the occurrence of a transaction involving Parent of the nature contemplated
hereby, (v) entry by Parent into any licensing or other agreement with regard to
the acquisition or disposition of any Intellectual Property other than licenses
in the ordinary course of business consistent with past practice or any
amendment or consent with respect to any licensing agreement filed or required
to be filed by Parent with respect to any Governmental Entity, (vi) any material
change by Parent in its accounting methods, principles or practices, except as
required by concurrent changes in U.S. GAAP, (vii) any change in the auditors of
Parent, (vii) any issuance of, or agreement to issue, capital stock of Parent or
any other securities of Parent or any options, warrants, calls or rights to
acquire any such shares or other securities, or (viii) any revaluation by Parent
of any of their respective assets, including, without limitation, writing down
the value of capitalized inventory or writing off notes or accounts receivable
or any sale of assets of Parent other than in the ordinary course of business.
3.10 Litigation. There are no claims, suits, actions or proceedings
pending or to Parent's knowledge, threatened against Parent, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seeks to restrain or enjoin the consummation of the
transactions contemplated by this Agreement or which could reasonably be
expected, either singularly or in the aggregate with all such claims, actions or
proceedings, to have a Material Adverse Effect on Parent or have a Material
Adverse Effect on the ability of the parties hereto to consummate the
Transaction.
3.11 Employee Benefit Plans. Except as disclosed on Schedule 3.11
hereto, Parent does not maintain, and has no liability under, any Plan, and
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or otherwise)
becoming due to any stockholder, director or employee of Parent, or (ii) result
in the acceleration of the time of payment or vesting of any such benefits.
3.12 Labor Matters. Parent is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by
Parent, nor does Parent know of any activities or proceedings of any labor union
to organize any such employees.
3.13 Restrictions on Business Activities. To Parent's knowledge, there
is no agreement, commitment, judgment, injunction, order or decree binding upon
Parent or to which Parent is a party which has or could reasonably be expected
to have the effect of prohibiting or materially impairing any business practice
of Parent, any acquisition of property by Parent or the conduct of business by
Parent as currently conducted other than such effects, individually or in the
aggregate, which have not had and could not reasonably be expected to have, a
Material Adverse Effect on Parent.
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3.14 Title to Property. Parent does not own or lease any Real Property or
Personal Property. There are no options or other contracts under which Parent
has a right or obligation to acquire or lease any interest in Real Property or
Personal Property.
3.15 Taxes. Except as set forth in Schedule 3.15 hereto, to Parent's
knowledge:
(a) Parent has timely filed all Returns required to be filed by
Parent with any Tax authority prior to the date hereof, except such Returns
which are not material to Parent. All such Returns are true, correct and
complete in all material respects. Parent has paid all Taxes shown to be due on
such Returns.
(b) All Taxes that Parent is required by law to withhold or collect
have been duly withheld or collected, and have been timely paid over to the
proper governmental authorities to the extent due and payable.
(c) Parent has not been delinquent in the payment of any material
Tax nor is there any material Tax deficiency outstanding, proposed or assessed
against Parent, nor has Parent executed any unexpired waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(d) No audit or other examination of any Return of Parent by any Tax
authority is presently in progress, nor has Parent been notified of any request
for such an audit or other examination.
(e) No adjustment relating to any Returns filed by Parent has been
proposed in writing, formally or informally, by any Tax authority to Parent or
any representative thereof.
(f) Parent has no liability for any material unpaid Taxes which have
not been accrued for or reserved on Parent's balance sheets included in the
audited financial statements for the most recent fiscal year ended, whether
asserted or unasserted, contingent or otherwise, which is material to Parent,
other than any liability for unpaid Taxes that may have accrued since the end of
the most recent fiscal year in connection with the operation of the business of
Parent in the ordinary course of business, none of which is material to the
business, results of operations or financial condition of Parent.
(g) Parent has not taken any action and does not know of any fact,
agreement, plan or other circumstance that is reasonably likely to prevent the
Transaction from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
3.16 Environmental Matters. Except as disclosed in Schedule 3.16 hereto
and except for such matters that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect, to Parent's knowledge: (i)
Parent has complied with all applicable Environmental Laws; (ii) the properties
currently owned or operated by Parent (including soils, groundwater, surface
water, buildings or other structures) are not contaminated with any Hazardous
Substances; (iii) the properties formerly owned or operated by Parent were not
contaminated with Hazardous Substances during the period of ownership or
operation by Parent; (iv) Parent is not subject to liability for any Hazardous
Substance disposal or contamination on any third party property; (v) Parent has
not been associated with any release or threat of release of any Hazardous
Substance; (vi) Parent has not received any notice, demand, letter, claim or
request for information alleging that Parent may be in violation of or liable
under any Environmental Law; and (vii) Parent is not subject to any orders,
decrees, injunctions or other arrangements with any Governmental Entity or
subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law or relating to Hazardous Substances.
30
3.17 Brokers. Except for Parent's obligations under the Financial Advisory
Agreement (as defined in Section 5.11), Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agent's commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.18 Intellectual Property. Parent does not own, license or otherwise have
any right, title or interest in any Intellectual Property or Registered
Intellectual Property. To the knowledge of Parent, Parent has not, does not and
will not infringe or misappropriate the Intellectual Property of any third party
or engage in activities constituting unfair competition or trade practices under
the laws of any jurisdiction.
3.19 Agreements, Contracts and Commitments.
(a) Except as set forth on Schedule 3.19, the Financial Advisory
Agreement, the agreement with Computershare Trust Company, Inc. ("Transfer
Agent"), the agreement with Vero Management, LLC ("Vero") which will be
terminated without liability to Parent prior to Closing, there are no contracts,
agreements, leases, mortgages, indentures, notes, bonds, liens, licenses,
permits, franchises, purchase orders, sales orders, arbitration awards,
judgments, decrees, orders, documents, instruments, understandings and
commitments, or other instrument or obligation (including without limitation
outstanding offers or proposals) of any kind, whether written or oral, to which
Parent is a party or by or to which any of the properties or assets of Parent
may be bound, subject or affected, which either (a) creates or imposes a
liability greater than $5,000, or (b) may not be cancelled without penalty or
further obligation or liability by the Company on less than 30 days' or less
prior notice ("Parent Contracts").
(b) Each Parent Contract was entered into at arms' length and in the
ordinary course, is in full force and effect and is valid and binding upon and
enforceable against each of the parties thereto. True, correct and complete
copies of all Parent Contracts (or written summaries in the case of oral Parent
Contracts) and of all outstanding offers or proposals of Parent have been
heretofore delivered to the Company.
(c) Neither Parent nor, to the knowledge of Parent, any other party
thereto is in breach of or in default under, and no event has occurred which
with notice or lapse of time or both would become a breach of or default under,
any Parent Contract, and no party to any Parent Contract has given any written
notice of any claim of any such breach, default or event, which, individually or
in the aggregate, are reasonably likely to have a Material Adverse Effect on
Parent. Each agreement, contract or commitment to which Parent is a party or by
which it is bound that has not expired by its terms is in full force and effect,
except where such failure to be in full force and effect is not reasonably
likely to have a Material Adverse Effect on Parent.
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3.20 Insurance. Parent does not maintain any Insurance Policies.
3.21 Governmental Actions/Filings. Parent has been granted and holds, and
has made, all Governmental Actions/Filings necessary to the conduct by Parent of
its businesses (as presently conducted) or used or held for use by Parent, all
of which are listed in Schedule 3.21 hereto, and true, complete and correct
copies of which have heretofore been delivered to the Company. Each such
Governmental Action/Filing is in full force and effect and will not expire prior
to December 31, 2006, and Parent is in compliance with all of its obligations
with respect thereto. No event has occurred and is continuing which requires or
permits, or after notice or lapse of time or both would require or permit, and
consummation of the transactions contemplated by this Agreement or the ancillary
documents will not require or permit (with or without notice or lapse of time,
or both), any modification or termination of any such Governmental
Actions/Filings. To Parent's knowledge, no Governmental Action/Filing is
necessary to be obtained, secured or made by Parent to enable it to continue to
conduct its businesses and operations and use its properties after the Closing
in a manner which is consistent with current practice.
