EXHIBIT 1
AGREEMENT (the "Agreement") dated as of November 19, 1999 (the "Closing
Date") by and between SETO HOLDINGS, INC. ("SETO"), and Thomas J.T. To (the
"Stockholder").
WHEREAS, (i) SETO is a corporation organized and existing under the laws of
the State of Nevada; (ii) HONG KONG BATTERIES INDUSTRIES, LTD. (the "Company"
and, unless the context otherwise requires includes all the Subsidiaries of the
Company) is a corporation organized and existing under the laws of Hong Kong and
(iii) THOMAS J.K. TO (the "Executive") is the principal executive officer and
the principal stockholder of the Company; and
WHEREAS, the Stockholders wish to sell to SETO, and SETO wishes to purchase
from the Stockholders, all of the issued and outstanding capital stock of the
Company upon the terms and conditions hereinafter set forth (the "Acquisition");
and
WHEREAS, the respective parties desire to make certain representations,
warranties and agreements in connection with the Acquisition.
NOW, THEREFORE, in consideration of the foregoing, the representations,
warranties, covenants and agreements set forth
herein and such other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
legally bound hereby, agree as follows:
Section 1. Sale and Purchase of the Company Shares.
1.1 Sale of the Company Shares. Each Stockholder does hereby agree to sell
and deliver to SETO, and SETO does hereby agree to purchase from each
Stockholder, at the Closing (as defined in Section 9), the number of shares of
the Company's common stock owned by such Stockholder as set forth on Exhibit A
hereto (the "Company Shares") by delivering to the Company stock certificates
representing his Company Shares, accompanied by a stock power executed by such
Stockholder, with his signature Medallion Guaranteed, together with all
applicable stock transfer tax stamps relative to said certificates.
1.2 Payment of Purchase Price. The purchase price shall be 2,000,000 shares
(the "SETO Shares") of SETO common stock (collectively the "Purchase Price"). At
the Closing SETO shall deliver to the Stockholders pro rata, 1,500,000 SETO
Shares. If SETO makes available to the Company an aggregate of US $700,000 in
additional working capital and the Company's operations for the fiscal year
ended January 31, 2001 generate net income of at least US $300,000, as
determined by SETO'S independent certified public accountants in accordance with
generally accepted accounting
-2-
principles as in effect from time to time in the United States ("GAAP"),
consistently applied, then SETO shall issue to the Stockholders, pro rata, the
remaining 500,000 SETO Shares.
Section 2. Representations, Warranties, Covenants, and Acknowledgments of
the Stockholders. The representations and warranties made and given in this
Section 2 are made by each Stockholder independent of the other Stockholders,
and any claim or liability for the breach of any such representation or warranty
shall be several against only the breaching Stockholder. Each Stockholder
severally (but not jointly) represents, warrants covenants, acknowledges and
agrees as follows:
2.1 Investment. Such Stockholder is acquiring the SETO Shares for his own
account, and not for the account of any other person. Such Stockholder is
acquiring the SETO Shares for investment and not with a view to distribution or
resale thereof except in compliance with applicable laws regarding the sale of
securities.
-3-
2.2 Business Experience. Such Stockholder is capable of evaluating the
merits and risks of his investment in SETO by acquiring the SETO Shares pursuant
to this Agreement.
-4-
2.3 Access to Information. Such Stockholder has had the opportunity to ask
questions of, and to receive answers from, Eugene J. Pian, the Chairman of SETO,
with respect to the terms and conditions of the transactions contemplated by
this Agreement and with respect to the business, affairs, financial condition,
results and prospects of operations of SETO. Such Stockholder has received from
Mr. Pian and has read SETO's Annual Report on Form 10K-SB for the fiscal year
ended January 31, 1999 and its Current Report on Form 10Q-SB for the quarter
ended October 31, 1999 and has had access to such additional financial and other
information as he has deemed necessary for him to make a fully-informed decision
to invest in SETO by acquiring SETO Shares pursuant to this Agreement; and he
has had the opportunity to obtain any additional information necessary to verify
any of such information to which he has had access.
2.4 Speculative Investment. Such Stockholder's investment in SETO by
acquiring the SETO Shares pursuant to this Agreement is highly speculative in
nature and is subject to a high degree of risk of loss in whole or in part. The
amount of such
-5-
potential total investment loss is within such Stockholder's risk capital means
and is not so great in relation to his total financial resources as to
jeopardize his personal financial needs or those of his family in the event such
investment were to be lost in whole.
2.5 SETO Shares Unregistered. Such Stockholder must bear the economic risk
of his investment in the SETO Shares for an indefinite period of time because
the SETO Shares being issued to him pursuant to this Agreement have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and therefore such Shares cannot be sold or otherwise transferred by such
Stockholder unless such Shares are registered under the Securities Act or an
exemption from such registration is available. None of SETO nor any of its
officers, directors, employees, agents or representatives has made any
agreements, covenants or undertakings whatsoever either (i) to register the SETO
Shares, or any of them, or (ii) as to whether any exemption will be available
from the registration requirements of the Securities Act for the future sale of
any SETO Shares, including without limitation for sales thereof under Rule 144
promulgated under the Securities Act. Such Stockholder acknowledges that the
exemption under Rule 144 as currently in effect would not be available until at
least one year after the Closing Date and not then unless, as to which neither
-6-
SETO nor any of its officers, directors, employees, agents or representatives,
has given any assurance will occur: (i) a public trading market then exists for
SETO's Common Stock; (ii) either SETO is current in its reporting obligations
under the Securities Exchange Act of 1934, as amended, or adequate current
information as to SETO's financial and other affairs and operations is then
available to the public; and (iii) all other applicable terms and conditions of
Rule 144 have been satisfied by SETO and such Stockholder.
2.6. Restrictive Legend. Stock certificates evidencing the SETO Shares
shall bear a restrictive legend for securities not registered under the
Securities Act, substantially as follows:
THE OFFERING AND SALE OF THE
SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1993 ("SECURITIES
ACT") OR UNDER ANY STATE SECURITIES
ACT ("STATE ACT"). ANY TRANSFER OF
SUCH SECURITIES WILL BE INVALID
UNLESS A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT IS IN
EFFECT AS TO SUCH TRANSFER OR IN
THE OPINION OF COUNSEL FOR THE
ISSUER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH
TRANSFER TO COMPLY WITH THE
SECURITIES ACT AND THE STATE ACT.
2.7 Questionnaire. Such Stockholder has truthfully completed the
Questionnaire in the form of Exhibit 2.7 hereof.
2.8 Tax Advice. Neither SETO nor the Company has made no warranties or
representations to such Stockholder with respect to the income tax consequences
of the transactions contemplated by
-7-
this Agreement, and such Stockholder is in no manner relying on SETO or the
Company or their respective representatives for an assessment of such tax
consequences.
2.9 Authorization.
(a) Such Stockholder has full power and authority and legal capacity to
enter into this Agreement and to perform this Agreement in accordance with its
terms; and the execution, delivery and performance of this Agreement by such
Stockholder has been duly authorized by all necessary corporate or other action.
Such Stockholder is not bound by any contractual or other obligation that would
be violated by his execution and performance of this Agreement; and this
Agreement is a valid and binding obligation of such Stockholder enforceable in
accordance with its terms.
(b) Neither the execution and delivery of this Agreement nor the
consummation by such Stockholder of any of the transactions contemplated herein
nor compliance by such Stockholder with the terms, conditions and provisions
hereof or of any agreement or instrument contemplated hereby will (i) conflict
with, result in a breach of, or constitute an event of default under (1) any
material instrument, agreement, lease, license, franchise, permit, or other
authorization, right, or obligation to which such Stockholder or the Company is
a party or any of his or its properties is subject or by which they are bound,
or (2) any
-8-
statute, ordinance, rule, regulation, judgment, order, award or decree
applicable to such Stockholder or the Company, or (ii) require the approval,
consent or authorization of, or the making of any declaration, filing or
registration with, any third party or any foreign, federal, state or local
court, governmental authority or regulatory body.
