FILED PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 333-107101
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 16, 2005
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
UP TO 4,506,868,683 SHARES OF COMMON STOCK
Attached hereto and hereby made part of the prospectus is: (1) the
company's Annual Report on Form 10-KSB for the year ended June 30, 2004, as
filed with the U.S. Securities and Exchange Commission on October 3, 2004, (2)
the company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 2004, as filed with the U.S. Securities and Exchange Commission on November
18, 2004, and (3) the company's Current Reports on Form 8-K as filed with the
U.S. Securities and Exchange Commission on June 18, 2004, December 14, 2004 and
January 5, 2005, respectively. Prospective investors in our common stock should
carefully read each of these documents and the related financial information
prior to making any investment decision.
You should rely on the information provided in the prospectus, this
prospectus supplement or any additional supplement. We have not authorized
anyone else to provide you with different information. The common stock is not
being offered in any state where the offer is not permitted. You should not
assume that the information in the prospectus or this prospectus supplement or
any additional supplement is accurate as of any date other than the date on the
front of those documents.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus or this prospectus supplement. Any
representation to the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS FEBRUARY 16, 2005
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
COMMISSION FILE NO. 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0738251
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
420 LEXINGTON AVENUE, NEW YORK, NY 10170
(Address of principal executive office)
(646) 227-1600
(Registrant's telephone number)
Securities registered under Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, No Par Value, 5,000,000,000 shares authorized
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The Registrant's revenue for fiscal year ended June 30, 2004 was $605,468.
The aggregate market value as of October 15, 2004 of the voting common equity
held by non-affiliates is $2,052,328.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING PRECEDING FIVE YEARS
Indicate by checkmark whether the Registrant has filed all documents and reports
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
YES |_| NO |_|
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of October 15, 2004, there were 2,004,247,731 shares of the Company's no par
value common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
FORM 10-KSB
TABLE OF CONTENTS
PAGE #
PART I
Item 1. Description of Business..........................................1-6
Item 2. Description of Property..........................................6-7
Item 3. Legal Proceedings................................................7
Item 4. Submission of Matters to a Vote of Security Holders..............7
PART II
Item 5. Market For Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities...................8-11
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................11-21
Item 7. Financial Statements.............................................21
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................21
Item 8A. Controls and Procedures..........................................21
Item 8B. Other Information ...............................................21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................22-25
Item 10. Executive Compensation...........................................25-27
Item 11. Security Ownership of Certain Beneficial Owners and Management...27-29
Item 12. Certain Relationships and Related Transaction....................29
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K..29-34
Item 14. Principal Accountant Fees and Services...........................34
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2004 .................F-1 - F-6
FORWARD-LOOKING STATEMENTS
Certain statements in the "Description of Business" (Item 1), "Management's
Discussion and Analysis of Financial Conditions and Results of Operation" (Item
6) and elsewhere in this Annual Report on Form 10-KSB constitute
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act")) relating to us and our business,
which represent our current expectations or beliefs including, but not limited
to, statements concerning our operations, performance, financial condition and
growth. The Act may, in certain circumstances, limit our liability in any
lawsuit based on forward-looking statements we have made. All statements, other
than statements of historical facts, included in this Annual Report on Form
10-KSB that address activities, events or developments that we expect or
anticipate will or may occur in the future, including such matters as our
projections, future capital expenditures, business strategy, competitive
strengths, goals, expansion, market and industry developments and the growth of
our businesses and operations are forward looking statements. Without limiting
the generality of the foregoing, words such as "may," "anticipation," "intend,"
"could," "estimate," or "continue" or the negative or other comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, such as
credit losses, dependence on management and key personnel, variability of
quarterly results, our ability to continue our growth strategy and competition,
certain of which are beyond our control. Any or all of our forward-looking
statements may turn out to be wrong. They may be affected by inaccurate
assumptions that we might make or by known or unknown risks or uncertainties.
Should one or more of these risks or uncertainties materialize or should the
underlying assumptions prove incorrect, actual outcomes and results could differ
materially from those indicated in the forward-looking statements.
Additional factors that could affect future results are set forth throughout the
"Description of Business" (Item 1) section, including the subsection entitled
"Risks Related to Our Business," and elsewhere in this Annual Report on Form
10-KSB. Because of the risks and uncertainties associated with forward-looking
statements, you should not place undo reliance on them. Further, any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Advanced Communications Technologies, Inc. ("we," "us," "our," or the "Company")
is a New York City-based diversified public holding company. We focus on high
growth-potential businesses through both our wholly-owned operating subsidiaries
in the technology services industry and our strategic investments in diverse
industries. Through our wholly-owned subsidiary and principal operating unit,
Encompass Group Affiliates, Inc. ("Encompass"), we own Cyber-Test, Inc., a
Delaware corporation ("Cyber-Test"). Cyber-Test is an electronic equipment
repair company based in Longwood, Florida, and is our core operating business.
Additionally, through our wholly-owned subsidiary, Hudson Street Investments,
Inc., an investment vehicle, we own a minority interest in Yorkville Advisors
Management, LLC, an investment management partnership, and through our
wholly-owned subsidiary, SpectruCell, Inc., we hold the North and South American
marketing and distribution rights, which we acquired in 1999, to SpectruCell, a
software-defined, radio-based wireless technology that is currently under
development in Australia by an unrelated third party.
THE BUSINESS OF ENCOMPASS GROUP AFFILIATES, INC.
Encompass, our principal operating unit, owns Cyber-Test, our core operating
business, which provides original equipment manufacturers ("OEMs"), retail
stores, national dealers and third-party warranty companies with service options
for repair, exchange, parts and warranty support for office equipment and
computer peripheral products, including facsimile machines, printers, scanners,
PDAs, laptop computers, monitors, and multi-function units, as well as the
repair of Point of Sale ("POS") equipment. Cyber-Test offers repair service for
entire pieces of equipment, the component parts of the equipment, and/or the
circuit boards of the equipment. A 90-day warranty is included with all entire
equipment repairs and a one-year warranty is included with all circuit board
repairs.
Encompass seeks to become a leader in the integrated technology and services
industry through the acquisition of assets and companies in that industry, and
then instilling sustainable growth skills as a core competency.
THE BUSINESS OF HUDSON STREET INVESTMENTS, INC.
In December 2003, we formed Hudson Street Investments, Inc. ("Hudson Street"),
our wholly-owned Delaware investment subsidiary, to purchase and hold minority
investments in selected financial and technology-based privately-owned
businesses. On January 14, 2004, Hudson Street purchased a minority interest in
Yorkville Advisors Management, LLC ("Yorkville Advisors"), an investment
management partnership and the portfolio manager of Cornell Capital Partners,
L.P., for a purchase price of $2,625,000.
Hudson Street's minority ownership interest entitles it to receive a pro rata
share of Yorkville Advisors' net profits from asset management, investment
banking and financial advisory fees. Hudson Street incurred $45,000 of legal and
professional fees associated with the purchase of the partnership interest
($15,000 of which is to a related party) that has been capitalized. As of June
30, 2004, Hudson Street received $335,000 of cash distributions from this
investment and recorded $439,999 as its distributive share of partnership net
earnings. Hudson Street's investment in Yorkville Advisors at June 30, 2004 is
$2,774,999 and is reflected on the consolidated balance sheet in "Other Assets."
In addition to its investment in Yorkville Advisors, Hudson Street made an
investment of $37,500 in the common stock of a privately held technology
company. Through Hudson Street we will continue to seek investments in high
growth-potential businesses in a variety of industries.
CYBER-TEST, INC. HISTORY
We formed Cyber-Test on May 10, 2004 to purchase substantially all of the assets
of Cyber-Test, Inc., a Florida corporation ("Cyber-Test Florida"), and on June
3, 2004, we closed on this acquisition. Cyber-Test Florida was incorporated in
Florida as a privately-owned corporation in December 1986. Initially, Cyber-Test
Florida was a prototype circuit board fixture facility that tested prototype
boards for the defense industry to ensure each board was operating at 100%
capacity. Cyber-Test Florida's founding principals funded its operations without
outside capital and developed a management team to oversee the services that
Cyber-Test Florida was providing to large organizations such as Martin Marietta
and NASA. Due in part to the slowdown in the economy in the early 1990s and the
corresponding softening in the defense industry, Cyber-Test Florida capitalized
on its test and repair expertise and re-focused its attention from repairing
space and defense industry circuit boards to repairing office equipment and
computer peripheral products. Later, Cyber-Test Florida became an authorized OEM
service support center, and has established numerous OEM relationships and
authorizations with Fortune 500 technology companies, including Xerox, Lexmark,
Brothers, HP/Compaq, Epson and Canon providing office equipment and computer
peripheral repairs and services.
1
THE COMPUTER REPAIR/WARRANTY MANAGEMENT INDUSTRY
Cyber-Test continues to operate within the office equipment and computer
peripheral products repair/warranty management industry, with its primary focus
on facsimile machines, printers, scanners, PDAs, laptop computers, monitors, and
multi-function units. Warranty periods and longer product life cycles demand a
maintenance/repair commitment that can typically support a product for up to ten
(10) years. In addition, the industry relationship among OEMs, the integrator,
and the third- and fourth-party service providers has become more complex. The
end-user, or consumer, must have assurance that products are supported by an
after-sales service team capable of providing preventive maintenance and/or an
immediate remedy upon equipment failure.
With the technological advances and associated cost reductions in shipping, the
warranty manager's challenge is to meet and exceed customer's expectations with
respect to speed of response. The repair/warranty industry has seen a shift
towards outsourcing warranty service to companies whose primary purpose and core
strength is to manage complex demands of the repair/warranty chain process.
Warranty service companies are expected to be able to:
o offer one-stop / turnkey service;
o have the technical ability to repair multi-products for
multi-vendors;
o offer advance exchange of office equipment computer peripheral
products;
o offer distribution logistics from call management through delivery;
and
o demonstrate supply-line parts management logistics efficiencies.
In addition to existing warranty service companies, traditional distribution
logistics providers (such as UPS, Airborne Express, etc.) are also entering this
industry. Ultimately, the success or failure of meeting warranty commitments
will depend on the ability of the warrantor or its service provider to have the
right component in the right place at the right time and the right skills to
effect the necessary repair at the most cost-effective price.
CYBER-TEST'S PRODUCTS AND SERVICES
The following describes the individual components that make up the current
Cyber-Test family of products and services.
Repair and Exchange. Cyber-Test has offered board-level repair of technical
products for more than 17 years, and offers service programs for equipment
dealers, OEMs, extended warranty companies, retail outlets and end-users. The
service programs include:
o return to depot repair of office equipment and computer peripheral
products;
o advance exchange of office equipment and computer peripheral
products;
o board-level repair of circuit boards and sub assemblies;
o return to depot repair for component-level circuit boards;
o OEM warranty exchange and repair programs;
o large volume repair and refurbishment; and
o call center technical support.
Cyber-Test repair and exchange service is managed by a proprietary system
designed and developed by the management team of Cyber-Test Florida with
software-tracking that allows customers or the call center function (whether it
is onsite at Cyber-Test's facilities or at the customer's facility) to be able
to track the repair status of the given unit, and provide a delivery date to the
end-user, while allowing executives of Cyber-Test to manage the output volume
and quality of the repair process.
2
In addition, Cyber-Test's software allows its clients to view their inventory,
parts, parts used per unit, and the status of all equipment on a real-time basis
via its secure website. Clients may also change priorities and escalate orders
directly from this proprietary, customized web portal.
Parts and Sales. Cyber-Test stocks a full line of parts, accessories, and
consumables for its in-house repair needs and offers these parts for sale as
well. Cyber-Test stocks over 32,000 parts for printers, facsimile machines,
scanners, monitors and PDAs. Customer's can view a full listing of parts at
Cyber-Test's website (in the ADVANCEX(TM) section) and, if any part is not in
stock, it can usually be made available in one business day. Cyber-Test's unique
parts ordering system has the capability to search, order, and buy parts without
an OEM part number. Cyber-Test's search feature will cross-reference other OEM
parts that may fit the ordered part from other manufacturers or OEMs.
In addition to repair services, Cyber-Test sells parts and consumable supplies
to dealers and end-users and has a customer base of approximately 1,500 dealers
and repair shops, two OEMs and four major extended warranty companies that
service five (5) of the top office equipment /computer retail chains.
In addition to parts, Cyber-Test stocks an extensive inventory of new and
refurbished equipment available for purchase. New equipment is backed with a
full OEM warranty, and 90 day warranties are offered by Cyber-Test for
refurbished units.
Call Center Technical Support. Cyber-Test offers partial or full (turnkey) Help
Desk support through its Call Center. The Call Center has handled as many as
25,000 calls per month from its customers and currently averages approximately
15,000 calls per month. The Call Center has a greater than 50% phone-fix rate,
which significantly reduces Cyber-Test's overall costs. Cyber-Test's Call Center
is the sole technical help line for selected Xerox copiers and fax machines.
Reverse Logistics and Outsourcing. Cyber-Test offers its customers an
outsourcing service of inventory, warehousing, and shipping of parts and end
products for warranty fulfillment, with full refurbishing and inspection
programs including "A" and "B" goods logistics. OEMs can direct all store
returns to Cyber-Test for inspection. If units have not been taken out of the
box, those items can be inspected and resold out as "A" goods. Products that
have been used or are defective are processed through the refurbishment process
and repackaged and resold as "B" goods. Cyber-Test can assist the OEM with "B"
goods distribution and resale.
Cyber-Test offers its "B" goods for resale through a web site portal
hyper-linked to the OEM web site. This eliminates the need to ship refurbished
equipment back to the OEM. Orders are placed directly with Cyber-Test via the
web site and products are delivered directly to the dealer or end-user.
Cyber-Test also has a salvage division that receives extended warranty products
that were "bought out" by the warranty provider. This asset recovery program is
one of the fastest growing divisions of Cyber-Test. Products are received,
sorted and palletized for resale to wholesalers worldwide.
Service Contracts. In addition to OEMs and major retailers, Cyber-Test has
established relationships with a number of insurance companies and third-party
service providers to provide full repair and call center support service.