3.22 Interested Party Transactions. Except as set forth in the Schedule
3.22 hereto or in the Parent's most recent report on Form 10-KSB or the Parent
SEC Reports subsequent thereto, no employee, officer, director or 5% or more
stockholder of Parent or a member of his or her immediate family is indebted to
Parent, nor is Parent indebted (or committed to make loans or extend or
guarantee credit) to any of them, other than (i) for payment of salary for
services rendered, (ii) reimbursement for reasonable expenses incurred on behalf
of Parent, and (iii) for other employee benefits made generally available to all
employees. Except as set forth in Schedule 3.22, to Parent's knowledge, none of
such individuals has any direct or indirect ownership interest in any Person
with whom Parent is affiliated or with whom Parent has a material contractual
relationship, or any Person that competes with Parent, except that each
employee, 5% or more stockholder, officer or director of Parent and members of
their respective immediate families may own less than 5% of the outstanding
stock in publicly traded companies that may compete with Parent. Except as set
forth in Schedule 3.22, to Parent's knowledge, no officer, director or
stockholder or any member of their immediate families is, directly or
indirectly, interested in any material contract with Parent (other than such
contracts as relate to any such individual ownership of capital stock or other
securities of Parent).
3.23 Indebtedness; Parent Assets. Parent has no indebtedness for borrowed
money. Immediately prior to the Closing, Parent will have no assets, except for
cash reserves earmarked for the payment of certain accounts payable and accrued
expenses of Parent with respect to the period prior to Closing which remain
unpaid, which Parent shall be responsible for payment following the Closing
pursuant to Section 5.11 hereof ("Cash Reserve").
3.24 Over-the-Counter Bulletin Board Quotation. Parent Common Stock is
quoted on the Over-the-Counter Bulletin Board ("OTC BB"). There is no action or
proceeding pending or, to Parent's knowledge, threatened against Parent by
NASDAQ or NASD, Inc. ("NASD") with respect to any intention by such entities to
prohibit or terminate the quotation of Parent Common Stock on the OTC BB.
32
3.25 Board Approval. The Board of Directors of Parent (including any
required committee or subgroup of the Board of Directors of Parent) has, as of
the date of this Agreement, approved this Agreement and the transactions
contemplated hereby.
3.26 Representations and Warranties Complete. The representations and
warranties of Parent included in this Agreement and any list, statement,
document or information set forth in, or attached to, any Schedule provided
pursuant to this Agreement or delivered hereunder, are true and complete in all
material respects and do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading, under the circumstance under
which they were made.
3.27 Representations and Warranties of Merger Sub. Merger Sub hereby
represents and warrants to, and covenants with, the Company as follows: -
(a) Organization. Merger Sub is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware.
Complete and correct copies of the certificate of incorporation and bylaws of
the Merger Sub, as currently in effect (the "Merger Sub Charter Documents"),
have been heretofore delivered to the Company. Merger Sub is not in violation of
any of the provisions of the Merger Sub Charter Documents.
(b) Authority Relative to this Agreement. Merger Sub has full
corporate power and authority to: (i) execute, deliver and perform this
Agreement, and each ancillary document which Merger Sub has executed or
delivered or is to execute or deliver pursuant to this Agreement, and (ii) carry
out Merger Sub's obligations hereunder and thereunder and, to consummate the
transactions contemplated hereby (including the Transaction). The execution and
delivery of this Agreement and the consummation by Merger Sub of the
transactions contemplated hereby (including the Transaction) have been duly and
validly authorized by all necessary corporate action on the part of Merger Sub
(including the approval by its Board of Directors and by Parent as the sole
stockholder of Merger Sub), and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Merger Sub and, assuming the due authorization,
execution and delivery thereof by the other parties hereto, constitutes the
legal and binding obligation of Merger Sub, enforceable against Merger Sub in
accordance with its terms, except as may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and by general principles of equity and public policy.
(c) Business of Merger Sub. Merger Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.
(d) Representations and Warranties Complete. The representations and
warranties of Merger Sub included in this Agreement and any list, statement,
document or information set forth in, or attached to, any Schedule provided
pursuant to this Agreement or delivered hereunder, are true and complete in all
material respects and do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading, under the circumstance under
which they were made.
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ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Company and Parent. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement pursuant to its terms or the Closing, each of the Company, Parent
and Merger Sub shall, except to the extent that the other party shall otherwise
consent in writing, carry on its business in the usual, regular and ordinary
course consistent with past practices, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and regulations
(except where noncompliance would not have a Material Adverse Effect), pay its
debts and taxes when due subject to good faith disputes over such debts or
taxes, pay or perform other material obligations when due, and use its
commercially reasonable efforts consistent with past practices and policies to
(i) preserve substantially intact its present business organization, (ii) keep
available the services of its present officers and employees and (iii) preserve
its relationships with customers, suppliers, distributors, licensors, licensees,
and others with which it has significant business dealings. In addition, except
as required or permitted by the terms of this Agreement, without the prior
written consent of the other party, during the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Closing, each of the Company and its Subsidiaries,
Parent and Merger Sub shall not do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or (except
as specifically provided for herein) change the period of exercisability of
options or restricted stock, or reprice options granted under any employee,
consultant, director or other stock plans or authorize cash payments in exchange
for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or
employee except pursuant to applicable law, written agreements outstanding, or
policies existing on the date hereof and as previously or concurrently disclosed
in writing or made available to the other party, or adopt any new severance
plan, or amend or modify or alter in any manner any severance plan, agreement or
arrangement existing on the date hereof;
(c) Transfer or license to any person or otherwise extend, amend or
modify any material rights to any Intellectual Property of the Company or
Parent, as applicable, or enter into any agreements to transfer or license to
any person future patent rights, other than in the ordinary course of business
consistent with past practices, provided that in no event shall the Company or
Parent license on an exclusive basis or sell any Intellectual Property of the
Company or Parent, as applicable;
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(d) Except for the Reverse Split by Parent and the conversion of the
Series A Preferred Stock into Parent Common Stock to be completed following the
Closing, declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock;
(e) Except as set forth in Schedule 4.1(e) hereof, purchase, redeem
or otherwise acquire, directly or indirectly, any shares of capital stock of the
Company and Parent, as applicable, except repurchases of unvested shares at cost
in connection with the termination of the employment relationship with any
employee pursuant to stock option or purchase agreements in effect on the date
hereof;
(f) Except for the Equity Financing, issue, deliver, sell,
authorize, pledge or otherwise encumber, or agree to any of the foregoing with
respect to, any shares of capital stock or any securities convertible into or
exchangeable for shares of capital stock, or subscriptions, rights, warrants or
options to acquire any shares of capital stock or any securities convertible
into or exchangeable for shares of capital stock, or enter into other agreements
or commitments of any character obligating it to issue any such shares or
convertible or exchangeable securities;
(g) Amend their respective Charter Documents except as contemplated
by the filing of the Certificate of Designations to be filed by Parent prior to
Closing;
(h) Except as disclosed in Schedule 4.1(h) hereto, acquire or agree
to acquire by merging or consolidating with, or by purchasing any equity
interest in or a portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets which are
material, individually or in the aggregate, to the business of Parent or the
Company as applicable, or enter into any joint ventures, strategic partnerships
or alliances or other arrangements that provide for exclusivity of territory or
otherwise restrict such party's ability to compete or to offer or sell any
products or services;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets, except sales of inventory in the ordinary course of
business consistent with past practice and, except for the sale, lease or
disposition (other than through licensing) of property or assets which are not
material, individually or in the aggregate, to the business of such party;
(j) Except as disclosed in Schedule 4.1(j) hereto, incur any
indebtedness for borrowed money in excess of $50,000 in the aggregate or
guarantee any such indebtedness of another person, issue or sell any debt
securities or options, warrants, calls or other rights to acquire any debt
securities of Parent or the Company, as applicable, enter into any "keep well"
or other agreement to maintain any financial statement condition or enter into
any arrangement having the economic effect of any of the foregoing;
(k) Except as disclosed in Schedule 4.1(k) hereto or as contemplated
by this Agreement, adopt or amend any employee benefit plan, policy or
arrangement, any employee stock purchase or employee stock option plan, or enter
into any employment contract or collective bargaining agreement (other than
offer letters and letter agreements entered into in the ordinary course of
business consistent with past practice with employees who are terminable "at
will"), pay any special bonus or special remuneration to any director or
employee, or increase the salaries or wage rates or fringe benefits (including
rights to severance or indemnification) of its directors, officers, employees or
consultants, except in the ordinary course of business consistent with past
practices;
35
(l) Except as disclosed in Schedule 4.1(1) hereto, (i) pay,
discharge, settle or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), or litigation
(whether or not commenced prior to the date of this Agreement) other than the
payment, discharge, settlement or satisfaction, in the ordinary course of
business consistent with past practices or in accordance with their terms, or
liabilities recognized or disclosed in the most recent financial statements (or
the notes thereto) of the Company or of Parent included in Parent SEC Reports,
as applicable, or incurred since the date of such financial statements, or (ii)
waive the benefits of, agree to modify in any manner, terminate, release any
person from or knowingly fail to enforce any confidentiality or similar
agreement to which the Company is a party or of which the Company is a
beneficiary or to which Parent is a party or of which Parent is a beneficiary,
as applicable;
(m) Except as disclosed on Schedule 4.2(m) and except in the
ordinary course of business consistent with past practices, modify, amend or
terminate any Contract of the Company, or Parent, as applicable, or other
material contract or material agreement to which the Company, or Parent is a
party or waive, delay the exercise of, release or assign any material rights or
claims thereunder;
(n) Except as required by U.S. GAAP, revalue any of its assets or
make any change in accounting methods, principles or practices;
(o) Except as set forth in Schedule 4.1(o) hereto or in the ordinary
course of business consistent with past practices, incur or enter into any
agreement, contract or commitment requiring such party to pay in excess of
$50,000 in any 12 month period;
(p) Engage in any action that could reasonably be expected to cause
the Transaction to fail to qualify as a "reorganization" under Section 368(a) of
the Code;
(q) Except as set forth in Schedule 4.1(q) hereto, settle any
litigation;
(r) Make or rescind any Tax elections that, individually or in the
aggregate, could be reasonably likely to adversely affect in any material
respect the Tax liability or Tax attributes of such party, settle or compromise
any material income tax liability or, except as required by applicable law,
materially change any method of accounting for Tax purposes or prepare or file
any Return in a manner inconsistent with past practice;
(s) Form, establish or acquire any Subsidiary except as contemplated
by this Agreement;
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(t) Permit any Person to exercise any of its discretionary rights
under any Plan to provide for the automatic acceleration of any outstanding
options, the termination of any outstanding repurchase rights or the termination
of any cancellation rights issued pursuant to such plans;
(u) Agree in writing or otherwise agree, commit or resolve to take
any of the actions described in Section 4.1 (a) through (v) above.