2.10 Ownership of the Company's Shares. Such Stockholder is the record
owner and the beneficial owner of the capital stock of the Company set forth
opposite his name on Exhibit A. Such Stockholder owns the Company Shares free
and clear of all liens and encumbrances, and he has the full and complete right
and power to dispose of the Company Shares in accordance with the terms of this
Agreement. At the Closing, such Stockholder will transfer the Company Shares to
SETO free and clear of all liens and encumbrances. There are no existing
arrangements that require or permit any of the Company Shares to be voted by or
at the discretion of anyone other than such Stockholder.
2.11 Confidentiality. Such Stockholder agrees to maintain as confidential,
and not use for his own benefit or for the benefit of any third party, all
material information and knowledge of the Company not generally known or
available to the public, including, without limitation, its business, affairs,
research and development, strategic and operating plans, products
-9-
and prospects (the "Confidential Information"), except (i) with respect to those
governmental agencies to which disclosure is required by law or applicable
regulation, (ii) pursuant to subpoena or other compulsory process, or (iii) as
may otherwise be required by law. In the event disclosure of Confidential
Information is required under subsections (i) through (iii) above, such
Stockholder will, to the extent lawfully possible, give SETO at least five (5)
days prior written notice before his disclosure and will provide SETO with
copies of any responsive materials.
2.12 Non-Solicitation. (a) For a period of three years after the Closing
Date such Stockholder will not either directly or indirectly for himself or any
third party (a) solicit, induce, recruit, or cause any person who was, is or
hereafter becomes an employee of the Company to terminate his employment for the
purpose of joining, associating or becoming employed by any business or activity
(i) which is in competition with any product sold, or any business or activity
now or hereafter engaged in, by the Company or SETO or (ii) in which such
Stockholder is an officer or director or directly or indirectly has any
ownership interest or to which he provides any services or (b) interfere or harm
the contractual or business relationships of the Company or SETO with any
person, firm or entity which was, is or hereafter becomes a licensor, licensee
or independent contractor of the Company or SETO.
-10-
2.13 Release of The Company. (a) As a material inducement to SETO to enter
into this Agreement and deliver the SETO Shares hereunder, such Shareholder
hereby irrevocably and unconditionally releases, acquits, and forever discharges
the Company and each of its stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, attorneys,
subsidiaries, affiliates (and agents, directors, officers, employees,
representatives, and attorneys of such divisions, subsidiaries, and affiliates),
and all persons acting by, through, under, or in concert with any of them (the
Company and each of its stockholders, etc. are collectively the "The Company
Releasees"), or any of them, from any and all charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages, actions,
causes of action, suits, rights, demands, costs, losses, debts and expenses
which such Stockholder now has, owns, or holds, or claims to have, own, or hold,
or which he at any time heretofore had, owned, or held, or claimed to have, own
or hold, or which he at any time hereafter may have, own, or hold, or claim to
have, own, or hold, against each or any of the Company Releasees with respect to
any events which occurred prior to the date of this Agreement.
(b) For the purposes of implementing a full and complete release and
discharge of the Company Releasees, such
-11-
Stockholder expressly acknowledges that this Agreement is intended to include in
its effect, without limitation, all claims, other than those for
indemnification, which he does not know or suspect to exist in his favor as of
the date of this Agreement, and that this Agreement contemplates the
extinguishment of any such claim or claims.
(c) The foregoing provisions of Section 2.13(a) and (b) shall not in any
way be construed as any claim or admission by any the Company Releasee that the
Company has acted wrongfully with respect to such Stockholder or to any other
person, or that such Stockholder has any rights whatsoever against the Company.
Section 3. Representations and Warranties of the Company and the
Executives. Each of the Company and Mr. To, jointly and severally, represent and
warrant to SETO as follows:
3.1 Organization. The Company is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization and has all
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as now being conducted. The Company is
duly qualified or licensed to do business and in good standing in each
jurisdiction in which the properties and assets owned, leased or operated by it
or the nature of the business conducted by it makes such qualification or
licensing necessary,
-12-
except for such failures to be so duly qualified or licensed and in good
standing that, individually or in the aggregate, could not reasonably be
expected to have a material adverse effect. The copies of the certificate of
incorporation and by-laws of the Company that have been delivered to SETO are
complete and correct as of the date of this Agreement, and the duplicate minute
book of the Company which has been furnished to SETO is complete and accurately
reflects all material actions or consents to action taken prior to the date of
this Agreement by the Board of Directors and stockholders of The Company.
3.2 Equity Capitalization; Subsidiaries and Joint Ventures. For purposes of
this Agreement, a "Joint Venture" means an entity in which the Company, either
jointly or individually, is, directly or indirectly, the beneficial owner of any
class of capital stock or other equity security or any profit participation
interest. The Company has no subsidiaries and is not a participant in any Joint
Venture, limited liability company, partnership or other arrangement except as
listed on Schedule 3.2, which also sets forth the number of shares and the
percentages of equity ownership of the Company in each thereof. Schedule 3.2
also sets forth the equity capitalization of the Company, including the total
number of authorized and issued shares of equity securities (the "Company
Securities") as of the date hereof. All issued and
-13-
outstanding shares of Company Common Stock have been duly authorized, are
validly issued, fully paid and non-assessable, and were issued in full
compliance with all applicable securities laws. In connection with the issuance
of all outstanding Company Securities there are no preemptive rights. Except for
the Company Securities, there are outstanding (i) no shares of capital stock or
other voting securities of the Company, (ii) no securities of the Company
convertible into or exchangeable for shares of capital stock or voting
securities of the Company, and (iii) no obligations of the Company to issue,
repurchase, redeem, or otherwise acquire (1) any shares of capital stock or
other voting securities, (2) no securities convertible into or exchangeable for
shares of capital stock or voting securities of the Company, or (3) options or
other rights to acquire from the Company any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company.
3.3 Restrictions on Business Activities. Except as disclosed on Schedule
3.3, there is no agreement, judgment, injunction, order or decree binding upon
the Company which has or could reasonably be expected to have the effect of
prohibiting or materially impairing (a) the ability of the Company to conduct
its business in any geographic area or field of use, (b) any acquisition of
property by the Company, or (d) the conduct of
-14-
business by the Company as currently conducted or as currently proposed to be
conducted by the Company.
3.4 Authorization; Binding Agreement. The Company has the full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Stockholders and (assuming the Agreement has been
duly and validly executed by SETO) constitutes a legal, valid and binding
agreement of the Company and the Stockholders, enforceable against them in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting creditors' rights
generally and to general principles of equity regardless of whether enforcement
is sought in a proceeding at law or in equity.
3.5 Noncontravention. Except as set forth on Schedule 3.5, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (a) conflict with or result in any breach
of any provision of the certificate of incorporation or by-laws of the Company,
(b) require any consent, approval or notice under, or conflict with or result in
a violation or breach of, or constitute (with or without notice or lapse of time
or both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms,
-15-
conditions or provisions of any loan or credit agreement, note, bond, mortgage,
indenture, license, agreement or other instrument or obligation (collectively,
"Contracts and Other Agreements") to which the Company is a party the failure to
obtain consent or approval or to give notice under which, or the conflict with
or violation of, breach of or default under, would, individually or in the
aggregate, have a material adverse effect on the Company or (c) violate any
order, judgment, writ, injunction, determination, award, decree, law, statute,
rule or regulation (collectively, "Legal Requirements") applicable to the
Company or its properties or assets the violation of which, individually or in
the aggregate, would have a material adverse effect on the Company.
3.6 Third Party Approvals. Except as set forth on Schedule 3.6, no consent,
approval or authorization of or declaration or filing with any U.S. or foreign,
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality (each, a "Governmental Entity") or other
person or third party on the part of the Company is required in connection with
the execution or delivery by the Company and the Stockholders of this Agreement
or the consummation by the Company and the Stockholders of the transactions
contemplated hereby.
-16-
3.7 Financial Statements; Absence of Undisclosed Liabilities. (a) The
Company will furnished to SETO the audited consolidated balance sheets of the
Company as at March 31, 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended,
including the footnotes thereto (the "Audited Financial Statements"), certified
by independent certified public accountants. The Audited Financial Statements
and the Interim Financial Statements will be prepared in accordance with GAAP,
and present fairly, on a consistent basis, the consolidated financial position
and consolidated results of operations of the Company on and as of the dates and
for the periods therein indicated. The statements of operations will not contain
any special or nonrecurring items (as compared to the prior year) of income or
loss.