Extended manufacturer's warranties sold at retail stores are typically backed by
a third party insurance company. In other cases, the extended warranty is
managed by the retailer itself. If a product covered in a service contract is
determined to be in need of repair by the Call Center, a replacement unit may be
sent directly to the end-user via ADVANCEX(TM). Cyber-Test manages the process
from call receipt and receiving the defective product back from the customer, to
tracking the product, repairing the returned units, and managing against
customer fraud.
Cyber-Test also offers an "Advance Exchange" program known as ADVANCEX(TM) that
provides same day service to its customers on all products Cyber-Test repairs.
With the ADVANCEX(TM) program, Cyber-Test can ship an equivalent-to-new ("ETN")
replacement product directly to the customer if phone support fails to correct
the problem. The customer then returns the defective unit to Cyber-Test for
repair and refurbishment and subsequent use for another customer. Its
proprietary systems allow the OEM to gather failure analysis and failure trends
critical to the release of new products. This information is collected on line,
while Cyber-Test provides level II and III technical support directly to the
customer. Its telephone support achieves a current phone fix-rate of more than
50%, saving OEMs millions of dollars per year in unnecessary product exchange.
Cyber-Test has a same-day fulfillment up to 5:00 p.m. Eastern Time on all
ADVANCEX(TM) products, and ships approximately 5,500 repaired units per month.
The ADVANCEX(TM) program has resulted in decreased product returns and increased
customer satisfaction.
3
COMPETITION
Cyber-Test's business is highly competitive. Cyber-Test competes with companies
that provide repair services for office equipment and computer peripheral
products, with companies that supply parts and consumables to end-users and
repair companies of such equipment and products, and with resellers of such
equipment and products.
Competition within the office equipment and computer peripheral products service
and repair industry is based on quality of service, depth of technical know-how,
price, availability of parts, speed and accuracy of delivery, and the ability to
tailor specific solutions to customer needs. According to a 2004 industry
directory and yearbook published by National Electronics Service Dealers
Association/International Society of Certified Electronic Technicians, there are
more than 800 manufacturers of technical products in the U.S. of the type
Cyber-Test repairs, more than 1,000 independent companies in the U.S. that
repair products in a manner similar to Cyber-Test's, over 350 companies in the
U.S. that supply parts and components for use in repair, and many tens of
thousands of independent service technicians that do on-site repair. In
addition, there are thousands of companies that sell technical products that may
need repair, and many of these do their own repair or service work.
Many of Cyber-Test's competitors are larger in size and have greater financial
and other resources, such as Decision One, Depot America, Teleplan, DataTech
America, and DEX.
Cyber-Test also competes with manufacturers and OEMs that do their own repair
work, as well as large distribution and logistics companies such as United
Parcel Service and Airborne Logistics.
Cyber-Test currently relies on a few large customers to generate a significant
portion of its revenues. The loss of one or more of these customers would have a
material adverse effect on our business, results of operations and financial
condition. Management believes it is essential to expand Cyber-Test's customer
base to minimize this dependency. Cyber-Test's ability to do so is dependent
upon many variables including its ability to successfully attract and retain
technicians that are capable of performing repair on all brands and models of
office equipment and computer peripherals at prices which remain competitive.
COMPANY HISTORY
We were incorporated in Florida on April 30, 1998 under the name Media Forum
International, Inc. ("Media Forum"). We were inactive from April 1998 to June
1998, except for the issuance of founders' shares during such time period. On
April 7, 1999, Advanced Communications Technologies, Inc., a Nevada corporation
("Advanced Communications (Nevada)") merged with and into us. Pursuant to this
merger, the shareholders of Advanced Communications (Nevada) (of which Mr. Roger
May, our former Chief Executive Officer and Chairman of the Board of Directors
until November 30, 2001, was the principal shareholder) received 90% of our
outstanding common stock and we received all of Advanced Communications
(Nevada)'s assets. These assets included all of the North and South American
rights to market and distribute SpectruCell, a wireless software-defined radio
("SDR")-based communications platform that is being developed to offer mobile
communications network providers the flexibility of processing and transmitting
multiple wireless communications signals through one base station. We are not
aware of any formal oral or written agreement documenting the transfer of the
rights of Advanced Communications (Nevada) in SpectruCell to the Company at the
time of the merger except for the Company's Proxy Statement prepared for a
shareholders meeting held on March 25, 1999 (the "Proxy Statement"). Proposal #6
of the Proxy Statement stated that Advanced Communications (Nevada) would merge
all of its assets into the Company, which included all of the rights to a
product being developed called SpectruCell. Mr. May and his related entities,
including Global Communications Technology Pty Ltd, of which Mr. May was the
sold shareholder, as majority owners of Advanced Communications (Nevada),
received approximately 42,000,000 shares of our common stock under the share
exchange. We were the surviving entity of the merger, and we subsequently
changed our name from Media Forum to Advanced Communications Technologies, Inc.
Upon completion of the merger, we changed our trading symbol to "ADVC." As a
result of the merger, Advanced Communications (Nevada) ceased to exist as a
separate entity.
4
On July 20, 1999, we formed Advanced Global Communications, Inc. ("AGC"), a
Florida corporation. AGC was formed to develop and operate our international
telecommunications network from the United States to Pakistan and India, as well
as to acquire other switching and telecommunications companies. The network was
established in 2000 and operated until 2001, when the regulatory climate in
Pakistan and India made it legally and economically impractical to operate.
During the fiscal year ended June 30, 2001, we ceased operating AGC's
international telecommunications network and wrote-off our entire investment in
various telephone equipment and network costs. AGC still exists as a separate
entity, but has been inactive since July 1, 2001.
On January 31, 2000, we acquired Smart Investments.com, Inc. through a stock
exchange with Smart Investments' sole shareholder. Immediately upon completion
of that acquisition, we elected successor issuer status in accordance with Rule
12g-3 promulgated under the Securities Exchange Act of 1934, as amended, and
consequently became a "reporting company" under Securities Exchange Act of 1934,
as amended.
On April 5, 2000, we entered into a Stock Purchase Agreement with Advanced
Communications Technologies, Pty. Ltd (Australia) ("Advanced Communications
(Australia)") to acquire a 20% interest in Advanced Communications (Australia)
for $19,350,000. The majority owner of Advanced Communications (Australia) was
Mr. May. In consideration for our purchase of the stock, we issued (i) 5,000,000
shares of our common stock having a value of $11,850,000 and (ii) a $7,500,000
unsecured non-interest bearing note payable in installments. The note payable
was payable in three equal monthly installments commencing May 31, 2000. Under
the terms of the April 2000 Stock Purchase Agreement, the monthly installment
deadline was extended indefinitely, without interest, to allow us to raise the
cash portion of the purchase price through the sale of securities. Upon raising
such funds, we were obligated to repay Advanced Communications (Australia)'s
note payable after deducting for reserves needed to fund our current operations,
our working capital and the development and expansion of our operations and the
operations of our subsidiaries, as determined by our board of directors. On
November 11, 2002, Advanced Communications (Australia) issued a Notice of
Termination to the Company which stated that the April 2000 Stock Purchase
Agreement was terminated immediately due to the Company's insolvency. We believe
that we have no further obligation to pay the unsecured note payable because the
Stock Purchase Agreement was unilaterally terminated by Advanced Communications
(Australia). On February 5, 2004, we filed suit in Superior Court, Orange
County, California against Advanced Communications (Australia), Roger May,
Global Communications Technologies Limited and Global Communications
Technologies Pty Ltd to recover damages incurred as a result of wrongful actions
by such defendants against us and to clarify the status of our obligations to
such defendants under various agreements and other arrangements, from which we
believe we have been relieved as a result of such wrongful actions. In May and
August 2004, the court issued an entry of default judgment in our favor and
against all of the above defendants. On October 22, 2004, the court held a
hearing for final determination of the above action. The court has not yet
issued its final determination based on that hearing.
In November 2000, we formed Advanced Network Technologies (USA), Inc., a
Delaware corporation ("Advanced Network USA"), owned 70% by us and 30% by
Advanced Network Technologies Pty. Ltd. It was our intention to have Advanced
Network USA acquire wireless network infrastructure in North and South America
to help showcase SpectruCell within a working network environment. To date, no
acquisitions have been made. Advanced Network USA, Inc. is presently inactive
and had no revenues or expenses for the fiscal years ended June 30, 2004 or
2003.
In 2002, we closed operations relating to SpectruCell, significantly reduced our
expenses, and shifted to a holding company structure, as it became uncertain
whether SpectruCell's development would ever be completed and brought to market
in the U.S. On December 17, 2003, we formed SpectruCell, Inc., a wholly-owned
Delaware subsidiary, and transferred all of our rights in the SpectruCell
technology to this subsidiary. SpectruCell, Inc. is presently inactive.
RECENT ACQUISITIONS
o CYBER-TEST, INC.
On April 13, 2004, we formed Encompass Group Affiliates, Inc. ("Encompass"), our
wholly-owned subsidiary, in the State of Delaware for the purpose of becoming
our principal operating unit. On June 3, 2004, a wholly-owned and newly formed
Delaware subsidiary of Encompass, Cyber-Test, Inc. ("Cyber-Test") acquired the
business and assets of Cyber-Test, Inc., a Florida-based, electronic equipment
repair company ("Cyber-Test Florida"), pursuant to the terms of an Asset
Purchase Agreement, dated May 27, 2004, by and among Cyber-Test Florida,
Cyber-Test and the shareholders of Cyber-Test Florida (the "Asset Purchase
Agreement"). Upon consummation of the acquisition, Cyber-Test became the core
operating business of Encompass with 85 employees and annual sales of
approximately $6,000,000. This acquisition is the Company's first step in
expanding the businesses of the Company's subsidiaries into vertically
integrated technology and service businesses. Under the terms of the Asset
Purchase Agreement, Cyber-Test acquired all of the operating assets, tangible
and intangible property, rights and licenses, good-will and business of
Cyber-Test Florida, for a total purchase price of $3,498,469 consisting of
$3,000,000 in cash, and a $498,469 three-year 6% unsecured installment note. The
Company also incurred $234,108 of capitalized transaction costs inclusive of
$125,000 of broker fees for a total acquisition cost of $3,732,577. In addition,
under the terms of the Asset Purchase Agreement, the Company has agreed to
contingently increase the purchase price by $500,000 by agreeing to issue to the
sellers, 50,000,000 shares of restricted common stock priced at $.01 per share,
to be earned on a pro rata basis over the next three years based on Cyber-Test
meeting certain revenue and earnings milestones and if certain events of
forfeiture do not occur (the "Contingent Stock Consideration"). Milestones means
the following revenue and EBITDA (earnings before income tax, depreciation and
amortization) goals of Cyber-Test for the applicable year:
5
FISCAL YEAR END REVENUES EBITDA
- --------------------------------------------------------------------------------
June 30, 2005 $ 6,600,000 $ 500,000
June 30, 2006 $ 8,600,000 $ 860,000
June 30, 2007 $11,600,000 $1,400,000
The Contingent Stock Consideration is subject to forfeiture in its entirety, at
any time, if Lisa Welton, the Chief Executive Officer of Cyber-Test, is
terminated for cause, or resigns from the Company. prior to June 30, 2007.
The Company accounted for this acquisition using the purchase method of
accounting in accordance with the provisions of SFAS 141. and, accordingly, the
operating results have been included in the Company's consolidated results of
operations from the date of acquisition. The Company acquired net tangible
assets valued at $1,286,985. The excess of the consideration given over the fair
value of net assets acquired has been recorded as goodwill of $2,445,592. The
Company will account for the purchased goodwill in accordance with the
provisions of SFAS 142. The future liability, if any, associated with any
Contingent Stock Consideration issuable in conjunction with this acquisition
based on the achievement of certain revenue and earnings results over a
three-year period will be recorded as additional goodwill in fiscal 2007 after
the event of forfeiture (Ms. Welton's continued employment with us for a period
of three years after consummation of the acquisition) lapses.
o HY-TECH TECHNOLOGY GROUP, INC. INTANGIBLE LICENSES
In June 2004, Encompass acquired certain licensing rights from Innova Holdings,
Inc. (formerly known as Hy-Tech Technology Group, Inc. ("Hy-Tech")), a custom
systems builder and authorized distributor of computer components and
peripherals. The licensing rights include the exclusive, worldwide,
royalty-free, perpetual, non-terminable and irrevocable right to Hy-Tech's
customer base, corporate web addresses, and the entitlement to hire Hy-Tech's
former Chief Executive Officer, Mr. Martin Nielson, as Chief Executive Officer
of Encompass. The consideration paid for these rights consists solely of the
retirement of certain of Hy-Tech's Senior Secured Convertible Debentures by the
payment in cash of $203,300 and the issuance of the Company's Series B
Convertible Preferred Stock with a liquidation preference of $300,000.
EMPLOYEES
As of October 1, 2004 the Company had 92 full-time and 3 part-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
On August 1, 2002, the Company relocated its principal executive office from
California to 420 Lexington Avenue, New York, New York 10170 within the office
facility of Danson Partners, LLC, a privately-owned company that employs our
President and Chief Financial Officer. No rent or facility usage fee is charged
to the Company by Danson Partners, LLC. As of November 25, 2003, the Company's
lease obligation of $250,734 consisting of $141,100 of unpaid past rent and
$109,634 of future rent for the California office was terminated and settled for
$35,000.
6
The Company's core operating business, Cyber-Test is located at 448 Commerce
Way, Longwood, Florida 32750. This 29,000 square foot office/warehouse facility
has a one-year triple net lease that commenced on August 1, 2004 and ends on
July 31, 2005, at a monthly lease obligation of $13,500. The lease is renewable
on a year-to-year basis by providing written notice 60 days prior to the
expiration of the then current term.
