<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): June 30, 1999
TELENETICS CORPORATION
(Exact name of registrant as specified in its charter)
California 0-16580 33-0061894
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
26772 Vista Terrace Drive
Lake Forest, California 92630
(Address of Principal Executive Offices)
(949) 455-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 30, 1999, Telenetics Corporation (the "Company") completed
the acquisition of all of the assets of Sunnyvale General Devices
and Instruments, Inc. ("GDI"). GDI was a provider of communications
equipment for the traffic control and transportation industries
headquartered in Verdi, Nevada. The Company may continue the prior
business of GDI as a separate component of the Company's overall
business.
The acquisition will to be accounted for using the purchase method
of accounting. The aggregate purchase price, excluding acquisition
costs, was comprised of $350,000 cash plus 400,000 shares of the
Company's Series C 7.0% Convertible Preferred Stock. The cash
portion of the acquisition was funded through the Company's line of
credit with Celtic Capital Corporation. In determining the purchase
price for GDI, the Company took into account the value of companies
of similar industry and size to GDI, comparable transactions and
the market for such companies generally.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of businesses acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
2.1 Asset Purchase Agreement effective as of June 1, 1999 by and
among the Company, Sunnyvale General Devices and
Instruments, Inc. and Frank R. Ribelin
2.2 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series C 7.0% Convertible
Preferred Stock of Telenetics Corporation
1
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 14, 1999 TELENETICS CORPORATION
By: /S/DAVID STONE
-----------------------------
David Stone
Chief Financial Officer
2
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 2.1 Asset Purchase Agreement effective as of June 1, 1999 by and among
the Company, Sunnyvale General Devices and Instruments, Inc. and
Frank R. Ribelin
Exhibit 2.2 Certificate of Determination of Rights, Preferences, Privileges
and Restrictions of Series C 7.0% Convertible Preferred Stock of
Telenetics Corporation
3
<PAGE>
Exhibit 2.1
ASSET PURCHASE AGREEMENT
by and among
TELENETICS CORPORATION,
SUNNYVALE GENERAL DEVICES AND INSTRUMENTS, INC.
and
FRANKLIN R. RIBELIN
Effective as of June 1, 1999
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C> <C> <C>
ARTICLE 1 PURCHASE AND SALE OF ASSETS.....................................................................1
1.1 Purchase and Sale of Assets. ...................................................................1
1.2 Purchased Assets Free of Liens. ................................................................2
1.3 Liabilities. ...................................................................................3
1.3.1 Assumed Liabilities. ..................................................................3
1.3.2 Excluded Liabilities. .................................................................3
1.4 Prepaid Expenses. ..............................................................................3
1.5 Payment of Consideration for Purchased Assets...................................................3
1.6 Allocation of Consideration for Purchased Assets................................................3
1.7 Taxes. .........................................................................................3
1.8 Transfer Fees. .................................................................................4
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER AND RIBELIN............................................4
2.1 Organization and Existence. ....................................................................4
2.2 Authority of Seller. ...........................................................................4
2.3 Capitalization. ................................................................................4
2.4 Financial Statements and Other Information; Financial Condition.................................4
2.5 Inventories. ...................................................................................5
2.6 Title to Purchased Assets. .....................................................................5
2.7 Personal Property Leases. ......................................................................5
2.8 Violation of Applicable Law. ...................................................................5
2.9 Customer Contracts; Ancillary Agreements. ......................................................5
2.10 No Materially Adverse Change. ..................................................................6
2.11 Absence of Certain Changes or Events. ..........................................................6
2.12 Licenses and Permits. ..........................................................................7
2.13 Patents, Trademarks, Etc. ......................................................................7
2.14 Indebtedness. ..................................................................................7
2.15 Compliance with Contractual Obligations. .......................................................7
2.16 No Materially Adverse Contracts, etc. ..........................................................7
2.17 Certain Real Property Matters...................................................................8
2.17.1 Ownership..............................................................................8
2.17.2 Real Property Leases. .................................................................9
2.17.3 Environmental Compliance...............................................................9
2.17.4 Use of the Leased Premises............................................................10
2.17.5 Superfund Liability...................................................................10
2.18 Pending Litigation. ...........................................................................10
2.19 Taxes. ........................................................................................11
2.20 Matters Relating to Common Stock. .............................................................12
2.21 Other Property. ...............................................................................12
2.22 Accounts Receivable. ..........................................................................12
2.23 Employees. ....................................................................................12
2.24 Transactions with Affiliated Parties. .........................................................13
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
----
2.25 Books, Records and Financial Controls. ........................................................13
2.26 Warranties. ...................................................................................13
2.27 Labor Matters. ................................................................................13
2.28 Insurance. ....................................................................................13
2.29 Employee Benefits..............................................................................13
2.30 Environmental Protection. .....................................................................13
2.31 No Conflict. ..................................................................................14
2.32 Distributors and Representatives. .............................................................14
2.33 Suppliers. ....................................................................................14
2.34 Prepayment of Liabilities. ....................................................................14
2.35 Cancellation of Contracts. ....................................................................14
2.36 Purchase and Sale or Lease Commitments. .......................................................15
2.37 Adequacy and Sufficiency of Purchased Assets. .................................................15
2.38 Year 2000 Compliance...........................................................................15
2.39 Securities Law Compliance. ....................................................................15
2.40 Full Disclosure................................................................................16
2.41 No Broker. ....................................................................................16
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PURCHASER....................................................16
3.1 Organization and Existence of Purchaser. ......................................................16
3.2 Authority of Purchaser. .......................................................................16
3.3 Financial Statements and Other Information; Financial Condition. ..............................16
3.4 No Broker. ....................................................................................17
ARTICLE 4 SELLER'S COVENANTS.............................................................................17
4.1 Assignment of Name. ...........................................................................17
4.2 Tax on Prior Sales. ...........................................................................17
4.3 Confidentiality. ..............................................................................17
4.4 Fulfillment of Conditions and Covenants. ......................................................17
4.5 Condition to Transfer of Certain Contracts. ...................................................18
4.6 Regulatory Approvals; Reasonable Efforts. .....................................................18
4.7 Bulk Transfer Provisions.......................................................................18
4.8 Seller's Cooperation. .........................................................................18
4.9 Employees. ....................................................................................18
4.10 Further Assurances. ...........................................................................19
4.11 Press Releases. ...............................................................................19
ARTICLE 5 THE CLOSING....................................................................................19
5.1 Closing. ......................................................................................19
5.2 Seller's Obligations. .........................................................................19
5.3 Purchaser's Obligations. ......................................................................20
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
----
ARTICLE 6 POST CLOSING...................................................................................20
6.1 Survival of Representations and Warranties. ...................................................20
6.2 Expenses. .....................................................................................20
6.3 Indemnification. ..............................................................................21
6.3.1 Indemnification by Seller and Ribelin. ...............................................21
6.3.2 Indemnification by Purchaser..........................................................21
6.3.3 Claims for Indemnification............................................................21
6.3.4 Defense by Indemnifying Party. .......................................................22
6.3.5 Manner of Indemnification. ...........................................................22
6.3.6 Limitations on Indemnification. ......................................................22
6.4 Cooperation in Litigation. ....................................................................23
6.5 Warranty Obligations...........................................................................23
ARTICLE 7 CERTAIN COVENANTS..............................................................................24
7.1 Covenant Not to Compete........................................................................24
7.2 Covenant Not to Solicit. ......................................................................25
7.3 Confidentiality. ..............................................................................25
7.4 Injunctive Relief..............................................................................25
ARTICLE 8 MISCELLANEOUS PROVISIONS.......................................................................26
8.1 Entire Agreement. .............................................................................26
8.2 Assignment. ...................................................................................26
8.3 Successors and Assigns. .......................................................................26
8.4 Waiver and Amendment. .........................................................................26
8.5 Cumulative Remedies. ..........................................................................26
8.6 Severability. .................................................................................26
8.7 Governing Law and Choice of Forum. ............................................................27
8.8 Attorneys' Fees. ..............................................................................27
8.9 Notices. ......................................................................................27
8.10 Interpretation. ...............................................................................28
8.11 Further Assurances. ...........................................................................28
8.12 Warranty of Authority. ........................................................................28
8.13 Specific Performance. .........................................................................28
8.14 Dispute Resolution. ...........................................................................29
8.14.1 Mediation. ...........................................................................29
8.14.2 Arbitration...........................................................................29
8.14.3 Costs and Attorneys' Fees. ...........................................................30
8.14.4 Tolling Statute of Limitations. ......................................................30
8.15 Counterparts. .................................................................................30
EXHIBIT 7.1(a) - California counties
-iii-
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
----
</TABLE>
-iv-
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into effective as of June 1, 1999, by and among Sunnyvale General Devices and
Instruments, Inc., a California corporation ("Seller"), Franklin R. Ribelin, an
individual ("Ribelin"), and Telenetics Corporation, a California corporation
("Purchaser").
R E C I T A L S
- - - - - - - -
A. Seller engages in the business of manufacturing communications
equipment for the traffic control and transportation industries (the "Business")
and desires to sell to Purchaser all of the assets of Seller used in the
Business.
B. Purchaser desires to purchase all of the assets of Seller used in
the Business and to assume certain enumerated liabilities of Seller.
C. Ribelin is the majority owner of all of the issued and outstanding
voting capital stock of Seller and together with the Shareholders, is the owner
of all voting capital stock of Seller.
A G R E E M E N T
- - - - - - - - -
In consideration of the foregoing recitals and the respective
covenants, agreements, representations and warranties contained herein, the
parties hereto agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions of
this Agreement, at the Closing (as defined in Section 5.1) Seller shall sell,
transfer, assign and deliver to Purchaser, and Purchaser shall purchase from
Seller all of Seller's right, title and interest in and to all of the assets,
properties, rights or claims of every type and nature and wherever situated,
personal, tangible, intangible or contingent (including all refunds, deposits,
rights, claims or payments, whether now existing or ascertainable, or existing
or ascertainable after the Closing Date (as defined in Section 5.1)) owned by
Seller or in which Seller has any interest of any type or nature, or which
Seller is presently using or the use of which is necessary or related to or used
directly or indirectly in the operation of the Business (collectively, the
"Purchased Assets"), including without limitation:
(a) The accounts and notes receivable specified on SCHEDULE 1.1(a)
("Accounts Receivable");
(b) The furniture, fixtures, machinery, equipment and other goods
specified on SCHEDULE 1.1(b);
(c) Seller's interests, claims and rights under certain leases, as
specified on SCHEDULE 1.1(c);
1
<PAGE>
(d) The inventory, including but not limited to, supplies,
materials, work in process, finished goods and goods on consignment, forms and
supplies as specified on SCHEDULE 1.1(d) ("Inventory");
(e) All title, claims and rights under contracts, notes, evidences
of indebtedness, and purchase and sales orders, as specified on SCHEDULE 1.1(e),
including, without limitation, Seller's beneficial interest in all customer
contracts, purchase orders and commitments ("Contracts"); PROVIDED, HOWEVER,
that with respect to each customer contract which is not or may not be
assignable without the consent of another party, this Agreement shall not
constitute an assignment or attempted assignment if any assignment or attempted
assignment would constitute a breach of such customer contract unless and until
such assignment is obtained;
(f) All copyrights, service marks, trademarks, trademark and
service mark applications, trade names, trade secrets, patents, patent
applications, licenses, permits, royalty rights, deposits and rights and claims
to refunds and adjustments of any kind, as specified on SCHEDULE 1.1(f);
(g) The computer software programs and systems, know how, formulae
and designs and all documentation relating to all of the foregoing, as specified
on SCHEDULE 1.1(g);
(h) The securities, notes, bank accounts, certificates of deposit
and bonds, as specified on SCHEDULE 1.1(h) (including the name of each bank in
which Seller has an account or safe deposit box, the amount in each account and
the names of all persons authorized to draw thereon or to have access thereto);
(i) All prepaid items, including but not limited to, insurance,
including any cash surrender value thereof, prepaid taxes, prepaid expenses and
prepaid rent, as specified on SCHEDULE 1.1(i);
(j) The books, records and accounting systems, including, but not
limited to, computer hardware and related software, as specified on SCHEDULE
1.1(j). Notwithstanding the foregoing, Seller shall have the right at its
expense after the Closing Date to make copies of any books and records which
shall be reasonably required for Seller's activities after the Closing Date;
(k) Any additional items of tangible property used or owned by
Seller which are not included above, as specified on SCHEDULE 1.1(k);
(l) All catalogs, price lists, product brochures and related sales
materials utilized by Seller in the Business; and
(m) The name "Sunnyvale General Devices and Instruments."
1.2 PURCHASED ASSETS FREE OF LIENS. Except as otherwise specifically
provided in this Agreement, all of the Purchased Assets shall be transferred by
Seller to Purchaser free and clear of all liens, claims, encumbrances,
restrictions or rights of others of every kind and description, including,
without limitation, tax liens. Notwithstanding anything to the contrary in the
foregoing, if the interest of Seller in any of the Purchased Assets shall in
2
<PAGE>
fact be other than an interest as an owner, then Seller shall be deemed to have
transferred to Purchaser all of Seller's right, title and interest in and to
such Purchased Assets, provided that Seller shall not be thereby released from
any liability it may otherwise have to Purchaser for breach of any
representation or warranty with respect to ownership of the Purchased Assets as
set forth in this Agreement.