For purposes of this Article IV, the term "Company" shall mean the
Company and each of its Subsidiaries.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Board of Directors of Parent. At Closing, the current board of
directors of Parent shall deliver duly adopted resolutions to: (a) set the size
of Parent's board of directors at five (5) members effective as of the Closing;
and (b) appoint the following persons to Parent's board of directors effective
as of the Closing: ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇.
▇▇▇▇▇▇▇ with one vacancy; and (c) accepting the resignations of the current
officers and directors of Parent effective as of the Closing ("Resolutions"). At
Closing, the current officers and directors of Parent shall deliver their
resignations, as appropriate, as officers and directors of Parent to be
effective upon the Closing (the "Resignations"). Prior to Closing, the Company
shall deliver or cause to be delivered to Parent completed and signed director
and officer questionnaires ("Questionnaires") for the new directors and each
officer to be appointed by Parent following Closing. The foregoing designations
of the new directors (and the officers to be appointed by Parent following
Closing) shall be subject to Parent's receipt of the completed and signed
Questionnaires ("D&O Information").
5.2 Undertaking by Company Accountant. On or before the Closing, the
Company shall obtain, and deliver to Parent, an undertaking from HJ & Associates
("Accountant"), in a form and substance satisfactory to Parent, providing that:
(i) the Accountant has agreed to an engagement with Parent to serve as its
certified public accountants following the Closing for purposes of auditing and
reviewing the financial statements of Parent and the Company to comply with
Parent's ongoing reporting requirements under the Exchange Act including,
without limitation, the filing of Forms 10-Q, 10-K, and 8-K, (ii) the
transaction contemplated hereunder will not disqualify or otherwise prohibit the
Accountant from rendering the foregoing engagement services or from undertaking
such services in a timely manner, (iii) the Accountant is duly registered with
the PCAOB, (iv) the Accountant shall provide its consent to the use of their
audited financial statements and accompanying reports for Parent and the
Company, as applicable, in any regulatory filing by Parent prior to or following
the Closing, and (v) consenting to the use of its name and the disclosure of its
engagement by Parent in the Change of Accountant Form 8-K (as defined in Section
5.3) ("Accountant Undertaking"). A signed copy of the engagement letter between
Parent and Accountant shall be attached to the Accountant Undertaking.
37
5.3 Change of Accountants. At Closing, Parent shall prepare the Form 8-K
announcing the change in Parent's certifying accountants from De ▇▇▇▇ ▇▇▇▇▇▇▇▇ &
Company, LLC ("Parent's Accountant") to the Accountant effective not later than
four business days after the Closing ("Change of Accountant Form 8-K"), in a
form acceptable to the Company and in a format acceptable for ▇▇▇▇▇ filing. The
Change of Accountant Form 8-K shall be filed with the SEC at or within four (4)
business days following Closing, and prior to the filing thereof, Parent's
Accountant shall have issued its resignation letter to Parent resigning from the
engagement and consenting to the use of its name and the disclosure of its
resignation in the Change of Accountant Form 8-K ("Resignation Letter").
5.4 Other Actions.
(a) At least ten (10) days prior to Closing, Parent shall prepare
the information statement required by Rule 14f-1 promulgated under the Exchange
Act ("14f-1 Information Statement"), and, after providing the Company with a
reasonable time to review and comment on the 14f-1 Information Statement, Parent
shall file the 14f-1 Information Statement with the SEC and mail the same to
each of Parent's stockholders.
(b) At least three (3) days prior to Closing, the Company shall
prepare the Form 8-K announcing the Closing, which shall include all information
required by such form, including the information required by Form 10-SB with
respect to the Company, any other information required in connection with Parent
ceasing to be a shell company as a result of the Transaction, the U.S. GAAP
Financial Statements and the Pro Forma Financial Statements (as defined below)
("Transaction Form 8-K"), which shall be in a form reasonably acceptable to
Parent and in a format acceptable for ▇▇▇▇▇ filing. Prior to the Closing, the
Company shall prepare the press release announcing the consummation of the
Transaction hereunder ("Press Release"). Within four (4) days after the Closing,
Parent shall file the Transaction Form 8-K with the SEC and distribute the Press
Release.
(c) If the Accountant deems it necessary, at least ten (10) days
prior to the Closing, the Company shall deliver to Parent pro forma consolidated
financial statements for the Company, its Subsidiaries and Parent giving effect
to the Transaction, for such periods as required by the SEC to be included in a
Form 8-K or any other report or form required to be filed with the SEC at or
after Closing with respect to the Transaction, all prepared in all material
respects with the published rules and regulations of the SEC and in accordance
with U.S. GAAP applied on a consistent basis throughout the periods involved
(the "Pro Forma Financial Statements"). The Pro Forma Financial Statements shall
have been reviewed by the Accountant and shall be in a format acceptable for
inclusion on the Transaction 8-K.
Each of the Company and Parent shall cooperate with each other and use
their respective commercially reasonable efforts to take or cause to be taken
all actions, and do or cause to be done all things, necessary, proper or
advisable on its part under this Agreement and applicable laws to consummate the
Transaction and the other transactions contemplated hereby as soon as
practicable, including preparing and filing as soon as practicable all
documentation to effect all necessary notices, reports and other filings and to
obtain as soon as practicable all consents, registrations, approvals, permits
and authorizations necessary or advisable to be obtained from any third party
and/or any Governmental Entity in order to consummate the Transaction or any of
the other transactions contemplated hereby. Subject to applicable laws relating
to the exchange of information and the preservation of any applicable
attorney-client privilege, work-product doctrine, self-audit privilege or other
similar privilege, each of the Company and Parent shall have the right to review
and comment on in advance, and to the extent practicable each will consult the
other on, all the information relating to such party, that appear in any filing
made with, or written materials submitted to, any third party and/or any
Governmental Entity in connection with the Transaction and the other
transactions contemplated hereby. In exercising the foregoing right, each of
Company and Parent shall act reasonably and as promptly as practicable.
