EXHIBIT 2.2
SHARE EXCHANGE AGREEMENT
AND
PLAN OF REORGANIZATION
among
ACHIEVE NETWORKS, INC.
a Nevada corporation
("Company")
and
▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇
▇▇▇▇▇▇ AND DGN SECURITIES, INC.
("Shareholders")
and
PIPELINE TECHNOLOGIES, INC.
a Colorado corporation
("Buyer")
As of September 27 , 2001
SHARE EXCHANGE AGREEMENT
TABLE OF CONTENTS
1. PURCHASE, SALE AND EXCHANGE OF SHARES...................................2
2. PURCHASE PRICE - PAYMENT.................................................2
2.1 Purchase Price.....................................................2
2.2 Payment of Purchase Price..........................................3
2.3 Buyer's Option to Restructure as Triangular Merger
If Unfavorable Tax Consequences..................................3
3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES
OF COMPANY AND SHAREHOLDERS..............................................3
3.1 Corporate..........................................................3
3.2 Shareholders.......................................................4
3.3 No Violation.......................................................5
3.4 Financial Statements and Payables..................................5
3.5 Tax Matters........................................................6
3.6 Accounts Receivable................................................7
3.7 Absence of Certain Changes.........................................7
3.8 Absence of Undisclosed Liabilities.................................9
3.9 No Litigation......................................................9
3.10 Compliance With Laws and Orders....................................9
3.11 Title to and Condition of Properties..............................10
3.12 Insurance.........................................................11
3.13 Contracts and Commitments.........................................12
3.14 Labor Matters.....................................................13
3.15 Employee Benefit Plans............................................14
3.16 Employment Compensation...........................................16
3.17 Trade Rights......................................................17
3.18 Major Customers and Suppliers.....................................17
3.19 Bank Accounts.....................................................18
3.20 Affiliates' Relationships to Company..............................18
3.21 Assets Necessary to Business......................................18
3.22 No Brokers or Finders.............................................18
3.23 Technology Matters................................................19
3.24 Company Compliance With Securities Laws...........................19
3.25 Shareholders Access To Information Concerning Buyer...............19
3.26 Suitability.......................................................20
3.27 Investment Purpose................................................20
3.28 Disclosure........................................................20
4. REPRESENTATIONS AND WARRANTIES OF BUYER.................................21
4.1 Corporate.........................................................21
4.2 Authority.........................................................21
4.3 No Brokers or Finders.............................................21
4.4 Disclosure........................................................21
4.5 Investment Intent.................................................22
4.6 Exchange Shares...................................................22
4.7 SEC Reports and Financial Statements..............................22
4.8 Absence of Certain Changes or Events..............................22
5. COVENANTS...............................................................23
5.1 Confidentiality and Noncompetition Agreement......................23
5.2 Noncompetition; Confidentiality...................................23
5.3 General Releases..................................................24
5.4 Shareholders' Resignations........................................25
5.5 Appointment of Buyer's Nominees to the Company's
Board of Directors..............................................25
5.6 Access to Information and Records.................................25
5.7 Conduct of Business Pending the Closing...........................25
5.8 Consents..........................................................27
5.9 Other Action......................................................27
5.10 Buyer's Subsequent Offer to Company Shareholders
for Exchange....................................................27
5.11 Buyer's Registration of Buyer's Shares Issued to
Shareholders....................................................28
5.12 Prohibition on Buyer Issuing Stock for Less than
$1.50 per Share for One Year Following Closing..................28
5.13 Company's Employment of ▇▇. ▇▇▇▇▇▇▇ Following
Closing.........................................................28
5.14 Disclosure Schedule...............................................28
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS.............................29
6.1 Representations and Warranties True of the
Closing Date....................................................29
6.2 Compliance With Agreement.........................................29
6.3 Absence of Litigation.............................................29
6.4 Consents and Approvals............................................29
6.5 Estoppel Certificates.............................................29
6.6 Appointment of Buyer's Nominees to Company's Board
of Directors....................................................30
6.7 Due Diligence Investigation.......................................30
7. CONDITIONS PRECEDENT TO SHAREHOLDERS' OBLIGATIONS.......................30
7.1 Representations and Warranties True on the
Closing Date......................................................30
7.2 Compliance With Agreement.........................................30
7.3 Absence of Litigation.............................................30
7.4 Minimum Average Trading Price for Buyer's Shares..................30
8. INDEMNIFICATION.........................................................31
8.1 By Shareholders...................................................31
8.2 By Buyer..........................................................31
8.3 Indemnification of Third-Party Claims.............................31
8.4 Payment...........................................................32
9. CLOSING.................................................................33
9.1 Documents to be Delivered by Company and
Shareholders....................................................34
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9.2 Documents to be Delivered by Buyer................................35
10. TERMINATION.............................................................35
10.1 Right of Termination Without Breach...............................35
10.2 Termination for Breach............................................36
11. BUYER'S POST-CLOSING OBLIGATIONS TO PROVIDE CERTAIN
LOANS AND ADVANCES TO COMPANY...........................................37
11.1 Buyer's Loans and Advances to Company.............................37
11.2 Conditions for Loans and Advances.................................37
11.3 Repayment of Loans by Providing VOiP Services.....................38
12. COMPANY TO PROVIDE VOiP SERVICES TO BUYER AT ACTUAL COST................38
12.1 The Company to Provide VOiP Services to Buyer at
Actual Cost.....................................................38
12.2 Cost of Services..................................................38
12.3 Minimum Purchases.................................................39
12.4 Termination of Company's Obligation To Provide
VOiP To Company.................................................39
12.5 Waiver Of Conflict Of Intent......................................39
12.6 Acknowledgement With Regard To Independent
Creditor-Debtor Relationships Between Buyer And
Company.........................................................39
12.7 Buyer's Obligation to Use Good Faith Business
Judgment to Operate Company Successfully........................40
13. RESOLUTION OF DISPUTES..................................................40
13.1 Arbitration.......................................................40
13.2 Arbitrators.......................................................40
13.3 Procedures; No Appeal.............................................40
13.4 Authority.........................................................41
13.5 Entry of Judgment.................................................41
13.6 Confidentiality...................................................41
13.7 Continued Performance.............................................41
13.8 Tolling...........................................................41
14. MISCELLANEOUS...........................................................41
14.1 Disclosure Schedule...............................................41
14.2 Further Assurance.................................................42
14.3 Disclosures and Announcements.....................................42
14.4 Assignment; Parties in Interest...................................42
14.5 Law Governing Agreement...........................................42
14.6 Amendment and Modification........................................42
14.7 Notice............................................................43
14.8 Expenses..........................................................45
1.2 Shareholders' Agent; Power of Attorney............................46
1.3 Entire Agreement..................................................47
1.4 Counterparts......................................................47
1.5 Headings..........................................................47
1.6 Glossary of Terms.................................................47
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Disclosure Schedule
Schedule 3.1(d) - Foreign Corporation Qualification
Schedule 3.1(e) - Subsidiaries
Schedule 3.1(g) - Shareholder List
Schedule 3.3 - Violation, Conflict, Default
Schedule 3.4 - Financial Statements
Schedule 3.5(b) - Tax Returns (Exceptions to Representations)
Schedule 3.5(c) - Tax Audits
Schedule 3.5(d) - Consolidated Tax Returns
Schedule 3.5(e) - Tax, Other
Schedule 3.6 - Accounts Receivable (Aged Schedule)
Schedule 3.7 - Certain Changes
Schedule 3.8 - Off-Balance Sheet Liabilities
Schedule 3.9 - Litigation Matters
Schedule 3.10(a) - Non-Compliance with Laws
Schedule 3.10(a)(iii) - Licenses and Permits
Schedule 3.11 - Liens
Schedule 3.11(c) - Owned Real Property
Schedule 3.12 - Insurance
Schedule 3.13(a) - Real Property Leases
Schedule 3.13(b) - Personal Property Leases
Schedule 3.13(g) - Collective Bargaining Agreements
Schedule 3.13(h) - Loan Agreements, etc.
Schedule 3.13(i) - Guarantees
Schedule 3.13(l) - Material Contracts
Schedule 3.14 - Labor Matters
Schedule 3.15(a) - Employee Plans/Agreements
Schedule 3.16 - Employment Compensation
Schedule 3.17 - Trade Rights
Schedule 3.18(a) - Major Customers
Schedule 3.18(b) - Major Suppliers
Schedule 3.18(c) - Dealers and Distributors
Schedule 3.19 - Bank Accounts
Schedule 3.20(a) - Contracts with Affiliates
Schedule 3.20(c) - Obligations of and to Affiliates
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SHARE EXCHANGE AGREEMENT
AND
PLAN OF REORGANIZATION
SHARE EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement")
dated as of September 27, 2001, by and among PIPELINE TECHNOLOGIES, INC., a
Colorado corporation ("Buyer"), ACHIEVE NETWORKS, INC., a Nevada corporation
("Company"), ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ AND
DGN SECURITIES, INC. (individually "Shareholder" and together, jointly and
severally, the "Shareholders"), and ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, as agent (the
"Shareholders' Agent").
FACTUAL BACKGROUND
A. The Company is engaged in the business of providing long distance
telephone and telecommunication services over the Internet. The Company has
developed and presently owns and operates a voice over internet protocol
("VoIP") network, including the hardware and software necessary to provide VoIP
to customers. (the "Business").
B. The Company has had difficulty attracting customers for its services.
The Company presently does not have sufficient revenue to support operations as
a going concern, and has been unable to obtain additional financing in the
present, challenging capital market environment.
C. The Buyer also engages in the VoIP business. The Buyer has enjoyed more
success attracting customers. The Buyer subcontracts, from time to time, for
actual VoIP transmission services. The Buyer's common stock is publicly traded
on the NASDAQ Bulletin Board.
D. The Buyer is willing to acquire not less than 81% of the Company's
outstanding common stock in order that Buyer may consolidate the Company's
results for financial reporting and federal income tax purposes. The Buyer is
willing to exchange 3.0 million of the Buyer's common shares with the Company's
shareholders, pro rata, for 100% of the Company's outstanding shares.
E. The Shareholders collectively own approximately 81% of the Company's
outstanding common stock. The Shareholders are willing to exchange their shares
of the Company to Buyer pursuant to the terms and conditions of the Agreement.
The parties intend that the transaction be treated as a "stock-for-stock"
tax-free reorganization pursuant to Section 368(a)(1)(B) of the Internal Revenue
Code, to the extent possible.
F. The Buyer intends to offer the other shareholders of the Company the
voluntary opportunity, after Closing, to exchange their shares of the Company
for shares of the Buyer on the same economic terms. However, there is no
assurance that such a transaction could be consummated because it must be
registered pursuant to the Securities Act of 1933 and applicable state
securities laws.
G. The Buyer presently intends to provide certain loans and advances to the
Company, which can be repaid by the Company by providing the Buyer with VoIP
transmission services on a subcontract basis, at a price per minute equal to
approximately the Company's out-of-pocket direct cost of providing such services
plus a ▇▇▇▇-up of 20%, which shall in no event exceed prevailing market bulk
rates. Although these loans and advances are believed by the Company's
management to be essential in order for the Company to meet its present cash
flow requirements, there is no assurance that these loans will be sufficient to
sustain the Company as a viable going concern.
H. The transactions contemplated by this Agreement, including the
Shareholders' sale and exchange of their Company shares to the Buyer in exchange
for Buyer's shares, the Buyer's loans to the Company and the election of Buyer's
nominees to the Company's Board of Directors at Closing, have been unanimously
approved by the Company's Board of Directors.
I. The Shareholders desire to designate ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ as their agent and
attorney-in-fact with the authority to act on their behalf in connection with
certain acts regarding the sale and exchange of their shares to Buyer.
Plan of Reorganization
----------------------
This Plan of Reorganization shall be a reorganization within the meaning of
Section 368(a)(1)(B) by application of Section 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended.
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and intending to be legally bound hereby, the parties hereto agree as
follows.
1. PURCHASE, SALE AND EXCHANGE OF SHARES
Subject to the terms and conditions of this Agreement, on the Closing Date
(as hereinafter defined) Shareholders shall sell to Buyer and Buyer shall
purchase from Shareholders 21,060,000 shares of common stock, $0.01 par value of
the Company (the "Shares"), together with all the Shareholders' other right,
title and interest in and to any equity or ownership of the Company, if any.
2. PURCHASE PRICE - PAYMENT
2.1 Purchase Price.
--------------
The purchase price (the "Purchase Price") payable for the Shares shall be
2,430,000 common shares, par value $0.001, of the Buyer (the "Exchange Shares"),
for pro rata distribution among the Shareholders in accordance with their
respective ownership of Shares as set forth in Schedule 3.1(g). The parties
acknowledge that this exchange ratio is based upon Buyer's desire to exchange
3.0 million of Buyer's common shares for all stock of all classes of the
Company, on a pro rata basis.
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2.2 Payment of Purchase Price.
-------------------------
At the Closing, Buyer shall deliver the Exchange Shares, which constitute
the Purchase Price, to the Shareholders.
2.3 Buyer's Option to Restructure as Triangular Merger If Unfavorable
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Tax Consequences.
---------------
Based on Company's and Shareholders' representations and warranties
contained in this Agreement, Buyer believes the transactions contemplated by
this Agreement should qualify as "stock-for-stock" tax-free reorganization
pursuant to Section 368(a)(1)(B) of the Internal Revenue Code. If the Buyer
concludes that, due to the Company's capital structure or other facts, that the
proposed structure as a share exchange does not appear to qualify as a tax-free
reorganization, Buyer may require, by written notice to Company and
Shareholders, that the transaction be restructured as a triangular merger or
similar structure in order to improve the prospects of qualifying as a tax-free
reorganization, in which case the Company and Shareholders agree to take all
steps reasonably requested by Buyer to accomplish such alternative structure,
including without limitation, holding a shareholders' meeting to vote on the
merger and voting their shares in favor of the merger. Notwithstanding the
foregoing, nothing will require Buyer to restructure this transaction. The
parties agree that the Buyer has not provided any tax planning advice to the
Company or Shareholders and each party is relying on its own professional tax
advisors.
3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF COMPANY AND
SHAREHOLDERS
Company and Shareholders, jointly and severally, make the following
representations and warranties to Buyer, each of which is true and correct on
the date hereof, shall remain true and correct to and including the Closing
Date, shall be unaffected by any investigation heretofore or hereafter made by
Buyer, or any knowledge of Buyer other than as specifically disclosed in the
Disclosure Schedule to be delivered to Buyer within five days of execution of
this Agreement, and shall survive the Closing of the transactions provided for
herein. Regardless of the foregoing, the representations and warranties set
forth in Section 3.2 are made severally by each Shareholder, with respect to
such Shareholder only.
3.1 Corporate.
---------
3.1(a) Organization. Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada.