ITEM 3. LEGAL PROCEEDINGS
During the fiscal year ended June 30, 2004, the Company settled a majority of
its accounts payable and accrued liabilities at a substantial discount, the
financial results of which have been recorded in the Company's June 30, 2004
consolidated financial statements. The Company has been, and may in the future
be, involved as a party to various legal proceedings, which are incidental to
the ordinary course of business. Management regularly analyzes current
information and, as necessary, provides accruals for probable liabilities on the
eventual disposition of these matters. In the opinion of management as of June
30, 2004, there were no threatened or pending legal matters that would have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
On February 5, 2004, the Company filed suit in California against Advanced
Communications (Australia), Roger May, Global Communications Technologies
Limited and Global Communications Technologies Pty Ltd to recover damages
incurred as a result of wrongful actions of such defendants against the Company
and to clarify the status of the Company's obligations to such defendants under
various agreements and other arrangements, from which the Company believes it
has been relieved as a result of such wrongful actions. In May and August 2004,
the court issued an entry of default judgment for the Company and against all of
the above defendants. On October 22, 2004, the court held a hearing for final
determination of the above action. The court has not yet issued its final
determination based on that hearing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "ADVC." As of October 15, 2004 there were
2,004,247,731 common shares issued and outstanding and approximately 505 holders
of record. We believe that the number of beneficial owners is substantially
greater than the number of record holders because a large portion of our common
stock is held in "broker" or "street names".
The following table sets forth, for the fiscal periods indicated, the bid price
range of our common stock, as reported by Bloomberg Financial Markets:
- --------------------------------------------------------------------------------
HIGH BID LOW BID
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2003
- --------------------------------------------------------------------------------
Quarter Ended September 30, 2002 $ .080 $ .005
Quarter Ended December 31, 2002 .015 .004
Quarter Ended March 31, 2003 .010 .002
Quarter Ended June 30, 2003 .011 .006
- --------------------------------------------------------------------------------
2004
- --------------------------------------------------------------------------------
Quarter Ended September 30, 2003 $ .007 $.00163
Quarter Ended December 31, 2003 .00363 .00169
Quarter Ended March 31, 2004 .0025 .00131
Quarter Ended June 30, 2004 .0015 .00081
Such market quotations reflect inter-dealer prices retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.
We did not pay any dividends during fiscal 2004 and have never paid any
dividends on our capital stock. We currently expect that we will retain future
earnings for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. Any decision on
the future payment of dividends will depend on our earnings and financial
position at that time and such other factors as our Board of Directors deems
relevant.
RECENT SALES OF UNREGISTERED SECURITIES
All issuances of restricted stock have been valued based on the closing price of
the stock as of the date the Company's Board of Directors approved the grant of
shares or under the terms of our Convertible Debentures.
In order to finance our acquisition of the assets of Cyber-Test Florida and to
pay the cash portion of our acquisition of certain licensing rights from Innova
Holdings, Inc. (formerly known as Hy-Tech Technology, Inc. ("Hy-Tech")) and its
subsidiary Hy-Tech Computer Systems, Inc., on May 28, 2004, we issued 4,200
shares of our non-voting Series A Convertible Preferred Stock, $0.01 par value
per share (the "Series A Preferred Stock"), to Cornell Capital Partners, L.P.
The Series A Preferred Stock ranks senior to our common stock and all other
series of our preferred stock. The Series A Preferred Stock is entitled to
receive dividends and distributions on a pro rata basis, prior to any of our
other outstanding securities, when and if declared by the Board of Directors of
the Company. Upon our liquidation, dissolution or winding up, holders of Series
A Preferred Stock would receive $1,000 per share (the "Series A Liquidation
Amount") of Series A Preferred Stock. Holders of the Series A Preferred Stock
have the right, at any time and from time to time after May 21, 2005, to convert
the Series A Preferred Stock into shares of our common stock, at a conversion
price equal to either (a) $0.01 per share (which shall be adjusted in the event
of a subdivision, or combination of shares), or (b) 100.0% of the average of the
three (3) lowest closing bid prices of our common stock for the ten (10) trading
days immediately preceding the date of conversion, whichever is lower. The
Series A Preferred Stock shall automatically convert into shares of our common
stock, upon the consummation of an acquisition of our stock by, or the merger,
consolidation, or reorganization of us into or with, another entity through one
or a series of related transactions, or the sale, transfer, or lease of all or
substantially all of our assets to another entity. Upon ten (10) days' prior
written notice, we have the right to redeem each outstanding share of Series A
Preferred Stock at an amount equal to 120% of the Series A Liquidation Amount.
8
In connection with the acquisition of certain licensing rights from Hy-Tech and
its subsidiary Hy-Tech Computer Systems, Inc., on June 27, 2004, we issued 300
shares of our non-voting Series B Convertible Preferred Stock, $0.01 par value
per share (the "Series B Preferred Stock"), plus $203,300 in cash, to certain
holders of Hy-Tech Convertible Debentures in exchange for our assumption, and
cancellation, of all amounts due and owing, or $503,300, by Hy-Tech under the
Convertible Debentures. The Series B Preferred Stock ranks junior to the Series
A Preferred Stock and senior to our common stock and all other series of our
preferred stock, other than the Series A Preferred Stock. Subject to the rights
of the Series A Preferred Stock, the Series B Preferred Stock is entitled to
receive dividends and distributions on a pro rata basis, after the Series A
Preferred Stock, but prior to any of our other outstanding securities, when and
if declared by the Board of Directors of the Company. Upon a liquidation,
dissolution or winding up, subject to the rights of the Series A Preferred
Stock, holders of Series B Preferred Stock would receive $1,000 per share (the
"Series B Liquidation Amount") of Series B Preferred Stock. Holders of the
Series B Preferred Stock have the right, at any time and from time to time after
June 23, 2005, to convert the Series B Preferred Stock into shares of our common
stock, at a conversion price equal to either (a) $0.01 per share (which shall be
adjusted in the event of a subdivision, or combination of shares), or (b) 100.0%
of the average of the three (3) lowest closing bid prices of our common stock
for the ten (10) trading days immediately preceding the date of conversion,
whichever is lower. The Series A Preferred Stock shall automatically convert
into shares of our common stock, upon the consummation of an acquisition of our
stock by, or the merger, consolidation, or reorganization of us into or with,
another entity through one or a series of related transactions, or the sale,
transfer, or lease of all or substantially all of our assets to another entity.
Upon ten (10) days' prior written notice, we have the right to redeem each
outstanding share of Series B Preferred Stock at an amount equal to 120% of the
Series B Liquidation Amount.
On June 30, 2004, our Board of Directors approved the separate issuance of
10,000,000 and 5,000,000 shares of our restricted common stock, or 15,000,000
shares in the aggregate, having a value of $10,000 and $5,000, respectively, or
$15,000 in the aggregate, to Mr. Martin Nielson and Jackson Steinem,
respectively, at $.001 per share, for consulting services rendered to the
Company in connection with the acquisition of Cyber-Test Florida.
On March 9, 2004, our Board of Directors approved the issuance of 10,000,000
shares of our restricted common stock having a value of $18,000 or $.0018 per
share, to DDInvestor.com, Inc. in full satisfaction and settlement of
outstanding indebtedness owed by us to them.
On January 8, 2004, our Board of Directors approved the issuance of 1,000,000
shares of restricted common stock to Mr. Steve Black for professional services
rendered to the Company. The stock was valued at $.00281 per share or $2,810,
the closing bid price of the stock on the date approved by our Board of
Directors.
On January 5, 2004, January 7, 2004, January 15, 2004, January 22, 2004 and
February 2, 2004, holders of our outstanding 5% convertible debentures elected
to convert $25,000, $50,000, $75,000, $75,000 and $103,861, respectively, or
$328,861 in the aggregate, of principal and accrued interest, at conversion
prices of $.001676, $.001776, $.002076, $.00238 and $.002314 per share, into
14,916,468, 28,153,153, 36,127,168, 31,512,605 and 44,883,751 shares of our
common stock, respectively, or 155,593,145 shares of common stock in the
aggregate.
On December 3, 2003 and December 17, 2003, our Board of Directors approved the
issuance of 8,142,857 shares of our restricted common stock, in the aggregate,
having a value of $17,000, or $.0020 per share, to various creditors in full
satisfaction of their claims against us.
On December 3, 2003, holders of our 5% Convertible Debentures elected to convert
$85,252 of principal and accrued interest, at a conversion price of $.001716 per
share, into 49,680,653 shares of our common stock.
On November 3, 2003 and November 10, 2003, holders of our 5% Convertible
Debentures elected to convert $25,000 and $156,000, respectively, or $181,000,
in the aggregate, of principal and accrued interest, at conversion prices of
$.00189 and $.0016, respectively, per share, into 13,227,513 and 97,500,000
shares of our common stock, respectively, or 110,727,513 shares of common stock
in the aggregate.
9
On October 31, 2003, our Board of Directors approved the issuance of 39,583,333
shares, in the aggregate, of our restricted common stock, having a value of
$95,000 in the aggregate, to various officers and directors in partial
satisfaction of professional services previously rendered to us. The shares were
valued based on the closing price of our common stock immediately prior to its
issuance, or $.0024 per share. The shares were issued on November 4, 2003. On
that same date, our Board of Directors also approved the issuance of 8,833,333
shares of restricted common stock to various creditors in full satisfaction of
their claims against us. Those shares of common stock were also valued at
$21,200, or $.0024 per share.
On October 7, 2003, October 20, 2003 and October 21, 2003, holders of our 5%
Convertible Debentures elected to convert $188,746, $201,447 and $50,000,
respectively, or $440,193, in the aggregate, at conversion prices of $.00207,
$.00211 and $.00218 per share, respectively, of principal and interest into
91,181,642, 95,472,510 and 22,935,780 shares of our common stock, respectively,
or 209,589,932 shares of common stock in the aggregate.
On September 24, 2003, our Board of Directors approved the issuance of
85,714,285 shares, in the aggregate, of our restricted common stock, having a
value of $240,000 in the aggregate, to various officers and directors, in
partial satisfaction of professional services previously rendered to us. The
shares were valued based on the closing price of the stock immediately prior to
its issuance, or $.0028 per share. The shares were issued on October 3, 2003.
On September 4, 2003, holders of our 5% Convertible Debentures elected to
convert $82,375 of principal and accrued interest, at a conversion price of
$.00138 per share, into 59,692,027 shares of our common stock.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Rule 506 promulgated
under the Securities Act of 1933 (the "1933 Act"). These offerings may have
qualified for other exemptions as well. In each instance, the purchaser had
access to sufficient information regarding the Company so as to make an informed
investment decision. More specifically, the Company had a reasonable basis to
believe that each purchaser was an "accredited investor" as defined in
Regulation D under the 1933 Act, which information was based on representations
received from such investors, and otherwise had the requisite sophistication to
make an investment in the Company's securities.
We did not make any purchases of equity securities during the fiscal year ended
June 30, 2004.
10
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED JUNE 30,
------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Revenue $ 605,468 $ -- $ --
Cost of Revenue 400,265 -- --
Gross Profit 205,203 -- --
Operating Expenses 788,261 1,216,776 2,314,570
Operating (Loss) (583,058) (1,216,776) (2,314,570)
Income (Loss) from Goodwill Impairment -- -- (1,700,000)
Other Income (Expense) 1,058,878 (652,255) (318,123)
Income (Loss) Before Income Taxes 475,820 (1,869,031) (4,332,693)
Provision for Income Taxes -- -- --
Net Income (Loss) 475,820 (1,869,031) (4,332,693)
Net Income (Loss) Per Share:
Basic and Diluted $ .00 $ (.01) $ (.04)
Weighted Average Shares:
Basic and Dilutive 1,084,885,437 152,960,499 100,576,484
Cash $ 1,193,170 $ 22,527 $ 11,093
Working Capital (Deficiency) (2,197,667) (4,044,795) (3,252,643)
Total Assets 7,996,339 70,748 114,852
Total Liabilities 6,571,877 6,030,922 5,054,902
Stockholders' Equity (Deficiency) 1,424,462 (5,960,174) (4,940,050)
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes and the other financial information appearing
elsewhere in this report. In addition to historical information, the following
discussion and other parts of this Annual Report contain forward-looking
information that involves risks and uncertainties.
We are a New York-based holding company that, through our wholly-owned
subsidiaries, specializes in the repair of computer peripheral products and
other electronic equipment, and seek to make strategic minority investments in
privately held companies in diverse industries.
We intend to pursue the acquisition of, and investment in, technology and/or
brand differentiated companies with significant growth-potential. We seek to
make the process of growth, through both organic and inorganic means, a core
competency of each company which we acquire or in which we invest.
We have three principal means of diversifying our business, each of which is
designed to give shareholders a strong value driver. Encompass, our principal
operating subsidiary, intends to acquire synergistic companies in the
technologies and services arena. Hudson Street is a partner in the management
firm of an institutional investment company. The Company itself also seeks to
make minority investments in technology specific or highly differentiated
companies with significant growth-potential.
YEAR ENDED JUNE 30, 2004 COMPARED TO YEAR ENDED JUNE 30, 2003
OVERALL RESULTS OF OPERATIONS
For the fiscal year ended June 30, 2004, our financial results reflect an
overall profit of $475,820 or $.00 per share which was a substantial increase of
$2,344,851 from the net loss of $(1,869,031) or $(.012) per share for the fiscal
year ended June 30, 2003. This substantial turnaround in net earnings is
attributable to management's successful efforts during the year in restructuring
and settling substantially all of our obligations, significantly reducing our
ongoing operating and interest costs and generating a source of ongoing earnings
and cash flow through the purchase of an interest in a profitable financial
services business and the purchase of the Cyber-Test Florida business as our
core operating business. Of the $2,344,851 increase in net income, $780,938 is a
result of us negotiating and settling a majority of our accounts payable and
other liabilities at a substantial discount and generating forgiveness of debt
income along with a $918,711 reduction in interest expense, lawsuit settlements
and operating expenses. An additional $439,999 of net income was realized
through our investment in the Yorkville Advisors investment partnership.
11
REVENUE
Revenue for the fiscal year ended June 30, 2004 was $605,468 and was entirely
attributable to Cyber-Test's operations for the period from June 3 through June
30, 2004. We did not recognize any revenue for fiscal year ended June 30, 2003.