(b) Except as set forth in the Audited Financial Statements or incurred in
connection with this transaction, the Company will have no direct or indirect
material liabilities of any nature whatsoever.
-17-
3.8 Absence of Certain Changes or Events. Since December 31, 1998 the
Company has conducted its business in the ordinary course consistent with past
practice and there has not been any condition, event or occurrence that,
individually or in the aggregate, has resulted, or could reasonably be expected
to result, in a material adverse effect with respect to the Company.
3.9 Absence of Litigation. Except as set forth on Schedule 3.9, as of the
date hereof there are no claims, actions, proceedings, investigations or audits
pending or, to the knowledge of the Company, threatened against the Company on
the date hereof before any court or Governmental Entity or Regulatory Agency. As
of the date hereof, the Company is not subject to any order, judgment,
injunction or decree (collectively, "Orders") of any court, Governmental Entity
or Regulatory Agency. Schedule 3.9 sets forth the best faith estimates of the
Company as to the maximum amount of the potential liability of the Company with
respect to each claim, action, proceeding, investigation and audit pending as
reflected in the statements of claim and pleadings related thereto.
3.10 Contracts. Schedule 3.10 sets forth, as of the date hereof, a list of
all of the following Contracts and Other Agreements to which the Company is a
party: (i) contracts, severance agreements, non-competition agreements,
non-disclosure agreements or any other type of contract or understanding with
any
-18-
current or former holder of at least 10% of the outstanding Company Common
Stock, or any current or former officer, director, employee or person retained
by the Company (including, without limitation, independent consultants and
commission agents); (ii) contracts and other agreements with any labor union or
association representing any employee of the Company; (iii) partnership, joint
venture or license agreements; (iv) indentures, mortgages, promissory notes,
loan agreements, guarantees or other agreements or commitments for the borrowing
of money or for a line of credit; (v) contracts with any person to sell,
distribute or otherwise market any of the Company's products or services, other
than in the ordinary course of business; (vi) contracts (other than those
terminable without penalty on not more than thirty (30) days notice) for the
purchase or lease of materials, supplies, goods, services, equipment or other
assets providing for future aggregate payments by the Company of $25,000 or
more; (vii) contracts for the sale of any material assets of the Company other
than in the ordinary course of business or the grant to any person of any
options or preferential rights to purchase any material assets of the Company;
(viii) contracts under which the Company agrees to indemnify any party, to
guarantee any third party obligations or to share the tax liability of any
party; (ix) contracts relating to the acquisition by the Company of any
operating business or the capital stock of any other person; (x)
-19-
contracts containing obligations or liabilities of any kind to holders of the
Company Securities; (xi) contracts for the payment of fees or other
consideration to any current or former employee, consultant, officer or director
of the Company; (xii) leases or options or rights of first refusal for the
purchase or lease of any real property; (xiii) contracts which contain any
material non compete or exclusivity provisions with respect to any business or
geographic area in which business is conducted with respect to the Company or
which restricts the conduct of any business by the Company or any geographic
area in which the Company may conduct business or requires exclusive referrals
of any business, in each case in any material respect; or (xiv) contracts with
any person for the provision of investment banking or financial consulting
services by the Company. There have been delivered or made available to SETO
true and complete copies of all such Contracts and Other Agreements as set forth
on Schedule 3.10. All of such Contracts and Other Agreements are in full force
and effect with respect to the Company and are in full force and effect with
respect to the other parties thereto.
3.11 Compliance. (a) Except as set forth on Schedule 3.11, the Company is
not in default or violation of any term, condition or provision of (a) its
certificate of incorporation or by-laws, (b) any of the Contracts and Other
Agreements set forth on
-20-
Schedule 3. 10 or (c) any Legal Requirements applicable to the Company the
default or violation of which individually, or in the aggregate, would have a
material adverse effect on the Company.
(b) For purposes of this Section 3.11:
"Hazardous Material" shall mean any material or substance that, whether by
its nature or use, is now or hereafter defined as hazardous waste, hazardous
substance, pollutant or contaminant under any Environmental Law (defined below),
or which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and which is now or hereafter
regulated under any Environmental Law, or which is or contains petroleum,
gasoline, diesel fuel or another petroleum hydrocarbon product, lead paint,
asbestos, asbestos-containing materials or polychlorinated biphenyls;
"Environmental Laws" means those federal, provincial, local and other laws,
statutes, ordinances, rules, regulations, orders and decrees (including any
amendments thereto) relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of Hazardous Materials, pollutants, wastewater (other than non-contact
cooling or process water), or wastes constituting hazardous substances in, into,
onto or upon the environment (including, without limitation, ambient air,
surface water,
-21-
groundwater, or land), or otherwise relating to the processing, distribution,
use, treatment, collection, accumulation, storage, disposal, transport, or
handling of Hazardous Materials.
(c) The operations of the Company have been and are now in material
compliance with all Environmental Laws. All approvals of government authorities
required to be held by the Company concerning the environment have been
obtained, are valid and are in full force and effect, have been and are being
complied with in all material respects and there are no proceedings commenced or
threatened to revoke or amend any such approvals. The business operations of the
Company have not and are not now the subject of any remedial order (being any
administrative complaint, direction, order or sanction issued, filed or imposed
by any governmental authority pursuant to any Environmental Laws). No part of
any premises occupied by the Company in the operation of its business has ever
been used as a landfill or for the disposal of waste or, except for the
operations of the Company conducted in material compliance with Environmental
Laws, for the storage, treatment or disposal of Hazardous Material. The Company
neither uses nor stores in or on the premises occupied by it in the operation of
its business any Hazardous Material other than in material compliance with
Environmental Laws. The Company and the Executives have no knowledge of any
Hazardous Material in, on or
-22-
under the premises occupied by it in the operation of its business other than
those used in the ordinary course of the Company's business.
3.12 ERISA and Employee Benefit Matters.
(a) Neither the Company nor any ERISA Affiliate (as defined below)
maintains any Employee Benefit Plan. As used in this Agreement, "Employee
Benefit Plan" shall mean any "employee benefit plan" as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and any other material plan, policy, program, practice, agreement, understanding
or arrangement (whether written or unwritten) providing compensation or other
benefits to any current or former director, officer, employee or consultant (or
to any dependent or beneficiary thereof), of the Company or any ERISA Affiliate
which are now, or were within the past six (6) years, maintained by the Company
or any ERISA Affiliate or under which the Company or any ERISA Affiliate has or
could have any obligation or liability, whether actual or contingent (and
including, without limitation, any liability arising out of an indemnification,
guarantee, hold harmless or similar agreement), including, without limitation,
all incentive, bonus, deferred compensation, vacation, holiday, cafeteria,
medical, disability, stock purchase, stock option, stock appreciation, phantom
stock, restricted stock or other stock-based
-23-
compensation plans, policies, programs, practices or arrangements. As used in
this Agreement, "ERISA Affiliate" shall mean any entity (whether or not
incorporated) other than the Company that, together with the Company, is or was
a member of (i) a controlled group of corporations within the meaning of Section
414(b) of the Code, (ii) a group of trades or businesses under common control
within the meaning of Section 414(c) of the Code or (iii) an affiliated service
group within the meaning of Section 414(m) of the Code.
3.13 Intellectual Property; Software.
(a) Except as set forth on Schedule 3.13(a), (i) the Company owns or has a
valid license or otherwise has the right to use all patents, copyrights,
trademarks, service marks and trade names, including any registrations or
applications for registration of any of the foregoing, technology, know-how,
computer software programs and applications, and tangible or intangible
proprietary information or material (collectively, "Intellectual Property") that
are material to the operation of the business of the Company as presently
conducted, all of which are listed on Schedule 3.13 (ii) the use of the
Intellectual Property by the Company does not infringe upon or otherwise violate
any intellectual property rights of third parties and (iii) no third party,
including, but not limited to, any employee, former employee, independent
contractor
-24-
or consultant of the Company is infringing upon or otherwise violating the
rights of the Company in the Intellectual Property.