1.3 LIABILITIES.
1.3.1 ASSUMED LIABILITIES. Purchaser shall, on and as of the
Closing Date, expressly assume, perform or otherwise discharge as the same shall
become due in accordance with their respective terms, only those trade payables
and certain tax liabilities of Seller described on SCHEDULE 1.3 ("Assumed
Liabilities").
1.3.2 EXCLUDED LIABILITIES. Except for the Assumed Liabilities,
Purchaser shall not assume any liabilities or obligations of Seller. Such
liabilities and obligations ("Excluded Liabilities") shall remain the
liabilities and obligations of Seller.
1.4 PREPAID EXPENSES. The prepaid expenses identified on SCHEDULE
1.1(i) shall be prorated between Purchaser and Seller in proportion to the
number of days remaining in the period for which payment has been made, as
compared to the number of days in such period which have elapsed as of the
Closing Date. The cash portion of the payments to be made on the Closing Date
shall be increased by the amount of such proration.
1.5 PAYMENT OF CONSIDERATION FOR PURCHASED ASSETS. Subject to the terms
hereof, the consideration for the sale, transfer, assignment and delivery of the
Purchased Assets shall be paid by Purchaser to Seller at the Closing as follows:
(a) A certified or bank cashier's check, payable to Seller, or wire
transfer to Seller's account, in the amount of $350,000; and
(b) 400,000 shares of the Purchaser's Series C Convertible
Preferred Stock (the "Shares").
1.6 ALLOCATION OF CONSIDERATION FOR PURCHASED ASSETS. The parties agree
to allocate the Purchase Price among such Purchased Assets in a manner
consistent with the requirements set forth in Section 1060 of the Internal
Revenue Code of 1986, as amended, and the Treasury regulations promulgated
thereunder. The parties agree to prepare and timely file all applicable Internal
Revenue Service forms, including Form 8594 (Asset Acquisition Statement), and
other governmental forms, to cooperate with each other in the preparation of
such forms and to furnish each other with a copy of such forms prepared in
draft, within a reasonable period prior to the filing due date thereof.
1.7 TAXES. Seller shall pay all sales and use taxes arising out of the
transfer of the Purchased Assets and shall pay its portion, prorated as of the
Closing Date, of state and local real and personal property taxes. Purchaser
shall not be responsible for any payroll, excise, income, business, occupation,
withholding, or similar tax, or any taxes of any kind related to any period
before the Closing Date.
3
<PAGE>
1.8 TRANSFER FEES. Seller shall pay any and all transfer and assumption
fees and expenses relating to the sale of the Purchased Assets.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER AND RIBELIN
Seller and Ribelin hereby jointly and severally represent and warrant
to Purchaser, and Purchaser, in agreeing to consummate the transactions
contemplated by this Agreement, has relied upon such representations and
warranties with respect to the operations, Business and assets of Seller, the
following:
2.1 ORGANIZATION AND EXISTENCE. Seller is a corporation duly organized,
validly existing, and in good standing under the laws of the State of California
with all requisite corporate power to carry on its business as now conducted.
Seller is qualified to do business as a foreign corporation in each jurisdiction
in which the conduct of its business or the ownership or leasing of properties
makes such qualification necessary, such jurisdictions being limited to Nevada,
California, Georgia and North Carolina. Seller has full corporate power and
authority to own its property and to carry on the Business as now owned and
operated. Copies of Seller's Articles of Incorporation and Bylaws, each
certified by Seller's Secretary, will be delivered to Purchaser at the Closing,
will be complete and correct and, since the respective dates of certification
thereof, there will not be any amendments to such Articles of Incorporation or
Bylaws.
2.2 AUTHORITY OF SELLER. The execution, delivery and performance by
Seller of this Agreement has been duly authorized by the Board of Directors of
Seller and the shareholders of Seller and no further corporate action is
necessary on the part of Seller to make this Agreement valid and binding upon
Seller in accordance with its terms, and Purchaser has received certified copies
of all resolutions pertaining to such authorizations.
2.3 CAPITALIZATION. The authorized capital stock of Seller consists
solely of 100,000 shares of common stock, no par value per share (the "Common
Stock") and 50,000 shares of preferred stock, no par value per share (the
"Preferred Stock"). As of the Closing Date there were 49,800 shares of Common
Stock and no shares of Preferred Stock issued and outstanding. There are no
outstanding subscriptions, options, rights, warrants, convertible securities or
other agreements or commitments obligating Seller to issue or to transfer any
additional shares of its capital stock.
2.4 FINANCIAL STATEMENTS AND OTHER INFORMATION; FINANCIAL CONDITION.
Seller has heretofore furnished to Purchaser copies of: (a) the unaudited
balance sheets of Seller at June 30, 1998, and the related statements of income
and changes in financial position for the period then ended, and (b) Seller's
unaudited balance sheet at May 31, 1999 ("Balance Sheet Date"), and the related
statement of income and cash flow for the period then ended, together with the
related notes thereto. To the best of Seller's knowledge, all financial
statements referred to in this Section 2.4 ("Financial Statements") are complete
and correct, have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the respective periods, and
fairly present the financial condition of Seller as at the respective dates
thereof and the results of operations of Seller for the respective periods
covered by the statements of income contained therein. To the best of Seller's
knowledge, Seller does not have any material obligations or liabilities,
contingent or otherwise, not fully disclosed by the Financial Statements.
4
<PAGE>
2.5 INVENTORIES. The inventories of Seller shown on the Financial
Statements or thereafter acquired by Seller consist of items of a quality and
quantity usable and saleable in the normal course of the Business. The value of
obsolete material and of materials of below standard quality has been written
down to realizable market value or adequate reserves have been provided
therefore.
2.6 TITLE TO PURCHASED ASSETS. Seller either owns or holds under leases
all of the material properties used by it in the Business. Seller has good,
indefeasible and marketable title to all of the Purchased Assets owned by it,
and to its leased interests in all leased assets used by it, including, but not
limited to, the Purchased Assets reflected on the May 31, 1999 Balance Sheet,
free and clear of all security interests, liens, encumbrances, restrictions and
other burdens, except only as set forth in SCHEDULE 2.6. Title to the Purchased
Assets shall be transferred by Seller to Purchaser free and clear of all
security interests, liens, encumbrances, restrictions and other burdens, except
for the items set forth in SCHEDULE 2.6. Seller enjoys peaceful and undisturbed
possession of all of the Purchased Assets, including those assets used by it
pursuant to leases.
2.7 PERSONAL PROPERTY LEASES. To the best of Seller's knowledge, all
leases under which Seller leases from others any personal property are in good
standing, valid and effective and there is not under any of such leases (except
the lease relating to certain video equipment) any existing default by Seller or
event or condition which after notice or lapse of time or both would constitute
a default. All such leases are identified on SCHEDULE 2.7.
2.8 VIOLATION OF APPLICABLE LAW. Seller is not in violation of any
applicable law, ordinance, rule or regulation relating to the operation of the
Business or affecting any of the Purchased Assets. Seller's operation of the
Business is in compliance with all zoning laws, and the machinery, equipment and
motor vehicles, and their operation by Seller, comply with all applicable rules
and regulations of the Occupational Safety and Health Agency, Environmental
Protection Agency and any other state or local authority having jurisdiction
over occupational health and safety, environmental quality or emission control.
Seller has not received any notice from any governmental authority or other
person claiming any violation of any law, ordinance, rule or regulation, or
requiring or calling attention to the need for any work, repairs, construction,
alteration or installation related to its business.
2.9 CUSTOMER CONTRACTS; ANCILLARY AGREEMENTS. As of the Balance Sheet
Date, Seller had no outstanding contracts with customers requiring payments in
excess of $10,000 on an annualized basis, except for those listed on SCHEDULE
2.9, and had no outstanding contracts with suppliers or vendors requiring
payments in excess of $10,000 on an annualized basis, except for those listed on
SCHEDULE 2.9. Since the Balance Sheet Date, Seller has not entered into any
contracts with customers, suppliers or vendors other than those set forth on
such Schedules, except only in the ordinary course of business. No consent is
required to the assignment of any contract with customers, suppliers or vendors.
True and complete copies of all contracts with customers, suppliers or vendors,
or any other agreement listed in any Schedule hereto, including all amendments,
modifications, renewals or extensions thereof, have been previously furnished to
Purchaser. SCHEDULE 2.9 sets forth a correct and complete list of all customers
of Seller during the twelve months ended December 31, 1998. There are no
outstanding disputes with any customer listed thereon and no customer listed
thereon has refused to do business with Seller or has stated its intention not
to continue to do business with Seller.
5
<PAGE>
2.10 NO MATERIALLY ADVERSE CHANGE. Since the Balance Sheet Date, there
have been no changes in the condition, financial or otherwise, of the Business,
or in its prospects, earnings or properties, whether or not arising from
transactions in the ordinary course of business, that, individually or in the
aggregate, have been materially adverse to the prospects, earnings, properties
or condition, financial or otherwise, of Seller.
2.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed on
SCHEDULE 2.11, since the Balance Sheet Date, there has not been any:
(a) Transaction by Seller except in the ordinary course of
business as conducted on that date;
(b) Destruction, damage to, or loss of any material asset of
Seller (whether or not covered by insurance);
(c) Labor dispute or other event or condition of any character
materially and adversely affecting the prospects, earnings, properties or
condition, financial or otherwise, of the Business;
(d) Change in accounting methods or practices (including, without
limitation, any change in depreciation or amortization policies or rates) by
Seller;
(e) Increase in the salary or other compensation payable or to
become payable by Seller to any of its officers, directors or employees, or the
declaration, payment, or commitment or obligation of any kind for the payment,
by Seller, of a bonus or other additional salary or compensation to any such
person;
(f) Amendment or termination of any contract, agreement or license
to which Seller is a party, or by which it or any of its assets or properties
are subject, except in the ordinary course of business;
(g) Waiver or release of any right or claim of Seller;
(h) Declaration of or agreement to declare or make, any payment or
distribution of any assets of any kind whatsoever;
(i) Citation or notice of threatened citation received for any
violations of any act, law, rule or regulation of any governmental entity or
agency;
(j) Claim incurred for damages or alleged damages for actual or
alleged negligence or other tort or breach of contract (whether or not fully
covered by insurance);
6
<PAGE>
(k) Sales, transfers, disposals of or agreements to sell, transfer
or otherwise dispose of any of the assets, properties or rights of Seller,
except in the ordinary course of business consistent with the past practices of
Seller;
(l) Agreements entered into granting any preferential rights to
purchase any of the assets, properties, or rights (including management and
control thereof), or requiring the consent of any party to the transfer or
assignment of any such assets, properties or rights (including management and
control thereof); or
(m) Agreement by Seller to do any of the things described in
clauses (a) through (l), above.
2.12 LICENSES AND PERMITS. Seller holds free from materially burdensome
restrictions all franchises, permits, licenses, rights-of-way, easements,
municipal and other consents, and other rights from governmental, regulatory or
administrative agencies that are sufficient for the lawful and efficient
operation of the Business as presently conducted and as presently proposed to be
conducted. Attached hereto as SCHEDULE 2.12 is a list of all such franchises,
permits, licenses, rights-of-way, easements, municipal and other consents and
rights, true and complete copies of which have been furnished to Purchaser.
2.13 PATENTS, TRADEMARKS, ETC. Seller does not own or possess any
patents, patent applications, trademarks, service marks, trademark or service
mark applications, trade names or copyrights.
2.14 INDEBTEDNESS. Attached hereto as SCHEDULE 2.14 is a list of all
liabilities, obligations, or indebtedness (including but not limited to
unsecured trade accounts payable arising in the ordinary course of business)
whether accrued, absolute, contingent, invoiced, or otherwise, of Seller as of
the date hereof. Additionally, Seller will provide to Purchaser at the Closing a
list of all such liabilities, obligations or indebtedness of Seller at the
Closing Date.
2.15 COMPLIANCE WITH CONTRACTUAL OBLIGATIONS. Seller is not in default
and there is no event that, with the passage of time or the giving of notice,
would constitute an event of default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in (a)
any evidence of indebtedness, or any agreement or instrument under or pursuant
to which any evidence of indebtedness has been issued, or (b) any other
agreement or instrument to which Seller is a party or by which Seller, any of
the properties of Seller, or the Business is affected, nor has any third party
raised any claim, dispute or controversy with respect to any such evidence of
indebtedness, agreement or instrument. The execution, delivery or performance of
this Agreement does not (i) conflict with or result in a breach of any of the
terms, conditions or provisions of, or constitute a default under, any evidence
of indebtedness or other agreement or instrument referred to in this Section
2.15, or (ii) require the consent of or other action by any trustee or any
creditor of, or investor in, Seller. All of such evidences of indebtedness,
instruments and agreements are valid, binding and in full force and effect and
are assignable to Purchaser in accordance with their respective terms.
