UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. __ )
Pacific Magtron International Corp.
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(Name of Issuer)
Common Stock, par value $0.001 per share
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(Title of Class of Securities)
694532102
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(CUSIP Number)
Copy to:
Wayne I. Danson
President and Chief Executive Officer Gary A. Miller
Advanced Communications Technologies, Inc. Eckert Seamans Cherin & Mellott, LLC
420 Lexington Avenue 1515 Market Street, Ninth Floor
New York, NY 10170 Philadelphia, PA 19102-1909
(646) 227-1600 (215) 851-8400
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(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
December 10, 2004
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the
following box. [ ]
1
SCHEDULE 13D
CUSIP No. 694532102
1. Name of Reporting Person: Advanced Communications Technologies, Inc. I.R.S.
Identification No.: 65-0738251
2. Check the Appropriate Box if a Member of a Group (a) [ ]
(b) [ ]
3. SEC Use Only
4. Source of Funds: WC
5. Check Box if Disclosure of Legal Proceedings is Required Pursuant To Items
2(d) or 2(e) [ ]
6. Citizenship or Place of Organization: Florida
Number of 7. Sole Voting Power: - 6,454,300 -
Shares
Beneficially 8. Shared Voting Power: - 0 -
Owned by
Each 9. Sole Dispositive Power: - 6,454,300 -
Reporting
Person 10. Shared Dispositive Power: - 0 -
With
11. Aggregate Amount Beneficially Owned by Each - 6,454,300 -
Reporting Person:
12. Check Box if the Aggregate Amount in Row (11)
Excludes Certain Shares [ ]
13. Percent of Class Represented by Amount in Row (11): - 61.56% -
14. Type of Reporting Person: CO
2
ITEM 1. SECURITY AND ISSUER.
The title of the class of equity securities to which this
Schedule 13D relates is the common stock, par value $0.001 per share (the
"Common Stock"), of Pacific Magtron International Corp., a Nevada corporation
(the "Company"). The Company's principal executive offices are located at 1600
California Circle, Milpitas, California 95035. Set forth below in Items 3, 4 and
6 are descriptions of selected provisions of the Purchase Agreement and the
Series A Agreement (each as defined below) and certain of the Exhibits thereto.
Such descriptions are qualified in their entirety by reference to the copy of
such agreements and their respective Exhibits filed as exhibits hereto, which
are incorporated by reference herein and are made a part hereof to the same
extent as though set forth herein in full.
ITEM 2. IDENTITY AND BACKGROUND.
This statement is filed on behalf of Advanced Communications
Technologies, Inc., a Florida corporation (the "Reporting Person"), having its
principal place of business and executive offices located at 420 Lexington
Avenue, New York, New York 10170. The Reporting Person is a holding company
that, through its wholly-owned subsidiaries, specializes in the repair of
computer peripheral products and other electronic equipment and makes strategic
investments in diverse industries.
Filed as Schedule I to this Schedule 13D is a list of the
executive officers and directors of the Reporting Person containing the
following information with respect to such persons: (i) name, (ii) business
address and (iii) present principal occupation or employment and the name and,
if different from the person's business address, the address of any other entity
or organization in which such employment is conducted. Each person listed in
Schedule I is a United States citizen, except Michael R. Finch who is a citizen
of the United Kingdom.
During the past five years, neither the Reporting Person nor any
person named in Schedule I (based on information provided by such individuals)
has (i) been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or (ii) been a party to a civil proceeding of a judicial
or administrative body of competent jurisdiction and as a result was or is
subject to a judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, federal or state securities
laws, or finding any violation with respect to such laws.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
On December 10, 2004 the Reporting Person entered into a Stock
Purchase Agreement with Theodore S. Li and Hui Cynthia Lee, (the "Sellers"),
pursuant to which the Reporting Person has agreed to purchase from the Sellers,
and the Sellers have agreed to sell to the Reporting Person, an aggregate of
6,454,300 shares of the Common Stock of the Company (the "PMIC" Shares") for the
aggregate purchase price of $500,000 (the "Purchase Agreement"). The parties
currently anticipate consummating the transactions contemplated by the Purchase
Agreement on a date shortly after fulfillment of all conditions to closing, but
not later than January 10, 2005 (the "Closing").
3
The Purchase Agreement contemplates that payment of the purchase
price for the PMIC Shares will be made pursuant to the terms of two convertible
promissory notes (the "Notes") in the principal amounts of $166,889 and $333,111
to be delivered by the Reporting Person to Mr. Li and Ms. Lee, respectively, at
the Closing. The Notes will mature on the first anniversary of the Closing and
no principal or interest payments will be required prior to such date. The Notes
will bear interest at 6.0% per annum. Upon the occurrence and during the
continuation of an Event of Default (as defined in the Notes), the interest rate
will increase to 10.0% per annum and the holders of the Notes may declare the
principal amount of their respective Note and all accrued and unpaid interest
thereon immediately due and payable. The Reporting Person will be able to redeem
all or a portion of Mr. Li's Note on or prior to the maturity date at 110.0% of
the principal amount redeemed, plus all accrued and unpaid interest thereon. The
Reporting Person will be able to redeem all or a portion of Ms. Lee's Note prior
to the six month anniversary of the Closing at 105.0% of the principal amount
redeemed or thereafter prior to the maturity date at 110.0% of the principal
amount redeemed, in each case, plus all accrued and unpaid interest thereon. The
holders of the Notes, at their option, will be able to convert, at any time and
from time to time, until payment in full of all amounts due and owing under
their respective Note, any unpaid principal amount of their Note into shares of
common stock of the Reporting Person at a conversion price per share of $0.01,
subject to adjustment for stock splits, reverse stock splits and other
recapitalizations effected by the Reporting Person. The Reporting Person expects
to use funds out of its working capital to repay all amounts due and owing under
the Notes. The Reporting Person's payment obligations under the Notes will be
secured by the PMIC Shares pursuant to a Custodial and Stock Pledge Agreement to
be entered into among the Reporting Person, the Sellers and Quarles & Brady
Streich Lang LLP (the "Pledge Agreement"), which is further described in Item 6.
ITEM 4. PURPOSE OF TRANSACTION.
In April 2004, the Reporting Person formed Encompass Group
Affiliates, Inc. ("Encompass") as a Delaware corporation and wholly-owned
subsidiary of the Reporting Person for the purpose of Encompass becoming the
Reporting Person's principal operating unit. In June 2004, a wholly-owned
subsidiary of Encompass, Cyber-Test, Inc., a Delaware corporation ("Cyber-Test
Delaware"), acquired the business and assets of another entity named Cyber-Test,
Inc., a Florida-based, electronic equipment repair company. Upon consummation of
the acquisition, Cyber-Test Delaware became the core operating business of
Encompass. CyberTest Delaware provides original equipment manufacturers, retail
stores, national dealers and third-party warranty companies with service options
for repair, exchange, parts and warranty support for office equipment and
computer peripheral products, including facsimile machines, printers, scanners,
PDAs, laptop computers, monitors, and multi-function units, as well as the
repair of point of sale equipment. In June 2004, the Reporting Person, through
Encompass, also acquired a license to certain assets of Hy-Tech Computer
Systems, Inc., which is a wholly-owned subsidiary of Hy-Tech Technology Group,
Inc., an electronic equipment repair and sales company (the "HYTT Transaction").
In connection with the HYTT Transaction, the Reporting Person hired Martin
Nielson as its Senior Vice President - Acquisitions and appointed him as a
director of the Reporting Person and as Chief Executive Officer of Encompass.
4
The Reporting Person seeks to expand the business of its
subsidiaries into vertically integrated technology and service businesses. The
Reporting Person believes that the proposed acquisition of the PMIC Shares is
consistent with this goal and represents an expansion of the Reporting Person's
investments in businesses engaged in office equipment and computer peripheral
product sale and repair services.
As a condition to the Reporting Person's obligation to close
the transactions contemplated by the Purchase Agreement, Mr. Li must submit his
resignation as Chief Executive Officer of the Company and Ms. Lee must submit
her resignation as a director of the Company. The Reporting Person may also
request the resignations of other individuals serving as officers or directors
of the Company and/or its subsidiaries immediately prior to the Closing as it
deems appropriate, and currently contemplates that it will request the
resignations of Jey Hsin Yao, Hank C. Ta and Raymond Crouse as directors of the
Company. The Purchase Agreement contemplates that each of Mr. Li and Ms. Lee
will enter into an employment agreement with the Company, Encompass and the
Reporting Person pursuant to which Mr. Li and Ms. Lee would be employed by the
Company following the Closing. The Reporting Person contemplates that, following
the Closing, Martin Nielson, Senior Vice President-Acquisitions and a director
of the Reporting Person, will become a director and Chief Executive Officer of
the Company, Mr. Li will remain a director of the Company and become Chief
Financial Officer and Chief Operating Officer of the Company and Ms. Lee will be
retained as Senior Vice President of the Company. The Reporting Person also
contemplates that it will recommend at least two additional individuals to be
appointed as non-employee members of the Board of Directors of the Company, but
such individuals have not been determined as of the date of this report.
As a further condition to the Reporting Person's obligation to
proceed to Closing, the Company must modify the terms of its Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred Stock") pursuant to the
terms of an Agreement dated December 10, 2004 between the Company and
StoneStreet, L.P. ("StoneStreet"), the holder of the outstanding Series A
Preferred Stock (the "Series A Agreement"). The modifications contemplated by
the Series A Agreement include the following: (i) the number of shares
designated as Series A Preferred Stock shall be decreased from 1000 to 600
shares; (ii) the "Stated Value" of each share of Series A Preferred Stock will
be reduced from $1,000 to $666.67; (iii) the holders of the Series A Preferred
Stock will no longer have the right to require the Company to redeem each share
of Series A Preferred Stock, which rights were triggered upon the occurrence of
certain events; (iv) the redemption amount payable by the Company upon exercise
of its redemption right will be reduced from 115% of Stated Value to 100% of
Stated Value; (v) there will be a 181-day waiting period from the date of filing
the Amended and Restated Certificate of Designation before conversion rights may
be exercised (unless the Company initiates a redemption prior to the end of the
181-day period); (vi) the conversion price of the Series A Preferred Stock will
be changed from a formula that took into account average closing prices of the
Company's common stock, with a floor price of $0.75 per share, to a fixed price
of $.50 per share, subject to customary and anti-dilution adjustments; and (vii)
the Company will have five trading days, instead of three, to comply with
conversion procedures. Additionally, as part of the Series A Agreement,
Stonestreet agreed to forfeit a Stock Purchase Warrant, exercisable for 300,000
shares of the Company's common stock, that was issued to Stonestreet in
connection with the original issuance of the Series A Preferred Stock.
5
To effect the foregoing changes, the Company will file an Amended and
Restated Certificate of Designation of Preferences, Rights and Limitations of
Series A Redeemable Convertible Preferred Stock immediately after Closing.
The Series A Agreement contains customary representations and
warranties with respect to authority of the parties, transfer restrictions on
the Series A Preferred Stock, indemnification provisions and a general release
by each party of the other party. The Series A Agreement may be terminated by
either the Company or Stonestreet if the Closing does not occur on or before
January 10, 2005.
The Reporting Person, may, but does not currently expect to waive the
foregoing conditions to Closing.
Following the Closing, the Reporting Person intends to propose to
the Board of Directors of the Company that the Company change its fiscal year
end to June 30th from its current fiscal year end of December 31st. The
Reporting Person contemplates that it will consolidate the Company's financial
results with the financial results of the Reporting Person and its other
consolidated subsidiaries.
While the Reporting Person has not yet formulated any further
specific plans or proposals with respect to its relationship with the Company,
it anticipates that its investment will provide mutually advantageous
opportunities and that it will consider other transactions involving the Company
and its subsidiaries and their respective assets, including potential
acquisitions of, or mergers with, third parties that would further diversify the
Reporting Person's overall investments.
Except as set forth in this Item 4, the Reporting Person and the
other persons named in Item 2 (based on information provided by such
individuals) have no present plans or proposals which relate to or would result
in any of the following (although the Reporting Person reserves the right to
develop such plans or proposals or any other plans relating to the Company and
to take action with respect thereto): (i) the acquisition by any person of
additional securities of the Company, or the disposition of securities of the
Company; (ii) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Company or any of its subsidiaries;
(iii) a sale or transfer of a material amount of assets of the Company or any of
its subsidiaries; (iv) any change in the present board of directors or
management of the Company, including any plans or proposals to change the number
or term of directors or to fill any existing vacancies on the board; (v) any
material change in the present capitalization or dividend policy of the Company;
(vi) any other material change in the Company's business or corporate structure;
(vii) changes in the Company's certificate of incorporation, bylaws, or
instruments corresponding thereto or other actions which may impede the
acquisition of control of the Company by any person; (viii) causing a class of
securities of the Company to be delisted from a national securities exchange or
to cease to be authorized to be quoted in an inter-dealer quotation system of a
registered national securities association; (ix) a class of equity securities of
the Company becoming eligible for termination of registration pursuant to
6
Section 12(g)(4) of the Exchange Act (the "Exchange Act"); or (x) any action
similar to any of those enumerated above.
The Reporting Person, without the consent of the Company, may
purchase additional shares of Common Stock in the open market or in private
transactions at any time. While the Reporting Person would own a majority of the
Company's outstanding Common Stock following the Closing, the Reporting Person
currently intends for the Company to remain a publicly held company.
Notwithstanding the foregoing, the following information is
included herein to disclose certain factors that could become applicable if a
determination were made by the Reporting Person at a future date to acquire a
substantial number of additional shares of Common Stock.
Shares of Common Stock are traded on the Over the Counter
Bulletin Board. If additional shares of Common Stock are purchased by the
Reporting Person, such purchase would reduce the number of such shares that
might otherwise trade publicly and may reduce the number of holders of such
shares and, depending on the number of such shares so purchased, could adversely
affect the liquidity and market value of the remaining such shares held by the
public.
The Company is subject to the reporting requirements of the
Exchange Act. Such reporting requirements may be terminated upon application to
the Securities and Exchange Commission if there are fewer than 300 holders of
record of such shares. The termination of the registration of the Common Stock
under the Exchange Act would reduce the information required to be furnished by
the Company to its stockholders and would render inapplicable certain provisions
of the Exchange Act. If the Reporting Person was to acquire a substantial number
of shares of Common Stock, the ability of affiliates of the Company and of
persons holding such shares which are "restricted securities" of the Company to
dispose of such shares under Rule 144 promulgated under the Securities Act of
1933, as amended, may be impaired or eliminated.
See Items 3 and 6 for a description of certain other provisions
of the Purchase Agreement and a description of the Pledge Agreement.
ITEM 5. INTEREST IN SECURITIES OF ISSUER.
The number of shares of Common Stock issued and outstanding and
the percentage calculations resulting therefrom in this Item 5 are based on
representations made by the Sellers in the Purchase Agreement. The Reporting
Person disclaims responsibility for the accuracy of the number of shares of
Common Stock issued and outstanding and the resulting percentage calculations.
By reason of the Reporting Person entering into the Purchase
Agreement, the Reporting Person may be deemed to be the beneficial owner of the
6,454,300 shares of Common Stock to be acquired thereunder, which represent
7
approximately 61.56% of the Common Stock issued and outstanding. Until the
Closing, the Reporting Person disclaims beneficial ownership of the 6,454,300
shares of Common Stock to be acquired pursuant to the Purchase Agreement.
Except as indicated herein, neither the Reporting Person nor any
of the persons listed on Schedule I (based on information provided by such
individuals) presently beneficially owns any Common Stock. Except as described
herein, no transactions in Common Stock were effected during the past 60 days by
the Reporting Person or any other person named in Item 2 (based on information
provided by such individuals).
See Item 6 for a description of the Pledge Agreement.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF THE ISSUER.
STOCK PURCHASE AGREEMENT
The Sellers under the Purchase Agreement are Theodore S. Li and
Hui Cynthia Lee. Each of Mr. Li and Ms. Lee are executive officers and directors
of the Company and Ms. Lee's spouse, Jey Hsin Yao, is a director of the Company.
The Purchase Agreement contains customary representations, warranties, covenants
and indemnities of the parties. Closing under the Purchase Agreement is subject
to the satisfaction or waiver of various conditions set forth therein, and the
Purchase Agreement may be terminated as set forth therein.
CUSTODIAL AND STOCK PLEDGE AGREEMENT
It is a condition to Closing under the Purchase Agreement that
the parties enter into the Pledge Agreement to secure the payment obligations of
the Reporting Person under the Notes (the "Obligations"). Under the Pledge
Agreement, the Reporting Person will pledge to the Sellers all of the PMIC
Shares acquired under the Purchase Agreement and grant to such Sellers a lien
upon and a continuing security interest in such PMIC Shares, subject to the
terms and conditions of the Pledge Agreement. Until such time all amounts due
and owing under the Notes are paid in full or until their earlier release in
accordance with the terms of the Pledge Agreement, as the case may be, the
certificates representing the PMIC Shares will be held in escrow by Quarles &
Brady Streich Lang LLP (the "Custodian") in accordance with the terms of the
Pledge Agreement.
If the Reporting Person becomes entitled to receive or shall
receive with respect to the PMIC Shares (i) any additional shares of capital
stock of the Company; (ii) any stock certificate, including without limitation,
any certificate representing a stock dividend or in connection with any increase
or reduction of capital, reclassification, merger, consolidation, sale of
assets, combination of shares, stock split or other recapitalization; (iii) any
option, warrant or right, whether as an addition to, in substitution of or in
exchange for any of the PMIC Shares, or otherwise; or (iv) any dividend or other
distribution payable in property, or securities issued by a person other than
the Company, then the Reporting Person will receive and accept the same, in
trust, as trustee for the Sellers, and shall deliver them to the Custodian. Any
cash distributions received by the Reporting Person in respect of the PMIC
Shares may be applied to reduce such of the Obligations as the Reporting Person
may determine in its sole discretion.
8
Unless and until an Event of Default (as that term is defined in
the Notes) shall have occurred, the Reporting Person shall be entitled to
exercise all voting and other corporate rights in respect of the PMIC Shares
(except for the right to receive dividends and distributions payable in kind,
which are to be delivered to the Custodian), including, without limitation, all
rights and privileges of conversion, exchange and subscription, as though the
Reporting Person were the absolute owner of the PMIC Shares, subject to the
pledge in the Pledge Agreement. Notwithstanding the foregoing, the Reporting
Person will covenant and agree that it will not vote any of the PMIC Shares in
any way inconsistent with the provisions or intent of the Pledge Agreement. All
rights of the Reporting Person to vote and give consents, waivers and
ratifications, and to convert, exchange or subscribe (collectively referred to
as the "Corporate Rights"), shall cease if an Event of Default shall occur. If
an Event of Default shall occur, whether or not the PMIC Shares shall have been
registered in the Sellers' name, the Sellers then shall have the right to
exercise all Corporate Rights with respect to the PMIC Shares.
The Reporting Person will covenant in the Pledge Agreement that
until all of the Obligations have been satisfied in full it shall not sell,
convey or otherwise dispose of any of the PMIC Shares or any interest in the
PMIC Shares, or create, incur or permit to exist any pledge, mortgage, lien,
charge or encumbrance or any security interest whatsoever in or with respect to
any of the PMIC Shares, other than that created by the Pledge Agreement, nor
attempt to do any of the foregoing.
See Items 3 and 4 for additional information which may be
required by this Item 6.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
A. Stock Purchase Agreement, dated December 10, 2004, among Advanced
Communications Technologies, Inc., Theodore S. Li and Hui Cynthia
Lee.
B. Form of 6% Secured Convertible Promissory Note to be issued to
Theodore S. Li.
C. Form of 6% Secured Convertible Promissory Note to be issued to
Hui Cynthia Lee.
D. Form of Custodial and Stock Pledge Agreement to be entered into
among Advanced Communications Technologies, Inc., Theodore S. Li,
Hui Cynthia Lee, and Quarles & Brady, Streich Lang LLP.
E. Form of Employment Agreement to be entered into among Advanced
Communications Technologies, Inc., Encompass Group Affiliates, Inc.
Pacific Magtron International Corp. and Theodore S. Li.
9
F. Form of Employment Agreement to be entered into among Advanced
Communications Technologies, Inc., Encompass Group Affiliates, Inc.
Pacific Magtron International Corp. and Hui Cynthia Lee.
G. Agreement, dated December 10, 2004, between Pacific Magtron
International Corp. and Stonestreet LP.
H. Amended and Restated Certificate of Designation of Preferences,
Rights and Limitations of Series A Redeemable Convertible Preferred
Stock (included as Exhibit A to Exhibit G hereto).
10
SIGNATURES.
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
December 20, 2004 By: /s/ Wayne I. Danson
------------------------ ------------------------------
Date Wayne I. Danson
President and Chief Financial Officer
11
SCHEDULE I
The following is a list of the executive officers and directors
of Advanced Communications Technologies, Inc. ("ACT").
Name and Business Address ACT Office Held Principal Occupation
------------------------- --------------- --------------------
Wayne I. Danson President, Chief Financial Officer Managing Director of Danson
420 Lexington Avenue and Director Partners, LLC and President and
New York, NY 10170 Chief Financial Officer of ACT
Michael R. Finch Director Chief Technology Officer of New
37 Walnut Street, No. 10 Media Solutions, Inc.
Wellesley, MA 02481
Jonathan J. Lichtman Secretary and Director Attorney with
120 E. Palmetto Park Road Levinson & Lichtman, LLP
Suite 100
Boca Raton, FL 33432
Martin Nielson Senior Vice President - Senior Vice President of ACT and
420 Lexington Avenue Acquisitions and Director Chief Executive Officer of Encompass
New York, NY 10170
Randall Prouty Director President and Chairman of the Board
420 Lexington Avenue of Directors of World Associates,
New York, NY 10170 Inc.
Wilbank J. Roche Director Attorney with Roche & Holt
2530 Wilshire Blvd., Suite 200
Santa Monica, CA 90403
EXHIBIT A
STOCK PURCHASE AGREEMENT
DATED DECEMBER 10, 2004
BY AND AMONG
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
AND
THEODORE S. LI AND HUI CYNTHIA LI
TABLE OF CONTENTS
PAGE NO.
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ARTICLE I - DEFINITIONS............................................................1
ARTICLE II - SALE AND TRANSFER OF SHARES; CLOSING..................................10
2.1 Shares....................................................................10
2.2 Purchase Price............................................................10
2.3 Closing...................................................................11
2.4 Closing Deliveries........................................................11
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLERS ...........................12
3.1 Organization And Good Standing............................................12
3.2 Authority; No Conflict....................................................12
3.3 Capitalization............................................................14
3.4 Reports; Financial Statements.............................................14
3.5 Books And Records.........................................................15
3.6 Title To Properties; Encumbrances.........................................15
3.7 Condition And Sufficiency Of Assets.......................................16
3.8 Accounts Receivable.......................................................17
3.9 Inventory.................................................................17
3.10 No Undisclosed Liabilities................................................17
3.11 Taxes.....................................................................17
3.12 No Material Adverse Change................................................18
3.13 Benefit Plans.............................................................18
3.14 Compliance With Legal Requirements; Governmental Authorizations...........22
3.15 Legal Proceedings; Orders.................................................23
3.16 Absence Of Certain Changes And Events.....................................24
3.17 Contracts; No Defaults....................................................25
3.18 Insurance.................................................................27
3.19 Environmental Matters.....................................................28
3.20 Employees.................................................................29
3.21 Labor Disputes; Compliance................................................30
3.22 Intellectual Property.....................................................30
3.23 Certain Payments..........................................................32
3.24 Relationships With Related Persons........................................33
3.25 Brokers Or Finders........................................................33
3.26 Nevada Statutes...........................................................33
3.27 Disclosure................................................................33
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ARTICLE IV - REPRESENTATIONS AND WARRANTIES BY BUYER...............................34
4.1 Organization And Good Standing............................................34
4.2 Authority; No Conflict....................................................34
4.3 Investment Intent.........................................................35
4.4 Brokers Or Finders .......................................................35
4.5 Capitalization............................................................35
4.6 Reports; Financial Statements.............................................36
ARTICLE V - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER.......................36
5.1 Representation And Warranties True At The Closing Date....................36
5.2 No Material Adverse Change ...............................................37
5.3 Sellers' Performance
5.4 Opinion Of Sellers' Counsel...............................................37
5.5 Ownership Of Shares ......................................................37
5.6 No Prohibition Of Transaction.............................................37
5.7 Compliance With Law ......................................................37
5.8 Documentation And Consents ...............................................37
5.9 Employment Agreements ....................................................38
5.10 Consents To Assignments...................................................38
5.11 Resignations..............................................................38
5.12 Sellers' Release..........................................................38
5.13 Due Diligence.............................................................38
5.14 Inventory Facility........................................................38
5.15 Series A Preferred Stock..................................................39
5.16 Consent...................................................................39
5.17 Records...................................................................39
5.18 Opinion Of Nevada Counsel.................................................39
5.19 Other Documents And Aspects Of The Transaction............................39
5.20 Actions Satisfactory......................................................39
5.21 Shares....................................................................39
5.22 UCC Financing Statements..................................................39
ARTICLE VI - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS....................39
6.1 Representations And Warranties True At The Closing Date...................40
6.2 Indemnity Agreement.......................................................40
6.3 Pledge Agreement..........................................................40
6.4 Buyer's Performance.......................................................40
6.5 Opinion Of Buyer's Counsel................................................40
6.6 Revolving Line Of Credit ................................................40
6.7 Continued Listing ........................................................40
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ARTICLE VII - COVENANTS OF SELLERS PRIOR TO CLOSING DATE...........................40
7.1 Access And Investigation..................................................40
7.2 Operation Of The Businesses Of The Acquired Companies.....................41
7.3 Negative Covenant.........................................................41
7.4 Approvals Of Governmental Bodies..........................................41
7.5 Notification..............................................................41
7.6 Payment Of Indebtedness By Related Persons................................41
7.7 No Negotiation............................................................41
7.8 SEC Reports...............................................................42
7.9 Series A Preferred Stock..................................................42
7.10 Best Efforts..............................................................42
ARTICLE VIII - COVENANTS OF BUYER PRIOR TO CLOSING DATE............................42
8.1 Approvals Of Governmental Bodies .........................................42
8.2 Notification..............................................................42
8.3 Best Efforts..............................................................42
ARTICLE IX - COVENANTS OF SELLERS AND BUYER SUBSEQUENT TO THE CLOSING DATE.........42
9.1 Further Assurances........................................................42
9.2 Further Consents..........................................................43
9.3 SEC Reports...............................................................43
9.4 SEC Reports...............................................................43
9.5 Textron Facility..........................................................43
ARTICLE X - MUTUAL COVENANTS.......................................................43
10.1 Expenses..................................................................43
10.2 Public Announcements......................................................43
10.3 Confidentiality...........................................................44
ARTICLE XI - INDEMNIFICATION; REMEDIES.............................................44
11.1 Survival..................................................................44
11.2 Time Limitations..........................................................44
11.3 Indemnification By Sellers................................................45
11.4 Indemnification By Buyer..................................................45
11.5 Procedure For Indemnification -- Third Party Claims.......................45
ARTICLE XII - TERMINATION .........................................................46
12.1 Termination Events........................................................46
12.2 Effect Of Termination.....................................................47
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ARTICLE XIII - MISCELLANEOUS.......................................................47
13.1 Notices...................................................................47
13.2 Governing Law And Venue; Waiver Of Jury Trial.............................48
13.3 Further Assurances........................................................49
13.4 Waiver....................................................................49
13.5 Entire Agreement And Modification.........................................49
13.6 Assignments, Successors And No Third-Party Rights.........................50
13.7 Severability..............................................................50
13.8 Section Headings, Construction............................................50
13.9 Time Of Essence...........................................................50
13.10 Counterparts..............................................................50
EXHIBITS
Exhibit 2.1 Custodial and Stock Pledge Agreement
Exhibit 2.4(i) 6% Secured Convertible Promissory Note issuable to Theodore S. Li
Exhibit 2.4(i) 6% Secured Convertible Promissory Note issuable to Hui Cynthia Lee
Exhibit 2.4(i) Indemnity Agreement
Exhibit 5.9(a) Employment Agreement with Theodore S. Li
Exhibit 5.9(b) Employment Agreement with Hui Cynthia Lee
Exhibit 5.12 Sellers' Release
DISCLOSURE LETTER
Section 3.1 Organization and Good Standing
Section 3.2 Authority; No Conflict
Section 3.3 Capitalization
Section 3.4 Reports; Financial Statements
Section 3.5 Books and Records
Section 3.6 Title to Properties; Encumbrances
Section 3.8 Accounts Receivable
Section 3.9 Inventory
Section 3.10 No Undisclosed Liabilities
Section 3.11 Taxes
Section 3.12 No Material Adverse Change
Section 3.13 Benefit Plans
Section 3.14 Compliance with Legal Requirements; Governmental Authorizations
Section 3.15 Legal Proceedings; Orders
Section 3.16 Absence of Certain Changes and Events
Section 3.17 Contracts; No Defaults
Section 3.18 Insurance
Section 3.19 Environmental Matters
Section 3.20 Employees
Section 3.21 Labor Disputes; Compliance
Section 3.22 Intellectual Property
Section 3.24 Relationships with Related Persons
BUYER DISCLOSURE LETTER
Section 4.5 Capitalization
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STOCK PURCHASE AGREEMENT
Stock Purchase Agreement (hereinafter called, this "Agreement"), dated as
of December 10, 2004 among ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida
corporation ("Buyer"), THEODORE S. LI, an individual residing in California
("Li"), HUI CYNTHIA LEE ("Lee"), an individual residing in California. Li and
Lee shall be collectively referred to hereinafter as "Sellers."
Sellers own 6,454,300 shares (the "Shares") of the common stock, par value
$0.001 per share, of PACIFIC MAGTRON INTERNATIONAL CORP., a Nevada corporation
(the "Company"), which constitute 61.56% of the issued and outstanding shares of
capital stock of the Company. Sellers desire to sell, and Buyer desires to
purchase, the Shares for the consideration and on the terms set forth in this
Agreement.
The parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings specified or referred to in this Section 1:
"ACQUIRED COMPANIES" -- the Company and its Subsidiaries,
collectively; each of the foregoing is an "Acquired Company."
"AUDIT DATE" -- as defined in Section 3.4.
"BALANCE SHEET" -- as defined in Section 3.4(a).
"BEST EFFORTS" -- the efforts that a prudent Person desirous of
achieving a result would use under similar circumstances to ensure that such
result is achieved as expeditiously as possible.
"BUYER" -- as defined in the first paragraph of this Agreement.
"BUYER AUDIT DATE" -- as defined in Section 4.6.
"BUYER COMMON STOCK" -- as defined in Section 4.5.
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EXECUTION COPY
"BUYER'S DISCLOSURE LETTER" - the disclosure letter delivered by
Buyer to Sellers concurrently with the execution and delivery of this Agreement.
"BUYER MATERIAL ADVERSE EFFECT" - means any circumstance(s) or
event(s), the result of which would have, or reasonably could be expected to
have, individually or in the aggregate, a material adverse effect on the
business, assets, results of operations, or condition (financial or otherwise)
of Buyer and its Subsidiaries or on the Contemplated Transactions.
"BUYER PREFERRED SHARES" -- as defined in Section 4.5.
"BUYER REPORTS" -- as defined in Section 4.6.
"BUYER STOCK PLANS" -- as defined in Section 4.5.
"CLOSING" -- as defined in Section 2.3.
"CLOSING DATE" -- shall mean January __, 2005, or such other date
and time mutually agreed to among the parties hereto.
"CODE" -- the Internal Revenue Code of 1986, as amended from time to
time, or any successor law.
"COMPANY" -- as defined in the second paragraph of this Agreement.
"CONSENT" -- any approval, consent, ratification, permission, waiver
or other authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated
by this Agreement, including, but not limited to:
(i) the sale of the Shares by Sellers to Buyer;
(ii) the execution, delivery and performance of the Promissory
Notes, the Employment Agreements, the Indemnity Agreement, the Pledge
Agreement and the Releases;
(iii) the performance by Buyer and Sellers of their respective
covenants and obligations hereunder;
(iv) Buyer's acquisition and exercise of control over the Acquired
Companies; and
(v) any change in the directors, officers or other key employees of
the Acquired Companies.
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"CONTRACT" -- any agreement, contract, instrument, indenture,
guaranty, power of attorney, commitment, promise, assurance, obligation or
undertaking.
"CONVERSION SHARES" -- as defined in Section 3.2.
"COPYRIGHTS" -- as defined in Section 3.22.
"DAMAGES" -- as defined in Section 11.3.
"DIRECTOR'S PLANS" -- as defined in Section 3.13(a).
"DISCLOSURE LETTER" -- the disclosure letter delivered by Sellers to
Buyer concurrently with the execution and delivery of this Agreement; provided
that on or prior to 12:00 noon (Phoenix, Arizona time) Saturday, December 11,
2004, Sellers shall have the right to update the Disclosure Letter solely with
respect to (i) cross referencing information contained in the Disclosure Letter
delivered to Buyer concurrently with the execution and delivery of this
Agreement with the appropriate section numbers of the Agreement, (ii) compiling
Exhibits referenced in the Disclosure Letter delivered to Buyer concurrently
with the execution and delivery of this Agreement, and (iii) disclosing consents
that Sellers are required to obtain from third parties who are parties to
agreements set forth in the Disclosure Letter delivered to Buyer concurrently
with the execution and delivery of this Agreement.
"EMPLOYMENT AGREEMENTS" -- as defined in Section 5.9.
"ENCUMBRANCE" -- any lien, pledge, hypothecation, charge, mortgage,
deed of trust, security interest, encumbrance, equity, trust, equitable
interest, claim, easement, right-of-way, servitude, right of possession, lease
tenancy, license, encroachment, intrusion, covenant, infringement, interference,
Order, proxy, option, right of first refusal, community property interest,
legend, defect, impediment, exception, reservation, limitation, impairment,
imperfection of title, condition or restriction of any kind, including, but not
limited to, restriction on the use, voting (in the case of any security),
transfer, receipt of income or other exercise of any other attribute of
ownership.
"ENVIRONMENT" -- soil, surface or subsurface land, strata, surface
waters (including navigable waters and ocean waters), groundwaters, drinking
water supply, stream sediments, ambient air, plant and animal life and any other
environmental medium or natural resource.
"ENVIRONMENTAL, HEALTH AND SAFETY LIABILITIES" --any loss, cost,
expense, claim, demand, liability, obligation or other responsibility of
whatever kind or otherwise, based upon Environmental Laws, relating to:
(i) any environmental, health or safety matters or conditions
(including, but not limited to, on-site or off-site contamination,
occupational safety and health, and regulation of chemical substances or
products);
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(ii) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
remedial or inspection costs and expenses arising under Environmental Law;
(iii) financial responsibility under Environmental Law for cleanup
costs or corrective action, including for any removal, remedial or other
response actions, and for any natural resource damages;
(iv) any other compliance, corrective or remedial measures required
under Environmental Law.
The terms "removal," "remedial" and "response" action shall include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended
("CERCLA").
"ENVIRONMENTAL LAW" -- any provision of past, present or future,
national, federal, state, local or any other governmental law, directive,
statute, ordinance, rule, regulation, code, standard or other legal requirement,
or common law (including, but not limited to, common law that may impose strict
liability) or any judgment, order, writ, notice, decree, permit, license,
authorization approval, consent, injunction, or agreement with a Governmental
Body, relating to any environmental, health or safety matters or conditions,
Hazardous Materials, pollution, protection, preservation or restoration of the
Environment, including, but not limited to, on-site or off-site contamination,
occupational safety and health and regulation of chemical substances or
products, emissions, discharges, releases or threatened release of pollutants,
contaminants, chemicals, or industrial, toxic, radioactive or Hazardous
Materials or wastes into the Environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, pollutants, contaminants,
chemicals, or industrial, toxic, radioactive or hazardous substances or wastes.
Environmental Laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss. 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss. 6901 et seq., the Clean Air Act, as amended, 42 U.S.C. ss. 7401 et
seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et
seq., the Toxic Substances Control Act, as amended, 15 U.S.C. ss. 2601 et seq.,
the Hazardous Materials Transportation Act, as amended 49 U.S.C. ss. 1471 et
seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss.
11001 et seq., and the Safe Drinking Water Act, 42 U.S.C. ss. 300f et seq.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law.
EXCHANGE ACT" - shall mean the Securities Exchange Act of 1934, as
amended from time to time, or any successor law.
"FACILITIES" -- any real property, leaseholds or other interests
currently or formerly owned or operated by any Acquired Company (or any
predecessor Person) and/or any buildings, plants, structures or equipment of any
Acquired Company (or any predecessor Person).
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"GAAP" -- generally accepted United States accounting principles
applied on a basis consistent with the basis on which financial statements
referred to in Section 3.4 were prepared.
"GOVERNMENTAL AUTHORIZATION" -- any permit, license, franchise,
approval, consent, ratification, permission, confirmation, endorsement, waiver,
certification, registration, qualification or other authorization issued,
granted, given or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement.