3.1(b) Corporate Power. Company has all requisite corporate power and
authority to own, operate and lease its properties and to carry on its
business as and where such is now being conducted, and to enter into,
execute and deliver this Agreement and the other agreements, instruments
and documents contemplated hereby (such other documents sometimes referred
to herein as "Ancillary Documents") and to carry out the transactions
contemplated hereby
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3.1(c) Authorization. The execution and delivery of this Agreement and
the Ancillary Instruments and the full performance thereunder, have been
duly authorized by the unanimous affirmative vote of the Board of Directors
of the Company and no other or further corporate act (including, without
limitation any shareholder vote or act) is necessary therefore.
3.1(d) Qualification. Company is duly licensed or qualified to do
business as a foreign corporation, and is in good standing, in each
jurisdiction wherein the character of the properties owned or leased by it,
or the nature of its business, makes such licensing or qualification
necessary. The states in which Company is licensed or qualified to do
business are listed in Schedule 3.1(d).
3.1(e) Subsidiaries. Company does not own any interest in any
corporation, partnership or other entity.
3.1(f) Corporate Documents, etc. The copies of the Articles of
Incorporation and Bylaws of the Company, including any amendments thereto,
which have been delivered by Shareholders to Buyer are true, correct and
complete copies of such instruments as presently in effect. The corporate
minute book and stock records of the Company which have been furnished to
Buyer for inspection are true, correct and complete and accurately reflect
all material corporate action taken by the Company. The directors and
officers of the Company are listed in Schedule 3.1(f).
3.1(g) Capitalization of the Company. The authorized capital stock of
the Company consists entirely of 50,000,000 shares of common stock, par
value $0.001 per share and 10,000,000 shares of preferred stock, par value
$0.01 per share. A total of 26,000,000 shares of common stock and 520,000
shares of preferred stock of the Company are issued or outstanding, of
which 21,060,000 shares of common stock of the Company are owned of record
and beneficially by Shareholders in the respective numbers set forth in
Schedule 3.1(g). No other securities of the Company are issued or
outstanding as of the date hereof. All such shares of capital stock of the
Company are validly issued, fully paid and nonassessable. There are no (a)
securities convertible into or exchangeable for any of the Company's
capital stock or other securities, (b) options, warrants or other rights to
purchase or subscribe to capital stock or other securities of the Company
or securities which are convertible into or exchangeable for capital stock
or other securities of the Company, or (c) contracts, commitments,
agreements, understandings or arrangements of any kind relating to the
issuance, sale or transfer of any capital stock or other equity securities
of the Company, any such convertible or exchangeable securities or any such
options, warrants or other rights other than the rights described in
Schedule 3.1(g) hereof.
3.2 Shareholders.
------------
3.2(a) Power. Each Shareholder has full power, legal right and
authority to enter into, execute and deliver this Agreement and the other
agreements, instruments and documents contemplated hereby (such other
documents sometimes referred to herein as "Ancillary Instruments"), and to
carry out the transactions contemplated hereby.
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3.2(b) Authorization. The execution and delivery of this Agreement and
the Ancillary Instruments, and full performance thereunder, have been duly
authorized by the respective boards of directors and the shareholders of
each Shareholder which is a corporation, and no other or further corporate
act on the part of any such Shareholder is necessary therefor.
3.2(c) Validity. This Agreement has been duly and validly executed and
delivered by each Shareholder and is, and when executed and delivered, each
Ancillary Instrument will be, the legal, valid and binding obligation of
such Shareholder, enforceable in accordance with its terms, except as such
may be limited by bankruptcy, insolvency, reorganization or other laws
affecting creditors' rights generally, and by general equitable principles.
3.2(d) Title. Each Shareholder has, and at Closing Buyer will receive,
good and marketable title to the Shares to be sold by such Shareholder
hereunder, free and clear of all Liens (as defined in Section 3.11(a))
including, without limitation, voting trusts or agreements, proxies,
marital or community property interests.
3.3 No Violation.
------------
Except as set forth on Schedule 3.3, neither the execution and delivery of
this Agreement or the Ancillary Instruments nor the consummation by Company and
Shareholders of the transactions contemplated hereby and thereby (a) will
violate any statute, law, ordinance, rule or regulation (collectively, "Laws")
or any order, writ, injunction, judgment, plan or decree (collectively,
"Orders") of any court, arbitrator, department, commission, board, bureau,
agency, authority, instrumentality or other body, whether federal, state,
municipal, foreign or other (collectively, "Government Entities"), (b) will
require any authorization, consent, approval, exemption or other action by or
notice to any Government Entity (including, without limitation, under any
"plant-closing" or similar law), or (c) subject to obtaining the consents
referred to in Schedule 3.3, will violate or conflict with, or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or will result in the termination of, or accelerate
the performance required by, or result in the creation of any Lien upon any of
the assets of Company (or the Shares) under, any term or provision of the
Articles of Incorporation or Bylaws of Company or of any contract, commitment,
understanding, arrangement, agreement or restriction of any kind or character to
which Company or any Shareholder is a party or by which Company or any
Shareholder or any of its or their assets or properties may be bound or
affected.
3.4 Financial Statements and Payables.
---------------------------------
3.4(a) Financial Statements. Included as Schedule 3.4(a) are true and
complete copies of the financial statements of Company consisting of (i)
unaudited balance sheets of Company as of June 30, 2001, and the related
statements of income and cash flows for the two years (or portions thereof
during which the Company has been in existence) then ended (including the
notes contained therein or annexed thereto), and (ii) an unaudited balance
sheet of Company as of August 31, 2001 (the "Recent Balance Sheet"), and
the related unaudited statements of income and cash flows for the two
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months then ended and for the corresponding period of the prior year
(including the notes and schedules contained therein or annexed thereto).
All of such financial statements (including all notes and schedules
contained therein or annexed thereto) are true, complete and accurate, have
been prepared in accordance with the books and records of Company, and
fairly present, the assets, liabilities and financial position, the results
of operations and cash flows of Company as of the dates and for the years
and periods indicated.
3.4(b) Aging of Payables. Included as Schedule 3.4(b) is a true and
complete list of the Company's accounts payable aging, as of September 30,
2001, including the amount owed by the Company to every creditor and
vendor, and the portion of such payables which is less than 30 days
outstanding, the portion of such payables which is between 31 and 60 days
outstanding, between 61 and 90 days outstanding and the portion of such
payables which is more than 90 days outstanding, and a note regarding
whether any portion or all of such payables is in dispute, contested or
contingent.
3.5 Tax Matters.
------------
3.5(a) Provision For Taxes. The provision made for taxes on the Recent
Balance Sheet is sufficient for the payment of all federal, state, foreign,
county, local and other income, ad valorem, excise, profits, franchise,
occupation, property, payroll, withholding, FICA, FUTA, sales, use, gross
receipts and other taxes (and any interest and penalties) and assessments,
whether or not disputed, at the date of the Recent Balance Sheet and for
all years and periods prior thereto. Since the date of the Recent Balance
Sheet, Company has not incurred any taxes other than taxes incurred in the
ordinary course of business consistent in type and amount with past
practices of Company.
3.5(b) Tax Returns Filed. Except as set forth on Schedule 3.5(b), all
federal, state, foreign, county, local and other tax returns required to be
filed by or on behalf of Company have been timely filed and when filed were
true and correct in all material respects, and the taxes shown as due
thereon were paid or adequately accrued. True and complete copies of all
tax returns or reports filed by Company have been delivered to Buyer.
Company has duly withheld and paid all taxes which it is required to
withhold and pay relating to salaries and other compensation heretofore
paid to the employees of Company.
3.5(c) Tax Audits. The federal and state income tax returns of Company
have been audited by the Internal Revenue Service and appropriate state
taxing authorities for the periods and to the extent set forth in Schedule
3.5(c), and Company has not received from the Internal Revenue Service or
from the tax authorities of any state, county, local or other jurisdiction
any notice of underpayment of taxes or other deficiency which has not been
paid nor any objection to any return or report filed by Company. There are
outstanding no agreements or waivers extending the statutory period of
limitations applicable to any tax return or report.
3.5(d) Consolidated Group. Schedule 3.5(d) lists every year Company
was a member of an affiliated group of corporations that filed a
consolidated tax return on which the statute of limitations does not bar a
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federal tax assessment, and each corporation that has been part of such
group. No affiliated group of corporations of which Company has been a
member has discontinued filing consolidated returns during the past five
years.
3.5(e) Other. Except as set forth in Schedule 3.5(e), since January 1,
2000, Company has not (i) filed any consent or agreement under Section
341(f) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii)
applied for any tax ruling, (iii) entered into a closing agreement with any
taxing authority, (iv) filed an election under Section 338(g) or Section
338(h)(10) of the Code (nor has a deemed election under Section 338(e) of
the Code occurred), (v) made any payments, or been a party to an agreement
(including this Agreement) that under any circumstances could obligate it
to make payments that will not be deductible because of Section 280G of the
Code, or (vi) been a party to any tax allocation or tax sharing agreement.
The Company is not a "United States real property holding company" within
the meaning of Section 897 of the Code.
3.6 Accounts Receivable.
-------------------
All accounts receivable of Company reflected on the Recent Balance Sheet,
and as incurred in the normal course of business since the date thereof,
represent arm's length sales actually made in the ordinary course of business;
are collectible (net of the reserve shown on the Recent Balance Sheet for
doubtful accounts) in the ordinary course of business without the necessity of
commencing legal proceedings; are subject to no counterclaim or setoff; and are
not in dispute. Schedule 3.6 contains an aged schedule of accounts receivable
included in the Recent Balance Sheet.
3.7 Absence of Certain Changes.
--------------------------
Except as and to the extent set forth in Schedule 3.7, since the date of
the Recent Balance Sheet there has not been:
3.7(a) No Adverse Change. Any adverse change in the financial
condition, assets, liabilities, business, prospects or operations of
Company;
3.7(b) No Damage. Any loss, damage or destruction, whether covered by
insurance or not, affecting Company's business or properties;
3.7(c) No Increase in Compensation. Any increase in the compensation,
salaries or wages payable or to become payable to any employee or agent of
Company (including, without limitation, any increase or change pursuant to
any bonus, pension, profit sharing, retirement or other plan or
commitment), or any bonus or other employee benefit granted, made or
accrued;
3.7(d) No Labor Disputes. Any labor dispute or disturbance, other than
routine individual grievances which are not material to the business,
financial condition or results of operations of Company.
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3.7(e) No Commitments. Any commitment or transaction by Company
(including, without limitation, any borrowing or capital expenditure) other
than in the ordinary course of business consistent with past practice;
3.7(f) No Dividends. Any declaration, setting aside, or payment of any
dividend or any other distribution in respect of Company's capital stock;
any redemption, purchase or other acquisition by Company of any capital
stock of Company, or any security relating thereto; or any other payment to
any shareholder of Company as such a shareholder;
3.7(g) No Disposition of Property. Any sale, lease or other transfer
or disposition of any properties or assets of Company, except for the sale
of inventory items in the ordinary course of business;
3.7(h) No Indebtedness. Any indebtedness for borrowed money incurred,
assumed or guaranteed by Company except for advances from Buyer in
accordance with the terms of an agreement dated August 24, 2001;
3.7(i) No Liens. Any mortgage, pledge, lien or encumbrance made on any
of the properties or assets of Company;
3.7(j) No Amendment of Contracts. Any entering into, amendment or
termination by Company of any contract, or any waiver of material rights
thereunder, other than in the ordinary course of business;
3.7(k) Loans and Advances. Any loan or advance (other than advances to
employees in the ordinary course of business for travel and entertainment
in accordance with past practice) to any person including, but not limited
to, any Affiliate (for purposes of this Agreement, the term "Affiliate"
shall mean and include all Shareholders, directors and officers of Company;
any owner of more than 1% of the Company's common stock, the spouse of any
such person; any person who would be the heir or descendant of any such
person if he or she were not living; and any entity in which any of the
foregoing has a direct or indirect interest, except through ownership of
less than 5% of the outstanding shares of any entity whose securities are
listed on a national securities exchange or traded in the national
over-the-counter market);
3.7(l) Credit. Any grant of credit to any customer or distributor on
terms or in amounts more favorable than those which have been extended to
such customer or distributor in the past, any other change in the terms of
any credit heretofore extended, or any other change of Company's policies
or practices with respect to the granting of credit; or
3.7(m) No Unusual Events. Any other event or condition not in the
ordinary course of business of Company.
-8-
3.8 Absence of Undisclosed Liabilities.
----------------------------------
Except as and to the extent specifically disclosed in the Recent Balance
Sheet, or in Schedule 3.8, Company does not have any liabilities, commitments or
obligations (secured or unsecured, and whether accrued, absolute, contingent,
direct, indirect or otherwise), other than commercial liabilities and
obligations incurred since the date of the Recent Balance Sheet in the ordinary
course of business and consistent with past practice and none of which has or
will have a material adverse effect on the business, financial condition or
results of operations of Company. Except as and to the extent described in the
Recent Balance Sheet or in Schedule 3.8, neither Company nor any Shareholder has
knowledge of any basis for the assertion against Company of any liability and
there are no circumstances, conditions, happenings, events or arrangements,
contractual or otherwise, which may give rise to liabilities, except commercial
liabilities and obligations incurred in the ordinary course of Company's
business and consistent with past practice.
3.9 No Litigation.
-------------
Except as set forth in Schedule 3.9 there is no action, suit, arbitration,
proceeding, investigation or inquiry, whether civil, criminal or administrative
("Litigation") pending or threatened against Company, its directors (in such
capacity), its business or any of its assets, nor does Company or any
Shareholder know, or have grounds to know, of any basis for any Litigation.
Schedule 3.9 also identifies all Litigation to which Company or any of its
directors (in such capacity) have ever been parties. Except as set forth in
Schedule 3.9, neither Company nor its business or assets is subject to any Order
of any Government Entity.
3.10 Compliance With Laws and Orders.
-------------------------------
3.10(a) Compliance. Except as set forth in Schedule 3.10(a), Company
(including each and all of its operations, practices, properties and
assets) is in compliance with all applicable Laws and Orders, including,
without limitation, those applicable to discrimination in employment,
occupational safety and health, trade practices, competition and pricing,
product warranties, zoning, building and sanitation, employment, retirement
and labor relations, product advertising and the Environmental Laws as
hereinafter defined. Except as set forth in Schedule 3.10(a), Company has
not received notice of any violation or alleged violation of, and is
subject to no Liability for past or continuing violation of, any Laws or
Orders. All reports and returns required to be filed by Company with any
Government Entity have been filed, and were accurate and complete when
filed. Without limiting the generality of the foregoing:
(i) The operation of Company's business as it is now conducted
does not, nor does any condition existing at any of the Facilities, in
any manner constitute a nuisance or other tortious interference with
the rights of any person or persons in such a manner as to give rise
to or constitute the grounds for a suit, action, claim or demand by
any such person or persons seeking compensation or damages or seeking
to restrain, enjoin or otherwise prohibit any aspect of the conduct of
such business or the manner in which it is now conducted.