7
<PAGE>
2.16 NO MATERIALLY ADVERSE CONTRACTS, ETC. Seller is not a party to and
none of its properties is bound or affected by, any agreement or instrument, or
is subject to any order, writ, injunction, judgment, rule, regulation, decree,
or other action of any court or other governmental or public authority or
agency, or the award of any arbitrator or any contractual restriction, that
materially adversely affects, or in the future may materially adversely affect,
the prospects, earnings, properties or condition, financial or otherwise, of the
Business. Except only as to contracts, agreements and other documents listed on
any Schedule attached hereto ("Contracts"), Seller is not a party to or bound by
any written or oral:
(a) Contract not made in the ordinary course of business;
(b) Employment or independent contractor agreement;
(c) Contract with any labor union or association;
(d) Bonus, pension, profit sharing, retirement, stock purchase,
hospitalization, medical reimbursement, insurance or other plan providing
employee benefits;
(e) Lease with respect to any property, real or personal, whether
as lessor or lessee;
(f) Continuing contract for the future purchase of materials,
supplies or equipment;
(g) Contract or commitment for capital expenditures;
(h) Contract continuing over a period of more than 30 days from
its date;
(i) Contract for the lease, operation or maintenance of any
machinery or equipment;
(j) Contract or agreement for the joint performance of work or
services, and all other joint venture, partnership or similar agreement;
(k) Contract or agreement containing non-competition covenants;
(l) Licenses required in Seller's business from any federal,
state, local or foreign governmental agency;
(m) Contract or agreement to pay any royalties or fees with
respect to any sales of Seller; or
(n) Contract, understanding, or agreement for which Seller or
Purchaser may be held liable.
2.17 CERTAIN REAL PROPERTY MATTERS.
8
<PAGE>
2.17.1 OWNERSHIP. Seller owns no real property used in connection
with the Business.
2.17.2 REAL PROPERTY LEASES. Attached hereto as SCHEDULE 2.17.2 is
a list describing and specifying the location of all real property leased by, or
on behalf of, Seller (collectively, the "Leased Premises"). The lease agreements
described on SCHEDULE 2.17.2 are in full force and effect and there is no
existing default and there is no event that, with the passage of time, would
constitute an event of default under any of such lease agreements on the part of
the lessor or lessee thereunder. Such lease agreements consist only of the
documents described on SCHEDULE 2.17.2, true and complete copies of which have
been delivered to Purchaser. No Affiliated Party (as defined in Section 2.24)
owns or has any interest in, directly or indirectly, any of the leaseholds
described in SCHEDULE 2.17.2.
2.17.3 ENVIRONMENTAL COMPLIANCE.
(a) As of the Closing, no Hazardous Material (as defined in
paragraph (iv) below), underground storage tanks, pipes or sumps are present on
the Leased Premises, and to the best of Seller's knowledge, no reasonable
likelihood exists that any Hazardous Material present on other property will
come to be present on the Leased Premises. Seller has conducted no Hazardous
Materials Activity in connection with the Business or at the Leased Premises.
(b) Seller has obtained no Environmental Permits (as
defined in paragraph (d) below) in connection with the conduct of the Business,
and none are required.
(c) Seller has delivered to Purchaser all records
concerning activities of Seller and all environmental audits and environmental
assessments of the Leased Premises conducted at the request of, or otherwise
possessed by, Seller. Seller has complied with all environmental disclosure
obligations imposed upon it with respect to the Business or the transactions
contemplated herein under any applicable law.
(d) For purposes of this Section 2.17.3, the following
capitalized terms shall have the following meanings:
(i) "Environmental Laws" shall mean all laws, rules,
regulations, orders, treaties, statutes and codes of any federal, state, or
local governmental authority relating to human health, safety, or the
environment.
(ii) "Environmental Permit" shall mean any approval,
permit, license, clearance or consent required to be obtained from any private
person or any governmental authority pursuant to any Environmental Law.
(iii) "Hazardous Material" shall mean any material or
substance that is prohibited or regulated by any Environmental Law or that has
been designated by any governmental authority to be radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment.
9
<PAGE>
(iv) "Hazardous Materials Activity" shall mean the
transportation, transfer, recycling, storage, use, treatment, manufacture,
investigation, removal, remediation, release, exposure of others to, sale,
handling, or distribution of any Hazardous Material or any product containing a
Hazardous Material.
2.17.4 USE OF THE LEASED PREMISES. No portion of the Leased
Premises is now being or has ever been used by Seller or any of its predecessors
in interest for any of the following:
(i) In a manner requiring the issuance of a permit
covering the discharge or disposal of a pollutant or waste into any waters,
groundwaters or aquifer of the States of Nevada, California, Georgia and North
Carolina or waters of the United States pursuant to applicable federal, state or
local laws;
(ii) For the treatment, collection, storage or disposal
of any refuse or objectionable waste or material in a manner inconsistent with,
or so as to require a permit or approval pursuant to, applicable federal, state
or local laws;
(iii) For the generation, transport, treatment, storage
or disposal of any hazardous waste subject to federal or state regulation;
(iv) For the manufacture, processing, distribution in
commerce, use or disposal of any toxic substance subject to federal or state
regulation;
(v) For storage, handling or processing in any
underground storage tank system subject to federal, state or local regulation;
(vi) For any injection well, dry well or any similar
facility subject to federal, state or local regulation; or
(vii) As a sanitary landfill, open dump or other waste
storage, treatment, disposal, transfer or handling facility subject to federal,
state or local regulation.
2.17.5 SUPERFUND LIABILITY. There is no current and there has
been no past release or substantial threat of a release of a hazardous
substance, pollutant or contaminant from or onto the Leased Premises or the
environment adjacent to the Leased Premises that are or may be subject to the
Comprehensive Environmental Response, Compensation and Liability Act (42 USC
ss.9601 et seq.) or the California Hazardous Substance Account Act (California
Health and Safety Code ss.25300 et seq.), or for which Purchaser may be liable
under any other statute or under any contract, or in tort, equity or other legal
theory.
2.18 PENDING LITIGATION. There is no pending or, to the best of
Seller's knowledge, threatened, action at law, suit, proceeding or
investigation, at law or in equity or otherwise, in, for or by any court or
governmental board, commission, agency, department or office arising from or
relating to or any of its properties, including the Leased Premises (whether or
not purportedly on behalf of Seller) or to the past, present or proposed
operations of the Business. Seller is not subject to, nor does any basis exist
for, any order, judgment, decree or governmental restriction that does or
10
<PAGE>
could adversely affect the prospects, earnings, properties or condition,
financial or otherwise, of the Business. There is no plan, study, litigation,
action, proceeding or effort by any governmental authority or private party that
in any way challenges, affects, or would challenge or affect, the prospects,
earnings, properties or condition, financial or otherwise, of the Business.
2.19 TAXES.
(a) All federal, state and other tax returns of Seller required by
law to be filed have been duly filed on a timely basis. All tax returns filed or
to be filed with respect to all fiscal periods through and including the fiscal
year ended June 30, 1998 by Seller are true, correct and complete in all
material respects and no taxes, assessments, fees or other governmental charges
upon Seller or any of its properties or assets (other than those already paid or
reserved for with respect to such tax returns) are or will be required to be
paid. There are no liens on any properties or assets of Seller imposed or
arising as a result of the delinquent payment or non-payment of any such tax,
assessment, fee, or other governmental charge except liens for current taxes not
yet due.
(b) As used in this Agreement, "tax" and "taxes" are defined to
include all taxes, charges, fees, levies or other assessments imposed by and
required to be paid to any federal, state, local, or foreign taxing authority,
including, without limitation, income, excise, property, sales, transfer, ad
valorem, payroll, and franchise taxes (including any interest, penalties or
additions attributable to or imposed on or with respect to any such assessment)
and any estimated payments or estimated taxes.
(c) As used in this Agreement, "tax return" is defined as any
return, report, information return or other document (including any related or
supporting information) filed or required to be filed with any federal, state,
local or foreign governmental entity or other authority in connection with the
determination, assessment or collection of any tax (whether or not such tax is
imposed on Seller) or the administration of any laws, regulations or
administrative requirements relating to any tax.
(d) SCHEDULE 2.19 lists each jurisdiction in which Seller is
required to file tax returns and any action, suit, proceeding, investigation,
audit or claim now pending against Seller in respect of any tax or assessment,
and any matter under discussion between an officer of Seller and any taxing
authority relating to any tax or assessment or any claim for any additional tax
or assessment asserted by any such authority against Seller. True and correct
copies of all such returns for the past five years have been provided to
Purchaser.
(e) Seller has never been audited by the Internal Revenue Service
or any other taxing authority. Seller has not granted any extensions of statutes
of limitations with respect to any taxes.
(f) The charges, accruals and reserves on the books of Seller in
respect of federal and state income taxes for all fiscal years since the fiscal
year ended June 30, 1995, and in respect of other taxes for all outstanding
periods, are adequate and Seller does not know of any additional assessments for
such years or any basis therefor. There are no applicable taxes, fees, or other
governmental charges payable in connection with the execution and delivery of
this Agreement. Seller is not a party to any pending action or proceeding, nor,
11
<PAGE>
to the best of Seller's knowledge, is any such action or proceeding threatened
by any governmental authority, for the assessment or collection of taxes,
interest, penalties, assessments or deficiencies, and no claim for assessment or
collection of taxes, interest or penalties, assessments or deficiencies has been
asserted against Seller nor is there any basis for any such action, proceeding
or claim. Notwithstanding anything contained in this Agreement to the contrary,
if any claims or assessments for additional federal, state, local or foreign
taxes are made against Seller for any period prior to the Closing Date, Seller
and Ribelin shall jointly and severally indemnify and hereby hold harmless
Purchaser from and against any such damage, liability, loss, cost or deficiency
(including interest and penalties), subject to and in accordance with the
procedures set forth in Section 6.3.
2.20 MATTERS RELATING TO COMMON STOCK. There has not been, and shall
not be, any declaration, setting aside or payment of dividends or other
distribution on or in respect of shares of the capital stock of Seller, or any
direct or indirect redemption, retirement, purchase or other acquisition by
Seller of any such shares.
2.21 OTHER PROPERTY. Attached hereto as SCHEDULE 2.21 is a list
describing and specifying the location of all furniture, fixtures and equipment
owned or leased by, in the possession of, or used by Seller in connection with
the Business, and such list constitutes all tangible personal property necessary
for the conduct of the Business as now conducted and as presently proposed to be
conducted, and such property is in good working order. Seller is the owner,
beneficially and of record, of all of such assets free and clear of all liens,
encumbrances, security agreements, equities, options, claims, charges and
restrictions, except as described on SCHEDULE 2.21. The lease agreements
described on SCHEDULE 2.21 are in full force and effect and there is no existing
default under any of such lease agreements on the part of the lessor or lessee
thereunder. Except as described on SCHEDULE 2.21, no Affiliated Party owns or
has any interest in, directly or indirectly, any of the leaseholds described on
SCHEDULE 2.21.
2.22 ACCOUNTS RECEIVABLE. Attached hereto as SCHEDULE 2.22 is a true
and complete list of all Accounts Receivable owed to Seller at the Balance Sheet
Date, including all Accounts Receivable from Affiliated Parties. Except to the
extent collected since the Balance Sheet Date, all Accounts Receivable are
reflected on the Financial Statements and SCHEDULE 2.22 are, and all Accounts
Receivable of Seller accruing or created between the Balance Sheet Date and the
Closing Date are and will be, (a) valid bona fide claims against debtors for
sales or other charges, and (b) subject to no defenses, set-offs, or
counterclaims. No loss reserves are required with respect to such notes and
accounts receivable. Seller has no reason to believe that the Accounts
Receivable are not collectible in accordance with their terms. Seller will
provide to Purchaser at the Closing a list of all Accounts Receivable owed to
Seller at the Closing Date.
2.23 EMPLOYEES. Attached hereto as SCHEDULE 2.23 is a list of the
names, current annual rates of salary, bonus, employee benefits, accrued
vacation times, sick pay and other compensation of all the present employees and
agents of Seller whose current annual cash compensation from Seller (salary and
bonus) is expected to equal or exceed $15,000. There are no employment or
consulting contracts or arrangements, including pensions, bonus or profit
sharing plans, or other severance or termination contracts or arrangements which
constitute contractual obligations of Seller not terminable on 30 days' notice,
except as listed on SCHEDULE 2.23. There are no collective bargaining
12
<PAGE>
agreements with any union or other bargaining group for any of Seller's
employees. No corporate officer of Seller has left his or her employ since May
31, 1999 and no current executive employee has indicated any present or future
intention to terminate his or her employment with Seller.