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5.5 Required Information. In connection with the preparation of the
Transaction Form 8-K, 14f-1 Information Statement, and Press Release, and for
such other reasonable purposes, each of the Company and Parent shall, upon
request by the other, furnish the other with all information concerning
themselves, their respective subsidiaries, directors, officers, managers,
managing members, stockholders and members (including the directors and officers
of Parent to be elected effective as of the Closing pursuant to Section 5.1
hereof) and such other matters as may be reasonably necessary or advisable in
connection with the Transaction, or any other statement, filing, notice or
application made by or on behalf of each of the Company and Parent to any third
party and/or any Governmental Entity in connection with the Transaction and the
other transactions contemplated hereby. Each party warrants and represents to
the other party that all such information shall be true and correct in all
material respects and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
5.6 Confidentiality; Access to Information.
(a) To the extent the provisions of this Agreement provide greater
protection against the disclosure of confidential information by the parties
than any confidentiality agreement or letter of intent previously executed by
the parties, such provisions of such prior confidentiality agreement or letter
of intent shall be superseded by the provisions of this Agreement. Each party
agrees to maintain in confidence any non-public information received from the
other party, and to use such non-public information only for purposes of
consummating the transactions contemplated by this Agreement. Such
confidentiality obligations will not apply to (i) information which was known to
the one party or their respective agents prior to receipt from the other party;
(ii) information which is or becomes generally known; (iii) information acquired
by a party or their respective agents from a third party who was not bound to an
obligation of confidentiality; and (iv) disclosure required by law. In the event
this Agreement is terminated as provided in Article IX hereof, each party will
return or cause to be returned to the other all documents and other material
obtained from the other in connection with the Transaction contemplated hereby.
(b) Access to Information.
(i) The Company will afford Parent and its financial advisors,
accountants, counsel and other representatives reasonable access during normal
business hours, upon reasonable notice, to the properties, books, records and
personnel of the Company and its Subsidiaries during the period prior to the
Closing to obtain all information concerning the business, including the status
of product development efforts, properties, results of operations and personnel
of the Company and its Subsidiaries, as Parent may reasonably request. No
information or knowledge obtained by Parent in any investigation pursuant to
this Section 5.6 will affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Transaction.
39
(ii) Parent will afford the Company and its financial
advisors, underwriters, accountants, counsel and other representatives
reasonable access during normal business hours, upon reasonable notice, to the
properties, books, records and personnel of Parent during the period prior to
the Closing to obtain all information concerning the business, including the
status of product development efforts, properties, results of operations and
personnel of Parent, as the Company may reasonably request. No information or
knowledge obtained by the Company in any investigation pursuant to this Section
5.6 will affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Transaction.
5.7 No Solicitation. Other than with respect to the Transaction, the
Company and Parent agree that neither of them nor any of their officers,
directors, managers, or managing members shall, and that they shall cause their
agents and other representatives (including any investment banker, attorney or
accountant retained by it) not to, directly or indirectly, initiate, solicit,
encourage or otherwise facilitate any inquiries or the making of any proposal or
offer with respect to (i) a merger, reorganization, share exchange,
consolidation or similar transaction involving them, (ii) any sale, lease,
exchange, mortgage, pledge, transfer or purchase of all or substantially all of
the assets or equity securities of them, taken as a whole, in a single
transaction or series of related transactions or (iii) any tender offer or
exchange offer for 20% or more of the outstanding shares of Parent Common Stock
or the Company's capital stock (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"). The Company and Parent further agree
that neither of them nor any of their officers, directors, managers, or managing
members shall, and that they shall direct and use their reasonable best efforts
to cause their agents and representatives not to, directly or indirectly, engage
in any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal. The Company and Parent agree that they will immediately
cease and cause to be terminated any existing discussions or negotiations with
any parties conducted heretofore with respect to any Acquisition Proposal. The
Company and Parent agree that they will take the necessary steps to promptly
inform the individuals or entities referred to in the first sentence hereof of
the obligations undertaken in this Section 5.7.
40
Notwithstanding anything contained in this Agreement to the contrary,
nothing contained in this Agreement shall prevent the board of directors of
Parent, or their respective representatives from, prior to the Closing (A)
complying with Rule 14e-2 promulgated under the Exchange Act with regard to an
Acquisition Proposal, if applicable, or otherwise complying with the Exchange
Act; (B) providing information in response to a request therefore by a person
who has made a bona fide unsolicited Acquisition Proposal; (C) engaging in any
negotiations or discussions with any person who has made a bona fide unsolicited
Acquisition Proposal or otherwise facilitating any effort or attempt to
implement an Acquisition Proposal; or (D) withdrawing or modifying the approval
or recommendation by Parent's board of directors of this Agreement, approving or
recommending any unsolicited Acquisition Proposal or causing the applicable
party to enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement relating to any unsolicited Acquisition
Proposal, if, and only to the extent that in each such case referred to in
clause (B), (C) or (D) above, Parent's board of directors determines in good
faith, after consultation with outside legal counsel that such action is
necessary to act in a manner consistent with the directors' fiduciary duties
under applicable law and determines in good faith after consultation with its
financial advisors that the person or group making such Acquisition Proposal has
adequate sources of financing to consummate such Acquisition Proposal and that
such Acquisition Proposal, if consummated as proposed, is materially more
favorable to the stockholders of Parent from a financial point of view (any such
more favorable Acquisition Proposal being referred to as a "Superior Proposal")
and determines in good faith that such Superior Proposal is reasonably capable
of being consummated, taking into account legal, financial, regulatory and other
aspects of the proposal and the person making the proposal.
5.8 Public Disclosure. Except to the extent previously disclosed or to the
extent the parties believe that they are required by applicable law or
regulation to make disclosure, prior to Closing, no party shall issue any
statement or communication to the public regarding the Transaction without the
consent of the other party, which consent shall not be unreasonably withheld. To
the extent a party hereto believes it is required by law or regulation to make
disclosure regarding the Transaction, it shall, if possible, immediately notify
the other party prior to such disclosure. Notwithstanding the foregoing, the
parties hereto agree that Parent will prepare and file a Current Report on Form
8-K pursuant to the Exchange Act reasonably acceptable to the Company to report
the execution of this Agreement and that any party hereto may file any reports
as required by the Exchange Act including, without limitation, any reports on
Schedule 13D.
5.9 Reasonable Efforts; Notification.
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(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its commercially reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done, and
to assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Transaction and the other transactions contemplated by
this Agreement, including using commercially reasonable efforts to accomplish
the following: (i) the taking of all reasonable acts necessary to cause the
conditions precedent set forth in Article VI to be satisfied, (ii) the obtaining
of all necessary actions or nonactions, waivers, consents, approvals, orders and
authorizations from Governmental Entities and the making of all necessary
registrations, declarations and filings (including registrations, declarations
and filings with Governmental Entities, if any) and the taking of all reasonable
steps as may be necessary to avoid any suit, claim, action, investigation or
proceeding by any Governmental Entity, (iii) the obtaining of all consents,
approvals or waivers from third parties required as a result of the transactions
contemplated in this Agreement, (iv) the defending of any suits, claims,
actions, investigations or proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions contemplated
hereby, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed, and (v)
the execution or delivery of any additional instruments reasonably necessary to
consummate the transactions contemplated by, and to fully carry out the purposes
of, this Agreement. In connection with and without limiting the foregoing,
Parent and its board of directors and the Company and its directors, officers
and stockholders shall, if any state takeover statute or similar statute or
regulation is or becomes applicable to the Transaction, this Agreement or any of
the transactions contemplated by this Agreement, use their commercially
reasonable efforts to enable the Transaction and the other transactions
contemplated by this Agreement to be consummated as promptly as practicable on
the terms contemplated by this Agreement. Notwithstanding anything herein to the
contrary, nothing in this Agreement shall be deemed to require Parent or the
Company to agree to any divestiture by itself or any of its affiliates of shares
of capital stock, membership interests or ownership interest or of any business,
assets or property, or the imposition of any material limitation on the ability
of any of them to conduct their business or to own or exercise control of such
assets, properties and stock.
(b) The Company shall give prompt notice to Parent upon becoming
aware that any representation or warranty made by them contained in this
Agreement has become untrue or inaccurate, or of any failure of the Company to
comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by them under this Agreement, in each
case, such that the conditions set forth in Article VI would not be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
(c) Parent shall give prompt notice to the Company upon becoming
aware that any representation or warranty made by it contained in this Agreement
has become untrue or inaccurate, or of any failure of Parent to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement, in each case, such that
the conditions set forth in Article VI would not be satisfied; provided,
however, that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
5.10 Treatment as a Reorganization. Parent and the Company shall not take
any action that is reasonably likely to prevent the Transaction from qualifying
as a reorganization within the meaning of Section 368(a) of the Code.