-9-
(ii) Company has made all required payments to its unemployment
compensation reserve accounts with the appropriate governmental
departments of the states where it is required to maintain such
accounts, and each of such accounts has a positive balance.
(iii) Company has delivered to Buyer copies of all reports of
Company for the past five (5) years required under the federal
Occupational Safety and Health Act of 1970, as amended, and under all
other applicable health and safety laws and regulations. The
deficiencies, if any, noted on such reports have been corrected.
3.10(b) Licenses and Permits. To the best of the Company's and
Shareholders' knowledge, Company has all licenses, permits, approvals,
authorizations and consents of all Government Entities and all
certification organizations required for the conduct of the business (as
presently conducted and as proposed to be conducted) and operation of the
Facilities. All such licenses, permits, approvals, authorizations and
consents are described in Schedule 3.10(a)(iii), are in full force and
effect and will not be affected or made subject to loss, limitation or any
obligation to reapply as a result of the transactions contemplated hereby.
Except as set forth in Schedule 3.10(a)(iii), Company (including its
operations, properties and assets) is and has been in compliance with all
such permits and licenses, approvals, authorizations and consents.
3.11 Title to and Condition of Properties.
-------------------------------------
3.11(a) Marketable Title. Company has good and marketable title to all
of Company's assets, business and properties, including, without
limitation, all such properties (tangible and intangible) reflected in the
Recent Balance Sheet, except for inventory disposed of in the ordinary
course of business since the date of such Recent Balance Sheet, free and
clear of all mortgages, liens, (statutory or otherwise) security interests,
claims, pledges, licenses, equities, options, conditional sales contracts,
assessments, levies, easements, covenants, reservations, restrictions,
rights-of-way, exceptions, limitations, charges or encumbrances of any
nature whatsoever (collectively, "Liens") except those described in
Schedule 3.11 and, in the case of real property, Liens for taxes not yet
due or which are being contested in good faith by appropriate proceedings
(and which have been sufficiently accrued or reserved against in the Recent
Balance Sheet), municipal and zoning ordinances and easements for public
utilities, none of which interfere with the use of the property as
currently utilized. None of Company's assets, business or properties are
subject to any restrictions with respect to the transferability thereof;
and the Company's title thereto will not be affected in any way by the
transactions contemplated hereby.
3.11(b) Condition. All property and assets owned or utilized by
Company are in good operating condition and repair, free from any defects
(except such minor defects as do not interfere with the use thereof in the
conduct of the normal operations of Company), have been maintained
consistent with the standards generally followed in the industry and are
sufficient to carry on the business of Company as conducted during the
preceding 12 months. All buildings, plants and other structures owned or
-10-
otherwise utilized by Company are in good condition and repair and have no
structural defects or defects affecting the plumbing, electrical, sewerage,
or heating, ventilating or air conditioning systems.
3.11(c) Real Property. Schedule 3.11(c) sets forth all real property
used or occupied by Company (the "Real Property").
3.11(d) No Condemnation or Expropriation. Neither the whole nor any
portion of the property or any other assets of Company is subject to any
Order to be sold or is being condemned, expropriated or otherwise taken by
any Government Entity with or without payment of compensation therefor, nor
to the best of Company's and Shareholders' knowledge has any such
condemnation, expropriation or taking been proposed.
3.12 Insurance.
---------
Set forth in Schedule 3.12 is a complete and accurate list and description
of all policies of fire, liability, product liability, workers compensation,
health and other forms of insurance presently in effect with respect to the
business and properties of Company, true and correct copies of which have
heretofore been delivered to Buyer. Schedule 3.12 includes, without limitation,
the carrier, the description of coverage, the limits of coverage, retention or
deductible amounts, amount of annual premiums, date of expiration and the date
through which premiums have been paid with respect to each such policy, and any
pending claims in excess of $10,000. All such policies are valid, outstanding
and enforceable policies and provide insurance coverage for the properties,
assets and operations of Company, of the kinds, in the amounts and against the
risks customarily maintained by organizations similarly situated; and no such
policy (nor any previous policy) provides for or is subject to any currently
enforceable retroactive rate or premium adjustment, loss sharing arrangement or
other actual or contingent liability arising wholly or partially out of events
arising prior to the date hereof. Schedule 3.12 indicates each policy as to
which (a) the coverage limit has been reached or (b) the total incurred losses
to date equal 75% or more of the coverage limit. No notice of cancellation or
termination has been received with respect to any such policy, and neither
Company nor any Shareholder has knowledge of any act or omission of Company
which could result in cancellation of any such policy prior to its scheduled
expiration date. Company has not been refused any insurance with respect to any
aspect of the operations of the business nor has its coverage been limited by
any insurance carrier to which it has applied for insurance or with which it has
carried insurance during the last three years. Company has duly and timely made
all claims it has been entitled to make under each policy of insurance. Since
January 1, 2000, all products liability and general liability policies
maintained by or for the benefit of Company have been "occurrence" policies and
not "claims made" policies. There is no claim by Company pending under any such
policies as to which coverage has been questioned, denied or disputed by the
underwriters of such policies, and neither Company nor any of the Shareholders
knows of any basis for denial of any claim under any such policy. Company has
not received any written notice from or on behalf of any insurance carrier
issuing any such policy that insurance rates therefor will hereafter be
substantially increased (except to the extent that insurance rates may be
increased for all similarly situated risks) or that there will hereafter be a
cancellation or an increase in a deductible (or an increase in premiums in order
to maintain an existing deductible) or nonrenewal of any such policy. Such
policies are sufficient in all material respects for compliance by Company with
all requirements of law and with the requirements of all material contracts to
which Company is a party.
-11-
3.13 Contracts and Commitments.
--------------------------
3.13(a) Real Property Leases. Except as set forth in Schedule 3.11(c),
Company has no leases of real property.
3.13(b) Personal Property Leases. Except as set forth in Schedule
3.13(b), Company has no leases of personal property involving consideration
or other expenditure in excess of $10,000 or involving performance over a
period of more than three (3) months.
3.13(c) Purchase Commitments. Company has no purchase commitments for
inventory items or supplies that, together with amounts on hand, constitute
in excess of three (3) months normal usage, or which are at an excessive
price.
3.13(d) Sales Commitments. Company has no sales contracts or
commitments to customers or distributors which aggregate in excess of
$25,000 to any one customer or distributor (or group of affiliated
customers or distributors). Company has no sales contracts or commitments
except those made in the ordinary course of business, at arm's length, and
no such contracts or commitments are for a sales price which would result
in a loss to the Company.
3.13(e) Contracts With Affiliates and Certain Others. Company has no
agreement, understanding, contract or commitment (written or oral) with any
Affiliate or any employee, agent, consultant, distributor, dealer or
franchisee that is not cancelable by Company on notice of not longer than
30 days without liability, penalty or premium of any nature or kind
whatsoever.
3.13(f) Powers of Attorney. The Company has not given a power of
attorney, which is currently in effect, to any person, firm or corporation
for any purpose whatsoever.
3.13(g) Collective Bargaining Agreements. Except as set forth in
Schedule 3.13(g), Company is not a party to any collective bargaining
agreements with any unions, guilds, shop committees or other collective
bargaining groups. Copies of all such agreements have heretofore been
delivered to Buyer.
3.13(h) Loan Agreements. Except as set forth in Schedule 3.13(h),
Company is not obligated under any loan agreement, promissory note, letter
of credit, or other evidence of indebtedness as a signatory, guarantor or
otherwise.
3.13(i) Guarantees. Except as disclosed on Schedule 3.13(i), Company
has not guaranteed the payment or performance of any person, firm or
corporation, agreed to indemnify any person or act as a surety, or
otherwise agreed to be contingently or secondarily liable for the
obligations of any person.
-12-
3.13(j) Contracts Subject to Renegotiation. Company is not a party to
any contract with any governmental body which is subject to renegotiation.
3.13(k) Burdensome or Restrictive Agreements. Company is not a party
to nor is it bound by any agreement, deed, lease or other instrument which
is so burdensome as to materially affect or impair the operation of
Company. Without limiting the generality of the foregoing, Company is not a
party to nor is it bound by any agreement requiring Company to assign any
interest in any trade secret or proprietary information, or prohibiting or
restricting Company from competing in any business or geographical area or
soliciting customers or otherwise restricting it from carrying on its
business anywhere in the world.
3.13(l) Other Material Contracts. Company has no lease, contract or
commitment of any nature involving consideration or other expenditure in
excess of $10,000, or involving performance over a period of more than
three (3) months, or which is otherwise individually material to the
operations of Company, except as explicitly described in Schedule 3.13(l)
or in any other Schedule.
3.13(m) No Default. Company is not in default under any lease,
contract or commitment, nor has any event or omission occurred which
through the passage of time or the giving of notice, or both, would
constitute a default thereunder or cause the acceleration of any of
Company's obligations or result in the creation of any Lien on any of the
assets owned, used or occupied by Company. No third party is in default
under any lease, contract or commitment to which Company is a party, nor
has any event or omission occurred which, through the passage of time or
the giving of notice, or both, would constitute a default thereunder or
give rise to an automatic termination, or the right of discretionary
termination, thereof.
3.14 Labor Matters.
-------------
Except as set forth in Schedule 3.14, within the last five years Company
has not experienced any labor disputes, union organization attempts or any work
stoppage due to labor disagreements in connection with its business. Except to
the extent set forth in Schedule 3.14, (a) Company is in compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and is not engaged in any unfair
labor practice; (b) there is no unfair labor practice charge or complaint
against Company pending or threatened; (c) there is no labor strike, dispute,
request for representation, slowdown or stoppage actually pending or threatened
against or affecting Company nor any secondary boycott with respect to products
of Company; (d) no question concerning representation has been raised or is
threatened respecting the employees of Company; (e) no grievance which might
have a material adverse effect on Company, nor any arbitration proceeding
arising out of or under collective bargaining agreements, is pending and no such
claim therefor exists; and (f) there are no administrative charges or court
complaints against Company concerning alleged employment discrimination or other
employment related matters pending or threatened before the U.S. Equal
Employment Opportunity Commission or any Government Entity.
-13-
3.15 Employee Benefit Plans.
-----------------------
3.15(a) Disclosure. Schedule 3.15(a) sets forth all pension, thrift,
savings, profit sharing, retirement, incentive bonus or other bonus,
medical, dental, life, accident insurance, benefit, employee welfare,
disability, group insurance, stock purchase, stock option, stock
appreciation, stock bonus, executive or deferred compensation,
hospitalization and other similar fringe or employee benefit plans,
programs and arrangements, and any employment or consulting contracts,
"golden parachutes," collective bargaining agreements, severance agreements
or plans, vacation and sick leave plans, programs, arrangements and
policies, including, without limitation, all "employee benefit plans" (as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")), all employee manuals, and all written or
binding oral statements of policies, practices or understandings relating
to employment, which are provided to, for the benefit of, or relate to, any
persons ("Company Employees") employed by Company. The items described in
the foregoing sentence are hereinafter sometimes referred to collectively
as "Employee Plans/Agreements," and each individually as an "Employee
Plan/Agreement." True and correct copies of all the Employee
Plans/Agreements, including all amendments thereto, have heretofore been
provided to Buyer. No Employee Plan/Agreement is a "multiemployer plan" (as
defined in Section 4001 of ERISA), and Company has never contributed nor
been obligated to contribute to any such multiemployer plan.
3.15(b) Terminations, Proceedings, Penalties, etc. With respect to
each employee benefit plan (including, without limitation, the Employee
Plans/Agreements) that is subject to the provisions of Title IV of ERISA
and with respect to which the Company or any of its assets may, directly or
indirectly, be subject to any Liability, contingent or otherwise, or the
imposition of any Lien (whether by reason of the complete or partial
termination of any such plan, the funded status of any such plan, any
"complete withdrawal" (as defined in Section 4203 of ERISA) or "partial
withdrawal" (as defined in Section 4205 of ERISA) by any person from any
such plan, or otherwise):
(i) no such plan has been terminated so as to subject, directly
or indirectly, any assets of Company to any liability, contingent or
otherwise, or the imposition of any lien under Title IV of ERISA;
(ii) no proceeding has been initiated or threatened by any person
(including the Pension Benefit Guaranty Corporation ("PBGC")) to
terminate any such plan;
(iii) no condition or event currently exists or currently is
expected to occur that could subject, directly or indirectly, any
assets of Company to any liability, contingent or otherwise, or the
imposition of any lien under Title IV of ERISA, whether to the PBGC or
to any other person or otherwise on account of the termination of any
such plan;
-14-
(iv) if any such plan were to be terminated as of the Closing
Date, no assets of Company would be subject, directly or indirectly,
to any liability, contingent or otherwise, or the imposition of any
lien under Title IV of ERISA;
(v) no "reportable event" (as defined in Section 4043 of ERISA)
has occurred with respect to any such plan;
(vi) no such plan which is subject to Section 302 of ERISA or
Section 412 of the Code has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA and Section 412 of the
Code, respectively), whether or not waived; and
(vii) no such plan is a multiemployer plan or a plan described in
Section 4064 of ERISA.
3.15(c) Prohibited Transactions, etc. There have been no "prohibited
transactions" within the meaning of Section 406 or 407 of ERISA or Section
4975 of the Code for which a statutory or administrative exemption does not
exist with respect to any Employee Plan/Agreement, and no event or omission
has occurred in connection with which the Company or any of its assets or
any Employee Plan/Agreement, directly or indirectly, could be subject to
any liability under ERISA, the Code or any other Law or Order applicable to
any Employee Plan/Agreement, or under any agreement, instrument, Law or
Order pursuant to or under which Company has agreed to indemnify or is
required to indemnify any person against liability incurred under any such
Law or Order.
3.15(d) Full Funding. The funds available under each Employee
Plan/Agreement which is intended to be a funded plan exceed the amounts
required to be paid, or which would be required to be paid if such Employee
Plan/Agreement were terminated, on account of rights vested or accrued as
of the Closing Date (using the actuarial methods and assumptions then used
by Company's actuaries in connection with the funding of such Employee
Plan/Agreement).
3.15(e) Controlled Group; Affiliated Service Group; Leased Employees.
Company is not and never has been a member of a controlled group of
corporations as defined in Section 414(b) of the Code or in common control
with any unincorporated trade or business as determined under Section
414(c) of the Code. Company is not and never has been a member of an
"affiliated service group" within the meaning of Section 414(m) of the
Code. There are not and never have been any leased employees within the
meaning of Section 414(n) of the Code who perform services for Company, and
no individuals are expected to become leased employees with the passage of
time.