"GOVERNMENTAL BODY" -- any:
(i) nation, kingdom, republic, confederation, principality, state,
commonwealth, province, territory, canton, country, parish, city, town,
township, municipality, village, hamlet, borough, district or other
jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign or other government;
(iii) governmental or quasi-governmental authority of any nature
(including any governmental division, subdivision, department, agency,
ministry, service, system, corps, administration, bureau, branch, office,
commission, council, board, instrumentality, officer, official,
representative, organization, unit, organ, body or entity and any court or
other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, entitled or purporting to exercise, any
executive, legislative, judicial, administrative, regulatory, police or
taxing authority or power of any nature.
"HAZARDOUS MATERIALS" -- any substance which presently or may in the
future be listed, defined, designated or classified as, or otherwise determined
to be, hazardous, toxic, radioactive or dangerous, or otherwise regulated, under
any Environmental Law, whether by type or by quantity, including any material
containing any such substance as a component, and includes, but shall not be
limited to, any (i) "hazardous substance," "pollutant" or "contaminant" (as
defined in Sections 101(14), (33) of CERCLA, 42 U.S.C. ss.ss. 9601(14), (33) or
the regulations designated pursuant to Section 102 of CERCLA, 42 U.S.C. ss. 9602
and found at 40 C.F.R. Part 302), including any element, compound, mixture,
solution, or substance which is or may be designated pursuant to Section 102 of
CERCLA; (ii) substance which is or may be designated pursuant to Section
311(b)(2)(A) of the Federal Water Pollution Control Act, 33 U.S.C. ss.ss. 1251,
1321(b)(2)(A), as amended ("FWPCA"); (iii) hazardous waste having the
characteristics which are identified under or listed pursuant to Section 3001 of
the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901,6921, as
amended ("RCRA") or having such characteristics which shall subsequently be
considered under RCRA to constitute a hazardous waste; (iv)
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substance containing petroleum, as that term is defined in Section 9001(8) of
RCRA, 42 U.S.C. ss. 991(8) or 40 C.F.R. Part 280; (v) toxic pollutant which is
or may be listed under Section 307(a) of the FWPCA, 33 U.S.C. ss. 1317(a); (vi)
hazardous air pollutant which is or may be listed under Section 112 of the Clean
Air Act, 42 U.S.C. ss.ss. 7401, 7412, as amended; (vii) imminently hazardous
chemical substance or mixture with respect to which action has been or may be
taken pursuant to Section 7 of the Toxic Substances Control Act, 15 U.S.C.
ss.ss. 2601, 2606, as amended; (viii) waste oil and other petroleum products;
(ix) asbestos, asbestos containing material or urea formaldehyde or material
which contains it; or (x) source, special nuclear or by-product material as
defined by the Atomic Energy Act of 1954, as amended, 42 U.S.C. ss. 3011 et seq.
"Hazardous Materials" does not include small quantities of consumer products,
office cleaning products or other office supplies as are customarily used in
compliance with applicable Environmental Laws in the ordinary course in a
general office facility.
"INDEMNIFIED PERSONS" -- as defined in Section 11.3.
"INDEMNITY AGREEMENT" -- as defined in Section 2.4(b)(iv).
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 3.22.
"INTERIM BALANCE SHEET" -- as defined in Section 3.4.
"KNOWLEDGE" -- an individual shall be deemed to have "Knowledge" of
a particular fact or other matter if:
(i) such individual is actually aware of such fact or other matter;
or
(ii) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the truth or existence
of such fact or other matter.
A Person (other than an individual) shall be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, or employee of such Person (or in any
similar capacity) has, or at any time had, Knowledge of such fact or other
matter.
"LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign
or other law, statute, legislation, bill, act, enactment, constitution,
resolution, proposition, initiative, canon, ordinance, code, edict, decree,
proclamation, treaty, convention, rule, regulation, ruling, directive,
guideline, or interpretation issued, enacted, adopted, passed, approved,
ratified, endorsed, promulgated, made, entered, rendered, published or
implemented by or under the authority of any Governmental Body or by the
eligible voters of any jurisdiction.
"MARKS" -- as defined in Section 3.22.
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"MATERIAL ADVERSE EFFECT" - means any circumstance(s) or event(s),
the result of which would have, or reasonably could be expected to have,
individually or in the aggregate, a material adverse effect on the business,
assets, results of operations, or condition (financial or otherwise) of any
Acquired Company or on the Contemplated Transactions.
"NEVADA STATUTES" -- as defined in Section 3.26.
"ORDER" -- any order, judgment, injunction, edict, decree, ruling,
pronouncement, determination, decision, opinion, sentence, subpoena, writ or
award issued, made, entered or rendered by any court, administrative agency or
other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person shall
be deemed to have been taken in the "Ordinary Course of Business" only if:
(i) such action is recurring in nature, is consistent with the past
practices of such Person and is taken in the ordinary course of the normal
day-to-day operations of such Person;
(ii) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority), is not required to be authorized by the parent company
(if any) of such Person and does not require any other separate or special
authorization of any nature; and
(iii) such action is similar in nature and magnitude to actions
customarily taken, without any separate or special authorization, in the
ordinary course of the normal day-to-day operations of other Persons that
are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS" -- (i) the articles or certificate of
incorporation and the bylaws of a corporation; (ii) the partnership agreement
and any statement of partnership of a general partnership; (iii) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (iv) any charter or similar document adopted or filed in connection
with the formation, creation, constitution or organization of a Person; and (v)
any amendment to any of the foregoing.
"PATENTS" -- as defined in Section 3.22.
"PBGC" -- the Pension Benefit Guaranty Corporation, or any successor
thereto.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general partnership, limited partnership, joint venture, estate,
trust, cooperative, foundation, union, syndicate, league, consortium, coalition,
committee, society, firm, company or other enterprise, association, organization
or other entity or Governmental Body.
"PLAN" -- any "employee benefit plan," as defined in Section 3(3) of
ERISA, that covers any employee or former employee of any of the Companies.
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"PLEDGE AGREEMENT" - As defined in Section 2.1(b).
"PROCEEDING" -- any action, suit, litigation, arbitration,
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding and any informal proceeding), prosecution, contest,
hearing, inquiry, inquest, audit, examination, investigation commenced, brought,
conducted or heard by or before, or otherwise involving, any Governmental Body
or arbitrator.
"PROMISSORY NOTES" -- as defined in Section 2.4(b)(i).
"PURCHASE PRICE" -- as defined in Section 2.2.
"QUARLES" -- as defined in Section 2.1(b).
"RELATED PERSON" -- with respect to a particular individual:
(i) each other member of such individual's Family;
(ii) any Person that is directly or indirectly controlled by any one
or more members of such individual's Family;
(iii) any Person in which members of such individual's Family hold
(individually or in the aggregate) a Material Interest; and
(iv) any Person with respect to which one or more members of such
individual's Family serves as a director, officer, employee, general
partner, executor or trustee (or in a similar capacity).
(for purposes of this definition, the "Family" of an individual includes (i)
such individual, (ii) the individual's spouse, (iii) any other natural person
who is related to the individual or the individual's spouse within the second
degree, and (iv) any other natural person who resides with such individual and
"Material Interest" means direct or indirect beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of voting securities or
other voting interests representing at least twenty percent (20%) of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least twenty percent (20%) of the outstanding equity
securities or equity interests in a Person).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
-8-
(c) each Person that serves as a director, officer, employee,
general partner, executor or trustee of such specified Person (or in a
similar capacity);
(d) any Person in which such specified Person holds a Material
Interest; and
(e) any Person with respect to which such specified Person serves as
a general partner or a trustee (or in a similar capacity).
"RELEASE" -- any releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, depositing,
disposing, dumping or emplacement into the Environment.
"REPORTS" -- as defined in Section 3.4.
"RIGHTS IN MASK WORKS" -- as defined in Section 3.22.
"SEC" -- as defined in Section 3.4.
"SECURITIES ACT" -- the Securities Act of 1933, as amended from time
to time, or any successor law.
"SELLERS" -- as defined in the first paragraph of this Agreement.
"SELLERS' RELEASE" -- as defined in Section 5.12.
"SERIES A PREFERRED STOCK" -- as defined in Section 3.3(a).
"SERIES A TRANSACTION" -- as defined in Section 5.15.
"SHARES" -- as defined in the second paragraph of this Agreement.
"SUBSIDIARY" -- with respect to any Person ("owner"), any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having that power only upon the happening of a contingency
that has not occurred) are held by owner or one or more of its Subsidiaries;
when used without reference to a particular Person, "Subsidiary" means
Subsidiary of the Company.
"TAX" -- any tax (including any income tax, franchise tax, capital
gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem
tax, transfer tax, stamp tax, sales tax, use tax, property tax, inventory tax,
occupancy tax, withholding tax, payroll tax, gift tax, estate tax or inheritance
tax), levy, assessment, tariff, impost, imposition, toll, duty (including any
customs duty), deficiency or fee, and any related charge or amount (including
any fine, penalty or interest), imposed, assessed or collected by or under the
authority of any Governmental Body or payable pursuant to any tax-sharing
agreement or pursuant to any other Contract relating to the sharing or payment
of any such tax, levy, assessment, tariff, impost, imposition, toll, duty,
deficiency or fee.
-9-
"TAX RETURN" -- any return (including any information return),
report, statement, declaration, schedule, notice, notification, form,
certificate or other document or information filed with or submitted to, or
required to be filed with or submitted to, any Governmental Body in connection
with the determination, assessment, collection or payment of any Tax or in
connection with the administration, implementation or enforcement of or
compliance with any Legal Requirement relating to any Tax.
"TEXTRON" -- as defined in Section 5.14.
"TEXTRON FACILITY" -- as defined in Section 5.14.
"THREAT OF RELEASE" -- a substantial likelihood of a Release which
might require action in order to prevent or mitigate damage to the Environment
that might result from such Release.
"THREATENED" -- a claim, Proceeding, dispute, action or other matter
shall be deemed to have been "Threatened" if any demand or statement shall have
been made (orally or in writing) or any notice shall have been given (orally or
in writing), or if any other event shall have occurred or any other
circumstances shall exist, that might lead a prudent Person to conclude that
such a claim, Proceeding, dispute, action or other matter might be asserted,
commenced, taken or otherwise pursued in the future.
"TRADE SECRETS" -- as defined in Section 3.22.
"VEBA'S" -- as defined in Section 3.13(a).
ARTICLE II
SALE AND TRANSFER OF SHARES; CLOSING.
2.1 SHARES.
(a) Subject to the terms and conditions of this Agreement, at the Closing,
Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, the Shares.
(b) The Shares shall be delivered to and held by Quarles & Brady Streich
Lang LLP ("Quarles") in accordance with that certain Custodial and Pledge
Agreement by and among Sellers, Buyer and Quarles in substantially the form of
Exhibit 2.1 attached hereto (the "Pledge Agreement").
2.2 PURCHASE PRICE. The purchase price (the "Purchase Price") for the
Shares shall be $500,000.
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2.3 CLOSING. The purchase and sale (the "Closing") provided for in this
Agreement shall take place at the offices of Eckert Seamans Cherin & Mellott,
LLC, 1515 Market Street - 9th Floor, Philadelphia, Pennsylvania, counsel for
Buyer, at 1:00 p.m. (Philadelphia time) on January 10, 2005, or at such other
time and place as the parties hereto shall mutually agree. Subject to the
provisions of Section 12, failure to consummate the purchase and sale provided
for in this Agreement on the date and time and at the place determined pursuant
to this Section 2.3 shall not result in the termination of this Agreement and
shall not relieve any parties to this Agreement of any obligation hereunder.
2.4 CLOSING DELIVERIES. At the Closing:
(a) Sellers shall deliver, or cause to be delivered, to Buyer:
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers), with signatures guaranteed by
a commercial bank or by a member firm of the New York Stock Exchange, for
transfer to Buyer, together with instructions to the transfer agent of the
Company requesting that a new certificate or certificates representing the
Shares be issued in Buyer's name;
(ii) the opinion of Sellers' counsel required pursuant to Section
5.4 hereof and the opinion of Nevada counsel required pursuant to Section
5.18 hereof;
(iii) the Employment Agreements;
(iv) the Sellers' Release; and
(v) such other documents, instruments, certificates and opinions as
may be required by this Agreement or as may be reasonably requested by
Buyer; and
(b) Buyer shall deliver, or cause to be delivered, to Sellers:
(i) promissory notes payable to Li and Lee in the respective
principal amounts of $166,889.00 and $333,111.00 each in the form of
Exhibit 2.4(i) (the "Promissory Notes");
(ii) the opinion of Buyer's counsel required pursuant to Section 6.5
hereof;
(iii) the Pledge Agreement;
(iv) an Indemnity Agreement in substantially the form of Exhibit
2.4(iv) attached hereto (the "Indemnity Agreement"); and
(v) such other documents instruments, certificates and opinions as
may be required by this Agreement or as may be reasonably requested by
Sellers.
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(c) Buyer shall deliver, or cause to be delivered, to Quarles, the
certificates representing the Shares to be held by Quarles in accordance with
the terms of the Pledge Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING. (a) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada with full corporate power and authority to carry on its business as it is
now being conducted, to own or hold under lease the properties and assets which
it owns or holds under lease and perform all its obligations under the
agreements and instruments to which it is a party or by which it is bound. The
Company is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which the
ownership or leasing of the properties owned by it or the nature of the
activities conducted by it requires such qualification. Section 3.1(a) of the
Disclosure Letter lists each such jurisdiction. Section 3.1(a) of the Disclosure
Letter lists each Subsidiary of the Company.
(b) Section 3.1(b) of the Disclosure Letter sets forth as to each
Subsidiary its name, jurisdiction of incorporation, other jurisdictions in which
authorized to do business, and capitalization. Each Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation as set forth in Section 3.1(b) of the Disclosure
letter, with full corporate power and authority to carry on its business as it
is now being conducted, to own or hold under lease the properties and assets
which it owns or holds under lease and perform all its obligations under the
agreements and instruments to which it is a party or by which it is bound, is
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which the ownership or
leasing of the properties owned by it or the nature of the activities conducted
by it requires such qualification. Section 3.1(b) of the Disclosure Letter lists
each such jurisdiction. None of the Acquired Companies is an "investment
company" within the meaning of the Investment Company Act of 1940. Sellers have
made available to Buyer copies of the Organizational Documents of each Acquired
Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT. This Agreement constitutes the legal, valid
and binding obligation of Sellers, enforceable against Sellers in accordance
with its terms. Upon the execution and delivery by Sellers of the Employment
Agreements and the Releases, those documents will constitute the legal, valid
and binding obligations of Sellers, enforceable against Sellers in accordance
with their respective terms. Sellers have the absolute and unrestricted right,
power, authority and capacity to execute and deliver this Agreement, the
Employment Agreements, the Releases and each other document contemplated
hereunder or thereunder and to perform their obligations hereunder and
thereunder. Except as set forth in Section 3.2 of the Disclosure Letter, neither
the execution and delivery of this Agreement nor the consummation or performance
of any of the Contemplated Transactions will, directly or indirectly:
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(a) contravene, conflict with or result (with or without notice or
lapse of time) in a violation of (i) any of the provisions of the
Organizational Documents of the Acquired Companies or (ii) any resolution
adopted by the board of directors or the stockholders of any Acquired
Company;
(b) contravene, conflict with or result (with or without notice or
lapse of time) in a violation of any Legal Requirement or any Order to
which any Acquired Company or either Seller, or any of the assets owned or
used by any Acquired Company, may be subject, except that, which could not
have a Material Adverse Effect;
(c) cause Buyer or any Acquired Company to become subject to, or to
become liable for the payment of, any Tax;
(d) cause any of the assets owned by any Acquired Company to be
reassessed or revalued by any taxing authority or other Governmental Body;
(e) contravene, conflict with or result (with or without notice or
lapse of time) in a violation of any of the terms or requirements of, or
give any Governmental Body the right (with or without notice or lapse of
time) to revoke, withdraw, suspend, cancel, terminate or modify, any
Governmental Authorization that is held by any Acquired Company or that
otherwise relates to the business of, or any of the assets owned or used
by, any Acquired Company, except that, which could not have a Material
Adverse Effect;
(f) contravene, conflict with or result (with or without notice or
lapse of time) in a violation or breach of any of the provisions of, or
give any Person the right (with or without notice or lapse of time) to
declare a default or exercise any remedy under, or to accelerate the
maturity or performance of or cancel, terminate or modify, any Contract to
which any Acquired Company or any Seller is a party or under which any
Acquired Company has any rights, or by which any Acquired Company or any
Seller, or any of the assets owned or used by any Acquired Company, may be
bound, except that, which could not have a Material Adverse Effect; or
(g) result (with or without notice or lapse of time) in the
imposition or creation of any Encumbrance upon or with respect to any of
the assets owned or used by any Acquired Company.
Except as disclosed in Section 3.2 of the Disclosure Letter, no Acquired Company
is or will be required to give any notice to or obtain any Consent from, and no
Seller is or will be required to give any notice to or obtain any Consent from,
any Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions. Sellers
are acquiring the Promissory Notes and, if applicable, the shares of Buyer's
common stock issuable upon conversion of the Promissory Notes (the "Conversion
Shares") for their own account and not with a view to their distribution within
the meaning of Section 2.11 of the Securities Act. Each Seller is an "accredited
investor," as such term is defined in Rule 501(a) promulgated pursuant to the
Securities Act. Each Seller acknowledges that such Seller has had
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the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of Buyer concerning the
financial and other affairs of Buyer, and to the extent deemed necessary in
light of such personal knowledge of the Buyer's affairs, such Seller has asked
such questions and received answers to the full satisfaction of such Seller.
Each Seller understands that no United States federal or state agency or any
other government or governmental agency has passed on or made any recommendation
or endorsement of the Promissory Notes or Conversion Shares or the fairness of
suitability of the investment in the Promissory Notes or Conversion Shares nor
have such authorities passed upon or endorsed the merits of the offering of the
Promissory Notes or Conversion Shares.
3.3 CAPITALIZATION. The authorized capital stock of the Company consists
of (i) 25,000,000 shares of Common Stock, par value $0.001 per share, of which
10,485,062 shares are issued and outstanding, of which 6,454,300 constitute the
Shares and (ii) 5,000,000 shares of Preferred Stock, par value $0.001 per share,
of which 1,000 shares are designated Series A Redeemable Convertible Preferred
Stock, of which 600 shares are issued and outstanding (the "Series A Preferred
Stock"). Sellers are and will be on the Closing Date the record and beneficial
owners and holders of the Shares, free and clear of all Encumbrances. Li owns
2,154,300 of the Shares and Lee owns 4,300,000 of the Shares. Except as set
forth in Section 3.3 of the Disclosure Letter, with the exception of the Shares
(which are owned by Sellers) and the other outstanding shares of common stock of
the Company, all of the outstanding equity securities of each Acquired Company
are owned of record and beneficially by one or more Acquired Companies. Except
as set forth in Section 3.3 of the Disclosure Letter, no legend or other
reference to any purported Encumbrance appears upon any certificate representing
equity securities of any Acquired Company. All of the outstanding equity
securities of each Acquired Company have been duly authorized and validly issued
and are fully paid and nonassessable. Except as set forth in Section 3.3 of the
Disclosure Letter and except for the Series A Preferred Stock, there are no
outstanding options, rights, conversion rights, agreements or commitments of any
kind relating to the issuance, sale or transfer of any equity securities or
other securities of any Acquired Company. None of the outstanding equity
securities or other securities of any Acquired Company was issued in violation
of the Securities Act or the securities or blue sky Legal Requirements of any
state or other jurisdiction. No Acquired Company owns, or has any option, right,
agreement or commitment of any kind to acquire, any equity securities or other
securities of any Person (other than Acquired Companies) or any direct or
indirect equity or ownership interest in any other business.
3.4 REPORTS; FINANCIAL STATEMENTS.
(a) Sellers have made available to Buyer, each registration
statement, report, proxy statement or information statement prepared by
the Company since December 31, 2003 (the "Audit Date"), including the
Company's Annual Report on Form 10-K for the year ended December 31, 2003
(the "10-K") and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004
respectively (collectively, the "10-Q"), in the forms, including exhibits,
annexes and any amendments thereto, filed with the Securities and Exchange
Commission (the "SEC") (collectively, including any such reports filed
subsequent to the date hereof, its "Reports"). Except as set forth in
Section 3.4(a) of the Disclosure Letter, as of their respective dates, to
the Knowledge of each Seller, the Company's Reports did not contain
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any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not
misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Company's Reports (including the
related notes and schedules) fairly presents the consolidated financial
position of the Company and its Subsidiaries as of such Report's date and
each of the consolidated statements of income and of cash flows included
in or incorporated by reference into its Reports (including any related
notes and schedules) fairly presents the consolidated results of
operations, retained earnings and cash flows, as the case may be, of the
Company and its Subsidiaries for the periods set forth therein (subject,
in the case of unaudited statements, to notes and normal year-end audit
adjustments that will not be material in amount or effect), in each case
in accordance with GAAP consistently applied during the periods involved,
except as may be noted therein (the 10-K balance sheet being referred to
hereinafter as the "Balance Sheet" and the balance sheet contained in the
Form 10-Q filed by the Company for the period ended September 30, 2004
being referred to hereinafter as the "Interim Balance Sheet"). Since the
Audit Date, the Company and each Subsidiary required to make filings under
any Legal Requirement has filed with the applicable Governmental Bodies
all material forms, statements, reports and documents (including exhibits,
annexes and any amendments thereto) required to be filed by them, and each
such filing complied in all material respects with all applicable laws,
rules and regulations, other than such failures to file and non-compliance
that could not have a Material Adverse Effect. Except as set forth in
applicable filings with the SEC, to any Seller's Knowledge, as of the date
hereof, no Person or "group" "beneficially owns" 5% or more of its
outstanding voting securities, with the terms "beneficially owns" and
"group" having the meanings ascribed to them under Rule 13d-3 and Rule
13d-5 under the Exchange Act. Except as set forth in Section 3.4(a) of the
Disclosure Letter, to any Seller's Knowledge, any Person or "group"
"beneficially owning" 5% or more of the Company's securities has filed
with the SEC all statements required to be filed by it or them under Rules
13d-1 and 13d-2 of the Exchange Act.
(b) As of the date hereof, there are no reports or statements on
file with the SEC to which the SEC has provided comments and the Company
has not responded. As of the date hereof, there are no registration
statements on file with the SEC for which a formal withdrawal should have
been delivered to the SEC by the Company, but for which a formal
withdrawal has not been so delivered.
3.5 BOOKS AND RECORDS. The books of account, minute books, stock record
books and other records of the Acquired Companies, all of which have been made
available to Buyer, are complete and correct in all material respects and have
been maintained in accordance with sound business practices and the requirements
of Section 13(b)(2) of the Exchange Act (regardless of whether or not the
Acquired Companies are subject to that Section), including, but not limited to,
the maintenance of an adequate system of internal controls. Except as set forth
in Section 3.5 of the Disclosure Letter, the minute books of the Acquired
Companies containing records of all meetings held of, and corporate action taken
by, the stockholders, the Boards of Directors and committees of the Board of
Directors of the Acquired Companies are accurate and complete in all material
respects and no meeting of any such stockholders, Board of Directors or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of the Acquired Companies.
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3.6 TITLE TO PROPERTIES; ENCUMBRANCES. Section 3.6 of the Disclosure
Letter lists all real property, leaseholds or other interests therein owned by
the Acquired Companies. Sellers have made available to Buyer copies of the deeds
and other instruments (as recorded) by which the Acquired Companies acquired
such real property and interests, and copies of all title insurance policies,
opinions, abstracts and surveys in the possession of Sellers or the Acquired
Companies and relating to such property or interests. The Acquired Companies own
(with good and marketable title in the case of real property, subject only to
the matters permitted by the following sentence) all the properties and assets
(real, personal and mixed, tangible and intangible) that they purport to own,
including, but not limited to, all the properties and assets reflected in the
Balance Sheet and the Interim Balance Sheet (except for assets held under
capitalized leases disclosed in Section 3.6 of the Disclosure Letter and
personal property sold since the date of the Balance Sheet and the Interim
Balance Sheet, as the case may be, in the Ordinary Course of Business), and all
the properties and assets purchased or otherwise acquired by the Acquired
Companies since the date of the Balance Sheet (except for personal property
acquired and sold since the date of the Balance Sheet in the Ordinary Course of
Business and consistent with past practice), which subsequently purchased or
acquired properties and assets (other than inventory and short term investments)
are listed in Section 3.6 of the Disclosure Letter. All properties and assets
reflected in the Balance Sheet and the Interim Balance Sheet are free and clear
of all Encumbrances and are not, in the case of real property, subject to any
rights of way, building use restrictions, exceptions, variances, reservations or
limitations of any nature whatsoever except, with respect to all such properties
and assets, (a) mortgages or security interests shown on the Balance Sheet or
the Interim Balance Sheet as securing specified liabilities or obligations, with
respect to which no default (or event which, with notice or lapse of time or
both, would constitute a default) exists, (b) mortgages or security interests
incurred in connection with the purchase of property or assets after the date of
the Interim Balance Sheet (such mortgages and security interests being limited
to the property or assets so acquired), with respect to which no default (or
event which, with notice or lapse of time or both, would constitute a default)
exists, (c) liens for current taxes not yet due, and (d) as to real property,
(i) minor imperfections of title, if any, none of which is substantial in
amount, materially detracts from the value or impairs the use of the property
subject thereto, or impairs the operations of any Acquired Company and (ii)
zoning laws and other land use restrictions that do not impair the present or
anticipated use of the property subject thereto. All buildings, plants and
structures owned by the Acquired Companies lie wholly within the boundaries of
the real property owned by the Acquired Companies and do not encroach upon the
property of, or otherwise conflict with the property rights of, any other
Person.
3.7 CONDITION AND SUFFICIENCY OF ASSETS. The buildings, plants, structures
and equipment of the Acquired Companies are structurally sound with no defects
of which the Sellers or the Acquired Companies have Knowledge, are in good
operating condition and repair and are adequate for the uses to which they are
being put, and none of such buildings, plants, structures or equipment is in
need of maintenance or repairs, except for ordinary, routine maintenance and
repairs that are not material in nature or cost. The building, plants,
structures and equipment of the Acquired Companies are sufficient for the
continued conduct of the Acquired Companies' business after the Closing in
substantially the same manner as conducted prior to the Closing.
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3.8 ACCOUNTS RECEIVABLE. All accounts receivable of the Acquired Companies
that are reflected on the Balance Sheet or the Interim Balance Sheet or on the
accounting records of the Acquired Companies as of the Closing Date (referred to
collectively as the "Accounts Receivable") represent or will represent valid
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business. Unless paid prior to the Closing Date, the
Accounts Receivable are or will be as of the Closing Date current and, to the
Knowledge of each Seller, collectible net of the respective reserves shown on
the Balance Sheet or the Interim Balance Sheet or on the accounting records of
the Acquired Companies as of the Closing Date (which reserves are adequate and
calculated consistent with past practice and, in the case of the reserve as of
the Closing Date, will not represent a greater percentage of the Accounts
Receivable as of the Closing Date than the reserve reflected in the Interim
Balance Sheet represented of the accounts receivable reflected therein and will
not represent a material adverse change in the composition of such Accounts
Receivable in terms of aging). Subject to such reserves, each of the Accounts
Receivable either has been or is scheduled to be collected in full, without any
setoff, within 90 days after the day on which it first becomes due and payable.
Except as set forth in Section 3.8 of the Disclosure Letter, there is no
contest, claim or right of set-off, other than returns in the Ordinary Course of
Business, contained in any agreement with any maker of an Accounts Receivable
relating to the amount or validity of such Accounts Receivable. The Acquired
Companies have made available to the Buyer a list of all Accounts Receivable of
the Corporation as of the date of the Interim Balance Sheet, which list is
correct and complete in all material respects and sets forth the aging of such
Accounts Receivable.
3.9 INVENTORY. Except as set forth in Section 3.9 of the Disclosure
Letter, all inventory of the Acquired Companies, whether or not reflected in the
Balance Sheet or the Interim Balance Sheet, consists of a quality and quantity
usable and salable in the Ordinary Course of Business, except for obsolete items
and items of below-standard quality, all of which have been written off or
written down to net realizable value in the Balance Sheet or the Interim Balance
Sheet or on the accounting records of the Acquired Companies as of the Closing
Date, as the case may be. All inventories not written off have been priced at
the lower of cost or market on a first in, first out basis. The quantities of
each type of inventory (whether raw materials, work-in-process, or finished
goods) are not excessive, but are reasonable and warranted in the present
circumstances of the Acquired Companies. All work in process and finished-goods
inventory is free of any defect or other deficiency.
3.10 NO UNDISCLOSED LIABILITIES. Except as set forth in Section 3.10 of
the Disclosure Letter, the Acquired Companies have no liabilities or obligations
of any nature (known or unknown, absolute, accrued, contingent or otherwise)
that were not fully reflected or reserved against in the Balance Sheet or the
Interim Balance Sheet.
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3.11 TAXES. The Acquired Companies have filed or caused to be filed (on a
timely basis) all Tax Returns that are or were required to be filed by or with
respect to any of them, either separately or as a member of a group of
corporations, pursuant to the Legal Requirements of each Governmental Body with
taxing power over them or their assets. Sellers have made available to Buyer
copies of, and Section 3.11 of the Disclosure Letter lists, all such Tax Returns
filed since fiscal year ended December 31, 2000. The Acquired Companies have
paid, or made provision for the payment of, all Taxes that have or may have
become due pursuant to those Tax Returns, or otherwise, or pursuant to any
assessment received by Sellers or any of the Acquired Companies, except such
Taxes, if any, as are set forth in Section 3.11 of the Disclosure Letter and are
being contested in good faith and as to which adequate reserves (determined in
accordance with GAAP) have been provided in the Balance Sheet and the Interim
Balance Sheet. The United States federal and state income and franchise Tax
Returns of each Acquired Company subject to such Taxes have been audited by the
Internal Revenue Service or relevant state tax authorities or are closed by the
applicable statute of limitations for all taxable years through December 31,
2003. All deficiencies proposed as a result of such audits have been paid,
reserved against, settled, or, as described in Section 3.11 of the Disclosure
Letter, are being contested in good faith by appropriate proceedings. Section
3.11 of the Disclosure Letter describes all adjustments to the United States
federal income Tax Returns filed by any Acquired Company or any group of
corporations, including any Acquired Company for all taxable years since
December 31, 2003, and the resulting deficiencies proposed by the Internal
Revenue Service. Except as set forth in Section 3.11 of the Disclosure Letter,
none of Sellers or any Acquired Company has given or been requested to give
waivers or extensions (or is or would be subject to a waiver or extension given
by any other Person) of any statute of limitations relating to the payment of
Taxes of any Acquired Company or for which any Acquired Company may be liable.
The charges, accruals and reserves with respect to Taxes on the respective books
of each Acquired Company are adequate (determined in accordance with GAAP).
There exists no proposed tax assessment against any Acquired Company, except as
disclosed in the Balance Sheet or in Section 3.11 of the Disclosure Letter. All
Taxes that any Acquired Company is or was required by Legal Requirements to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Body or other Person, except
where the failure to withhold, collect or pay could not have a Material Adverse
Effect. All Tax Returns filed by (or which include on a consolidated basis) any
Acquired Company are true, correct and complete in all material respects. There
is no tax sharing agreement that will require any payment by any Acquired
Company after the date of this Agreement.
3.12 NO MATERIAL ADVERSE CHANGE. Except as set forth in Section 3.12 of
the Disclosure Letter, since the date of the Balance Sheet, there has not been
any material adverse change in the business, operations, properties, prospects,
assets or condition of any Acquired Company or any event, condition or
contingency that is likely to result in such a material adverse change.
3.13 BENEFIT PLANS. (a) Section 3.13(a) of the Disclosure Letter includes
a complete and accurate list of all pension, retirement, profit sharing, Section
401(k), thrift-savings, individual retirement account, excess benefit plan,
deferred compensation, incentive compensation, stock bonus, stock option,
restricted stock, cash bonus, employee stock ownership (including, without
limitation, payroll related employee stock ownership), severance pay, cafeteria,
flexible compensation, life insurance, medical, dental, disability, welfare, or
vacation plans or arrangements of any kind and any other Employee Pension
Benefit Plan or Employee Welfare Benefit Plan (as defined in Section 3 of
ERISA), incentive compensation plan or fringe
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benefit or any combination of the foregoing established, maintained, sponsored,
contributed to or otherwise participated in by any Acquired Company (including,
for this purpose and for the purpose of all of the representations in this
Section 3.13, all employers, whether or not incorporated, which by reason of
common control are treated together with Sellers and the Acquired Companies as a
single employer within the meaning of Section 414 of the Code) for any of the
employees or past employees of the Acquired Companies at any time prior to the
Closing Date, copies of each of which have heretofore been delivered by Sellers
to Buyer. Section 3.13(a) of the Disclosure Letter also includes a complete and
accurate list of all voluntary employees' beneficiary associations and related
trusts ("VEBA's"), and a complete and accurate list of all current and deferred
compensation, pension, stock option and other incentive compensation plans,
agreements or other arrangements, welfare plans or fringe benefits covering the
members of the Boards of Directors of the Acquired Companies ("Directors Plans")
to whom payments are being made or are scheduled to be made in the future.
(b) Section 3.13(b) of the Disclosure Letter lists all outstanding
employment or consulting, severance or termination agreements or other similar
commitments which cover any past, present or retired director, officer or
employee of the Acquired Companies and a list of prerequisites and other fringe
benefits being made available, or scheduled to be made, to them, copies of each
of which have heretofore been delivered to Buyer.
(c) Except for liabilities to the PBGC pursuant to Section 4007 of
ERISA, all of which have been fully paid, each Acquired Company has no liability
to the PBGC, nor has any Acquired Company ceased operations at any facility or
withdrawn from any such Plan in a manner which would subject it or Sellers to
liability under Section 4062(e), 4063 or 4064 of ERISA, and neither Sellers nor
the Acquired Companies know of any facts or circumstances which might give rise
to any liability of Sellers, the Acquired Companies or Buyer to the PBGC under
Title IV or ERISA which could result in any claims being made against Buyer with
respect to the Acquired Companies by the PBGC.
(d) The Acquired Companies have no liability and Sellers have no
liability with respect to the Acquired Companies to the Internal Revenue Service
with respect to any pension plan qualified under Section 401 of the Code or any
funded welfare benefit plan, including any liability imposed by Sections 412,
4971, 4972, 4976, 4977, 4978, 4978A, 4979, 4979A and 4980 of the Code.
(e) The Acquired Companies do not, and Sellers do not with respect
to the Acquired Companies, maintain or contribute to, and have not participated
in or agreed to participate in, a Multi-employer plan as defined in Section
4001(a)(3) of ERISA and no event has occurred, and there exists no condition or
set of circumstances, which presents a risk of the occurrence of any withdrawal
from or the partition, termination, reorganization or insolvency of any
Multi-employer Plan which could result in any liability of the Acquired
Companies or Buyer with respect to the Acquired Companies to a Multi-Employer
Plan.
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(f) All "Employee Benefit Plans," as defined in Section 3(3) of
ERISA, that cover one or more employees employed by the Acquired Companies (each
individually, a "Plan" and collectively the "Plans") are in material compliance
with ERISA and, where applicable for tax-qualified or tax-favored treatment,
with the Code. To the Knowledge of any Seller or any Acquired Company, all of
the Plans have been administered in material compliance with the requirements of
ERISA and have complied with the reporting and disclosure requirements of Title
I of ERISA and the Code, and none of the Acquired Companies or any administrator
or fiduciary of any Plan (or agent of any of the foregoing) has engaged in any
transaction or acted or failed to act in any manner which would subject any
Acquired Company to any liability for a breach of fiduciary duty under ERISA.
Each Employee Pension Benefit Plan sponsored, maintained or contributed to by
any Acquired Company which is intended to be qualified under Section 401(a) of
the Code is qualified under Section 401(a) of the Code; all related trusts are
exempt from federal income tax under Section 501(a) of the Code (or has been
adopted using a prototype plan which has received an opinion letter from the
Internal Revenue Service); each such Plan has received a determination letter
from the Internal Revenue Service stating that the Plan is qualified under
Section 401(a) of the Code and all related trusts are exempt from federal income
tax under Section 501(a) of the Code; and nothing has occurred since the date of
the last such determination which resulted in, or is likely to result in, the
revocation of such determination. Sellers and the Acquired Companies have made
all required contributions under any Plan for all periods through and including
the date hereof or proper accruals have been made and are reflected on its
balance sheet and book and records. All such Plans that are subject to the
minimum funding standards of Section 412 of the Code and Section 302 of ERISA
meet those standards and have not incurred any accumulated funding deficiency
within the meaning of Section 412 or 418B of the Code or have applied for or
obtained from the Internal Revenue Service a waiver of any minimum funding
requirement under Section 412 of the Code. All required installments under
Section 412 of the Code and Section 302 of ERISA have been paid on or before the
applicable due date. There has been no misstatement of pension liabilities that
would result in the imposition of tax under Section 6659A of the Code. To the
Knowledge of any Seller or any Acquired Company, no representations or
communications, oral or written, with respect to participation, eligibility for
benefits, vesting, benefit accrual or coverage under any Plan have been made to
employees of the Acquired Companies, which (a) are not in accordance with the
terms and conditions of such Plan and/or (b) could have any adverse economic
consequences to the Acquired Companies. Neither any Plan nor any fiduciary or
administrator thereof has engaged in a "prohibited transaction" within Section
406 of ERISA or, where applicable, Section 4975 of the Code, for which no
exemption is applicable, nor otherwise breached any of the responsibilities or
obligations imposed upon fiduciaries under Title I of ERISA or taken any other
action which would subject the Plan or such fiduciary or administrator to any
tax, penalty or such liability for prohibited transactions or which would result
in any claim being made under, or by or on behalf of, any such Plans by any
party with standing to make such claim or which may have any adverse economic
consequences to the Acquired Companies or Buyer. There have been no "reportable
events" within the meaning of Section 4043 of ERISA for which the 30-day notice
requirement of ERISA has not been waived by the PBGC. No proceeding or other
action has been initiated by the PBGC to terminate any Employee Pension Benefit
Plan, and no written notice has been given to Seller or the Acquired Companies
of an intention to commence or seek the commencement of any such proceeding or
action.