2.24 TRANSACTIONS WITH AFFILIATED PARTIES. Attached hereto as SCHEDULE
2.24 is a true and complete list and description of all transactions engaged in
between Seller and any director, officer, employee or agent of Seller or any of
their spouses or children, any trust of which any such person is the grantor,
trustee or beneficiary, any corporation of which any such person or party is a
shareholder, employee, officer or director, or any partnership in which any such
person or party owns an interest ("Affiliated Party"). Except as set forth on
SCHEDULE 2.24, no Affiliated Party has any ownership interest, directly,
indirectly or beneficially, in any competitor or potential competitor, supplier
or customer of Seller.
2.25 BOOKS, RECORDS AND FINANCIAL CONTROLS. The books and records of
account of Seller are complete and correct in all respects and reflect a true
record of Seller's financial condition and the Business through the date hereof.
2.26 WARRANTIES. Seller has not given or made any express warranties to
third parties with respect to any properties sold or services performed by
Seller. Seller has no knowledge of any state of facts or the occurrence of any
event forming the basis of any present claim against Seller for liability due to
any express or implied warranty.
2.27 LABOR MATTERS. Seller is in compliance with all federal and state
laws respecting employment and employment practices, terms and conditions of
employment, and wages and hours, and is not engaged in any unfair labor
practices.
2.28 INSURANCE. Seller maintains, with financially sound insurers and
insurance associations of nationally recognized stature and responsibility,
insurance with respect to its properties and the Business of such a nature, with
such terms and in such amounts as a prudent person would maintain with respect
to similar properties and a similar business and maintains insurance on all of
its properties of a character usually insured by persons engaged in the same or
similar business similarly situated against loss or damage or the kinds and in
the amounts customarily insured against, and carries, with such insurers and
customary amounts, such other insurance, including public liability insurance,
as is usually carried by persons engaged in the same or a similar business
similarly situated. Attached as SCHEDULE 2.28 is a true and complete list of all
insurance maintained by Seller.
2.29 EMPLOYEE BENEFITS. Seller does not maintain nor has it ever
maintained an "employee benefit plan" as defined by Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended.
2.30 ENVIRONMENTAL PROTECTION. Except with respect to environmental
matters which are addressed in Section 2.17, Seller has obtained all material
permits, licenses and other authorizations which are required under federal,
state and local laws relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
13
<PAGE>
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes. Seller is in compliance with all terms and conditions of
the required permits, licenses and authorizations, except when the failure to
comply will not, in the aggregate with all other failures, have a material
adverse effect on Seller. Seller is in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in those laws or contained in any regulation,
code, plan, order, decree, judgment, notice or demand letter issued, entered,
promulgated or approved thereunder all as in effect on the date hereof, except
when the failure to comply will not, in the aggregate with all other failures,
have a material adverse effect on Seller. There are no past or present events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may interfere with or prevent continued compliance, or which may give rise
to any common law or legal liability of Seller, or otherwise form the basis of
any claim, action, suit, proceeding, hearing or investigation, against or
involving Seller based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, or hazardous or toxic material or waste.
2.31 NO CONFLICT. The execution and delivery of this Agreement by
Seller, and the performance of its obligations hereunder, (a) are not in
violation or breach of, and will not conflict with or constitute a default under
any of the terms of the charter documents or bylaws of Seller or, any note, debt
instruments, security agreement or other contract, agreement or commitment
binding upon Seller or any of its respective assets or properties; (b) will not
result in the creation or imposition of any lien, encumbrance or restriction in
favor of any third party upon any of the assets of Seller; and (c) will not
conflict with or violate any applicable law, rule, regulation, judgment, order
or decree of any government, governmental instrumentality or court having
jurisdiction over Seller or any of its assets or properties. No consents,
waivers or approvals of third parties are required to be obtained by Seller in
connection with the execution and delivery of this Agreement by Seller and the
performance of its obligations hereunder.
2.32 DISTRIBUTORS AND REPRESENTATIVES. SCHEDULE 2.32 sets forth a
complete and accurate list of all distributors, wholesalers and sales
representatives of Seller as of May 31, 1999. Since May 31, 1999 there has been
no termination of any distributor, wholesaler or sales representative of the
products of Seller that materially affects the operations of Seller, nor has any
present distributor, wholesaler or sales representative indicated any present or
future intention to terminate that relationship or materially change its terms.
2.33 SUPPLIERS. SCHEDULE 2.33 sets forth a complete and accurate list
of suppliers of products to Seller. Since May 31, 1999, there has been no
supplier of products to Seller who has declined to continue to supply such
products and except as set forth on SCHEDULE 2.33, no present supplier has
indicated any present or future intention to cease to provide such products to
Seller or materially change the terms under which it has provided such products.
2.34 PREPAYMENT OF LIABILITIES. All liabilities and obligations of
Seller may be prepaid by Purchaser or Seller without any prepayment fee,
penalty, premium or any other similar amount, or any other exception or
condition.
14
<PAGE>
2.35 CANCELLATION OF CONTRACTS. Except as set forth on SCHEDULE 2.35,
all contracts, commitments and other obligations between Ribelin and Seller
(including any indebtedness of Ribelin to Seller) have been, or at the Closing
will be terminated, released or forgiven, without any continuing obligation of
Seller.
2.36 PURCHASE AND SALE OR LEASE COMMITMENTS. The outstanding purchase
commitments of Seller are not materially adversely in excess of the normal,
ordinary and usual requirements of the Business; and the contract prices to
which Seller has agreed in any outstanding purchase commitment are not
materially adversely excessive when compared to current market prices for the
relevant materials, products, commodities or services. No outstanding sales or
lease commitment by Seller obligates or purports to obligate Seller to sell or
lease any products or services at a price which would result, individually or in
the aggregate with all other such sales and lease commitments, in a material
adverse effect on Seller.
2.37 ADEQUACY AND SUFFICIENCY OF PURCHASED ASSETS. The Purchased Assets
are adequate and sufficient for the lawful and efficient operation of the
Business as presently conducted and as presently proposed to be conducted.
2.38 YEAR 2000 COMPLIANCE. To the best of Seller's knowledge, Seller's
information technology is Year 2000 Compliant. "Year 2000 Compliant" means, with
respect to a company's information technology, the information technology is
designed to be used prior to, during and after the calendar year 2000 A.D., and
the information technology used during each such time period will accurately
receive, provide and process date/time data (including calculating, comparing
and sequencing) from, into and between the 20th and 21st centuries, including
the years 1999 and 2000, and leap-year calculations and will not malfunction,
cease to function, or provide invalid or incorrect results as a result of
date/time data, to the extent that other information technology, used in
combination with Seller's information technology, properly exchanges date/time
data with it. For purposes of this Section 2.38, Seller's information technology
shall include computer software, computer firmware, computer hardware (whether
general or specific purpose), equipment including embedded programmable
microchips or controllers and other similar or related items of automated,
computerized, or software systems that are used or relied on by Seller in the
conduct of its business.
2.39 SECURITIES LAW COMPLIANCE. Seller represents that: (i) it has been
advised by Purchaser that the Shares have not been and will not be registered
under the Securities Act of 1933, as amended (the "Securities Act"), or
qualified under any state securities laws on the ground, among others, that no
distribution or public offering of shares of any securities of Purchaser is
being or will be effected, and that in this connection Purchaser is relying in
part on the representations of Seller set forth herein; (ii) it acknowledges
that in order to resell the Shares pursuant to Rule 144 adopted under the
Securities Act certain conditions must be satisfied, including that (A) at least
one (1) year must elapse from the Closing Date before any resale may be made and
during which time it must have owned continuously the Shares acquired under this
Agreement and (B) during the period from the first anniversary to the second
anniversary of the Closing Date no public resales of any such shares may be made
unless financial and other information concerning the Company is publicly
available and, even if publicly available, there will be, during such year,
certain restrictions on the manner in which public resales may be effectuated
and on the number of shares that may be sold in any three-month period; (iii) it
is an "accredited investor" as defined in Regulation D under the Securities Act;
and (iv) it acknowledges and agrees that the certificates representing the
Shares shall contain such restrictive legends as may be required under
applicable state securities laws with respect to the transferability of the
Shares and the following, or a substantially similar legend:
15
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY
HAVE BEEN ACQUIRED BY THE HOLDER HEREOF FOR INVESTMENT ONLY
AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER."
2.40 FULL DISCLOSURE. No representation, warranty or other statement or
information of or from Seller contained in this Agreement or in the Schedules or
any other document, certificate or written statement furnished or to be
furnished to Purchaser in connection with the transactions contemplated by this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact required to be stated herein or
therein necessary to make the statements and facts contained herein or therein,
in light of the circumstances in which they are made, not false or misleading.
Copies of all documents heretofore or hereafter delivered or made available to
Purchaser pursuant to this Agreement were or will be complete and accurate
records of such documents. There is no fact known to Seller which has or could
have a material adverse effect on the prospects, earnings, properties or
condition, financial or otherwise, of the Business that has not been disclosed
herein or in such other documents, certificates and statements furnished to
Purchaser for use in connection with the transactions contemplated hereby.
2.41 NO BROKER. No broker, agent or other person acting pursuant to
Seller's or Ribelin's authority is entitled to any commission or finder's fee in
connection with the transactions contemplated by this Agreement, and Seller and
Ribelin shall hold harmless Purchaser from any commission or fee payable to any
such broker or agent or other person by reason of his or her retention by Seller
and/or Ribelin.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller and the Shareholders
as follows:
3.1 ORGANIZATION AND EXISTENCE OF PURCHASER. Purchaser is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of California, and has all requisite corporate power to enter into and
perform this Agreement and the transactions contemplated hereby.
3.2 AUTHORITY OF PURCHASER. The Board of Directors of Purchaser has
duly authorized the execution, delivery, and performance by Purchaser of this
Agreement and no further corporate action is necessary on the part of Purchaser
to make this Agreement valid and binding upon Purchaser in accordance with its
terms, and Seller has received certified copies of all resolutions pertaining to
such authorization.
16
<PAGE>
3.3 FINANCIAL STATEMENTS AND OTHER INFORMATION; FINANCIAL CONDITION.
Purchaser has heretofore furnished to Seller copies of: (a) the audited balance
sheets of Purchaser at March 31, 1998, and December 31, 1998, and the related
statements of income and changes in financial position for the periods then
ended, together with the related notes thereto and the auditors' report thereon
of George Rombach, C.P.A. and BDO Seidman, LLP, respectively, independent
certified public accountants, and (b) Purchaser's unaudited balance sheets at
March 31, 1999, and the related statements of income and cash flow for the
period then ended, together with the related notes thereto. All such financial
statements referred to in this Section 3.3 ("Purchaser's Financial Statements")
are complete and correct, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
respective periods, and fairly present the financial condition of Purchaser as
at the respective dates thereof and the results of operations of Purchaser for
the respective periods covered by the statements of income contained therein.
Purchaser does not have any material obligations or liabilities, contingent or
otherwise, not fully disclosed by Purchaser's Financial Statements.
3.4 NO BROKER. No broker, agent or other person acting pursuant to the
Purchaser's authority is entitled to any commission or finder's fee in
connection with the transactions contemplated by this Agreement, and Purchaser
shall hold harmless Seller and Ribelin from any commission or fee payable to any
such broker or agent or other person by reason of his or her retention by
Purchaser.
ARTICLE 4
SELLER'S COVENANTS
Seller covenants as follows:
4.1 ASSIGNMENT OF NAME. At the Closing, Seller shall assign and
transfer to Purchaser all of Seller's right, title and interest in and to the
names Sunnyvale General Devices and Instruments and the term "GDI"and Seller
shall take all necessary action to change its corporate name to a name which
shall not include the words Sunnyvale General Devices and Instruments or GDI or
any variant thereof. Seller shall at no time after the Closing utilize in its
corporate name or business operations (by assumed name or otherwise) the names
Sunnyvale General Devices and Instruments or GDI or any variant thereof.
4.2 TAX ON PRIOR SALES. Seller agrees to furnish to Purchaser a
certificate from the state taxing authorities and any related certificates that
Purchaser may reasonably request as evidence that all sales and use tax
liabilities of Seller accruing before the Closing Date have been fully satisfied
or provided for.
4.3 CONFIDENTIALITY. Seller and its employees, officers, directors and
other representatives will hold in strict confidence, and will not use to the
detriment of Purchaser, any information or data obtained in connection with this
Agreement; and if the transaction contemplated by this Agreement is not
consummated, Seller will return to Purchaser all such information and data as
Purchaser may reasonably request, including, but not limited to, worksheets,
test reports, manuals, lists, memoranda and other documents prepared or made
available to Seller in connection with this transaction.
17
<PAGE>
4.4 FULFILLMENT OF CONDITIONS AND COVENANTS. Seller shall not take any
course of action inconsistent with satisfaction of the requirements or
conditions applicable to it set forth in this Agreement. Seller shall promptly
do all acts and take all measures as may be appropriate to enable it to perform
as early as possible the obligations herein provided to be performed by it.
4.5 CONDITION TO TRANSFER OF CERTAIN CONTRACTS. Seller has used its
best efforts to obtain the necessary consents to the assignment of each Contract
which by its terms requires the consent of any of the other contracting parties
thereto to an assignment to Purchaser. It is a condition to the obligations of
each party hereto to close the transactions contemplated hereby that all
required consents be obtained for each of the Contracts listed in SCHEDULE 4.5.