(b) Schedule 3.13 also contains a list of all patents issued, assigned to
or licensed by, and trademarks registered to, the Company and all pending
applications therefor. Except as set forth on said Schedule, the Company owns or
has an exclusive right or license to use the Scheduled IP free and clear of all
liens and encumbrances. No consent of any third party is or will be required for
the use by SETO of any of the Scheduled IP or the transfer of the Company's
rights therein to SETO. Except as set forth on said Schedule, the Company is not
obligated to pay any royalties or fees with respect to the Scheduled IP. Said
Schedule also contains a true and complete list of all licenses of or rights to
any intellectual property rights granted by the Company to others.
(c) The Company does not have knowledge of any infringement by it upon the
patents, trademarks, trade names, service marks, trade secrets, copyrights or
other intellectual property rights of others. The Company has not received any
notice of, nor has it been a defendant or plaintiff in any suit, action or
proceeding which involves, any claim that the Company has infringed or is
infringing any intellectual property rights of others. The Company has taken all
measures as it has deemed necessary and
-25-
appropriate in the circumstances to maintain the confidentiality of the process
and formulae, research and development results and other know-how of the
Company. The Company has obtained from its current employees and consultants
written confidentiality agreements, copies of which are attached hereto as
Exhibit 3.13(a).
(d) To the knowledge of the Company, the computer software and hardware of
the Company is free of defects in programming and operation, which individually
or in the aggregate would have a material adverse effect with respect to the
Company. Any software products or services owned, provided or otherwise
developed by the Company, or used by the Company in the conduct of the Company's
business as presently conducted and as it is expected to be conducted after the
date of this Agreement, whether in whole or in part, by or for the Company,
which incorporate any date- related information or otherwise process any
date-related information, provide, among other things, the following
functionality: (i) accurate processing of date-related information before,
during and after January 1, 2000, including accepting the date input, providing
the date output, and performing calculations on dates or portions of dates; (ii)
accurate functioning without interruption before, during and after January 1,
2000 without any change in operation associated with the advent of the new
century; (iii) ability to respond to two digit date input in a way that
-26-
resolves any ambiguity as to century in a disclosed, defined and predetermined
manner and (iv) the ability to store and provide output date information in ways
that are unambiguous as to century.
3.14 Labor Matters.
(a) Neither the Company nor any of the Stockholders has been advised by, or
has knowledge that, any of the Company's officers or other executive level
employees (such as managing directors) intends to leave its employ.
(b) The Company is in compliance in all material respects with all laws
(including any legal obligation to engage in affirmative action), agreements and
contracts relating to the employment of former, current, and prospective
employees and independent contractors of the Company, including all such laws,
agreements and contracts relating to wages, hours, collective bargaining,
employment discrimination, immigration, disability, civil rights, fair labor
standards, occupational safety and health, workers' compensation, pay equity,
wrongful discharge and violation of the potential rights of such former,
current, and prospective employees, independent contractors and leased
employees, and it has timely prepared and filed all appropriate forms required
by any relevant governmental authority. The Company is not engaged in any unfair
labor practice.
-27-
(c) No collective bargaining agreement with respect to the business of the
Company is currently in effect or being negotiated. The Company has no
obligation to negotiate any such collective bargaining agreement, and neither
the Company nor any of the Stockholders has been advised that, or has any
knowledge that, the employees of the Company desire to be covered by a
collective bargaining agreement.
(d) There are no strikes, slowdowns or work stoppages pending or, to the
best knowledge of the Company and the Stockholders, threatened with respect to
the employees of the Company, nor has any such strike, slowdown or work stoppage
occurred or, to the best knowledge of the Company and the Stockholders, been
threatened since January 1, 1998. There is no representation claim or petition
pending before or any federal, state or local labor agency, and, to the best
knowledge of the Stockholders, no question concerning representation has been
raised or threatened since January 1, 1998 respecting the employees of the
Company.
(e) There are no complaints or charges against the Company pending before
any federal, state or local labor agency, and, to the best knowledge of the
Stockholders, no person has threatened since January 1, 1998 to file any
complaint or charge against the Company with any such board or agency.
-28-
(f) No charges with respect to or relating to the business of the Company
or any affiliate thereof are pending before any federal, state or local agency
responsible for the prevention of unlawful employment practices.
(g) Since January 1, 1998, the Company has not received any notice of the
intent of any federal, state, local or foreign agency responsible for the
enforcement of labor or employment laws to conduct an investigation of the
Company, and, to the best knowledge of the Stockholders, no such investigation
is in progress.
(h) Schedule 3.14 hereto is a schedule setting forth, the annual base
salary of each salaried employee of the Company as of June 30, 1999 and as
proposed as of January 1, 2000.
(i) Schedule 3.14 hereto contains the names of all employees or former
employees of the Company who are receiving, or who are entitled to receive after
the date hereof, continuing payments of any kind after termination of employment
together with the annual amounts payable to each of such employees and the
duration of such payments.
3.15 Insurance Coverage. Attached hereto as Schedule 3.15 is a list of all
insurance policies and fidelity bonds relating to the assets, business,
operations, employees, officers or directors of the Company. True and complete
copies of all such policies and bonds have been delivered by the Company to
SETO. There is no claim by the Company pending under any of such policies or
bonds as to which coverage has been denied by the underwriters of such policies
or bonds or in respect of which such underwriters have reserved their rights,
except as could not reasonably be expected to have a Material Adverse Effect
with respect to the Company. All premiums payable under all such
-29-
policies and bonds have been timely paid, and the Company has otherwise complied
in all material respects with the terms and conditions of all such policies and
bonds. Each insurance policy is in full force and effect. The insurance policies
provide adequate coverage for all normal risks incident to the Company's
business conducted on the date hereof and the assets and properties of the
Company.
3.16 Licenses and Permits. Schedule 3.16 lists each material license,
franchise, permit, certificate, approval or other similar authorization issued
by any Governmental Entity or Regulatory Agency to the Company and affecting, or
relating in any way to, the assets or business of the Company (the "Permits").
Except as set forth on Schedule 3.16, (i) the Permits are valid and in full
force and effect and (ii) the Company is not in default under, and no condition
exists that with notice or lapse of time or both would constitute a default
under, the Permits, which default,
-30-
individually or in the aggregate, would have a Material Adverse Effect.
3.17 Finders and Investment Bankers. Neither the Company or any of its
officers or directors nor the Stockholders have employed any investment banker,
financial advisor, broker or finder in connection with the transactions
contemplated by this Agreement or incurred any liability for any investment
banking, business consultancy, financial advisory, brokerage or finders' fees or
commissions in connection with the transactions contemplated hereby.
3.18 Books and Records. All constituent documents, business licenses,
minute books, stock certificate books, stock transfer ledgers and other records
of the Company (collectively, the "Records") have been maintained in accordance
with sound business practices and Legal Requirements applicable to the Company.
The Records are complete and accurate in all material respects and contain all
material matters required to be dealt with in such Records.
3.19 Title to and Condition of Assets. Except as set forth on Schedule
3.19, the Company owns and has good and marketable title to all of its assets
(whether tangible or intangible) which are material to the conduct of the
Company's business, free and clear from all Liens other than Liens that do
-31-
not materially interfere with the present use by the Company of the property
subject thereto or affected thereby. All of the assets owned, leased or used by
the Company are in good operating condition and repair (except for normal wear
and tear), are suitable for the purposes used and are adequate and sufficient
for all current operations of the Company, and the use thereof is in material
conformance with all applicable ordinances and regulations, and all building,
zoning and other laws.
3.20 Transactions with Certain Persons. Except as set forth on Schedule
3.20, since January 1, 1998 the Company has not, except on an arm's-length
basis, directly or indirectly, purchased, leased or otherwise acquired any
assets or properties or obtained any services from, or sold, leased or otherwise
disposed of any assets or properties or furnished any services to, or otherwise
dealt with (except with respect to remuneration for services rendered as a
director, officer or employee of the Company), any person which, directly or
indirectly, alone or together with others, controls, is controlled by or is
under common control with the Company. Except as set forth in Schedule 3.20 the
Company does not use or lease any property that is owned by any officer,
director or affiliate of or any relative of any thereof.