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5.11 Absence of Material Liabilities. Immediately prior to Closing, Parent
and Merger Sub shall have no liabilities or obligations requiring the payment of
monies, other than obligations under or with respect to: (i) a certain Financial
Advisory Agreement by and between ▇▇▇▇▇▇▇ Securities, LLC ("▇▇▇▇▇▇▇") and Parent
in the form attached hereto as Exhibit B ("Financial Advisory Agreement"), (ii)
any agreement with the Transfer Agent, and (iii) unpaid accounts payable,
accrued expenses or other liabilities of Parent arising out of or with respect
to the period commencing December 29, 2005 through the Closing (including any
costs and expenses incurred by Parent in connection with the
Transaction)("Accounts Payable"), which shall be included on a schedule prepared
by Parent and delivered to the Company not less than three (3) days prior to
Closing. Parent shall establish the Cash Reserve provided for in Section 3.23 in
an amount equal to the Accounts Payable. Following the Closing, to the extent
not satisfied by Parent prior to or at Closing, the Accounts Payable (whether or
not included on the Accounts Payable schedule) shall be paid in full from the
Cash Reserve. To the extent that any Cash Reserve remains after payment of the
Accounts Payable (whether or not included on the Accounts Payable schedule), the
remaining balance of the Cash Reserve shall be paid to Vero or its designees as
a final management fee. To the extent the Cash Reserve is not sufficient to pay
and satisfy the Accounts Payable (whether or not included on the Accounts
Payable schedule) in full, KI Equity agrees to pay such unpaid Accounts Payable
(whether or not included on the Accounts Payable schedule) and to indemnify and
hold Parent harmless from such unpaid Accounts Payable (whether or not included
on the Accounts Payable schedule) for a period of one year following the
Closing. Following the Closing, the Company shall pay and satisfy, or cause
Parent to pay and satisfy, all of Parent's obligations under the agreement with
the Transfer Agent that arise in connection with or after the Closing and the
Placement Agreement.
5.12 Deposits; Cash Payments at Closing. Parent and Company hereby
acknowledge Company's prior payment to Parent of a $50,000 deposit upon
execution of the letter of intent between the parties dated March 27, 2006
("Letter of Intent"). Such deposit shall be referred to herein as the "Deposit."
At Closing, the Company shall cause Parent to pay to ▇▇▇▇▇▇▇ the reverse merger
fees of $500,000 under the Financial Advisory Agreement, less the amount of the
Deposit (such sum being referred to herein, as the "Company Closing Payment").
In addition, at Closing, the Deposit shall be paid to ▇▇▇▇▇▇▇ by Parent in
partial payment of the reverse merger fees under the Financial Advisory
Agreement ("Parent Closing Payment").
5.13 Business Records. At Closing, Parent shall cause to be delivered to
the Company all records and documents relating to Parent, which Parent
possesses, including, without limitation, books, records, government filings,
Returns, Charter Documents, Corporate Records, Stock Records, consent decrees,
orders, and correspondence, director and stockholder minutes and resolutions,
stock ownership records, financial information and records, electronic files
containing any financial information and records, and other documents used in or
associated with Parent ("Business Records").
5.14 Proxy/Information Statement. As soon as practicable after the
Closing, Parent shall cause its stockholders to approve and adopt all of the
following matters (the "Stockholder Matters"):
(a) To approve a 1 for 15 reverse stock split with special treatment
for certain of Parent's stockholders to preserve round lot stockholders
("Reverse Split");
(b) To approve the change of the name of Parent to a name selected
by the Board;
(c) To approve an amendment to the Company's 2005 Equity Incentive
Plan ("Stock Plan"), which will be assumed by Parent, to set the number of
shares of Parent Common Stock reserved for issuance thereunder at 2,000,000
shares of Parent Common Stock (on a post-Reverse Split basis); and
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(d) All such other actions as shall be necessary or desirable in
connection with or related to the foregoing actions in (a) through (c) above.
In connection therewith, Parent shall either (i) notice a meeting of its
stockholders and with respect thereto prepare a proxy statement pursuant to
Regulation 14A promulgated under Section 14 of the Exchange Act (together with
any amendments or supplements thereto, the "Proxy Statement") or (ii) upon
receipt of the written consent of a sufficient number of its stockholders
prepare an information statement pursuant to Regulation 14C promulgated under
Section 14 of the Exchange Act (together with any amendments or supplements
thereto, the "Information Statement"). Following Closing, KI Equity shall
reasonably cooperate with Parent and provide such information available to it as
may be necessary or required, in the reasonable determination of counsel to the
Company and to Parent, for Parent to prepare the Proxy Statement or Information
Statement.
In the event Parent elects to solicit stockholder approval via a Proxy
Statement, as soon as practicable following the Closing, but not later than ten
(10) days after the Closing, Parent shall file the Proxy Statement with the SEC
and shall cause such Proxy Statement to become definitive and to be mailed to
the holders of Parent's securities entitled to vote at a meeting of
stockholders.
In the event Parent elects to use an Information Statement and does not
solicit stockholder approval via a Proxy Statement, as soon as practicable
following the Closing, but not later than ten (10) days after the Closing,
Parent shall obtain the written consent of holders of the requisite number of
voting securities of Parent approving the Stockholder Matters, such consent to
be effective twenty (20) days following the filing of the definitive Information
Statement with the SEC. Upon receipt of such written consent, Parent will file
the Information Statement with the SEC and shall cause such Information
Statement to become definitive and to be mailed to the holders of Parent's
securities entitled to vote at a meeting of stockholders.
In the event the Proxy Statement or Information Statement is reviewed by
the SEC, Parent shall respond promptly to any comments of the SEC or its staff
with respect to the Proxy Statement or Information Statement and use its
reasonable best efforts to have the Proxy Statement or Information Statement
cleared by the SEC as soon as practicable after its filing, provided, however,
in the event that the substance of any review by the SEC involves or inquires
with respect to information, filings, reports, financial statements or other
circumstances of Parent occurring, reported or filed prior to the Closing (the
"Pre-Closing Period"), KI Equity shall, upon the reasonable request of the
Company or Parent, use its reasonable best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the Company and Parent in doing, all things necessary, proper or advisable
to consummate and make effective, in the most expeditious manner practicable,
the Proxy Statement or Information Statement, including, without limitation,
providing such information, addressing such comments, and otherwise resolving
such matters as may relate to the Pre-Closing Period and any SEC comments
relating thereto or any SEC inquiry thereof.
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As a condition to the Closing, the holders of the Company's capital stock
representing a majority of the Company's voting power immediately after the
Closing (including KI Equity) (collectively, the "Majority Holders") shall
execute and deliver a certain voting agreement ("Voting Agreement") in the form
attached hereto as Exhibit C which shall provide, among other things, that such
parties will vote their Series A Preferred Stock (or in the event of conversion,
the Parent Common Stock issuable upon conversion) or Parent Common Stock, as the
case may be, to approve the Stockholder Matters.
5.15 Registration Statement. Parent shall include on the Registration
Statement (as defined in Section 6.1(k)) to be filed following the Closing with
respect to the Equity Financing; (i) 2,400,000 shares of Parent Common Stock (on
a pre-Reverse Split basis) which are currently outstanding and have been granted
piggyback registration rights, (ii) 2,281,302 shares of Parent Common Stock
currently held by KI Equity which do not have piggyback registration rights, and
(iii) the shares of Parent Common Stock underlying the Series A Preferred Stock
issued in connection with the Merger (or, in the event of conversion, the shares
of Parent Common Stock issued upon such conversion) (collectively, the
"Conversion Shares"); provided, however, that the Conversion Shares held by the
Company's existing executive management team will be excluded from such
Registration Statement in the event such exclusion is necessary to have the
registration statement declared effective by the SEC or in the event required by
the investors in the Equity Financing as a condition to the Equity Financing.
ARTICLE VI
CONDITIONS TO THE TRANSACTION
6.1 Conditions to Obligations of Each Party to Effect the Transaction. The
respective obligations of each party to this Agreement to effect the Transaction
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions, unless waived by the Company and Parent:
(a) No Order. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Transaction illegal or
otherwise prohibiting consummation of the Transaction, substantially on the
terms contemplated by this Agreement. All waiting periods, if any, under any law
in any jurisdiction in which the Company or Parent has material operations
relating to the transactions contemplated hereby has expired or terminated early
and all material approvals required to be obtained prior to the Transaction in
connection with the transactions contemplated hereby shall have been obtained.
(b) Debt Holder Consents. The lenders under any credit facilities,
secured loans, mortgages and other indebtedness of the Company or its
Subsidiaries for borrowed money shall have consented in writing to the
Transaction (if such consent is required in connection with this Transaction).
(c) Required Approvals. This Agreement and the Transaction have been
duly approved and adopted, by the requisite vote, if any, of the Company's
stockholders and by the requisite actions of the Board of Directors of the
Company under the laws of the State of Nevada and the Company Charter Documents,
and by the requisite actions of the Board of Directors of Parent under the laws
of the State of Delaware and the Parent Charter Documents.
45
(d) Certificate of Designations. Prior to Closing, the Board of
Directors of Parent shall have adopted, and Parent shall have filed with, and
had accepted by, the Secretary of State of the State of Delaware, the
Certificate of Designations in the form attached hereto as Exhibit A.