(g) All Directors' Plans have been administered according to their
terms and no representations or communications, oral or otherwise, with respect
to participation, vesting, benefit accrual or coverage have been made to any
current or former director not in accordance with the terms and conditions of
such Directors' Plan and/or could have any adverse consequences to the Acquired
Companies.
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(h) All VEBA's are exempt from federal income tax under Section
501(a) of the Code, have received a determination from the Internal Revenue
Service recognizing their tax exempt status under Section 501(c)(9) of the Code,
and nothing has occurred since the date of the last such determination which
resulted in, or is likely to result in, a revocation of such determination or
loss of tax exempt status. All VEBA's have filed all required returns of exempt
organizations, and properly reported and paid any tax imposed on any unrelated
trade or business income by Section 511 of the Code.
(i) Section 3.13(i) of the Disclosure Letter lists, and Sellers have
made available to Buyer a true and complete set of copies of, (a) all Employee
Benefit Plans, VEBA's and related trusts as in effect with respect to the
Acquired Companies immediately prior to the Closing Date, together with all
amendments thereto which will become effective at a later date; (b) the latest
Internal Revenue Service determination letter obtained with respect to any such
Employee Benefit Plan or VEBA qualified or exempt under Section 401 or 501 of
the Code; (c) Form 5500's and certified financial statements for the most recent
completed three fiscal years for each Employee Benefit Plan of the Acquired
Companies required to file such form with respect to each defined benefit
pension plan or VEBA, together with the most full actuarial report by the Plan's
or VEBA's enrolled actuary; (d) all Summary Plan Descriptions for each Employee
Benefit Plan of the Acquired Companies required to prepare, file and distribute
Summary Plan Descriptions; (e) all summaries furnished employees, officers and
directors of the Acquired Companies of all incentive compensation, other plans
and fringe benefits for which a Summary Plan Description is not required; (f)
all personnel and employment policies and manuals of she Acquired Companies; (g)
current registration statements on Form 5-8 and amendments; and (h) the
notifications to employees of their rights under Section 4980B of the Code.
(j) Benefits under all Employee Benefit Plans, incentive
compensation plans and fringe benefits of the Acquired Companies (including all
Directors' Plans) are as represented and have not been increased subsequent to
the date of the Interim Balance Sheet.
(k) Sellers and the Acquired Companies have complied with the
provisions of Section 4980B of the Code and Sections 601 to 608 of ERISA, Title
III of the Public Health Service Act and the applicable provisions of the Social
Security Act since the effective date of those provisions to the applicable
group health plans maintained, sponsored or contributed to by the Acquired
Companies.
(l) No payment made to any officer, director or employee or agent of
the Acquired Companies pursuant to any employment or severance Contract or other
arrangement will be non-deductible to the Companies because of the applicability
of Sections 280G and 4999 of the Code, nor will the Companies be required to
"gross up" or otherwise compensate any recipient because of the imposition of
any excise tax (including any interest or penalties related thereto) because of
the applicability of Sections 2806 and 4999 to the payment.
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(m) Sellers and the Acquired Companies have provided Buyer with
their estimate of the liability created for providing retiree life and medical
benefits coverage to the Companies' active and retired employees together with
the assumptions used in estimating that liability. The Companies have the right
to modify and to terminate benefits to retirees (other than pensions) with
respect to both retired and active employees.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth in Section 3.14 of the Disclosure Letter:
(i) each Acquired Company is, and at all times has been, in full
compliance with each Legal Requirement that is or was applicable to it or
to the conduct or operation of its business or the ownership or use of any
of its assets, except where such failure to comply could not result in a
Material Adverse Effect;
(ii) no event has occurred, and no condition or circumstance exists,
that might (with or without notice or lapse of time) constitute or result
directly or indirectly in a violation by any Acquired Company of, or a
failure on the part of any Acquired Company to comply with, any Legal
Requirement, except where such violation or failure could not result in a
Material Adverse Effect; and
(iii) no Acquired Company has received any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding (A) any actual, alleged, possible or potential
violation of, or failure to comply with, any term or requirement of any
Governmental Authorization or (B) any actual, alleged, possible or
potential revocation on the part of any Acquired Company to undertake, or
to bear all or any portion of the cost of, any remedial action of any
nature.
(b) Section 3.14 of the Disclosure Letter identifies each
Governmental Authorization that is held by any Acquired Company or that
otherwise relates to the business of, or to any of the assets owned or used by,
any Acquired Company. Each Governmental Authorization identified or required to
be identified in Section 3.14 of the Disclosure Letter is valid and in full
force and effect. Except as set forth in Section 3.14 of the Disclosure Letter:
(i) each Acquired Company is, and at all times, has been in full
compliance with all of the terms and requirements of each Governmental
Authorization identified or required to be identified in Section 3.14 of
the Disclosure Letter;
(ii) no event has occurred, and no condition or circumstance exists,
that might (with or without notice or lapse of time) (A) constitute or
result directly or indirectly in a violation of or a failure to comply
with any term or requirement of any Governmental Authorization identified
or required to be identified in Section 3.14 of the Disclosure Letter or
(B) result directly or indirectly in the revocation, withdrawal,
suspension, cancellation or termination of, or any modification to, any
Governmental Authorization identified or required to be identified in
Section 3.14 of the Disclosure Letter;
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(iii) no Acquired Company has received any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding (A) any actual, alleged, possible or potential
violation of or failure to comply with any term or requirement of any
Governmental Authorization or (B) any actual, proposed, possible or
potential revocation, withdrawal, suspension, cancellation or termination
of, or modification to, any Governmental Authorization which, with respect
to (A) and (B) could result in a Material Adverse Effect; and
(iv) all applications required to have been filed for the renewal of
the Governmental Authorizations required to be identified in Section 3.14
of the Disclosure Letter have been duly filed on a timely basis with the
appropriate Governmental Bodies, and all other filings required to have
been made with respect to such Governmental Authorizations have been duly
made on a timely basis with the appropriate Governmental Bodies, except
where such failure could not result in a Material Adverse Effect.
The Governmental Authorizations identified in Section 3.14 of the Disclosure
Letter collectively constitute all of the Governmental Authorizations necessary
to permit the Acquired Companies to conduct and operate their businesses in the
manner in which such businesses are currently conducted and operated and to
permit the Companies to own and use their assets in the manner in which such
assets are currently owned and used.
3.15 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Section 3.15 of the Disclosure Letter, there is
no pending Proceeding:
(i) that has been commenced by or against any Acquired Company or
that otherwise relates to or might affect the business of, or any of the
assets owned or used by, any Acquired Company; or
(ii) that challenges, or that might have the effect of preventing,
delaying, making illegal or otherwise interfering with, any of the
Contemplated Transactions.
To the Knowledge of each Seller and the Acquired Companies, (1) no such
Proceeding has been Threatened and (2) no event has occurred, and no condition
or circumstance exists, that might give rise to or serve as a basis for the
commencement of any such Proceeding. Sellers have made available to Buyer copies
of all pleadings, correspondence and other documents relating to each Proceeding
identified in Section 3.15 of the Disclosure Letter. The Proceedings identified
in Section 3.15 of the Disclosure Letter will not have a Material Adverse
Effect.
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(b) Except as set forth in Section 3.15 of the Disclosure Letter:
(i) there is no Order to which any of the Acquired Companies, or any
of the assets owned or used by any of the Acquired Companies, is subject;
(ii) neither Seller is subject to any Order that relates to the
business of, or to any of the assets owned or used by, any Acquired
Company; and
(iii) no officer, director or employee of any Acquired Company is
subject to any Order that prohibits such officer, director or employee
from engaging in or continuing any conduct, activity or practice relating
to the business of any of the Companies.
(c) Except as set forth in Section 3.15 of the Disclosure Letter:
(i) each Acquired Company is, and at all times has been, in full
compliance with all of the terms and requirements of each Order to which
it, or any of the assets owned or used by it, is or has been subject,
except where such failure to comply could not result in a Material Adverse
Effect;
(ii) no event has occurred, and no condition or circumstance exists,
that might (with or without notice or lapse of time) constitute or result
directly or indirectly in a violation of or a failure to comply with any
term or requirement of any Order to which any Acquired Company, or any of
the assets owned or used by any Acquired Company, is subject, except where
such violation or failure could not result in a Material Adverse Effect;
and
(iii) no Acquired Company has received any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding any actual, alleged, possible or potential
violation of, or failure to comply with, any term or requirement of any
Order to which any Acquired Company, or any of the assets owned or used by
any Acquired Company, is or has been subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. (a) Except as set forth in
Section 3.16 of the Disclosure Letter, since the Audit Date, the Acquired
Companies have conducted their businesses only in the Ordinary Course of
Business and there has not been any:
(i) change in any Acquired Company's authorized or issued capital
stock; grant of any stock option or right to purchase shares of capital
stock of any Acquired Company; issuance of any security convertible into
such capital stock; grant of any registration rights; purchase,
redemption, retirement or other acquisition by any Acquired Company of any
shares of any such capital stock; or declaration or payment of any
dividend or other distribution or payment in respect of shares of capital
stock;
(ii) amendment to the Organizational Documents of any Acquired
Company;
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(iii) payment or increase by any Acquired Company of any bonuses,
salaries, or other compensation to any director, officer, employee, or
stockholder (except to directors, officers, employees, or stockholders in
the Ordinary Course of Business) or entry into any employment, severance,
or similar Contract with any director, officer, or employee;
(iv) adoption of, or increase in, any profit sharing, bonus,
deferred compensation, savings, insurance, pension, retirement, or other
employee benefit plan for or with any employees of any Acquired Company;
(v) damage, destruction, or loss to any asset or property of any
Acquired Company, whether or not covered by insurance, affecting
materially and adversely the properties, assets, business, financial
condition, or prospects of the Acquired Company, taken as a whole;
(vi) entry into, termination, or receipt of notice of termination of
(a) any license, distributorship, dealer, sales representative, joint
venture, credit, or similar agreement, or (b) any Contract or transaction
involving a total remaining commitment by any Acquired Company of at least
$25,000;
(vii) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of any
Acquired Company or mortgage, pledge, or imposition of any lien or other
encumbrance on any material asset or property of any Acquired Company,
including, without limitation, the sale, lease, or other disposition of
any Intellectual Property Assets;
(viii) cancellation or waiver of any claims or rights with a value
to any Acquired Company in excess of $25,000;
(ix) conduct of business or entering into any transaction, other
than in the Ordinary Course of Business of the Acquired Companies;
(x) material change in the accounting methods followed by any
Acquired Company; and
(xi) agreement, whether or not in writing, to do any of the
foregoing by any Acquired Company.
3.17 CONTRACTS; NO DEFAULTS. (a) Except as set forth in Section 3.17 of
the Disclosure Letter, Sellers have delivered to Buyer copies of all Contracts
described in (i) through (xv) below to which any Acquired Company is a party or
by which any Acquired Company is bound. Section 3.17 of the Disclosure Letter
also sets forth reasonably complete details concerning such Contracts,
including, among other things, the parties to the Contracts, the amount of the
remaining commitment of the Acquired Companies thereunder, and the Acquired
Companies' office where details relating to the Contract are located.
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(i) Each Contract that involves performance of services or delivery
of goods and/or materials by any of the Acquired Companies of an amount or
value in excess of $25,000;
(ii) Each Contract that involves performance of services or delivery
of goods and/or materials to any Acquired Company of an amount or value in
excess of $25,000;
(iii) Each Contract not in the Ordinary Course of Business involving
expenditures or receipts of the Acquired Companies in excess of $25,000;
(iv) Each lease, rental or occupancy agreement, license, installment
and conditional sale agreement, and other Contract affecting the ownership
of, leasing of, title to, use of, or any leasehold or other interest in,
any real or personal property (except personal property leases and
installment and conditional sales agreements having a value per item or
aggregate payments of less than $25,000 and with terms of less than one
year);
(v) Each licensing agreement or other Contract with respect to
patents, trademarks, copyrights, or other intellectual property, including
agreements with current or former employees, consultants, or contractors
regarding the appropriation or the non-disclosure of Intellectual Property
Assets;
(vi) Each Contract to which any employee, consultant, or contractor
of any Acquired Company is bound which in any manner purports to (A)
restrict such employee's, consultant's, or contractor's freedom to engage
in any line of business or to compete with any other Person, or (B) assign
to any other Person such employee's, consultant's, or contractor's rights
to any invention, improvement, or discovery;
(vii) Each collective bargaining agreement or other Contract to or
with any labor union or other employee representative of a group of
employees relating to wages, hours, and other conditions of employment;
(viii) Each joint venture, partnership or other Contract (however
named) involving a sharing of profits, losses, costs, or liabilities by
any Acquired Company with any other Person;
(ix) Each Contract containing covenants which in any way purport to
restrict any Acquired Company's business activity or purport to limit the
freedom of any Acquired Company to engage in any line of business or to
compete with any Person;
(x) Each Contract providing for payments to or by any Person based
on sales, purchases or profits, other than direct payments for goods;
(xi) Each power of attorney which is currently effective and
outstanding;
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(xii) Each Contract entered into other than in the Ordinary Course
of Business which contains or provides for an express undertaking by any
Acquired Company to be responsible for consequential damages;
(xiii) Each Contract for capital expenditures in excess of $25,000;
(xiv) Each written warranty, guaranty or other similar undertaking
with respect to contractual performance extended by any Acquired Company
other than in the Ordinary Course of Business; and
(xv) Each amendment, supplement, and modification (whether written
or oral) in respect of any of the foregoing.
(b) Except as set forth in Section 3.17 of the Disclosure Letter, all of
the Contracts listed in the Disclosure Letter pursuant to paragraph (a) hereof
are in full force and effect, are valid and enforceable in accordance with their
terms, and no condition exists or event has occurred which, with notice or lapse
of time or both, would constitute a default or a basis for force majeure or
other claim of excusable delay or non-performance thereunder, other than that
which could not cause a Material Adverse Effect. The terms and conditions of all
such Contracts are reasonable and customary in the industries and trades in
which the Acquired Companies operate, and there are no extraordinary terms
contained therein.
(c) There are no renegotiations of, or attempts to renegotiate, or
outstanding rights to renegotiate, any material amounts paid or payable to any
Acquired Company under current or completed Contracts with any Person having the
contractual or statutory right to demand or require such renegotiation. No such
Person has made written demand for such renegotiation.
(d) The Contracts relating to the sale, design, manufacture, or provision
of products or services by the Companies have been entered into in the Ordinary
Course of Business and have been entered into without the commission of any act
alone or in concert with another Person, or any consideration having been paid
or promised, which is or would be in violation of any Legal Requirement.
3.18 INSURANCE. (a) Section 3.18(a) of the Disclosure Letter contains an
accurate and complete description of all policies of property, fire and
casualty, product liability, workers compensation, and other forms of insurance
owned or held by any Acquired Company. Such description provides reasonably
complete details concerning such policies, identifying among other things, (i)
the issuer of each such policy, (ii) the amount of coverage still available and
outstanding under each such policy, (iii) whether each such policy is a "claims
made" or an "occurrences" policy, and (iv) any provision for reimbursement to
the insurer or retrospective premium adjustments. Copies of such policies have
been made available to Buyer or are attached to the Disclosure Letter.
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(b) Except as set forth in Section 3.18(b) of the Disclosure Letter, all
policies described in paragraph (a) hereof (i) are issued by insurance companies
reasonably believed by the Acquired Companies to be financially sound and
reputable, (ii) are sufficient for material compliance with all Legal
Requirements and Contracts to which any Acquired Company is a party or by which
any of them is bound, (iii) are valid, outstanding, and enforceable policies,
(iv) provide adequate insurance coverage for the assets and the operations of
the Acquired Companies for all material risks normally insured against by a
Person carrying on the same business or businesses as the Acquired Companies,
and (v) will not in any way be affected by, terminate, or lapse by reason of,
the Contemplated Transactions.
(c) Except as set forth in Section 3.18(c) of the Disclosure Letter,
neither Sellers nor any Acquired Company has received, (i) any notice of
cancellation of any policy described in paragraph (a) hereof or refusal of
coverage thereunder, (ii) any notice that any issuer of such policy has filed
for protection under applicable bankruptcy laws or is otherwise in the process
of liquidating or has been liquidated, or (iii) any other indication that such
policies are no longer in full force or effect or that the issuer of any such
policy is no longer willing or able to perform its obligations thereunder.
3.19 ENVIRONMENTAL MATTERS. Except as disclosed in Schedule 3.19 of the
Disclosure Letter:
(a) Neither the Sellers nor any Acquired Company, nor any other
Person for whose conduct they are or may be held responsible, has, or has
any basis to expect, any Environmental, Health and Safety Liabilities with
respect to the Facilities or with respect to any other properties and
assets (real, personal and mixed, tangible and intangible) in which
Sellers or any Acquired Company (or any predecessor), has or had an
interest.
(b) Set forth in Section 3.19(b) of the Disclosure Letter are all
the consents, licenses, permits, approvals, and certificates held by the
Acquired Companies on the date hereof which constitute all of the
consents, licenses, permits, approvals, and certificates required under
Environmental Laws for the Acquired Companies to lawfully own, operate,
use, and maintain their assets and to conduct their businesses. Sellers
and the Acquired Companies have, at all times prior to Closing, maintained
the assets and conducted the businesses of the Acquired Companies in full
compliance with the terms and conditions of all such consents, licenses,
permits, approvals, and certificates, and all required filings and all
required applications with respect to and for renewal thereof have been
timely made and filed. All such consents, licenses, permits, approvals,
and certificates are in full force and effect and there are no proceedings
pending or, to the Knowledge of each Seller or of the Acquired Companies,
threatened that seek the revocation, cancellation, suspension, or adverse
modification thereof.
(c) (i) There are no Hazardous Materials on or in the Facilities;
and (ii) neither the Sellers nor any Acquired Company, nor any other
Person for whose conduct they are or may be held responsible, has
generated, manufactured, refined, transported, treated, stored, handled,
disposed, transferred, produced, imported, used or processed any Hazardous
Materials.
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(d) There has been no Release or Threat of Release, of any Hazardous
Materials at or from the Facilities or at any other locations where any
Hazardous Materials were generated, manufactured, refined, transferred,
produced, imported, used or processed from or by the Facilities, or from
or by any other properties and assets (real, personal and mixed, tangible
and intangible) in which Sellers or any Acquired Company has or had an
interest, whether by the Sellers, any Acquired Company or by any other
Person for whose conduct they are or may be held responsible.
(e) There are no claims, liens, encumbrances, or any other
restrictions of any nature whatsoever, resulting from any Environmental,
Health or Safety Liabilities or arising under or pursuant to any
Environmental Law, with respect to or affecting any of the Facilities or
any other properties and assets (real, personal and mixed, tangible and
intangible) in which Sellers or any Acquired Company has an interest.
3.20 EMPLOYEES. Section 3.20 of the Disclosure Letter contains a current
list setting forth the following information for each employee or director of
the Acquired Companies, including, without limitation, each employee on leave of
absence or layoff status: employer; name; job title; current compensation paid
or payable and showing any change in compensation since the Audit Date; vacation
accrued and service credited for purposes of vesting and eligibility to
participate under the Acquired Companies' pension, retirement, profit-sharing,
thrift-savings, deferred compensation, stock bonus, stock option, cash bonus,
employee stock ownership (including, without limitation, investment credit or
payroll stock ownership) severance pay, insurance, medical, welfare and vacation
plans, other or any director plan. To the Knowledge of each Seller, no former or
current employee or current or former director of the Acquired Companies is a
party to, or is otherwise bound by, any agreement or arrangement, including,
without limitation, any confidentiality, non-competition or proprietary rights
agreement between such employee or director and any other entity or person
("Proprietary Rights Agreement") which in any way adversely affected, affects or
will affect (i) the performance of his duties as an employee or director of the
Acquired Companies or (ii) the Acquired Companies' ability to conduct the
Acquired Companies' business, including, without limitation, any Proprietary
Rights Agreement with Sellers or the Acquired Companies by any such employee or
director. At Buyer's request, Sellers shall assign to Buyer or, at Buyer's
request, Sellers shall use their Best Efforts to enforce, at Sellers' expense,
any or all of their rights under any Proprietary Rights Agreements against
Sellers' former and current employees or former or current directors with
respect to the Acquired Companies' business. To each Seller's Knowledge, no
director, officer or other key employee of the Acquired Companies intends to
terminate his employment with the Acquired Companies. At Buyer's request,
Sellers shall (and prior to the Closing Date shall cause the Acquired Companies
to) use their Best Efforts in order that Buyer may enjoy to the extent permitted
by law the Acquired Companies' record rating and benefits under the worker's
compensation laws and unemployment compensation laws of the states and countries
in which there is coverage of employees of the Acquired Companies, any of whom
may be employees of the Acquired Companies after the Closing Date.
Sellers have set forth in Section 3.20 of the Disclosure Letter a current
list setting forth the following for each retired employee or director or their
dependents of the Acquired Companies receiving benefits or scheduled to receive
benefits in the future: name, pension benefit, pension option election, retiree
medical insurance coverage, retiree life insurance coverage, and other benefits.
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3.21 LABOR DISPUTES; COMPLIANCE. None of the Acquired Companies has been,
or is a party to any collective bargaining or other labor Contract. There has
not been, and there is not presently pending or existing, any strike, slowdown,
picketing, work stoppage, labor arbitration or proceeding in respect of the
grievance of any employee, an application or complaint filed by an employee or
union with the National Labor Relations Board or any comparable Governmental
Body, organizational activity or other labor dispute against or affecting the
Acquired Companies or the premises of any of them, or to the best of Sellers'
Knowledge threatened, and no application for certification of a collective
bargaining agent is pending, or to the best of Sellers' Knowledge threatened. No
facts or circumstances exist which could provide the basis for any work stoppage
or other labor dispute. There is no lockout of any employees by the Acquired
Companies, nor is any such action contemplated by any of them. The Acquired
Companies have complied in all respects with all Legal Requirements relating to
employment, equal employment opportunity, nondiscrimination, immigration, wages,
hours, benefits, collective bargaining, the payment of social security and
similar taxes, occupational safety and health and plant closing. None of the
Acquired Companies is liable for the payment of taxes, fines, penalties or other
amounts, however designated, for failure to comply with any of the foregoing
Legal Requirements.
3.22 INTELLECTUAL PROPERTY. (a) Intellectual Property Assets: The term
"Intellectual Property Assets" shall include each Acquired Company's name, all
fictitious business names, trade names, registered and unregistered trademarks,
service marks and applications (collectively "Marks"), all patents and patent
applications (collectively "Patents"), all copyrights in both published works
and unpublished works which are material to the business ("Copyrights"), all
rights in mask works (collectively "Rights in Mask Works"), and all know-how,
trade secrets, confidential information, software, technical information,
process technology, plans, drawings and blue prints ("Trade Secrets") owned,
used or licensed by any Acquired Company as licensee or licensor.
(b) Agreements: Except for any license implied by the sale of a product
and common software programs with a value of less than $25,000, Section 3.22 of
the Disclosure Letter is an accurate and complete listing and summary
description, including any royalties paid or received by the Acquired Companies,
of all agreements relating to the Intellectual Property Assets to which any
Acquired Company is a party. There are no outstanding and, to the Knowledge of
each Seller, no threatened disputes or disagreements with respect to any such
agreement.
(c) Know-How Necessary for the Business:
(i) The Intellectual Property Assets are all those necessary for the
operation of the Acquired Companies' business as it is currently
conducted. The Acquired Companies are the owners of all right, title and
interest in and to each of the Intellectual Property Assets free and clear
of all liens, security interests, charges, encumbrances, equities and
other adverse claims and has the right to use without payment to a third
party all the Intellectual Property Assets.
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(ii) All employees of any Acquired Company have executed written
agreements with one or more of the Acquired Companies which assign to one
or more of the Acquired Companies all rights to any inventions,
improvements, discoveries or information which relate to the business of
the Acquired Companies. No employee of any Acquired Company has entered
into any agreement which restricts or limits in any way the scope or type
of work in which the employee may be engaged or requires the employee to
transfer, assign or disclose information concerning his work to anyone
other than one or more of the Acquired Companies.
(d) Patents:
(i) Section 3.22 of the Disclosure Letter is an accurate and
complete listing and summary description of all Patents. One or more of
the Acquired Companies is the owner of all right, title and interest in
and to each of the Patents free and clear of all liens, security
interests, charges, encumbrances, equities and other adverse claims.
(ii) All the Patents are currently in compliance with formal legal
requirements (including payment of filing, examination and maintenance
fees and proofs of working or use), are valid and enforceable, and are not
subject to any maintenance fees or taxes or actions falling due within 90
days after the date of Closing.
(iii) No Patent has been or is now involved in any interference,
reissue, re-examination or opposition proceeding. Seller is not aware of
any potentially interfering patent or patent application of any third
party.
(iv) No Patent is infringed, or to each Seller's Knowledge, has been
challenged or threatened in any way. None of the products manufactured and
sold, nor any processes or know-how used, by Seller infringe or to each
Seller's Knowledge, are alleged to infringe any patent or other
proprietary right of any other Person.
(e) Trademarks:
(i) Section 3.22 of the Disclosure Letter is an accurate and
complete listing and summary of all Marks. Seller is the owner of all
right, title and interest in and to each of the Marks free and clear of
all liens, security interests, charges, encumbrances, equities and other
adverse claims.
(ii) All the Marks have been registered and are currently in
compliance with formal legal requirements (including the payment of
filing, examination and maintenance fees and proofs of working or use),
are valid and enforceable and are not subject to any maintenance fees or
taxes or actions falling due within 90 days after the date of Closing.
(iii) No Mark has been or is now involved in any opposition,
invalidation or cancellation proceeding nor, to each Seller's Knowledge,
is any such action threatened with respect to any of the Marks.
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(iv) Seller is not aware of any potentially interfering trademark or
trademark application of any third party.
(v) No Mark is infringed or, to each Seller's Knowledge, has been
challenged or threatened in any way. None of the Marks used by Seller
infringe or to each Seller's Knowledge, are alleged to infringe any trade
name, trademark or service mark of any third party.
(f) Copyrights:
(i) Section 3.22 of the Disclosure Letter is an accurate and
complete listing and summary description of all Copyrights. One or more of
the Acquired Companies is the owner of all right, title and interest in
and to each of the Copyrights free and clear of all liens, security
interests, charges, encumbrances, equities and other adverse claims.
(ii) All the Copyrights have been registered and are currently in
compliance with formal legal requirements (including the payment of
filing, examination and maintenance fees and proofs of working or use),
are valid and enforceable and are not subject to any maintenance fees or
taxes or actions falling due within 90 days after the date of Closing.
(iii) No Copyright is infringed or, to each Seller's Knowledge, has
been challenged or threatened in any way. None of the Copyrights infringe
or to each Seller's Knowledge, are alleged to infringe any copyright of
any third party.
(g) Trade Secrets:
(i) With respect to each Trade Secret the documentation relating to
such Trade Secret is current, accurate and sufficient in detail and
content to identify and explain it, and to allow its full and proper use
without reliance on the special knowledge or memory of others.
(ii) Sellers and the Acquired Companies have taken all reasonable
precautions to protect the secrecy, confidentiality and value of its Trade
Secrets.
(iii) One or more of the Acquired Companies has good title and an
absolute (although not necessarily exclusive) right to use the Trade
Secrets. The Trade Secrets are not part of the public knowledge or
literature, nor to the best knowledge of Seller have they been used,
divulged, or appropriated for the benefit of any Person other than one or
more of the Acquired Companies or to the detriment of the Acquired
Companies. No Trade Secret is subject to any adverse claim nor has any
Trade Secret been challenged or threatened in any way.
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3.23 CERTAIN PAYMENTS. Neither the Acquired Companies nor any director,
officer, agent or employee of the Acquired Companies has and no other Person
associated with or acting for or on behalf of the Acquired Companies has
directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff
influence payment, kickback or other payment to any Person, private or public,
regardless of form whether in money, property or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable treatment
for business secured or (iii) to obtain special concessions or for special
concessions already obtained for or in respect of the Acquired Companies or any
Affiliate of the Acquired Companies or (b) established or maintained any fund or
asset which has not been recorded in the books of the Acquired Companies.
3.24 RELATIONSHIPS WITH RELATED PERSONS. Sellers do not have, and no
Related Person of Sellers or the Acquired Companies has, (nor since January 1,
2002 had) any interest in any property, real or personal, tangible or
intangible, used in or pertaining to the business of the Acquired Companies.
Since January 1, 2002, neither Sellers nor any Related Person of Sellers or the
Acquired Companies, individually or collectively, has, or owns or has owned of
record or as a beneficial owner an equity interest or any other financial or
profit interest in any Person which has, (i) had business dealings or a material
financial interest in any transaction with the Acquired Companies, or (ii)
engaged in competition with the Acquired Companies with respect to any line of
the products or services of the Acquired Companies (a "Competing Business") in
any market presently served by the Acquired Companies, except for less than one
percent of the outstanding capital stock of any Competing Business that is
publicly traded on any recognized exchange or in the over-the-counter market.
None of the Sellers is party to any Contract with, or has any claim or right
against, any Acquired Company, except as set forth in Section 3.24 of the
Disclosure Letter.
3.25 BROKERS OR FLNDERS. Sellers and their agents have incurred no
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other like payment in connection with this Agreement
and will indemnify and hold Buyer harmless from any such payment alleged to be
due by or through Sellers as a result of the action of Sellers or its agents.
3.26 NEVADA STATUTES. Provided that Buyer does not amend the Company's
Organizational Documents for at least eleven (11) days after the Closing,
Sellers have caused the Company to take all action necessary to render Sections
78.378 to 78.3793 and Sections 78.411 to 78.444 of the General Corporation Law
of Nevada (the "Nevada Statutes") inapplicable to the Company. The Nevada
Statutes will not apply to the Contemplated Transactions.
3.27 DISCLOSURE.
(a) No representation or warranty of Sellers contained in this
Agreement or statement in the Disclosure Letter contains any untrue statement.
No representation or warranty of Sellers contained in this Agreement or
statement in the Disclosure Letter omits to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
(b) No notice given pursuant to Section 7.5 will contain any untrue
statement or will omit to state a material fact necessary in order to make the
statements therein or in this Agreement, in light of the circumstances under
which they were made, not misleading.
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(c) There is no fact known to any Seller which has specific
application to any Seller or the Acquired Companies (other than general economic
or industry conditions) and which materially adversely affects or, so far as any
Seller can reasonably foresee, materially threatens, the assets, business,
prospects, financial condition or results of operations of the Acquired
Companies considered as a whole which has not been set forth in this Agreement
or the Disclosure Letter.
(d) The disclosures in the Disclosure Letter, and those in any
supplement thereto, shall relate only to the representations and warranties in
the Section of the Agreement to which they expressly relate and to no other
representation or warranty in this Agreement.
(e) In the event of any inconsistency between the statements in the
body of this Agreement and those in the Disclosure Letter (other than an
exception expressly set forth as such is in the Disclosure Letter in relation to
a specifically identified representation or warranty), those in this Agreement
shall control.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida.
4.2 AUTHORITY; NO CONFLICT. Buyer has full corporate power and authority
to execute and deliver this Agreement, the Promissory Notes, the Indemnity
Agreement, and the Pledge Agreement and to perform its obligations hereunder and
thereunder and each of Buyer and Encompass Group Affiliates, Inc. has full
corporate power and authority to execute and deliver the Employment Agreements
and to perform its obligations thereunder. This Agreement has been, and the
Promissory Notes, the Indemnity Agreement, the Pledge Agreement and the
Employment Agreements will be, duly authorized, executed, and delivered by
Buyer, and Encompass with respect to the Employment Agreements, and constitute,
or will constitute, as the case may be, the legal, valid and binding obligation
of Buyer enforceable against Buyer, and Encompass with respect to the Employment
Agreements, in accordance with their respective terms. Neither the execution and
delivery of this Agreement, the Promissory Notes, the Indemnity Agreement, the
Pledge Agreement and the Employment Agreements by Buyer, and Encompass with
respect to the Employment Agreements, nor the consummation of the Contemplated
Transactions will:
(a) violate or conflict with any provision of the Organizational
Documents of Buyer or its Subsidiaries;
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(b) violate or conflict with any provision of any Legal Requirement
binding upon Buyer and its Subsidiaries, except that which could not have
a Buyer Material Adverse Effect; or
(c) result in a breach of, or constitute a default under (or with
notice or lapse of time or both result in a breach of or constitute a
default under) or otherwise give any Person the right to terminate, any
Contract to which Buyer or its Subsidiaries is a party or by which it is
bound, except that which could not have a Buyer Material Adverse Effect.
Buyer and its Subsidiaries are not required to give prior notice to, or obtain
any Consent of, any Person in connection with Buyer's execution and delivery of
this Agreement, the Promissory Notes, the Indemnity Agreement, the Pledge
Agreement and the Employment Agreements or the consummation of the Contemplated
Transactions.
4.3 INVESTMENT INTENT. Buyer is acquiring the Shares for its own account,
and not with a view to their distribution within the meaning of Section 2.11 of
the Securities Act. Buyer is an "accredited investor," as such term is defined
in Rule 501(a) promulgated pursuant to the Securities Act.
4.4 BROKERS OR FINDERS. Except as contemplated by that certain Advisory
Agreement, dated April 1, 2004, between Buyer and Maximum Ventures, Inc., Buyer
and its officers and agents have incurred no obligation or liability, contingent
or otherwise, for brokerage or flinders' fees or agents' commissions or other
like payment in connection with this Agreement and will indemnify and hold
sellers harmless from any such payment alleged to be due by or through Buyer as
a result of the action of Buyer, its officers and agents.
4.5 CAPITALIZATION. The authorized capital stock of Buyer consists of (i)
5,000,000,000 shares of Common Stock, no par value per share (the "Buyer Common
Stock"), of which 2,016,247,731 shares were issued and outstanding and no shares
were held in treasury as of the close of business on December 1, 2004, and (ii)
25,000 shares of preferred stock, par value $.01 per share (the "Buyer Preferred
Shares") of which (A) 4,200 Buyer Preferred Shares designated Series A and (B)
300 Buyer Preferred Shares designated Series B were issued and outstanding on
December 1, 2004. All of the outstanding shares of Buyer Common Stock and Buyer
Preferred Shares have been duly authorized and are validly issued, fully paid
and nonassessable. Except as set forth in Section 4.5 of Buyer's Disclosure
Letter, Buyer has no shares of Buyer Common Stock or Buyer Preferred Shares
reserved for or subject to issuance. Except as set forth in Section 4.5 of
Buyer's Disclosure Letter, as of December 1, 2004, Buyer was not obligated to
issue any shares of Buyer Common Stock pursuant to any stock ownership plan,
stock incentive plan, stock option plan or any other qualified retirement plan
(the "Buyer Stock Plans"). Each of the outstanding shares of capital stock of
each of Buyer's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by Buyer or a direct or indirect wholly-owned subsidiary
of Buyer, free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as set forth in Section 4.5 of Buyer's Disclosure Letter,
there are no preemptive or other outstanding rights, options, warrants,
conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements or commitments to issue or to sell any shares
of capital stock or other securities of Buyer or any of its Subsidiaries or any
securities or obligations convertible or exchangeable into or exercisable for,
or giving any Person a right to subscribe for or acquire, any securities of
Buyer or any of its Subsidiaries, and no securities or obligation evidencing
such rights are authorized, issued or outstanding. Buyer does not have
outstanding any bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for securities
having the right to vote) with the stockholders of Buyer on any matter.
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4.6 REPORTS; FINANCIAL STATEMENTS. Buyer has made available to each
Seller, each registration statement, report, proxy statement or information
statement prepared by it since June 30, 2004 (the "Buyer Audit Date"), including
its Annual Report on Form 10-K for the year ended June 30, 2004, in the form
(including exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed subsequent to the date hereof,
the "Buyer Reports"). As of their respective dates, to the Knowledge of Buyer,
the Buyer Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they were
made, not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Buyer Reports (including the related notes
and schedules) fairly presents the consolidated financial position of Buyer and
its Subsidiaries as of its date and each of the consolidated statements of
income and of cash flows included in or incorporated by reference into the Buyer
Reports (including any related notes and schedules) fairly presents the
consolidated results of operations, retained earnings and cash flows, as the
case may be, of it and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to notes and normal year-end
audit adjustments that will not be material in amount or effect), in each case
in accordance with consistently applied during the periods involved, except as
may be noted therein. Since the Buyer Audit Date, Buyer and each of its
Subsidiaries required to make filings under any Legal Requirement has filed with
the applicable Governmental Bodies all material forms, statements, reports and
documents (including exhibits, annexes and any amendments thereto) required to
be filed by them, and each such filing complied in all material respects with
all applicable laws, rules and regulations, other than such failures to file and
non-compliance that could not have a Buyer Material Adverse Effect. Except as
set forth in applicable filings with the SEC, to Buyer's Knowledge, as of the
date hereof, no Person or "group" "beneficially owns" 5% or more of its
outstanding voting securities, with the terms "beneficially owns" and "group"
having the meanings ascribed to them under Rule 13d-3 and Rule 13d-5 under the
Exchange Act.