All revenue was generated from the repair and service of office equipment and
computer peripheral products, extended warranty sales and the sale of computer
parts and accessories.
OPERATING EXPENSES
Total operating expenses for the fiscal years ended June 30, 2004 and June 30,
2003 were $788,261 and $1,216,776, respectively, representing a 35% decrease for
fiscal year ended June 30, 2004 as compared to fiscal year ended June 30, 2003.
Of these amounts $292,633 and $648,328 were paid during the fiscal year ended
June 30, 2004 and fiscal year ended June 30, 2003, respectively, for
professional services rendered, of which $2,810 and $5,000 during the fiscal
years 2004 and 2003, respectively, was paid through the issuance of restricted
common stock and represents a non-cash expense. Professional and consulting fees
for the fiscal year ended June 30, 2004 decreased by $355,695 or 55% versus the
prior fiscal year ended due to the overall reduction in legal fees and other
expenses associated with our settlement of all of our remaining lawsuits during
fiscal year ended June 30, 2004, including our litigation with Roger May and
Advanced Communications (Australia).
Depreciation and amortization expense for the fiscal year ended June 30, 2004
decreased by $196,709 to $229,103 from $425,812 for the fiscal year ended June
30, 2003 due to deferred commitment fees and financing costs being fully
amortized in fiscal year 2004.
Other general and administrative expenses amounted to $266,525 for the fiscal
year ended June 30, 2004, which is a $138,163 increase from the prior fiscal
year due principally to the addition of the Cyber-Test operating business
overhead in June 2004. Such overhead expenses include the one month overhead
operation and cost associated with employing approximately 85 employees and
operating a 29,000 square foot office and warehouse facility.
OTHER INCOME (EXPENSES)
During the fiscal year ended June 30, 2004, we realized $1,058,878 of net other
income due to the favorable results of our investment in Yorkville Advisors,
which generated $439,999 of net income and $780,938 of forgiveness of
indebtedness income generated from the successful settlement, at a discount, of
certain of our debts. These items were offset, in part by, net interest expense
of $162,059 attributable to $69,032 of accrued interest on our 10% Secured
Convertible Debentures, the remaining 5% Convertible Debentures and the 8% Note
Payable and $93,752 of debt discount expense treated as interest attributable to
the beneficial conversion feature of our 10% Secured Convertible Debentures, net
of $725 of interest income.
Interest expense incurred for the fiscal year ended June 30, 2003 was $428,761
and was principally attributable to $119,721 of discount amortization relating
to the beneficial conversion feature of our 10% Secured Convertible Debentures,
$283,139 of accrued and penalty interest on the 5% Convertible Debentures paid
in January 2004, $8,829 of interest on the 8% Note Payable and $12,522 of
interest on the 10% Secured Convertible Debentures. Overall interest expense
decreased from $428,761 in fiscal 2003 to $162,059 in fiscal 2004 for a $266,702
reduction in interest expense due to the lower levels of interest bearing debt
in fiscal 2004 compared to fiscal 2003. During the fiscal year ended June 30,
2003, we settled our remaining lawsuits and recorded $223,494 of settlement
expense. No such expense was incurred during the fiscal year ended June 30,
2004.
12
SIGNIFICANT ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us. In addition, Financial
Reporting Release No. 61 was recently released by the Securities and Exchange
Commission to require all companies to include a discussion to address, among
other things, liquidity, off-balance sheet arrangements, contractual obligations
and commercial commitments.
USE OF ESTIMATES
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with the
Company's warranties. If the actual value of the Company's inventories differs
from these estimates, the Company's operating results could be adversely
impacted. The actual results with regard to warranty expenditures could also
have an adverse impact on the Company if the actual rate of repair failure or
the cost to re-repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
INVENTORY
Inventory consists primarily of repair parts, consumable supplies for resale and
used machines that are held for repair and/or resale, and are stated at the
lower of weighted average cost or market. The weighted average cost of inventory
approximates the first-in, first-out ("FIFO") method. Management performs
periodic assessments to determine the existence of obsolete, slow-moving and
nonsalable inventory and records necessary provisions to reduce such inventory
to net realizable value.
PROPERTY AND EQUIPMENT
Property, plant and equipment are stated at cost. Assets are depreciated using
the straight-line method for both financial statement and tax purposes based on
the following estimated useful lives:
Leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Maintenance and repairs are charged to expense when incurred.
WARRANTY RESERVE
Refurbished peripheral computer equipment sold to customers and the repair of
customer owned equipment is guaranteed for a period of ninety days and the
repair of circuit boards is guaranteed for a period of 12 months. Any defective
refurbished equipment is replaced free of charge and customer owned equipment is
repaired without charge during the warranty period. Cyber-Test provides a
reserve for warranty repairs based on historical failure rates and the estimated
cost to repair.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. For those invoices not specifically reviewed, provisions
are provided at differing rates, based upon the age of the receivable. In
determining these percentages, the Company analyzes its historical collection
experience and current economic trends. If the historical data the Company uses
to calculate the allowance provided for doubtful accounts does not reflect the
future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected. During the fiscal year ended June 30, 2004, accounts in the
amount of $8,914 were determined to be uncollectible and were charged to the
allowance for doubtful accounts. As of June 30, 2004, accounts receivable from
two major customers aggregated $253,847 or 63% of accounts receivable.
13
LONG-LIVED ASSETS
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If such review indicates that the asset is impaired,
when the carrying amount of an asset exceeds the sum of its expected future cash
flows, on an undiscounted basis, the asset's carrying amount is written down to
fair value. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
EXCESS OF COST OVER NET ASSETS ACQUIRED
In accordance with SFAS No. 141, the Company allocates the purchase price of its
acquisitions to the tangible assets, liabilities and intangible assets acquired
based on their estimated fair values. The excess purchase price over those fair
values is recorded as "Excess of Cost Over Net Assets Acquired". The fair value
assigned to intangible assets acquired is either based on valuations prepared by
independent third party appraisal firms using estimates and assumptions provided
by management or negotiated at arms-length between the Company and the seller of
the acquired assets. In accordance with SFAS No. 142, goodwill and purchase
intangibles with indefinite lives acquired after June 30, 2001, are not
amortized but will be reviewed periodically for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method, that could share in the
earnings of an entity. During the year ended June 30, 2004, shares of common
stock that could have been issued upon conversion of convertible debt were
excluded from the calculation of diluted earnings (loss) per share as their
effect would have been anti-dilutive.
BUSINESS SEGMENTS
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". During
the fiscal year ended June 30, 2004, the Company operated in one segment and
therefore segment information is not presented.
Management has determined that it is not meaningful to provide geographic
segment disclosures for revenues and long-lived assets because the Company
performs services for and generates revenue from customers throughout the U.S.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of refurbished computer equipment
and related products upon delivery of goods to a common carrier for delivery to
the customer. Revenue for the repair of customer owned equipment is recognized
upon completion of the repair. The Company assumes the risk of loss due to
damage or loss of products during shipment. The Company is reimbursed by the
common carriers for shipping damage and lost products. The Company sells
extended warranty and product maintenance contracts. Revenue from these
contracts is deferred and recognized as income on a straight-line basis over the
life of the contract, which typically is for a period of one year. Service
warranty and product maintenance revenue represented less than 5% of the
Company's total revenue for the period June 2, 2004 through June 30, 2004, our
period of ownership.
INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
The Company accounts for its investment in an unconsolidated partnership under
the equity method of accounting, as the Company does not have any management
control over this entity. This investment is recorded initially at cost and
subsequently adjusted for equity in net earnings and cash distributions.
14
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the U.S. Securities and Exchange Commission's Office of the Chief
Accountant and the Division of Corporate Finance released Staff Accounting
bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". This bulletin contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB105 requires the disclosure of the accounting
policy for loan commitments, including methods and assumptions used to estimate
the fair value of loan commitments, and any associated hedging strategies. SAB
105 is effective for derivative instruments entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate. The
Company has not yet completed its evaluation of SAB 105, but does not anticipate
a material impact on its financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our acquisitions and investments principally with short-term
borrowings, which were provided to us by Cornell Capital Partners, L.P., a
private limited partnership ("Cornell Capital"), and cash received in exchange
for the issuance of 4,200 shares of our Series A Preferred Stock to Cornell
Capital. We have funded our ongoing operations through cash distributions
received from (i) our investment in Yorkville Advisors, an investment management
partnership, and (ii) working capital generated by Cyber-Test, our core
operating business. Our cash and cash equivalents totaled $1,193,170 at June 30,
2004.
On July 16, 2003, we entered into an Equity Line of Credit Agreement with
Cornell Capital Partners, L.P., a private limited partnership. Pursuant to the
Equity Line of Credit, the Company may, at its discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $30,000,000. For each share of common stock purchased under the Equity Line
of Credit, Cornell Capital Partners will pay 91% of the lowest closing bid price
of the Company's common stock on the Over-the-Counter Bulletin Board or other
principal market on which the common stock is traded for the five (5) days
immediately following the notice date. The effectiveness of the sale of the
shares under the Equity Line of Credit is conditioned upon us registering the
shares of common stock with the Securities and Exchange Commission. In
accordance with the terms of the Equity Line of Credit with Cornell Capital
Partners, Cornell is not permitted to own more than 9.99% of the outstanding
common stock at any one time; however Cornell is permitted to waive such
restriction, which waiver is effective on the 61st day after delivery of the
waiver to the Company.
During the fiscal year ended June 30, 2004, we made advances under the Equity
Line of Credit in the aggregate amount of $725,000 in exchange for issuing
361,956,145 shares of common stock to Cornell Capital Partners. The Company
netted $684,125 from these advances after deducting escrow agent expenses and
other direct costs totaling $40,875 that have been recorded as a reduction of
common stock as of June 30, 2004. These advances were principally used to
provide a source of working capital to sustain our limited operations and
enabled us to restructure and settle a majority of our outstanding obligations.
During the fiscal year ended June 30, 2004, Hudson Street received $335,000 of
partnership cash distributions from Yorkville Advisors. We believe that our
existing sources of liquidity including cash resources and cash provided by
operating activities, supplemented as necessary with funds available under our
Equity Line of Credit arrangement, and distributions from Hudson Street's
investment will provide sufficient resources to meet our present and future
working capital and cash requirements for at least the next 12 months.
The Company had total liabilities of $6,571,877 as of June 30, 2004. Included in
this total are contractual obligations of $3,724,975. These contractual
obligations, along with the dates on which such payments are due, are described
below:
15
PAYMENTS DUE BY PERIOD (FROM JUNE 30, 2004)
-----------------------------------------------------------
1 2-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR OR LESS YEARS YEARS YEARS
- ----------------------- ----------- ------------ ---------- -------- --------
Notes Payable and Interest Thereon $3,004,254* $2,606,548 $ 397,706 $ -- $ --
Convertible Debentures and Interest Thereon 181,744 181,744 -- -- --
Accounts Payable and Accrued Expenses 194,540 194,540 -- -- --
Other Current Liabilities 344,437 344,437 -- -- --
Total Contractual Obligations $3,724,975 $3,327,269 $ 397,706 $ -- $ --
* Excludes $1,791,166 due to Advanced Communications (Australia) under the
Stock Purchase Agreement dated April 5, 2000. The Company believes that
this obligation is not enforceable as a result of Advanced Communications
(Australia)'s improper unilateral revocation of the Stock Purchase
Agreement and other wrongful acts of Advanced Communications (Australia),
Roger May and related parties. Also excludes $1,055,736 due to Roger May
and/or Global Communications Technologies Limited and/or Global
Communications Technologies Pty Ltd for monies provided to the Company.
The Company believes it is not obligated to pay these amounts as a result
of wrongful acts of such parties against the Company. On February 5, 2004,
the Company filed suit in California seeking a judgment against Advanced
Communications (Australia), Roger May, Global Communications Technologies
Limited and Global Communications Technologies Pty Ltd to recover damages
related to their wrongful acts against the Company. The Company's damages
claims exceed the $2,846,902 allegedly due such defendants. The Company
also seeks in the action to have its obligations under the Stock Purchase
Agreement and other arrangements clarified as to such defendants. In May
and August 2004, the court issued an entry of default judgment in favor of
the Company and against all of the above defendants. On October 22, 2004,
the court held a hearing for final determination of the above action. The
court has not yet issued its final determination based on that hearing.
During the fiscal year ended June 30, 2004, the Company reduced its contractual
obligations by approximately $2,250,000 through a combination of debenture
holders' conversions, debt forgiveness, settlements with creditors and the
issuance of shares of its common stock. At June 30, 2004, we had a working
capital deficiency of $2,197,667. In September and October 2004, the Company
repaid $375,000 of its short-term note payable to Cornell Capital Partners, L.P.
through the issuance of 172,881,526 shares of our common stock valued at
$100,000 and the payment of cash in the amount of $275,000.
Below is a discussion of our sources and uses of funds for the fiscal year ended
June 30, 2004:
NET CASH USED IN OPERATING ACTIVITIES
Net cash used in operating activities was $829,775 and $123,566 for the fiscal
years ended June 30, 2004 and June 30, 2003, respectively. The use of cash in
operating activities for the fiscal year ended June 30, 2004 was principally
from net income of $475,820 offset by a reduction in accounts payable in the
amount of $419,696, and an increase in debt forgiveness income offset by
non-cash charges for amortization and debt discount expense in the net aggregate
amount of $458,083. The use of cash in operating activities for the fiscal year
ended June 30, 2003 was principally the result of a net loss during the period
reduced by an increase in accounts payable and accrued interest in the amount of
$942,162 and by non-cash charges for depreciation and amortization, debt
discount expense, common stock issued in exchange for services and lawsuit
settlements in the aggregate amount of $773,577.
NET CASH USED IN INVESTING ACTIVITIES
No cash was provided from investing activities for the fiscal year ended June
30, 2003. Cash used in investing activities for the fiscal year ended June 30,
2004 was $5,176,376 and was attributable to the Company's investment in a
partnership for $2,670,000 reduced by $335,000 of cash distributions from this
partnership investment and our purchase of the Cyber-Test Florida business, net
of cash acquired, in the amount of $2,841,376.