3.21 Absence of Certain Business Practices. None of the Company or any
officer, employee or agent of the Company, nor any
-32-
other person acting on its or their behalf, has, directly or indirectly, within
the past three years given or agreed to give any gift or similar benefit to any
customer, supplier, governmental employee or other person who is or may be in a
position to help or hinder the business which (a) would subject the Company to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding, (b) if not given in the past, would have had a material adverse
effect on the business, or (c) if not continued in the future, would result in a
material adverse effect or would subject the Company to suit or penalty in any
private or governmental litigation or proceeding, in the case of (b) and (c),
however, without taking into account ordinary and customary activities as
permitted by the relevant jurisdictions.
3.22 Real Property. The Company does not own any real property any interest
therein other as identified on Schedule 3.22. Except as identified in Schedule
3.22, the Company owns outright, free and clear of any claim, lien, security
interest, pledge, restriction, charge or encumbrance, all such real property
estate and real estate interests and all leasehold improvements, equipment,
inventory and other personal property used in its business or presently located
in any of its premises, except for the lien, if any, of current taxes not yet
due and payable.
-33-
3.23 Real Property and Other Leases. All leases of real property and all
material leases of other property, and amendments and modifications thereof, are
in full force and effect and have not been modified or amended in any material
respect, all rents and additional rents due to date under each such lease have
been paid, the Company has been in peaceable possession since the commencement
of the original term of such lease, and the Company does not have any knowledge
of an uncured default under such leases by it or by the lessor under any of such
leases nor of any event which with notice or lapse of time or both would
constitute a default thereunder by the Company.
3.24 Inventory. All of the inventory of the Company is carried on its books
at cost (on the basis of FIFO and average cost).
3.25 Accounts Receivable. All of the accounts receivable of the Company
arose from bona fide transactions in the ordinary course of business, and none
is subject to any defense, set-off or counterclaim.
3.26 Taxes.
(a) For the purposes of this Agreement, "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means, for any entity, (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer,
-34-
franchise, profits, license, withholding on amounts paid to or by such entity or
any subsidiary thereof, payroll, employment, excise, severance, stamp,
occupation, property, environmental or windfall profit tax, or other tax,
together with any interest or any penalty, addition to tax or additional amount
imposed by any governmental authority responsible for the imposition of any such
tax (domestic or foreign) (a "Taxing Authority"), and (ii) liability of such
entity or any subsidiary thereof for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group for any taxable period, and (iii) liability of such
entity or any subsidiary thereof for the payment of any amounts of the type
described in clauses (i) or (ii) as a result of any express or implied
obligation to indemnify any other person.
(b) Except as set forth in Schedule 3.26:
(i) all Tax returns, statements, reports and forms (including estimated Tax
returns and reports and information returns and reports) required to be filed
with any Taxing Authority with respect to any Taxable period ending on or before
the Closing Date by or on behalf of the Company (the "Company Tax Returns"),
have been or will be filed when due (subject to any extensions of such due date)
and each Tax Return is materially correct and complete as filed;
-35-
(ii) the Company has timely paid, withheld or made provision on its books
for all Taxes shown as due and payable on the Company Tax Returns that have been
filed;
(iii) no Company's Tax Returns relating to income or franchise Taxes filed
with respect any Taxable years of the Company has been examined by appropriate
income tax authorities;
(iv) the Company has not granted any extension or waiver of the limitation
period applicable to any the Company Tax Returns;
(v) there is no claim, audit, action, suit, proceeding, or investigation
now pending or threatened in a writing received by the Company against or with
respect to the Company in respect of any Tax or assessment;
(vi) there are no requests for rulings in respect of any Tax pending
between the Company and any Taxing Authority;
(vii) there are no liens for Taxes upon the assets of the Company except
liens for current Taxes not yet due;
(viii) the Company will not be required to include any adjustment in
Taxable income for any Tax period (or portion thereof) ending after the Closing
Date as a result
-36-
of a change in method of accounting for any Tax period (or portion thereof)
ending on or before the Closing Date or pursuant to the provisions of any
agreement entered into with any Taxing Authority with regard to the Tax
liability of the Company for any Tax period (or portion thereof) ending on or
before the Closing Date;
(ix) the Company has not been a member of an affiliated group other than
one of which the Company was the common parent, or filed or been included in a
combined, consolidated or unitary Tax return other than one filed by The
Company, or a return for a group consisting solely of its predecessors, or
participated in any other similar arrangement whereby any income, revenues,
receipts, gains, losses, deductions, credits or other Tax items of the Company
was determined or taken into account for Tax purposes with reference to or in
conjunction with any such items of another person other than the Company or any
such predecessor;
(x) the Company is not currently under any contractual obligation to pay to
a Taxing Authority the income or franchise tax obligations of, or with respect
to transactions relating to, any other person or to indemnify any other person
with respect to any income or franchise tax; and
-37-
(xi) the Company has not signed any letter or entered into any agreement or
arrangement in writing consenting to the surrender or sharing of any deductions,
credits or other Tax attributes with any other person or transferred or assigned
to any other person for Tax purposes any such items.
3.27 Principal Customers and Suppliers.
(a) Schedule 3.27 contains a true and complete list of the top 10
purchasers (by dollar volume) of the Company's products during the 12 months
ended December 31, 1998 and the nine months ended September 30, 1999 and the
aggregate dollar amount of their purchases thereof during such periods. Since
January 1, 1999 no such purchaser has terminated its relationship with the
Company or notified the Company in writing of its intention (for any reason) to
terminate its relationship or reduce its purchases of Products by more than 50%.
(b) Schedule 3.27 contains a true and complete list of the Company's top 10
suppliers (by dollar volume) during the 12 months ended December 31, 1998 and
the nine months ended September 30, 1999 and the aggregate dollar amount of
purchases from such suppliers during such periods. Since January 1, 1999 no such
supplier has terminated its relationship with the Company or notified the
Company in writing of its intention (for any reason)
-38-
to terminate such relationship or reduce its sales to the Company from the level
during the six months ended December 30, 1998.
3.28 Product Returns. Schedule 3.28 hereto contains a true and complete
description of the product return experience of the Company for the two years
ended June 30, 1999.
3.29 Product Liability. Schedule 3.29 hereto contains a true and complete
description of the Company's product liability experience with respect to its
business since January 1, 1997.
3.30 Questionable Payments. Neither the Company nor any active employee
acting on The Company's behalf has used any corporate funds for: (i) illegal
contributions, entertainment or gifts for purposes of influencing the activities
or decision making of a political official; or (ii) illegal payments, bribes or
kickbacks to any United States government official or employee or foreign
government official or employee or other third party. Neither the Company nor
any director, officer or other employee of the Company has: (i) made any
payments or provided services or other favors in the United States of America or
in any other country in order to obtain preferential treatment or consideration
by any governmental entity with respect to any aspect of the business of the
Company; or (ii) made any political contributions which would not be lawful
under the laws of the United States and the foreign country in which such
payments were made. Neither the
-39-
Company nor any director, officer or other employee of the Company or any
customer or supplier of the Company has been the subject of any inquiry or
investigation by any governmental entity in connection with payments or benefits
or other favors to or for the benefit of any governmental or armed services
official, agent, representative or employee with respect to any aspect of the
business of the Company or with respect to any political contribution.
3.31 Disclosure. The representations and warranties by the Company and the
Executives contained in this Agreement and in any document, instrument or
certificate furnished or to be furnished by him in connection herewith or
pursuant hereto do not contain any untrue statement of a material fact, or do
not omit to state any material fact required to be stated therein in order to
make the statements herein or therein, in light of the circumstances under which
they were made, not misleading. The representations and warranties contained in
this Section 3.31 or elsewhere in this Agreement or in any document or
certificate furnished or to be furnished as aforesaid in connection herewith or
pursuant hereto shall not be affected or deemed waived by reason of the fact
that SETO and/or its representatives know or should have known that any such
representation or warranty is or might be inaccurate in any respect.
-40-
Section 4. Representations and Warranties of SETO. SETO represents and
warrants to the Company and the Stockholders as follows:
4.1 Organization. SETO is a corporation duly organized, validly existing
and in good standing under the laws of the State of Nevada and is duly
authorized to carry on its business where and as now conducted and to own, lease
and operate properties as it now does.