3.15(f) Payments and Compliance. With respect to each Employee
Plan/Agreement, (i) all payments due from Company to date have been made
and all amounts properly accrued to date as liabilities of Company which
have not been paid have been properly recorded on the books of Company and
are reflected in the Recent Balance Sheet; (ii) Company has complied with,
and each such Employee Plan/Agreement conforms in form and operation to,
-15-
all applicable laws and regulations, including but not limited to ERISA and
the Code, in all respects and all reports and information relating to such
Employee Plan/Agreement required to be filed with any governmental entity
have been timely filed; (iii) all reports and information relating to each
such Employee Plan/Agreement required to be disclosed or provided to
participants or their beneficiaries have been timely disclosed or provided;
(iv) each such Employee Plan/Agreement which is intended to qualify under
Section 401 of the Code has received a favorable determination letter from
the Internal Revenue Service with respect to such qualification, its
related trust has been determined to be exempt from taxation under Section
501(a) of the Code, and nothing has occurred since the date of such letter
that has or is likely to adversely affect such qualification or exemption;
(iv) there are no actions, suits or claims pending (other than routine
claims for benefits) or threatened with respect to such Employee
Plan/Agreement or against the assets of such Employee Plan/Agreement; and
(v) no Employee Plan/Agreement is a plan which is established and
maintained outside the United States primarily for the benefit of
individuals substantially all of whom are nonresident aliens.
3.15(g) Post-Retirement Benefits. No Employee Plan/Agreement provides
benefits, including, without limitation, death or medical benefits (whether
or not insured) with respect to current or former Company employees beyond
their retirement or other termination of service other than (i) coverage
mandated by applicable law, (ii) death or retirement benefits under any
Employee Plan/Agreement that is an employee pension benefit plan, (iii)
deferred compensation benefits accrued as liabilities on the books of
Company (including the Recent Balance Sheet), (iv) disability benefits
under any Employee Plan/ Agreement that is an employee welfare benefit plan
and which have been fully provided for by insurance or otherwise or (v)
benefits in the nature of severance pay.
3.15(h) No Triggering of Obligations. The consummation of the
transactions contemplated by this Agreement will not (i) entitle any
current or former employee of Company to severance pay, unemployment
compensation or any other payment, except as expressly provided in this
Agreement, (ii) accelerate the time of payment or vesting, or increase the
amount of compensation due to any such employee or former employee or (iii)
result in any prohibited transaction described in Section 406 of ERISA or
Section 4975 of the Code for which an exemption is not available.
3.15(i) Future Commitments. Company has no announced plan or legally
binding commitment to create any additional Employee Plans/Agreements or to
amend or modify any existing Employee Plan/Agreement.
3.16 Employment Compensation.
------------------------
Schedule 3.16 contains a true and correct list of all employees to whom
Company is paying compensation, including bonuses and incentives, at an annual
rate in excess of Twenty-five Thousand Dollars ($25,000) for services rendered
or otherwise; and in the case of salaried employees such list identifies the
current annual rate of compensation for each employee and in the case of hourly
or commission employees identifies certain reasonable ranges of rates and the
number of employees falling within each such range.
-16-
3.17 Trade Rights.
-------------
Schedule 3.17 lists all Trade Rights (as defined below) in which Company
now has any interest, specifying whether such Trade Rights are owned,
controlled, used or held (under license or otherwise) by Company, and also
indicating which of such Trade Rights are registered. All Trade Rights shown as
registered in Schedule 3.17 have been properly registered, all pending
registrations and applications have been properly made and filed and all
annuity, maintenance, renewal and other fees relating to registrations or
applications are current. In order to conduct the business of Company, as such
is currently being conducted or proposed to be conducted, Company does not
require any Trade Rights that it does not already have. Company is not
infringing and has not infringed any Trade Rights of another in the operation of
the business of Company, nor is any other person infringing the Trade Rights of
Company. Company has not granted any license or made any assignment of any Trade
Right listed on Schedule 3.17, nor does Company pay any royalties or other
consideration for the right to use any Trade Rights of others. There is no
Litigation pending or threatened to challenge Company's right, title and
interest with respect to its continued use and right to preclude others from
using any Trade Rights of Company. All Trade Rights of Company are valid,
enforceable and in good standing, and there are no equitable defenses to
enforcement based on any act or omission of Company. The consummation of the
transactions contemplated hereby will not alter or impair any Trade Rights owned
or used by Company. As used herein, the term "Trade Rights" shall mean and
include: (i) all trademark rights, business identifiers, trade dress, service
marks, trade names and brand names, all registrations thereof and applications
therefor and all goodwill associated with the foregoing; (ii) all copyrights,
copyright registrations and copyright applications, and all other rights
associated with the foregoing and the underlying works of authorship; (iii) all
patents and patent applications, and all international proprietary rights
associated therewith; (iv) all contracts or agreements granting any right,
title, license or privilege under the intellectual property rights of any third
party; (v) all inventions, mask works and mask work registrations, know-how,
discoveries, improvements, designs, trade secrets, shop and royalty rights,
employee covenants and agreements respecting intellectual property and
non-competition and all other types of intellectual property; and (vi) all
claims for infringement or breach of any of the foregoing.
3.18 Major Customers and Suppliers.
------------------------------
3.18(a) Major Customers. Schedule 3.18(a) contains a list of the ten
largest customers, including distributors, of Company for each of the two
(2) most recent quarters (determined on the basis of the total dollar
amount of net sales) showing the total dollar amount of net sales to each
such customer during each such year. Neither Company nor any Shareholder
has any knowledge or information of any facts indicating, nor any other
reason to believe, that any of the customers listed on Schedule 3.18(a)
will not continue to be customers of the business of Company after the
Closing at substantially the same level of purchases as heretofore.
-17-
3.18(b) Major Suppliers. Schedule 3.18(b) contains a list of the ten
largest suppliers to Company for each of the two (2) most recent quarters
(determined on the basis of the total dollar amount of purchases) showing
the total dollar amount of purchases from each such supplier during each
such year. Neither Company nor any Shareholder has any knowledge or
information of any facts indicating, nor any other reason to believe, that
any of the suppliers listed on Schedule 3.18(b) will not continue to be
suppliers to the business of Company after the Closing and will not
continue to supply the business with substantially the same quantity and
quality of goods at competitive prices.
3.18(c) Dealers and Distributors. Schedule 3.18(c) contains a list by
product line of all sales representatives, dealers, resellers, distributors
and franchisees of Company, together with representative copies of all
sales representative, dealer, distributor and franchise contracts and
policy statements, and a description of all substantial modifications or
exceptions.
3.19 Bank Accounts.
-------------
Schedule 3.19 sets forth the names and locations of all banks, trust
companies, savings and loan associations and other financial institutions at
which the Company maintains a safe deposit box, lock box or checking, savings,
custodial or other account of any nature, the type and number of each such
account and the signatories therefore, a description of any compensating balance
arrangements, and the names of all persons authorized to draw thereon, make
withdrawals therefrom or have access thereto.
3.20 Affiliates' Relationships to Company.
------------------------------------
3.20(a) Contracts With Affiliates. All leases, contracts, agreements
or other arrangements between Company and any Affiliate are described on
Schedule 3.20(a).
3.20(b) No Adverse Interests. No Affiliate has any direct or indirect
interest in (i) any entity which does business with Company or is
competitive with Company's business, or (ii) any property, asset or right
which is used by Company in the conduct of its business.
3.20(c) Obligations. All obligations of any Affiliate to Company, and
all obligations of Company to any Affiliate, are listed on Schedule
3.20(c).
3.21 Assets Necessary to Business.
----------------------------
Company presently has and at the Closing will have good, valid and
marketable title to all property and assets, tangible and intangible, and all
leases, licenses and other agreements, necessary to permit Buyer to carry on the
business of Company as presently conducted.
3.22 No Brokers or Finders.
---------------------
Neither Company nor any of its directors, officers, employees, Shareholders
or agents have retained, employed or used any broker or finder in connection
with the transaction provided for herein or in connection with the negotiation
thereof.
-18-
3.23 Technology Matters.
------------------
3.23(a) Technology. Company owns or licenses certain hardware and
software utilized and suitable for, among other things, transmitting voice
data and facilitating voice communications via VoIP (collectively referred
to as the "Technology"), and which is more specifically described,
including whether the separate components of the Technology is owned (the
"Owned Technology") or licensed (the "Licensed Technology"), on Schedule
3.23(a).
3.23(b) Technology Agreements. All licenses, leases or other
agreements relating to Company's ownership or right to use the Technology
(the "Technology Agreements") are identified on Schedule 3.23(b).
3.23(c) Ownership/Authority. Company is the sole and exclusive owner
of the Owned Technology. Company is a duly authorized licensee of the
Licensed Technology. Company has the right, power and authority to enter
into this Agreement without violating the terms of any of the Technology
Agreement. Company has made a full and complete disclosure of all
information required under this Agreement to be provided to Buyer with
respect to the Technology. Company does not need any other licenses or
rights not already owned by Company that is necessary to use the Technology
for facilitating VoIP communications and transmissions. To the best of
Company's knowledge and Shareholder's knowledge, the Technology is
sufficient for transmitting voice data and facilitating voice
communications using VoIP protocol. Company is not in default of any of the
Technology Agreements, and all Technology Agreements are in full force and
effect for the term as provided therein. The Technology Agreements and the
other part(ies) to the Technology Agreements.
3.24 Company Compliance With Securities Laws.
----------------------------------------
Since its inception, the Company has not offered or sold any of its
securities except in compliance with all applicable federal and state securities
laws. Without limiting the foregoing, all shares of capital stock sold by the
Company were sold in reliance on exemptions from registration for private or
limited offerings under the Securities Act of 1933 and all applicable state
securities laws and in compliance with all applicable disclosure requirements
under federal and state law. Attached as Schedule 3.25 is a true and complete
list of all security holders of the Company as of the date of this Agreement,
containing the names and addresses of each security holder of record, the type
and amount of securities held by each, and whether each such person is an
"accredited investor," as defined in Rule 501(a) of the Securities and Exchange
Commission under the Securities Act of 1933.
3.25 Shareholders Access To Information Concerning Buyer.
----------------------------------------------------
Each Shareholder has read the periodic reports and other information filed
by Buyer with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (the "1934 Act Reports"). Shareholder and Shareholder's
representatives have had full access to all books, records and documents
pertaining to Buyer, Buyer's business and Shareholder's acquisition of the
Exchange Shares, and all materials requested by Shareholder have been made
-19-
available or delivered to Shareholder. Shareholder has had the opportunity to
ask questions of, and receive answers from, representatives of Buyer and to
obtain such information, to the extent that Buyer's representatives could
acquire such information without unreasonable effort or expense, as Shareholder
deems necessary in connection with the transactions contemplated by this
Agreement. Shareholder has relied solely upon the 1934 Act Reports and
independent investigations made by Shareholder or Shareholder's representatives
in entering into this Agreement. Shareholder is aware that an investment in
Buyer involves significant risks and has carefully considered the investment
based on the 1934 Act Reports and such investigations.
3.26 Suitability.
-----------
Each Shareholder is an "accredited investor," as defined in Rule 501(a) of
the Securities and Exchange Commission under the Securities Act of 1933. Each
Shareholder has such knowledge and experience in financial affairs as to be
capable of evaluating the merits and risks of the transactions contemplated by
this Agreement.
3.27 Investment Purpose.
------------------
Each Shareholder understands that the Exchange Shares have not been and
will not be registered under the Securities Act of 1933 or any state securities
laws in reliance on exemptions which are contingent, among other things, on the
Exchange Shares being acquired for investment only and not for redistribution.
Each Shareholder represents and warrants that the Exchange Shares will be
acquired solely for Shareholder's own account for investment and not for resale,
fractionalization or distribution. Shareholder has no contract, undertaking,
agreement or arrangement with any person to transfer the Exchange Shares, or any
part thereof, and Shareholder has no present plan to enter into any such
contract, undertaking, agreement or arrangement. Shareholder agrees not to
dispose of the Exchange Shares or any interest therein, except in compliance
with the Securities Act of 1933 and all applicable state securities laws.
Shareholder understands that pursuant to Rule 144 of the Securities and Exchange
Commission under the Securities Act of 1933, the Exchange Shares must be
beneficially owned for at least one year before they may be sold in the open
market in reliance on Rule 144 and after such one-year period will continue to
be subject to Rule 144's other requirements, including volume limits.
Shareholder understands that the certificates evidencing the Exchange Shares
will bear legends referring to the transfer restrictions imposed by applicable
securities laws.
3.28 Disclosure.
----------
No representation or warranty by Company and/or the Shareholders in this
Agreement, nor any statement, certificate, schedule, document or exhibit hereto
furnished or to be furnished by or on behalf of Company or Shareholders pursuant
to this Agreement or in connection with transactions contemplated hereby,
contains or shall contain any untrue statement of material fact or omits or
shall omit a material fact necessary to make the statements contained therein
not misleading. All statements and information contained in any certificate,
instrument, Disclosure Schedule or document delivered by or on behalf of Company
and/or Shareholders shall be deemed representations and warranties by the
Company and the Shareholders.
-20-
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to the
Shareholders and the Company, each of which is true and correct on the date
hereof, shall remain true and correct to and including the Closing Date, shall
be unaffected by any investigation heretofore or hereafter made by Shareholders
or the Company or any notice to Shareholders or the Company, and shall survive
the Closing of the transactions provided for herein.
4.1 Corporate.
----------
4.1(a) Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado.
4.1(b) Corporate Power. Buyer has all requisite corporate power to
enter into this Agreement and the other documents and instruments to be
executed and delivered by Buyer and to carry out the transactions
contemplated hereby and thereby.
4.2 Authority.
----------
The execution and delivery of this Agreement and the other documents and
instruments to be executed and delivered by Buyer pursuant hereto and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by the Board of Directors of Buyer. No other corporate act or
proceeding on the part of Buyer or its shareholders is necessary to authorize
this Agreement or the other documents and instruments to be executed and
delivered by Buyer pursuant hereto or the consummation of the transactions
contemplated hereby and thereby. This Agreement constitutes, and when executed
and delivered, the other documents and instruments to be executed and delivered
by Buyer pursuant hereto will constitute, valid and binding agreements of Buyer,
enforceable in accordance with their respective terms, except as such may be
limited by bankruptcy, insolvency, reorganization or other laws affecting
creditors' rights generally, and by general equitable principles.
4.3 No Brokers or Finders.
--------------------
Neither Buyer nor any of its directors, officers, employees or agents have
retained, employed or used any broker or finder in connection with the
transaction provided for herein or in connection with the negotiation thereof.