NET CASH FROM FINANCING ACTIVITIES
Net cash of $7,176,794 from financing activities for the fiscal year ended June
30, 2004 was from net proceeds of $513,125 from the sale of shares of the
Company's common stock to Cornell Capital Partners, L.P., under the Company's
Equity Line of Credit facility, proceeds of $3,000,000 from the issuance of a
short-term promissory note to Cornell Capital Partners, L.P., and net proceeds
of $3,756,500 from the issuance of shares of the Company's Series A Convertible
Preferred Stock to Cornell Capital Partners, L.P., offset by the repayment of
short-term and installment debt in the amount of $92,831. Net cash of $135,000
from financing activities for the fiscal year ended June 30, 2003 was from the
10% Secured Convertible Debentures issued in November 2002 and the issuance of a
$35,000.00 short-term promissory note to Cornell Capital Partners, L.P.
16
CHANGE IN NET ASSETS
As of and through June 30, 2004, the Company experienced material changes to its
net assets from its prior fiscal year ended June 30, 2003. During the fiscal
year ended June 30, 2004, the Company purchased the business and operating
assets of Cyber-Test Florida and through its wholly-owned investment subsidiary,
Hudson Street, made a minority investment in the amount of $2,670,000 in
Yorkville Advisors, an investment partnership. As a result of the Cyber-Test
Florida acquisition, the Company acquired total assets of approximately $1.6
million, consisting principally of cash ($643,195), accounts receivable
($391,101), inventory ($350,480) and fixed assets ($166,516) and assumed
$313,091 of liabilities, which consisted principally of accounts payable and
accrued expenses. The Company also recorded goodwill in the amount of $2,445,592
associated with the Cyber-Test Florida acquisition. In addition, during this
period, the Company acquired the license rights to certain intangible assets of
Innova Holdings, Inc. (formerly known as Hy-Tech Technology Group, Inc.) and its
wholly-owned subsidiary Hy-Tech Computer Systems, Inc. for $503,300, and settled
approximately $2.2 million of liabilities for stock and cash resulting in
$780,938 of forgiveness of debt income. The net effect of these transactions on
the balance sheet was to increase our net assets by approximately $7.9 million.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
RISKS RELATED TO OUR BUSINESS
In addition to historical facts or statements of current condition, this Annual
Report on Form 10-KSB contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events.
The following discussion outlines certain factors that we think could cause our
actual outcomes and results to differ materially from our forward-looking
statements as well as impact our future overall performance. These factors are
in addition to those set forth elsewhere in this Annual Report on Form 10-KSB.
WE HAVE A HISTORY OF LOSSES, AND MAY INCUR ADDITIONAL LOSSES.
We are a holding company with a limited history of operations. We achieved
profitability for the first time in fiscal year 2004. While we have achieved
profitability, we cannot be sure that we will maintain revenue sufficient for us
to continue to remain profitable.
WE MAY NEED ADDITIONAL CAPITAL.
To pursue our objectives, we may need additional capital which may not be
available to us. This may delay our progress in achieving our goals.
We will require funds in excess of our existing cash resources:
o to seek out and find investment opportunities in high
growth-potential companies;
o to acquire the assets or stock of technology-related companies;
o to hire and retain highly skilled employees who understand, and can
implement, our business model; and
o to finance the growth of our current operations.
17
In the past, we have funded all of our growth through equity and debt
financings. We anticipate that our existing capital resources will enable us to
maintain currently planned operations through the next twelve (12) months.
However, this expectation is based on our current operating plan, which could
change as a result of many factors, and we may need additional funding sooner
than anticipated. Because our operating and capital resources may be
insufficient to meet future requirements, we may need to raise additional funds
in the near future to continue our business expansion plans.
It is possible that we will be unable to obtain additional funding as and when
we need it. If we are unable to obtain additional funding as and when needed, we
could be forced to delay the progress of our business expansion plans.
NEW EQUITY FINANCING COULD DILUTE CURRENT STOCKHOLDERS.
If we raise funds through equity financing to meet the needs discussed above, it
will have a dilutive effect on existing holders of our shares by reducing their
percentage ownership. The shares may be sold at a time when the market price is
low because we need the funds. This will dilute existing holders more than if
our stock price was higher. In addition, equity financings often involve shares
sold at a discount to the current market price.
THE LOSS OF ANY ONE OF CYBER-TEST'S KEY CUSTOMERS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
Cyber-Test relies heavily on the business of a few key customers. While all
these key customers are contractually committed to purchase parts or service
from Cyber-Test, these contracts are terminable within 60 to 90 days. If any one
(or all) of these key customers terminates its relationship with Cyber-Test, it
could have a material adverse effect on our business.
WE AND OUR SUBSIDIARIES OPERATE IN COMPETITIVE INDUSTRIES.
Cyber-Test's business is highly competitive. Cyber-Test competes with companies
that provide repair services for office equipment and computer peripheral
products, with companies that supply parts and consumables to end-users and
repair companies of such equipment and products, and with resellers of such
equipment and products.
Competition within the office equipment and computer peripheral products service
and repair industry is based on quality of service, depth of technical know-how,
price, availability of parts, speed and accuracy of delivery, and the ability to
tailor specific solutions to customer needs. Many of Cyber-Test's competitors
are larger in size and have greater financial and other resources, such as
Decision One, Depot America, Teleplan, DataTech America, and DEX. Cyber-Test
also competes with manufacturers and OEMs that do their own repair work, as well
as large distribution and logistics companies such as United Parcel Service and
Airborne Logistics.
Management believes Cyber-Test has a competitive advantage over many of its
competitors, but Cyber-Test's ability to maintain such competitive advantage is
dependent upon many variables including its ability to successfully attract and
retain technicians that are capable of performing repair on all brands and
models of office equipment and computer peripherals at prices which remain
competitive. We can provide no assurances that Cyber-Test will continue to have
the resources to successfully compete in the technology repair service industry.
OUR BUSINESS COULD SUFFER IF THERE IS A PROLONGED ECONOMIC DOWNTURN.
We derive a substantial amount of our net revenue from the repair and resale by
Cyber-Test of office equipment and computer peripheral products. Revenue from
the repair and resale of such equipment does not generally fluctuate widely with
economic cycles. However, a prolonged national or regional economic recession
could have a material adverse effect on our business.
We also derive a substantial amount of our net revenue from cash distributions
received by us from our investments in companies operating in diverse
industries. A prolonged economic downturn could hinder the ability of these
companies to provide us with a substantial, or any, return on our investments.
18
FLUCTUATIONS IN THE PRICE OR AVAILABILITY OF OFFICE EQUIPMENT PARTS AND COMPUTER
PERIPHERAL PRODUCTS COULD MATERIALLY ADVERSELY AFFECT US.
The price of office equipment parts and computer peripheral products may
fluctuate significantly in the future. Changes in the supply of or demand for
such parts and products could affect delivery times and prices. We cannot
provide any assurances that Cyber-Test will continue to have access to such
parts and products in the necessary amounts or at reasonable prices or that any
increases in the cost of such parts and products will not have a material
adverse effect on our business.
WE COULD BE MATERIALLY AFFECTED BY TURNOVER AMONG OUR SERVICE REPRESENTATIVES.
Cyber-Test depends on its ability to identify, hire, train, and retain qualified
service personnel as well as a management team to oversee the services that
Cyber-test provides. A loss of a significant number of these experienced
personnel would likely result in reduced revenues for Cyber-Test and could
materially affect our business. Cyber-test's ability to attract and retain
qualified service representatives depends on numerous factors, including factors
that Cyber-Test cannot control, such as conditions in the local employment
markets in which it operates. We cannot provide and assurances that Cyber-Test
will be able to hire or retain a sufficient number of service representatives to
achieve its financial objectives.
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH.
OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on our indebtedness, and to fund planned capital
expenditures will depend on our ability to generate cash from our operations in
the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Based on our current level of operations, we believe our
cash flow from operations, available cash and available borrowings under our
credit facility with Cornell Capital Partners, L.P. will be adequate to meet our
future liquidity needs for at least the next twelve (12) months.
We cannot provide any assurances, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to us in an amount sufficient to enable us to pay our indebtedness or to fund
our other liquidity needs. We may need to refinance or restructure all or a
portion of our indebtedness on or before maturity. We cannot make any assurances
that we will be able to refinance any of our indebtedness on commercially
reasonable terms or at all. If we cannot service our indebtedness, we may have
to take actions such as selling assets, seeking additional equity or reducing or
delaying capital expenditures, strategic acquisitions, investments and
alliances. We cannot make any assurances that any such actions, if necessary,
could be effect on commercially reasonable terms, or at all.
THE FUTURE CONVERSION OF OUR OUTSTANDING SERIES A AND B CONVERTIBLE PREFERRED
STOCK WILL CAUSE DILUTION TO OUR EXISTING SHAREHOLDERS, WHICH MEANS THAT OUR
PER-SHARE INCOME AND STOCK PRICE COULD DECLINE
The issuance of shares upon any future conversion of the outstanding Series A
Convertible Preferred Shares and B Convertible Preferred Shares will have a
dilutive impact on our stockholders. We currently have $4,500,000 of outstanding
Series A Convertible Preferred Shares and B Convertible Preferred Shares that
are convertible into shares of our common stock no earlier than May 2005 and
June 2005, respectively. Both the Series A Convertible Preferred Shares and B
Convertible Preferred Shares are convertible at a price of $0.01 per share or
100% of the average of the three lowest closing bid prices for the ten trading
days immediately preceding the date of conversion, whichever is lower. If our
share price is equal to or greater than $.01 per share at the time of
conversion, the Series A Convertible Preferred Shares and B Convertible
Preferred Shares would be convertible into an aggregate of 450,000,000 shares of
our common stock. In the event the price of our common stock is less than $.01
per share at the time of conversion, the number of shares of our common stock
issuable would be greater than 450,000,000. If such conversions had taken place
at $0.001, our recent stock price, then holders of our Series A and B
Convertible Preferred shares would have received 4,500,000,000 shares of our
common stock. As a result, our net income per share could decrease in future
periods, and the market price of our common stock could decline.
19
THE CONVERSION OF OUR SERIES A CONVERTIBLE PREFERRED STOCK COULD CAUSE A
CHANGE OF CONTROL
The issuance of shares upon the conversion of our Series A Convertible Preferred
Stock could result in a change of control. Cornell Capital Partners, L.P. holds
our Series A Convertible Preferred Stock, which if converted at current prices
on or after May 2005, would result in the issuance of 4,500,000,000 shares of
our common stock. After such conversions, Cornell Capital Partners, L.P. would
own in excess of 60% of our then outstanding shares of Common Stock, computed
based on 5,000,000,000 shares that are currently authorized to be issued. In
such event, Cornell Capital Partners, L.P. would be our largest shareholder and
would be able to exercise control of us by electing directors, increasing the
number of authorized shares of common stock that we could issue or otherwise.
WE HAVE A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON JUNE
30, 2004 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES ON THAT DATE
We had a working capital deficit of $2,197,667 as of June 30, 2004, which means
that our current liabilities exceeded our current assets by $2,197,667. Current
assets are assets that are expected to be converted into cash within one year
and, therefore, may be used to pay current liabilities as they become due. Our
working capital deficit means that our current assets on June 30, 2004 were not
sufficient to satisfy all of our current liabilities on that date.
OUR INDEPENDENT AUDITORS HAVE ADDED A GOING CONCERN OPINION TO OUR FINANCIAL
STATEMENTS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE
OBTAIN ADDITIONAL FUNDING
Our independent auditors have added an explanatory paragraph to their audit
opinions issued in connection with the years 2004 and 2003 financial statements,
which states that our ability to continue as a going concern depends upon our
ability to resolve liquidity problems by generating sufficient operating profits
to provide additional working capital. Our ability to obtain additional funding
and pay off our obligations will determine our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
THE PRICE OF OUR COMMON STOCK MAY BE AFFECTED BY A LIMITED TRADING VOLUME
AND MAY FLUCTUATE SIGNIFICANTLY
There is a limited public market for our common stock and there can be no
assurance that an active trading market will continue. An absence of an active
trading market could adversely affect our stockholders' ability to sell our
common stock in short time periods, or at all. Our common stock has experienced,
and is likely to experience in the future, significant price and volume
fluctuations that could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934, as amended. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets of less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less than
three years), or with average revenues of less than $6.0 million for
the last three years.
20
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key executives,
including Mr. Wayne Danson, our President and Chief Financial Officer, Mr.
Martin Nielson, our Senior Vice President-Acquisitions and Ms. Lisa Welton, our
President and Chief Executive Officer of Cyber-Test. The loss of the services of
Mr. Danson, Mr. Nielson or Ms. Welton could materially adversely affect our
business because of the cost and time necessary to replace and train a
replacement. Such a loss would also divert management's attention away from
operational issues. We maintain a $2,000,000 key-man life insurancE policy for
each of Mr. Danson, Mr. Nielson and Ms. Welton.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by item 7 are included in the Form 10-KSB
beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL REPORTING
None.
ITEM 8A. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL REPORTING
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
As of June 30, 2004, we carried out an evaluation, under the supervision and
with the participation of our acting Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of June 30, 2004, our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic reports that are filed with
the Securities and Exchange Commission. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. In addition, we reviewed our internal controls, and
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last valuation.
(B) CHANGES IN INTERNAL CONTROLS:
There were no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect these
controls during the fiscal year covered by this Report or from the end of the
reporting period to the date of this Form 10-KSB.
ITEM 8B. OTHER INFORMATION
Not applicable.
21
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each such
person became a director or executive officer. Our executive officers are
elected annually by the Board of Directors and serve terms of one year or until
their death, resignation or removal by the Board of Directors. Our directors
serve one-year terms until their successors are elected. There are no family
relationships or understandings between any of the directors and executive
officers. In addition, except for the arrangement with Mr. Nielson, as described
in Mr. Nielson's profile set forth below, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.