ARTICLE V
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER.
The obligations of Buyer to effect the transactions contemplated under
this Agreement at the Closing are subject to the fulfillment on or prior to the
Closing Date of the following conditions, any one or more of which may be waived
in whole or in part by Buyer in writing:
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5.1 REPRESENTATION AND WARRANTIES TRUE AT THE CLOSING DATE. The
representations and warranties of Sellers contained in this Agreement and the
Disclosure Letter (without giving effect to any updating or corrective
information provided pursuant to Article VII or otherwise) shall have been true
and correct in all material respects (except for those representations and
warranties qualified as to materiality, which shall be true and correct in all
respects) when made and as of the Closing Date, and Sellers shall have delivered
to Buyer a certificate, executed by each Seller and dated the Closing Date, to
the foregoing effect.
5.2 NO MATERIAL ADVERSE CHANGE. During the period from the date of the
Interim Balance Sheet to the Closing Date, there shall not have been any
material adverse change in the financial condition, results of operations,
business or prospects of any Acquired Company, individually or taken as a whole,
nor any material loss or damage to its assets, whether or not insured, which
materially affects the ability of any Acquired Company, individually or taken as
a whole, to conduct its business; Sellers shall have delivered to Buyer a
certificate, executed by each Seller and dated the Closing Date, to the
foregoing effect.
5.3 SELLERS' PERFORMANCE. Each of the Sellers shall have performed and
complied with all covenants and agreements required by this Agreement and each
other agreement entered into in connection herewith to be performed or complied
with by that Sellers on or before the Closing Date. At the Closing, each Seller
shall have delivered to Buyer a certificate, dated the Closing Date, to the
foregoing effect.
5.4 OPINION OF SELLERS' COUNSEL. Sellers shall have delivered to Buyer an
opinion of counsel to Sellers, dated the Closing Date, in a form reasonably
acceptable to Buyer's counsel.
5.5 OWNERSHIP OF SHARES. Sellers shall have transferred all the Shares to
Buyer, free and clear of all Encumbrances. No claim shall have been filed, made
or threatened by any Person asserting that such Person is entitled to any part
of the Purchase Price paid for the Shares. The parties agree that Buyer's
purchase of the Shares pursuant to the terms and conditions of this Agreement
will not trigger any transfer taxes.
5.6 NO PROHIBITION OF TRANSACTION. No Proceeding or regulation or
legislation shall have been instituted, threatened or proposed before, nor any
Order issued by, any Governmental Body to enjoin, restrain, prohibit or obtain
substantial damage (a) in respect of, or which is related to, or arises out of,
this Agreement or the consummation of the Contemplated Transactions, or (b)
which, in the reasonable judgment of the Buyer, could have a Material Adverse
Effect.
5.7 COMPLIANCE WITH LAW. There shall have been obtained any and all
permits, approvals and consents of any Governmental Body which counsel for Buyer
may reasonably deem necessary or appropriate so that consummation of the
Contemplated Transactions will be in compliance with applicable Legal
Requirements.
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5.8 DOCUMENTATION AND CONSENTS. Sellers shall have made all deliveries
required pursuant to Section 2.4 (a) of this Agreement. In addition, Sellers
shall have delivered all assignments, consents, approvals and other documents,
certificates and instruments as the Buyer may reasonably request for the purpose
of (a) enabling its counsel to provide the opinion required under this
Agreement, (b) evidencing the accuracy and completeness of any representations
or warranties, the performance of any covenants and agreements of the Sellers,
or the satisfaction any conditions, all as contained or referred to in this
Agreement or (c) effectuating or confirming the conveyance and transfer of the
Shares to Buyer.
5.9 EMPLOYMENT AGREEMENTS. Each of Li and Lee shall have executed and
delivered to Buyer employment agreements (the "Employment Agreements") in the
forms of Exhibits 5.9(a) and 5.9(b), respectively.
5.10 CONSENTS TO ASSIGNMENTS. On or prior to the Closing Date, Sellers
shall have furnished Buyer with evidence of consents as Sellers shall know or
Buyer shall determine to be required to enable Buyer to continue to enjoy the
benefit of any Contract or Governmental Authorization to or of which any
Acquired Company is a party or a beneficiary and which can, by its terms (with
consent) and consistent with applicable Legal Requirements, be so enjoyed after
the transfer of the Shares to the Buyer. If there is in existence any
Governmental Authorization that by its terms or applicable Legal Requirements,
expires, terminates, or is otherwise rendered invalid upon the transfer of the
Shares to the Buyer acquired Company to continue to be conducted following the
transfer of the Shares, Buyer shall have obtained or been furnished by Sellers
an equivalent of that license or permit, effective as of and after the Closing
Date.
5.11 RESIGNATIONS. Buyer shall have received the resignation of Li as
Chief Executive Officer of the Company, the resignation of Lee as a director of
the Company and the resignations of all other individuals who are officers or
directors of any Acquired Company immediately prior to the Closing that Buyer
deems appropriate.
5.12 SELLERS' RELEASE. Buyer shall have received a release in the form of
Exhibit 5.12 executed by each of the Sellers and such other employees of any
Acquired Company as Buyer may designate (the "Sellers' Release").
5.13 DUE DILIGENCE. Buyer shall have been satisfied, in its sole and
absolute discretion, with its due diligence investigation and review of the
financial condition, business and operations of the Company, including, without
limitation, Buyer's review of the Company's medical plans; provided, however,
that Buyer's due diligence investigation with respect to (i) Encumbrances on or
against the personal property of the Company existing prior to the date hereof
and (ii) judgments against the Company existing prior to the date hereof shall
be limited to searches through the website of LexisNexis, www.lexis.com;
provided further, however, that the foregoing shall in no way limit Sellers'
obligation hereunder to disclose to Buyer information of which either Seller
becomes aware related to (i) and (ii) above.
5.14 INVENTORY FACILITY. The Company's $3,500,000 inventory financing
facility, including the $1,000,000 standby letter of credit facility (the
"Textron Facility"), provided by Textron Financial Corporation ("Textron"),
shall remain in full force and effect with the consent of Textron, or the
Textron Facility shall have been refinanced by a third party on terms and
conditions satisfactory to Buyer, in its sole discretion.
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5.15 SERIES A PREFERRED STOCK. The closing of the transaction contemplated
by that certain agreement entered into, or to be entered into, by and among the
Company and the holders of the shares of Series A Preferred Stock shall have
occurred simultaneously with the Closing (the "Series A Transaction").
5.16 CONSENT. Buyer shall have received the consent of KPMG, the Company's
independent auditors, to the inclusion of the Company's financials in any Form
8-K filed to disclose the Contemplated Transactions and any other reports
required to be filed by the Company, Buyer or any of their affiliates on or
after the Closing.
5.17 RECORDS. The Acquired Companies shall retain possession of all
corporate, accounting, business and tax records of each such Acquired Company.
5.18 OPINION OF NEVADA COUNSEL. Sellers shall have delivered to Buyer an
opinion of counsel, authorized to practice law in the State of Nevada, that the
Nevada Statutes will not apply to the Contemplated Transactions.
5.19 OTHER DOCUMENTS AND ASPECTS OF THE TRANSACTION. Buyer shall have
received such other documents, instruments, certificates and opinions as may be
required by this Agreement or as may be reasonably requested by Buyer.
5.20 ACTIONS SATISFACTORY. All certificates, opinions and other documents
to be delivered by Sellers and all other matters to be accomplished prior to or
at the Closing shall be satisfactory in the reasonable judgment of Buyer and its
counsel.
5.21 SHARES. The Shares shall continue to be eligible for trading on the
Over-The-Counter Bulletin Board or NASDAQ.
5.22 UCC FINANCING STATEMENTS. Except for Micro Technology Concept, Inc.,
Textron Financial Corporation and Wells Fargo Bank National Association, Sellers
shall have (i) filed, or shall have obtained authorizations from the applicable
creditors to file, in the proper filing offices, UCC-3 Financing Statements
terminating all UCC-1 Financing Statements, and amendments thereto, set forth in
Section 3.8 of the Disclosure Letter, or (ii) demonstrated that the obligation
underlying the UCC-1 has been satisfied to the reasonable satisfaction of Buyer.
ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS
The obligations of Sellers to effect the transactions contemplated under
this Agreement at the Closing are subject to the fulfillment on or prior to the
Closing Date of the following conditions, any one or more of which may be waived
in whole or in part by Sellers in writing:
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6.1 REPRESENTATIONS AND WARRANTIES TRUE AT THE CLOSING DATE. The
representations and warranties of Sellers contained in Section 4 of this
Agreement shall have been true and correct when made and as of the Closing Date,
and Buyer shall have delivered to Sellers a certificate, executed by an
executive officer of Buyer and at the Closing Date, to the foregoing effect.
6.2 INDEMNITY AGREEMENT. Buyer shall have delivered to Sellers the
Indemnity Agreement.
6.3 PLEDGE AGREEMENT. Buyer shall have delivered to Quarles the Pledge
Agreement and the certificates representing the Shares.
6.4 BUYER'S PERFORMANCE. Buyer shall have performed and complied with all
covenants and agreements required by this Agreement to be performed or complied
with by Buyer on or before the Closing Date. At the Closing, Buyer shall have
delivered to Sellers a certificate, signed by an executive officer of Buyer and
dated the Closing Date, to the foregoing effect.
6.5 OPINION OF BUYER'S COUNSEL. Buyer shall have delivered to Sellers an
opinion of counsel to Buyer, dated the Closing Date, in a form reasonably
acceptable to Sellers' counsel.
6.6 REVOLVING LINE OF CREDIT. Buyer shall have used commercially
reasonable efforts to obtain a $1,000,000 to $2,000,000 revolving line of credit
for bulk wholesale purchases and resales for the Company.
6.7 CONTINUED LISTING. Buyer's Common Stock shall continue to be eligible
for trading on the Over-The-Counter Bulletin Board or NASDAQ.
ARTICLE VII
COVENANTS OF SELLERS PRIOR TO CLOSING DATE
7.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement to the Closing Date, Sellers shall, and shall cause each Acquired
Company and its officers, employees, agents and representatives to, afford Buyer
and its representatives (including legal counsel, financial and other advisors,
consultants and independent accountants) full and free access to each Acquired
Company's personnel, properties, contracts, books and records and other
documents and data, including tax returns, and shall furnish Buyer with copies
of all documents and with such additional financial and operating data and other
information as Buyer shall, from time to time, reasonably request for the
purpose of enabling Buyer to investigate the affairs of each Acquired Company
and the accuracy of the representations and warranties of Sellers made in this
Agreement. During such investigation, Buyer and its representatives shall have
the right to make copies of such contracts, books and records, tax returns and
other documents and data as it may deem advisable. The furnishing of such
information to Buyer any such investigation by Buyer shall not affect Buyer's
right to rely on any of the representations and warranties made in this
Agreement.
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7.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. During the
period the date of this Agreement to the Closing Date, Sellers shall cause each
Acquired Company to conduct its business only in the ordinary course and in a
manner consistent with the past practices of such Acquired Company; use its Best
Efforts to preserve intact its current business organization, keep available the
services of its current officers, employees and agents, and maintain its
relations and good will with suppliers, customers, landlords, creditors,
employees, agents and others having business relationships with it; confer with
Buyer concerning operational matters of material nature; and report periodically
to Buyer concerning the status of the business, operations and finances of the
Acquired Companies.
7.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by this
Agreement, Sellers shall not, without the prior consent of Buyer, take any
action described in Section 3.16 of this Agreement.
7.4 APPROVALS OF GOVERNMENTAL BODIES. Between the date of this Agreement
the Closing Date, Sellers will use their Best Efforts, and will cooperate with
Buyer in taking all steps necessary, promptly to (i) make any filing and (ii)
obtain any consent, approval or authorization of any Governmental Body, in each
case required by Legal Requirements to allow the consummation of this Agreement
and the Contemplated Transactions.
7.5 NOTIFICATION. Between the date of this Agreement and the Closing Date,
each Seller will promptly notify Buyer in writing if such Seller or any Acquired
Company becomes aware of any fact or condition which makes untrue any
representation or breaches any warranty made by Sellers in this Agreement or if
he, she or any Acquired Company becomes aware of the occurrence after the date
of this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) make untrue any such representation or breach
any such warranty had such representation or warranty been made as of the time
of occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Disclosure Letter if such Disclosure Letter
were dated the date of the occurrence or discovery of any such fact or
condition, Sellers shall deliver to Buyer a Supplement to the Disclosure Letter
specifying such change. Delivery of such Supplements shall be for information
purposes only and shall not modify in any such respect any representation,
warranty, covenant or condition contained herein. During the same period, each
Seller will promptly notify Buyer of the occurrence of any breach of any
covenant of Sellers set forth in this Section 7 or of the occurrence of any
event that may make the satisfaction of the conditions set forth in Section 5
impossible or unlikely.
7.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS. Except as expressly
provided herein, Sellers shall cause all indebtedness of any Related Person to
any Acquired Company to be paid in full prior to Closing.
7.7 NO NEGOTIATION. Until such time, if any, as this Agreement is
terminated pursuant to Section 12.1, Sellers shall not, and shall cause each of
the Acquired Companies not to, solicit or entertain offers from, negotiate with,
or in any manner discuss, encourage, recommend or agree to any proposal of, any
other potential buyer or buyers of the assets or stock of any of the Acquired
Companies.
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7.8 SEC REPORTS. After the date hereof, Sellers shall file, and cause the
Company to file, with the SEC all reports and/or statements required to be filed
by them or it under applicable Legal Requirements, including, without
limitation, such reports and statements required to be filed as a result of each
Seller's execution of this Agreement, and such reports and/or statements shall
be filed within the time periods provided for under such Legal Requirements.
7.9 SERIES A PREFERRED STOCK. Each Seller shall use his or her Best
Efforts to assist Buyer and the Company with closing the Series A Transaction.
7.10 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, Sellers will use their Best Efforts to cause the conditions specified in
Article V to be satisfied.
ARTICLE VIII
COVENANTS OF BUYER PRIOR TO CLOSING DATE.
8.1 APPROVALS OF GOVERNMENTAL BODIES. Between the date of this Agreement
and the Closing Date, Buyer will use its Best Efforts, and will cooperate with
Sellers in taking all steps necessary, promptly to (i) make any filing and (ii)
obtain any consent, approval or authorization of any Governmental Body, in each
case required by Legal Requirements to allow the consummation of this Agreement
and the Contemplated Transactions, provided that nothing herein shall require
Buyer to dispose of, or make any change in, any portion of its business or to
incur any other burden in order to obtain any consent, approval or
authorization.
8.2 NOTIFICATION. Between the date of this Agreement and the Closing Date,
Buyer will promptly notify Sellers in writing if it becomes aware of any fact or
condition which makes untrue any representation or breaches any warranty made by
Buyer in this Agreement or if it becomes aware of the occurrence after the date
of this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) make untrue any such representation or breach
any such warranty had such representation or warranty been made as of the time
of occurrence or discovery of such fact or condition.
8.3 BEST EFFORTS. Between the date of this Agreement and the Closing Date,
Buyer will use its Best Efforts to cause the condition specified in Article VI
hereof to be satisfied.
ARTICLE IX
COVENANTS OF SELLERS AND BUYER SUBSEQUENT TO THE CLOSING DATE.
9.1 FURTHER ASSURANCES. Sellers will, upon request of Buyer from time to
time after the Closing, execute and deliver, and use their Best Efforts to cause
other Persons to execute and deliver, to Buyer all such further documents and
instruments, and will do or use their Best Efforts to cause to be done such
other acts, as Buyer may reasonably request more completely to consummate and
make effective the Contemplated Transactions.
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9.2 FURTHER CONSENTS. If the transfer of the Shares to the Buyer at the
Closing without the consent or approval of a third Person would constitute a
breach of any Contract to which the Company is a party or by which it or any of
its properties are bound or create in any third Person the right to declare a
default in respect of, or to cancel or terminate, any such Contract or any
Governmental Authorization of the Company and if such consent or approval (or an
effective waiver thereof) is not obtained prior to the Closing, then Buyer shall
have the right by an instrument executed in writing and delivered to the Sellers
at the Closing to cause the transfer of the Shares not to carry with it an
assignment of the item or items that necessitate such consent or approval until
such consent or approval (or an effective waiver thereof) shall have been
obtained. In such an event, the Sellers will continue after Closing to use their
Best Efforts promptly to obtain such consents and approvals, or effective
waivers thereof, and will cooperate with Buyer in any reasonable arrangement
designed to provide Buyer with the benefit of the Company's rights thereunder.
9.3 SEC REPORTS. On and after the Closing Date, Sellers shall timely file,
and cause Sellers' counsel to timely file on behalf of the Company, with the
SEC, such reports and/or statements required to be filed by them or it in
connection with the consummation of the Contemplated Transactions.
9.4 SEC REPORTS. On and after the Closing Date, Buyer shall timely file,
or cause to be timely filed, with the SEC, such reports and/or statements
required to be filed by it in connection with the consummation of the
Contemplated Transactions.
9.5 TEXTRON FACILITY. In the event that on or prior to the Closing Date,
each of Li's and Lee's personal guarantee of the Textron Facility shall not have
been terminated, or the Textron Facility shall not have been refinanced by the
Company with a third party not requiring the personal guarantees of Li and Lee,
not later than the date which is 300 days after the Closing Date, Buyer shall
cause the personal guarantee of each of Li and Lee to be terminated.
ARTICLE X
MUTUAL COVENANTS
10.1 EXPENSES. Except as expressly otherwise provided herein, each party
to this Agreement shall bear its respective expenses incurred in connection with
the preparation, execution and performance of this Agreement and the
Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel and accountants. In the case of termination of this
Agreement, the obligation of each party to pay its own expenses shall be subject
to any rights of such party arising from a breach of this Agreement by another
party.
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10.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity,
including any reports or statements required to be filed with the SEC with
respect to this Agreement or the Contemplated Transactions shall be issued, if
at all, at such time and in such manner as Buyer and Sellers shall mutually
determine; provided that the parties agree that (i) a press release announcing
the signing of this Agreement shall be issued and filed by each of the Company
and Buyer within 24 hours of execution of this Agreement by Buyer and Sellers
and (ii) a Form 8-K shall be filed by each of the Buyer and the Company and a
Schedule 13D, as deemed necessary to comply with Rule 13d-1 promulgated under
the Exchange Act, shall be filed by each of Buyer and each Seller, within the
time frames provided under the applicable rules and regulation of the Securities
and Exchange Commission. Unless consented to by the Buyer in advance or required
by Legal Requirements, prior to the Closing, Sellers shall, and shall cause the
Acquired Companies to, keep the provisions of this Agreement strictly
confidential and make no disclosure thereof to any Person. Sellers and Buyer
will consult with each other concerning the means by which the Company's
employees, customers and suppliers and others having dealings with the Company
will be informed of the Contemplated Transactions, and Buyer shall have the
right to be present for any such communication.
10.3 CONFIDENTIALITY. Between the date of this Agreement and the Closing
Date, each party will maintain in confidence, and cause its directors, officers,
employees, agents and advisors to maintain in confidence, and not use to the
detriment of another party or the Company any written, oral or other information
obtained in confidence from another party or the Company in connection with this
Agreement or the Contemplated Transactions unless such information is already
known to such party or to others not bound by a duty of confidentiality or
unless such information becomes publicly available through no fault of such
party, unless the use of such information is necessary or appropriate in making
any filing or obtaining any consent or approval required for the consummation of
the Contemplated Transactions or unless the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings.
If the transactions contemplated by this Agreement are not consummated,
each party will return or destroy as much of such written information as may
reasonably be requested. Whether or not the Closing takes place, Sellers waive,
and will upon request cause the Company to waive, any cause of action, right or
claim arising out of the access of Buyer or its representatives to any trade
secrets or other confidential information of the Company except for the
intentional competitive misuse by the Buyer of such trade secrets or
confidential information.
ARTICLE XI
INDEMNIFICATION; REMEDIES
11.1 SURVIVAL. All representations, warranties and agreements contained in
this Agreement or in any certificate delivered pursuant to this Agreement shall
survive the Closing notwithstanding any investigation conducted with respect
thereto or any knowledge acquired as to the accuracy or inaccuracy of any such
representation or warranty.
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11.2 TIME LIMITATIONS. If the Closing occurs, Sellers shall have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, or agreement to be performed and complied with prior to the Closing
Date, unless on or before the date that is eighteen (18) months after the
Closing Date Sellers are given notice asserting a claim with respect thereto and
specifying the factual basis of that claim in reasonable detail to the extent
then known by Buyer; provided, however, a claim with respect to Sections 3.3,
3.11, 3.13 and 3.19, or a claim for indemnification not based upon any
representation or warranty or agreement to be performed and complied with prior
to the Closing Date, may be made at any time. If the Closing occurs, Buyer shall
have no liability (for indemnification or otherwise) with respect to any
representation or warranty, or agreement to be performed and complied with prior
to the Closing Date, unless on or before the date that is eighteen (18) months
after the Closing Date Buyer is given notice of a claim with respect thereto and
specifying the factual basis of that claim in reasonable detail to the extent
then known by Sellers.
11.3 INDEMNIFICATION BY SELLERS. Sellers, jointly and severally, shall
indemnify and hold harmless Buyer, the Acquired Companies and their respective
agents, representatives, employees, officers, directors, stockholders,
controlling persons and affiliates (collectively, the "Indemnified Persons"),
and shall reimburse the Indemnified Persons for, any loss, liability, claim,
damage, expense (including, but not limited to, costs of investigation and
defense and reasonable attorneys fees) or diminution of value, whether or not
involving a third-party claim (collectively, "Damages") arising from or in
connection with (a) any inaccuracy in any of the representations and warranties
of Sellers in this Agreement or in any certificate delivered by Sellers pursuant
to this agreement (for this purpose, the qualification as to materiality in the
certificate delivered pursuant to Section 5.1 shall be disregarded), or any
actions, omissions or state of facts inconsistent with any such representation
or warranty, (b) any failure by Sellers to perform or comply with any agreement
in this Agreement, or (c) any claim by any Person for brokerage or finder's fees
or commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either Seller or any Acquired
Company (or any Person acting on their behalf) in connection with any of the
Contemplated Transactions. Notwithstanding the foregoing, the aggregate
liability of Sellers to the Indemnified Persons under this Article XI shall not
exceed $1,000,000.
11.4 INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless
Sellers, and shall reimburse Sellers for, any Damages arising from or in
connection with (a) any inaccuracy in any of the representations and warranties
of Buyer in this Agreement or in any certificate delivered by Buyer pursuant to
this Agreement, or any actions, omissions or state of facts inconsistent with
any such representation or warranty, (b) any failure by Buyer to perform or
comply with any agreement in this Agreement, or (c) any claim by any Person for
brokerage or finder's fees or commissions or similar payments based upon any
agreement or understanding alleged to have been made by such Person with Buyer
(or any Person acting on its behalf) in connection with any of the Contemplated
Transactions. Notwithstanding the foregoing, the aggregate liability of Buyer to
Sellers under this Article XI shall not exceed $1,000,000.
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11.5 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS. Promptly after
receipt by an indemnified party under Section 11.3 or 11.4 of notice of the
commencement of any Proceeding against it, such indemnified party shall, if a
claim in respect thereof is to be made against an indemnifying party under such
Section, give notice to the indemnifying party of the commencement thereof, but
the failure so to notify the indemnifying party shall not relieve it of any
liability that it may have to any indemnified party except to the extent the
indemnifying party demonstrates that the defense of such action is prejudiced
thereby. In case any such Proceeding shall be brought against an indemnified
party and it shall give notice to the indemnifying party of the commencement
thereof, the indemnifying party shall, unless the claim involves Taxes, be
entitled to participate therein and, to the extent that it shall wish (unless
(i) the indemnifying party is also a party to such Proceeding and the
indemnified party determines in good faith that joint representations would be
inappropriate or (ii) the indemnifying party fails to provide reasonable
assurance to the indemnified party of its financial capacity to defend such
Proceeding and provide indemnification with respect thereto), to assume the
defense thereof with counsel satisfactory to such indemnified party and, after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party under such Section for any fees of other counsel or any
other expenses with respect to the defense of such Proceeding, in each case
subsequently incurred by such indemnified party in connection with the defense
thereof, other than reasonable costs of investigation. If an indemnifying party
assumes the defense of such a Proceeding, (a) no compromise or settlement
thereof may be effected by the indemnified party without the indemnified party's
consent unless (i) there is no finding or admission of any violation of Legal
Requirements or any violation of the rights of any Person and no effect on any
other claims that may be made against the indemnified party and (ii) the sole
relief provided is monetary damages that are paid in full by the indemnifying
party and (b) the indemnifying party shall have no liability with respect to any
compromise or settlement thereof effected without its consent. If notice is
given to an indemnifying party of the commencement of any Proceeding and it does
not, within ten days after the indemnified party's notice is given, give notice
to the indemnified party of its election to assume the defense thereof, the
indemnifying party shall be bound by any determination made in such action or
any compromise or settlement thereof effected by the indemnified party.
Notwithstanding the foregoing, if an indemnified party determines in good faith
that there is a reasonable probability that a Proceeding may adversely affect it
or its affiliates other than as a result of monetary damages, such indemnified
party may, by notice to the indemnifying party, assume the exclusive right to
defend, compromise or settle such Proceeding, but the indemnifying party shall
not be bound by any determination of a Proceeding so defended or any compromise
or settlement thereof effected without its consent (which shall not be
unreasonably withheld).
ARTICLE XII
TERMINATION
12.1 TERMINATION EVENTS. Subject to the provisions of Section 12.2, this
Agreement may, by written notice given at or prior to the Closing in the manner
hereinafter provided, be terminated:
(a) by either Buyer or Sellers if a default or breach shall be made
by the other party hereto with respect to the due and timely performance
of any of its covenants and agreements contained herein, or with respect
to the due compliance with any of its representations, warranties or
covenants, and such default cannot be cured and has not been waived;
-46-
(b) (i) by Buyer if all of the conditions set forth in Article V
shall not have been satisfied at the time the Closing would otherwise
occur or if satisfaction of such a condition is or becomes impossible,
other than through failure of Buyer to fully comply with its obligations
hereunder, and shall not have been waived by Buyer on or before such date;
or
(ii) by Sellers, if all of the conditions set forth in article
VI shall not have been satisfied at the time the Closing would
otherwise occur or if satisfaction of such a condition is or becomes
impossible, other than through failure of Sellers to fully comply
with its obligations hereunder, and shall not have been waived by
Sellers on or before such date;
(c) by mutual consent of Buyer and Sellers; or
(d) by either Buyer or Sellers if the Closing shall not have occurred,
other than through failure of any such party to fulfill its obligations
hereunder, on or before January 10, 2005 or such later date as may be agreed
upon in writing by the parties. Each party's right of termination hereunder is
in addition to any other rights it may have hereunder or otherwise and the
exercise of a right of termination shall not be an election of remedies.
12.2 EFFECT OF TERMINATION. In the event this Agreement is terminated
pursuant to Section 12.1, all further obligations of the parties hereunder shall
terminate, except that the obligations set forth in Sections 10.1 and 10.3 shall
survive; provided that, if this Agreement is so terminated by a party because
one or more of the conditions to such party's obligations hereunder is not
satisfied as a result of the other party's willful failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies for breach of contract or otherwise, including, without
limitation, damages relating thereto, shall also survive such termination
unimpaired.
ARTICLE XIII
MISCELLANEOUS
13.1 NOTICES. Notices. Notices, requests, instructions or other documents
to be in given under this Agreement shall be in writing and shall be deemed
given and received, (i) when sent if sent by facsimile, provided that the fax is
promptly confirmed by telephone confirmation thereof, (ii) when delivered, if
delivered personally to the intended recipient, and (iii) one business day
later, if sent by overnight delivery via a national courier service, and in each
case, addressed to a party at the following address for such party:
-47-
if to Buyer:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
if to any Shareholder:
to the address set forth below such Seller's
name on the signature pages hereto
with copies to:
Quarles & Brady Streich Lang LLP
Renaissance One
Two N. Central Avenue
Phoenix, Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire
Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
13.2 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS
SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW
OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES
THEREOF. The parties hereby irrevocably submit to the jurisdiction of the
Federal courts of the United States of America and the state courts located in
the State of New York solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred to in this
Agreement, and in respect of the transactions contemplated hereby, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it is
not subject thereto or that such action, suit or proceeding may not be brought
or is not maintainable in said courts or that the venue thereof may not be
appropriate or that this Agreement or any such document may not be enforced in
or by such courts, and the parties hereto irrevocably agree that all claims with
respect to such action or proceeding shall be heard and determined in such a
Federal or state court. The parties hereby consent to and grant any such court
jurisdiction over the Person of such parties and over the subject matter of such
dispute and agree that mailing of process or other papers in connection with any
such action or proceeding in the manner provided in Section 13.1 or in such
other manner as may be permitted by law, shall be valid and sufficient service
thereof.
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(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH
MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT,
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 13.2.
13.3 FURTHER ASSURANCES. The parties hereto agree (i) to furnish upon
request to each other such further information, (ii) to execute and deliver to
each other such other documents, and (iii) to do such other acts and things, all
as the other party hereto may at any time reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to herein.
13.4 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay on the part of
any party in exercising any right, power or privilege under this Agreement or
the documents referred to herein shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or privilege preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. To the maximum extent permitted by applicable law, (i) no claim or
right arising out of this Agreement or the documents referred to herein can be
discharged by one party hereto, in whole or in part, by a waiver or renunciation
of the claim or right unless in writing signed by the other party hereto; (ii)
no waiver which may be given by a party hereto shall be applicable except in the
specific instance for which it is given; and (iii) no notice to or demand on one
party hereto shall be deemed to be a waiver of any obligation of such party or
of the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents referred
to herein.
13.5 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements among the parties with respect to its subject matter
(including, but not limited to, any letter of intent among Buyer and Sellers and
is intended (with the documents referred to herein) as a complete and exclusive
statement of the terms of the agreement among the parties with respect thereto.
This Agreement may not be changed or terminated, except by a written agreement
executed by Buyer and Sellers.
-49-
13.6 ASSIGNMENTS, SUCCESSORS AND NO THIRD-PARTY RIGHTS. This Agreement
shall apply to and be binding in all respects upon, and shall inure to the
benefit of, the successors and assigns of the parties hereto. Nothing expressed
or referred to in this Agreement is intended or shall be construed to give any
Person other than the parties to this Agreement any legal or equitable right,
remedy or claim under or with respect to this Agreement, or any provision
hereof, it being the intention of the parties hereto that this Agreement and all
of its provisions and conditions are for the sole and exclusive benefit of the
parties to this Agreement, their successors and assigns, and for the benefit of
no other Person.
13.7 SEVERABILITY. In the event any provisions of this Agreement shall be
held invalid or unenforceable by any court of competent jurisdiction, such
holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent no held
invalid or unenforceable.
13.8 SECTION HEADINGS, CONSTRUCTION. The headings of Sections contained in
this Agreement are provided for convenience only. They form no part of this
Agreement and shall not affect its construction or interpretation. All
references to Sections in this Agreement refer to the corresponding Sections of
this Agreement. All words used herein shall be construed to be of such gender or
number as the circumstances require. Unless otherwise specifically noted, the
words "herein," "hereof," "hereby," "hereinabove," "hereinbelow," "hereunder,"
and words of similar import, refer to this Agreement as a whole and not to any
particular Section, subsection, paragraph, clause or other subdivision hereof.
13.9 TIME OF ESSENCE. With regard to all dates and time periods set forth
or referred to in this Agreement, time is of the essence.
13.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original copy of this
Agreement, and all of which, when taken together, shall be deemed to constitute
but one and the same agreement.
-50-
[SIGNATURE PAGE FOLLOWS]
-51-
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first written
above.
------------------------------------------------
THEODORE S. LI
Address:
------------------------------------------------
HUI CYNTHIA LEE
Address:
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By:
---------------------------------------------------
Name:
Title:
-52-
CONSENT OF SPOUSE OF THEODORE S. LI
The undersigned, the spouse of Theodore S. Li, consents to the
transactions contemplated hereby and acknowledges that the Purchase Price being
paid for Mr. Li's Shares hereunder is adequate, and after the Closing the
undersigned shall have no interest in Mr. Li's Shares.
-----------------------------
-53-
CONSENT OF SPOUSE OF HUI CYNTHIA LEE
The undersigned, the spouse of Hui Cynthia Lee, consents to the
transactions contemplated hereby and acknowledges that the Purchase Price being
paid for Ms. Lee's Shares hereunder is adequate, and after the Closing the
undersigned shall have no interest in Ms. Lee's Shares:
-----------------------------
-54-
EXHIBIT B
THIS SECURED CONVERTIBLE PROMISSORY NOTE, AND THE SECURITIES INTO WHICH IT IS
CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND REGULATION D THEREUNDER. THE SECURITIES ARE "RESTRICTED" AND MAY NOT
BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND
APPLICABLE STATE LAW OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS THEREOF AND THE COMPANY IS PROVIDED WITH AN OPINION OF COUNSEL OR
OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
EXEMPTIONS ARE AVAILABLE.
SECURED CONVERTIBLE PROMISSORY NOTE
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
6% SECURED CONVERTIBLE PROMISSORY NOTE
DUE JANUARY __, 2006
No. ___ $166,889.00
This Secured Convertible Promissory Note (this "Note") is issued by
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation (the
"Company"), to THEODORE S. LI (together with his permitted successors and
assigns, the "Holder") pursuant to exemptions from registration under the
Securities Act of 1933, as amended. Capitalized terms not otherwise defined
herein shall have the meanings given such terms in that certain Stock Purchase
Agreement of even date herewith by and between the Company, the initial Holder
and the other parties named therein (the "Purchase Agreement").
ARTICLE I.
Section 1.01 PRINCIPAL AND INTEREST. For value received on January __,
2005 (the "Issue Date"), the Company hereby promises to pay on January __, 2006
(the "Maturity Date") to the order of the Holder in lawful money of the United
States of America and in immediately available funds the principal sum of One
Hundred Sixty-Six Thousand Eight Hundred Eight-Nine Dollars (US $166,889.00),
together with accrued and unpaid interest on the unpaid principal of this Note
at the annual simple rate of six percent (6%) (computed on the basis of a
365/6-day year and the actual days elapsed) from the Issue Date until all
amounts due and owing hereunder by the Company to the Holder have been paid in
full. Upon the occurrence and during the continuance of an Event of Default (as
defined below) interest on the unpaid principal amount of this Note shall accrue
at the annual simple rate of ten percent (10%) (computed on the basis of a
365/6-day year and the actual days elapsed).
Section 1.02 OPTIONAL CONVERSION. On or after the Issue Date, the Holder
shall be entitled, at its option, to convert, at any time and from time to time,
until payment in full of all amounts due and owing under this Note, all or any
part of the unpaid principal amount of the Note, into shares (the "Conversion
Shares") of the Company's common stock, no par value per share, ("Common
Stock"), at a price per share (the "Conversion Price") equal to $0.01, subject
to adjustment for stock splits, reverse stock splits and other recapitalizations
effected by the Company. To convert this Note, the Holder shall deliver written
notice thereof, substantially in the form of Exhibit "A" to this Note, with
appropriate insertions (the "Conversion Notice"), to the Company in accordance
with Section 6.01 hereof. The date set forth in the Conversion Notice shall be
deemed to be the date upon which the conversion shall be effective (the
"Conversion Date").
Section 1.03 RIGHT OF REPURCHASE/REDEMPTION. At any time on or prior to
the Maturity Date, the Company shall, at its option, have the right to redeem,
upon three (3) business days prior written notice to the Holder (the "Redemption
Notice"), a portion or all of the outstanding amount due and owing under this
Note (the "Redemption Right"). The redemption price shall be one hundred ten
percent (110%) of the principal amount redeemed. Upon redemption, the Company
shall also pay all accrued and unpaid interest thereon. The third business day
after the Holder's receipt of the Redemption Notice shall be referred to herein
as the "Redemption Date." Once the Company has issued to the Holder a Redemption
Notice, the Holder may continue to execute conversions at any time, and from
time to time, on or prior to the business day immediately preceding the
Redemption Date. Notwithstanding the foregoing, payment by the Company on or
after the Maturity Date of all amounts due and owing hereunder shall not be
deemed an exercise by the Company of its Redemption Right.
ARTICLE II.
Section 2.01 AMENDMENTS AND WAIVER OF DEFAULT. This Note may be amended
solely with the written consent of the Holder and the Company.