4.4 Disclosure.
---------
No representation or warranty by Buyer in this Agreement, nor any
statement, certificate, schedule, document or exhibit hereto furnished or to be
furnished by or on behalf of Buyer pursuant to this Agreement or in connection
with transactions contemplated hereby, contains or shall contain any untrue
statement of material fact or omits or shall omit a material fact necessary to
make the statements contained therein not misleading.
-21-
4.5 Investment Intent.
-----------------
The Shares are being acquired by Buyer for investment only and not with the
view to resale or other distribution.
4.6 Exchange Shares.
---------------
The Exchange Shares, when issued in accordance with this Agreement, will be
duly and validly issued, fully paid, and non-assessable, and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws. However, the
Exchange Shares are not registered and therefore are subject to substantial
restrictions.
4.7 SEC Reports and Financial Statements.
------------------------------------
Buyer has filed with the Securities and Exchange Commission (the "SEC"),
and has heretofore made available to the Shareholders true and complete copies
of, all forms, reports, proxy statements, and other documents required to be
filed by it since June 1, 2001 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or the Securities Act (as such documents have been
amended since the time of their filing, collectively, the "Buyer SEC
Documents"). The Buyer SEC Documents, at the time filed, (a) did 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 and (b) complied
in all material respects with the applicable requirements of the Exchange Act or
the Securities Act, as the case may be. The consolidated financial statements of
Buyer included in the Buyer SEC Documents comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP during the period involved (except as may be indicated in
the notes thereto or, in the case of unaudited statements, as permitted by Form
10-QSB of the SEC) and fairly present (subject, in the case of the unaudited
statements to normal year-end audit adjustments) in all material respects the
consolidated financial position of Buyer and its consolidated subsidiaries as at
the dates thereof and financial position of Buyer and its consolidated
subsidiaries as at the dates thereof and set forth in the Buyer SEC Documents
and except for the liabilities and obligations incurred in the ordinary course
of business consistent with past practice, there are no material liabilities or
obligations of any nature required by GAAP to be set forth on a consolidated
balance sheet of Buyer and its subsidiaries or in the notes thereto which
individually or in the aggregate, would have a material adverse effect on the
financial condition or business of Buyer and its subsidiaries, on a consolidated
basis.
4.8 Absence of Certain Changes or Events.
------------------------------------
Except as disclosed in the Buyer SEC Documents prior to the date hereof,
since January 1, 2001 to the date hereof, there has not been any change or
development or combination of changes or developments, which has had a material
adverse effect on the financial condition or business of Buyer and its
subsidiaries on a consolidated basis.
-22-
4.9 Outstanding Shares of the Buyer.
------------------------------
After the exchange of the Buyer's stock for the Company's stock, assuming
all 3,000,000 shares of the Buyer are issued, the Buyer shall have no more than
fifteen million shares of common stock outstanding, inclusive of the maximum of
3,000,000 shares that may be issued to the Company's shareholders.
5. COVENANTS
5.1 Confidentiality and Noncompetition Agreement.
--------------------------------------------
At the Closing, Shareholders shall cause to be delivered to Company a
Confidentiality and Noncompetition Agreement, duly executed by ▇▇▇▇ ▇▇▇▇▇▇▇ with
terms and conditions as agreed upon between the Buyer and the Shareholders'
Agent.
5.2 Noncompetition; Confidentiality.
-------------------------------
Subject to the Closing, and as an inducement to Buyer to execute this
Agreement and complete the transactions contemplated hereby, and in order to
preserve the goodwill associated with the business of Company being acquired
pursuant to this Agreement, and in addition to and not in limitation of any
covenants contained in any agreement executed and delivered pursuant to Section
5.1 hereof, each Shareholder hereby covenants and agrees as follows:
5.2(a) Covenant Not to Compete. For a period of 3 years from the
Closing Date, no Shareholder will directly or indirectly:
(i) engage in, continue in or carry on any business which
competes with the Business or is substantially similar thereto,
including owning or controlling any financial interest in any
corporation, partnership, firm or other form of business organization
which is so engaged;
(ii) consult with, advise or assist in any way, whether or not
for consideration, any corporation, partnership, firm or other
business organization which is now or becomes a competitor of Company
or Buyer in any aspect with respect to the Business, including, but
not limited to, advertising or otherwise endorsing the products of any
such competitor; soliciting customers or otherwise serving as an
intermediary for any such competitor; loaning money or rendering any
other form of financial assistance to or engaging in any form of
business transaction on other than an arm's length basis with any such
competitor;
(iii) offer employment to an employee of Company, without the
prior written consent of Buyer; or
(iv) engage in any practice the purpose of which is to evade the
provisions of this covenant not to compete or to commit any act which
adversely affects the Business;
-23-
provided, however, that the foregoing shall not prohibit the ownership
of securities of corporations which are listed on a national
securities exchange or traded in the national over-the-counter market
in an amount which shall not exceed 5% of the outstanding shares of
any such corporation. The parties agree that the geographic scope of
this covenant not to compete shall extend to every state in the
continental United States. (Shareholder acknowledges that due to the
nature of the Company's long distance telephone business, the Company
does business in every state in the continental United States and that
this geographic scope is reasonable and fair. The parties agree that
Buyer may sell, assign or otherwise transfer this covenant not to
compete, in whole or in part, to any person, corporation, firm or
entity that purchases all or part of the business of the Company. In
the event a court of competent jurisdiction determines that the
provisions of this covenant not to compete are excessively broad as to
duration, geographical scope or activity, it is expressly agreed that
this covenant not to compete shall be construed so that the remaining
provisions shall not be affected, but shall remain in full force and
effect, and any such over broad provisions shall be deemed, without
further action on the part of any person, to be modified, amended
and/or limited, but only to the extent necessary to render the same
valid and enforceable in such jurisdiction.
5.2(b) Covenant of Confidentiality. No Shareholder shall at any time
subsequent to the Closing, except as explicitly requested by Buyer, (i) use
for any purpose, (ii) disclose to any person, or (iii) keep or make copies
of documents, tapes, discs or programs containing, any confidential
information concerning Company. For purposes hereof, "confidential
information" shall mean and include, without limitation, all Trade Rights
in which Company has an interest, all customer lists and customer
information, and all other information concerning Company's processes,
apparatus, equipment, packaging, products, marketing and distribution
methods, not previously disclosed to the public directly by Company.
5.2(c) Equitable Relief for Violations. Each Shareholder agrees that
the provisions and restrictions contained in this Section 5.2 are necessary
to protect the legitimate continuing interests of Buyer in acquiring the
Shares, and that any violation or breach of these provisions will result in
irreparable injury to Buyer for which a remedy at law would be inadequate
and that, in addition to any relief at law which may be available to Buyer
for such violation or breach and regardless of any other provision
contained in this Agreement, Buyer shall be entitled to injunctive and
other equitable relief as a court may grant after considering the intent of
this Section 5.2.
5.3 General Releases.
----------------
At the Closing, each Shareholder shall deliver general releases, with terms
and conditions as agreed upon between the Buyer and the Shareholders' Agent, to
Buyer releasing Company and the directors, officers, agents and employees of
Company from all claims to the Closing Date, except (i) as may be described in
written contracts disclosed in the Disclosure Schedule and expressly described
and excepted from such releases, and (ii) in the case of persons who are
employees of the Company, compensation for current periods expressly described
and excepted from such releases. Such releases shall also contain waivers of any
right of contribution or other recourse against Company with respect to
representations, warranties or covenants made herein by Company.
-24-
5.4 Shareholders' Resignations.
--------------------------
At the Closing, each Shareholder shall deliver, and shall cause ▇▇▇▇
▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, to deliver to the Company resignations of officers
and directors of this Company, in form and substance satisfactory to Buyer and
its counsel.
5.5 Appointment of Buyer's Nominees to the Company's Board of Directors.
-------------------------------------------------------------------
At the Closing, the Company and its Board of Directors shall have taken all
actions to elect ▇▇▇ ▇▇▇▇▇▇▇▇ and his designees as additional directors of the
Company, effective immediately following the Closing.
5.6 Access to Information and Records.
---------------------------------
During the period prior to the Closing, Shareholders shall cause Company to
give Buyer, its counsel, accountants and other representatives (i) access during
normal business hours to all of the properties, books, records, contracts and
documents of Company for the purpose of such inspection, investigation and
testing as Buyer deems appropriate (and Company shall furnish or cause to be
furnished to Buyer and its representatives all information with respect to the
business and affairs of Company as Buyer may request); (ii) access to employees,
agents and representatives for the purposes of such meetings and communications
as Buyer reasonably desires; and (iii) with the prior consent of Company in each
instance (which consent shall not be unreasonably withheld), access to vendors,
customers, manufacturers of its machinery and equipment, and others having
business dealings with Company.
5.7 Conduct of Business Pending the Closing.
---------------------------------------
From the date hereof until the Closing, except as otherwise approved in
writing by the Buyer, Company covenants as follows, and Shareholders shall cause
each of the following to occur:
5.7(a) No Changes. Company will carry on its business diligently and
in the same manner as heretofore and will not make or institute any changes
in its methods of purchase, sale, management, accounting or operation.
5.7(b) Maintain Organization. Company will take such action as may be
necessary to maintain, preserve, renew and keep in favor and effect the
existence, rights and franchises of Company and will use its best efforts
to preserve the business organization of Company intact, to keep available
to Company the present officers and employees, and to preserve for Company
its present relationships with suppliers and customers and others having
business relationships with Company.
-25-
5.7(c) No Breach. Company and Shareholders will not do or omit any
act, or permit any omission to act, which may cause a breach of any
material contract, commitment or obligation, or any breach of any
representation, warranty, covenant or agreement made by Company and/or the
Shareholders herein, or which would have required disclosure on Schedule
3.7 had it occurred after the date of the Recent Balance Sheet and prior to
the date of this Agreement.
5.7(d) No Material Contracts. No contract or commitment will be
entered into, and no purchase of raw materials or supplies and no sale of
goods or services (real, personal, or mixed, tangible or intangible) will
be made, by or on behalf of Company, except contracts, commitments,
purchases or sales which are in the ordinary course of business and
consistent with past practice, are not material to the Company
(individually or in the aggregate) and would not have been required to be
disclosed in the Disclosure Schedule had they been in existence on the date
of this Agreement.
5.7(e) No Corporate Changes. Company shall not amend its Articles of
Incorporation or Bylaws or make any changes in authorized or issued capital
stock.
5.7(f) Maintenance of Insurance. Company shall maintain all of the
insurance in effect as of the date hereof and shall procure such additional
insurance as shall be reasonably requested by Buyer.
5.7(g) Maintenance of Property. Company shall use, operate, maintain
and repair all property of Company in a normal business manner.
5.7(h) Interim Financials. Company will provide Buyer with interim
monthly financial statements and other management reports as and when they
are available.
5.7(i) No Negotiations. Neither Company nor any Shareholder will
directly or indirectly (through a representative or otherwise) solicit or
furnish any information to any prospective buyer, commence, or conduct
presently ongoing, negotiations with any other party or enter into any
agreement with any other party concerning the sale of Company, Company's
assets or business or any part thereof or any equity securities of Company
(an "acquisition proposal"), and Company and Shareholders shall immediately
advise Buyer of the receipt of any acquisition proposal.
5.7(j) No Transfer of Shares. No Shareholder shall transfer or attempt
to transfer any of the Shares except to Buyer pursuant hereto; and Company
shall refuse to accept any certificates for Shares to be transferred or
otherwise to allow such transfers to occur upon its books.
5.7(k) No Issuance of Additional Shares. The Company shall not issue
any additional shares of stock of any class and shall not grant any stock
options, warranty or rights to acquire shares of the Company.
5.7(l) No New Directors. The Company shall not elect or appoint any
new directors to the Company's Board of Directors.
5.7(m) No Dividends. The Company shall not, nor shall it propose to,
(i) declare or pay any dividends on or make other distributions in respect
of any of its capital stock, (ii) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or (iii) repurchase or otherwise acquire, or permit any
subsidiary to purchase or otherwise acquire, any shares of its capital
stock.
-26-
5.7(n) No Acquisitions. The Company shall not acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial
equity interest in or a substantial 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 in each case which are material, individually
or in the aggregate, to the Company.
5.7(o) Compensation. The Company shall not grant any increase in the
salary or other compensation to any of its officers or other employees or
grant any bonus to any officer or other employee or enter into any
employment agreement or make any loan to or enter into any material
transaction of any other nature with any officer or other employee of such
party. Neither shall the Company take any action to institute any new
severance or termination pay practices with respect to any directors,
officers or other employees of the Company or to increase the benefits
payable under its severance or termination pay practices.
5.8 Consents.
---------
Company and Shareholders will use their best efforts prior to Closing to
obtain all consents necessary for the consummation of the transactions
contemplated hereby.
5.9 Other Action.
-------------
Company and Shareholders shall use their best efforts to cause the
fulfillment at the earliest practicable date of all of the conditions to the
parties' obligations to consummate the transactions contemplated in this
Agreement.
5.10 Buyer's Subsequent Offer to Company Shareholders for Exchange.
--------------------------------------------------------------
As soon as practical after the Closing and in all events no later than 60
days after the Closing, Buyer shall file appropriate papers (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") to pursue a
voluntary exchange offer, on the same terms and conditions as offered to the
Shareholders, with the Company's remaining shareholders on a registered basis.
The Buyer shall exercise reasonable, good faith efforts to cause the
Registration Statement to be declared effective by the SEC no later than 120
days after the Registration Statement is first filed with the SEC. As a
condition to participating in this voluntary share exchange, Buyer shall require
the participating shareholders of the Company to provide a general release to
the Company, the Buyer and their affiliates, directors and employees and agents.
The parties acknowledge that circumstances may make such a filing unavailable,
impractical or impossible. Company and Shareholders shall cooperate with Buyer
in connection with such efforts, including, without limitation, providing copies
of all necessary documents related to potential securities exemption and
providing financial statements and information necessary for the preparation of
the securities law registration documentation.
-27-
5.11 Buyer's Registration of Buyer's Shares Issued to Shareholders.
-------------------------------------------------------------
As soon as practical after the Closing and in all events no later than 60
days after the Closing, Buyer shall file a Registration Statement with the SEC
to register the Exchange Shares issued to the Shareholders at Closing and shall
keep such registration effective for a period of not less than one year. The
Buyer shall exercise reasonable, good faith efforts to cause the Registration
Statement to be declared effective by the SEC no later than 120 days after the
Registration Statement is first filed with the SEC. The Company and Shareholders
shall cooperate with Buyer in connection with such efforts, including, without
limitation, providing all financial statements and information necessary for the
preparation and filing of the securities registration documents. The Company's
effort to register the shares shall be at the Company's expense. The parties
acknowledge that circumstances may make registration unavailable, impractical,
or unreasonably burdensome, in which case the Company will reasonably cooperate,
in good faith to register the shares once registration becomes available without
unreasonable burden or expense.