Our directors and executive officers are as follows:
NAME AND ADDRESS AGE POSITION
- ----------------------- --- ----------------------------------
Wayne I. Danson 51 President, Chief Financial Officer
420 Lexington Avenue and Director
New York, NY 10170
Dr. Michael Finch 56 Director 37 Walnut Street
Wellesley, MA 02481
Jonathan J. Lichtman 52 Secretary and Director
120 Palmetto Park Road
Boca Raton, FL 33432
Martin Nielson 52 Senior Vice President-Acquisitions
420 Lexington Avenue and Director
New York, NY 10170
Randall Prouty 52 Director
420 Lexington Avenue
New York, NY 10170
Wilbank J. Roche 58 Director
2530 Wilshire Boulevard
Santa Monica, CA 90403
The directors named above will serve until the next annual meeting of our
shareholders or until their successors shall be elected and accept their
positions.
WAYNE I. DANSON, PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr. Danson has
served as our Chief Financial Officer since December 1, 1999, as a Director
since January 3, 2000, and as President since April 30, 2002. Mr. Danson also
serves as Chairman of the Board of Encompass. Mr. Danson is the Managing
Director and Founder of Danson Partners, LLC, a financial advisory firm
specializing in middle market companies in the real estate and technology
industries. Prior to forming Danson Partners, LLC in May 1999, Mr. Danson was
co-head and Managing Director of PricewaterhouseCoopers LLP's Real Estate
Capital Markets Group. Prior to rejoining PricewaterhouseCoopers in 1996, Mr.
Danson was a Managing Tax Partner with Kenneth Leventhal & Company in New York
and Washington D.C., where he was also Kenneth Leventhal's National Director of
its International and Debt Restructure Tax Practices. Prior to his involvement
with Kenneth Leventhal in 1988, Mr. Danson was a Managing Director with Wolper
Ross & Co., Ltd. in New York, a closely held financial services company
specializing in financial tax, pension consulting, designing financial
instruments and providing venture capital and investment banking services. Mr.
Danson graduated with honors from Bernard M. Baruch College with a BBA in
Accounting and an MBA in Taxation. He is a certified public accountant and a
member of the AICPA and the New York State Society of CPAs.
22
MARTIN NIELSON, SENIOR VICE PRESIDENT-ACQUISITIONS, DIRECTOR. Mr. Nielson was
appointed Senior Vice President-Acquisitions in June 2004 and Director in August
2004. Mr. Nielson also serves as Chief Executive Officer of Encompass, our
wholly-owned subsidiary and principal operating unit. From 2003 until his
appointment to the foregoing offices, he was Chairman of Innova Holdings, Inc.
(formerly known as Hy-Tech Technology Group, Inc.). He also served as Chairman
of Inclusion Technologies, Inc. from 2000 to 2002. Since 1994, he has been the
Chairman and Chief Executive Officer of Altos Bancorp, Inc., a privately-held
mergers and acquisition company. In 1991, Mr. Nielson was founder and Chief
Executive Officer of The Business Superstore, an office supply and computer
superstore/telesales company in London that merged with Office World in 1993. In
1982, Mr. Nielson was part of the founding team and served until 1991 as Vice
President of Businessland, Inc., a New York Stock Exchanged listed computer and
networking reseller. From 1972 until 1981, Mr. Nielson was employed as a senior
officer of The Gap Stores. Mr. Nielson graduated from San Jose State University
with a BS in business management with a concentration in mathematics and
engineering, and attended San Francisco State University's Graduate School of
Business with a concentration in operations research.
JONATHAN J. LICHTMAN, SECRETARY AND DIRECTOR. Mr. Lichtman has served as a
Director since November 9, 1999 and is currently a partner with the Boca Raton
law firm of Levinson & Lichtman, LLP, where he specializes in structuring
corporate and partnership transactions, including real estate syndications. Mr.
Lichtman is also currently a general partner of several real estate partnerships
in New York, North Carolina and Florida. Prior to forming Levinson and Lichtman
LLP, Mr. Lichtman was an attorney with English, McCaughan and O'Bryan, PA, where
he performed legal work for domestic and international clients, as well as real
estate partnerships and development. Mr. Lichtman obtained his J.D. degree, cum
laude, from Syracuse University College of Law and his LLM degree in taxation
from the University of Miami School of Law. He is also a certified public
accountant and is licensed to practice law in Florida and New York.
DR. MICHAEL FINCH, DIRECTOR. Dr. Finch has served as a Director since March 10,
1997. For the four years before that, he was employed by Media Forum (first in
the UK, and then in the U.S.) as Director of Product Development. Since 1998, he
has been Chief Technology Officer of New Media Solutions, responsible for the
conception, planning, creation, execution and deployment of all software
products and projects. He was responsible for developing and implementing Media
Forum's software capabilities and strategy, managing technical and complex
software projects for high-end clients, and pre-sales demonstrations to clients
of Media Forum's software stance and expertise. From 1983 to 1993, Dr. Finch was
a Financial Software Engineer, who designed, wrote and implemented sophisticated
real-time computer programs for trading Financial Instruments and Commodities on
the Chicago and New York Futures exchanges. Prior to 1983, Dr. Finch was a
research scientist and mathematician, with an academic career at four UK
universities. He obtained a Doctorate of Mathematics at Sussex University for
original research into Einstein's Theory of General Relativity and its
application to Neutron Stars. He lectured at Queen Mary's College London on
advanced mathematics.
RANDALL PROUTY, DIRECTOR. Mr. Prouty has served as a Director since March 10,
1997. Mr. Prouty served as our Chairman from November 30, 2001 until December
12, 2002. Mr. Prouty is also currently the President and CEO of World
Associates, Inc., a publicly traded real estate development company. He is also
the sole owner of Bristol Capital, Inc., a firm active in consulting and
business development work for companies seeking access to capital markets, and
through which he is incubating other e-business ventures. Mr. Prouty is a
licensed real estate and mortgage broker in the State of Florida. His technical
background includes being a qualified Webmaster and developing e-businesses on
the web.
WILBANK J. ROCHE, DIRECTOR. Mr. Roche was appointed a Director on March 25, 1999
and is currently a principal with the law firm of Roche & Holt in Santa Monica,
California. Mr. Roche was an honors graduate from the University of Southern
California in 1976, as well as from Loyola University School of Law, Los
Angeles, in 1979. He was admitted to the California State Bar in 1979 and has
been practicing law actively since that time. Mr. Roche worked for law firms in
the Los Angeles area from 1976 to 1983, when he opened his own office. In 1985,
he formed Roche & Holt. Mr. Roche's law practice has revolved largely around
representing small businesses and their owners. In that regard, he has provided
legal services in connection with the formation, purchase, sale, and dissolution
of numerous entities, as well as in connection with their on-going operations.
23
OTHER SIGNIFICANT EMPLOYEES
LISA A. WELTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CYBER-TEST, INC. AND
EXECUTIVE VICE PRESIDENT OF ENCOMPASS GROUP AFFILIATES, INC. From 1990 to June
3, 2004, Ms. Welton served as President and Chief Executive Officer of
Cyber-Test Florida, where she was responsible for overseeing the company's
operational, marketing, contractual, and communications efforts, including
business development and growth. Upon our acquisition of Cyber-Test Florida's
assets, Ms. Welton was appointed to the same offices and given the same
responsibilities with Cyber-Test. Ms. Welton was appointed Executive Vice
President of Encompass in June 2004 and assists in the overall vision and
implementation of the business. From 1987 to 1989, Ms. Welton served as the
National Director of Business Development for Charlan Brock and Associates, an
International architectural firm specializing in hotels and high-end custom home
developments, where she secured architectural contracts for the firm's clients
in the United States and Europe. From 1985 to 1987, Ms. Welton was Senior
Account Manager at Robison, Yesawich and Pepperdine, an advertising and public
relations firm, where she coordinated hotel property grand openings and all
subsequent press events. Ms. Welton graduated from the University of Wisconsin
with a BS degree in advertising and marketing.
THOMAS SUTLIVE, VICE PRESIDENT OF CYBER-TEST, INC. From August 1995 to June 3,
2004, Mr. Sutlive was employed by Cyber-Test Florida, where he served as Vice
President, since January 2004, and was responsible for the overall service
structure and establishment of purchasing policies and procedures. Upon our
acquisition of Cyber-Test Florida's assets, Mr. Sutlive was appointed to the
same offices and given the same responsibilities with Cyber-Test. Prior to Mr.
Sutlive's appointment to Vice President, he served as Cyber-Test's Director of
Operations from September 1999 to January 2004 and Purchasing Manager from
August 1995 to September 1999. From 1989 to 1995, Mr. Sutlive was Lead Electric
Technician with Sprague Electric, where he handled the operational readiness of
specialized precision manufacturing equipment. Mr. Sutlive previously held the
position of Systems Analyst with Dyncorp, a defense contractor, where he was
responsible for generating failure analyses for naval missile tracking systems.
Mr. Sutlive earned a bachelors degree from the University of Georgia and served
six honorable years with the United States Navy.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS.
Our business affairs are managed under the direction of the Board of Directors.
During the fiscal year ended June 30, 2004, our Board of Directors held four (4)
meetings and took action by written consent eight (8) times. During the fiscal
year ended June 30, 2004, all of the directors attended all of the Board of
Directors meetings that were held.
The Board of Directors has established an Audit Committee and a Compensation
Committee.
The Audit Committee was established May 15, 2001. The Audit Committee reports to
our Board of Directors regarding the appointment of our independent public
accountants, the scope and results of our annual audits, compliance with our
accounting and financial policies and management's procedures and policies
relative to the adequacy of our internal accounting controls. The Audit
Committee is comprised of Messrs. Prouty and Finch.
The Compensation Committee was established May 15, 2001. The Compensation
Committee of our Board of Directors reviews and makes recommendations to our
Board of Directors regarding our compensation policies and all forms of
compensation to be provided to our executive officers. In addition, the
compensation committee will review bonus and stock compensation arrangements for
all employees. The compensation committee is comprised of Messrs. Roche and
Prouty.
The Board of Directors also has established an Acquisitions Committee and an
Advanced Communications (Australia) Committee. Messrs. Prouty, Danson, Lichtman
and Roche currently serve on the Acquisitions Committee and Messrs. Prouty,
Danson, Lichtman, Roche and Finch serve on the Advanced Communications
(Australia) Committee, which will address and make all decisions relating to
SpectruCell matters.
24
AUDIT COMMITTEE FINANCIAL EXPERT
Our Audit Committee does not currently have at an "audit committee financial
expert" as defined under Item 401(e) of Regulation S-B. Our Board of Directors
is actively seeking to appoint an individual to the Board of Directors and the
Audit Committee who would be deemed an audit committee financial expert and who
would be independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A.
CORPORATE GOVERNANCE
In April 2004, we established a Code of Business Conduct and Ethics (the
"Code"), applicable to all of our employees, including our principal executive,
accounting and financial officers, which states that we are committed to the
highest standards of legal and ethical conduct. This Code sets forth our
policies with respect to the way we conduct ourselves individually and operate
our business. The provisions of this Code are designed to deter wrongdoing and
to promote honest and ethical conduct among our employees, officers and
directors. The Code is attached hereto as Exhibit 14.1 and can also be found on
our corporate website at www.advancedcomtech.net. We will satisfy our disclosure
requirement under Item 5.05 of Form 8-K regarding certain amendments to, or
waivers of, any provision of our Code by posting such information on our
corporate website.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires that our directors and executive officers and any persons who own
more than ten percent of our common stock file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock and other
equity securities. Such persons are required by SEC regulations to furnish us
with copies of all such reports that they file. To our knowledge, based upon our
review of these reports, all Section 16 reports required to be filed by our
directors and executive officers during the fiscal year ended June 30, 2004 were
filed on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows all cash compensation accrued and/or paid by us to our
two executive officers, as well as certain other compensation paid or accrued,
for the fiscal years ended June 30, 2004, 2003 and 2002. Mr. Nielson became an
executive officer in June 2004. Other than as set forth herein, no executive
officer's cash salary and bonus exceeded $100,000 in any of the applicable
years. The following information includes the dollar value of base salaries,
bonus awards, the value of restricted shares issued in lieu of cash compensation
and certain other compensation, if any, whether paid or deferred.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- ---------------------------------------------
AWARDS PAYOUTS
---------------------- -------
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------ ---- ----------- ------- ------- ------------ ---- ---- ----
Wayne I. Danson, 2004 $150,000 $ -- 9,12(1) $ -- $ -- $ -- $ --
President and CFO 2003 190,138(2) -- -- -- -- -- --
2002 149,933(3) -- -- 110,000 (3) -- -- --
Martin Nielson, 2004 16,667 15,000 -- -- -- -- --
Sr. VP-Acquisitions 2003 -- -- -- -- -- -- --
2002 -- -- -- -- -- -- --
(1) Represents reimbursement of out-of-pocket expenses, net of a $35,000
write-off, received by Mr. Danson through Danson Partners, LLC, an entity
owned and operated by Mr. Danson.
(2) Represents accrued fees and out-of-pocket expenses. Mr. Danson received
$3,000 in cash and $1,000 in stock for fiscal 2003 services rendered.
(3) Represents accrued fees and out-of-pocket expenses. Mr. Danson received
$65,000 in cash for fiscal 2002 services and $32,775 for reimbursement of
prior and current out-of-pocket expenses. Mr. Danson was appointed
President on April 30, 2002.
25
We have no deferred compensation, stock options, SAR or other bonus arrangements
for our employees and/or directors. During the fiscal year ended June 30, 2004,
all decisions concerning executive compensation were made by our Compensation
Committee.
EMPLOYMENT AGREEMENTS
Mr. Danson is party to a written consulting agreement with us that entitled him
to $20,000 per month in cash and stock for the period September 1, 2000 through
August 31, 2001 and, as extended orally, to December 31, 2001. Effective January
1, 2002, Mr. Danson agreed to orally extend his consulting agreement with us
through December 31, 2003 at a monthly rate of $12,500. On January 1, 2004, Mr.