(e) 14f-1 Information Statement. At least ten (10) days prior to
Closing, Parent shall have filed the 14f-1 Information Statement with the SEC,
and Parent shall have mailed the 14f-1 Information Statement to each of the
stockholders of Parent, and Parent shall have otherwise complied with all of the
provisions under Rule 14f-1 under the Exchange Act.
(f) Assumption of Options and Warrants. The Company shall have taken
all necessary steps to effectuate the provisions of Sections 1.6(b) and (c),
including obtaining all necessary consents and releases, if any, from the
holders of Company Stock Options and Company Stock Warrants. The Company shall
have obtained agreements terminating all pre-emptive rights.
(g) Financial Statements; Transaction Form 8-K. The Company shall
have delivered to Parent the U.S. GAAP Financial Statements, the Pro Forma
Financial Statements and the Transaction Form 8-K, each in a form acceptable to
Parent, which acceptance shall not be unreasonably withheld.
(h) Vero Termination Agreement. Parent shall have terminated its
agreement with Vero, effective at Closing.
(i) Voting Agreement. The Majority Holders shall have executed and
delivered the Voting Agreement, in the form attached hereto as Exhibit C, or
similar agreement to approve the Stockholder Matters.
(j) Blue Sky Laws. The issuance of Series A Preferred Stock to be
issued under this Agreement and the issuance of Series A Preferred Stock or
Parent Common Stock under the Equity Financing shall be exempt from, or have
been qualified under, the Blue Sky Laws of each appropriate jurisdiction to the
satisfaction of Parent and the Company and their respective counsels.
46
(k) Equity Financing. Signed subscriptions shall have been received
to purchase Series A Preferred Stock or Parent Common Stock (as determined by
▇▇▇▇ Capital) in a private placement offering exempt from registration under the
Securities Act pursuant to Regulation D promulgated thereunder ("Equity
Financing"), which subscriptions shall represent gross proceeds of not less than
$10,000,000 (or such lesser amount as mutually agreed to by Parent and the
Company), with such gross proceeds having been fully funded into an escrow
account established for the Equity Financing the release of which to Parent is
conditioned upon satisfaction or waiver of the conditions to the investors'
obligations to close the Equity Financing as set forth in the subscription
documents, including, without limitation, the Closing of the Transaction,
Parent's acceptance of such subscriptions after the Closing and the approval of
the Equity Financing by Parent's board of directors following the Closing. The
Equity Financing shall be based on a pre-money valuation of Parent after giving
effect to the Merger with the Company of not less than $22,000,000 (or such
lesser amount as mutually agreed to by Parent and the Company) ("Pre-Money
Value"). The Equity Financing may include the issuance of warrants to purchase
Parent Common Stock ("Offering Warrants") to the investors and placement agent,
provided the exercise price thereof shall not be less than the per share price
of the Series A Preferred Stock (on an as-converted basis) or Parent Common
Stock sold in the Equity Financing. Each investor and the placement agent shall
in writing release and covenant not to ▇▇▇ the officers, directors and advisors
of Parent serving or providing services immediately prior to the Closing for any
matter respecting the Equity Financing, the Company or the Company's business.
Parent shall also assume the Placement Agreement immediately following the
Closing. Parent shall register for resale, on an at the market continuous basis
under Rule 415 promulgated under the Securities Act, the shares of Parent Common
Stock issued to investors in the Equity Financing (or the shares of Parent
Common Stock underlying the Series A Preferred Stock in the event Series A
Preferred Stock is issued in the Equity Financing) together with the shares of
Parent Common Stock underlying the Offering Warrants on a registration statement
to be filed with the SEC within the time frame and otherwise in accordance with
the agreement between the Parent and the investors ("Registration Statement").
(l) Investment Representation Letter. The Company shall have
delivered to Parent the investment representation letters, consistent with the
provisions of Section 1.12 hereof, signed by each holder of record (as of the
Effective Time) of Certificates, which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock whose shares were
converted into the right to receive shares of Series A Preferred Stock pursuant
to Section 1.6 hereof.
(m) Dissenter's Rights. Holders of no more than 0.5% of the
outstanding shares of Company Common Stock shall have taken action to exercise
their dissent's rights pursuant to the NGCL and the laws of the state of
California, to the extent such laws are applicable to the Transaction.
6.2 Additional Conditions to Obligations of the Company. The obligations
of the Company to consummate and effect the Transaction shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
47
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub in this Agreement shall be true and correct
in all respects on and as of the date of this Agreement and at and as of the
Closing as though such representations and warranties were made on and as of
such time (except for such representations and warranties that speak
specifically as of the date hereof or as of another date, which shall be true
and correct as of such date), disregarding for the purposes of such
determination any "Material Adverse Effect" or other materiality qualifiers set
forth in such representations and warranties, except for such failures of such
representations and warranties to be so true and correct as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Parent. The Company shall have received a certificate with
respect to the foregoing signed on behalf of Parent by an authorized officer of
Parent ("Parent Closing Certificate") and a certificate with respect to the
foregoing signed on behalf of merger Sub by an authorized officer of merger Sub
("Merger Sub Closing Certificate")
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Closing Date, except to the extent that any failure to perform or comply
(other than a willful failure to perform or comply or failure to perform or
comply with an agreement or covenant reasonably within the control of Parent and
Merger Sub, respectively) does not, or will not, constitute a Material Adverse
Effect with respect to Parent, and the Company shall have received Parent
Closing Certificate and Merger Sub Closing Certificate to such effect.
(c) Resignations and Resolutions. Parent shall have delivered to the
Company the Resignations and Resolutions, in a form reasonably satisfactory to
the Company, effective as of the Closing. Parent shall also have delivered to
the Company evidence satisfactory to the Company of the appointment of new
directors of Parent in accordance with Section 5.1 hereof.
(d) Consents. Parent shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby, other than consents, waivers and approvals the absence of
which, either alone or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect on Parent and Merger Sub.
(e) Material Adverse Effect. No Material Adverse Effect with respect
to Parent shall have occurred since the date of this Agreement.
(f) No Financial Obligations. Immediately prior to the Closing,
Parent shall have no material liabilities or obligations, other than as set
forth in Section 5.11 hereof.
(g) SEC Compliance. Immediately prior to Closing, Parent shall be in
compliance with the reporting requirements under the Exchange Act and shall have
filed with the SEC its Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2006.
(h) Business Records; Resignation Letter. The Parent shall have
delivered to the Company the Business Records and the Resignation Letter from
Parent's Accountant.
(i) OTC Quotation. The Parent Common Stock at the Closing will be
quoted on the OTC BB.
(j) Other Deliveries. At or prior to Closing, Parent and Merger Sub
shall have delivered to the Company (i) copies of resolutions and actions taken
by Parent's board of directors and Merger Sub's board of directors,
respectively, in connection with the approval of this Agreement and the
transactions contemplated hereunder, and (ii) such other documents or
certificates as shall reasonably be required by the Company and its counsel in
order to consummate the transactions contemplated hereunder.
48
(k) Financial Advisory Agreement. The Financial Advisory Agreement
between Parent and ▇▇▇▇▇▇▇, in the form of Exhibit B hereto, has been executed
by the parties thereto and has been duly authorized and approved by Parent's
board of directors.
(l) Closing Payments. Parent shall have made the Parent Closing
Payment as required by Section 5.12.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Transaction
shall be subject to the satisfaction at or prior to the Closing Date of each of
the following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. The representations and
warranties of the Company in this Agreement shall be true and correct in all
respects on and as of the date of this Agreement and at and as of the Closing as
though such representations and warranties were made on and as of such time
(except for such representations and warranties that speak specifically as of
the date hereof or as of another date, which shall be true and correct as of
such date), disregarding for the purposes of such determination any "Material
Adverse Effect" or other materiality qualifiers set forth in such
representations and warranties, except for such failures of such representations
and warranties to be so true and correct as could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Company. Parent shall have received a certificate with respect to the foregoing
signed on behalf of the Company by an authorized officer of the Company
("Company Closing Certificate").
(b) Agreements and Covenants. the Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by them at or prior to the
Closing Date except to the extent that any failure to perform or comply (other
than a willful failure to perform or comply or failure to perform or comply with
an agreement or covenant reasonably within the control of the Company) does not,
or will not, constitute a Material Adverse Effect on the Company, and Parent
shall have received the Company Closing Certificate to such effect.
(c) Consents. the Company shall have obtained all consents, waivers,
permits and approvals required in connection with the consummation of the
transactions contemplated hereby, other than consents, waivers and approvals the
absence of which, either alone or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on the Company.