5.12 Prohibition on Buyer Issuing Stock for Less than $1.50 per Share for
---------------------------------------------------------------------
One Year Following Closing.
--------------------------
The Buyer agrees that, except with the prior written consent of the
Shareholders' Agent, for one year following Closing, the Buyer will not issue
common stock or stock options or warrants convertible into stock unless the
offering generates at least $1.50 per share in net proceeds to the Buyer (but
excluding the exercise of currently outstanding warrants and conversion rights
with an exercise price of $1.00 per share.) Notwithstanding the foregoing, the
Buyer may convert valid Buyer debt into Buyer's common stock as long as such
debt is converted on a basis that is at least equal to $1.50 of debt converted
for each share of Buyer's common stock issued in satisfaction of such debt.
5.13 Company's Employment of ▇▇. ▇▇▇▇▇▇▇.
-----------------------------------
The Company agrees to employ ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇. ▇▇▇▇▇▇▇ agrees to work
for the Company, on a full-time basis, for one year following the Effective Date
at a gross salary of $15,000 per month and an expense account, subject to
reasonable policies established by the Company's Board of Directors, for
verified business expenses, with a maximum cap of $500 per month unless approved
in advance by the Board of Directors or its designees. ▇▇. ▇▇▇▇▇▇▇ shall devote
his full professional time and attention to the affairs of the Company, subject
to the supervision and direction of the Company's Board of Directors. The
Company shall provide ▇▇. ▇▇▇▇▇▇▇ with performance evaluations every six months,
at which time the Company, in its sole discretion, can terminate ▇▇. ▇▇▇▇▇▇▇'
employment upon not less than 30 days notice if the Company determines that
termination is in the best interest of the Company.
5.14 Disclosure Schedule.
-------------------
Shareholders and Company shall have a continuing obligation to promptly
notify Buyer in writing with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Disclosure Schedule, but no
such disclosure shall cure any breach of any representation or warranty which is
inaccurate.
-28-
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
Each and every obligation of Buyer to be performed on the Closing Date
shall be subject to the satisfaction prior to or at the Closing of each of the
following conditions:
6.1 Representations and Warranties True of the Closing Date.
-------------------------------------------------------
Each of the representations and warranties made by Shareholders and Company
in this Agreement, and the statements contained in the Disclosure Schedule or in
any instrument, list, certificate or writing delivered by Shareholders or
Company pursuant to this Agreement, shall be true and correct in all material
respects when made and shall be true and correct in all material respects at and
as of the Closing Date as though such representations and warranties were made
or given on and as of the Closing Date, except for any changes permitted by the
terms of this Agreement or consented to in writing by Buyer.
6.2 Compliance With Agreement.
-------------------------
Shareholders and Company shall have in all material respects performed and
complied with all of their agreements and obligations under this Agreement which
are to be performed or complied with by them prior to or on the Closing Date,
including the delivery of the closing documents specified in Section 9.1.
6.3 Absence of Litigation.
---------------------
No Litigation shall have been commenced or threatened, and no investigation
by any Government Entity shall have been commenced, against Buyer, Company or
any of the affiliates, officers or directors of any of them, with respect to the
transactions contemplated hereby.
6.4 Consents and Approvals.
----------------------
All approvals, consents and waivers that are required to effect the
transactions contemplated hereby shall have been received, and executed
counterparts thereof shall have been delivered to Buyer not less than two
business days prior to the Closing.
6.5 Estoppel Certificates.
---------------------
Company shall have delivered to Buyer on or prior to the Closing Date an
estoppel certificate or status letter from the landlord under each lease of Real
Property which estoppel certificate or status letter will certify (i) the lease
is valid and in full force and effect; (ii) the amounts payable by Company under
the lease and the date to which the same have been paid; (iii) whether there
are, to the knowledge of said landlord, any defaults thereunder, and, if so,
specifying the nature thereof; and (iv) a statement that the transactions
contemplated by this Agreement will not constitute a default under the lease.
-29-
6.6 Appointment of Buyer's Nominees to Company's Board of Directors.
---------------------------------------------------------------
▇▇▇ ▇▇▇▇▇▇▇▇ and his designees shall have been appointed as additional
directors of the Company, effective immediately after Closing.
6.7 Due Diligence Investigation.
---------------------------
Buyer shall have completed to its sole and absolute satisfaction its due
diligence investigation of the Company, including confirming that the financial
statements of the Company can be audited and a "clean" opinion issued by the
Company's independent accountants.
7. CONDITIONS PRECEDENT TO SHAREHOLDERS' OBLIGATIONS
Each and every obligation of Shareholders to be performed on the Closing
Date shall be subject to the satisfaction prior to or at the Closing of the
following conditions:
7.1 Representations and Warranties True on the Closing Date.
--------------------------------------------------------
Each of the representations and warranties made by Buyer in this Agreement
shall be true and correct in all material respects when made and shall be true
and correct in all material respects at and as of the Closing Date as though
such representations and warranties were made or given on and as of the Closing
Date.
7.2 Compliance With Agreement.
-------------------------
Buyer shall have in all material respects performed and complied with all
of Buyer's agreements and obligations under this Agreement which are to be
performed or complied with by Buyer prior to or on the Closing Date, including
the delivery of the closing documents specified in Section 9.2.
7.3 Absence of Litigation.
---------------------
No Litigation shall have been commenced or threatened, and no investigation
by any Government Entity shall have been commenced, against Buyer, Company or
any of the affiliates, officers or directors of any of them, with respect to the
transactions contemplated hereby.
7.4 Minimum Average Trading Price for Buyer's Shares.
------------------------------------------------
The average closing sale price for Buyer's common stock, on the NASDAQ
Bulletin Board, during the ten business day period ending three business days
prior to the Closing Date shall not be not less than $1.50 per share. (For
purpose of calculating the average closing sale price, a day on which the stock
did not trade shall be ignored.)
-30-
8. INDEMNIFICATION
8.1 By Shareholders.
---------------
Subject to the terms and conditions of this Article 8, each Shareholder,
jointly and severally, hereby agrees to indemnify, defend and hold harmless
Buyer, its directors, officers, employees and controlled and controlling persons
(hereinafter "Buyer's Affiliates") and the Company from and against all Claims
asserted against, resulting to, imposed upon, or incurred by Buyer, Buyer's
Affiliates or the Company, directly or indirectly, by reason of, arising out of
or resulting from (a) the inaccuracy or breach of any representation or warranty
of any Shareholder or Company contained in or made pursuant to this Agreement
(regardless of whether such breach is deemed "material" for purpose of Section
6.1), or (b) the breach of any covenant of any Shareholder or the Company
contained in this Agreement. Regardless of the foregoing, however, breaches of
representations and warranties contained in Section 3.2 hereof shall be subject
only to several indemnification by the respective Shareholders who shall have
made and breached such representations and warranties. As used in this Article
8, the term "Claim" shall include (i) all debts, liabilities and obligations;
(ii) all losses, damages (including, without limitation, consequential damages),
judgments, awards, settlements, costs and expenses (including, without
limitation, interest (including prejudgment interest in any litigated matter),
penalties, court costs and attorneys fees and expenses); and (iii) all demands,
claims, suits, actions, costs of investigation, causes of action, proceedings
and assessments, whether or not ultimately determined to be valid.
8.2 By Buyer.
--------
Subject to the terms and conditions of this Article 8, Buyer hereby agrees
to indemnify, defend and hold harmless each Shareholder from and against all
Claims asserted against, resulting to, imposed upon or incurred by any such
person, directly or indirectly, by reason of or resulting from (a) the
inaccuracy or breach of any representation or warranty of Buyer contained in or
made pursuant to this Agreement (regardless of whether such breach is deemed
"material" for purposes of Section 7.1), or (b) the breach of any covenant of
Buyer contained in this Agreement.
8.3 Indemnification of Third-Party Claims.
-------------------------------------
The obligations and liabilities of any party to indemnify any other under
this Article 8 with respect to Claims relating to third parties shall be subject
to the following terms and conditions:
8.3(a) Notice and Defense. The party or parties to be indemnified
(whether one or more, the "Indemnified Party") will give the party from
whom indemnification is sought (the "Indemnifying Party") prompt written
notice of any such Claim, and the Indemnifying Party will undertake the
defense thereof by representatives chosen by it. In all matters concerning
the Shareholders by virtue of joint and several liability, the
Shareholders' Agent shall give and receive notice and otherwise act in all
respects on their behalf. Failure to give such notice shall not affect the
Indemnifying Party's duty or obligations under this Article 8, except to
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the extent the Indemnifying Party is prejudiced thereby. So long as the
Indemnifying Party is defending any such Claim actively and in good faith,
the Indemnified Party shall not settle such Claim. The Indemnified Party
shall make available to the Indemnifying Party or its representatives all
records and other materials required by them and in the possession or under
the control of the Indemnified Party, for the use of the Indemnifying Party
and its representatives in defending any such Claim, and shall in other
respects give reasonable cooperation in such defense.
8.3(b) Failure to Defend. If the Indemnifying Party, within a
reasonable time after notice of any such Claim, fails to defend such Claim
actively and in good faith, the Indemnified Party will (upon further
notice) have the right to undertake the defense, compromise or settlement
of such Claim or consent to the entry of a judgment with respect to such
Claim, on behalf of and for the account and risk of the Indemnifying Party,
and the Indemnifying Party shall thereafter have no right to challenge the
Indemnified Party's defense, compromise, settlement or consent to judgment
therein.
8.3(c) Indemnified Party's Rights. Anything in this Section 8.3 to the
contrary notwithstanding, (i) if there is a reasonable probability that a
Claim may materially and adversely affect the Indemnified Party other than
as a result of money damages or other money payments, the Indemnified Party
shall have the right to defend, compromise or settle such Claim, and (ii)
the Indemnifying Party shall not, without the written consent of the
Indemnified Party, settle or compromise any Claim or consent to the entry
of any judgment which does not include as an unconditional term thereof the
giving by the claimant or the plaintiff to the Indemnified Party of a
release from all Liability in respect of such Claim.
8.4 Payment.
--------
The Indemnifying Party shall promptly pay the Indemnified Party any amount
due under this Article 8, which payment may be accomplished in whole or in part,
at the option of the Indemnified Party, by the Indemnified Party setting off any
amount owed to the Indemnifying Party by the Indemnified Party. To the extent
set-off is made by an Indemnified Party in satisfaction or partial satisfaction
of an indemnity obligation under this Article 8 that is disputed by the
Indemnifying Party, upon a subsequent determination by final judgment not
subject to appeal that all or a portion of such indemnity obligation was not
owed to the Indemnified Party, the Indemnified Party shall pay the Indemnifying
Party the amount which was set off and not owed together with interest from the
date of set-off until the date of such payment at an annual rate equal to the
average annual rate in effect as of the date of the set-off, on those three
maturities of United States Treasury obligations having a remaining life, as of
such date, closest to the period from the date of the set-off to the date of
such judgment. Upon judgment, determination, settlement or compromise of any
third party Claim, the Indemnifying Party shall pay promptly on behalf of the
Indemnified Party, and/or to the Indemnified Party in reimbursement of any
amount theretofore required to be paid by it, the amount so determined by
judgment, determination, settlement or compromise and all other Claims of the
Indemnified Party with respect thereto, unless in the case of a judgment an
appeal is made from the judgment. If the Indemnifying Party desires to appeal
from an adverse judgment, then the Indemnifying Party shall post and pay the
cost of the security or bond to stay execution of the judgment pending appeal.
Upon the payment in full by the Indemnifying Party of such amounts, the
Indemnifying Party shall succeed to the rights of such Indemnified Party, to the
extent not waived in settlement, against the third party who made such third
party Claim.
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8.5 Limitations on Indemnification.
------------------------------
Except for any willful or knowing breach or misrepresentation, as to which
claims may be brought without limitation as to time or amount:
8.5(a) Time Limitation. No claim or action shall be brought under this
Article 8 for breach of a representation or warranty unless written notice
of potential claim is provided to Indemnitor within two (2) years following
the Closing. Regardless of the foregoing, however, or any other provision
of this Agreement:
(i) There shall be no time limitation on claims on actions
brought for breach of any representation or warranty made by
Shareholders or Company in or pursuant to Section 3.2 and Shareholders
hereby waive all applicable statutory limitation periods with respect
thereto.
(ii) Any claim made by a party hereunder by giving written notice
of the potential claim by a demand for arbitration in accordance with
Article 13 hereof for breach of a representation or warranty prior to
the termination of the survival period for such claim shall be
preserved despite the subsequent termination of such survival period.
8.5(b) Amount Limitation. Except with respect to claims for breaches
of representations or warranties contained in Sections 3.2,3.22, and 3.25
through 3.27, the Shareholders shall not be responsible for indemnification
obligations in excess of the value of the Exchange Shares received by such
Shareholder.
8.5(c) Shareholder's Payment of Claim with Exchange Shares. After
Closing, Shareholder's Indemnification obligation shall be paid by delivery
of the Exchange Shares to the Buyer, in an amount equal to the amount of
the Indemnification Claim. The Exchange Shares shall be valued, for purpose
of paying a claim, based on the average of the last reported sales price,
for each of the last 30 Business Days, prior to the date on which the
amount of the indemnification claim is determined.
8.6 No Waiver.
---------
The closing of the transactions contemplated by this Agreement shall not
constitute a waiver by any party of its rights to indemnification hereunder,
regardless of whether the party seeking indemnification has knowledge of the
breach, violation or failure of condition constituting the basis of the Claim at
or before the Closing, and regardless of whether such breach, violation or
failure is deemed to be "material" for purposes of Section 10.2.
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9. CLOSING
The closing of this transaction ("▇▇▇ ▇▇▇▇▇▇▇") shall take place at the
offices of ▇▇▇▇▇ & ▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇, at on
November 1, 2001, at such time, or at such other time and place as the parties
hereto shall agree upon. Such date is referred to in this Agreement as the
"Closing Date".
9.1 Documents to be Delivered by Company and Shareholders.
-----------------------------------------------------
At the Closing, Company and Shareholders shall deliver to Buyer the
following documents, in each case duly executed or otherwise in proper form:
9.1(a) Stock Certificate(s). A stock certificate or certificates
representing the Shares, duly endorsed for transfer or with duly executed
stock powers attached.
9.1(b) Compliance Certificate. A certificate signed by each
Shareholder that each of the representations and warranties made by
Shareholders and the Company in this Agreement is true and correct in all
material respects on and as of the Closing Date with the same effect as
though such representations and warranties had been made or given on and as
of the Closing Date (except for any changes permitted by the terms of this
Agreement or consented to in writing by Buyer), and that Company and
Shareholders have performed and complied with all of Company's and
Shareholders' obligations under this Agreement which are to be performed or
complied with on or prior to the Closing Date.