ARTICLE III.
Section 3.01 EVENTS OF DEFAULT. An Event of Default is defined as follows:
the Company shall (i) make a general assignment for the benefit of creditors;
(ii) be adjudicated as bankrupt or insolvent; (iii) file a voluntary petition in
bankruptcy; (iv) have a petition or proceeding filed against it under any
bankruptcy or insolvency law or statute of the United States of America or any
state or jurisdiction thereof, which petition or proceeding is not dismissed
within ninety (90) days from the date of commencement thereof; or (v) have a
receiver, trustee, custodian, conservator or other person appointed by any court
to take charge of the Company's affairs, assets or business and such appointment
is not vacated or discharged within ninety (90) days thereafter.
2
Section 3.02 REMEDY. Upon the occurrence of an Event of Default, the
Holder may declare the principal amount hereof, and all accrued and unpaid
interest, to be forthwith due and payable whereupon the same shall immediately
become due and payable.
ARTICLE IV.
Section 4.01 RE-ISSUANCE OF NOTE. If and whenever the Holder elects to
convert a part of the Note pursuant to Section 1.02 hereof, the Company shall
reissue a new Note in the same form as this Note to reflect the new principal
amount.
Section 4.02 TERMINATION OF CONVERSION RIGHTS. The Holder's right to
convert all or any portion of the unpaid principal amount under this Note into
Conversion Shares in accordance with Section 1.02 hereof shall terminate on the
date that all amounts due and owing hereunder are paid in full.
ARTICLE V.
Section 5.01 SECURITY INTEREST. To secure the Company's payment
obligations hereunder, the Company hereby grants to the Holder a security
interest in and to those Shares delivered by the Holder pursuant to the Purchase
Agreement and the Pledge Agreement. Such security interest will be a first
priority lien provided there are no Encumbrances on the Shares on the Closing
Date.
ARTICLE VI.
Section 6.01 NOTICES. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this Note
must be in writing and will be deemed to have been delivered (i) upon receipt,
when delivered personally; (ii) upon confirmation of receipt, when sent by
facsimile; (iii) three (3) business days after being sent by U.S. certified
mail, return receipt requested; or (iv) one (1) business day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
if to the Company:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
3
if to the Holder:
Theodore S. Li
[Address]
with a copy to:
Quarles & Brady Streich Lang LLP
Renaissance One
Two N. Central Avenue
Phoenix, Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire
Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
Section 6.02 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of choice of law or conflicts of laws that would defer to the
substantive law of another jurisdiction. The Company and the Holder irrevocably
consent to the jurisdiction of the United States federal courts and the state
courts located in the State of New York in any suit or proceeding based on or
arising under this Note and irrevocably agree that any and all claims arising
out of this Note or related to the transactions contemplated by this Note shall
be determined exclusively in such courts. The Company and the Holder irrevocably
waive the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company and the Holder further agree that service of process
mailed by first class mail shall be deemed in every respect effective service of
process in any such suit or proceeding. Nothing herein shall affect the right of
either the Company or the Holder to serve process in any other manner permitted
by law. The Company and the Holder agree that a final non-appealable judgment in
any such suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
Section 6.03 SEVERABILITY. The invalidity of any of the provisions of this
Note shall not invalidate or otherwise affect any of the other provisions of
this Note, which shall remain in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
IN WITNESS WHEREOF, with the intent to be legally bound hereby, the
Company has executed this Note as of the date first written above.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
------------------------------------
Wayne I. Danson
President and Chief Financial
Officer
5
EXHIBIT "A"
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE HOLDER IN ORDER TO CONVERT THE NOTE)
TO:
The undersigned hereby irrevocably elects to convert $_________________ of
the principal amount of the above Note into Shares of Common Stock of ADVANCED
COMMUNICATIONS TECHNOLOGIES, INC., according to the conditions stated therein,
as of the Conversion Date written below.
CONVERSION DATE:
-------------------------------------------------
APPLICABLE CONVERSION PRICE:
-------------------------------------------------
SIGNATURE:
-------------------------------------------------
NAME:
-------------------------------------------------
ADDRESS:
-------------------------------------------------
AMOUNT TO BE CONVERTED: $
-------------------------------------------------
AMOUNT OF NOTE
UNCONVERTED: $
-------------------------------------------------
CONVERSION PRICE PER SHARE: $
-------------------------------------------------
NUMBER OF SHARES OF
COMMON STOCK TO BE ISSUED:
-------------------------------------------------
A-1
EXHIBIT C
THIS SECURED CONVERTIBLE PROMISSORY NOTE, AND THE SECURITIES INTO WHICH IT IS
CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND REGULATION D THEREUNDER. THE SECURITIES ARE "RESTRICTED" AND MAY NOT
BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND
APPLICABLE STATE LAW OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS THEREOF AND THE COMPANY IS PROVIDED WITH AN OPINION OF COUNSEL OR
OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
EXEMPTIONS ARE AVAILABLE.
SECURED CONVERTIBLE PROMISSORY NOTE
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
6% SECURED CONVERTIBLE PROMISSORY NOTE
DUE JANUARY __, 2006
No. ___ $333,111.00
This Secured Convertible Promissory Note (this "Note") is issued by
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation (the
"Company"), to HUI CYNTHIA LEE (together with her permitted successors and
assigns, the "Holder") pursuant to exemptions from registration under the
Securities Act of 1933, as amended. Capitalized terms not otherwise defined
herein shall have the meanings given such terms in that certain Stock Purchase
Agreement of even date herewith by and between the Company, the initial Holder
and the other parties named therein (the "Purchase Agreement").
ARTICLE I.
Section 1.01 PRINCIPAL AND INTEREST. For value received on January __,
2005 (the "Issue Date"), the Company hereby promises to pay on January __, 2006
(the "Maturity Date") to the order of the Holder in lawful money of the United
States of America and in immediately available funds the principal sum of Three
Hundred Thirty Three Thousand One Hundred Eleven Dollars (US $333,111.00),
together with accrued and unpaid interest on the unpaid principal of this Note
at the annual simple rate of six percent (6%) (computed on the basis of a
365/6-day year and the actual days elapsed) from the Issue Date until all
amounts due and owing hereunder by the Company to the Holder have been paid in
full. Upon the occurrence and during the continuance of an Event of Default (as
defined below) interest on the unpaid principal amount of this Note shall accrue
at the annual simple rate of ten percent (10%) (computed on the basis of a
365/6-day year and the actual days elapsed).
Section 1.02 OPTIONAL CONVERSION. On or after the Issue Date, the Holder
shall be entitled, at its option, to convert, at any time and from time to time,
until payment in full of all amounts due and owing under this Note, all or any
part of the unpaid principal amount of the Note, into shares (the "Conversion
Shares") of the Company's common stock, no par value per share, ("Common
Stock"), at a price per share (the "Conversion Price") equal to $0.01, subject
to adjustment for stock splits, reverse stock splits and other recapitalizations
effected by the Company. To convert this Note, the Holder shall deliver written
notice thereof, substantially in the form of Exhibit "A" to this Note, with
appropriate insertions (the "Conversion Notice"), to the Company in accordance
with Section 6.01 hereof. The date set forth in the Conversion Notice shall be
deemed to be the date upon which the conversion shall be effective (the
"Conversion Date").
Section 1.03 RIGHT OF REPURCHASE/REDEMPTION. At any time on or prior to
the Maturity Date, the Company shall, at its option, have the right to redeem,
upon three (3) business days prior written notice to the Holder (the "Redemption
Notice"), a portion or all of the outstanding amount due and owing under this
Note (the "Redemption Right"). In the event the Company exercises its Redemption
Right on or prior to July __, 2005, the redemption price shall be one hundred
five percent (105%) of the principal amount redeemed, thereafter the redemption
price shall be one hundred ten percent (110%) of the principal amount redeemed.
Upon redemption, the Company shall also pay all accrued and unpaid interest
thereon. The third business day after the Holder's receipt of the Redemption
Notice shall be referred to herein as the "Redemption Date." Once the Company
has issued to the Holder a Redemption Notice, the Holder may continue to execute
conversions at any time, and from time to time, on or prior to the business day
immediately preceding the Redemption Date. Notwithstanding the foregoing,
payment by the Company on or after the Maturity Date of all amounts due and
owing hereunder shall not be deemed an exercise by the Company of its Redemption
Right.
ARTICLE II.
Section 2.01 AMENDMENTS AND WAIVER OF DEFAULT. This Note may be amended
solely with the written consent of the Holder and the Company.
ARTICLE III.
Section 3.01 EVENTS OF DEFAULT. An Event of Default is defined as follows:
the Company shall (i) make a general assignment for the benefit of creditors;
(ii) be adjudicated as bankrupt or insolvent; (iii) file a voluntary petition in
bankruptcy; (iv) have a petition or proceeding filed against it under any
bankruptcy or insolvency law or statute of the United States of America or any
state or jurisdiction thereof, which petition or proceeding is not dismissed
within ninety (90) days from the date of commencement thereof; or (v) have a
receiver, trustee, custodian, conservator or other person appointed by any court
to take charge of the Company's affairs, assets or business and such appointment
is not vacated or discharged within ninety (90) days thereafter.
2
Section 3.02 REMEDY. Upon the occurrence of an Event of Default, the
Holder may declare the principal amount hereof, and all accrued and unpaid
interest, to be forthwith due and payable whereupon the same shall immediately
become due and payable.
ARTICLE IV.
Section 4.01 RE-ISSUANCE OF NOTE. If and whenever the Holder elects to
convert a part of the Note pursuant to Section 1.02 hereof, the Company shall
reissue a new Note in the same form as this Note to reflect the new principal
amount.
Section 4.02 TERMINATION OF CONVERSION RIGHTS. The Holder's right to
convert all or any portion of the unpaid principal amount under this Note into
Conversion Shares in accordance with Section 1.02 hereof shall terminate on the
date that all amounts due and owing hereunder are paid in full.
ARTICLE V.
Section 5.01 SECURITY INTEREST. To secure the Company's payment
obligations hereunder, the Company hereby grants to the Holder a security
interest in and to those Shares delivered by the Holder pursuant to the Purchase
Agreement and the Pledge Agreement. Such security interest will be a first
priority lien provided there are no Encumbrances on the Shares on the Closing
Date. ARTICLE VI.
Section 6.01 NOTICES. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this Note
must be in writing and will be deemed to have been delivered (i) upon receipt,
when delivered personally; (ii) upon confirmation of receipt, when sent by
facsimile; (iii) three (3) business days after being sent by U.S. certified
mail, return receipt requested; or (iv) one (1) business day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
if to the Company:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
3
if to the Holder:
Hui Cynthia Lee
[Address]
with a copy to:
Quarles & Brady Streich Lang LLP
Renaissance One
Two N. Central Avenue
Phoenix, Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire
Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
Section 6.02 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of choice of law or conflicts of laws that would defer to the
substantive law of another jurisdiction. The Company and the Holder irrevocably
consent to the jurisdiction of the United States federal courts and the state
courts located in the State of New York in any suit or proceeding based on or
arising under this Note and irrevocably agree that any and all claims arising
out of this Note or related to the transactions contemplated by this Note shall
be determined exclusively in such courts. The Company and the Holder irrevocably
waive the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Company and the Holder further agree that service of process
mailed by first class mail shall be deemed in every respect effective service of
process in any such suit or proceeding. Nothing herein shall affect the right of
either the Company or the Holder to serve process in any other manner permitted
by law. The Company and the Holder agree that a final non-appealable judgment in
any such suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
Section 6.03 SEVERABILITY. The invalidity of any of the provisions of this
Note shall not invalidate or otherwise affect any of the other provisions of
this Note, which shall remain in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
IN WITNESS WHEREOF, with the intent to be legally bound hereby, the
Company has executed this Note as of the date first written above.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
--------------------------------------
Wayne I. Danson
President and Chief Financial Officer
5
EXHIBIT "A"
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE HOLDER IN ORDER TO CONVERT THE NOTE)
TO:
The undersigned hereby irrevocably elects to convert $ of the principal
amount of the above Note into Shares of Common Stock of ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., according to the conditions stated therein, as of the
Conversion Date written below.
CONVERSION DATE:
-------------------------------------------------
APPLICABLE CONVERSION PRICE:
-------------------------------------------------
SIGNATURE:
-------------------------------------------------
NAME:
-------------------------------------------------
ADDRESS:
-------------------------------------------------
AMOUNT TO BE CONVERTED: $
-------------------------------------------------
AMOUNT OF NOTE
UNCONVERTED: $
-------------------------------------------------
CONVERSION PRICE PER SHARE: $
-------------------------------------------------
NUMBER OF SHARES OF
COMMON STOCK TO BE ISSUED:
-------------------------------------------------
A-1
EXHIBIT D
CUSTODIAL AND STOCK PLEDGE AGREEMENT
THIS CUSTODIAL AND STOCK PLEDGE AGREEMENT ("Agreement"), dated as of
January __, 2005, is by and among ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(referred to as the "Pledgor"), THEODORE S. LI and HUI CYNTHIA LEE (together,
the "Pledgees") and QUARLES & BRADY STREICH LANG LLP ("Custodian").
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. BACKGROUND.
Pledgor and Pledgees are parties to that certain Stock
Purchase Agreement, dated December ___, 2004 (the "Purchase Agreement"),
pursuant to which Pledgees agreed to sell to Pledgor, and Pledgor agreed to
purchase from Pledgees, all of the outstanding shares of common stock of Pacific
Magtron International Corp. (the "Company") owned by Pledgees (the "Pledged
Shares"). In exchange for the Pledged Shares, Pledgor issued to Sellers
promissory notes in aggregate principal amount of $500,000 (each a "Note" and
together the "Notes"). To secure the payment obligations of Pledgor under the
Notes (the "Obligations"), Pledgor has agreed to grant to Pledgees a security
interest in and to the Pledged Shares. Pledgor and Pledgees agree that until
such time all amounts due and owing under the Notes are paid in full or until
their earlier release in accordance with the terms hereof, as the case may be,
the certificates representing the Pledged Shares shall be held in escrow by
Custodian in accordance with the terms hereof.
2. PLEDGE OF PLEDGED SHARES.
2.1 As security for the full and prompt payment of the Notes,
Pledgor hereby pledges to Pledgees all of the Pledged Shares and grants to
Pledgees a lien upon and a continuing security interest in the Pledged Shares,
subject to the terms and conditions of this Agreement. Such security interest
will be a first priority lien provided there are no Encumbrances on the Shares
on the Closing Date. Pledgor will execute and file a UCC-1 Financing Statements
respecting the Shares. Upon payment of each Note the applicable Pledgee hereby
authorizes the Pldgor to file a UCC-3 Financing Statement terminating the
applicable UCC-1 Financing Statement.
2.2 If Pledgor shall become entitled to receive or shall
receive with respect to the Pledged Shares (i) any additional shares of capital
stock of the Company; or (ii) any stock certificate, including without
limitation, any certificate representing a stock dividend or in connection with
any increase or reduction of capital, reclassification, merger, consolidation,
sale of assets, combination of shares, stock split or other recapitalization; or
(iii) any option, warrant or right, whether as an addition to, in substitution
of or in exchange for any of the Pledged Shares, or otherwise; or (iv) any
dividend or other distribution payable in property, or securities issued by a
person other than the Company; then, in any such event, Pledgor shall receive
and accept the same, in trust, as trustee for Pledgees, and shall deliver them
immediately to Custodian, together with all necessary or appropriate
endorsements of Pledgor. Any cash distributions received by Pledgor in respect
of the Pledged Shares may be applied to reduce such of the Obligations as
Pledgor may determine in its sole discretion.
3. DELIVERY OF SHARES TO CUSTODIAN.
Concurrently with the execution and delivery of this
Agreement, Pledgor hereby authorizes Pledgees to deliver, on behalf of Pledgor,
to Custodian for the account of Sellers, the certificates representing all of
the Pledged Shares, together with duly executed Stock Powers to Pledgees, in the
form attached hereto as Exhibit "A", with signature guaranteed, permitting
transfer of the Pledged Shares to Pledgees or its assignee, receipt of which is
hereby acknowledged by the Custodian, to be held and released in accordance with
the terms of this Agreement. Concurrently with the execution and delivery of
this Agreement, Pledgor is also delivering to Pledgees letters addressed to the
transfer agent of the Company (the "Transfer Agent"), informing the Transfer
Agent of the pledge of the Pledged Shares, instructing the Transfer Agent to
honor the Stock Powers delivered to Pledgees, and informing the Transfer Agent
that Pledgor's address on the records of the transfer agent, during the term of
this Agreement, shall be c/o Quarles & Brady Streich Lang LLP. Pledgor shall
thereafter deliver to Custodian (a) any other certificates for the Pledged
Shares as required by the terms of this Agreement, together with duly executed
stock powers relating to such certificates, with signatures guaranteed; and (b)
any documents or other evidence received of Pledgor's interest in any securities
issued as a dividend, stock split or otherwise because of or with respect to the
Pledged Shares or in exchange for the Pledged Shares, promptly after receiving
such evidence, accompanied by duly executed stock powers or other appropriate
instrument of transfer, with signatures guaranteed covering the same.
4. RIGHTS OF PLEDGOR IN THE PLEDGED SHARES.
Unless and until an Event of Default (as that term is defined
herein) shall have occurred, Pledgor shall be entitled to exercise all voting
and other corporate rights in respect of the Pledged Shares (except for the
right to receive dividends and distributions payable in kind, which shall be
delivered to the Custodian), including, without limitation, all rights and
privileges of conversion, exchange and subscription, as though Pledgor were the
absolute owner of the Pledged Shares, subject to the pledge herein contained.
Notwithstanding the foregoing, Pledgor covenants and agrees that it shall not
vote any of the Pledged Shares in any way inconsistent with the provisions or
intent of this Agreement. All rights of Pledgor to vote and give consents,
waivers and ratifications, and to convert, exchange or subscribe (collectively
referred to as the "Corporate Rights"), shall cease if an Event of Default
hereunder shall occur. If an Event of Default shall occur, whether or not the
Pledged Shares shall have been registered in Pledgees' name, Pledgee then shall
have the right to exercise all Corporate Rights with respect to the Pledged
Shares.
5. REPRESENTATIONS AND WARRANTIES.
Pledgor represents and warrants to Pledgees that:
2
(a) this Agreement has been duly authorized, executed and
delivered by Pledgor;
(b) the execution, delivery and performance by Pledgor of
Pledgor's obligations under this Agreement does not and will not violate any
provision of law or any judgment, order or regulation of any court or of any
public or governmental agency or authority applicable to Pledgor or of the
Articles of Incorporation or Bylaws of the Pledgor;
(c) the execution, delivery and performance by Pledgor of
Pledgor's obligations under this Agreement does not and will not conflict with
or constitute a breach of or a default under any agreement, indenture or
instrument to which Pledgor is a party or by which Pledgor or any of Pledgor's
property is bound; and
(d) this Agreement constitutes the legal, valid and binding
obligation of Pledgor enforceable in accordance with its terms.
6. COVENANTS.
Pledgor covenants that until all of the Obligations have been
satisfied in full it shall not sell, convey or otherwise dispose of any of the
Pledged Shares or any interest in the Pledged Shares, or create, incur or permit
to exist any pledge, mortgage, lien, charge or encumbrance or any security
interest whatsoever in or with respect to any of the Pledged Shares, other than
that created by this Agreement, nor attempt to do any of the foregoing.
7. RELEASE OF PLEDGED SHARES.
7.1 Custodian shall disburse the Pledged Shares at any time
pursuant to the joint written instructions of Pledgees and Pledgor (which may be
executed and/or transmitted in counterparts).
7.2 If, within ten (10) business days after a Maturity Date
(as defined in the respective Notes), Custodian shall not have received a notice
from the applicable Pledgee(s) that the Obligations to such Pledgee(s) have not
been satisfied in full and that such Pledgee(s) disputes Pledgor's right to
receive any Pledged Shares, Custodian shall deliver to Pledgor the Pro Rata
Shares (as defined below) of the Pledgee(s) to which the Maturity Date relates.
In the event Custodian receives such notice from the applicable Pledgee(s),
Custodian shall release the Pledged Shares solely in accordance with Section 9.2
below.
7.3 Upon delivery of all Pledged Shares by Custodian in
accordance with the terms hereof, this Agreement shall terminate and be of no
further force or effect.
8. EVENTS OF DEFAULT.
Any Event of Default under the Note shall be deemed an Event
of Default hereunder.
3
9. PLEDGEES' REMEDIES UPON DEFAULT.
9.1 At any time after the occurrence of an Event of Default,
any Pledgee may, at its option, deliver a certificate to the Custodian and
Pledgor specifying the nature of the Event of Default. If, within ten business
days (10) after its receipt of such certificate, the Custodian shall not have
received written notice from Pledgor that it disputes the occurrence of such
Event of Default then the Custodian shall release to such Pledgee(s) a
certificate or certificates representing a percentage of the Pledged Shares
equal to the ratio of the original principal amount of such Pledgee's Note to
the aggregate original principal amount of all the Notes (with respect to any
Pledgee, the "Pro Rata Shares"). In the event that Pledgor does deliver a timely
notice to the Custodian that it disputes such determination, then Custodian
shall release the Pledged Shares solely in accordance with Section 9.2 below.
9.2 In the event any dispute arises between Pledgor and any
Pledgee, Custodian shall release such Pledgee's Pro Rata Shares solely (i) upon
its receipt of the joint written instructions of the applicable Pledgee(s) and
Pledgor (which may be executed and/or transmitted in counterparts) or (ii) in
accordance with a final judgment or final court order from a court of competent
jurisdiction directing disposition of the applicable Pledged Shares (a "Court
Order"). A judgment or order under any provision of this Agreement shall not be
deemed to be final until the time within which an appeal may be taken therefrom
has expired and no appeal has been taken, or until the entry of a judgment or
order from which no appeal may be taken. Custodian shall be entitled to receive
and may conclusively rely on an opinion of counsel to the presenting party to
the effect that a Court Order as referred to in this Section is final and
nonappealable and from a court of competent jurisdiction.
10. CUSTODIAN
10.1 Custodian undertakes to perform only such duties as
are expressly set forth herein.
10.2 Custodian may rely and shall be protected in acting or
refraining from acting upon any notice, instruction or request furnished to it
in writing hereunder and reasonably believed by it to be genuine and to have
been signed or presented by the proper party or parties.
10.3 Custodian shall not be liable for any action taken by it
in good faith without gross negligence, and may consult with counsel of its own
choice and shall have full and complete authorization and protection for any
reasonable action taken or suffered by it hereunder in good faith and in
accordance with the written opinion of such counsel.
10.4 Custodian may resign and be discharged from its duties or
obligations hereunder by giving notice in writing of such resignation specifying
a date (not less than thirty (30) days after the giving of such notice) when
such resignation shall take effect, and by transferring all funds then held by
it pursuant to this Agreement to the successor custodian. Promptly after such
notice, Pledgor and Pledgees shall by mutual agreement appoint a successor
custodian, such custodian to hold the Pledged Shares upon the resignation date
specified in such notice. If a successor custodian is not appointed within
thirty (30) days, Custodian shall have the right to petition any court of
competent jurisdiction for the appointment of a successor custodian. Pledgor and
4
Pledgees may by mutual agreement at any time substitute a new custodian by
giving fifteen (15) days' notice thereof to the Custodian then acting. Custodian
shall continue to serve until its successor accepts the responsibility of
Custodian and receives delivery of the Pledged Shares.
10.5 Pledgor and Pledgees agree, jointly and severally, to
indemnify Custodian for, and to hold it harmless against, any loss, liability or
expense incurred by it, arising out of or in connection with its entering into
this Agreement and carrying out its duties hereunder, including the costs and
expenses of defending itself against any claim of liability in the premises,
other than as incurred by reason of its willful or reckless misconduct or bad
faith. The provisions of this section shall survive the resignation or removal
of Custodian and the termination of this Agreement.
10.6 Custodian's duties hereunder may be altered, amended,
modified or revoked only by a writing signed by Pledgor, Pledgees and
Custodians.
10.7 Custodian is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case Custodian obeys or complies with any such order, judgment or
decree, Custodian shall not be liable to any of the parties hereto or to any
other person, firm or corporation by reason of such decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been entered
without jurisdiction.
10.8 CUSTODIAN HAS ACTED AS LEGAL COUNSEL FOR PLEDGEES, AND
MAY CONTINUE TO ACT AS LEGAL COUNSEL FOR PLEDGEES, FROM TIME TO TIME,
NOTWITHSTANDING ITS DUTIES AS CUSTODIAN HEREUNDER. PLEDGOR CONSENTS TO CUSTODIAN
ACTING IN SUCH CAPACITY AS LEGAL COUNSEL FOR PLEDGEES AND WAIVES ANY CLAIM THAT
SUCH REPRESENTATION REPRESENTS A CONFLICT OF INTEREST ON THE PART OF CUSTODIAN.
PLEDGOR UNDERSTANDS THAT PLEDGEES AND CUSTODIAN ARE RELYING EXPLICITLY ON THE
FOREGOING PROVISION IN ENTERING INTO THIS AGREEMENT. NOTWITHSTANDING THE
FOREGOING, CUSTODIAN SHALL NOT REPRESENT PLEDGEES IN ANY PROCEEDING RESULTING
FROM CUSTODIAN DELIVERY OF THE PLEDGED SECURITIES INTO COURT AS CONTEMPLATED IN
SECTION 9.2 HEREOF.
10.9 Pledgees shall pay the fees and costs of the Custodian
under this Agreement.
11. NOTICES.
Notices, requests, instructions or other documents to be in given under
this Agreement shall be in writing and shall be deemed given and received, (i)
when sent if sent by facsimile, provided that the fax is promptly confirmed by
telephone confirmation thereof, (ii) when delivered, if delivered personally to
the intended recipient, and (iii) one business day later, if sent by overnight
delivery via a national courier service, and in each case, addressed to a party
at the following address for such party:
if to Pledgor:
5
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
if to any Pledgee:
to the address set forth below such Pledgee's
name on the signature pages hereto
with copies to:
Quarles & Brady Streich Lang LLP
Renaissance One
Two N. Central Avenue
Phoenix, Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire
Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
12. MISCELLANEOUS.
12.1 No course of dealing between Pledgor and Pledgees, nor
any failure or delay in exercising any right, power or privilege hereunder shall
operate as a waiver of such right, power or privileges.
12.2 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AND THE PARTIES
AGREE AND CONSENT TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE
COURTS LOCATED IN NEW YORK COUNTY, NEW YORK IN ANY ACTION OR PROCEEDING
HEREUNDER, AND TO SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED (WHICH SHALL CONSTITUTE "PERSONAL SERVICE"). THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
6
12.3 This Agreement shall inure to the benefit of the
successors and assigns of each Pledgee. This Agreement shall be binding upon
each of the successors and assigns of Pledgor.
12.4 This Agreement contains or refers to the entire agreement
of the parties with respect to its subject matter, and supersedes any prior
arrangements or understandings between the parties with respect thereto. Any
waiver, modification, discharge or termination of this Agreement must be in
writing and signed by the parties necessary to the enforcement thereof.
7
IN WITNESS WHEREOF, and intending to be legally bound by this
Agreement, each of the parties hereto has caused this Agreement to be executed
and delivered as of December ___, 2005.
PLEDGOR:
ATTEST: ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By:
----------------------------------- ---------------------------------------
(Authorized Signature)
Name:
-------------------------------------
(Printed or Typed)
Title:
------------------------------------
Date:
-------------------------------------
State of _____________________ :
ss
County of ___________________ :
On this _____ day of ______________2005, before me the
subscriber, a Notary Public in and for the State and County aforesaid personally
appeared ___________________________, known or satisfactory identified to me,
who acknowledged that he/she was the ______________[title of office] of Advanced
Communications Technologies, Inc. and had executed the foregoing instrument in
such capacity in the name of and on behalf of such corporation for/ the purposes
stated therein.
Witness my hand and seal the day and year aforesaid.
[Notarial Seal]
Notary Public
SIGNATURES CONTINUE ON NEXT PAGE
PLEDGEES:
ATTEST:
----------------------------- -----------------------------------------------
Theodore S. Li
Address:
-----------------------------------------------
Hui Cynthia Lee
Address:
State of _____________________ :
ss
County of ___________________ :
On this _____ day of ____________2005, before me the
subscriber, a Notary Public in and for the State and County aforesaid personally
appeared THEODORE S. LI known or satisfactory identified to me, who acknowledged
that he had executed the foregoing instrument for the purposes stated therein.
Witness my hand and seal the day and year aforesaid.
[Notarial Seal]
-----------------------------------
Notary Public
10
State of _____________________ :
ss
County of ___________________ :
On this _____ day of ____________2005, before me the
subscriber, a Notary Public in and for the State and County aforesaid personally
appeared HUI CYNTHIA LEE known or satisfactory identified to me, who
acknowledged that she had executed the foregoing instrument for the purposes
stated therein.
Witness my hand and seal the day and year aforesaid.
[Notarial Seal]
-----------------------------------
Notary Public
11
IRREVOCABLE STOCK POWER
FOR VALUE RECEIVED, ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. does hereby
sell, assign and transfer to __________ , ______________________________________
shares of the common stock of PACIFIC MAGTRON INTERNATIONAL CORP., a ___________
corporation, represented by Certificate(s) No(s) _________________ inclusive,
standing in the name of ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. on the books
of PACIFIC MAGTRON INTERNATIONAL CORP. ADVANCED COMMUNICATIONS TECHNOLOGIES,
INC. does hereby irrevocably constitute and appoint _______________________
attorney to transfer the said stock or bond(s) as the case may be, on the books
of PACIFIC MAGTRON INTERNATIONAL CORP., with full power of substitution in the
premises.
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By: (SEAL)
----------------------------------
Dated: , 2005
-------------------------
Witness:
(SEAL)
-----------------------------------
SIGNATURE GUARANTEED BY:
-----------------------------------
[Signature must be guaranteed by a
National Bank or Member of the
National Association of Securities
Dealers, Inc.]
12
EXHIBIT E
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of this ___ day of
January 2005 ("Effective Date"), by and among Pacific Magtron International
Corp., a Nevada corporation ("PMIC"), Encompass Group Affiliates, Inc., a
Delaware corporation ("Encompass"), Advanced Communication Technologies, Inc., a
Florida corporation ("ACT"), and Theodore S. Li, an individual whose address is
________________________________ ("Executive"). For purposes hereof, the terms
PMIC, Encompass and ACT shall include each of their respective subsidiaries and
PMIC, Encompass and ACT shall be referred to collectively herein as the
"Company."
WITNESSETH
WHEREAS, Executive presently serves as a Director and as President,
Chief Executive Officer, Chief Financial Officer and Treasurer of PMIC;
WHEREAS, ACT, Executive and certain other shareholders of PMIC have
entered into a Stock Purchase Agreement, pursuant to which ACT will purchase all
of the shares of common stock of PMIC owned by Executive and each such other
shareholder (the "Stock Purchase"); and
WHEREAS, it is a condition to the Stock Purchase that Executive enter
into this Agreement with the Company effective as of the Effective Date.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT. PMIC hereby employs Executive, and Executive hereby accepts
employment with PMIC, as Chief Financial Officer and Chief Operating Officer, or
such other senior executive position as may be determined by the Board of
Directors of PMIC (the "Board") from time to time during the Employment Period
(as defined below). For purposes of this Agreement, "senior executive position"
shall mean a position of Vice President or a more senior position. In addition
to his duties set forth in this Section 1 and Section 3 below, Executive shall
at the request of the PMIC CEO (as defined below) or the Board serve as an
officer or director of PMIC or any subsidiary of PMIC, without additional
compensation and subject to any policy of the Compensation Committee of the
Board (the "PMIC Compensation Committee") with regard to directors' fees.
2. TERM; RENEWAL. The term of this Agreement shall commence on the Effective
Date and expire on the third anniversary thereof (the "Employment Period"),
unless earlier terminated in accordance with its terms; provided, however, that
the Employment Period may, by written agreement between the parties hereto, be
extended for an additional one-year period.
1
3. EMPLOYMENT AND DUTIES.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment Period
shall be that of Chief Financial Officer and Chief Operating Officer of PMIC.
Executive shall directly report to the Chief Executive Officer of PMIC (the
"PMIC CEO"), or such other senior executive officer of Encompass or ACT, as
determined from time to time by the Company. The services to be rendered by
Executive pursuant to this Agreement shall consist of such services as defined
and directed by the Board or the PMIC CEO.
(b) During the Employment Period, Executive shall serve the Company
faithfully and to the best of his ability; shall devote his entire working time,
attention, energy and skill to his employment and the benefit and business of
the Company; and shall use his best efforts, skills and ability to promote the
Company's interests and to perform such duties as from time to time may be
reasonably assigned to him and are consistent with his titles and positions with
the Company.
(c) During the Employment Period, in addition to any other duties or
responsibilities the Company may give to Executive consistent with Section 1,
Executive shall, subject to Section 3.2 herein, be required to sign, and shall
sign, all certifications and such other documents or instruments requested by
the Board, the Chief Executive Officer of ACT, or the PMIC CEO in connection
with PMIC's and/or ACT's obligations under or to (i) the Securities and Exchange
Commission, (ii) any exchange or association on which the Company's shares of
capital stock are listed, (iii) any federal, state or local authority, and/or
(iv) any other governmental, quasi-governmental or non-governmental entity or
organization (foreign or domestic) that regulates or has authority over PMIC
and/or ACT. In addition, in the event Executive, in his current position or in
any position Executive accepts in the future, becomes obligated to sign
certifications and such other documents or instruments as may be required by the
rules and regulations promulgated by any of (i) through (iv) above, Executive
shall, subject to Section 3.2 herein, sign all such certifications and other
documents or instruments as required thereby.
3.2 Observance of Rules and Regulations. Executive agrees to observe and
comply with all applicable laws and regulations, as well as the rules and
regulations of the Company with respect to the performance of his duties.
4. COMPENSATION; BENEFITS AND EXPENSES.
4.1 Base Salary. As compensation for the services to be rendered hereunder,
during the Employment Period, the Company shall pay to Executive a minimum
annual base salary (the "Base Salary") of $120,000.00. The Base Salary shall be
payable in accordance with usual payroll practices of the Company. Executive's
Base Salary shall be reviewed annually by the PMIC Compensation Committee during
the Employment Period and may be increased, but not decreased, from time to time
by the PMIC Compensation Committee in its sole discretion.
2
4.2 Bonus.
(a) Within thirty (30) days after the Effective Date, Executive shall
receive a signing bonus in the amount of $225,000.
(b) Immediately following each fiscal year, the Company shall set
aside for the payment of PMIC executive bonuses, an amount equal to ten percent
(10%) of net income of PMIC during such fiscal year (the "PMIC Bonus Pool").
For each fiscal year or portion thereof after the Effective Date and during the
Employment Period, the Company shall pay to Executive an annual performance
bonus, in cash, equal to a portion of the PMIC Bonus Pool, as determined by the
PMIC Compensation Committee, in its sole discretion (the "PMIC Performance
Bonus").
For purposes hereof, "net income" shall mean, with respect to PMIC, for any
fiscal year, the net income (loss) of PMIC for such fiscal year, determined in
accordance with generally accepted accounting principles, consistently applied;
provided, however, that there shall be excluded from net income (a) the net
income (loss) of any person in which PMIC has a joint interest with a third
party, except to the extent such net income is actually paid to PMIC by dividend
or other distribution during such fiscal year, (b) the net income (or loss) of
any person accrued prior to the date it becomes a subsidiary of PMIC or is
merged into or becomes consolidated with PMIC or its assets are purchased by
PMIC, and (c) the net income (if positive) of any subsidiary of PMIC to the
extent that the declaration or payment of dividends or similar distributions of
such net income by such subsidiary (i) is not at that time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order statute, rule or governmental regulation or (ii) would be subject
to any taxes payable on such dividends or distributions.
(c) In addition to the PMIC Performance Bonus, Executive may receive,
and ACT may grant to Executive, restricted shares of common stock of ACT, with a
vesting schedule and other terms established by the Compensation Committee of
the Board of Directors of ACT (the "ACT Compensation Committee"), in its sole
discretion (the "Incentive Bonus").
(d) Executive acknowledges that the amount of the PMIC Performance
Bonus and the amount of the Incentive Bonus shall at all times be determined by
the PMIC Compensation Committee and the ACT Compensation Committee,
respectively, in their respective sole discretion. The Company shall pay each of
the Performance Bonus and the Incentive Bonus to Executive within thirty (30)
days after the Company's audited results for the applicable fiscal year are
delivered to the Company.