Notwithstanding anything herein to the contrary, the parties acknowledge and
agree that at the Closing Seller will not assign to Purchaser any such Contract
which by its terms requires the consent of any other contracting party thereto
unless each consent has been obtained prior to the Closing Date. With respect to
each such unassigned Contract after the Closing Date Seller shall continue to
deal with the other contracting party(ies) to that Contract as the prime
contracting party and shall use its best efforts to obtain the consent of all
required parties to the assignment of such Contract, but Purchaser shall be
entitled to the benefits of such Contract accruing after the Closing Date to the
extent that Seller may provide Purchaser with such benefits without violating
the terms of such Contract. Purchaser agrees to perform at its sole expense all
of the obligations of Seller to be performed under such Contract the benefits of
which Purchaser is receiving after the Closing Date.
4.6 REGULATORY APPROVALS; REASONABLE EFFORTS. Seller shall take, as
promptly as possible, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable to consummate and make effective
the transactions contemplated by this Agreement and Seller will use its best
efforts to obtain all waivers, permits, consents, approvals, authorizations and
clearances and to effect all registrations, filings and notices with or to third
parties or governmental, regulatory or public bodies or authorities which are in
the opinion of Purchaser necessary or desirable in connection with the
transactions contemplated by this Agreement, including without limitation, all
waivers, permits, consents, approvals, authorizations and clearances required
from any governmental, regulatory or public bodies or authorities and all
waivers, permits, consents, approvals, authorizations and clearances required
under any contracts, agreements, leases, licenses or other documents to which
Seller is a party.
4.7 BULK TRANSFER PROVISIONS. Purchaser acknowledges that the
California Uniform Commercial Code is applicable to this transaction, but that
it will be impractical to comply with such provisions. Accordingly, Seller
covenants to indemnify and hold Purchaser harmless from any claims or demands of
Seller's creditors arising out of or related to the failure to comply with the
bulk transfer provisions, subject to and in accordance with the procedures set
forth in Section 6.3.
4.8 SELLER'S COOPERATION. The Seller and Ribelin agree that they will
cooperate fully with Purchaser in effecting an orderly transition of ownership
of the Purchased Assets and the providing of service to Seller's customers in a
manner and scope not less than that in effect prior to the date of this
Agreement.
18
<PAGE>
4.9 EMPLOYEES. Seller acknowledges that Purchaser intends to hire all
of Seller's current employees, as Purchaser's employees. Seller will cooperate
fully in providing the necessary information or to perform any other duties as
may be reasonably requested by Purchaser to accomplish this result. Any current
employee of Seller who is hired by Purchaser shall be terminated by Seller prior
to the Closing Date and deemed a "new hire" by Purchaser on the Closing Date and
Purchaser shall have no liability whatsoever on account of such hired employee's
previous employment by Seller, nor shall Purchaser assume or otherwise be
responsible for any past or future obligation of Seller to such employees.
Seller acknowledges that it shall be solely responsible for discharging any such
liability to such employees including, but not limited to, any payment,
compensation or benefit under any severance, vacation, sick pay, employee
benefit, worker's compensation, medical, insurance, bonus or similar plan or
arrangement and shall indemnify and hold harmless Purchaser with regard to such
liabilities, subject to and in accordance with the procedures set forth in
Section 6.3.
4.10 FURTHER ASSURANCES. From and after the date of this Agreement,
Seller shall perform all acts, execute all documents and do all things
reasonably requested by Purchaser in order to perfect Purchaser's ownership of
the Purchased Assets. If Seller is unable to or refuses to do so, Seller
irrevocably appoints Purchaser as its attorney-in-fact to do so on behalf of
Seller.
4.11 PRESS RELEASES. Neither party will issue or authorize to be issued
any press release or similar announcement concerning this Agreement or any of
the transactions contemplated hereby without the prior written approval of the
other party, which approval shall be given in order to allow compliance with the
disclosure requirements of applicable securities laws.
ARTICLE 5
THE CLOSING
5.1 CLOSING. The closing of the sale and purchase of the Purchased
Assets ("Closing" or "Closing Date") shall take place at the offices of Rutan &
Tucker, LLP, 611 Anton Boulevard, Suite 1400, Costa Mesa, California 92626, at
10:00 a.m. local time on June 30, 1999, or at such other time and date as may be
mutually agreed to by the parties.
5.2 SELLER'S OBLIGATIONS. At the Closing, Seller shall deliver to
Purchaser the following:
(a) Bill of Sale and Assignment and Assumption in the form of
EXHIBIT 5.2(a) and such other instruments of transfer which may be reasonably
necessary to transfer to Purchaser all of Seller's rights, title and interest in
and to the Purchased Assets, all in form and substance satisfactory to
Purchaser;
(b) All books, records and other data relating to the Business
(other than its corporate records);
19
<PAGE>
(c) Assignments of all leaseholds, properly executed and
acknowledged by Seller, and accompanied by all consents of lessors required by
this Agreement and the leases being assigned;
(d) Executed counterparts of all novation agreements with the
United States Government, its agencies and instrumentalities, and any other
persons requiring them;
(e) Instruments of assignment and transfer of all other property of
Seller of every kind and description and wherever situated;
(f) Properly executed and acknowledged titles and other instruments
of transfer to all motor vehicles owned by Seller; and
(g) The updates required by Section 2.14 (indebtedness) and Section
2.23 (Accounts Receivable).
Seller, at any time before or after the Closing, will execute,
acknowledge and deliver any further deeds, assignments, conveyances and other
assurances, documents and instruments of transfer, reasonably requested by
Purchaser, and will take any other action consistent with the terms of this
Agreement that may reasonably be requested by Purchaser, for the purpose of
assigning, transferring, granting, conveying and confirming to Purchaser, or
reducing to possession, any or all property to be conveyed and transferred by
this Agreement. If requested by Purchaser, Seller further agrees to prosecute or
otherwise enforce in its own name for the benefit of Purchaser, any claims,
rights or benefits that are transferred to Purchaser by this Agreement and that
require prosecution or enforcement in Seller's name. Any prosecution or
enforcement of claims, rights or benefits under this Section shall be solely at
Purchaser's expense, unless the prosecution or enforcement is made necessary by
a breach of this Agreement by Seller.
5.3 PURCHASER'S OBLIGATIONS. At the Closing, Purchaser shall deliver to
Seller the following:
(a) A certified or bank cashier's checks, payable to Seller, or
wire transfer to Seller's account, in the amount of $350,000, as required by
Section 1.5(a); and
(b) The Shares, as required by Section 1.5(b).
ARTICLE 6
POST CLOSING
6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Regardless of any
investigation at any time made by or on behalf of any party, or of any
information any party may have in respect thereof, all covenants, agreements,
representations and warranties made hereunder or pursuant hereto or in
connection with the transactions contemplated hereby shall survive the Closing.
20
<PAGE>
6.2 EXPENSES. Seller, Ribelin and Purchaser each (i) represents and
warrants that it has not taken and will not take any action that would cause the
other party to have any obligation or liability to any person for a finder's or
broker's fee, and (ii) agrees to indemnify the other party for breach of the
foregoing representation and warranty, whether or not the Closing occurs. Each
of the parties hereto shall pay all costs and expenses incurred by it or on its
behalf in connection with this Agreement and the transactions contemplated
hereby, including, without limiting the generality of the foregoing, fees and
expenses of its own financial consultants, accountants and counsel.
6.3 INDEMNIFICATION. The following Sections 6.3.1 through 6.3.6 provide
for the payment of certain other indemnities by the parties hereto.
6.3.1 INDEMNIFICATION BY SELLER AND RIBELIN. Seller and Ribelin
shall jointly and severally indemnify and hold Purchaser harmless in respect of
any and all claims, losses, damages, li abilities and expenses (including,
without limitation, settlement costs and any legal, accounting and other
expenses for investigating or defending any actions or threatened actions)
reasonably incurred by Purchaser, in connection with each and all of the
following:
(a) Any breach of any representation or warranty made by
Seller or Ribelin in this Agreement;
(b) The breach of any covenant, agreement or obligation of
Seller or Ribelin contained in this Agreement or any other instrument
contemplated by this Agreement;
(c) Any misrepresentation contained in any statement or
certificate furnished by Seller or Ribelin pursuant to this Agreement or in
connection with the transactions contemplated by this Agreement;
(d) Any claims against, or liabilities or obligations of,
Seller not specifically assumed by Purchaser pursuant to this Agreement
including, among other things, any claims, liabilities or obligations of Seller
relating to Seller's employees; and
(e) The failure of Purchaser to obtain the protections
afforded by compliance with the notification requirements of the Bulk Sales Laws
in force in the jurisdictions in which such laws may be applicable either to
Seller or to the transactions contemplated by this Agreement.
6.3.2 INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify and
hold Seller and Ribelin harmless in respect of any and all claims, losses,
damages, liabilities and expenses (including, without limitation, settlement
costs and any legal, accounting or other expenses for investigating or defending
any actions or threatened actions) reasonably incurred by Seller or Ribelin, in
connection with each and all of the following:
(a) Any breach of any representation or warranty made by
Purchaser in this Agreement;
(b) The breach of any covenant, agreement or obligation of
Purchaser contained in this Agreement or any other instrument contemplated by
this Agreement; and
21
<PAGE>
(c) Any misrepresentation contained in any statement or
certificate furnished by Purchaser pursuant to this Agreement.
6.3.3 CLAIMS FOR INDEMNIFICATION. Whenever any claim arises for
indemnification hereunder, the party entitled to indemnification ("indemnified
party") shall promptly notify the other party ("indemnifying party") of the
claim and, when known, the facts constituting the basis for such claim. In the
event of any claim for indemnification hereunder resulting from or in connection
with any claim or legal proceedings by a third party, the notice to the
indemnifying party shall specify, if known, the amount or an estimate of the
amount of the liability arising therefrom. The indemnified party shall not
settle or compromise any claim by a third party for which it is entitled to
indemnification hereunder, without the prior written consent of the indemnifying
party (which shall not be unreasonably withheld) unless suit shall have been
instituted against it and the indemnifying party shall not have taken control of
such suit after notification thereof as provided in Section 6.3.4.
6.3.4 DEFENSE BY INDEMNIFYING PARTY. In connection with any claim
giving rise to indemnity hereunder resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
indemnifying party at its sole cost and expense may, upon written notice to the
indemnified party, assume the defense of any such claim or legal proceeding if
it acknowledges to the indemnified party in writing its obligations to indemnify
the indemnified party with respect to all elements of such claim. The
indemnified party shall be entitled to participate in (but not control) the
defense of any such action, with its counsel and at its own expense. If the
indemnifying party does not assume the defense of any such claim or litigation
resulting therefrom, (a) the indemnified party may defend against such claim or
litigation, in such manner as it may deem appropriate, including, but not
limited to, settling such claim or litigation, after giving notice of the same
to the indemnifying party, on such terms as the indemnified party may deem
appropriate, and (b) the indemnifying party shall be entitled to participate in
(but not control) the defense of such action, with its counsel and at its own
expense. If the indemnifying party thereafter seeks to question the manner in
which the indemnified party defended such third party claim or the amount or
nature of any such settlement, the indemnifying party shall have the burden to
prove by a preponderance of the evidence that the indemnified party did not
defend or settle such third party claim in a reasonably prudent manner.
6.3.5 MANNER OF INDEMNIFICATION. All indemnification by Purchaser,
Seller or Ribelin shall be effected by payment of cash or delivery of a bank
cashier's check in the amount of the indemnification liability.
6.3.6 LIMITATIONS ON INDEMNIFICATION. All representations and
warranties made by the parties herein or in any instrument or document furnished
in connection herewith shall survive the Closing and any investigation at any
time made by or on behalf of the parties hereto and shall expire on the fourth
anniversary of the Closing Date, except (i) as to any matter as to which a claim
is submitted in writing to the indemnifying party prior to such fourth
anniversary and identified as a claim for indemnification pursuant to this
Agreement, (ii) as to any matter which is based upon willful fraud by the
indemnifying party, with respect to which representations and warranties shall
expire only upon expiration of the applicable statute of limitations, (iii) as
to any matter which is based upon the representations and warranties contained
in Sections 2.19 and 2.29, with respect to which representations and warranties
shall expire only upon expiration of the applicable statutes of limitation
22
<PAGE>
and (iv) as to any matter which is based upon the representations and warranties
contained in Sections 2.3, 2.17.3, 2.17.4 and 2.17.5, with respect to which
representations and warranties shall not expire. No claim or action for
indemnity pursuant to Sections 6.3.1 or 6.3.2 for breach of any representation
or warranty shall be asserted or maintained by any party hereto after the
expiration of such representation or warranty pursuant to the preceding sentence
except for claims made in writing prior to such expiration and actions (whether
instituted before or after such expiration) based on any claim made in writing
prior to such expiration.