9.1(c) Opinion of Counsel. A written opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇ pllc,
counsel to Company and Shareholders, dated as of the Closing Date,
addressed to Buyer, with terms and conditions as agreed upon between the
Buyer and the Shareholders' Agent.
9.1(d) Employment and Noncompetition Agreements. The Employment and
Noncompetition Agreements referred to in Section 5.1, duly executed by the
persons referred to in such Section.
9.1(e) Certified Resolutions. Certified copies of the resolutions of
the Board of Directors of Company, and of each Shareholder which is a
corporation, authorizing and approving this Agreement and the consummation
of the transactions contemplated by this Agreement.
9.1(f) Articles; Bylaws. A copy of the Bylaws of Company certified by
the secretary of Company, and a copy of the Articles of Incorporation of
Company certified by the Secretary of State of the state of incorporation
of Company.
9.1(g) Incumbency Certificate. Incumbency certificates relating to
each person executing (as a corporate officer or otherwise on behalf of
another person) any document executed and delivered to Buyer pursuant to
the terms hereof.
9.1(h) General Releases. The General Releases referred to in Section
5.3, duly executed by the persons referred to in such Section.
9.1(i) Resignations. The resignations of ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇
▇▇▇▇▇▇▇ as officers and as directors of the Company, effective as of the
Closing Date and in form satisfactory to Buyer's counsel.
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9.1(j) Other Documents. All other documents, instruments or writings
required to be delivered to Buyer at or prior to the Closing pursuant to
this Agreement and such other certificates of authority and documents as
Buyer may reasonably request.
9.2 Documents to be Delivered by Buyer.
----------------------------------
At the Closing, Buyer shall deliver to Shareholders the following
documents, in each case duly executed or otherwise in proper form:
9.2(a) Purchase Price. To the Shareholders, the stock certificates
representing the Exchange Shares as required by Section 2.2 hereof.
9.2(b) Compliance Certificate. A certificate signed by the chief
executive officer of Buyer that the representations and warranties made by
Buyer in this Agreement are true and correct on and as of the Closing Date
with the same effect as though such representations and warranties had been
made or given on and as of the Closing Date (except for any changes
permitted by the terms of this Agreement or consented to in writing by
Shareholders), and that Buyer has performed and complied with all of
Buyer's obligations under this Agreement which are to be performed or
complied with on or prior to the Closing Date.
9.2(c) Opinion of Counsel. A written opinion of ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ &
Associates, P.C., counsel to Buyer, dated as of the Closing Date, addressed
to Company with terms and conditions as agreed upon between the Buyer and
the Shareholders' Agent.
9.2(d) Certified Resolutions. A certified copy of the resolutions of
the Board of Directors of Buyer authorizing and approving this Agreement
and the consummation of the transactions contemplated by this Agreement.
9.2(f) Incumbency Certificate. Incumbency certificates relating to
each person executing any document executed and delivered to Company or
Shareholders by Buyer pursuant to the terms hereof.
9.2(g)Other Documents. All other documents, instruments or writings
required to be delivered to Company at or prior to the Closing pursuant to
this Agreement and such other certificates of authority and documents as
Company may reasonably request.
10. TERMINATION
10.1 Right of Termination Without Breach.
-----------------------------------
This Agreement may be terminated without further liability of any party at
any time prior to the Closing:
10.1(a) by mutual written agreement of Buyer and Shareholders' Agent,
or
10.1(b) by either Buyer or Shareholders' Agent if the Closing shall
not have occurred on or before November 30, 2001, provided the terminating
party has not, through breach of a representation, warranty or covenant,
prevented the Closing from occurring on or before such date.
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10.2 Termination for Breach.
----------------------
10.2(a) Termination by Buyer. If (i) there has been a material
violation or breach by any Shareholder or Company of any of the agreements,
representations or warranties contained in this Agreement which has not
been waived in writing by Buyer, or (ii) there has been a failure of
satisfaction of a condition to the obligations of Buyer which has not been
so waived, or (iii) Company, Shareholders' Agent or any Shareholder shall
have attempted to terminate this Agreement under this Article 10 or
otherwise without grounds to do so, then Buyer may, by written notice to
Shareholders' Agent at any time prior to the Closing that such violation,
breach, failure or wrongful termination attempt is continuing, terminate
this Agreement with the effect set forth in Section 10.2(c) hereof.
10.2(b) Termination by Shareholders' Agent. If (i) there has been a
material violation or breach by Buyer of any of the agreements,
representations or warranties contained in this Agreement which has not
been waived in writing by Shareholders' Agent, or (ii) there has been a
failure of satisfaction of a condition to the obligations of Shareholders
which has not been so waived, or (iii) Buyer shall have attempted to
terminate this Agreement under this Article 10 or otherwise without grounds
to do so, then Shareholders' Agent may, by written notice to Buyer at any
time prior to the Closing that such violation, breach, failure or wrongful
termination attempt is continuing, terminate this Agreement with the effect
set forth in Section 10.2(c) hereof.
10.2(c) Effect of Termination. Termination of this Agreement pursuant
to this Section 10.2 shall not in any way terminate, limit or restrict the
rights and remedies of any party hereto against any other party which has
violated, breached or failed to satisfy any of the representations,
warranties, covenants, agreements, conditions or other provisions of this
Agreement prior to termination hereof. In addition to the right of any
party under common law to redress for any such breach or violation, each
party whose breach or violation has occurred prior to termination shall
jointly and severally indemnify each other party for whose benefit such
representation, warranty, covenant, agreement or other provision was made
("indemnified party") from and against all losses, damages (including,
without limitation, consequential damages), costs and expenses (including,
without limitation, interest (including prejudgment interest in any
litigated matter), penalties, court costs, and attorneys fees and expenses)
asserted against, resulting to, imposed upon, or incurred by the
indemnified party, directly or indirectly, by reason of, arising out of or
resulting from such breach or violation. Subject to the foregoing, the
parties' obligations under Section 14.8(b) of this Agreement shall survive
termination.
10.2(d) Reaffirmation; Confidentiality. Notwithstanding any
termination under Article 10 hereof by either party, nothing shall be
deemed to relieve the Company from performing any of its obligations to
repay amounts advanced by the Buyer in accordance with the terms of the
agreement between Buyer and the Company dated August 24, 2001. Furthermore,
in the event of termination of this Agreement for any reason, each party
shall return to the other any confidential information delivered to the
other and to keep such information confidential unless such information
shall be made public by the owner of the confidential information or by a
third party not subject to a confidentiality agreement with the owner of
the confidential information.
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11. BUYER'S OBLIGATIONS TO PROVIDE CERTAIN LOANS AND ADVANCES TO COMPANY.
11.1 Buyer's Loans and Advances to Company.
-------------------------------------
Following the Effective Date, subject to the terms and conditions of this
Article, including the Company's satisfaction of the conditions set forth in
Section 11.2 below, the Buyer shall lend or advance to the Company up to a total
of $500,000 (the "Maximum Loan Amount") provided that such loans or advance
shall not exceed $95,000 (the "Monthly Cap") per calendar month. Notwithstanding
the foregoing, the Maximum Loan Amount shall be reduced, on a dollar for dollar
basis, by the amount of all the Buyer's loans and advances to the Company made
prior to the Closing. (The Maximum Loan Amount and the Monthly Cap shall be
subject to written modification if the Company and Buyer, acting in their
absolute discretion, execute written agreements modifying such limits, provided
that neither Buyer nor Company have any obligation whatsoever, express or
implied, to entertain or agree to any such modifications.)
The Buyer and Company acknowledge and agree that they have previously
entered into an agreement dated August 24, 2001, describing the payment of
various amounts by Buyer on behalf of the Company. The Buyer and Company agree
that the August 24, 2001, agreement will be performed according to its terms.
11.2 Conditions for Loans and Advances.
---------------------------------
The Buyer's obligation to make loans and advances to the Company is subject
to the Company's satisfaction at the time of each loan or advance and while any
loan or advance remains unpaid, of all the following conditions:
11.2(a) The Company shall not be in default under any of its
obligations to Buyer, including without limitation, Buyer's obligation to
provide VoIP services to Buyer.
11.2(b) The Company's lessors, vendors and creditors shall not have
repossessed, replevined or foreclosed upon or otherwise taken back any of
the software, hardware and ancillary equipment necessary for the Company to
provide VoIP services to Buyer.
11.2(c) The Company shall continue in business operations in the
ordinary course of business.
11.2(d) The Company shall not have had any Judgment entered against
the Company or any of its assets in excess of $10,000, which has not been
stayed, and the Company shall not have filed bankruptcy, made an assignment
for the benefit of creditors or suffered the appointment of a receiver,
trustee or similar officer.
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11.2(e) The Company's representations and warranties contained in this
Agreement shall be true and correct in all material respects as of, and as
if made, on the date of each requested loan.
11.2(f) The Company and Shareholders shall not be in default or breach
of this Agreement.
11.3 Repayment of Loans by Providing VoIP Services.
---------------------------------------------
For so long as the Company satisfies all the conditions set forth in
Section 11.2, the Company can repay the Loans and advances by taking a credit
against the amounts actually billed to and due and payable by Buyer, pursuant to
Section 12.4 for VoIP services provided by the Company to Buyer. At such time as
the Company fails to continue to satisfy all the conditions set forth in Section
12.4, all outstanding loans and advances shall be immediately due and payable to
Buyer by the Company, in cash, time being of the essence.
12. COMPANY TO PROVIDE VoIP SERVICES TO BUYER
12.1 The Company to Provide VoIP Services to Buyer.
---------------------------------------------
The Company hereby covenants and agrees that both prior to and after the
Closing, the Company shall provide Buyer VoIP services, which services shall
include, but not be limited to access to and use of the Company's Business,
including the origination and termination of (i) interstate, (ii) intrastate)
and (iii) international long distance telephone voice and data transmissions
over the Company's VoIP network. The Company understands and acknowledges that
the Buyer intends to provide such VoIP services to Buyer's customers as part of
Buyer's usual business operations. The Buyer and the Company agree to cooperate
reasonably and in good faith to identify, from time to time, the precise VoIP
services to be provided.
In the event the Company lacks the necessary resources or is otherwise
unable for any reason, to satisfy all demands of Buyer and demands of Company's
other customers, the Company agrees to accord Buyer "best customer" and "highest
priority" status and to work diligently, using Company best reasonable efforts,
to meet Buyer's request for service.
12.2 Cost of Services.
----------------
12.2(a) Pricing. The Company shall charge Buyer a price, for all VoIP
services provided under this Agreement, in an amount equal to the Company's
actual, direct, out-of-pocket cost plus a ▇▇▇▇-up of 20%, on a per minute
basis, for providing such services (excluding all charges for amortization,
depreciation, interest, general overhead allocation, and extraordinary
expenses), provided that in no event shall the cost of VoIP services exceed
the cost per minute at which Buyer could reasonable be expected to purchase
comparable services, in bulk, in the market from a third party.
12.2(b) Billing. The Company shall ▇▇▇▇ Buyer for services actually
delivered on a weekly basis. The Buyer shall pay Company within three
business days following receipt of a ▇▇▇▇, provided that if Buyer disagrees
or contests the amount of a ▇▇▇▇ or the pricing methodology, the Buyer
shall pay the uncontested portion of the ▇▇▇▇ within three business days
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and the Buyer and the Company shall promptly and in good faith attempt to
resolve any billing or pricing disputes. The Company shall provide the
Buyer with backup documentation for calculation of the Buyer's actual
direct cost per minute, and shall permit Buyer and its accountants and
representatives full access to the Company's books and records to audit and
verify such pricing.
12.2(c) Billing Dispute Resolution. In the event the Buyer and the
Company cannot agree upon the appropriate pricing, they shall refer any
dispute or disagreement to GVNW ("Outside Consultants ") for determination,
and the Outside Consultant's decision shall be final and binding for all
purposes. The Outside Consultants shall have discretion to decide how the
costs and expenses of any such billing despite resolution shall be paid
between Buyer and Company, as the Outside Consultants consider fair and
equitable under the circumstances.
12.3 Minimum Purchases.
-----------------
Provided that the Company provides satisfactory VoIP services to Buyer and
the Company satisfies all the conditions set forth in Section 11.2, the Buyer
shall purchase not less than 50,000 minutes per month from the Company during
the term of this provisions.
12.4 Termination of Company's Obligation To Provide VoIP To Company.
--------------------------------------------------------------
This provision to provide VoIP to Buyer shall continue from the execution
of this Agreement and shall survive and continue after the Closing or
termination of this Agreement as provided in Article 10. In the event this
Agreement is terminated prior to Closing, the provision of this Article 12 shall
continue until 60 days after either side provides written notice of termination
of this arrangement to the other Party. In the event a Closing occurs, this
provision shall continue for a minimum term of 3 years, and may be cancelled at
anytime thereafter upon not less than 180 days advance written notice of
termination by either party.
12.5 Waiver Of Conflict Of Intent.
----------------------------
The parties acknowledge that Buyer and Company are competitors in the VoIP
business. The Company hereby irrevocably and unconditionally waives the conflict
of interest and acknowledges that the Buyer will operate Buyer's business solely
in Buyer's self-interest and Buyer shall have no obligation or duty whatsoever,
express or implied, to attempt to develop customers or business for the Company.
To the contrary, all Buyer's marketing and business activities, shall be to
solely and exclusively develop new business and customers for Buyer and to
maximize the profitability of Buyer.
12.6 Acknowledgement With Regard To Independent Creditor-Debtor
---------------------------------------------------------------------
Relationships Between Buyer And Company.
---------------------------------------
The parties acknowledge, agree and confirm that Buyer and Company are
separate, independent and distinct legal entities. The Buyer has not assumed or
agreed to pay or perform any debts, obligations, liabilities or contracts of the
Company. The Company shall remain solely and exclusively responsible for the
Company's liabilities and debts. The Buyer shall not be responsible for any
debts or obligations of the Company. The relationship between Buyer and Company
shall be an independent, creditor-debtor relationship. No joint venture or
partnership exists between the parties.
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The Buyer shall be entitled to enforce its contractual rights and to seek
to collect its loans and advances as an independent, third party creditor. The
Buyer shall have no obligation, express or implied, to provide Company with any
preferential service or arrangements. The parties shall remain independent
competitors following Closing.
12.7 Buyer's Obligation to Use Good Faith Business Judgment to Operate
---------------------------------------------------------------------
Company Successfully.
--------------------
The Buyer shall use its good faith business judgment when making decisions
regarding the management and strategy of the Company generally in order to
maximize the success and value of the Company. Notwithstanding the foregoing,
all of Buyer's management related decisions concerning the Company shall be
protected by the "business judgment rule" and this provision shall not restrict
Buyer's arms-length transactions when Buyer is purchasing services pursuant to
this Section 12 or providing loans pursuant to Section 11 of this Agreement.