4.3 Earn-Out.
(a) Earn-Out Shares. In the event Pacific Magtron, Inc. ("PMI"),
Pacific Magtron (GA), Inc. ("PMI-GA"), and LiveWarehouse, Inc. ("LW") achieve
the Milestones (as defined in Section 4.3(b) below) for any year during the
three (3) year period commencing January 1, 2005 and expiring December 31, 2007,
Executive shall have the right to receive on March 31 of the immediately
following calendar year, the applicable ratable portion of 66,666,666 shares of
3
restricted common stock of ACT (priced at $.01 per share, or $666,666 in the
aggregate), to be earned at the end of each such year at the rate of 25% for
each of the first and second years and 50% for the third year (the "Shares");
provided, that in the event the Milestones are not achieved in any year, except
as provided below, such ratable portion of Shares shall be forfeited entirely,
without any ability to re-earn such Shares in a future year; provided further,
that in the event Executive's employment with the Company is terminated for
"cause" by the Company (as contemplated by Section 6.1 of this Agreement) prior
to the expiration of the initial Employment Period, all of the Shares earned or
to be earned by Executive shall be forfeited. In the event that Executive's
employment with the Company is terminated prior to the expiration of the initial
Employment Period for any reason other than "cause," Executive shall be
permitted to receive the Shares earned by him prior to such termination, but
shall in no event be entitled to receive Shares to be earned after the
Termination Date (as defined in Section 6.1 below). Notwithstanding the
foregoing, the number of Shares and the price per Share shall be adjusted
accordingly for stock splits, reverse stock splits and other recapitalizations
effected by ACT, so that Executive retains the right, after accounting for such
adjustment, to receive the same percentage of ACT's outstanding shares of Common
Stock as Executive would have had the right to receive had such adjustment not
been so effected.
Upon earning the Shares at the end of each year, if applicable, the Shares will
be placed in escrow with a mutually agreeable escrow agent to be held and
released in accordance with the terms of an escrow agreement in substantially
the form of Exhibit "A" hereto; provided, however, that in the event that the
employment of Executive is terminated by the Company prior to the expiration of
the initial Employment Period without cause (as contemplated by Section 6.2 of
this Agreement), Executive terminates this Agreement for Good Reason (as
contemplated by Section 6.3 of this Agreement), or this Agreement is terminated
due to Executive's death or Disability (as defined below), Executive shall
receive any Shares earned by him no later than the later of (a) the immediately
following March 31 or (b) thirty (30) days after the Termination Date. Upon
release from escrow, the Shares will include piggyback registration rights,
subject to customary underwriters' cutbacks.
Upon receipt of the Shares, Executive will acquire the Shares for his own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act of 1933, as amended. Executive is an "accredited
investor," as such term is defined in Rule 501(a) promulgated pursuant to the
Securities Act of 1933, as amended. Executive acknowledges that Executive has
had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary in light of such personal knowledge of the Company's affairs,
Executive has asked such questions and received answers to the full satisfaction
of Executive. Executive understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares or the fairness of suitability of
the investment in the Shares nor have such authorities passed upon or endorsed
the merits of the offering of the Shares.
Notwithstanding the foregoing, in the event that the Milestones are not achieved
in a given year, the Board of Directors of ACT shall have the right, in its sole
and absolute discretion, to grant to Executive all or a portion of the Shares
that could have been earned by Executive during such year.
4
(b) Milestones. Revenue and EBITDA (earnings before interest, taxes,
depreciation and amortization) herein shall be defined according to generally
accepted accounting principles and no allocation from PMIC, ACT or Encompass
overhead shall be included in the calculation of EBITDA. The Milestones for the
combined Revenues and EBITDA of PMI, PMI-GA and LW are:
Calendar Year End Revenues EBITDA
----------------- -------- ------
December 31, 2005 $70,000,000 $490,000
December 31, 2006 $82,000,000 $738,000
December 31, 2007 $95,000,000 $950,000
Notwithstanding anything contained herein to the contrary, the
determination of the Milestones shall be based on unaudited pro forma financial
statements of PMI, PMI-GA and LW, prepared by the management of PMIC and
approved by Executive, the Chief Executive Officer of ACT and the ACT
Compensation Committee.
4.4 Other Benefits. Executive shall also be eligible to participate in any
life and health insurance programs and any incentive, savings and retirement
plans that the Company makes available to all of its executives of similar
seniority. Executive shall also be eligible to receive discretionary performance
based bonuses as approved and authorized by the ACT Compensation Committee,
including any incentive stock programs approved by ACT's shareholders.
4.5 Business Expenses. Executive will be reimbursed, in accordance with
the Company's expense reimbursement policy, for business expenses that have been
pre-approved by the Board or the PMIC CEO upon presentation of vouchers or other
documents reasonably necessary to verify the expenditures and sufficient, in
form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
4.6 Vacation. Executive shall be entitled to take up to four (4) weeks of
vacation per calendar year, which shall be taken in accordance with the
Company's vacation policy in effect from time to time for executives of
comparable seniority.
5. NO COMPETITIVE ACTIVITIES; CONFIDENTIALITY; INVENTION
5.1 General Restriction. During the Employment Period and for a period of
two (2) years thereafter (the "Restricted Period"), Executive covenants and
agrees that, except on behalf of the Company, he will not, directly or
indirectly:
(a) Competing Business. Own, manage, operate, control, participate in
the ownership, management, operation or control of, be employed by, or provide
services as a consultant to, any individual or business that is involved in
business activities that are the same as, similar to or in competition with,
directly or indirectly, any business activities conducted, or actively being
planned, by Encompass and/or PMIC during the Restricted Period and anywhere in
5
the United States and Canada (it being acknowledged that Encompass' and/or
PMIC's businesses are international in scope). The ownership of less than one
percent (1%) of the outstanding stock of any public corporation shall not be
deemed a violation of this provision.
(b) Soliciting Customers. Attempt in any manner to contact or solicit
any individual, firm, corporation or other entity (i) that is or has been, a
customer of Encompass and/or PMIC at any time during the Restricted Period, (ii)
to which a proposal has been made by Encompass and/or PMIC during the Restricted
Period or (iii) appearing Encompass' and/or PMIC's new business target list on
the date of Executive's termination (as such list has been prepared and
maintained in accordance with Encompass' and/or PMIC's past practice), for the
purpose of providing services or products similar to the services and products
provided by Encompass and/or PMIC, or engaging in any activity which could be,
directly or indirectly, competitive with the business of Encompass and/or PMIC.
(c) Interfering with Other Relations. Persuade or attempt to persuade
any supplier, vendor, licensor or other entity or individual doing business with
Encompass and/or PMIC to discontinue or reduce its business with Encompass
and/or PMIC or otherwise interfere in any way with the business relationships
and activities of Encompass and/or PMIC.
(d) Employees. Attempt in any manner to solicit any individual, who is
at the time of such attempted solicitation, or was at any time during the one
(1) year period preceding the termination of Executive's employment, an employee
or consultant of Encompass and/or PMIC, to terminate his or her employment or
relationship with Encompass and/or PMIC, or engage such individual, as an
employee or consultant. Cooperate with any other person in persuading, enticing
or aiding, or attempting to persuade, entice or aid, any employee of or
consultant to Encompass and/or PMIC to terminate his or her employment or
business relationship with Encompass and/or PMIC, or to become employed as an
employee or retained as a consultant by any person other than Encompass and/or
PMIC.
In the event of a voluntary or involuntary filing under Chapter 7 of the United
States Bankruptcy Code by PMIC and Encompass that is not dismissed within ninety
(90) days, Executive shall no longer be bound by the restrictions contained in
this Section 5.1.
5.2 Confidentiality Agreement. Executive shall not, either during the
Employment Period or at any time thereafter, use or disclose to any third person
any Confidential Information (as defined below) of the Company, other than at
the direction of the Company, or pursuant to a court order or subpoena, provided
that Executive will give notice of such court order or subpoena to the Company
prior to such disclosure. Upon the termination of Executive's employment with
the Company for any reason, Executive shall return any notes, records, charts,
formulae or other materials (whether in hard copy or computer readable form)
containing Confidential Information (as defined below), and will not make or
retain any copies of such materials. Without limiting the generality of the
foregoing, the parties acknowledge that the Company from time to time may be
subject to agreements with its customers, suppliers or licensors to maintain the
confidence of such other persons' confidential information. The terms of such
agreements may require that the Company's employees, including Executive, be
bound by such agreements, and Executive shall be deemed so bound upon notice to
him of the terms of such agreements. The term "Confidential Information" as used
herein shall mean any confidential or proprietary information of the Company
6
whether of a technical, engineering, operational, financial or economic nature,
including, without limitation, all prices, discounts, terms and conditions of
sale, trade secrets, know-how, customers, inventions, business affairs or
practices, systems, products, product specifications, designs, plans,
manufacturing and other processes, data, ideas, details and other information of
the Company. Confidential Information shall not include information which can be
proven by Executive to have been developed by his own work as of the Effective
Date completely independent of its disclosure by the Company or which is in the
public domain, provided such information did not become available to the general
public as a result of Executive's breach of this Section 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full
written disclosure to the Company and solely the Company of all writings,
inventions, processes, methods, plans, developments, improvements, procedures,
techniques and other innovations of any kind that Executive may make, develop or
reduce to practice, alone or jointly with others, at any time during the
Employment Period, whether during working hours or at any other time and whether
at the request or upon the suggestion of the Company or otherwise, and whether
or not they are eligible for patent, copyright, trademark, trade secret or other
legal protection (collectively, "Innovations"). Examples of Innovations shall
include, but are not limited to, discoveries, research, formulas, tools,
know-how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software. The written disclosures provided for herein shall be made to the PMIC
CEO or the Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be the
sole and exclusive property of the Company. Executive hereby assigns all rights,
title or interest in and to the Innovations to the Company. At the Company's
request and expense, during the Employment Period and at any time thereafter,
Executive will assist and cooperate with the Company in all respects and will
execute documents and give testimony to obtain, maintain, perfect and enforce
for the Company any and all patent, copyright, trademark, trade secret and other
legal protections for the Innovations.
5.5 Remedies. Executive acknowledges that the restrictions contained in
the foregoing Sections 5.1 through 5.4, in view of the nature of the business in
which the Company is engaged, are reasonable and necessary in order to protect
the legitimate interests of the Company, and that the legal remedies for a
breach of any of the provisions of this Section 5 will be inadequate and that
such provisions may be enforced by restraining order, injunction, specific
performance or other equitable relief. Such equitable remedies shall be
cumulative and in addition to any other remedies which the injured party or
parties may have under applicable law, equity, this Agreement or otherwise.
Executive shall not, in any action or proceeding to enforce any of the
provisions of this Section 5, assert the claim or defense that an adequate
remedy at law exists. The prevailing party shall be entitled to recover its
legal fees and expenses in any action or proceeding for breach of this Section
5.
5.6 Company Property. All Confidential Information; all Innovations; and
all correspondence, files, documents, advertising, sales, manufacturers' and
other materials or articles or other information of any kind, in any media, form
or format furnished to Executive by the Company, which may not deemed
confidential, shall be and remain the sole property of the Company ("Company
7
Property"). Upon termination of Executive's employment or at the Company's
request, whichever is earlier, Executive shall immediately deliver to the
Company all such Company Property.
5.7 Public Policy/Severability. The parties do not wish to impose any
undue or unnecessary hardship upon Executive following his departure from
employment with PMIC and/or Encompass, as the case may be. The parties have
attempted to limit the provisions of this Section 5 to achieve such a result,
and the parties expressly intend that all provisions of this Section 5 be
construed to achieve such result. If, contrary to the effort and intent of the
parties, any covenant or other obligation contained in this Section 5 shall be
found not to be reasonably necessary for the protection of the Company, to be
unreasonable as to duration, scope or nature of restrictions, or to impose an
undue hardship on Executive, then it is the desire of the parties that such
covenant or obligation not be rendered invalid thereby, but rather that the
duration, scope or nature of the restrictions be deemed reduced or modified,
with retroactive effect, to render such covenant or obligation reasonable, valid
and enforceable. The parties further agree that in the event a court, despite
the efforts and intent of the parties, declares any portion of the covenants or
obligations in this Section 5 invalid, the remaining provisions of this Section
5 shall nonetheless remain valid and enforceable.
6. TERMINATION.
6.1 Termination For Cause. Notwithstanding anything to the contrary
contained herein, this Agreement may be terminated immediately for "cause," at
which time the Company shall have no further obligations or liabilities to
Executive whether under this Agreement or otherwise and Executive's right to
further compensation and benefits hereunder (including, but not limited to,
unearned Shares) shall immediately cease, other than payment to Executive of
Base Salary accrued, and reimbursement of expenses incurred in accordance with
Section 4.5, prior to the effective date of termination of this Agreement (the
"Termination Date"). As used herein and throughout this Agreement, the term
"cause" shall mean (i) any act or omission by Executive that constitutes
malfeasance or misfeasance in the course of Executive's duties hereunder, or in
the objectively reasonable judgment of the Chief Executive Officer of ACT, the
Board of Directors of ACT, the Board or the PMIC CEO, Executive has been grossly
negligent (including habitual neglect of duties), or insubordinate in carrying
out his duties hereunder, (ii) a material breach of this Agreement by Executive
that is not cured within twenty (20) days of receipt of written notice thereof,
(iii) Executive's breach of a fiduciary duty owed to the Company or its
affiliates, or (iv) Executive's conviction of, or pleading nolo contendere to, a
criminal offense or crime constituting a misdemeanor or felony, or conviction in
respect to any act involving fraud, dishonesty or moral turpitude (other than
minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by the Company
without cause and for any reason or no reason prior to the expiration of the
Employment Period upon thirty (30) days' prior written notice from the Company
to the Executive.
8
(b) Severance. In the event that the Company terminates Executive's
employment without cause, the Company shall pay to Executive (i) Base Salary
accrued, Shares earned in accordance with Section 4.3, and expenses incurred in
accordance with Section 4.5, prior to the Termination Date, (ii) any unpaid
bonus owed to Executive for a prior fiscal year, (iii) other benefits earned by
Executive in accordance with Section 4.4 ((i), (ii) and (iii), collectively, the
"Accrued Payments"), which Accrued Payments shall be paid to Executive in
accordance with Section 4.1, Section 4.2, Section 4.3 and Section 4.5, as
applicable, (iv) any accrued vacation under Section 4.6, and (v) an additional
amount of Base Salary which would have been payable to Executive during the six
(6) month period immediately following the Termination Date (the "Severance
Payment"), which Severance Payment shall be payable in cash to Executive in
equal monthly installments on the first business day of each calendar month
during the six (6) month period immediately following the Termination Date.
Except as provided in the preceding sentence, the Company shall have no further
obligations or liabilities to Executive whether under this Agreement or
otherwise and Executive's right to further compensation and benefits hereunder
(including, but not limited to, unearned Shares) shall immediately cease.
6.3 Termination for Good Reason.
(a) Good Reason. Executive may terminate this Agreement for Good
Reason at any time within ninety (90) days after the Executive first has actual
knowledge of the occurrence of such Good Reason. For purposes of this Agreement,
the term "Good Reason" shall mean any of the following: (i) the assignment to
Executive of any duties that are not consistent with the duties set forth in
Sections 1 and 3 of this Agreement or any other action by the Company that
results in a material diminution in any of the Executive's positions with the
Company or in the Executive's authority, duties or responsibilities and to which
Executive has not consented (excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company within ten (10) days after receipt of notice thereof
given by Executive); (ii) any failure by the Company to comply with any of the
provisions of Section 4 of this Agreement provided such failure is for an amount
in excess of $10,000 and not cured within five (5) days after receipt of notice
thereof given by Executive or is an isolated, insubstantial and inadvertent
failure which is not remedied by the Company within ten (10) days after receipt
of notice thereof given by the Executive; (iii) the Company's requiring
Executive, without Executive's consent and full agreement, to be based at any
office other than at PMIC's headquarters located in Milpitas, California; and
(iv) any failure by the Company to require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Encompass, ACT or PMIC to
assume expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.
(b) Severance. In the event that Executive terminates this Agreement
for Good Reason, the Company shall pay to Executive the Severance Payment in
accordance with Section 6.2(b) of this Agreement. Except as provided in the
preceding sentence, the Company shall have no further obligations or liabilities
to Executive whether under this Agreement or otherwise and Executive's right to
further compensation and benefits hereunder (including, but not limited to,
unearned Shares) shall immediately cease.
9
6.4 Termination of Other Positions. Upon the Termination Date, Executive
hereby resigns as Chief Financial Officer and Chief Operating Officer of PMIC
and from any and all other positions as officer and/or director Executive may
then hold with the Company, and as fiduciary of any benefit plan of the Company.
Executive shall promptly execute any further reasonable documentation as
requested by the Company and, if Executive is to receive any payments from the
Company, execution of such further documentation shall be a condition thereof.
7. DISABILITY OR DEATH.
7.1 Disability. If, during the Employment Period, Executive becomes
disabled or incapacitated as determined under the Company's Long Term Disability
Policy ("Permanently Disabled"), the Company shall have the right at any time
thereafter (but in no event less than 120 days after the event causing such
disability or incapacity), so long as Executive is then still Permanently
Disabled, to terminate this Agreement upon thirty (30) days' prior written
notice to Executive. In the event the Company does not have a Long Term
Disability Policy at the time of the event causing the Executive to become
Permanently Disabled, "Permanently Disabled" shall mean Executive's inability to
fully perform his duties and responsibilities hereunder to the full extent
required by the Company by reason of illness, injury or incapacity for 120
consecutive days or for more than six (6) months during any twelve (12) month
period. If the Company elects to terminate this Agreement in the event that
Executive becomes Permanently Disabled, the Company shall have no further
obligations or liabilities to Executive, whether under this Agreement or
otherwise (including, but not limited to, unearned Shares), other than payment
to Executive of the Accrued Payments, which Accrued Payments shall be paid to
Executive in accordance with Section 4.1, Section 4.2, Section 4.4 and Section
4.5, as applicable.
7.2 Death. If Executive dies during the Employment Period, this Agreement
shall automatically terminate as of the date of Executive's death, and the
Company shall have no further obligations or liabilities to Executive, whether
under this Agreement or otherwise (including, but not limited to, unearned
Shares), other than payment to Executive's estate of the Accrued Payments, which
Accrued Payments shall be paid to Executive in accordance with Section 4.1,
Section 4.2, Section 4.3 and Section 4.5, as applicable.
8. DISPUTE RESOLUTION. If there shall be any dispute between the Company and
Executive (i) in the event of any termination of Executive's employment by the
Company, or (ii) otherwise arising out of this Agreement, such dispute shall be
resolved in accordance with the dispute resolution procedures set forth in
Exhibit B attached to this Agreement, the provisions of which are incorporated
as a part of this Agreement, and the parties of this Agreement agree that such
dispute resolution procedures will be the exclusive method for resolution of
disputes under this Agreement; provided, however, that (a) the Company or
Executive may seek preliminary judicial relief if, in such party's judgment,
such action is necessary to avoid irreparable injury during the pendency of such
procedures, and (b) nothing in Exhibit B will prevent either party from
exercising the rights of termination set forth in this Agreement. IT IS
EXPRESSLY UNDERSTOOD THAT BY SIGNING THIS AGREEMENT, WHICH INCORPORATES BINDING
ARBITRATION, THE COMPANY AND EXECUTIVE AGREE TO WAIVE COURT OR JURY TRIAL
10
9. INDEMNIFICATION. Each of the Company and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their respective obligations contained in this
Agreement.
10. GOVERNING LAW. This Agreement shall be governed by the internal laws of the
State of Delaware, without regard to its or any other jurisdiction's conflict of
laws principles. Any action to enforce any term hereof shall be brought
exclusively within the state or federal courts of Delaware to which jurisdiction
and venue all parties hereby submit themselves.
11. BINDING EFFECT. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
12. ASSIGNMENT. Any assignee of the Company shall have the right to enforce the
restrictive covenants set forth in this Agreement, and the Company shall have
the right to assign this Agreement, including the right to enforce such
covenants to any successor or assign of the Company. Executive shall not assign
this Agreement or his rights and obligations hereunder.
13. NOTICES. All notices, designations, consents, offers, acceptances, waivers
or any other communication provided for herein, or required hereunder, shall be
sufficient if in writing and if sent by registered or certified mail, return
receipt requested, overnight courier, or delivered by hand or confirmed
facsimile transmission to (i) Executive at his last known address on the books
of the Company or (ii) the Company at its principal place of business.
14. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
15. COUNTERPARTS. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
16. ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement and
understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof, including, without limitation,
that certain expired Letter of Intent, dated May 18, 2004, by and among
Executive, the Company and the other parties named therein. There are no
representations, agreements, arrangements or understandings, oral or written,
between or among the parties concerning the subject matter hereto, which are not
fully expressed herein or in any supplemental written agreements of even or
subsequent date hereof.
11
17. SEVERABILITY. If any provision of this Agreement, or the application thereof
to any person or circumstances, shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected thereby,
but rather shall be enforced to the greatest extent permitted by law.
18. MODIFICATION. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
19. CONTRACT HEADINGS. All headings of the Sections of this Agreement have been
inserted for convenience of reference only, are not to be considered a part of
this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
20. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
21. REPRESENTATION OF EXECUTIVE. Executive, with the full knowledge that the
Company is relying thereon, represents and warrants that he has not made any
commitment inconsistent with the provisions hereof and that he is not under any
disability which would prevent him from entering into this Agreement and
performing all of his obligations hereunder.
22. JOINT PARTICIPATION IN DRAFTING. Each party to this Agreement participated
in the drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party to
this Agreement.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the day and year first above written.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By:
--------------------------------
Name:
Title:
ENCOMPASS GROUP AFFILIATES, INC., a
Delaware corporation
By:
--------------------------------
Name:
Title:
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., a Florida
corporation
By:
--------------------------------
Name:
Title:
EXECUTIVE:
-----------------------------------
THEODORE S. LI
13
EXHIBIT A
DISPUTE RESOLUTION PROCEDURES
1. If a controversy arises that is covered by Section 8 of the Agreement,
then not later than twelve (12) months from the date of the event that is the
subject of dispute Executive or the Company may serve on the other a written
notice specifying the existence of such controversy and setting forth in
reasonably specific detail the grounds of the notice ("Notice of Controversy");
provided that, in any event, the other party will have at least thirty (30) days
from and after the date of the Notice of Controversy to serve a written notice
of any counterclaim ("Notice of Counterclaim"). The Notice of Counterclaim will
specify the claim or claims in reasonably specific detail. If the Notice of
Controversy or the Notice of Counterclaim, as the case may be, is not served
within the applicable period, the claim set forth therein will be deemed to have
been waived, abandoned and rendered unenforceable.
2. For a three (3) week period following receipt of the Notice of
Controversy or the Notice of Counterclaim, as the case may be, the parties will
make a good faith effort to resolve the dispute through negotiation ("Period of
Negotiation"). Neither party will take any action during the Period of
Negotiation to initiate arbitration proceedings.
3. If the parties agree during the Period of Negotiation to mediate the
dispute, then the Period of Negotiation will be extended by an amount of time to
be agreed upon by the parties to permit such mediation. In no event, however,
may the Period of Negotiation be extended by more than five weeks or, stated
differently, in no event may the Period of Negotiation be extended to encompass
more than a total of eight weeks.
4. If the parties agree to mediate the dispute but are thereafter unable
to agree within a week on the format and procedures for the mediation, then the
effort to mediate will cease, and the period of Negotiation will terminate four
weeks from the Notice of Controversy or the Notice of Counterclaim, as the case
may be.
5. Following the termination of the Period of Negotiation, the dispute,
including the main claim and counterclaim, if any, will be settled by
arbitration, governed by the Federal Arbitration Act, 9 U.S.C. ss.1 et seq.
("FAA"), and judgment upon the award may be entered in any court having
jurisdiction. The format and procedures of the arbitration are set forth below
(referred to below as the "Arbitration Agreement").
6. A notice of intention to arbitrate ("Notice of Arbitration") will be
served within forty-five (45) days of the termination of the Period of
Negotiation. If the Notice of Arbitration is not served within this period, the
claim set forth in the Notice of Controversy or the Notice of Counterclaim, as
the case may be, will be deemed to have been waived, abandoned and rendered
unenforceable.
7. The arbitration, including the Notice of Arbitration, will be governed
by the Commercial Rules of the American Arbitration Association ("AAA") in
effect on the date of the Notice of Arbitration, except that the terms of this
Arbitration Agreement will control in the event of any difference or conflict
between such Rules and the terms of this Arbitration Agreement.
8. The arbitrator will reach a decision on the merits on the basis of
applicable legal principles as embodied in the law of the State of Delaware. The
arbitration hearing will take place in Delaware.
9. There will be one arbitrator, regardless of the amount in controversy.
The arbitrator selected, in order to be eligible to serve, will be a lawyer in
Delaware with at least fifteen (15) years experience specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA will appoint the arbitrator who will
meet the foregoing criteria.
10. At the time of appointment and as a condition of the appointment, the
arbitrator will be apprised of the time limitations and other provisions of this
Arbitration Agreement and will indicate such dispute resolver's agreement to the
Tribunal Administrator to comply with such provisions and time limitations.
11. During the thirty (30) day period following appointment of the
arbitrator, either party may serve on the other a request for limited numbers of
documents directly related to the dispute. Such documents will be produced
within seven (7) days of the request.
12. Following the thirty-day period of document production, there will be
a forty-five (45) day period during which limited depositions will be
permissible. Neither party will take more than five (5) depositions, and no
deposition will exceed three (3) hours of direct testimony.
13. Disputes as to discovery or prehearing matters of a procedural nature
will be promptly submitted to the arbitrator pursuant to telephone conference
call or otherwise. The arbitrator will make every effort to render a ruling on
such interim matters at the time of the hearing (or conference call) or within
five (5) business days thereafter.
14. Following the period of depositions, the arbitration hearing will
promptly commence. The arbitrator will make every effort to commence the hearing
within thirty (30) days of the conclusion of the deposition period and, in
addition, will make every effort to conduct the hearing on consecutive business
days to conclusion.
15. An award will be rendered, at the latest, within nine (9) months of
the date of the Notice of Arbitration and within thirty (30) days of the close
of the arbitration hearing. The award will set forth the grounds for the
decision (findings of fact and conclusions of law) in reasonably specific
detail. The award will be final and nonappealable except as provided in the FAA
and except that a court of competent jurisdiction will have the power to review
whether, as a matter of law, based upon the findings of fact by the arbitrator,
the award should be confirmed or should be modified or vacated in order to
correct any errors of law made by the arbitrator. Such judicial review will be
limited to issues of law, and the parties agree that the findings of fact made
by the arbitrator will be final and binding on the parties and will serve as the
facts to be relied upon by the court in determining the extent to which the
award should be confirmed, modified or vacated.
Except for consequential damages arising from Executive's breach of
Section 5 of the Agreement, which shall not be limited, the award may only be
made for compensatory damages, and if any other damages (whether exemplary,
punitive, consequential, statutory or other) are included, the award will be
vacated and remanded, or modified or corrected, as appropriate to promote this
damage limitation.
Notwithstanding the foregoing, nothing contained herein shall limit the
Company's ability to seek a permanent injunction for Executive's breach of
Section 5 of the Agreement.
EXHIBIT F
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of this ____ day of
January 2005 ("Effective Date"), by and among Pacific Magtron International
Corp., a Nevada corporation ("PMIC"), Encompass Group Affiliates, Inc., a
Delaware corporation ("Encompass"), and Advanced Communications Technologies,
Inc., a Florida corporation ("ACT"), and Hui Cynthia Lee, an individual whose
address is _______________________________ ("Executive"). For purposes hereof,
the terms PMIC, Encompass and ACT shall include each of their respective
subsidiaries and PMIC, Encompass and ACT shall be referred to collectively
herein as the ("Company").
WITNESSETH
WHEREAS, Executive presently serves as a Director and as Secretary of
PMIC and is a shareholder of PMIC;
WHEREAS, ACT, Executive and certain other shareholders of PMIC have
entered into a Stock Purchase Agreement, pursuant to which ACT will purchase all
of the shares of common stock of PMIC owned by Executive and each such other
shareholder (the "Stock Purchase"); and
WHEREAS, it is a condition to the Stock Purchase that Executive enter
into this Agreement with the Company effective as of the Effective Date.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT. PMIC hereby employs Executive, and Executive hereby
accepts employment with PMIC, as Senior Vice President, or such other senior
executive position as may be determined by the Board of Directors of PMIC (the
"Board") from time to time during the Employment Period (as defined below). For
purposes of this Agreement, "senior executive position" shall mean a position of
Vice President or a more senior position.
2. TERM; RENEWAL. The term of this Agreement shall commence on the
Effective Date and expire on the second anniversary thereof (the "Employment
Period"), unless earlier terminated in accordance with its terms; provided,
however, that the Employment Period may, by written agreement between the
parties hereto, be extended for an additional one-year period.
3. EMPLOYMENT AND DUTIES.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment
Period shall be that of Senior Vice President of PMIC. Executive shall directly
report to the Chief Executive Officer of PMIC (the "PMIC CEO"), or such other
1
senior executive officer of ACT or Encompass, as determined from time to time by
the Board or the PMIC CEO. The services to be rendered by Executive pursuant to
this Agreement shall consist of such services as defined and directed by the
Board or the PMIC CEO.
(b) During the Employment Period, Executive shall serve the
Company faithfully and to the best of her ability; shall devote her entire
working time, attention, energy and skill to her employment and the benefit and
business of the Company; and shall use her best efforts, skills and ability to
promote the Company's interests and to perform such duties as from time to time
may be reasonably assigned to her and are consistent with her titles and
positions with the Company.
(c) During the Employment Period, in addition to any other duties
or responsibilities the Company may give to Executive consistent with Section 1,
Executive shall subject to Section 3.2 below be required to sign, and shall
sign, all certifications and such other documents or instruments requested by
the Board, the Chief Executive Officer of ACT, the Chief Executive Officer of
Encompass, or the PMIC CEO in connection with PMIC's and/or ACT's obligations
under or to (i) the Securities and Exchange Commission, (ii) any exchange or
association on which the Company's shares of capital stock are listed, (iii) any
federal, state or local authority, and/or (iv) any other governmental,
quasi-governmental or non-governmental entity or organization (foreign or
domestic) that regulates or has authority over PMIC and/or ACT. In addition, in
the event Executive, in her current position or in any position Executive
accepts in the future, becomes obligated to sign certifications and such other
documents or instruments as may be required by the rules and regulations
promulgated by any of (i) through (iv) above, Executive shall, subject to
Section 3.2 below, sign all such certifications and other documents or
instruments as required thereby.
3.2 Observance of Rules and Regulations. Executive agrees to observe
and comply with all applicable laws and regulations, as well as the rules and
regulations of the Company with respect to the performance of her duties.
4. COMPENSATION; BENEFITS AND EXPENSES.
4.1 Base Salary. As compensation for the services to be rendered
hereunder, during the Employment Period, the Company shall pay to Executive a
minimum annual base salary (the "Base Salary") of $120,000.00. The Base Salary
shall be payable in accordance with usual payroll practices of the Company.
Executive's Base Salary shall be reviewed annually by the Compensation Committee
of the Board (the "PMIC Compensation Committee") during the Employment Period
and may be increased, but not decreased, from time to time by the PMIC
Compensation Committee in its sole discretion.
4.2 Bonus.
(a) Within thirty (30) days after the Effective Date, Executive
shall receive a signing bonus in the amount of $225,000.
2
(b) Immediately following each fiscal year, PMIC shall set aside
for the payment of PMIC executive bonuses, an amount equal to ten percent (10%)
of net income of PMIC during such fiscal year (the "PMIC Bonus Pool"). For each
fiscal year or portion thereof after the Effective Date and during the
Employment Period, PMIC shall pay to Executive an annual performance bonus, in
cash, equal to a portion of the PMIC Bonus Pool, as determined by the PMIC
Compensation Committee, in its sole discretion (the "PMIC Performance Bonus").
For purposes hereof, "net income" shall mean, with respect to PMIC, for any
fiscal year, the net income (loss) of PMIC for such fiscal year, determined in
accordance with generally accepted accounting principles, consistently applied;
provided, however, that there shall be excluded from net income (a) the net
income (loss) of any person in which PMIC has a joint interest with a third
party, except to the extent such net income is actually paid to PMIC by dividend
or other distribution during such fiscal year, (b) the net income (or loss) of
any person accrued prior to the date it becomes a subsidiary of PMIC or is
merged into or becomes consolidated with PMIC or its assets are purchased by
PMIC, and (c) the net income (if positive) of any subsidiary of PMIC to the
extent that the declaration or payment of dividends or similar distributions of
such net income by such subsidiary (i) is not at that time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order statute, rule or governmental regulation or (ii) would be subject
to any taxes payable on such dividends or distributions.
(c) In addition to the PMIC Performance Bonus, Executive may
receive, and ACT may grant to Executive, restricted shares of common stock of
ACT, with a vesting schedule and other terms established by the Compensation
Committee of the Board of Directors of ACT (the "ACT Compensation Committee"),
in its sole discretion (the "Incentive Bonus").
(d) Executive acknowledges that the amount of the PMIC
Performance Bonus and the amount of the Incentive Bonus shall at all times be
determined by the PMIC Compensation Committee and the ACT Compensation
Committee, respectively, in their respective sole discretion. PMIC shall pay
each of the Performance Bonus and the Incentive Bonus to Executive within thirty
(30) days after the Company's audited results for the applicable fiscal year are
delivered to the Company.
4.3 Earn-Out.
(a) Earn-Out Shares. In the event Pacific Magtron, Inc. ("PMI"),
Pacific Magtron (GA), Inc. ("PMI-GA"), and LiveWarehouse, Inc. ("LW") achieve
the Milestones (as defined in Section 4.3 below) for any year during the two (2)
year period commencing January 1, 2005 and expiring December 31, 2006, Executive
shall have the right to receive on March 31 of the immediately following
calendar year, the applicable ratable portion of 33,333,333 shares of restricted
common stock of ACT (priced at $.01 per share, or $333,333 in the aggregate), to
be earned at the end of each such year at the rate of 50% for each year (the
"Shares"); provided, that in the event the Milestones are not achieved in any
year, except as provided below, such ratable portion of Shares shall be
forfeited entirely, without any ability to re-earn such Shares in a future year;
provided further, that in the event Executive's employment with PMIC is
terminated for "cause" by PMIC (as contemplated by Section 6.1 of this
3
Agreement) prior to the expiration of the initial Employment Period, all of the
Shares earned or to be earned by Executive shall be forfeited. In the event that
Executive's employment with PMIC is terminated prior to the expiration of the
initial Employment Period for any reason other than "cause," Executive shall be
permitted to receive the Shares earned by her prior to such termination, but
shall in no event be entitled to receive Shares to be earned after the
Termination Date (as defined in Section 6.1 below). Notwithstanding the
foregoing, the number of Shares and the price per Share shall be adjusted
accordingly for stock splits, reverse stock splits and other recapitalizations
effected by ACT, so that Executive retains the right to receive, after
accounting for such adjustment, the same percentage of ACT's outstanding shares
of Common Stock as Executive would have had the right to receive had such
adjustment not been so effected.
Upon earning the Shares at the end of each year, if applicable, the Shares will
be placed in escrow with a mutually agreeable escrow agent to be held and
released in accordance with the terms of an escrow agreement in substantially
the form of Exhibit "A" hereto; provided, however, that in the event that the
employment of Executive is terminated by PMIC prior to the expiration of the
initial Employment Period without cause (as contemplated by Section 6.2 of this
Agreement), Executive terminates this Agreement for Good Reason (as contemplated
by Section 6.3 of this Agreement), or this Agreement is terminated due to
Executive's death or Disability (as defined below), Executive shall receive any
Shares earned by her no later than the later of (a) the immediately following
March 31 or (b) thirty (30) days after the Termination Date. Upon release from
escrow, the Shares will include piggyback registration rights, subject to
customary underwriters' cutbacks.
Upon receipt of the Shares, Executive will acquire the Shares for her own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act of 1933, as amended. Executive is an "accredited
investor," as such term is defined in Rule 501(a) promulgated pursuant to the
Securities Act of 1933, as amended. Executive acknowledges that Executive has
had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary in light of such personal knowledge of the Company's affairs,
Executive has asked such questions and received answers to the full satisfaction
of Executive. Executive understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares or the fairness of suitability of
the investment in the Shares nor have such authorities passed upon or endorsed
the merits of the offering of the Shares.
Notwithstanding the foregoing, in the event that the Milestones are not achieved
in a given year, the Board of Directors of ACT shall have the right, in its sole
and absolute discretion, to grant to Executive all or a portion of the Shares
that could have been earned by Executive during such year.
(b) Milestones. Revenue and EBITDA (earnings before interest,
depreciation, taxes and amortization) herein shall be defined according to
generally accepted accounting principles and no allocation from PMIC, ACT or
Encompass overhead shall be included in the calculation of EBITDA. The
Milestones for the combined Revenues and EBITDA of PMI, PMI-GA and LW are:
4
Calendar Year End Revenues EBITDA
----------------- -------- ------
December 31, 2005 $70,000,000 $490,000
December 31, 2006 $82,000,000 $738,000
Notwithstanding anything contained herein to the contrary, the
determination of the Milestones shall be based on unaudited pro forma financial
statements of PMI, PMI-GA and LW, prepared by the management of PMIC and
approved by Executive, the Chief Executive Officer of ACT and the ACT
Compensation Committee.
4.4 Other Benefits. Executive shall also be eligible to participate
in any life and health insurance programs and any incentive, savings and
retirement plans that the Company makes available to all of its executives of
similar seniority. Executive shall also be eligible to receive discretionary
performance based bonuses as approved and authorized by the ACT Compensation
Committee, including any incentive stock programs approved by ACT's
shareholders.