4.2 Corporate Authority, Etc.
(a) SETO has full power and authority to enter into this Agreement and to
perform this Agreement in accordance with its terms; the execution, delivery and
performance of this Agreement by SETO and the consummation of the Acquisition
have been duly authorized by its Board of Directors and SETO is not bound by any
contractual or other obligation that would be violated by the execution or
performance of this Agreement; and this Agreement is a valid and binding
obligation of SETO enforceable in accordance with its terms; and
(b) Neither the execution and delivery of this Agreement nor the
consummation by SETO of any of the transactions contemplated herein nor
compliance by SETO with the terms, conditions and provisions hereof or of any
agreement or instrument contemplated hereby will (i) conflict with, result in a
breach of,
-41-
or constitute an event of default under the certificate of incorporation or
by-laws of SETO, or any material instrument, agreement, lease, license,
franchise, permit, judgment, order, award, decree or other authorization, right,
or obligation to which SETO is a party or any of its properties is subject or by
which they are bound, or any statute, ordinance, rule or regulation applicable
to SETO, or (ii) require the approval, consent or authorization of, or the
making of any declaration, filing or registration with, any third party or any
foreign, federal, state or local court, governmental authority or regulatory
body.
4.3 Governmental Consents and Approvals. The execution, delivery and
performance by SETO of this Agreement and the consummation of the Acquisition by
SETO requires no action by or in respect of, or filing with, any United States,
state or local governmental body, agency, official or authority.
4.4 Capitalization. SETO's authorized capitalization is 100,000,000 shares
of capital stock, all of which is common stock, of which 10,949,100 shares are
issued and outstanding. All the outstanding shares of SETO were duly authorized
for issuance and are validly issued, fully-paid and non-assessable. There are no
outstanding options, warrants, calls, commitments or rights of any kind relating
to the issued or unissued capital stock or other
-42-
securities or equity interests of SETO, except for issued stock options for
6,310,000 shares.
4.5 Litigation. There is no litigation, proceeding or governmental
investigation pending or, so far as is known to SETO, threatened, or any order,
injunction or decree outstanding, against or relating to SETO or any of its
properties or businesses.
4.6 Finders' Fee. SETO has not employed or utilized the services of any
broker, finder or other intermediary in connection with this Agreement or the
transactions contemplated by this Agreement.
4.7 Absence of Undisclosed Liabilities. Except to the extent fully
reflected or reserved against in its July 31, 1999 balance sheet, SETO has no
liabilities of any nature, whether accrued, absolute, contingent or otherwise,
including, but not limited to, any tax or other liabilities of any nature that
were unknown or undetermined as of that date but that, if then known or
determined, would have been required to be reflected in a balance sheet prepared
in accordance with generally accepted accounting principles applied on a
consistent basis. There is no basis for the assertion against SETO of any
liability of any nature (and in any amount) not fully reflected or reserved
against in its July 31, 1999 balance sheet or not incurred in the ordinary
course of business thereafter.
-43-
Section 5. Covenants of the Parties.
5.1 Preserve Accuracy of Representations; Other Action. Each party will use
its best efforts to cause the satisfaction of the conditions to the obligations
of the parties set forth in Section 8 and to prevent the taking of any action
that would result in any of the representations and warranties of such party not
being true in and as of the Closing Date.
5.2 Exhibits. Any information furnished in an exhibit to this Agreement
shall be deemed to be furnished under any other exhibit which calls for the
furnishing of the same information whether or not that information is separately
stated in such other schedule.
5.3 Further Action. Each party to this Agreement shall take all such
further action, and execute and deliver such further documents, as may be
necessary to carry out the transactions contemplated by this Agreement.
5.4 Expenses. Each party shall bear its own expenses incurred in connection
with the negotiation, preparation and closing of this Agreement and in
connection with all duties and obligations required to be performed by it under
this Agreement.
5.5 Public Announcements. SETO and the Executives will use their best
efforts to mutually agree on any press release or other public announcement with
respect to this Agreement and the
-44-
transactions contemplated hereby. No public announcement about this Agreement
shall be made by either party, except as otherwise required by law, without the
prior written approval of the other party, which approval shall not be withheld
unreasonably.
5.6 Consents and Approvals. The parties shall cooperate in using their best
efforts to obtain as promptly as practicable all approvals, consents and
authorizations, governmental, regulatory or otherwise, which may be required in
connection with the consummation of the Acquisition.
Section 6. Covenants of the Company.
6.1 Access to Information. From the date hereof until the Closing Date, the
Company shall permit SETO and its representatives to make such investigation of
the assets and the businesses of the Company as the Company may desire, and the
Company further agrees to give to SETO and its legal counsel, accountants and
other representatives, upon reasonable notice, during normal business hours,
full access throughout the period to the Closing Date to all of its offices,
properties, assets, books, agreements, commitments, records and files. The
Company further agrees to furnish to SETO, upon request, during that period,
such financial and operating data and all other scientific and technical
information as SETO may reasonably request, and to instruct the Company's
employees, counsel and financial advisors to cooperate
-45-
with SETO in its investigation of the business of the Company. The Company shall
also keep SETO apprised of any material developments affecting its Intellectual
Property.
From the date hereof until the Closing Date, reasonably promptly following
the end of each month, the Company will deliver to SETO a copy of the management
reporting package prepared by the Company for such month in the ordinary course
of its business for internal distribution.
6.2 Conduct of the Company Pending the Closing. From the date hereof until
the Closing Date, the Company shall in all material respects operate only in the
ordinary course of business. Without limiting the generality of the foregoing,
until the Closing Date the Company:
(a) not pay, discharge, satisfy or accrue any liability for any claims,
liabilities or obligations (whether absolute, accrued, contingent or otherwise)
other than the payment, discharge or satisfaction of liabilities incurred in the
normal course of business;
(b) not make loans or advances or incur any indebtedness for borrowed money
or guarantee or otherwise become responsible for any such indebtedness, or issue
or sell any debt securities or guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of others;
-46-
(c) not take any action that would result in any of the representations or
warranties of the Executives set forth in this Agreement becoming untrue or in
any of the conditions to the closing set forth in Section 7.1 hereof not being
satisfied;
(d) promptly notify SETO in writing of, and furnish any information which
SETO may request with respect to, the occurrence of any event or the existence
of any state of facts that would result in any of the Company or the Executives'
representations and warranties not being true as of the Closing Date, including,
but not limited to, any material litigation, proceeding or governmental
investigation threatened or asserted by or against the Company, any material
adverse change in the condition (financial or otherwise), assets, liabilities or
business of the Company or any other occurrence of any kind which materially and
adversely affects the assets, business or prospects of the Company;
(e) except as required by existing employment agreements, not (i) grant or
agree to grant any general increase in the rates of salaries or compensation of
its employees, or any specific increase to any employee whose total salary or
compensation after the increase would be at any annual rate in excess of
$50,000, or increase the pension, retirement or other employment benefits of its
employees, (ii) enter into any written
-47-
contract, agreement or plan covering any director, officer, consultant or
employee that provides for the making of payments, the reduction of any exercise
price or the acceleration of vesting of any benefit or right or any other
entitlement contingent upon (1) the Acquisition or (2) the termination of
employment after the Acquisition if such payment, acceleration or entitlement
would not have been provided but for the Acquisition, (iii) adopt or amend any
conditions under any stock option plan, (iv) enter into or amend any employment,
severance or other similar arrangements or agreements or special pay
arrangements with respect to termination of employment with any of its
directors, officers, consultants or employees, or (v) make any offer of
employment to any person or offer any employee or former employee engagement for
consulting services;
(f) not issue or commit itself to issue any shares of its capital stock or
other securities or options or warrants with respect thereto;
(g) not declare, set aside or pay any dividends or other distribution in
respect of its capital stock; redeem, purchase or otherwise acquire any of such
stock; or make any direct or indirect payment of any kind to any of its
stockholders, to any corporation controlled by any of its stockholders, or to
any
-48-
relative of any of its stockholders, except compensation for services rendered
in each case consistent with past practice;
(h) not amend its certificate of incorporation or by-laws or change any of
its banking arrangements, or amend any lease, agreement or commitment set forth
in any exhibit hereto;
(i) not acquire or agree to acquire by merging or consolidating with or by
purchasing any material portion of the capital stock or assets of any business
or any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets which are
material, individually or in the aggregate, to the business condition of the
Company taken as a whole;
(j) not waive any of its rights or claims having value, except rights or
claims that individually or in the aggregate are not material in amount and are
waived in the ordinary course of business;
(k) not enter into any lease, agreement or commitment which, if entered
into prior to the date of this Agreement, would have been required to be
included in any exhibit hereto, except with SETO's prior written approval;
(l) not settle or compromise, or agree to settle or compromise, any suit or
other litigation matter or any matter in an arbitration proceeding;
-49-
(m) not commence a lawsuit other than for the routine collection or amounts
due and owing;
(n) not change the accounting methods or practices followed by the Company,
make any material tax election, file any material ($10,000) tax agreement, or
settle any material tax claim or assessment;
(o) not (a) expend cash in excess of $25,000 in any single transaction or
series of related transactions, except in the ordinary course of business, (b)
purchase any item of capital equipment costing in excess or $25,000 or (c) enter
into any capital commitment or long-term obligation equal to or in excess of
$25,000;
(p) maintain and preserve its business organizations intact, retain its
present employees so that they will be available to SETO after the Acquisition,
and maintain its relationships with suppliers, customers and others so that they
will be preserved after the Acquisition;
(q) keep in full force and effect all of its existing liability insurance,
and will not modify or reduce the coverages thereunder;
(r) duly comply with (A) all laws, ordinances, orders, injunctions and
decrees applicable to the Company and to the conduct of its business, and (B)
all material agreements and
-50-
obligations by which it, its properties or its assets may be bound;
(s) not amend, willfully violate or terminate any material agreements,
including, without limitation, any agreements pursuant to which it has been
granted a license or exclusive rights in a geographical area or field of use;
(t) not amend or abandon, or allow to become amended or abandoned, any
pending application for a patent, or fail to maintain any existing patent owned
or licensed to it; and
(u) maintain all of its machinery and equipment in customary repair,
maintenance and condition, except to the extent of normal wear and tear.