13. RESOLUTION OF DISPUTES
13.1 Arbitration.
-----------
Any dispute, controversy or claim arising out of or relating to this
Agreement or any contract or agreement entered into pursuant hereto or the
performance by the parties of its or their terms shall be settled by binding
arbitration held in Jacksonville, Florida in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect, except
as specifically otherwise provided in this Article 13. Notwithstanding the
foregoing, Buyer may, in its discretion, apply to a court of competent
jurisdiction for equitable relief from any violation or threatened violation of
the covenants of any Shareholder under Section 5.2 of this Agreement, or any
covenants not to compete contained in any Employment and Noncompetition
Agreement delivered pursuant to Section 5.1 hereof.
13.2 Arbitrators.
-----------
If the matter in controversy (exclusive of attorney fees and expenses)
shall appear, as at the time of the demand for arbitration, to exceed
$1,000,000, then the panel to be appointed shall consist of three neutral
arbitrators; otherwise, one neutral arbitrator.
13.3 Procedures; No Appeal.
---------------------
The arbitrator(s) shall allow such discovery as the arbitrator(s) determine
appropriate under the circumstances and shall resolve the dispute as
expeditiously as practicable, and if reasonably practicable, within 120 days
after the selection of the arbitrator(s). The arbitrator(s) shall give the
parties written notice of the decision, with the reasons therefor set out, and
shall have 30 days thereafter to reconsider and modify such decision if any
party so requests within 10 days after the decision. Thereafter, the decision of
the arbitrator(s) shall be final, binding, and nonappealable with respect to all
persons, including (without limitation) persons who have failed or refused to
participate in the arbitration process.
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13.4 Authority.
---------
The arbitrator(s) shall have authority to award relief under legal or
equitable principles, including interim or preliminary relief, and to allocate
responsibility for the costs of the arbitration and to award recovery of
attorneys fees and expenses in such manner as is determined to be appropriate by
the arbitrator(s).
13.5 Entry of Judgment.
-----------------
Judgment upon the award rendered by the arbitrator(s) may be entered in any
court having in personam and subject matter jurisdiction. Buyer and each
Shareholder hereby submit to the in personam jurisdiction of the Federal and
state courts in Jacksonville, Florida, for the purpose of confirming any such
award and entering judgment thereon.
13.6 Confidentiality.
---------------
All proceedings under this Article 13, and all evidence given or discovered
pursuant hereto, shall be maintained in confidence by all parties.
13.7 Continued Performance.
---------------------
The fact that the dispute resolution procedures specified in this Article
13 shall have been or may be invoked shall not excuse any party from performing
its obligations under this Agreement and during the pendency of any such
procedure all parties shall continue to perform their respective obligations in
good faith, subject to any rights to terminate this Agreement that may be
available to any party and to the right of setoff provided in Section 8.4
hereof.
13.8 Tolling.
-------
All applicable statutes of limitation shall be tolled while the procedures
specified in this Article 13 are pending. The parties will take such action, if
any, required to effectuate such tolling.
14. MISCELLANEOUS
14.1 Disclosure Schedule.
-------------------
The Schedules will be delivered within five days of execution of this
Agreement and will be compiled in a bound volume (the "Disclosure Schedule"),
executed by Shareholders and dated and delivered to Buyer. Information set forth
in the Disclosure Schedule specifically refers to the article and section of
this Agreement to which such information is responsive and such information
shall not be deemed to have been disclosed with respect to any other article or
section of this Agreement or for any other purpose. The Disclosure Schedule
includes a table of contents and/or index to all of the information and
documents contained therein. The Disclosure Schedule shall not vary, change or
alter the language of the representations and warranties contained in this
Agreement and, to the extent the language in the Disclosure Schedule does not
conform in every respect to the language of such representations and warranties,
such language in the Disclosure Schedule shall be disregarded and be of no force
or effect.
-41-
14.2 Further Assurance.
-----------------
From time to time, at Buyer's request and without further consideration,
Company and Shareholders will execute and deliver to Buyer such documents and
take such other action as Buyer may reasonably request in order to consummate
more effectively the transactions contemplated hereby.
14.3 Disclosures and Announcements.
-----------------------------
Announcements concerning the transactions provided for in this Agreement by
Buyer, Company or Shareholders shall be subject to the approval of the other
parties in all essential respects, except that approval of the Shareholders or
Company shall not be required as to any statements and other information which
Buyer may submit to the Securities and Exchange Commission, or Buyer's
stockholders or be required to make pursuant to any rule or regulation of the
Securities and Exchange Commission or NASDAQ,, or otherwise required by law.
Shareholders shall act hereunder only through Shareholders' Agent.
14.4 Assignment; Parties in Interest.
-------------------------------
14.4(a) Assignment. Except as expressly provided herein, the rights
and obligations of a party hereunder may not be assigned, transferred or
encumbered without the prior written consent of the other parties.
Notwithstanding the foregoing, Buyer may, without consent of any other
party, cause one or more subsidiaries of Buyer to carry out all or part of
the transactions contemplated hereby; provided, however, that Buyer shall,
nevertheless, remain liable for all of its obligations, and those of any
such subsidiary, to Shareholders hereunder.
14.4(b) Parties in Interest. This Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the respective successors
and permitted assigns of the parties hereto. Nothing contained herein shall
be deemed to confer upon any other person any right or remedy under or by
reason of this Agreement.
14.5 Law Governing Agreement.
-----------------------
This Agreement may not be modified or terminated orally, and shall be
construed and interpreted according to the internal laws of the State of
Florida, excluding any choice of law rules that may direct the application of
the laws of another jurisdiction.
14.6 Amendment and Modification.
--------------------------
Buyer and Shareholders may amend, modify and supplement this Agreement in
such manner as may be agreed upon in writing between Buyer and Shareholders'
Agent; provided, however, that Buyer may, in Buyer's discretion, require the
execution of any amendment by all the Shareholders personally.
-42-
14.7 Notice.
------
All notices, requests, demands and other communications hereunder shall be
given in writing and shall be: (a) personally delivered; (b) sent by telecopier,
facsimile transmission or other electronic means of transmitting written
documents; or (c) sent to the parties at their respective addresses indicated
herein by registered or certified U.S. mail, return receipt requested and
postage prepaid, or by private overnight mail courier service. The respective
addresses to be used for all such notices, demands or requests are as follows:
(a) If to Buyer, to:
PIPELINE TECHNOLOGIES, INC.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, President
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
(with a copy to)
▇▇▇▇▇ & Lardner
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
(and with a copy to)
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇, P.C.
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ 0111
Attention: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other person or address as Buyer shall furnish to Shareholders' Agent
in writing.
(b) If to Shareholders, to Shareholders' Agent:
▇▇▇▇ ▇. ▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile(972) 6689417
(with a copy to)
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
▇▇▇▇ ▇▇▇ ▇▇▇▇ ▇▇▇., ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
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or to such other person or address as Shareholders shall designate as a
successor Shareholders' Agent in accordance with this Agreement.
(c) If to Company, to:
Achieve Networks, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇.
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile(972) 668-9417
(with a copy to)
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
▇▇▇▇ ▇▇▇ ▇▇▇▇ ▇▇▇., ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
In addition, any notice to Company given prior to Closing shall also be given in
the same manner to Shareholders' Agent; and any notice to Company given after
Closing shall also be given in the same manner to Buyer.
If personally delivered, such communication shall be deemed delivered upon
actual receipt; if electronically transmitted pursuant to this paragraph, such
communication shall be deemed delivered the next business day after transmission
(and sender shall bear the burden of proof of delivery); if sent by overnight
courier pursuant to this paragraph, such communication shall be deemed delivered
upon receipt; and if sent by U.S. mail pursuant to this paragraph, such
communication shall be deemed delivered as of the date of delivery indicated on
the receipt issued by the relevant postal service, or, if the addressee fails or
refuses to accept delivery, as of the date of such failure or refusal. Delivery
to Shareholders' Agent shall constitute delivery to all Shareholders. Any party
to this Agreement may change its address for the purposes of this Agreement by
giving notice thereof in accordance with this Section.
14.8 Expenses.
--------
Regardless of whether or not the transactions contemplated hereby are
consummated:
14.8(a) Brokerage. Shareholders and Buyer each represent and warrant
to each other that there is no broker involved or in any way connected with
the transfer provided for herein on their behalf respectively (and
Shareholders represent and warrant that there is no broker involved on
behalf of Company) and each agrees to hold the other harmless from and
against all other claims for brokerage commissions or finder's fees in
connection with the execution of this Agreement or the transactions
provided for herein.
14.8(b) Expenses to be Paid by Shareholders. Shareholders shall pay,
and shall indemnify, defend and hold Buyer and Company harmless from and
against, each of the following:
-44-
(i) Transfer Taxes. Any sales, use, excise, transfer or other
similar tax imposed with respect to the transactions provided for in
this Agreement, and any interest or penalties related thereto.
(ii) Professional Fees. All fees and expenses of their own and
Company's legal, accounting, investment banking and other professional
counsel in connection with the transactions contemplated hereby.
14.8(c) Other. Except as otherwise provided herein, each of the
parties shall bear its own expenses and the expenses of its counsel and
other agents in connection with the transactions contemplated hereby.
14.8(d) Costs of Litigation or Arbitration. The parties agree that
(subject to the discretion, in an arbitration proceeding, of the arbitrator
as set forth in Section 13.4) the prevailing party in any action brought
with respect to or to enforce any right or remedy under this Agreement
shall be entitled to recover from the other party or parties all reasonable
costs and expenses of any nature whatsoever incurred by the prevailing
party in connection with such action, including without limitation
attorneys' fees and prejudgment interest.
14.9 Shareholders' Agent; Power of Attorney.
--------------------------------------
14.9(a) Shareholders' Agent. The Shareholders hereby appoint and
constitute ▇▇▇▇ ▇. ▇▇▇▇▇▇▇ as Shareholders' Agent hereunder, to exercise
the powers on behalf of Shareholders set forth in this Agreement; and ▇▇▇▇
▇. ▇▇▇▇▇▇▇ hereby accepts such appointment. In the event of the death,
resignation or inability to act of ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, and upon receipt by
Buyer of evidence of the same which is satisfactory to Buyer, ▇▇▇▇▇▇
▇▇▇▇▇▇▇ shall be successor Shareholders' Agent with all powers of his
predecessor.
14.9(b) Power of Attorney. Each Shareholder, by his execution of this
Agreement, hereby constitutes and appoints the Shareholders' Agent his true
and lawful attorney in fact, with full power in his name and on his behalf:
(i) to receive on behalf of such Shareholder the proceeds of sale
of such Shareholder's Shares being sold hereunder, to give Buyer a
receipt therefor on behalf of such Shareholder and to hold such
proceeds subject to the terms hereof and the instructions of such
Shareholder with respect to the ultimate disbursement thereof;
(ii) to act on such Shareholder's behalf according to the terms
of this Agreement, including, without limitation, to amend this
Agreement in accordance with Article 14.6 or terminate this Agreement
in accordance with Section 10.1; to waive compliance with conditions
precedent to the Shareholders' obligations set forth in Article 7; to
consent to the assignment of rights under this Agreement in accordance
with Section 14.4(a); to give and receive notices on behalf of all the
Shareholders; and to act on their behalf in connection with any matter
as to which the Shareholders jointly and severally are an "Indemnified
Party" or "Indemnifying Party" under Article 8 hereof; all in the
absolute discretion of the Shareholders' Agent;
-45-
(iii) in general, to do all things and to perform all acts,
including, without limitation, executing and delivering all
agreements, certificates, receipts, instructions and other instruments
contemplated by or deemed advisable in connection with this Agreement.
This power of attorney, and all authority hereby conferred, is granted
subject to the interests of the other Shareholders and the Buyer hereunder
and in consideration of the mutual covenants and agreements made herein,
and shall be irrevocable and shall not be terminated by any act of any
Shareholder or by operation of law, whether by the death or incapacity of
any Shareholder or by the occurrence of any other event. Each Shareholder
agrees, jointly and severally, to hold the Shareholders' Agent free and
harmless from any and all loss, damage or liability which they, or any one
of them, may sustain as a result of any action taken in good faith
hereunder.
14.10 Entire Agreement.
----------------
This instrument embodies the entire agreement between the parties hereto
with respect to the transactions contemplated herein, and there have been and
are no agreements, representations or warranties between the parties other than
those set forth or provided for herein.
14.11 Counterparts.
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
14.12 Headings.
--------
The headings in this Agreement are inserted for convenience only and shall
not constitute a part hereof.
14.13 Glossary of Terms.
------------------
The following sets forth the location of definitions of capitalized terms
defined in the body of this Agreement:
"Affiliate" - Section 3.7(k)
---------
"Ancillary Instruments" - Section 3.2(a)
---------------------
"Buyer's Affiliates" - Section 8.1
------------------
"Claim" - Section 8.1
-----
"Closing" - Preamble to Article 9
-------
"Closing Date" - Section 9
------------
-46-
"Code" - Section 3.5(e)
----
"Company Employees" - Section 3.15(a)
-----------------
"Disclosure Schedule" - Article 14
-------------------
"Employee Plans/Agreement(s)" - Section 3.15(a)
---------------------------
"ERISA" - Section 3.15(a)
-----
"Government Entities" - Section 3.3
-------------------
"HSR Act" - Section 3.3
-------
"Indemnified Party" - Section 8.3(a)
-----------------
"Indemnifying Party" - Section 8.3(a)
------------------
"Laws" - Section 3.3
----
"Lien" - Section 3.11(a)
----
"Litigation" - Section 3.9
----------
"Orders" - Section 3.3
------
"PBGC" - Section 3.15(b)(ii)
----
"Purchase Price" - Section 2.1
--------------
"Real Property" - Section 3.11(c)
-------------
"Recent Balance Sheet" - Section 3.4
--------------------
"Subsidiary" - Section 3.1(e)]
----------
"Trade Rights" - Section 3.17
------------
Where any group or category of items or matters is defined collectively in the
plural number, any item or matter within such definition may be referred to
using such defined term in the singular number.
-47-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
"BUYER"
PIPELINE TECHNOLOGIES, INC.
By:/s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
---------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: President
"COMPANY"
ACHIEVE NETWORKS, INC., a Nevada
corporation
By:/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
---------------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: President
"SHAREHOLDERS"
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
---------------------------------------
▇▇▇▇ ▇. ▇▇▇▇▇▇▇
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
---------------------------------------
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇
▇▇▇▇▇▇▇ AND DGN SECURITIES, INC., BY
THEIR ATTORNEY IN FACT, ▇▇▇▇ ▇. ▇▇▇▇▇▇▇