Danson agreed to extend his oral agreement indefinitely, and our Compensation
Committee is currently negotiating with Mr. Danson regarding a two-year
employment agreement. The terms and conditions of this agreement are not yet
finalized. Mr. Danson is reimbursed for reasonable out-of-pocket expenses
relating to activities for us. We have provided Mr. Danson with a $2 million
life insurance policy for his benefit and also insure Mr. Danson under a $2
million key man life insurance policy.
On June 24, 2004, we entered into a two year employment agreement with Martin
Nielson, our Senior Vice President-Acquisitions (the "Nielson Agreement"). Under
the terms of the Nielson Agreement, Mr. Nielson is employed as Encompass'
President and Chief Executive Officer and a Senior Vice President-Acquisitions
of the Company. Mr. Nielson is entitled to a $200,000 annual salary and the
right to earn up to 50,000,000 shares of our restricted common stock valued at
$.01 per share, or $500,000, to vest over a two-year period. Mr. Nielson is also
entitled to receive an Incentive Bonus determined at the discretion of our
Compensation Committee based on his contribution to our overall performance as
well as a bonus based on the overall separate business and financial performance
of Encompass and its wholly-owned operating subsidiaries. In addition, we have
provided Mr. Nielson with a $1 million life insurance policy for his benefit and
also insure Mr. Nielson under a $2 million key man life insurance policy. If Mr.
Nielson's employment with us terminates for any reason other than by us for
"cause," Mr. Nielson is entitled to receive an additional amount of base salary
equal to the amount of base salary Mr. Nielson would have received during the
six (6) month period immediately following the date of his termination. The
severance payment is payable in cash in equal monthly installments of the first
business day of each month during the six (6) month period immediately following
the date of his termination. Under Mr. Nielson's employment agreement, "cause"
means the following: (i) any act or omission by Mr. Nielson that constitutes
malfeasance, misfeasance or nonfeasance in the course of his duties, or in the
judgment of our Board of Directors or our Chief Executive Officer, Mr. Nielson
has been grossly negligent (including habitual neglect of duties), incompetent
or insubordinate in carrying out his duties, (ii) a material breach by Mr.
Nielson of his employment agreement that is not cured within ten (10) days of
receipt of notice thereof, (iii) Mr. Nielson's breach of a fiduciary duty owed
to us or our affiliates, or (iv) Mr. Nielson's conviction of, or pleading nolo
contendere to, a criminal offense or crime constituting a misdemeanor or felony,
or conviction in respect to any act involving fraud, dishonesty or moral
turpitude (other than minor traffic infractions or similar minor offenses).
On June 3, 2004, we entered into a three-year employment agreement with Lisa
Welton. In accordance with the terms of Ms. Welton's employment agreement, Ms.
Welton will hold the offices of President and Chief Executive Officer, and be a
director, of Cyber-Test, as well as hold the office of Executive Vice-President
of Encompass. Ms. Welton is entitled to a $120,000 annual salary. Ms. Welton is
also entitled to receive an incentive bonus determined at the discretion of our
Compensation Committee based on her contribution to our overall performance as
well as a bonus based on the overall separate business and financial performance
of Cyber-Test. In addition, we insure Ms. Welton under a $2 million key man life
insurance policy. If Ms. Welton's employment with us terminates for any reason
other than by us for "cause," Ms. Welton is entitled to receive an additional
amount of base salary equal to the amount of base salary Ms. Welton would have
received during the six (6) month period immediately following the date of her
termination. The severance payment is payable in cash in equal monthly
installments of the first business day of each month during the six (6) month
period immediately following the date of her termination. Under Ms. Welton's
employment agreement, "cause" means the following: (i) any act or omission by
Ms. Welton that constitutes malfeasance, misfeasance or nonfeasance in the
course of her duties, or in the judgment of our Board of Directors or our Chief
Executive Officer, Ms. Welton has been grossly negligent (including habitual
neglect of duties), incompetent or insubordinate in carrying out her duties,
(ii) a material breach by Ms. Welton of her employment agreement that is not
cured within ten (10) days of receipt of notice thereof, (iii) Ms. Welton's
breach of a fiduciary duty owed to us or our affiliates, or (iv) Ms. Welton's
conviction of, or pleading nolo contendere to, a criminal offense or crime
constituting a misdemeanor or felony, or conviction in respect to any act
involving fraud, dishonesty or moral turpitude (other than minor traffic
infractions or similar minor offenses).
26
On June 3, 2004, we entered into a three-year employment agreement with Thomas
Sutlive. In accordance with the terms of Mr. Sutlive's employment agreement, Mr.
Sutlive will hold the office of Vice-President of Cyber-Test. Mr. Sutlive is
entitled to a $110,000 annual salary. Mr. Sutlive is also entitled to receive an
incentive bonus determined at the discretion of our Compensation Committee based
on his contribution to our overall performance as well as a bonus based on the
overall separate business and financial performance of Cyber-Test. If Mr.
Sutlive's employment with us terminates for any reason other than by us for
"cause," Mr. Sutlive is entitled to receive an additional amount of base salary
equal to the amount of base salary Mr. Sutlive would have received during the
six (6) month period immediately following the date of his termination. The
severance payment is payable in cash in equal monthly installments of the first
business day of each month during the six (6) month period immediately following
the date of his termination. Under Mr. Sutlive's employment agreement, "cause"
means the following: (i) any act or omission by Mr. Sutlive that constitutes
malfeasance, misfeasance or nonfeasance in the course of his duties, or in the
judgment of our Board of Directors or our Chief Executive Officer, Mr. Sutlive
has been grossly negligent (including habitual neglect of duties), incompetent
or insubordinate in carrying out his duties, (ii) a material breach by Mr.
Sutlive of his employment agreement that is not cured within ten (10) days of
receipt of notice thereof, (iii) Mr. Sutlive's breach of a fiduciary duty owed
to us or our affiliates, or (iv) Mr. Sutlive's conviction of, or pleading nolo
contendere to, a criminal offense or crime constituting a misdemeanor or felony,
or conviction in respect to any act involving fraud, dishonesty or moral
turpitude (other than minor traffic infractions or similar minor offenses).
Each of the foregoing agreements contains standard confidentiality, noncompete
and work-for-hire provisions.
Our directors did not receive any cash or stock compensation for their services
as a director in fiscal 2004 or 2003, but were reimbursed for all of their
out-of-pocket expenses incurred in connection with the rendering of services as
a director. For fiscal 2005, each of the independent directors, as defined under
NASDAQ Rules and Regulations, will receive $25,000 in cash compensation, payable
$6,250 per quarter of service. Messer. Prouty will receive an additional $5,000
for serving as Chairman of the Compensation Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table contains information about the beneficial ownership of our
common stock as of October 15, 2004 for:
o each of our directors;
o each of our executive officers named in the summary compensation
table in item 10; and
o all directors and executive officers as a group.
We are not aware of any person who at June 30, 2004 owned more than five percent
of our common stock. Unless otherwise indicated, the address for each person or
entity named below is c/o Advanced Communications Technologies, Inc., 420
Lexington Avenue, New York, NY 10170.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 2,004,247,731 shares of common stock outstanding as of
27
COMMON STOCK
BENEFICIALLY OWNED
-----------------------------
NAME/TITLE NUMBER PERCENT (1)
- ------------------------------------------- ----------- -----------
Wayne I. Danson, President, CFO & Director 65,158,832 (2) 3.25%
Martin Nielson, Sr. VP-Acq. & Director 10,000,000 *
Jonathan J. Lichtman, Secretary & Director 30,710,334 (3) 1.53%
Dr. Michael Finch, Director 591,334 *
Randall Prouty, Director 13,527,080 *
Wilbank Roche, Director 18,507,143 *
----------- -----------
All Executive Officers and Directors as a
Group (6 persons) 138,494,723 6.91%
=========== ===========
(1) Percentage of outstanding shares is based on 2,004,247,731 shares of
common stock outstanding as of October 15, 2004, together with shares
deemed beneficially owned by each shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities.
(2) Includes 64,808,832 shares beneficially owned by Mr. Danson's affiliated
entity, spouse and adult children.
(3) Excludes 396,666 shares held by various family trusts. Mr. Lichtman has no
beneficial ownership in these shares.
* Less than 1%.
Although pursuant to the terms of our Equity Line of Credit with Cornell Capital
Partners Cornell is not permitted to own more than 9.99% of our outstanding
common stock at any one time, Cornell is permitted to waive such restriction,
which waiver is effective on the 61st day after delivery of the waiver to us.
Accordingly, there are a sufficient number of shares of our common stock
issuable under the Equity Line of Credit, such that by delivering such waiver
Cornell could affect a change of control on or after the 61st day following
delivery.
EXISTING STOCK COMPENSATION PLANS
The following table sets forth information as of June 30, 2004 regarding our
existing compensation plans and individual compensation arrangements pursuant to
which our equity securities are authorized for issuance to employees or
non-employees (such as directors, consultants and advisors) in exchange for
consideration in the form of services:
- ------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 0 0 0
Equity compensation
plans not approved by
security holders (1) 50,000,000 $0.01 50,000,000
- ------------------------------------------------------------------------------------------------------------
Total 50,000,000 $0.01 50,000,000
- ------------------------------------------------------------------------------------------------------------
28
(1) Pursuant to the terms of Mr. Nielson's employment agreement, Mr. Nielson is
entitled to receive 50,000,000 shares of the Company's restricted common stock,
priced at $.01 per share, of which (i) 12,500,000 shares will fully vest on July
1, 2005, and (ii) 37,500,000 shares will fully vest on July 1, 2006; provided
that, as to each vesting traunch, Mr. Nielson is then employed by the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of August 1, 2002, the Company relocated its principal executive office from
California to 420 Lexington Avenue, New York, NY 10170 within the office
facility of Danson Partners, LLC, a privately-owned company that employs our
President and Chief Financial Officer Wayne I. Danson. No rent or facility use
fee is charged to the Company by Danson Partners, LLC.
On September 1, 2000, Mr. Danson entered into a one-year consulting agreement
with the Company for the period September 1, 2000 through August 31, 2001. Under
the terms of the consulting agreement, Mr. Danson received $10,000 per month in
cash and $10,000 per month in stock for his services. Immediately prior to the
agreement's expiration on August 31, 2001, Mr. Danson agreed to orally extend
his consulting agreement with the Company indefinitely at a monthly rate of
$12,500, plus reimbursement for reasonable out of pocket expenses. As of June
30, 2004, no money is owed to Danson Partners, LLC for consulting fees and
expenses. The Company's Compensation Committee is presently in contract
discussions with Mr. Danson to extend a two-year employment agreement to him.
The terms and conditions of Mr. Danson's agreement are not yet finalized.
Jonathan J. Lichtman, Secretary and a director of the Company, is a partner at
Levinson & Lichtman, LLP, a law firm in Boca Raton, FL that the Company retained
to provide legal services during fiscal years 2004 and 2003. The Company paid
Levinson & Lichtman, LLP $93,612 and $105,000 in cash and stock, respectively,
during fiscal 2004, and $0 and $1,000 in cash and stock, respectively, during
fiscal 2003 for legal services rendered. As of June 30, 2004, the Company owes
Levinson & Lichtman, LLP $40,706 in cash for current legal services.
Wilbank Roche, a director of the Company, is a partner at Roche & Holt, a law
firm in Los Angeles, CA that the Company retained to provide legal services
during fiscal years 2004 and 2003. The Company paid Roche & Holt $56,392 and
$50,000 in cash and stock, respectively, during fiscal 2004 and $0 and $1,000 in
cash and stock, respectively, during fiscal 2003 for legal services rendered. As
of June 30, 2004, the Company owes Roche & Holt $26,930 in cash for current
legal services rendered.
Effective July 1, 2002, the Company entered into a six-month consulting
agreement with Randall Prouty, a director of the Company, pursuant to which Mr.
Prouty has agreed to provide certain business services, such as dispute
resolution, corporate communications strategies, and business acquisitions to
the Company. Pursuant to the terms of the consulting agreement, Mr. Prouty
accrued $10,000 in monthly compensation for services provided to the Company.
During the fiscal year ended June 30, 2004, the Company again extended Mr.
Prouty's contract for an additional six-month period commencing November 1, 2003
and ending April 30, 2004 at the rate of $4,167 per month or $25,000 in the
aggregate. During the fiscal year ended June 30, 2004, the Company paid Mr.
Prouty $18,000 and $30,000 in cash and stock, respectively, for past and current
services rendered. As of June 30, 2004, the Company owed Mr. Prouty $20,073 in
cash for current services rendered.
During the fiscal year ended June 30, 2004, the Company engaged the services of
Dr. Michael Finch, a director, to evaluate certain third party software programs
and proposed business and investment candidates. The Company incurred $10,000 of
expenses to Dr. Finch for his services, of which $6,666 was paid as of June 30,
2004.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(i) Exhibits:
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------- ---------------------------------------------
1.1 Exchange Agreement between MRC Legal Services Incorporated by reference to Exhibit 1.1 to
Corporation and Advanced Communications Technologies, Company's Form 8-K filed on February 4, 2000
Inc. dated as of January 31, 2000
29
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------- ---------------------------------------------
2.1 Asset Purchase Agreement dated May 27, 2004, by and Incorporated by reference to Exhibit 10.1 to
between Cyber-Test, Inc., a Delaware corporation and the Company's Form 8-K filed on June 3, 2004
Cyber-Test, Inc., a Florida corporation.