6.4 COOPERATION IN LITIGATION. Each party will fully cooperate with the
others in the defense or prosecution of any litigation or proceeding already
instituted or which may be instituted hereafter against or by such party
relating to or arising out of the conduct of the Business prior to or after the
Closing Date (other than litigation arising out of the transactions contemplated
by this Agreement). The party requesting such cooperation shall pay the
out-of-pocket expenses (including legal fees and disbursements) of the party
providing such cooperation and of its officers, directors, employees and agents
reasonably incurred in connection with providing such cooperation, but shall not
be responsible to reimburse the party providing such cooperation for such
party's time spent in such cooperation or the salaries or costs of fringe
benefits or other similar expenses paid by the party providing such cooperation
to its officers, directors, employees and agents while assisting in the defense
or prosecution of any such litigation or proceeding.
6.5 WARRANTY OBLIGATIONS.
(a) Except as hereinafter provided in this Section 6.5, at the
Closing, Purchaser shall assume and thereafter discharge all responsibilities of
Seller to those in direct contractual relationship with Seller or Purchaser, as
the case may be, for breach (a "Breach of Warranty") of any express or implied
warranty (including, without limitation, the implied warranties of
merchantability and fitness for a particular purpose) granted by Seller or
Purchaser, as the case may be, in connection with sales of (i) products
manufactured and sold by Seller at any time within the two year period
immediately preceding the Closing Date in connection with Seller's conduct of
the Business, and (ii) finished goods comprising any part of the Inventory
existing on the Closing Date which may be sold by Purchaser at any time after
the Closing Date; provided, however, that if the aggregate amount of all losses,
damages, liabilities and expenses (including, without limitation, settlement
costs and any legal, accounting and other expenses for investigating or
defending any actions or threatened actions) reasonably incurred by Purchaser in
connection with all Breaches of Warranty exceeds $50,000, Seller shall indemnify
and hold harmless (as provided in Section 6.3) Purchaser in respect of the
amount by which such aggregate losses, damages, liabilities and expenses
(including as aforesaid) exceeds $50,000.
(b) Notwithstanding the terms of paragraph (a) above, Purchaser
shall not assume any of Seller's responsibilities for, and Seller and Ribelin
hereby agree to indemnify and hold harmless (as provided in Section 6.3)
Purchaser with respect to, all losses, damages, liabilities and expenses
(including as aforesaid) incurred in connection with:
(i) Any claim for Breach of Warranty based upon facts known by
Seller on or at any time prior to the Closing Date, including, without
limitation, all claims for Breaches of Warranty disclosed in SCHEDULE 6.5; and
23
<PAGE>
(ii) Any claim, demand or cause of action asserted or brought
by any person (including those in direct contractual relationship with Seller or
Purchaser) for physical injury to or death of or property damage suffered by
such person or any other person which was proximately caused by any products
manufactured and sold by Seller at any time prior to the Closing Date or which
comprised any part of the finished goods in the Inventory existing on the
Closing Date.
(c) Except as otherwise provided in paragraph (a) above with
respect to finished goods in the Inventory on the Closing Date, Purchaser shall
assume all responsibilities for, and shall indemnify and hold harmless (as
provided in Section 6.3) Seller in respect of, any and all claims, losses,
damages, liabilities and expenses (including as aforesaid) incurred in
connection with:
(i) Breaches of Warranty in connection with sales of products
sold by Purchaser after the Closing Date (including, without limitation,
products manufactured in whole or in part out of any work in process comprising
any part of the Inventory existing on the Closing Date); and
(ii) Any claim, demand or cause of action asserted or brought
by any person for physical injury to or death of or property damage suffered by
such person or any other person which was proximately caused by goods of a type
described in clause (i) of this paragraph.
(d) Purchaser shall have the exclusive right in its sole discretion
to defend, settle and compromise any claim of a type covered by the
indemnification provisions of paragraphs (a) and (c) above;
(e) Seller shall have the exclusive right in its sole discretion to
defend, settle and compromise any claims of a type covered by the
indemnification provisions of paragraph (b) above.
6.6 COBRA REQUIREMENTS. Seller shall be responsible for satisfying the
requirements of Section 4980B of the Code and Sections 601 through 609 of ERISA
("COBRA requirements") with respect to any employee of the Business who had a
qualifying event prior to the Closing or for any employee of the Business not
otherwise employed by Purchaser after the Closing, to the extent required under
the COBRA requirements. Purchaser shall be responsible for satisfying the COBRA
requirements for any employee of the Business employed by Purchaser after the
Closing, to the extent required under the COBRA requirements.
ARTICLE 7
CERTAIN COVENANTS
7.1 COVENANT NOT TO COMPETE.
(a) Subject to the Closing having occurred and except in connection
with Ribelin's employment with Purchaser after the Closing, without the prior
written consent of Purchaser, neither Seller nor Ribelin will, directly or
indirectly (whether through any partnership of which it or Ribelin is a member,
through any trust in which it or Ribelin is a beneficiary or trustee, or through
24
<PAGE>
a corporation or other association in which it or Ribelin has any interest,
legal or equitable, or in any other capacity whatsoever), engage in any business
competitive with the Business (including within the definition of the Business,
without limitation, any business of the type or types conducted by Seller at any
time during the two year period preceding the Closing Date or under development
by Seller on the Closing Date) in any county or any other political subdivision
of any state of the United States of America or of any other country in the
world where Seller conducted any Business at any time during the two year period
preceding the Closing Date, including those counties in California set forth on
EXHIBIT 7.1(a) for a period of three years after the Closing Date.
(b) Seller and Ribelin acknowledge that they intend that Seller
shall fully and effectively convey to Purchaser all intellectual property rights
to be transferred to Purchaser pursuant to Section 1.1(h) and 1.1(i), including,
without limitation, each process, invention, trade secret, formula and other
item of know-how relating to the Business. Accordingly, notwithstanding the
expiration of the covenant not to compete set forth in this Section 7.1 on the
third anniversary of the Closing Date, at all times thereafter Seller and
Ribelin shall keep confidential and shall not disclose to others any of those
intellectual property rights and shall not use or permit to be used any of these
intellectual property rights.
(c) The parties hereto agree that the duration and area for which
the covenant not to compete set forth in this Section 7.1 is to be effective are
reasonable. If any court determines that the time period or the area, or both of
them, are unreasonable and that such covenant is to that extent unenforceable,
the parties hereto agree that the covenant shall remain in full force and effect
for the greatest time period and in the greatest area that would not render it
unenforceable. The parties intend that this covenant shall be deemed to be a
series of separate covenants, one for each and every county of each and every
state of the United States of America and each and every political subdivision
of each and every country outside the United States of America where this
covenant is intended to be effective.
(d) The parties hereto acknowledge that the covenant not to compete
set forth in this Section 7.1 has not been bargained for separate and apart from
the consideration to be paid for the Purchased Assets and that no part of such
consideration is allocable to such covenant not to compete.
7.2 COVENANT NOT TO SOLICIT. During the period of the covenant set
forth in Section 7.1, Seller and Ribelin covenants and agrees that he or it
shall not, directly or indirectly, (i) induce or attempt to induce any employee
of Purchaser to leave the employ of Purchaser and become employed by any other
business entity, (ii) hire or retain any such employee, or (iii) contact or
attempt to contact any customer of Seller for the twelve (12) month period
immediately preceding the Closing Date for the purpose of soliciting from any
such customer business that is similar to the Business previously conducted
between Seller and such customer.
7.3 CONFIDENTIALITY. During the period of the covenant set forth in
Section 7.1, Seller and Ribelin covenants and agrees that he or it shall hold
confidential all knowledge and information which he or it may acquire with
respect to the plans, processes, formulae, machinery, products, customers and
business of Seller or Purchaser and that each shall keep the same knowledge or
information or any part thereof strictly confidential and shall not disclose the
same to any third party or use in any manner inconsistent with the intent of
this Section 7.3.
25
<PAGE>
7.4 INJUNCTIVE RELIEF. Seller and Ribelin hereby acknowledge and agree
that any violations of the provisions of this Article 7 will cause damage to
Purchaser in an amount or amounts difficult to ascertain. Accordingly, in
addition to any other relief to which Purchaser may be entitled at law or in
equity, Purchaser shall be entitled to temporary and/or permanent injunctive
relief from any breach or threatened breach by Seller or Ribelin of the
provisions of this Article 7, without proof of actual damages that have been or
may be caused to Purchaser by such breach or threatened breach.
ARTICLE 8
MISCELLANEOUS PROVISIONS
8.1 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties with regard to the subject matter of this Agreement. All
agreements, covenants, representations and warranties, express or implied, oral
and written, of the parties with regard to the subject matter of this Agreement
(including, without limitation, the letter of intent between the parties dated
March 6, 1999, the preliminary agreement between the parties dated April 7, 1999
and the letter agreement dated May 27, 1999) are contained in this Agreement, in
the Schedules and Exhibits to this Agreement, and the documents referred to or
implementing the provision of this Agreement. No other agreements, covenants,
representations or warranties, express or implied, oral or written, have been
made by either party to the other with respect to the subject matter of this
Agreement. All prior and contemporaneous conversations, negotiations, covenants
and warranties with respect to the subject matter of this Agreement are waived,
merged in this Agreement and superseded by this Agreement.
This is an integrated agreement.
8.2 ASSIGNMENT. Except as specifically provided otherwise in this
Agreement, neither this Agreement nor any interest herein shall be assignable by
any party hereto (voluntarily, involuntarily, by judicial process, operation of
law or otherwise), in whole or in part, without the prior written consent of all
other parties hereto. Any attempt at such an assignment without such consent
shall be void and, at the option of the non-consenting party, shall be an
incurable breach of this Agreement resulting in the termination of this
Agreement.
8.3 SUCCESSORS AND ASSIGNS. Each of the terms, provisions and
obligations of this Agreement shall be binding upon, shall inure to the benefit
of, and shall be enforceable by the parties and their respective legal
representatives, successors and assigns.
8.4 WAIVER AND AMENDMENT. This Agreement may be amended, supplemented,
modified and/or rescinded only through an express written instrument signed by
all parties or their respective successors and permitted assigns. Any party may
specifically and expressly waive in writing any portion of this Agreement or any
breach hereof, but no such waiver shall constitute a further or continuing
waiver of any preceding or succeeding breach of the same or any other provision.
The consent by one party to any act for which such consent was required shall
not be deemed to imply consent or waiver of the necessity of obtaining such
consent for the same or similar acts in the future.
26
<PAGE>
8.5 CUMULATIVE REMEDIES. No remedy made available hereunder by any of
the provisions of this Agreement is intended to be exclusive of any other
remedy, and each and every remedy shall be cumulative and shall be in addition
to every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise.
8.6 SEVERABILITY. Each provision of this Agreement is intended to be
severable. If any covenant, condition or other provision contained in this
Agreement is held to be invalid, void or illegal by any court of competent
jurisdiction, such provision shall be deemed severable from the remainder of
this Agreement and shall in no way affect, impair or invalidate any other
covenant, condition or other provision contained in this Agreement. If such
condition, covenant or other provision shall be deemed invalid due to its scope
or breadth, such covenant, condition or other provision shall be deemed valid to
the extent of the scope or breadth permitted by law.
8.7 GOVERNING LAW AND CHOICE OF FORUM. This Agreement has been
negotiated and executed in the State of California and is to be performed in
Orange County, California. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California, including all matters of
construction, validity, performance and enforcement, without giving effect to
principles of conflict of laws. The parties hereby consent, in any dispute,
action, litigation, or other proceeding concerning this Agreement (including
arbitration) to the jurisdiction of the courts of California, with the County of
Orange being the sole venue for the bringing of the action or proceeding.
8.8 ATTORNEYS' FEES. In any action, litigation or proceeding (including
arbitration) between the parties arising out of or in relation to this
Agreement, the prevailing party in such action shall be awarded, in addition to
any damages, injunctions or other relief, and without regard to whether or not
such matter be prosecuted to final judgment, such party's costs and expenses,
including but not limited to taxable costs and reasonable attorneys',
accountants' and experts' fees incurred in bringing such action, litigation or
proceeding and/or enforcing any judgment or order granted therein, all of which
shall be deemed to have accrued upon the commencement of such action, litigation
or proceeding. Any judgment or order entered in such action, litigation or
proceeding shall contain a specific provision providing for the recovery of
attorneys' fees and costs incurred in enforcing such judgment. If the judgment
or order should fail to contain such a provision, the prevailing party shall
have the right to initiate further action to recover its attorneys' fees
incurred in enforcing such judgment or order, which right shall survive the
entry of judgment or order in the initial action, litigation or proceeding. For
the purpose of this Section 8.8, attorneys' fees shall include, without
limitation, fees incurred in the following: (1) post-judgment motions; (2)
contempt proceedings; (3) garnishment, levy, and debtor and third-party
examinations; (4) discovery; and (5) bankruptcy litigation.