(d) Material Adverse Effect. No Material Adverse Effect with respect
to the Company shall have occurred since the date of this Agreement.
(e) Accountant Undertaking; The Company shall have delivered to
Parent the Accountant Undertaking in a form satisfactory to Parent.
49
(f) D&O Information. The Company shall have delivered the fully
completed and signed Questionnaires, and the D&O Information shall be reasonably
acceptable to Parent.
(g) Voting Agreement. The Majority Holders and KI Equity shall have
executed and delivered the Voting Agreement, in the form attached hereto as
Exhibit C.
(h) Repayment of Affiliate Obligations. At the Closing Date, all
amounts owed to the Company or any Subsidiary by each officer, director or
stockholder of the Company or any Subsidiary (regardless of whether such amounts
are due and payable) shall have been paid in full.
(i) Closing Payments. The Company shall have made the Company
Closing Payment as required by Section 5.12.
(j) Other Deliveries. At or prior to Closing, the Company shall have
delivered to Parent: (i) copies of resolutions and actions taken the Company's
board of directors and stockholders in connection with the approval of this
Agreement and the transactions contemplated hereunder, and (ii) such other
documents or certificates as shall reasonably be required by Parent and its
counsel in order to consummate the transactions contemplated hereunder.
(k) Investor Relations Agreement. At Closing, Parent shall have
entered into an agreement with an investors relation firm which provides for a
comprehensive investors relations and after market support program for a period
of not less than one year, which investors relations firm and program shall be
subject to the approval of KI Equity, which approval shall not be unreasonably
withheld ("Investor Relations Agreement").
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Except as specifically set forth in Sections 5.11, 5.14, 5.15, 8.6 and
9.1, and such other provisions contained herein which specifically contemplates
the performance of any agreement or covenant by any party hereto after the
Closing, all representations, warranties, agreements and covenants contained in
or made pursuant to this Agreement by any party hereto or contained in any
Schedule hereto shall not survive the Closing, and no claims made by virtue of
such representations, warranties, agreements and covenants shall be made or
commenced by any party hereto from and after the Closing. Notwithstanding the
foregoing, nothing herein shall be construed as limiting or otherwise
restricting any party's liability in any way for fraud or intentional
misrepresentation.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated at any time prior to the
Closing:
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(a) by mutual written agreement of Parent and the Company at any
time;
(b) by either Parent or the Company if the Transaction shall not
have been consummated by June 30, 2006 for any reason; provided, however, that
the right to terminate this Agreement under this Section 8.1(b) shall not be
available to any party whose action or failure to act has been a principal cause
of or resulted in the failure of the Transaction to occur on or before such date
and such action or failure to act constitutes a breach of this Agreement;
(c) by either Parent or the Company if a Governmental Entity shall
have issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Transaction, which order, decree, ruling or other action is final and
nonappealable;
(d) by Company, upon a material breach of any representation,
warranty, covenant or agreement on the part of Parent set forth in this
Agreement, or if any representation or warranty of Parent shall have become
materially untrue, in either case such that the conditions set forth in Article
VI would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Parent's representations and warranties or breach by Parent is
curable by Parent prior to the Closing Date, then the Company may not terminate
this Agreement under this Section 8.1(d) for thirty (30) days after delivery of
written notice from the Company to Parent of such breach, provided Parent
continues to exercise commercially reasonable efforts to cure such breach (it
being understood that the Company may not terminate this Agreement pursuant to
this Section 8.1(d) if it shall have materially breached this Agreement or if
such breach by Parent is cured during such thirty (30)-day period);
(e) by Parent, upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if any representation or warranty of the Company shall have become
materially untrue, in either case such that the conditions set forth in Article
VI would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Company's representations and warranties or breach by the Company
is curable by the Company prior to the Closing Date, then Parent may not
terminate this Agreement under this Section 8.1(e) for thirty (30) days after
delivery of written notice from Parent to the Company of such breach, provided
the Company continues to exercise commercially reasonable efforts to cure such
breach (it being understood that Parent may not terminate this Agreement
pursuant to this Section 8.1(e) if it shall have materially breached this
Agreement or if such breach by the Company is cured during such thirty (30)-day
period).
8.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 8.1 above will be effective immediately upon (or, if the
termination is pursuant to Section 8.1(d) or Section 8.1(e) and the proviso
therein is applicable, thirty (30) days after) the delivery of written notice of
the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 8.1, this Agreement shall
be of no further force or effect and the Transaction shall be abandoned, except
for and subject to the following: (i) Section 8.2, Section 8.3 and Article X
(General Provisions) shall survive the termination of this Agreement, (ii) if
this Agreement is terminated by Parent under Section 8.1(b), (c) or (e), as a
result of the Company's failure to satisfy the conditions precedent to Closing
that are applicable to it hereunder or as a result of a breach or
misrepresentation by Company under this Agreement, the Deposit shall be retained
by Parent as liquidated damages and as its sole and exclusive remedy for any
breach or termination of this Agreement, (iii) if this Agreement is terminated
for any reason other than for those set forth in (ii) above, the Deposit shall
be returned to the Company within three (3) business days, and (iv) nothing
herein shall relieve any party from liability for any intentional or willful
breach of this Agreement.
51
8.3 Fees and Expenses. All fees and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses whether or not the Transaction is consummated;
provided, however, that the Transaction expenses incurred by the Parent that are
not paid prior to the Closing will be paid out of the Cash Reserve account in
accordance with Section 5.11. The parties further agree that, whether or not the
Transaction is consummated, each party shall be responsible for any and costs
and expenses incurred by them in connection with the preparation of the
Transaction Form 8-K (including the U.S. GAAP Financial Statements and Pro Forma
Financial Statements contained therein), the Information Statement, and the
14f-1 Information Statement.
8.4 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of each of the
parties hereto.
8.5 Extension; Waiver. At any time prior to the Closing, any party hereto
may, to the extent legally allowed, (i) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. Delay in exercising any right under this Agreement shall
not constitute a waiver of such right.
8.6 Rescission. The parties and ▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP ("▇▇▇▇▇") shall enter
into an agreement (the "Escrow Agreement") in substantially the form attached
hereto as Exhibit D, which shall provide that, following the Closing, the
certificates of Series A Preferred Stock to be delivered to the Company's
stockholders in connection with the Merger, and the Certificates representing
the Company Common Stock owned by the Company's stockholders, shall be delivered
to ▇▇▇▇▇ and held by ▇▇▇▇▇ until Parent and KI Equity have provided written
notice to ▇▇▇▇▇ of the closing of the Equity Financing. In the event the Equity
Financing fails to close for whatever reason within three business (3) days
following the Closing (or such later time as mutually agreed to by the Company,
Parent and KI Equity, but not more than ten (10) business days following the
Closing, the parties hereto agree that this Agreement is hereby rescinded and
the transactions hereunder shall be voided ab initio (the "Rescission"). The
Escrow Agreement shall provide that in the event of the Rescission, (i) ▇▇▇▇▇
shall promptly deliver to Parent the certificates representing Series A
Preferred Stock (subject to adjustment for any stock dividend, stock split,
recapitalization, merger, consolidation, combination or exchange of shares
occurring after the Closing with respect to such Series A Preferred Stock); (ii)
▇▇▇▇▇ shall promptly deliver to each of the Company's stockholders any of the
Certificates then held by it; and (iii) ▇▇▇▇▇ shall deliver the signed
resignations of all of the then current officers and directors of Parent
together with a written consent action of all of the then current directors
appointing ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ as the sole director of Parent.
52
Notwithstanding anything contained herein to the contrary, in the event
this Agreement is rescinded and the transactions consummated hereunder are
voided ab initio, the Company agrees to indemnify and hold harmless, Parent
against (i) any and all liabilities, obligations, losses, damages, claims,
actions, Liens and deficiencies which exist, or which may be imposed on,
incurred by or asserted against Parent or any of its assets, based upon,
resulting from or arising out of, the management, operation and ownership of
Parent from and after the Closing and through and including the effective date
of the Rescission, and (ii) any cost or expense (including reasonable attorneys'
fees and court costs) incurred by Parent in connection with the foregoing
(including, without limitation, any cost or expense incurred by Parent in
enforcing its rights pursuant to this Section 8.6). The parties hereto agree
that the provisions of this Section 8.6 shall survive the Closing.