4.5 Business Expenses. Executive will be reimbursed, in accordance
with the Company's expense reimbursement policy, for business expenses that have
been pre-approved by the Board or the PMIC CEO upon presentation of vouchers or
other documents reasonably necessary to verify the expenditures and sufficient,
in form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
4.6 Vacation. Executive shall be entitled to take up to four (4)
weeks of vacation per calendar year, which shall be taken in accordance with the
Company's vacation policy in effect from time to time for executives of
comparable seniority.
5. NO COMPETITIVE ACTIVITIES; CONFIDENTIALITY; INVENTION
5.1 General Restriction. During the Employment Period and for
a period of two (2) years thereafter (the "Restricted Period"), Executive
covenants and agrees that, except on behalf of the Company, she will not,
directly or indirectly:
(a) Competing Business. Own, manage, operate, control,
participate in the ownership, management, operation or control of, be employed
by, or provide services as a consultant to, any individual or business that is
involved in business activities that are the same as, similar to or in
competition with, directly or indirectly, any business activities conducted, or
actively being planned, by Encompass and/or PMIC during the Restricted Period
anywhere in the United States and Canada (it being acknowledged that Encompass'
and/or PMIC's businesses are international in scope). The ownership of less than
one percent (1%) of the outstanding stock of any public corporation shall not be
deemed a violation of this provision.
(b) Soliciting Customers. Attempt in any manner to contact or
solicit any individual, firm, corporation or other entity (i) that is or has
been, a customer of Encompass and/or PMIC at any time during the Restricted
Period, (ii) to which a proposal has been made by Encompass and/or PMIC during
5
the Restricted Period or (iii) appearing on Encompass' and/or PMIC's new
business target list on the date of Executive's termination (as such list has
been prepared and maintained in accordance with Encompass' and/or PMIC's past
practice), for the purpose of providing services or products similar to the
services and products provided by Encompass and/or PMIC, or engaging in any
activity which could be, directly or indirectly, competitive with the business
of Encompass and/or PMIC.
(c) Interfering with Other Relations. Persuade or attempt to
persuade any supplier, vendor, licensor or other entity or individual doing
business with Encompass and/or PMIC to discontinue or reduce its business with
Encompass and/or PMIC or otherwise interfere in any way with the business
relationships and activities of Encompass and/or PMIC.
(d) Employees. Attempt in any manner to solicit any individual,
who is at the time of such attempted solicitation, or was at any time during the
one (1) year period preceding the termination of Executive's employment, an
employee or consultant of Encompass and/or PMIC, to terminate his or her
employment or relationship with Encompass and/or PMIC, or engage such
individual, as an employee or consultant. Cooperate with any other person in
persuading, enticing or aiding, or attempting to persuade, entice or aid, any
employee of or consultant to Encompass and/or PMIC to terminate his or her
employment or business relationship with Encompass and/or PMIC, or to become
employed as an employee or retained as a consultant by any person other than
Encompass and/or PMIC.
In the event of a voluntary or involuntary filing under Chapter 7 of the United
States Bankruptcy Code by PMIC and Encompass that is not dismissed within ninety
(90) days, Executive shall no longer be bound by the restrictions contained in
this Section 5.1.
5.2 Confidentiality Agreement. Executive shall not, either during the
Employment Period or at any time thereafter, use or disclose to any third person
any Confidential Information (as defined below) of the Company, other than at
the direction of the Company, or pursuant to a court order or subpoena, provided
that Executive will give notice of such court order or subpoena to the Company
prior to such disclosure. Upon the termination of Executive's employment with
the Company for any reason, Executive shall return any notes, records, charts,
formulae or other materials (whether in hard copy or computer readable form)
containing Confidential Information (as defined below), and will not make or
retain any copies of such materials. Without limiting the generality of the
foregoing, the parties acknowledge that the Company from time to time may be
subject to agreements with its customers, suppliers or licensors to maintain the
confidence of such other persons' confidential information. The terms of such
agreements may require that the Company's employees, including Executive, be
bound by such agreements, and Executive shall be deemed so bound upon notice to
her of the terms of such agreements. The term "Confidential Information" as used
herein shall mean any confidential or proprietary information of the Company
whether of a technical, engineering, operational, financial or economic nature,
including, without limitation, all prices, discounts, terms and conditions of
sale, trade secrets, know-how, customers, inventions, business affairs or
practices, systems, products, product specifications, designs, plans,
manufacturing and other processes, data, ideas, details and other information of
the Company. Confidential Information shall not include information which can be
proven by Executive to have been developed by her own work as of the Effective
6
Date completely independent of its disclosure by the Company or which is in the
public domain, provided such information did not become available to the general
public as a result of Executive's breach of this Section 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full
written disclosure to the Company and solely the Company of all writings,
inventions, processes, methods, plans, developments, improvements, procedures,
techniques and other innovations of any kind that Executive may make, develop or
reduce to practice, alone or jointly with others, at any time during the
Employment Period, whether during working hours or at any other time and whether
at the request or upon the suggestion of the Company or otherwise, and whether
or not they are eligible for patent, copyright, trademark, trade secret or other
legal protection (collectively, "Innovations"). Examples of Innovations shall
include, but are not limited to, discoveries, research, formulas, tools,
know-how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software. The written disclosures provided for herein shall be made to the PMIC
CEO or the Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be
the sole and exclusive property of the Company. Executive hereby assigns all
rights, title or interest in and to the Innovations to the Company. At the
Company's request and expense, during the Employment Period and at any time
thereafter, Executive will assist and cooperate with the Company in all respects
and will execute documents and give testimony to obtain, maintain, perfect and
enforce for the Company any and all patent, copyright, trademark, trade secret
and other legal protections for the Innovations.
5.5 Remedies. Executive acknowledges that the restrictions contained
in the foregoing Sections 5.1 through 5.4, in view of the nature of the business
in which the Company is engaged, are reasonable and necessary in order to
protect the legitimate interests of the Company, and that the legal remedies for
a breach of any of the provisions of this Section 5 will be inadequate and that
such provisions may be enforced by restraining order, injunction, specific
performance or other equitable relief. Such equitable remedies shall be
cumulative and in addition to any other remedies which the injured party or
parties may have under applicable law, equity, this Agreement or otherwise.
Executive shall not, in any action or proceeding to enforce any of the
provisions of this Section 5, assert the claim or defense that an adequate
remedy at law exists. The prevailing party shall be entitled to recover its
legal fees and expenses in any action or proceeding for breach of this Section
5.
5.6 Company Property. All Confidential Information; all Innovations;
and all correspondence, files, documents, advertising, sales, manufacturers' and
other materials or articles or other information of any kind, in any media, form
or format furnished to Executive by the Company, which may not deemed
confidential, shall be and remain the sole property of the Company ("Company
Property"). Upon termination of Executive's employment or at the Company's
request, whichever is earlier, Executive shall immediately deliver to the
Company all such Company Property.
5.7 Public Policy/Severability. The parties do not wish to impose any
undue or unnecessary hardship upon Executive following her departure from
employment with PMIC and/or Encompass, as the case may be. The parties have
7
attempted to limit the provisions of this Section 5 to achieve such a result,
and the parties expressly intend that all provisions of this Section 5 be
construed to achieve such result. If, contrary to the effort and intent of the
parties, any covenant or other obligation contained in this Section 5 shall be
found not to be reasonably necessary for the protection of the Company, to be
unreasonable as to duration, scope or nature of restrictions, or to impose an
undue hardship on Executive, then it is the desire of the parties that such
covenant or obligation not be rendered invalid thereby, but rather that the
duration, scope or nature of the restrictions be deemed reduced or modified,
with retroactive effect, to render such covenant or obligation reasonable, valid
and enforceable. The parties further agree that in the event a court, despite
the efforts and intent of the parties, declares any portion of the covenants or
obligations in this Section 5 invalid, the remaining provisions of this Section
5 shall nonetheless remain valid and enforceable.
6. TERMINATION.
6.1 Termination For Cause. Notwithstanding anything to the contrary
contained herein, this Agreement may be terminated immediately for "cause," at
which time the Company shall have no further obligations or liabilities to
Executive whether under this Agreement or otherwise and Executive's right to
further compensation and benefits hereunder (including, but not limited to,
unearned Shares) shall immediately cease, other than payment to Executive of
Base Salary accrued, and reimbursement of expenses incurred in accordance with
Section 4.5, prior to the effective date of termination of this Agreement (the
"Termination Date"). As used herein and throughout this Agreement, the term
"cause" shall mean (i) any act or omission by Executive that constitutes
malfeasance or misfeasance in the course of Executive's duties hereunder, or in
the objectively reasonable judgment of the Chief Executive Officer of ACT, the
Board of Directors of ACT, the Board or the PMIC CEO, Executive has been grossly
negligent (including habitual neglect of duties), incompetent or insubordinate
in carrying out her duties hereunder, (ii) a material breach of this Agreement
by Executive that is not cured within twenty (20) days of receipt of written
notice thereof, (iii) Executive's breach of a fiduciary duty owed to PMIC or its
affiliates, or (iv) Executive's conviction of, or pleading nolo contendere to, a
criminal offense or crime constituting a misdemeanor or felony, or conviction in
respect to any act involving fraud, dishonesty or moral turpitude (other than
minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by PMIC
without cause and for any reason or no reason prior to the expiration of the
Employment Period upon thirty (30) days' prior written notice from PMIC to the
Executive.
(b) Severance. In the event that PMIC terminates Executive's
employment without cause, PMIC shall pay to Executive (i) Base Salary accrued,
Shares earned in accordance with Section 4.3, and expenses incurred in
accordance with Section 4.5, prior to the Termination Date, (ii) any unpaid
bonus owed to Executive for a prior fiscal year, (iii) other benefits earned by
Executive in accordance with Section 4.4 ((i), (ii) and (iii), collectively, the
"Accrued Payments"), which Accrued Payments shall be paid to Executive in
accordance with Section 4.1, Section 4.2, Section 4.3 and Section 4.5, as
applicable, (iv) any accrued vacation under Section 4.6, and (v) an additional
8
amount of Base Salary which would have been payable to Executive during the six
(6) month period immediately following the Termination Date (the "Severance
Payment"), which Severance Payment shall be payable in cash to Executive in
equal monthly installments on the first business day of each calendar month
during the six (6) month period immediately following the Termination Date.
Except as provided in the preceding sentence, the Company shall have no further
obligations or liabilities to Executive whether under this Agreement or
otherwise and Executive's right to further compensation and benefits hereunder
(including, but not limited to, unearned Shares) shall immediately cease.
6.3 Termination for Good Reason.
(a) Good Reason. Executive may terminate this Agreement for Good
Reason at any time within ninety (90) days after the Executive first has actual
knowledge of the occurrence of such Good Reason. For purposes of this Agreement,
the term "Good Reason" shall mean any of the following: (i) the assignment to
Executive of any duties that are not consistent with the duties set forth in
Sections 1 and 3 of this Agreement or any other action by the Company that
results in a material diminution in any of the Executive's positions with the
Company or in the Executive's authority, duties or responsibilities and to which
Executive has not consented (excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company within ten (10) days after receipt of notice thereof
given by Executive); (ii) any failure by the Company to comply with any of the
provisions of Section 4 of this Agreement provided such failure is for an amount
in excess of $10,000 and not cured within five (5) days after receipt of notice
thereof given by Executive or is an isolated, insubstantial and inadvertent
failure which is not remedied by the Company within ten (10) days after receipt
of notice thereof given by the Executive; (iii) the Company's requiring
Executive, without Executive's consent and full agreement, to be based at any
office other than at PMIC's headquarters located in Milpitas, California; and
(iv) any failure by the Company to require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Encompass, ACT or PMIC to
assume expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.
(b) Severance. In the event that Executive terminates this
Agreement for Good Reason, the Company shall pay to Executive the Severance
Payment in accordance with Section 6.2(b) of this Agreement. Except as provided
in the preceding sentence, the Company shall have no further obligations or
liabilities to Executive whether under this Agreement or otherwise and
Executive's right to further compensation and benefits hereunder (including, but
not limited to, unearned Shares) shall immediately cease.
6.4 Termination of Other Positions. Upon the Termination Date,
Executive hereby resigns as Senior Vice President of PMIC and from any and all
other positions as officer and/or director Executive may then hold with the
Company, and as fiduciary of any benefit plan of the Company. Executive shall
promptly execute any further documentation as requested by PMIC and, if
Executive is to receive any payments from PMIC, execution of such further
documentation shall be a condition thereof.
9
7. DISABILITY OR DEATH.
7.1 Disability. If, during the Employment Period, Executive
becomes disabled or incapacitated as determined under PMIC's Long Term
Disability Policy ("Permanently Disabled"), the Company shall have the right at
any time thereafter (but in no event less than 120 days after the event causing
such disability or incapacity), so long as Executive is then still Permanently
Disabled, to terminate this Agreement upon thirty (30) days' prior written
notice to Executive. In the event PMIC does not have a Long Term Disability
Policy at the time of the event causing the Executive to become Permanently
Disabled, "Permanently Disabled" shall mean Executive's inability to fully
perform her duties and responsibilities hereunder to the full extent required by
PMIC by reason of illness, injury or incapacity for 120 consecutive days or for
more than six (6) months during any twelve (12) month period. If PMIC elects to
terminate this Agreement in the event that Executive becomes Permanently
Disabled, the Company shall have no further obligations or liabilities to
Executive, whether under this Agreement or otherwise (including, but not limited
to, unearned Shares), other than payment to Executive of the Accrued Payments,
which Accrued Payments shall be paid to Executive in accordance with Section
4.1, Section 4.2, Section 4.4 and Section 4.5, as applicable.
7.2 Death. If Executive dies during the Employment Period, this
Agreement shall automatically terminate as of the date of Executive's death, and
the Company shall have no further obligations or liabilities to Executive,
whether under this Agreement or otherwise (including, but not limited to,
unearned Shares), other than payment by PMIC to Executive's estate of the
Accrued Payments, which Accrued Payments shall be paid to Executive in
accordance with Section 4.1, Section 4.2, Section 4.3 and Section 4.5, as
applicable.
8. DISPUTE RESOLUTION. If there shall be any dispute between the Company and
Executive (i) in the event of any termination of Executive's employment by the
Company, or (ii) otherwise arising out of this Agreement, such dispute shall be
resolved in accordance with the dispute resolution procedures set forth in
Exhibit B attached to this Agreement, the provisions of which are incorporated
as a part of this Agreement, and the parties of this Agreement agree that such
dispute resolution procedures will be the exclusive method for resolution of
disputes under this Agreement; provided, however, that (a) the Company or
Executive may seek preliminary judicial relief if, in such party's judgment,
such action is necessary to avoid irreparable injury during the pendency of such
procedures, and (b) nothing in Exhibit B will prevent either party from
exercising the rights of termination set forth in this Agreement. IT IS
EXPRESSLY UNDERSTOOD THAT BY SIGNING THIS AGREEMENT, WHICH INCORPORATES BINDING
ARBITRATION, THE COMPANY AND EXECUTIVE AGREE TO WAIVE COURT OR JURY TRIAL.
9. INDEMNIFICATION. Each of the Company and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their respective obligations contained in this
Agreement.
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10. GOVERNING LAW. This Agreement shall be governed by the internal laws
of the State of Delaware, without regard to its or any other jurisdiction's
conflict of laws principles. Any action to enforce any term hereof shall be
brought exclusively within the state or federal courts of Delaware to which
jurisdiction and venue all parties hereby submit themselves.
11. BINDING EFFECT. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
12. ASSIGNMENT. Any assignee of the Company shall have the right to
enforce the restrictive covenants set forth in this Agreement, and the Company
shall have the right to assign this Agreement, including the right to enforce
such covenants to any successor or assign of the Company. Executive shall not
assign this Agreement or her rights and respective obligations hereunder.
13. NOTICES. All notices, designations, consents, offers, acceptances,
waivers or any other communication provided for herein, or required hereunder,
shall be sufficient if in writing and if sent by registered or certified mail,
return receipt requested, overnight courier, or delivered by hand or confirmed
facsimile transmission to (i) Executive at her last known address on the books
of PMIC or (ii) PMIC at its principal place of business.
14. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
15. COUNTERPARTS. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
16. ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement
and understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof, including, without limitation,
that certain expired Letter of Intent, dated May 18, 2004, by and among
Executive, the Company and the other parties named therein. There are no
representations, agreements, arrangements or understandings, oral or written,
between or among the parties concerning the subject matter hereto, which are not
fully expressed herein or in any supplemental written agreements of even or
subsequent date hereof.
17. SEVERABILITY. If any provision of this Agreement, or the application
thereof to any person or circumstances, shall, for any reason and to any extent,
be invalid or unenforceable, the remainder of this Agreement and the application
of such provision to other persons or circumstances shall not be affected
thereby, but rather shall be enforced to the greatest extent permitted by law.
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18. MODIFICATION. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
19. CONTRACT HEADINGS. All headings of the Sections of this Agreement have
been inserted for convenience of reference only, are not to be considered a part
of this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
20. WAIVER. Failure to insist upon strict compliance with any of the
terms, covenants, or conditions hereof shall not be deemed a waiver of such
term, covenant, or condition, nor shall any waiver or relinquishment of any
right or power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
21. REPRESENTATION OF EXECUTIVE. Executive, with the full knowledge that
the Company is relying thereon, represents and warrants that she has not made
any commitment inconsistent with the provisions hereof and that she is not under
any disability which would prevent him from entering into this Agreement and
performing all of her obligations hereunder.
22. JOINT PARTICIPATION IN DRAFTING. Each party to this Agreement
participated in the drafting of this Agreement. As such, the language used
herein shall be deemed to be the language chosen by the parties hereto to
express their mutual intent, and no rule of strict construction shall be applied
against any party to this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the day and year first above written.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By:
------------------------------------------
Name:
Title:
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By:
------------------------------------------
Name:
Title:
ENCOMPASS GROUP AFFILIATES, INC., a
Delaware corporation
By:
---------------------------------
Name:
Title:
EXECUTIVE:
-----------------------------------
HUI CYNTHIA LEE
EXHIBIT A
DISPUTE RESOLUTION PROCEDURES
1. If a controversy arises that is covered by Section 8 of the Agreement,
then not later than twelve (12) months from the date of the event that is the
subject of dispute Executive or the Company may serve on the other a written
notice specifying the existence of such controversy and setting forth in
reasonably specific detail the grounds of the notice ("Notice of Controversy");
provided that, in any event, the other party will have at least thirty (30) days
from and after the date of the Notice of Controversy to serve a written notice
of any counterclaim ("Notice of Counterclaim"). The Notice of Counterclaim will
specify the claim or claims in reasonably specific detail. If the Notice of
Controversy or the Notice of Counterclaim, as the case may be, is not served
within the applicable period, the claim set forth therein will be deemed to have
been waived, abandoned and rendered unenforceable.
2. For a three (3) week period following receipt of the Notice of
Controversy or the Notice of Counterclaim, as the case may be, the parties will
make a good faith effort to resolve the dispute through negotiation ("Period of
Negotiation"). Neither party will take any action during the Period of
Negotiation to initiate arbitration proceedings.
3. If the parties agree during the Period of Negotiation to mediate the
dispute, then the Period of Negotiation will be extended by an amount of time to
be agreed upon by the parties to permit such mediation. In no event, however,
may the Period of Negotiation be extended by more than five weeks or, stated
differently, in no event may the Period of Negotiation be extended to encompass
more than a total of eight weeks.
4. If the parties agree to mediate the dispute but are thereafter
unable to agree within a week on the format and procedures for the mediation,
then the effort to mediate will cease, and the period of Negotiation will
terminate four weeks from the Notice of Controversy or the Notice of
Counterclaim, as the case may be.
5. Following the termination of the Period of Negotiation, the dispute,
including the main claim and counterclaim, if any, will be settled by
arbitration, governed by the Federal Arbitration Act, 9 U.S.C. ss.1 et seq.
("FAA"), and judgment upon the award may be entered in any court having
jurisdiction. The format and procedures of the arbitration are set forth below
(referred to below as the "Arbitration Agreement").
6. A notice of intention to arbitrate ("Notice of Arbitration") will be
served within forty-five (45) days of the termination of the Period of
Negotiation. If the Notice of Arbitration is not served within this period, the
claim set forth in the Notice of Controversy or the Notice of Counterclaim, as
the case may be, will be deemed to have been waived, abandoned and rendered
unenforceable.
7. The arbitration, including the Notice of Arbitration, will be governed
by the Commercial Rules of the American Arbitration Association ("AAA") in
effect on the date of the Notice of Arbitration, except that the terms of this
Arbitration Agreement will control in the event of any difference or conflict
between such Rules and the terms of this Arbitration Agreement.
8. The arbitrator will reach a decision on the merits on the basis of
applicable legal principles as embodied in the law of the State of Delaware. The
arbitration hearing will take place in Delaware.
9. There will be one arbitrator, regardless of the amount in controversy.
The arbitrator selected, in order to be eligible to serve, will be a lawyer in
Delaware with at least fifteen (15) years experience specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA will appoint the arbitrator who will
meet the foregoing criteria.
10. At the time of appointment and as a condition of the appointment, the
arbitrator will be apprised of the time limitations and other provisions of this
Arbitration Agreement and will indicate such dispute resolver's agreement to the
Tribunal Administrator to comply with such provisions and time limitations.
11. During the thirty (30) day period following appointment of the
arbitrator, either party may serve on the other a request for limited numbers of
documents directly related to the dispute. Such documents will be produced
within seven (7) days of the request.
12. Following the thirty-day period of document production, there will be
a forty-five (45) day period during which limited depositions will be
permissible. Neither party will take more than five (5) depositions, and no
deposition will exceed three (3) hours of direct testimony.
13. Disputes as to discovery or prehearing matters of a procedural nature
will be promptly submitted to the arbitrator pursuant to telephone conference
call or otherwise. The arbitrator will make every effort to render a ruling on
such interim matters at the time of the hearing (or conference call) or within
five (5) business days thereafter.
14. Following the period of depositions, the arbitration hearing will
promptly commence. The arbitrator will make every effort to commence the hearing
within thirty (30) days of the conclusion of the deposition period and, in
addition, will make every effort to conduct the hearing on consecutive business
days to conclusion.
15. An award will be rendered, at the latest, within nine (9) months of
the date of the Notice of Arbitration and within thirty (30) days of the close
of the arbitration hearing. The award will set forth the grounds for the
decision (findings of fact and conclusions of law) in reasonably specific
detail. The award will be final and nonappealable except as provided in the FAA
and except that a court of competent jurisdiction will have the power to review
whether, as a matter of law, based upon the findings of fact by the arbitrator,
the award should be confirmed or should be modified or vacated in order to
correct any errors of law made by the arbitrator. Such judicial review will be
limited to issues of law, and the parties agree that the findings of fact made
by the arbitrator will be final and binding on the parties and will serve as the
facts to be relied upon by the court in determining the extent to which the
award should be confirmed, modified or vacated.
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Except for consequential damages arising from Executive's breach of
Section 5 of the Agreement, which shall not be limited, the award may only be
made for compensatory damages, and if any other damages (whether exemplary,
punitive, consequential, statutory or other) are included, the award will be
vacated and remanded, or modified or corrected, as appropriate to promote this
damage limitation.
Notwithstanding the foregoing, nothing contained herein shall limit
the Company's ability to seek a permanent injunction for Executive's breach of
Section 5 of the Agreement.
3
EXHIBIT G
AGREEMENT
This Agreement (the "Agreement"), dated as of December 10, 2004, is by
and between Pacific Magtron International Corp., a Nevada corporation (the
"Company"), and the holder of the Company's Series A Redeemable Convertible
Preferred Stock (the "Holder").
WHEREAS, the Holder owns all of the issued and outstanding shares of the
Company's Series A Redeemable Convertible Preferred Stock (the "Series A
Preferred Stock"), which shares of Series A Preferred Stock were issued pursuant
to that certain Securities Purchase Agreement, dated May 31, 2002, by and
between the Company and the Holder (the "Purchase Agreement").
WHEREAS, the shares of Series A Preferred Stock are convertible into
shares of the Company's common stock (the "Conversion Shares" and together with
the Series A Preferred Stock, the "Securities");
WHEREAS, the Company and the Holder desire to amend and restate the
preferences, rights and limitations of the Series A Preferred Stock in
accordance with the terms of the Amended and Restated Certificate of Designation
of Preferences, Rights and Limitations of Series A Convertible Preferred Stock,
attached hereto as Exhibit "A" (the "Amended and Restated Certificate of
Designation");
WHEREAS, the Holder has owned the shares of Series A Preferred Stock for
a period of time in excess of two (2) years and therefore, the Conversion Shares
may be issued free of restrictive legend in reliance on Rule 144(k) promulgated
under the Securities Act as an exemption from the registration requirements of
Section 5 of the Securities Act;
WHEREAS, in connection with the issuance of the Series A Preferred
Stock, the Company issued a Stock Purchase Warrant to purchase 300,000 shares of
the Company's common stock (the "Warrant"); and
WHEREAS, the Company desires, and the Holder agrees, to cancel the
Warrant in connection with the transaction contemplated hereby.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for good and valuable consideration the receipt and adequacy
of which are hereby acknowledged, the Company and the Holder agree as follows:
ARTICLE 1
DEFINITIONS
Section 1. Definitions. In addition to the terms defined elsewhere in
this Agreement, the following terms have the meanings indicated in this
Section 1:
"Commission" means the Securities and Exchange Commission.
"Person" means an individual or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof)
or other entity of any kind.
"Trading Day" means (a) a day on which the Common Stock is traded on a
Principal Market on which the Common Stock is then listed or quoted, as the case
may be, or (b) if the Common Stock is not listed on a Principal Market, a day on
which the Common Stock is traded in the OTC Market, as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); provided, however, that in the event that
the Common Stock is not listed or quoted as set forth in (a) and (b) hereof,
then Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.
"Securities Act" means the Securities Act of 1933, as amended.
ARTICLE II
SERIES A PREFERRED STOCK SECURITIES
Section 2.1. Authorization to Amend and Restate the Certificate of
Designation. The Holder hereby authorizes the Company to amend and restate the
Company's Certificate of Designation of Preferences, Rights and Limitations of
Series A Redeemable Convertible Stock, filed with the Secretary of State of the
State of Nevada in connection with the issuance of the Series A Preferred Stock
under the Purchase Agreement (the "Original Certificate of Designation"). The
Holder hereby further consents to the terms of the Amended and Restated
Certificate of Designation and authorizes the Company to file, on or promptly
after the Closing Date (as defined below), the Amended and Restated Certificate
of Designation, and acknowledges that the preferences, rights and limitations
set forth therein shall supersede the preferences, rights and limitations set
forth in the Original Certificate of Designation, which shall be of no further
force and effect upon such filing.
Section 2.2. Stock Purchase Warrants. On the Closing Date, the Stock
Purchase Warrant to purchase 300,000 shares of the Company's common stock issued
by the Company to the Holder in connection with the issuance of the Series A
Preferred Stock shall be cancelled and be of no further force and effect (the
"Warrant").
Section 2.3 Condition to Filing Amended and Restated Certificate of
Designation. The Company's right to file the Amended and Restated Certificate of
Designation and consummate the transaction contemplated hereby shall be
conditioned upon the simultaneous closing of the transaction contemplated by
that certain Stock Purchase Agreement, dated the date hereof, by and among
Theodore S. Li and Hui Cynthia Lee, stockholders of the Company, and Advanced
Communications Technologies, Inc. (the "Closing") and nothing contained herein
shall obligate the Company to file the Amended and Restated Certificate of
Designation or consummate the transaction contemplated hereby prior to the
Closing. In the event the Closing shall not have occurred on or prior to January
10, 2005 (the "Closing Date"), either party hereto may terminate this Agreement.
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ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1. Representations and Warranties of the Company. The Company
hereby makes the representations and warranties set forth below to the Holder
that as of the date of its execution of this Agreement and as of the Closing
Date:
(a) Authorization, etc. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, and this Agreement
constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
(b) Compliance with Laws, Other Instruments of the Company,
etc. None of the execution and delivery of this Agreement, or the
consummation of the transactions herein contemplated or compliance with
the terms and provisions hereof will conflict with or result in a
breach of, or require any consent under, the articles of incorporation
or any applicable law or regulation, or any order, writ, injunction or
decree of any court or governmental authority or agency, or any
agreement or instrument to which the Company is a party or by which it
is bound or to which it is subject, or constitute a default under any
such agreement or instrument, or result in the creation or imposition
of any lien upon any of the revenues or assets of the Company pursuant
to the terms of any such agreement or instrument.
(c) Governmental Consent. Other than the filing of the Amended
and Restated Certificate of Designation, neither the nature of the
Company or of any of its respective businesses or properties, nor any
relationship between the Company and any other Person is such as to
require the consent, approval or authorization of, or filing,
registration or qualification with, any governmental authority (other
than filings which will be made by the Company as may be required by
applicable federal and state securities laws) on the part of the
Company or as a condition to the execution and delivery of this
Agreement or any other document required in connection herewith.
(d) No Commission. The Company has not paid, nor has it
accepted payment of, directly or indirectly, any commission or other
remuneration in connection herewith.
Section 3.2. Representations and Warranties of the Holder. The Holder
hereby makes the representations and warranties set forth below to the Company
that as of the date of its execution of this Agreement and as of the Closing
Date:
(a) General Representations and Covenants. This Agreement is
made by the Company with such Holder in reliance upon such Holder's
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representations and covenants made in this Section 3.2, which by such
Holder's execution of this Agreement, it hereby confirms.
(b) Ownership of Series A Preferred Stock. The Holder is the
sole legal and beneficial owner of all of the shares of Series A
Preferred Stock and the Warrant. Such Holder has neither previously
sold, assigned, conveyed, transferred, pledged or otherwise disposed
of, in whole or in part, any shares of Series A Preferred Stock or the
Warrant, nor has such Holder entered into any agreement to sell,
assign, convey, transfer, pledge or otherwise dispose of, in whole or
in part, any shares of Series A Preferred Stock or the Warrant.
(c) Due Authorization. The Holder represents and warrants that
(i) the execution and delivery of this Agreement by it and the
consummation by it of the transactions contemplated hereby have been
duly authorized by all necessary action on its behalf and (ii) this
Agreement has been duly executed and delivered by the Holder and
constitutes the valid and binding obligation of the Holder,
enforceable against it in accordance with its terms.
(d) Brokers. Neither the Holder nor any of its agents has
incurred any obligation or liability, contingent or otherwise,
for brokerage or finders' fees or agents' commissions or other like
payment in connection with this Agreement and will indemnify and hold
the Company armless from any such payment alleged to be due by or
through the Holder or its agents as a result of the action of the
Holder or its agents.
3.3 Covenants.
(a) Neither the Holder nor the Company shall enter into any
agreement, arrangement or understanding, whether written or oral, which would in
any way violate or contravene the terms and conditions contained in this
Agreement. At no time on or prior to the Closing Date, shall Holder sell,
assign, convey, hypothecate or pledge, or agree to sell, assign, convey,
hypothecate or pledge, any shares of Series A Preferred Stock, the Conversion
Shares, the Warrant or the shares of common stock issuable upon exercise of the
Warrant.
(b) Upon conversion of shares of Series A Preferred Stock,
certificates representing the Conversion Shares shall not contain any legend
restricting the sale of the Conversion Shares. The Company shall cause an
opinion to be issued by legal counsel that the certificates representing the
Conversion Shares may be issued without any restrictive legend.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with
state and federal securities laws. In connection with any transfer of Securities
other than pursuant to an effective registration statement, to the Company, to
an Affiliate of the Holder, to an entity managed by the Holder or in connection
4
with a pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel selected by
the transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such transferred Securities under the Securities Act. As a
condition of transfer, any such transferee shall agree in writing to be bound by
the terms of this Agreement and shall have the rights of a Purchaser under this
Agreement.
(b) The Holder agrees to the imprinting, so long as is
required by this Section 4.1(b), of the following legend on any certificate
evidencing Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES. THE COMPANY SHALL ISSUE STOP TRANSFER
INSTRUCTIONS IN CONNECTION HEREWITH.
The Company acknowledges and agrees that the Holder may from time to
time pledge pursuant to a bona fide margin agreement or grant a security
interest in some or all of the Securities and, if required under the terms of
such arrangement, the Holder may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of the pledgee, secured party or
pledgor shall be required in connection therewith. Further, no notice shall be
required of such pledge. At the Holder 's expense, the Company will execute and
deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of the
Securities.
(c) Certificates evidencing Securities shall not contain any
legend (including the legend set forth in Section 4.1(b)): (i) while a
registration statement covering the resale of such security is effective under
the Securities Act, provided the Holder represents to the Company that it has
sold or will promptly sell such security, or (ii) following any sale of such
Securities pursuant to Rule 144, or (iii) if such Securities are eligible for
sale under Rule 144(k), or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the Staff of the Commission) as determined by the
5
Company in good faith. In the event that any certificate does not bear the
legend set forth in Section 4.1(b), and, to the knowledge of the Holder, none of
the above-referenced conditions exist, then the Holder shall submit the
certificate to the Company for application of such legend to the certificate. If
all or any shares of Preferred Stock are converted (as applicable) at a time
when there is a effective registration statement to cover the resale of the
Conversion Shares, or if such Conversion Shares may be sold under Rule 144(k) or
if such legend is not otherwise required under applicable requirements of the
Securities Act (including judicial interpretations thereof) then such Conversion
Shares shall be issued free of all legends. The Company agrees that following
the Filing Date or at such time as such legend is no longer required under this
Section 4.1(c), it will, no later than three Trading Days following the delivery
by the Holder to the Company or the Company's transfer agent of a certificate
representing Securities issued with a restrictive legend, deliver or cause to be
delivered to the Holder a certificate representing such Securities that is free
from all restrictive and other legends. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company that
enlarge the restrictions on transfer set forth in this Section.
4.2 Furnishing of Information. As long as the Holder owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. Upon the request of the Holder, the Company shall deliver to the
Holder a written certification of a duly authorized officer as to whether it has
complied with the preceding sentence. Until such time as all Securities are
eligible for sale under Rule 144(k), if the Company is not required to file
reports pursuant to such laws, it will prepare and furnish to the Holder and
make publicly available in accordance with Rule 144(c) such information as is
required for the Holder to sell the Securities under Rule 144.
4.3 Reservation and Listing of Securities.
(a) The Company shall maintain a reserve shares of Common
Stock for issuance pursuant to in such amount as may be required to fulfill its
obligations hereunder and under the Amended and Restated Certificate of
Designation.
(b) If, on any date, the number of authorized but unissued
(and otherwise unreserved) shares of Common Stock is less than 125% of (i) the
maximum number of shares issuable upon conversion of the Series A Preferred
Stock on such date, minus (ii) the number of shares of Common Stock previously
issued pursuant to the Amended and Restated Certificate of Designation, then the
Board of Directors of the Company shall use its best efforts to amend the
Company's certificate or articles of incorporation to increase the number of
authorized but unissued shares of Common Stock to at least the maximum number of
shares issuable upon conversion of the Series A Preferred Stock at such time
(minus the number of shares of Common Stock previously issued pursuant to the
Amended and Restated certificate of Designation), as soon as possible and in any
event not later than the 60th day after such date; provided that the Company
will not be required at any time to authorize a number of shares of Common Stock
6
greater than the maximum remaining number of shares of Common Stock that could
possibly be issued after such time pursuant to the Amended and Restated
Certificate of Designation.
(c) The Company shall: (i) in the time and manner required by
each Principal Market, if applicable, prepare and file with such Principal
Market an additional shares listing application covering a number of shares of
Common Stock at least equal to the greater of (A) the maximum number of shares
issuable upon conversion of the Series A Preferred Stock on the Closing Date and
(B) the maximum number of shares issuable upon conversion of the Series A
Preferred Stock on the date of such application, (ii) take all steps necessary
to cause such shares of Common Stock to be approved for listing on each
Principal Market as soon as possible thereafter, (iii) provide to the Holder
evidence of such listing, and (iv) maintain the listing of such Common Stock on
each such Principal Market or on the OTC Market.
(d) If, on any date, the number of shares of Common Stock
previously listed on a Principal Market is less than 125% of the maximum number
of shares issuable upon conversion of the Series A Preferred Stock on such date,
then the Company shall take the necessary actions to list on such Principal
Market, as soon as reasonably possible, a number of shares of Common Stock at
least equal to the maximum number of shares issuable upon conversion of the
Series A Preferred Stock on such date; provided that the Company will not be
required at any time to list a number of shares of Common Stock greater than the
maximum number of shares of Common Stock that could possibly be issued pursuant
to the under the Amended and Restated Certificate of Designation.
4.4 Conversion and Exercise Procedures. The form of Conversion
Notice included in the Preferred Stock set forth the totality of the procedures
required in order to convert the Preferred Stock. No additional legal opinion or
other information or instructions shall be necessary to enable the Holder to
convert their Preferred Stock. The Company shall honor Amended and Restated
Certificate of Designation conversions of the Preferred Stock and shall deliver
Conversion Shares in accordance with the terms, conditions and time periods set
forth in the Amended and Restated Certificate of Designation.