6.3 Other Offers. The Company agrees that it has terminated any existing
negotiations contemplating the sale, merger, or acquisition of the Company or
its business, or the possible acquisition of a material portion of its assets or
the issue or sale of authorized capital stock or other securities of the Company
which would directly or indirectly constitute a change in control of the Company
(a "Sale of the Company") and (b) from the date hereof until the Closing Date or
the earlier termination of this Agreement, (i) to refrain, directly and
indirectly, from soliciting or initiating discussions with any person or entity
other than SETO relating to any offers, negotiations, understandings, letters of
intent, commitments or agreements,
-51-
written or oral, contemplating the Sale of the Company, (ii) to conduct its
business only in the ordinary course consistent with its current business
strategy, except that the Company will not sell, assign, license or otherwise
diminish or dispose of any of its material assets or properties except after
consultation with SETO, and (iii) not to participate, directly or indirectly, in
any negotiations regarding, or furnish to any other person information with
respect to, any effort or attempt by any other person to do or seek a Sale of
the Company. The Company shall inform SETO within one business day of its
receipt of any offer, proposal or inquiry relating to any Sale of the Company.
6.4 Notices of Certain Events. The Company shall, upon obtaining knowledge
of any of the following, promptly notify SETO of and, if same be in writing,
promptly deliver to SETO copies of: (i) any notice or communication from any
person alleging that the consent of such person is or may be required in
connection with the transactions contemplated herein; (ii) any notice or other
communication from any governmental or regulatory agency or authority in
connection with the transactions contemplated herein; (iii) any actions, suits,
claims, investigations or other judicial proceedings commenced or threatened
against the Company; and (iv) any adverse determination or recommendation in
connection with any governmental proceeding regarding any of the Company's
products.
-52-
6.5 FIRPTA. The Company shall deliver to the Internal Revenue Service a
properly executed notice in accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2) which states that shares of capital stock of
the Company do not constitute "United States real property interests" under
Section 897(e) of the Code. The Company shall provide a copy of such statement
to SETO for purposes of satisfying SETO's obligations under Treasury Regulation
Section 1.1445-2(c)(3) within the 30 day period immediately preceding the
Closing Date.
6.6 Consents. The Company shall use its best efforts to cause obtain at the
earliest practicable date, by instruments in form and substance satisfactory to
SETO and without any conditions materially adverse to the Company or to SETO,
all consents and approvals referred to in Schedule 3.6. SETO shall cooperate to
the extent reasonably required in order to obtain such consents, but SETO shall
not be obligated to agree to any change in any lease or agreement or to agree to
make any payment or furnish any guaranty in connection with any such consents.
6.7 Maintenance of Business. The Company will use its best efforts to carry
on its business and preserve its relationships with those customers, suppliers,
licensees, licensors and commercial partners that are material to its business
in substantially the same manner as it has prior to the date hereof.
-53-
Should the Company become aware of a material deterioration in any such
relationship, it will promptly bring such information to the attention of SETO
in writing.
Section 7. Covenants of SETO.
7.1 Notices of Certain Events. SETO shall, upon obtaining knowledge of any
of the following, promptly notify the Company of and, if same be in writing,
promptly deliver to the Company copies of: (i) any notice or communication from
any person alleging that the consent of such person is or may be required in
connection with the transactions contemplated herein; and (ii) any notice or
other communication from any governmental or regulatory agency or authority in
connection with the transactions contemplated herein.
Section 8. Conditions to the Acquisition.
8.1 Conditions Precedent to Obligations of SETO. The obligation of SETO to
consummate the Acquisition is subject to the fulfillment, prior to or at the
Closing, of each of the following conditions (any or all of which may be waived
by SETO):
(a) All representations and warranties of the Company, Stockholders and the
Executives shall be true and accurate at and as of the time of the Closing with
the same effect as though made again at and as of that time;
-54-
(b) The Company, the Stockholders and the Executives shall have performed
and complied with all obligations and covenants required by this Agreement to be
performed or complied with by it or them prior to or at the Closing;
(c) The Company shall have been furnished with a certificate (dated the
date of the Closing and in form and substance reasonably satisfactory to the
Company) executed by the chief executive officer and chief financial officer of
the Company and by each Stockholder and Executive certifying to the fulfillment
of the conditions specified in Sections 8.1(a) and 8.1(b);
(d) No preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the Acquisition shall
have been issued and remain in effect (each party agreeing to use its reasonable
efforts to have any such injunction, order or decree lifted);
(e) No action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States or China which would prevent the consummation of the
Acquisition;
(f) Since the date hereof, (a) there shall have been no changes that
constitute, and (b) no event or events shall have occurred which have resulted
in or constitute, a material adverse change in the business, operations,
properties, assets,
-55-
condition (financial or other), results of operations or prospects of the
Company;
(g) All and other governmental consents, orders and approvals legally
required for the consummation of the Acquisition and the transactions
contemplated hereby shall have been obtained and be in effect at the date of the
Closing; SETO shall have received duly executed copies of all of the instruments
evidencing those consents, orders and approvals; no such consent, order or
approval shall have any terms which in the reasonable judgment of SETO, when
taken together with the terms of all such consents, orders or approvals, would
materially impair the value to SETO of the Acquisition; and no governmental
authority shall have promulgated any statute, rule or regulation which, when
taken together with all such promulgations, would materially impair the value to
SETO of the Acquisition;
-56-
(h) each of the Company's directors, officers and its ten largest
stockholders (determined as of the date hereof and as of the Closing Date) shall
have entered into an agreement with SETO not to compete with SETO or the Company
for a period of three years from the Closing Date.
8.2 Conditions Precedent to Obligations of the Company. The obligation of
the Company and the Stockholders to consummate the Acquisition is subject to the
fulfillment, prior to or at the Closing, of each of the following conditions
(any or all of which may be waived by the Company) and the Stockholders:
(a) All representations and warranties of SETO shall be true at and as of
the time of the Closing with the same effect as though made again at and as of
that time;
(b) SETO shall have performed and complied with all obligations and
covenants required by this Agreement to be performed or complied with by it
prior to or at the Closing; and
(c) The Company shall have been furnished with a certificate (dated the
date of the Closing and in form and substance reasonably satisfactory to the
Company) executed by the chief executive officer and chief financial officer of
SETO certifying to the fulfillment of the conditions specified in Sections
8.2(a) and 8.2(b).
-57-
Section 9. Closing.