8.9 NOTICES. All notices, demands or other communications which are
required or are permitted to be given hereunder shall be in writing and shall be
deemed to have been sufficiently given upon personal delivery, facsimile
transmission or on the third business day following due deposit in the United
States mail, postage prepaid, and sent certified mail, return receipt requested,
correctly addressed to the addresses of the parties as follows:
27
<PAGE>
If to Purchaser: Telenetics Corporation
26772 Vista Terrace Drive
Lake Forest, California 92630
Attention: Michael A. Armani, President
With a copy to: Rutan & Tucker, LLP
611 Anton Boulevard, Suite 1400
Costa Mesa, California 92626
Attention: Larry A. Cerutti, Esq.
If to Seller Sunnyvale General Devices and Instruments, Inc.
or Ribelin: Post Office Box 1330
Verdi, Nevada 89439
Attn: Franklin R. Ribelin
Any party may give written notice of a change of address by certified
mail, return receipt requested, and after notice of such change has been
received, any notice shall be given to such party in the manner above described
at such new address.
8.10 INTERPRETATION. The language in all parts of this Agreement shall
be in all cases construed simply according to its fair meaning and not strictly
for or against any party. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice versa, and
each gender will include any other gender. The captions of the Sections and
Subsections of this Agreement are for convenience only and shall not affect the
construction or interpretation of any of the provisions of this Agreement. This
Agreement has been negotiated between unrelated parties who are sophisticated
and knowledgeable in the matters contained in this Agreement and who have acted
in their own self interest. In addition, each party has been represented by
legal counsel. Accordingly, any rule of law, including Section 1654 of the
California Civil Code, as well as any other statute, law, ordinance or common
law principles or other authority of any jurisdiction of similar effect, or
legal decision that would require interpretation of any ambiguities in this
Agreement against the party who has drafted it is not applicable and is hereby
waived. The provisions of this Agreement shall be interpreted in a reasonable
manner to effect the purpose of the parties, and this Agreement shall not be
interpreted or construed against any party to this Agreement because that party
or any attorney or representative for that party drafted this Agreement or
participated in the drafting of this Agreement. FURTHER, THE LIMITATION OF
LIABILITIES AND REMEDIES AND THE EXCLUSION OF DAMAGES AND WARRANTIES CONTAINED
HEREIN REFLECT A BARGAINED FOR ALLOCATION OF RISKS BASED ON NEGOTIATIONS AND
CONSIDERATION EXCHANGED BETWEEN THE PARTIES.
8.11 FURTHER ASSURANCES. In addition to the documents and instruments
to be delivered as provided in this Agreement, each of the parties shall, from
time to time at the request of another party, execute and deliver to another
party such other documents and shall take such other action as may be necessary
or proper to more effectively carry out the terms of this Agreement.
28
<PAGE>
8.12 WARRANTY OF AUTHORITY. Each of the individuals signing this
Agreement on behalf of a party hereto warrants and represents that such
individual is duly authorized and empowered to enter into this Agreement and
bind such party hereto.
8.13 SPECIFIC PERFORMANCE. Each party's obligations under this
Agreement are unique. If any party should default in its obligations under this
Agreement, the parties each acknowledge that it would be extremely impracticable
to measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other available rights or remedies, may sue in equity for
specific performance, and the parties each expressly waive the defense that a
remedy in damages will be adequate. Notwithstanding any breach or default by any
of the parties of any of their respective representations, warranties,
covenants, or agreements under this Agreement, if the purchase and sale
contemplated by it shall be consummated at the Closing, each of the parties
waives any rights that it or he may have to rescind this Agreement or the
transaction consummated by it; PROVIDED, HOWEVER, this waiver shall not affect
any other rights or remedies available to the parties under this Agreement or
under the law.
8.14 DISPUTE RESOLUTION. Except for matters with respect to which
injunctive relief is sought, all claims, disputes and other matters in
controversy (a "dispute") arising directly or indirectly out of or related to
this Agreement, or the breach thereof, whether contractual or noncontractual,
and whether during the term or after the termination of this Agreement, shall be
resolved exclusively according to the procedures set forth in this Section 8.14.
8.14.1 MEDIATION. Neither party shall commence an arbitration
proceeding pursuant to the provisions of Section 8.14.2 unless that party first
gives a written notice (a "Dispute Notice") to the other party setting forth the
nature of the dispute. The parties shall attempt in good faith to resolve the
dispute by mediation under the Commercial Mediation Rules of the American
Arbitration Association ("AAA") in effect on the date of the Dispute Notice. If
the parties cannot agree on the selection of a mediator within 20 days after
delivery of the Dispute Notice, the mediator will be selected by the AAA. If the
dispute has not been resolved by mediation as provided above within 60 days
after delivery of the Dispute Notice, then the dispute shall be determined by
arbitration in accordance with the provisions of Section 8.14.2.
8.14.2 ARBITRATION.
(a) Any dispute that is not settled through mediation as
provided in Section 8.14.1 above shall be resolved by arbitration in Orange
County, California, governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et
seq, and administered by the American Arbitration Association under its
Commercial Arbitration Rules in effect on the date of the Dispute Notice, as
modified by the provisions of this Section 8.14.2, by a single arbitrator.
Persons eligible to be selected as an arbitrator shall be limited to lawyers
with excellent academic and professional credentials (i) who are or have been a
partner in a highly respected law firm for at least 15 years specializing in
either general commercial litigation or general corporate and commercial matters
and (ii) who have had both training and experience as an arbitrator. Each party
shall be entitled to strike on a peremptory basis, for any reason or no reason,
any or all of the names of potential arbitrators on the list submitted to the
parties by the AAA as being qualified in accordance with the criteria set forth
herein. If the parties cannot agree on a mutually acceptable single arbitrator
from the one or more lists submitted by the AAA, the AAA shall designate three
persons who, in its opinion, meet the criteria set forth herein, which designees
29
<PAGE>
may include persons named on any list previously submitted by the AAA. Each
party shall be entitled to strike one of such three designees on a peremptory
basis, indicating its order of preference with respect to the remaining
designees, and the selection of the arbitrator shall be made from among such
designee(s) which have not been so stricken by either party in accordance with
their indicated order of mutual preference to the extent possible. The
arbitrator shall base the award on applicable law and judicial precedent and,
unless both parties agree otherwise, shall include in such award the findings of
fact and conclusions of law upon which the award is based. Judgment on the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof.
(b) Notwithstanding the foregoing, if the dispute is
determined by a single arbitrator as contemplated, or if the parties agree to a
panel of three arbitrators to be selected in accordance with the applicable AAA
rules, and in the event the dispute is determined by less than the unanimous
decision of the three arbitrators, then upon the application by either party to
a court for an order confirming, modifying or vacating the award, the court
shall have the power to review whether, as a matter of law based on the findings
of fact determined by the arbitrator, the award should be confirmed, modified or
vacated in order to correct any errors of law made by the arbitrator. In order
to effectuate judicial review limited to issues of law, the parties agree (and
shall stipulate to the court) that the findings of fact made by the arbitrator
shall be final and binding on the parties and shall serve as the facts to be
submitted to and relied on by the court in determining the extent to which the
award should be confirmed, modified or vacated.
8.14.3 COSTS AND ATTORNEYS' FEES. If either party fails to proceed
with mediation or arbitration as provided herein or unsuccessfully seeks to stay
such mediation or arbitration, or fails to comply with any arbitration award, or
is unsuccessful in vacating or modifying the award pursuant to a petition or
application for judicial review, the other party shall be entitled to be awarded
costs, including reasonable attorneys' fees, paid or incurred by such other
party in successfully compelling such arbitration or defending against the
attempt to stay, vacate or modify such arbitration award and/or successfully
defending or enforcing the award.
8.14.4 TOLLING STATUTE OF LIMITATIONS. All applicable statutes of
limitations and defenses based upon the passage of time shall be tolled while
the procedures specified in this Section 8.14 are pending. The parties will take
such action, if any, required to effectuate such tolling.
30
<PAGE>
8.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement as
of the date first set forth above.
SELLER: PURCHASER:
- ------- ----------
SUNNYVALE GENERAL DEVICES TELENETICS CORPORATION
AND INSTRUMENTS, INC.
By: /S/FRANKLIN R. RIBELIN By: /S/MICHAEL A. ARMANI
---------------------------------- -----------------------------------
Franklin R. Ribelin, Michael A. Armani, President
President and Chief Executive Officer
RIBELIN: By: /S/DAVID STONE
- -------- -----------------------------------
David Stone, Assistant Secretary
/S/FRANKLIN R. RIBELIN
- -------------------------------------
Franklin R. Ribelin
31
<PAGE>
EXHIBIT 7.1(a)
Counties and Political Subdivisions
Subject to Covenant Not to Compete
----------------------------------
The following counties in the State of California:
Alameda Orange
Alpine Placer
Amador Plumas
Butte Riverside
Calaveras Sacramento
Colusa San Benito
Contra Costa San Bernardino
Del Norte San Francisco
El Dorado San Joaquin
Fresno San Luis Obispo
Glenn San Mateo
Humboldt Santa Barbara
Imperial Santa Clara
Inyo Santa Cruz
Kern Shasta
Kings San Diego
Lake Sierra
Lassen Siskiyou
Los Angeles Solano
Madera Sonoma
Marin Stanislaus
Mariposa Sutter
Mendocino Tehama
Merced Trinity
Modoc Tulare
Mono Tuolumne
Monterey Ventura
Napa Yolo
Nevada Yuba
All counties and political subdivisions in each of the other forty-nine states
of the United States of America.
The District of Columbia.
<PAGE>
LIST OF OMITTED SCHEDULES AND EXHIBITS*
---------------------------------------
Schedules
- ---------
Schedule 1.1(a) Accounts Receivable
Schedule 1.1(b) Furniture, Fixtures and Equipment
Schedule 1.1(c) Leases
Schedule 1.1(d) Inventory
Schedule 1.1(e) Contracts
Schedule 1.1(f) Intellectual Property
Schedule 1.1(g) Computer Software
Schedule 1.1(h) Bank Accounts
Schedule 1.1(i) Prepaid Items
Schedule 1.1(j) Books and Records
Schedule 1.1(k) Additional Tangible Property
Schedule 1.3 Assumed Liabilities
Schedule 2.6 Liens, etc.
Schedule 2.7 Leases
Schedule 2.9 Contracts
Schedule 2.11 Absence of Certain Changes or Events
Schedule 2.12 Licenses and Permits
Schedule 2.14 Indebtedness
Schedule 2.17.2 Real Property Matters
Schedule 2.19 Taxes
Schedule 2.21 Other Property
Schedule 2.22 Accounts Receivable
Schedule 2.23 Employment Matters
Schedule 2.24 Transactions with Affiliates
Schedule 2.28 Insurance
Schedule 2.32 Distributors and Representatives
Schedule 2.33 Suppliers
Schedule 2.35 Cancellation of Contracts
Schedule 4.5 Required Consents
Schedule 5.2(a) Bill of Sale and Assignment and Assumption
Exhibits
- --------
7.1(a) Territory covered by Covenant Not to Compete
- ---------------
*Registrant agrees to furnish supplementally a copy of any of the
omitted Schedules and Exhibits listed above to the Commission upon request.
<PAGE>
Exhibit 2.2
CERTIFICATE OF DETERMINATION OF
RIGHTS, PREFERENCES, PRIVILEGES
AND RESTRICTIONS OF
SERIES C 7.0% CONVERTIBLE PREFERRED STOCK
OF TELENETICS CORPORATION
Michael Armani and David Stone certify that:
A. They are President and Assistant Secretary, respectively, of
Telenetics Corporation, a California corporation (the "Corporation").
B. Pursuant to authority given by the Corporation's Restated and
Amended Articles of Incorporation, the Board of Directors of the Corporation has
duly adopted the following preambles and resolutions:
WHEREAS, the Restated and Amended Articles of Incorporation of the
Corporation provide for a class of shares known as undesignated
Preferred Stock, issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Corporation is authorized to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of undesignated
Preferred Stock, to fix the number of shares constituting any such
series and to determine the designation thereof, or any of them; and
WHEREAS, the Board of Directors now desires, pursuant to the authority
described above, to determine and fix the rights, preferences,
privileges and restrictions relating to a series of Preferred Stock and
the number of shares constituting and the designation of that series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
fixes and determines the designation of, the number of shares
constituting and the rights, preferences, privileges and restrictions
relating to a series of Preferred Stock as follows:
1. DESIGNATION. There is hereby created a series of Preferred Stock
designated as "Series C 7.0% Convertible Preferred Stock" ("Series C Convertible
Preferred Stock") with the rights, preferences, privileges and restrictions set
forth below.
2. NUMBER AND RANK. The number of shares constituting the Series C
Convertible Preferred Stock shall be 400,000. The Series C Convertible Preferred
Stock shall rank (i) senior to the common stock, no par value per share (the
"Common Stock"), of the Corporation (ii) on a parity with the Series B
Convertible Preferred Stock, no par value per share, of the Corporation as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and junior to the Series B
Convertible Preferred Stock as to the payment of dividends, and (iii) junior to
the Series A 7.0% Convertible Redeemable Preferred Stock, no par value per
share, of the Corporation as to the payment of dividends and as to distributions
of assets upon liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary. The Corporation shall have the right to create
other classes of Preferred Stock which shall rank below or on a parity with the
Series C Convertible Preferred Stock without the consent of the holders of the
Series C Convertible Preferred Stock.