4.5 Securities Laws Disclosure; Publicity. The Company shall,
within four business days after the Closing Date, issue a press release or file
a Current Report on Form 8-K reasonably acceptable to the Holder disclosing all
material terms of the transactions contemplated hereby. The Company and the
Holder shall consult with each other in issuing any press releases with respect
to the transactions contemplated hereby. The Company shall not publicly disclose
the name of the Holder, or include the name of the Holder in any filing with the
Commission or any regulatory agency or Principal Market, without the prior
written consent of the Holder, except to the extent such disclosure is required
by law or Principal Market regulations, in which case the Company shall provide
the Holder with prior notice of such disclosure.
4.6 Non-Public Information. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide the Holder or
its agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto the Holder shall have
7
executed a written agreement regarding the confidentiality and use of such
information. The Company understands and confirms that the Holder shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.
4.7 Indemnification of the Holder. The Company will indemnify and
hold the Holder and their directors, officers, shareholders, partners, employees
and agents (each, a "Holder Party") harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation that any such Holder Party may suffer
or incur as a result of or relating to: (a) any misrepresentation, breach or
inaccuracy, or any allegation by a third party that, if true, would constitute a
breach or inaccuracy, of any of the representations, warranties, covenants or
agreements made by the Company in this Agreement; or (b) any cause of action,
suit or claim brought or made against such Holder Party and arising solely out
of or solely resulting from the execution, delivery, performance or enforcement
of this Agreement or any of the Amended and Restated Certificate of Designation;
provided such cause of action, suit or claim is not due to or the result of any
activity, obligation, condition or liability of the Holder other than as
contemplated by this Agreement. resulting from the execution, delivery,
performance or enforcement of this Agreement. The Company will reimburse the
Holder for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred.
4.8 Compliance with Law. The Holder agrees that it will comply
with the prospectus delivery requirements under the Securities Act.
ARTICLE V
GENERAL RELEASE
5.1 Complete and General Release, Covenant Not to Sue
(a) The Holder, on behalf of itself and each of its heirs,
executors, parents, subsidiaries, affiliates, predecessors, successors, members,
partners, officers, directors, employees, assigns, agents, insurers, insured and
attorneys (collectively, the "Holder Related Persons"), hereby releases, waives,
acquits and forever discharges the Company and each of its current and former
parents, subsidiaries, affiliates, officers, shareholders, directors, members,
predecessors, successors, employees, agents, attorneys, assigns, heirs,
executors, receivers, trustees, personal representatives and administrators
(collectively, the "Company Released Persons") from any and all manner of
actions and causes of action, lawsuits, charges, complaints, liabilities,
promises, covenants, agreements, judgments, damages, expenses, suits, debts,
claims and demands whatsoever in law or in equity, whether known or unknown,
direct or indirect, absolute or contingent (including, but not limited to,
claims for attorneys' fees and expenses whatsoever), which either the Holder
and/or the Holder Related Persons has ever had, now has, or hereafter may have
against the Company and/or the Company Released Persons arising out of, due to,
or in any way related to (i) the Purchase Agreement, the Registration Rights
Agreement, dated May 31, 2002, by and between the Company and the Holder (the
"Registration Rights Agreement"), the Warrant or any other document entered into
in connection therewith or (ii) the preferences, rights and limitations
8
contained in the Original Certificate of Designation, including, without
limitation, any accrued and unpaid dividends on the Series A Preferred Stock
(the "Holder Release").
(b) The Company, on behalf of itself and each of its heirs,
executors, parents, subsidiaries, affiliates, predecessors, successors, members,
partners, officers, directors, employees, assigns, agents, insurers, insured and
attorneys (collectively, the "Company Related Persons"), hereby releases,
waives, acquits and forever discharges the Holder and each of its current and
former parents, subsidiaries, affiliates, officers, shareholders, directors,
members, predecessors, successors, employees, agents, attorneys, assigns, heirs,
executors, receivers, trustees, personal representatives and administrators
(collectively, the "Holder Released Persons") from any and all manner of actions
and causes of action, lawsuits, charges, complaints, liabilities, promises,
covenants, agreements, judgments, damages, expenses, suits, debts, claims and
demands whatsoever in law or in equity, whether known or unknown, direct or
indirect, absolute or contingent (including, but not limited to, claims for
attorneys' fees and expenses whatsoever), which either the Company and/or the
Company Related Persons has ever had, now has, or hereafter may have against the
Holder and/or the Holder Released Persons arising out of, due to, or in any way
related to (i) the Purchase Agreement, the Registration Rights Agreement, the
Warrant or any other document entered into in connection therewith or (ii) the
preferences, rights and limitations contained in the Original Certificate of
Designation (the "Company Release" and together with the Holder Release, each a
"Release" and together the "Releases").
5.2. Unknown Facts. It is expressly understood and agreed by each
of the Holder and the Company that each Release is intended to and does cover
any and all losses, injuries, damages and claims of every kind and nature
whatsoever, whether direct or indirect, known or unknown, and suspected or
unsuspected. Each of the Holder and the Company acknowledges that it may
hereafter discover facts different from, or in addition to, those which it now
knows to be or believes to be true, and each of the Holder and the Company
agrees that each Release shall be and remain effective in all respects,
notwithstanding such different or additional facts and the subsequent discovery
thereof.
5.3. Scope of Release. Each Release is intended to be as broad as
can possibly be created by the Holder and the Company, as the case may be, and
includes, but is not limited to, any liability whatsoever which arises directly
or indirectly from the actions or representations of the Holder Released Persons
or the Company Released Persons, as the case may be, or which arises directly or
indirectly out of or is in any manner related to any of the matters, occurrences
or transactions which could have been asserted, including, without limitation,
any and all claims for relief and damages.
5.4. Covenant Not to Sue.
(a) The Holder, on behalf of itself and each of the Holder
Related Persons, hereby covenants that neither it nor any of the Holder Related
Persons will sue any of the Company or the Company Released Persons due to, or
in any way related to, the matters contained in the Holder Release.
9
(b) The Company, on behalf of itself and each of the Company
Related Persons hereby covenants that neither it nor any of the Company Related
Persons will sue any of the Holder or the Holder Released Persons due to, or in
any way related to, the matters contained in the Company Release.
ARTICLE VI. MISCELLANEOUS
6.1 Termination. This Agreement may be terminated by the Company
or any Purchaser, by written notice to the other parties, if the Closing has not
been consummated by January 10, 2005; provided that no such termination will
affect the right of any party to sue for any breach by the other party (or
parties) .
6.2 Fees And Expenses. Each party shall pay the fees and expenses
of its advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Company shall pay all
transfer agent fees, stamp taxes and other taxes and duties levied in connection
with the issuance of any Securities.
6.3 Entire Agreement. This Agreement, together with the Amended
and Restated Certificate of Designation, contain the entire understanding of the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules. At or after the Closing, and without further consideration, the
Company and the Holder will execute and deliver to each other such further
documents as may be reasonably requested in order to give practical effect to
the intention of the parties under this Agreement and Amended and Restated
Certificate of Designation.
6.4 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (a) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section prior to 5:00 p.m. (New York City
time) on a Trading Day and confirmation of receipt is received, (b) the next
Trading Day after the date of transmission and confirmation of receipt, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day or later than 5:00
p.m. (New York City time) on any Trading Day, (c) the Trading Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is required
to be given. The addresses for such notices and communications are those set
forth on the signature pages hereof, or such other address as may be designated
in writing hereafter, in the same manner, by such Person.
6.5 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and the Holder or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
10
6.6 Construction. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
6.7 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Holder. The Holder may assign
its rights under this Agreement to any Person to whom the Holder assigns or
transfers any Securities.
6.8 No Third-Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
6.9 Governing Law; Venue; Waiver of Jury Trial. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of New York, without regard to the principles of
conflicts of law thereof. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties hereby waive all
rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of this Agreement, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.
6.10 Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery, exercise
and/or conversion of the Securities, as applicable.
6.11 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
11
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
6.12 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
6.13 Rescission and Withdrawal Right. Notwithstanding anything to
the contrary contained herein or in (and without limiting any similar provisions
of) the Amended and Restated Certificate of Designation, whenever the Holder
exercises a right, election, demand or option hereunder or under the Amended and
Restated Certificate of Designation and the Company does not timely perform its
related obligations within the periods therein provided, then the Holder may
rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights.
6.14 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
6.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Holder and
the Company will be entitled to specific performance hereunder or under the
Amended and Restated Certificate of Designation. The parties agree that monetary
damages may not be adequate compensation for any loss incurred by reason of any
breach of obligations described in the foregoing sentence and hereby agrees to
waive in any action for specific performance of any such obligation the defense
that a remedy at law would be adequate.
6.16 Payment Set Aside. To the extent that the Company makes a
payment or payments to the Holder pursuant to this Agreement or the Amended and
Restated Certificate of Designation or the Holder enforces or exercises its
rights thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
12
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.
***********************
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IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed by their respective authorized signatory as of the date first
indicated above.
PACIFIC MAGTRON INTERNATIONAL CORP.
By: ________________________________________
Theodore S. Li, President
STONESTREET L.P.
By: ________________________, its general partner
By: ________________________________________
Name:
Title:
14
EXHIBIT H
PACIFIC MAGTRON INTERNATIONAL CORP.
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
PURSUANT TO SECTION 78.1955 OF THE GENERAL
CORPORATION LAW OF THE STATE OF NEVADA
The undersigned, Theodore S. Li, and Hui Cynthia Lee, do hereby certify
that:
1. They are the President and Secretary, respectively, of
PACIFIC MAGTRON INTERNATIONAL CORP., a Nevada corporation (the "Corporation").
2. A Certificate of Designation of Preferences, Rights and
Limitations of Series A Redeemable Convertible Preferred Stock was filed with
the Secretary of State of the State of Nevada on May 31, 2002.
3. The holder of the Series A Redeemable Convertible Preferred Stock
has duly adopted a resolution authorizing the adoption of this Amended and
Restated Certificate of Designation of Preferences, Rights and Limitations of
Series A Redeemable Convertible Preferred Stock and the filing hereof with the
Secretary of State of the State of Nevada.
4. There is no class or series of stock of the Corporation that has
rights senior to the Series A Redeemable Convertible Preferred Stock.
5. The following resolutions were duly adopted by the Board of
Directors of the Corporation:
WHEREAS, the Certificate of Incorporation of the Corporation provides
for a class of its authorized stock known as preferred stock, comprised of
5,000,000 shares, $0.001 par value, issuable from time to time in one or more
series;
WHEREAS, the Board of Directors of the Corporation is authorized to fix
the dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and
WHEREAS, a Certificate of Designation of Preferences, Rights and
Limitations of Series A Redeemable Convertible Preferred Stock was filed with
the Secretary of State of the State of Nevada on May 31, 2002 (the "Original
Certificate of Designation").
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to amend and restate the preferences,
rights and limitations of the Series A Redeemable Convertible Preferred Stock
contained in the Original Certificate of Designation as follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
amend and the restate the rights, preferences, restrictions and other matters
relating to the Series A of Preferred Stock as follows:
TERMS OF PREFERRED STOCK
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as its 4% Series A Convertible Preferred
Stock (the "Preferred Stock") and the number of shares so designated shall be
600 (which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $0.001 per share and a stated
value equal to the sum of $666.67 plus all accrued and unpaid dividends to the
date of determination to the extent not previously paid in cash in accordance
with the terms hereof (the "Stated Value").
Section 2. Dividends.
(a) Holders shall be entitled to receive, out of funds legally
available therefor, and the Corporation shall pay, cumulative dividends
at the rate per share (as a percentage of the Stated Value per share)
of 4% per annum, payable in arrears on each Conversion Date (as defined
in Section 5(a)(i)) and/or such other date as the Corporation may
determine from time to time for each such share, in cash or by
accretion of the Stated Value. Subject to the terms and conditions
herein, the decision whether to accrete dividends hereunder to the
Stated Value or to pay for dividends in cash shall be at the discretion
of the Corporation. The Corporation shall provide the Holders written
notice of its intention to accrete dividends hereunder to the Stated
Value or pay dividends in cash not more than ninety days after the end
of each fiscal year of the Corporation or within five Trading Days
after a Conversion Date, as the case may be, for so long as shares of
Preferred Stock are outstanding (the Corporation may indicate in such
notice that the election contained in such notice shall continue for
later periods until revised). Failure to timely provide such written
notice shall be deemed (if permitted hereunder) an election by the
Corporation to accrete dividends hereunder to the Stated Value.
Dividends on the Preferred Stock shall be calculated on the basis of a
360-day year, shall accrue annually commencing on the date this
2
Certificate of Designation is filed with the Secretary of State of the
State of Nevada (the "Filing Date"), and shall be deemed to accrue from
such date whether or not earned or declared and whether or not there
are profits, surplus or other funds of the Corporation legally
available for the payment of dividends. Except as otherwise provided
herein, if at any time the Corporation pays less than the total amount
of dividends then accrued on account of the Preferred Stock, such
payment shall be distributed ratably among the Holders based upon the
number of shares of Preferred Stock held by each Holder. Any dividends
to be paid in cash hereunder that are not paid within three Trading
Days (as defined in Section 7) following a Conversion Date shall
continue to accrue and shall entail a late fee, which must be paid in
cash, at the rate of 12% per annum or the lesser rate permitted by
applicable law (such fees to accrue daily, from the date such dividend
is due hereunder through and including the date of payment).
(b) Notwithstanding anything to the contrary contained herein,
the Corporation must pay dividends in cash if:
(i) the number of shares of Common Stock (as defined in
Section 7) at the time authorized, unissued and unreserved for all
purposes is insufficient to accrete such dividends to the Stated Value
and permit conversion in full of all outstanding Stated Value; or
(ii) the Common Stock is not then listed or quoted on the
Nasdaq Small-Cap Market or on the New York Stock Exchange, American
Stock Exchange or Nasdaq National Market (each, a "Principal Market")
or the over-the-counter market (the "OTC Market").
(c) So long as any Preferred Stock shall remain outstanding,
neither the Corporation nor any subsidiary thereof shall redeem,
purchase or otherwise acquire directly or indirectly any Junior
Securities (as defined in Section 7), nor shall the Corporation
directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in
Section 5 or dividends due and paid in the ordinary course on preferred
stock of the Corporation at such times when the Corporation is in
compliance with its payment and other obligations hereunder) upon, nor
shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or
redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the Holders of a majority
of the shares of the Preferred Stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
alter or amend this Certificate of Designation, (b) authorize or create any
class of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) senior to or otherwise pari passu with the
3
Preferred Stock, (c) amend its certificate or articles of incorporation or other
charter documents so as to affect adversely any rights of the Holders, or (d)
enter into any agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), the Holders shall be entitled to receive out of the assets of
the Corporation, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value per share before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Corporation shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the Holders shall be
distributed among the Holders ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. A sale, conveyance or disposition of 50% or more of the assets of the
Corporation or the effectuation by the Corporation of a transaction or series of
related transactions in which more than 33% of the voting power of the
Corporation is disposed of, or a consolidation or merger of the Corporation with
or into any other company or companies into one or more companies not
wholly-owned by the Corporation shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Corporation shall
mail written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record Holder.
Section 5. Conversion.
(a) (i) Conversions at Option of Holder. Each share of
Preferred Stock shall be convertible into shares of Common
Stock (subject to the limitations set forth in Section
5(a)(ii)) at the Conversion Ratio (as defined in Section 7),
at the option of the Holder, at any time and from time to time
on or after the 181st day following the Filing Date; provided,
however, that in the event the Corporation exercises its
redemption right under Section 6 prior to such date, the
Holder shall be permitted to convert up to that number of
shares of Series A Preferred Stock for which a redemption has
been exercised at any time prior to the date the Redemption
Price for such shares is paid in full. Holders shall effect
conversions by providing the Corporation with the form of
conversion notice attached hereto as Annex A (a "Conversion
Notice"). Each Conversion Notice shall specify the number of
shares of Preferred Stock to be converted, the number of
shares of Preferred Stock owned prior to the conversion at
issue, the number of shares of Preferred Stock owned
subsequent to the conversion at issue and the date on which
such conversion is to be effected, which date may not be prior
to the date the Holder delivers such Conversion Notice by
facsimile (the "Conversion Date"). If no Conversion Date is
specified in a Conversion Notice, the Conversion Date shall be
the date that such Conversion Notice is deemed delivered
hereunder. To effect conversions of shares of Preferred Stock,
a Holder shall not be required to surrender the certificate(s)
representing such shares of Preferred Stock to the Corporation
unless all of the shares of Preferred Stock represented
4
thereby are so converted, in which case the Holder shall
deliver the certificate representing such share of Preferred
Stock promptly following the Conversion Date at issue. The
calculations and entries set forth in the Conversion Notice
shall control in the absence of manifest or mathematical
error.
(ii) Beneficial Ownership Conversion Restriction. A
Holder may not convert shares of Preferred Stock or receive
shares of Common Stock as payment of dividends hereunder to
the extent such conversion or receipt of such dividend payment
would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act (as defined in Section 8)
and the rules promulgated thereunder) in excess of 4.999% of
the then issued and outstanding shares of Common Stock,
including shares issuable upon conversion of, and payment of
dividends on, the shares of Preferred Stock held by such
Holder after application of this Section. Since the Holder
will not be obligated to report to the Corporation the number
of shares of Common Stock it may hold at the time of a
conversion hereunder, unless the conversion at issue would
result in the issuance of shares of Common Stock in excess of
4.999% of the then outstanding shares of Common Stock without
regard to any other shares which may be beneficially owned by
the Holder or an affiliate thereof, the Holder shall have the
authority and obligation to determine whether the restriction
contained in this Section will limit any particular conversion
hereunder and to the extent that the Holder determines that
the limitation contained in this Section applies, the
determination of which portion of the shares of Preferred
Stock are convertible shall be the responsibility and
obligation of the Holder. If the Holder has delivered a
Conversion Notice for shares of Preferred Stock that, without
regard to any other shares that the Holder or its affiliates
may beneficially own, would result in the issuance in excess
of the permitted amount hereunder, the Corporation shall
notify the Holder of this fact and shall honor the conversion
for the maximum number of shares of Preferred Stock permitted
to be converted on such Conversion Date in accordance with the
periods described in Section 5(b) and, at the option of the
Holder, either retain shares of Preferred Stock tendered for
conversion in excess of the permitted amount hereunder for
future conversions or return such excess shares of Preferred
Stock permitted to the Holder. The provisions of this Section
may be waived by a Holder (but only as to itself and not to
any other Holder) upon not less than 61 days prior notice to
the Corporation. Other Holders shall be unaffected by any such
waiver.
(b) (i) Not later than five Trading Days after each Conversion
Date, the Corporation will deliver to the Holder (A) a
certificate or certificates which, after the Conversion Date,
5
shall be free of restrictive legends and trading restrictions
representing the number of shares of Common Stock being
acquired upon the conversion of shares of Preferred Stock, and
(B) a bank check in the amount of accrued and unpaid dividends
(if the Corporation has elected or is required to pay accrued
dividends in cash). The Corporation shall, upon request of the
Holder, if available, use commercially reasonable efforts to
deliver any certificate or certificates required to be
delivered by the Corporation under this Section electronically
through the Depository Trust Corporation or another
established clearing corporation performing similar functions.
If in the case of any Conversion Notice such certificate or
certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after the
Conversion Date, the Holder shall be entitled to elect by
written notice to the Corporation at any time on or before its
receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Corporation shall
immediately return the certificates representing the shares of
Preferred Stock tendered for conversion.
(ii) If the Corporation fails to deliver to the
Holder such certificate or certificates pursuant to Section
5(b)(i) by the fifth Trading Day after the Conversion Date,
the Corporation shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $5,000 of
Stated Value of Preferred Stock being converted, $50 per
Trading Day (increasing to $100 per Trading Day after 5
Trading Days and increasing to $200 per Trading Day 6 Trading
Days after such damages begin to accrue) for each Trading Day
after such fifth Trading Day until such certificates are
delivered. Nothing herein shall limit a Holder's right to
pursue actual damages for the Company's failure to deliver
certificates representing shares of Common Stock upon
conversion within the period specified herein and such Holder
shall have the right to pursue all remedies available to it
hereunder, at law or in equity including, without limitation,
a decree of specific performance and/or injunctive relief.
(iii) In addition to any other rights available to
the Holder, if the Corporation fails to deliver to the Holder
such certificate or certificates pursuant to Section 5(b)(i),
by the fifth Trading Day after the Conversion Date, and if
after such fifth Trading Day the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares
which the Holder was entitled to receive upon such conversion
(a "Buy-In"), then the Corporation shall (A) pay in cash to
the Holder the amount by which (x) the Holder's total purchase
price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such Holder
was entitled to receive from the conversion at issue
multiplied by (2) the market price of the Common Stock at the
time of the sale giving rise to such purchase obligation on
6
the Conversion Date and (B) at the option of the Holder,
either return the shares of Preferred Stock for which such
conversion was not honored or deliver to such Holder the
number of shares of Common Stock that would have been issued
had the Corporation timely complied with its conversion and
delivery obligations under Section 5(b)(i). For example, if
the Holder purchases Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an
attempted conversion of shares of Preferred Stock with respect
to which the market price of the Underlying Shares on the
Conversion Date totaled $10,000, under clause (A) of the
immediately preceding sentence the Corporation shall be
required to pay the Holder $1,000. The Holder shall provide
the Corporation written notice indicating the amounts payable
to the Holder in respect of the Buy-In. Nothing herein shall
limit a Holder's right to pursue any other remedies available
to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive
relief with respect to the Corporation's failure to timely
deliver certificates representing shares of Common Stock upon
conversion of the shares of Preferred Stock as required
pursuant to the terms hereof.
(iv) Acknowledgement of Holder Damages The
Corporation acknowledges and agrees that, due to the fact that
the Preferred Stock is convertible, a breach of the
Corporation's obligations hereunder could result in damages
greater than the aggregate Stated Value. Without limitation,
the Company agrees and acknowledges that a material benefit of
the bargain to the Holders is the underlying conversion
benefit which is the number of shares of Common Stock issuable
to the Holder multiplied by the then market price of the
Common Stock.
(c) (i) The conversion price for each share of Preferred
Stock (the "Conversion Price") shall equal $0.50, subject to
adjustment as provided herein.
(ii) If the Corporation, at any time while any shares
of Preferred Stock are outstanding, shall (a) pay a stock
dividend or otherwise make a distribution or distributions on
shares of its Junior Securities or securities pari passu with
the Preferred Stock in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of
shares, (c) combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of
shares, or (d) issue by reclassification and exchange of the
Common Stock any shares of capital stock of the Corporation,
then the Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of
shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(c)(ii) shall become
7
effective immediately after the record date for the
determination of stockholders entitled to receive such
dividend or distribution and shall become effective
immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If at any time while shares of Preferred Stock
are outstanding the Company or any Subsidiary (with respect to
Common Stock Equivalents) shall offer, sell, grant any option
to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition)
any of shares of Common Stock or Common Stock Equivalents at a
price that is, at the issuance thereof, or at any later time
due to adjustment, reset, additional issuances or otherwise,
less than the Conversion Price, then, at the option of the
Holder for such conversions as such Holder shall indicate in
its Conversion Notices (including on conversion pursuant to
section 5(a)(ii) and (iii)), the Conversion Price shall be
adjusted to mirror the conversion, exchange or purchase price
for such Common Stock or Common Stock Equivalents (including
any reset provisions thereof) at issue. Such adjustment shall
be made whenever such Common Stock or Common Stock Equivalents
are issued. If the holder of the Common Stock or Common Stock
Equivalent so issued shall at any time, whether by operation
of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due
to warrants, options or rights issued in connection with such
issuance, be entitled to receive shares of Common Stock at a
price less than the Conversion Price, such issuance shall be
deemed to have occurred for less than the Conversion Price. A
"Common Stock Equivalent" means any equity or equity
equivalent securities (including debt or any other instrument
that is at any time over the life thereof convertible into or
exchangeable for Common Stock) issued by the Company or a
subsidiary thereof that provide the holder thereof to receive
shares of Common Stock. The Company shall notify the Holder in
writing, no later than the Trading Day following the issuance
of any Common Stock or Common Stock Equivalent subject to this
section, indicating therein the applicable issuance price, or
of applicable reset price, exchange price, conversion price
and other pricing terms.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all
holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets or rights or warrants to subscribe for
or purchase any security (excluding those referred to in
Sections 5(c)(ii)-(iii) above), then in each such case the
Conversion Price at which each share of Preferred Stock shall
thereafter be convertible shall be determined by multiplying
the Conversion Price in effect immediately prior to the record
date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the
8
denominator shall be the Per Share Market Value determined as
of the record date mentioned above, and of which the numerator
shall be such Per Share Market Value on such record date less
the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith. In either
case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences
of indebtedness so distributed or such subscription rights
applicable to one share of Common Stock. Such adjustment shall
be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned
above.
(v) All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as
the case may be. The number of shares of Common Stock
outstanding at any given time shall not include shares owned
or held by or for the account of the Corporation, and the
disposition of any such shares shall be considered an issue or
sale of Common Stock.
(iv) Whenever the Conversion Price is adjusted
pursuant to Section 5(c)(ii), (iii) or (iv), the Corporation
shall promptly mail to each Holder, a notice setting forth the
Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
(v) In case of any reclassification of the Common
Stock, or any compulsory share exchange pursuant to which the
Common Stock is converted into other securities, cash or
property, the Holders of the Preferred Stock then outstanding
shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or share
exchange, and the Holders of the Preferred Stock shall be
entitled upon such event to receive such amount of securities,
cash or property as a holder of the number of shares of Common
Stock of the Corporation into which such shares of Preferred
Stock could have been converted immediately prior to such
reclassification or share exchange would have been entitled.
This provision shall similarly apply to successive
reclassifications or share exchanges.
(vi) In case of any merger or consolidation of the
Corporation with or into another Person, or sale by the
Corporation of more than one-half of the assets of the
Corporation (on an as valued basis) in one or a series of
related transactions to any Person other than an affiliate (as
defined in Rule 13e-3 of the Exchange Act) of the Corporation,
a Holder shall have the right thereafter to (A) convert its
shares of Preferred Stock into the shares of stock and other
securities, cash and property receivable upon or deemed to be
9
held by holders of Common Stock following such merger,
consolidation or sale, and such Holder shall be entitled upon
such event or series of related events to receive such amount
of securities, cash and property as the shares of Common Stock
into which such shares of Preferred Stock could have been
converted immediately prior to such merger, consolidation or
sales would have been entitled or (B) in the case of a merger
or consolidation, (x) require the surviving entity to issue
shares of convertible preferred stock or convertible
debentures with such aggregate stated value or in such face
amount, as the case may be, equal to the Stated Value of the
shares of Preferred Stock then held by such Holder, plus all
accrued and unpaid dividends and other amounts owing thereon,
which newly issued shares of preferred stock or debentures
shall have terms identical (including with respect to
conversion) to the terms of the Preferred Stock (except, in
the case of debentures, as may be required to reflect the
differences between debt and equity) and shall be entitled to
all of the rights and privileges of a Holder of Preferred
Stock set forth herein and the agreements pursuant to which
the Preferred Stock was issued (including, without limitation,
as such rights relate to the acquisition, transferability,
registration and listing of such shares of stock other
securities issuable upon conversion thereof), and (y)
simultaneously with the issuance of such convertible preferred
stock or convertible debentures, shall have the right to
convert such instrument only into shares of stock and other
securities, cash and property receivable upon or deemed to be
held by holders of Common Stock following such merger,
consolidation or sale. In the case of clause (B), the
conversion price applicable for the newly issued shares of
convertible preferred stock or convertible debentures shall be
based upon the amount of securities, cash and property that
each share of Common Stock would receive in such transaction,
the Conversion Ratio immediately prior to the effectiveness or
closing date for such transaction and the Conversion Price
stated herein. The terms of any such merger, sale or
consolidation shall include such terms so as continue to give
the Holders the right to receive the securities, cash and
property set forth in this Section upon any conversion or
redemption following such event. This provision shall
similarly apply to successive such events.
(vii) If (a) the Corporation shall declare a dividend
(or any other distribution) on the Common Stock, (b) the
Corporation shall declare a special nonrecurring cash dividend
on or a redemption of the Common Stock, (c) the Corporation
shall authorize the granting to all holders of Common Stock
rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (d) the approval
of any stockholders of the Corporation shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Corporation is a party,
any sale or transfer of all or substantially all of the assets
of the Corporation, or any compulsory share of exchange
whereby the Common Stock is converted into other securities,
10
cash or property, or (e) the Corporation shall authorize the
voluntary or involuntary dissolution, liquidation or winding
up of the affairs of the Corporation; then the Corporation
shall notify the Holders at their last addresses as they shall
appear upon the stock books of the Corporation, at least 20
calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of
which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for
securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or
share exchange. Holders are entitled to convert shares of
Preferred Stock during the 20-day period commencing the date
of such notice to the effective date of the event triggering
such notice.
(viii) Exceptions to Adjustment of Conversion Price.
No adjustment to the Conversion Price will be made (i) upon
the conversion of any other Preferred Stock of this series or
of any other securities issued by the Company in connection
with the offer and sale of this Company's securities pursuant
to the Purchase Agreement; (ii) upon the exercise of or
conversion of any convertible securities, options or warrants
issued and outstanding on the Filing Date; (iii) upon the
grant or exercise of any options which may hereafter be
granted or exercised under any employee benefit plan of the
Company now existing or to be implemented in the future, so
long as the issuance of such options is approved by a majority
of the non-employee members of the Board of Directors of the
Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iv) upon
the issuance of Common Stock or convertible securities in any
transaction of the nature contemplated by Rule 145,
promulgated under the Securities Act; or (v) in connection
with any strategic partnership or joint venture or acquisition
(including the issuance of Common Stock or convertible
securities in connection with any financing transaction, the
primary purpose of which is to finance the strategic
partnership or joint venture or acquisition) or key consulting
agreements (the primary purpose of which is not to raise
equity capital for the Company).
(d) The Corporation covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of
Common Stock solely for the purpose of issuance upon conversion of
Preferred Stock, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of persons other than
11
the Holders, not less than such number of shares of Common Stock as
shall be issuable (taking into account the provisions of Section 5(a)
and Section 5(c)) upon the conversion of all outstanding shares of
Preferred Stock. The Corporation covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid and nonassessable.
(e) Upon a conversion hereunder the Corporation shall not be
required to issue stock certificates representing fractions of shares
of Common Stock, but may if otherwise permitted, make a cash payment in
respect of any final fraction of a share based on the Per Share Market
Value at such time. If any fraction of an Underlying Share would,
except for the provisions of this Section, be issuable upon a
conversion hereunder, the Corporation shall pay an amount in cash equal
to the Conversion Ratio multiplied by such fraction.
(f) The issuance of certificates for Common Stock on
conversion of Preferred Stock shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be
payable in respect of the issue or delivery of such certificate,
provided that the Corporation shall not be required to pay any tax that
may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such shares of Preferred Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or
redeemed in accordance with the terms hereof shall be canceled and may
not be reissued.
(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and
delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Chief
Executive Officer of the Corporation addressed to 1600 CALIFORNIA
CIRCLE, MILPITAS, CALIFORNIA 950356, FAX: (408) 956-___, or to such
other address or facsimile number as shall be specified in writing by
the Corporation for such purpose. Any and all notices or other
communications or deliveries to be provided by the Corporation
hereunder shall be in writing and delivered personally, by facsimile or
sent by a nationally recognized overnight courier service, addressed to
each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Corporation, or if no such facsimile
telephone number or address appears, at the principal place of business
of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in this
Section prior to 5:00 p.m. (New York City time) (with confirmation of
transmission), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date (with confirmation of transmission), (iii) upon
12
receipt, if sent by a nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. Redemption.
(a) Optional Redemption by Corporation. At anytime and from
time to time after the Filing Date, the Corporation shall have the
right, upon at least 10 Trading Days' notice to the Holders (a
"Redemption Notice" and the date such notice is received by the Holder,
the "Redemption Notice Date"), to redeem for cash all or a portion of
the outstanding Preferred Stock (a "Redemption") at a price per share
of Preferred Stock equal to 100% of the Stated Value (the "Redemption
Price"). Nothing in this Section 6 shall be deemed to restrict or
otherwise limit the Holder's right to convert any of the shares of
Preferred Stock pursuant to Section 5(a)(i) at any time prior to the
date the Redemption Price is paid in full.
(b) Redemption Procedure. The payment of cash pursuant to any
redemption hereunder shall be made on the date set forth in the
applicable Redemption Notice, which shall be at least 10 Trading Days
after the applicable Redemption Notice Date. If any portion of the cash
payment for a Redemption shall not be paid by the Corporation by such
date, interest shall accrue thereon at the rate of 12% per annum (or
the maximum rate permitted by applicable law, whichever is less) until
the cash payment for such Redemption Price is paid in full. In
addition, if any portion of a Redemption Price remains unpaid after
such date, the Holders subject to such redemption may elect, by written
notice to the Corporation given at any time thereafter, to invalidate
ab initio such redemption, notwithstanding anything herein contained to
the contrary. If a Holder elects to invalidate such redemption the
Corporation shall promptly, and, in any event, not later than 5 Trading
Days from receipt of such Holder's notice of such election, return to
such Holder all of the Preferred Stock for which the redemption price
shall not have been paid in full and the Corporation shall have no
further right to redeem the Preferred Stock hereunder. For purposes of
this Section, a share of Preferred Stock is outstanding until such date
as the Holder shall have received Underlying Shares upon a conversion
(or attempted conversion) thereof that meets the requirements hereof.
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Common Stock" means the Corporation's common stock, par value
$.001 per share, and stock of any other class into which such shares
may hereafter have been reclassified or changed.
13
"Conversion Ratio" means, at any time, a fraction, the
numerator of which is Stated Value (or Excess Stated Value, as the case
may be) and the denominator of which is the Conversion Price at such
time.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Junior Securities" means the Common Stock and all other
series of Preferred Stock (other than the Preferred Stock) of the
Corporation other than those securities which are explicitly senior in
rights or liquidation preference to the Preferred Stock.
"OTC Market" shall be as defined in Section 2(b)(ii).
"Per Share Market Value" means on any particular date (a) the
lowest sale price for a share of the Common Stock (other than a sale by
the Holder) on such date on the Principal Market on which the Common
Stock is then listed or quoted, or if there is no such price on such
date, then the lowest sale price of the Common Stock (other than a sale
by the Holder) on the Principal Market on the date nearest preceding
such date, or (b) if the Common Stock is not then listed or quoted on a
Principal Market, the lowest sale price of the Common Stock (other than
a sale by the Holder) in the OTC Market, as reported by the National
Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices) at the close of
business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization
or agency succeeding to its functions of reporting prices), then the
lowest "Pink Sheet" quotes for the relevant conversion period, as
determined in good faith by the Holder, or (d) if the Common Stock are
not then publicly traded the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith
by the Board of Directors of the Corporation.
"Person" means a corporation, an association, a partnership,
an organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"Principal Market" shall be as defined in Section 2(b)(ii).
"Trading Day" means (a) a day on which the Common Stock is
traded on a Principal Market on which the Common Stock is then listed
or quoted, as the case may be, or (b) if the Common Stock is not listed
on a Principal Market, a day on which the Common Stock is traded in the
OTC Market, as reported by the National Quotation Bureau Incorporated
(or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common
Stock is not listed or quoted as set forth in (a) and (b) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day
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which shall be a legal holiday or a day on which banking institutions
in the State of New York are authorized or required by law or other
government action to close.
"Underlying Shares" means, collectively, the shares of Common
Stock into which the shares of Preferred Stock are convertible in
accordance with the terms hereof.
RESOLVED, FURTHER, that the President and the Secretary of the
Corporation be and they hereby are authorized and directed to prepare and file a
Certificate of Designation of Preferences, Rights and Limitations in accordance
with the foregoing resolution and the provisions of Nevada law.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Designation this ___ day of January, 2005.
-------------------------- --------------------------
Theodore S. Li, President Hui Cynthia Lee, Secretary
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ANNEX A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert shares of Preferred
Stock)
The undersigned hereby elects to convert the number of shares of 4% Series A
Convertible Preferred Stock indicated below, into shares of common stock, par
value $.001 per share (the "Common Stock"), of Pacific Magtron International
Corp., a Nevada corporation (the "Corporation"), according to the conditions
hereof, as of the date written below. If shares are to be issued in the name of
a person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Corporation in accordance therewith. No
fee will be charged to the Holder for any conversion, except for such transfer
taxes, if any.
THE UNDERSIGNED REPRESENTS TO THE CORPORATION THAT IT HAS SOLD OR WILL PROMPTLY
SELL UPON RECEIPT, SUCH SHARES OF COMMON STOCK. [REQUIRED TO RECEIVE UNLEGENDED
SHARES IMMEDIATELY PURSUANT TO THE REGISTRATION STATEMENT]
Conversion calculations:
Date to Effect Conversion
-----------------------------------------
Number of shares of Preferred Stock owned prior to Conversion
-----------------------------------------
Number of shares of Preferred Stock to be Converted
-----------------------------------------
Stated Value of shares of Preferred Stock to be Converted
-----------------------------------------
Number of shares of Common Stock to be Issued
-----------------------------------------
Applicable Conversion Price
-----------------------------------------
Number of shares of Preferred Stock subsequent to Conversion
-----------------------------------------
[HOLDER]
By:_______________________
Name:
Title:
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