9.1 Time and Place of Closing. The parties shall deliver the documents
referred to in Sections 9.2 and 9.3 at a closing to be held at the offices of
Messrs. Hofheimer Gartlir & Gross, LLP, 530 Fifth Avenue, New York, New York
10036 on April 17, 2000 (or such other place and time as the parties shall
agree).
9.2 Documents To Be Delivered by the Company and the Stockholders. At the
Closing, the Company shall deliver to SETO the following:
(a) Copies of resolutions of its board of directors authorizing its
execution, delivery and performance of this Agreement and its consummation of
the Acquisition, and a certificate of its secretary, dated the date of the
closing, that such resolutions were duly adopted and are in full force and
effect;
(b) The certificates referred to in Section 8.1(c);
(c) An opinion of counsel in form and substance satisfactory to SETO's
counsel;
-58-
(d) The non-compete agreements described in Section 8.1(k).
(e) Stock certificates from each Stockholder representing all of his
ownership of shares of the Company, endorsed to SETO or accompanied by a signed
stock power transferring to SETO all of such shares, together with all
applicable stock transfer stamps relative to said certificates;
9.3 Documents To Be Delivered by SETO. At the Closing, SETO shall deliver
to the Stockholders the following:
(a) copies of resolutions of its Board of Directors authorizing its
execution, delivery and performance of this Agreement and its consummation of
the Acquisition and certificates of its secretary of SETO, dated the date of the
Closing, that such resolutions were duly adopted and are in full force and
effect; and
(b) the certificate referred to in Section 8.2(c);
(c) the SETO Shares representing the Purchase Price designated for such
Stockholder in Section 1.2.
Section 10. Survival of Representations and Indemnity.
10.1 Survival. The representations, warranties, covenants and agreements of
the parties shall survive the Closing Date for two years.
-59-
Section 11. Termination.
11.1 Grounds for Termination. This Agreement may be terminated by written
notice to the other parties, by any party (i) if at any time prior to the date
of the Closing any event shall have occurred or any state of facts shall exist
that renders any of the conditions to its obligations as provided in this
Agreement incapable of fulfillment, or (ii) if on the date on which the Closing
would otherwise have been held, any condition to its obligations has not been
fulfilled, or (iii) if for any reason other than its own wilful default, the
Acquisition has not been consummated on or before April 17, 2000.
11.2 Continuing Liability. The termination of this Agreement pursuant to
Section 11.1 shall not relieve the Company or SETO or any Stockholder or
Executives, from any liability for breach of this Agreement prior to the date of
termination.
Section 12. Indemnification.
12.1 The Company, the Executives and the Stockholders on the one hand, and
SETO on the other, do hereby agree to indemnify, defend and hold harmless each
other from and against any and all claims, demands, damages, losses, injuries,
liabilities, penalties, costs, expenses (including without limitation reasonable
attorneys' fees), suits, actions, investigations, judgments and fees which may
be imposed upon, incurred or suffered by or asserted against it
-60-
arising out of or in connection with any one or more of the following:
(a) Any failure to perform or comply with any agreements, obligations or
undertakings to be performed pursuant to this Agreement; and
(b) Any breach of any of their respective presentation, warranty, covenant
or agreement made in this Agreement, or in respect of the facts associated
therewith.
(c) Notwithstanding subparagraph (a) of this Section 12.1, no indemnifying
party shall have liability under this Section 12.1 with respect to any single or
aggregate claim for less than US$50,000.
(d) A party seeking indemnification shall notify the indemnifying parties
within a reasonable time in writing of any action, claim or liability in respect
of which it intends to claim such indemnification, provided that the failure to
give timely notice shall not release any of the indemnifying parties from any
liability to the extent the indemnifying parties are not prejudiced thereby. The
indemnifying parties shall have the right, by prompt notice to the party seeking
indemnification to assume the defense of such claim with counsel reasonably
satisfactory to the party seeking indemnification, and at the sole cost of the
-61-
indemnifying parties. If the indemnifying parties do not so assume the defense
of such claim, the party seeking indemnification may assume such defense with
counsel of its choice and at the sole cost of the indemnifying parties. If the
indemnifying parties so assume such defense, the party seeking indemnification
may participate therein through counsel of its choice, but at its sole cost. The
party not assuming the defense of any such claim shall render all reasonable
assistance to the party assuming such defense, and all out-of- pocket costs of
such assistance shall be for the account of the Indemnifying Parties. No such
claim shall be settled other than by the party defending the same, and then only
with the consent of the other party, which shall not be unreasonably withheld;
provided that the party seeking indemnification shall have no obligation to
consent to any settlement of any such claim which imposes on SETO any liability
or obligation which cannot be assumed and performed in full by the Indemnifying
Parties.
Section 13. Miscellaneous.
13.1 Further Assurances. Each party agrees to cooperate fully with the
other parties and to execute such further instructions, documents and agreements
and to give such further written assurances as may be reasonably requested by
any other party to better evidence and reflect the transactions described herein
and contemplated hereby and to carry into effect the intents and purposes of
this Agreement.
13.2 Schedules. Any information furnished in a schedule to this Agreement
shall be deemed to be furnished under any other schedule which calls for the
furnishing of the same information
-62-
whether or not that information is separately stated in such other schedule.
13.3 Expenses. Each party shall bear its own expenses incurred in
connection with the negotiation and preparation of this Agreement and in
connection with all duties and obligations required to be performed by it under
this Agreement.
13.4 Public Announcements. No public announcement about the Acquisition
shall be made by any party hereto without the prior written approval of the
other parties, which approval shall not be withheld unreasonably, subject to
SETO's obligation to comply with federal securities laws.
13.5 Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed given when delivered
personally or by reputable overnight courier or mailed by registered or
certified mail, return receipt requested, to the parties at the following
addresses (or to such other address as a party may have specified by notice to
the other parties pursuant to this provision):
(a) if to the Company or any Executive or Stockholder, at:
Hong Kong Batteries Industries, Ltd.
Flat #7, 10/F Kam Hon Industrial Bldg.
8 Wang Kwun Road
Kowloon Bay, K/n Hong Kong
Fax: 852-2798-0321
-63-
(b) if to SETO Holdings, Inc., at
554 North State Road
Briarcliff Manor, New York 10510
Attn: Eugene J. Pian, Chairman
With a copy to:
Hofheimer Gartlir & Gross, LLP
530 Fifth Avenue - 9th Floor
New York, New York 10036
Attn: Richard G. Klein, Esq.
13.8 No Assignment. This Agreement is personal to each of the parties and
may not be assigned without the written consent of the other parties.
13.9 Entire Agreement. This Agreement shall be governed by and construed in
accordance with the laws of the State of Nevada, exclusive of its choice-of-law
principles. Each party hereby irrevocably submits to the jurisdiction of any
state or Federal court sitting in Wake County, North Carolina in any action or
proceeding arising out of or relating to this Agreement, and each party hereby
irrevocably waives the defenses of improper venue or an inconvenient forum for
the maintenance of any such action or proceeding to the fullest extent permitted
by law.
13.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Nevada, exclusive of its choice-of-law
principles. Each party hereby irrevocably submits to the jurisdiction of any
state or Federal court sitting in New York County, New York in any action or
-64-
proceeding arising out of or relating to this Agreement, and each party hereby
irrevocably waives the defenses of improper venue or an inconvenient forum for
the maintenance of any such action or proceeding to the fullest extent permitted
by law.
13.11 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
13.12 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
13.13 Parties in Interest. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors and assigns, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
13.14 Choice of Language. The parties declare that at their request, the
present Agreement, along with all notices, schedules, exhibits, etc. has been
drawn up in the English language
-65-
and henceforth, all communications between them, including without limitation
those intended to have any legal effect, are to be in the English language.
13.15 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
-66-
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as
of the date first written above.
SETO HOLDINGS, INC.
By: /s/ Eugene J. Pian
--------------------------------
Name: Eugene J. Pian
Title: Chairman
HONG KONG BATTERIES INDUSTRIES, LTD.
By: /s/ Thomas J.T. To
--------------------------------
Name: Thomas J.T. To
Title: President
STOCKHOLDER:
/s/Thomas J.T. To
--------------------------------
Thomas J.T. To
-67-