1
<PAGE>
3. DIVIDENDS.
(a) Dividend rates on the shares of Series C Convertible Preferred
Stock shall be at a rate of $0.105 per share per annum (i) for the period (the
"Initial Dividend Period") pro rated on a daily basis from the date on which the
first share of the Series C Convertible Preferred Stock was originally issued
(the "Original Issue Date") to and including June 30, 1999, and (ii) for each
quarterly dividend period (the "Quarterly Dividend Period"), which Quarterly
Dividend Periods shall commence on April 1, July 1, October 1 and January 1, in
each year and shall end on and include the day immediately preceding the first
day of the next Quarterly Dividend Period. Such dividends shall be cumulative
(but not compounded) and accrue quarterly from the date of original issue of
such shares and shall be payable, if, when, and as declared by the Board of
Directors out of funds legally available therefor, on July 1, 1999 (in respect
of the Initial Dividend Period), on April 1 (in respect of the Quarterly
Dividend Period beginning the preceding January 1), on July 1 (in respect of the
Quarterly Dividend Period beginning the preceding April 1), on October 1 (in
respect of the Quarterly Dividend Period beginning the preceding July 1) and on
January 1 (in respect of the Quarterly Dividend Period beginning the preceding
October 1) of each year thereafter. Each such dividend shall be paid to the
holders of record of the Series C Convertible Preferred Stock as they shall
appear on the stock register of the Corporation on such record date, not
exceeding thirty (30) days nor less than ten (10) days preceding the payment
date thereof, as shall be fixed by the Board of Directors of the Corporation or
a duly authorized committee thereof. If declared, dividends shall be payable in
cash.
(b) No dividends shall be payable on any shares of Series C
Convertible Preferred Stock unless all dividends that are accrued to the record
date of such proposed dividends on shares of any class of the Corporation's
capital stock ranking senior to the Series C Convertible Preferred Stock as to
the payment of dividends shall have been paid or have been declared and a sum
sufficient for the payment of those dividends reserved. No dividends shall be
payable on any shares of any class of the Corporation's capital stock ranking
junior to the Series C Convertible Preferred Stock as to the payment of
dividends unless all accrued dividends on the Series C Convertible Preferred
Stock to the record date of the proposed dividends on the junior class shall
have been paid or have been declared and a sum sufficient for the payment of
those dividends reserved.
(c) Upon any conversion of any shares of Series C Convertible
Preferred Stock as described in Section 6, the holders thereof shall be entitled
to receive in cash, any accumulated, accrued or unpaid dividends in respect of
such shares of the Series C Convertible Preferred Stock
4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation,
including the liquidation preference payable on any shares of any class or
series of the Corporation's capital stock ranking senior to the Series C
Convertible Preferred Stock as to the payment of a liquidation preference, the
holders of shares of Series C Convertible Preferred Stock shall be entitled to
2
<PAGE>
receive out of the assets of the Corporation, whether such assets are capital or
surplus, $1.50 per share, and no more, before any distribution shall be made to
the holders of the Common Stock or any other class of shares or series thereof
ranking junior to the Series C Convertible Preferred Stock with respect to the
distribution of assets.
(b) For purposes of this Section 4, a merger or consolidation of the
Corporation with or into any other corporation or corporations, or the merger of
any other corporation or corporations with or into the Corporation, or the sale
of all or substantially all of the assets of the Corporation, or any other
corporate reorganization, in which consolidation, merger, sale of assets or
reorganization the shareholders of the Corporation receive distributions in cash
or securities of another corporation or corporations as a result of such
consolidation, merger, sale of assets or reorganization, shall be treated as a
liquidation, dissolution or winding up of the Corporation, unless the
shareholders of this Corporation hold more than fifty percent (50%) of the
voting equity securities of the successor or surviving corporation immediately
following such consolidation, merger, sale of assets or reorganization, in which
case such consolidation, merger, sale of assets or reorganization shall not be
treated as a liquidation, dissolution, or winding up within the meaning of this
Section 4.
(c) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, stating a payment
date and the place where the distributive amounts shall be payable, shall be
given by mail, postage prepaid, not less than thirty (30) days prior to the
payment date stated therein, to the holders of record of the Series C
Convertible Preferred Stock at their respective addresses as the same shall
appear on the books of the Corporation.
(d) No payment on account of such liquidation, dissolution or
winding up of the affairs of the Corporation shall be made to the holders of any
class or series of stock ranking on a parity with the Series C Convertible
Preferred Stock in respect of the distribution of assets, unless there shall
likewise be paid at the same time to the holders of the Series C Convertible
Preferred Stock like proportionate distributive amounts, ratably, in proportion
to the fully distributive amounts to which they and the holders of such parity
stock are respectively entitled with respect to such preferential distribution.
5. VOTING RIGHTS. In addition to all voting rights provided by
applicable law, the affirmative vote or consent of the holders of a majority of
the shares of the Series C Convertible Preferred Stock at the time outstanding,
given in person or by proxy, either in writing without a meeting or by vote at
any meeting called for the purpose, shall be necessary for effecting or
validating any merger or consolidation of the Corporation with or into any other
corporation which would result in the holders of the outstanding equity
securities of the Corporation immediately prior to such transaction holding less
than fifty percent (50%) of the voting equity securities of the surviving entity
immediately following such transaction, or any sale, lease or conveyance of all
or substantially all of its property or business, or any liquidation,
dissolution or winding up of the Corporation.
6. CONVERSION.
6.1 VOLUNTARY CONVERSION. Each share of Series C Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time following the date that is three years after the date of issuance of
such share, at the office of the Corporation or, if the Corporation shall have
appointed a transfer agent for the Series C Convertible Preferred Stock, at the
office of such transfer agent, into such number of fully paid and nonassessable
shares of Common Stock at the Conversion Price (as hereinafter defined) in
effect at the time of conversion determined as provided herein.
3
<PAGE>
6.2 AUTOMATIC CONVERSION. Each share of Series C Convertible
Preferred Stock shall automatically be convertible into fully paid and
nonassessable shares of Common Stock, immediately upon the happening of the
following events: (a) the average of the closing bid price of the Common Stock
on the Market is at least an amount equal to the Conversion Price multiplied by
five (5) (i.e., $7.50 based upon the initial Conversion Price), for twenty (20)
trading days within a thirty (30) consecutive trading day period, or (b) the
Company has completed an underwritten public offering of its Common Stock in
which the aggregate gross proceeds exceeds $7.5 million and the offering price
exceeds $4.75 per share of Common Stock (appropriately adjusted for subdivisions
and combinations of shares of Common Stock). Upon the automatic conversion of
the Series C Convertible Preferred Stock into shares of Common Stock, the
Company shall pay to all registered holders of Series C Convertible Preferred
Stock all accrued and unpaid dividends through and including the date of such
automatic conversion (the "Automatic Conversion Date"), and the person or
persons entitled to receive the Common Stock issuable upon such automatic
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock on the date following the Automatic Conversion Date. For
purposes hereof, the term "Market" shall mean the National Association of
Securities Dealers Automated Quotation System, the Nasdaq OTC Bulletin Board,
the New York Stock Exchange, the American Stock Exchange or wherever the Common
Stock then trades.
6.3 CONVERSION PRICE. The Series C Convertible Preferred Stock shall
be convertible into the number of shares of Common Stock that results from
dividing the Conversion Price per share in effect at the time of conversion into
$1.50 for each share of Series C Convertible Preferred Stock being converted.
The Conversion Price per share for the Series C Preferred Stock shall initially
be $1.50. The initial Conversion Price for the Series C Convertible Preferred
Stock shall be subject to adjustment from time to time as provided herein.
6.4 MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon any conversion of Series C Convertible Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay cash equal to such fraction. Before any holder of
Series C Convertible Preferred Stock shall be entitled to convert the same into
full shares of Common Stock and to receive certificates therefor, the holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or if the Corporation shall have appointed a transfer
agent for the Series C Convertible Preferred Stock, at the office of such
transfer agent, and shall give written notice to the Corporation at either such
office that the holder elects to convert the same; PROVIDED, HOWEVER, that in
the event of any automatic conversion pursuant to Section 6.2, the outstanding
shares of Series C Convertible Preferred Stock shall be converted automatically
without any further action by the holders of such shares, whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent, if any; and PROVIDED, FURTHER, that the Corporation shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such automatic conversion unless the certificates evidencing such shares of
Series C Convertible Preferred Stock are either delivered to the Corporation or
its transfer agent, if any, as provided above, or the holder notifies the
Corporation or its transfer agent, if any, that such certificates have been
4
<PAGE>
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as practicable
after such delivery, or such agreement and indemnification in the case of a lost
certificate, issue and deliver at such office to such holder of Series C
Convertible Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which the holder shall be entitled as aforesaid and a
check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock. In the case of
any automatic conversion pursuant to Section 6.2, such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of the event causing the required conversion. The person or persons entitled to
receive the shares of Common Stock issuable upon any such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
6.5 ADJUSTMENTS FOR SUBDIVISIONS, COMBINATIONS OR CONSOLIDATIONS OF
COMMON STOCK. If at any time or from time to time after the Original Issue Date
the outstanding shares of Common Stock are subdivided (by stock split, stock
dividend or otherwise), into a greater number of shares of Common Stock, the
Conversion Price then in effect immediately prior to such subdivision shall be
proportionately decreased. Conversely, if the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the Conversion Price then in effect
immediately prior to such combination or consolidation, shall be proportionately
increased. Any adjustment under this Section 6.5 shall become effective at the
close of business on the date the subdivision or combination becomes effective.
6.6 ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time, or from time to time, after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price for the Series C Convertible Preferred Stock then in effect shall be
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date, by
multiplying the Conversion Price for the Series C Convertible Preferred Stock
then in effect by a fraction:
(a) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(b) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution;
PROVIDED, HOWEVER, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price for the Series C Convertible Preferred
Stock shall be recomputed accordingly as of the close of business on such record
date and thereafter the Conversion Price for the Series C Convertible Preferred
Stock shall be adjusted pursuant to this Section 6.6 as of the time of actual
payment of such dividends or distributions.
5
<PAGE>
6.7 ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time after the Original Issue Date makes
or fixes a record date for the determination of holders of Common Stock entitled
to receive any distribution (excluding any repurchases of securities by the
Corporation not made on a pro rata basis from all holders of any class of the
Corporation's securities) payable in property or in securities of the
Corporation other than shares of Common Stock, and other than as otherwise
adjusted in this Section 6, then and in each such event the holders of Series C
Convertible Preferred Stock shall receive at the time of such distribution, the
amount of property or the number of securities of the Corporation that they
would have received had their Series C Convertible Preferred Stock been
converted into Common Stock on the date of such event.
6.8 ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
Except as provided in Section 4, upon any liquidation, dissolution or winding up
of the Corporation, if the Common Stock issuable upon conversion of the Series C
Convertible Preferred Stock is changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the number of shares of Common Stock
into which each share of Series C Convertible Preferred Stock may be converted
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series C Convertible
Preferred Stock shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of the Series C Convertible Preferred Stock immediately
before the change.
6.9 REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If
at any time or from time to time there is a capital reorganization of the Common
Stock (other than a subdivision, combination, consolidation, reclassification,
substitution or exchange of shares provided for elsewhere in this Section 6), or
a merger or consolidation of the Corporation with or into another corporation,
or the sale of all or substantially all of the Corporation's properties and
assets to any other person, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the holders of the Series
C Convertible Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series C Convertible Preferred Stock, the number of shares of
stock or other securities or property of the Corporation, or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of Common Stock deliverable upon conversion would have been entitled on
such capital reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of the Series C
Convertible Preferred Stock after the reorganization, merger, consolidation or
sale to the end that the provisions of this Section 6 shall be applicable after
that event as nearly equivalent as may be practicable.
6
<PAGE>
6.10 NO IMPAIRMENT. Except as provided in Section 7, the Corporation
will not, by amendment of its Restated and Amended Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Section 6 and in the
taking of all such actions as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series C Convertible
Preferred Stock against impairment.
6.11 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock into which
each share of Series C Convertible Preferred Stock may be converted pursuant to
this Section 6, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series C Convertible Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.
7. STATUS OF CONVERTED STOCK. If any shares of Series C Convertible
Preferred Stock are repurchased or converted pursuant to Section 6, the shares
so repurchased or converted shall not be reissued, shall be retired and shall
thereafter have the status of authorized and unissued shares of Preferred Stock
which may be reissued by the Corporation at any time as shares of any series of
Preferred Stock, including shares of Series C Convertible Preferred Stock.
C. The authorized number of shares of Series C Convertible Preferred
Stock is 400,000, none of which has been issued.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
IN WITNESS WHEREOF, the undersigned have executed this certificate this
30th day of June, 1999.
/S/ MICHAEL ARMANI
--------------------------------
Michael Armani, President
/S/ DAVID STONE
--------------------------------
David Stone, Assistant Secretary
7