ARTICLE IX
POST-CLOSING COVENANT
9.1 Post-Closing Covenants. The Company acknowledges that the agreements
contained in this Section 9.1 are an integral part of the transactions
contemplated by this Agreement and that, without these agreements, Parent would
not enter into this Agreement. The parties hereto acknowledge and agree that the
failure by Parent or the Company to satisfy, perform and comply with the
covenants set forth in this Section 9.1 ("Post-Closing Covenants") following the
Closing will have a material adverse effect on Parent and the investment of KI
Equity in Parent. During the period beginning upon the Closing and ending on the
first anniversary of the Closing, Parent agrees to:
(a) Utilize its commercially reasonable efforts to, and the Company
agrees to utilize its commercially reasonable efforts to cause Parent to, a
Section 12(g) reporting company in compliance with and current in its reporting
requirements under the Exchange Act, and to remain quoted on, at a minimum, the
OTC BB.
(b) Certify in writing to any person holding restricted shares of
Parent Common Stock as of the date of this Agreement that Parent has filed all
of the reports required to be filed by it under the Exchange Act to enable such
person to sell such person's restricted stock under Rule 144 or 145, as may be
applicable in the circumstances, or will inform such person in writing that it
has not filed any such report or reports, upon being informed in writing by such
person of its intent to sell any shares under Rule 144 or Rule 145 promulgated
under the Securities Act (including any rule adopted in substitution or
replacement thereof), (ii) if any certificate representing any restricted shares
of Parent Common Stock is presented to Parent's Transfer Agent for registration
of transfer in connection with any sale theretofore made or to be made under
Rule 144 or 145, provided such certificate is duly endorsed for transfer by the
appropriate person(s) or accompanied by a separate stock power duly executed by
the appropriate person(s) in each case with reasonable assurances that such
endorsements are genuine and effective, and is accompanied by an opinion of
counsel satisfactory to Parent and its counsel that such transfer has complied
with the requirements of Rule 144 or 145 ("Opinion"), as the case may be,
promptly instruct the Transfer Agent to register such transfer and to issue one
or more new certificates representing such shares to the transferee and, if
appropriate under the provisions of Rule 144 or 145, as the case may be, free of
any stop transfer order or restrictive legend, and (iii) in the event Parent's
counsel is unwilling or unable to issue such Opinion, Parent hereby agrees to
accept, and shall instruct its counsel to accept, an Opinion of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
(New York, New York) or such other reasonable counsel selected by KI Equity, and
Parent and its counsel shall hereby authorize the Transfer Agent to accept the
opinion of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ (or such other reasonable counsel selected by KI
Equity) for such purposes ("Transfer Agent Authorization"), which Transfer Agent
Authorization shall be delivered to Transfer Agent prior to Closing, with a copy
to KI Equity.
53
(c) Parent shall comply with the terms and conditions of the
Investor Relations Agreement.
9.2 Other Provisions. Notwithstanding anything contained herein to the
contrary, the provisions of this Article IX shall survive (and not be affected
in any respect by) the Closing. KI Equity shall be a third party beneficiary to
provisions contained in this Article IX.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent (prior to Closing), to: Applied Spectrum
Technologies, Inc. Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President ▇▇▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇ ▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇ ▇▇▇▇▇ (772)
▇▇▇-▇▇▇▇ telephone (▇▇▇) ▇▇▇-▇▇▇▇ telecopy
(b) if to the Company or to Parent (after Closing), to: ▇▇▇ ▇.
▇▇▇▇▇▇▇▇▇▇, CEO Pro-Stars, Inc.
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇ ▇▇▇, ▇▇ ▇▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇ telephone
(▇▇▇) ▇▇▇-▇▇▇▇ telecopy
54
with a copy to:
▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇ telephone
(▇▇▇) ▇▇▇-▇▇▇▇ telecopy
(c) if to KI Equity, to:
▇▇. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Manager KI Equity Partners III, LLC
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇
▇▇▇▇▇-▇▇▇▇ (▇▇▇) ▇▇▇-▇▇▇▇ telephone (▇▇▇) ▇▇▇-▇▇▇▇ telecopy
10.2 Interpretation.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise indicated.
When a reference is made in this Agreement to Sections, such reference shall be
to a Section of this Agreement. Unless otherwise indicated the words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. When reference is
made herein to "the business of" an entity, such reference shall be deemed to
include the business of all direct and indirect Subsidiaries of such entity.
Reference to the Subsidiaries of an entity shall be deemed to include all direct
and indirect Subsidiaries of such entity.
(b) For purposes of this Agreement, the term "Material Adverse
Effect" when used in connection with an entity means any change, event,
violation, inaccuracy, circumstance or effect, individually or when aggregated
with other changes, events, violations, inaccuracies, circumstances or effects,
that is materially adverse to the business, assets (including intangible
assets), revenues, financial condition or results of operations of such entity
(it being understood that neither of the following alone or in combination shall
be deemed, in and of itself, to constitute a Material Adverse Effect: (a)
changes attributable to the public announcement or pendency of the transactions
contemplated hereby, (b) changes in general national or regional economic
conditions, (c) changes affecting the industry generally in which the Company or
Parent operates), or (d) any SEC rulemaking requiring enhanced disclosure of
reverse merger transactions with a public shell.
(c) For purposes of this Agreement, the term "Legal Requirements"
means any federal, state, local, municipal, foreign or other law, statute,
constitution, principle of common law, resolution, ordinance, code, edict,
decree, rule, regulation, ruling or requirement issued, enacted, adopted,
promulgated, implemented or otherwise put into effect by or under the authority
of any Governmental Entity (as defined in Section 2.5(b)), and all requirements
set forth in applicable Contracts (as defined in Section 2.21(a)).
55
(d) For purposes of this Agreement, all monetary amounts set forth
herein are referenced in United States dollars, unless otherwise noted.
10.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart. Signatures by facsimile or in
electronic form shall be treated the same as if such signatures were original
signatures of the parties.
10.4 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Schedules hereto (a)
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
it being understood that the letter of intent between Parent and Company dated
March 27, 2006 is hereby terminated in its entirety and shall be of no further
force and effect; and (b) are not intended to confer upon any other person any
rights or remedies hereunder (except as specifically provided in this
Agreement). KI Equity is a third-party beneficiary of the certain provisions
contained herein to which KI Equity derives a benefit and, with respect to such
provisions, KI Equity has the right to enforce them as if it were a signatory to
this Agreement.
10.5 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
10.6 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
56
10.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, USA, regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof.
10.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
10.9 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the first sentence of this Section 10.9, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
10.10 Arbitration. Any disputes or claims arising under or in connection
with this Agreement or the transactions contemplated hereunder shall be resolved
by binding arbitration. Notice of a demand to arbitrate a dispute by either
party shall be given in writing to the other at their last known address.
Arbitration shall be commenced by the filing by a party of an arbitration demand
with the American Arbitration Association ("AAA") in its office in Denver,
Colorado USA. The arbitration and resolution of the dispute shall be resolved by
a single arbitrator appointed by the AAA pursuant to AAA rules. The arbitration
shall in all respects be governed and conducted by applicable AAA rules, and any
award and/or decision shall be conclusive and binding on the parties. The
arbitration shall be conducted in Denver, Colorado. The arbitrator shall supply
a written opinion supporting any award, and judgment may be entered on the award
in any court of competent jurisdiction. Each party shall pay its own fees and
expenses for the arbitration, except that any costs and charges imposed by the
AAA and any fees of the arbitrator for his services shall be assessed against
the losing party by the arbitrator. In the event that preliminary or permanent
injunctive relief is necessary or desirable in order to prevent a party from
acting contrary to this Agreement or to prevent irreparable harm prior to a
confirmation of an arbitration award, then either party is authorized and
entitled to commence a lawsuit solely to obtain equitable relief against the
other pending the completion of the arbitration in a court having jurisdiction
over the parties. All rights and remedies of the parties shall be cumulative and
in addition to any other rights and remedies obtainable from arbitration.
[The remainder of this page has been intentionally left blank.]
57
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
APPLIED SPECTRUM TECHNOLOGIES, INC.
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
-------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
APSP ACQUISITION, INC.
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
-------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
PRO-STARS, INC.
By: /s/ ▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
-------------------------------------
▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, CEO
ACKNOWLEDGED AND AGREED
WITH RESPECT TO OBLIGATIONS
UNDER SECTIONS 5.11 AND 5.14 HEREOF:
KI Equity Partners III, LLC,
a Delaware limited liability company
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
-------------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Manager
58
Index of Exhibits and Schedules
Exhibits
Exhibit A - Certificate of Designations
Exhibit B - Financial Advisory Agreement
Exhibit C - Voting Agreement
Exhibit D - Escrow Agreement
Schedules
Company Disclosure Schedules
Parent and Merger Sub Disclosure Schedules
59