3.1.1 Articles of Incorporation of Media Forum Incorporated by reference to Exhibit 2.1 to
International, Inc. the Company's Form S-8 filed on February 9,
2000
3.1.2 Second Amendment to Articles of Incorporation of Incorporated by reference to Exhibit 2.2 to
Telenetworx, Inc. the Company's Form S-8 filed on February 9,
2000
3.1.3 Third Amendment to Articles of Incorporation of Media Incorporated by reference to Exhibit 2.3 to
Forum International, Inc. the Company's Form S-8 filed on February 9,
2000
3.1.4 Fourth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.7 to
the Form SB-2 filed with the SEC on March 5,
2002
3.1.5 Fifth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.8 to
the Form SB-2 filed with the SEC on July 16,
2003
3.1.6 Sixth Amendment to Articles of Incorporation Provided herewith
3.1.7 Seventh Amendment to Articles of Incorporation Provided herewith
3.2 Bylaws of the Company Incorporated by reference to Exhibit 2.4 to
the Company's Form S-8 filed on February 9,
2000
10.1 Lease Agreement dated as of November 27, 2001 between Incorporated by reference to Exhibit 10.1 to
the Company and Continental Development, L.P. II the Form SB-2 filed with the SEC on March 5,
2002
10.2 Stock Purchase Agreement between Advanced Incorporated by reference to Exhibit 10.2 to
Communications Technologies, Inc. and Advanced the Form S-1 Registration Statement filed on
Communications Technologies (Australia) Pty Ltd. August 14, 2001
10.3 Agreement dated June 27, 2000, between Ladenburg Incorporated by reference to Exhibit 10.3 to
Thalmann & Co. and the Company the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.4 Common Stock Purchase Agreement dated December 14, Incorporated by reference to Exhibit 10.4 to
2000, between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.5 Registration Rights Agreement dated December 14, Incorporated by reference to Exhibit 10.5 to
2000, between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.6 Escrow Agreement dated December 14, 2000, among the Incorporated by reference to Exhibit 10.6 to
Company, Wanquay Ltd. and Epstein Becker & Green the Company's Form S-1 Registration Statement
filed on August 14, 2001
30
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------- ---------------------------------------------
10.7 Consulting Agreement with M. Richard Cutler dated Incorporated by reference to Exhibit 10.1 to
January 31, 2000 the Company's Form S-8 filed on February 9,
2000
10.8 Stock Purchase Agreement dated April 5, 2000, between Incorporated by reference to Exhibit 10.5 to
Advanced Communications Technologies, Inc. and the Company's Form 10-QSB filed on May 24,
Advanced Communications Technologies Pty Ltd. 2000
10.9 Securities Purchase Agreement dated January 10, 2002, Incorporated by referenced to Exhibit 10.9 to
by and among Advanced Communications Technologies, the Company's Form 10-QSB filed on February
Inc. and Buyers 12, 2002
10.10 Investor Registration Rights Agreement dated January Incorporated by reference to Exhibit 10.10 to
10, 2002, by and among Advanced Communications the Company's Form 10-QSB filed on February
Technologies, Inc. and Investors 12, 2002
10.11 Transfer Agent Instructions Incorporated by reference to Exhibit 10.11 to
the Company's Form 10-QSB filed on February
12, 2002
10.12 Escrow Agreement dated January 10, 2002, by and among Incorporated by reference to Exhibit 10.12 to
Advanced Communications Technologies, Inc., Buyers the Company's Form 10-QSB filed on February
and First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated July 2003, by Incorporated by reference to Exhibit 10.13 to
and between Cornell Capital Partners, LP and Advanced the Form SB-2 filed with the SEC on July 16,
Communications Technologies, Inc. 2003
10.14 Registration Rights Agreement dated July 2003, by and Incorporated by reference to Exhibit 10.14 to
between Advanced Communications Technologies, Inc. the Form SB-2 filed with the SEC on July 16,
2003
10.15 Placement Agent Agreement dated July 2003, by and Incorporated by reference to Exhibit 10.15 to
between Advanced Communications Technologies, Inc. the Form SB-2 filed with the SEC on July 16,
and Westrock Advisors, Inc. 2003
10.16 Escrow Agreement dated July 2003, by and among Incorporated by reference to Exhibit 10.16 to
Advanced Communications Technologies, Inc., Cornell the Form SB-2 filed with the SEC on July 16,
Capital Partners, LP, Butler Gonzalez LLP and First 2003
Union National Bank
10.17 License and Distribution Agreement dated as of Incorporated by reference to Exhibit 10.17 to
July 5, 2000, between Advanced Communications the Company's Amendment to Form 10-KSB filed
Technologies, Inc. and Advanced Communications on May 23, 2002
Technologies (Australia) Pty. Ltd.
10.18 Letter of Intent dated September 7, 2001 re: Purchase Incorporated by reference to Exhibit 10.18 to
of Advanced Communications (Australia) Amendment No. 1 to the Company's Form 10-QSB
for the quarter ended December 31, 2001
10.19 Securities Purchase Agreement, dated November 2002, Incorporated by reference to Exhibit 10.19 to
by and among Advanced Communications and Buyers the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
31
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------- ---------------------------------------------
10.20 Investor Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.20 to
November 2002, by and among Advanced Communications the Company's Form 10-KSB for the year ended
and Investors June 30, 2002 filed on December 6, 2002
10.21 Secured Convertible Debenture Incorporated by reference to Exhibit 10.21 to
the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.22 Escrow Agreement, dated November 2002, by and among Incorporated by reference to Exhibit 10.22 to
Advanced Communications, Buyers, and Wachovia Bank, the Company's Form 10-KSB for the year ended
N.A. June 30, 2002 filed on December 6, 2002
10.23 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit 10.23 to
November 2002 the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.24 Security Agreement, dated November 2002, by and among Incorporated by reference to Exhibit 10.24 to
Advanced Communications and Buyers the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.25 Middletons Lawyers Letter, dated November 11, 2002, Incorporated by reference to Exhibit 10.25 to
terminating the April 2000 Stock Purchase Agreement the Company's Form 10-KSB for the year ended
between Advanced Communications Technologies, Inc. June 30, 2002 filed on December 6, 2002
and Advanced Communications (Australia)
10.26 Consulting Agreement dated July 1, 2002, between Incorporated by reference to Exhibit 10.26 to
Advanced Communications and Randall H. Prouty the Company's Third Amended Form 10-KSB for
the year ended June 30, 2002 filed on
June 13, 2003
10.27 Proxy Statement, dated March 25, 1999 Incorporated by reference to Exhibit
10.27 to the Company's Third Amended
Form 10-KSB for the year ended June 30,
2002 filed on June 13, 2003
10.28 Termination of Lease Agreement, dated November 25, Incorporated by reference to Exhibit 10.28 to
2003, by and between Continental Development, L.P. II the Company's Form 10-QSB filed on February
(Lessor) and Advanced Communications 13, 2004
10.29 6% Senior Unsecured Promissory Note, in the original Incorporated by reference to Exhibit 10.2 to
principal amount of $547,000 issued on June the Company's Form 8-K filed on June 3, 2004
3, 2004 by Cyber-Test, Inc., a Delaware corporation
in favor of Cyber-Test, Inc., a Florida corporation.
10.30 Escrow Agreement, June 3, 2004, by and between Incorporated by reference to Exhibit 10.3 to
Cyber-Test, Inc., a Delaware corporation and the Company's Form 8-K filed on June 3, 2004
Cyber-Test, Inc., a Florida corporation.
32
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------- ---------------------------------------------
10.31 NonCompetition Agreement, June 3, 2004, by and Incorporated by reference to Exhibit 10.4 to
between Cyber-Test, Inc., a Delaware corporation, and the Company's Form 8-K filed on June 3, 2004
Cyber-Test, Inc., a Florida corporation and the
shareholders of Cyber-Test Florida.
10.32 Employment Agreement, June 3, 2004, by and between Incorporated by reference to Exhibit 10.5 to
Cyber-Test, Inc., a Delaware corporation and Lisa the Company's Form 8-K filed on June 3, 2004
Welton.
10.33 Employment Agreement, June 3, 2004, by and between Incorporated by reference to Exhibit 10.6 to
Cyber-Test, Inc., a Delaware corporation and Thomas the Company's Form 8-K filed on June 3, 2004
Sutlive.
10.34 [RESERVED]
10.35 Amendment No. 1 to 6% Unsecured Promissory Note dated Provided herewith
August 10, 2004
10.36 Agreement, dated May 27, 2004, by and among Provided herewith
Encompass Group Affiliates, Inc. , Hy-Tech Technology
Group, Inc. and Hy-Tech Computer Systems, Inc.
10.37 Customers Lists License Agreement, dated June 24, Provided herewith
2004, by and among Encompass Group Affiliates, Inc.,
Hy-Tech Technology Group, Inc. and Hy-Tech Computer
Systems, Inc.
10.38 Websites License Agreement, dated June 24, 2004, by Provided herewith
and among Encompass Group Affiliates, Inc. , Hy-Tech
Technology Group, Inc. and Hy-Tech Computer Systems,
Inc.
10.39 NonCompetition and Nondisclosure Agreement by and Provided herewith
among Encompass Group Affiliates, Inc. , Hy-Tech
Technology Group, Inc. and Hy-Tech Computer Systems,
Inc.
10.40 Form of Exchange Agreement, dated June 24, 2004, by and Provided herewith
between Advanced Communication and certain debenture
holders of Hy-Tech Technology Group, Inc.
10.41 Employment Agreement dated June 24, 2004 by and Provided herewith
between Encompass Group Affiliates, Inc., Advanced
Communications Technologies, Inc. and Martin Nielson
10.42 Escrow Agreement dated May 28, 2004 by and among Provided herewith
Advanced Communications Technologies, Inc., Buyers
and Butler Gonzalez, LLP, Escrow Agent
10.43 Investment Agreement dated May 28, 2004 by and among Provided herewith
Advanced Communications Technologies, Inc. and
Cornell Capital Partners, L.P.
33
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------------------------------------------------- ---------------------------------------------
10.44 Registration Rights Agreement dated May 28, 2004 by Provided herewith
and among Advanced Communications Technologies, Inc.
and Cornell Capital Partners, L.P.
14.1 Code of Business Conduct and Ethics for Advanced Provided herewith
Communications
31.1 Certification by President and Chief Financial Provided herewith
Officer pursuant to Sarbanes-Oxley Section 302
32.1 Certification by President and Chief Financial Provided herewith
Officer pursuant to 18 U.S.C. Section 1350:
(b) Reports on Form 8-K:
On June 3, 2004, the Company filed a report on Form 8-K disclosing that on June
2, 2004, through its wholly-owned subsidiary, Encompass Group Affiliates, Inc.,
it acquired all of the operating assets, tangible and intangible property,
rights and licenses, goodwill, trade name and business of Cyber-Test, Inc., an
electronic equipment repair company, for a total purchase price consisting of
$3,000,000 in cash, a $498,469 three-year unsecured installment note and
50,000,000 shares of restricted Company common stock that may be earned pro rata
over a three-year period if Cyber-Test meets certain revenue and earnings
milestones and no event of forfeiture occurs.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES. The aggregate fees billed for professional services rendered was
$59,795 and $66,102 for the audit of the Company's annual financial statements
for the fiscal years ended June 30, 2004 and 2003, respectively, and the reviews
of the financial statements included in the Company's Forms 10-QSB for those
fiscal years.
AUDIT-RELATED FEES. The aggregate fees billed for professional services rendered
was $15,271 and $0 in connection with due diligence services for Cyber-Test,
Inc. for the fiscal years ended June 30, 2004 and 2003, respectively.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. None of the
professional services described in Paragraphs (C)(4)(ii) of Rule 2-01 of
Regulation S-X were rendered by the principal accountant for the fiscal year
ended June 30, 2004.
TAX FEES. No fees were billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning services.
ALL OTHER FEES. Other than the services described above, the aggregate fees
billed for services rendered by the principal accountant was $2,818 and $16,099
for the fiscal years ended June 30, 2004 and 2003, respectively. These fees
related to the review of the Company's Registration Statement in fiscal years
2004 and 2003, and 424B filing in fiscal 2004
POLICY FOR PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES
All engagements of our independent auditor to perform any audit services and
non-audit services were approved by the Audit Committee in accordance with its
normal functions. The Board of Directors and the Audit Committee are in the
process of creating a policy to pre-approve all audit services and all non-audit
services that our independent auditor will perform for us under applicable
federal securities regulations. As permitted by the applicable regulations, we
anticipate that the Audit Committee's policy will utilize a combination of
specific pre-approval on a case-by-case basis of individual engagements of our
independent auditor and general pre-approval of certain categories of
engagements up to predetermined dollar thresholds that will be reviewed annually
by the Audit Committee.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
-----------------------------------------
Name: Wayne I. Danson
Title: President and Chief Financial Officer
Date: November 3, 2004
In accordance with the Exchange Act, this amended report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Wayne I. Danson President (Principal Executive Officer), Chief
- ---------------------------- Financial Officer (Principal Accounting Officer) November 3, 2004
Wayne I. Danson and Director
/s/ Martin Nielson
- ----------------------------
Martin Nielson Senior Vice President-Acquisitions and Director November 3, 2004
/s/ Jonathan Lichtman, Esq.
- ----------------------------
Jonathan Lichtman, Esq. Secretary and Director November 3, 2004
/s/ Dr. Michael Finch
- ----------------------------
Dr. Michael Finch Director November 3, 2004
/s/ Randall Prouty
- ----------------------------
Randall Prouty Director November 3, 2004
/s/ Wilbank J. Roche, Esq.
- ----------------------------
Wilbank J. Roche, Esq. Director November 3, 2004
35
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONTENTS
PAGE F-1 INDEPENDENT AUDITORS' REPORT
PAGE F-2 CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND 2003
PAGE F-3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JUNE 30, 2004 AND 2003
PAGE F-4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY) FOR THE YEARS ENDED
JUNE 30, 2004 AND 2003
PAGE F-5 - F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 2004 AND 2003
PAGES F7 - F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 30, 2004
ii
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Advanced Communications Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Advanced
Communications Technologies, Inc., and Subsidiaries ("Company") as of June 30,
2004 and 2003 and the related consolidated statements of operations, changes in
stockholders' equity (deficiency) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Advanced
Communications Technologies, Inc. and Subsidiaries as of June 30, 2004 and 2003,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 12 to
the consolidated financial statements, the Company's negative cash flow from
operations of $829,775 and working capital deficiency of $2,197,667 as of June
30, 2004, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Note 12. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
August 20, 2004
F-1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
ASSETS
Current Assets
Cash $ 1,193,170 $ 22,527
Accounts Receivable (less allowance for doubtful accounts of
$8,914 and 0) 400,747 --
Inventory 350,963 --
Other Receivables and Prepaid Expenses 81,863 --
------------- -------------
Total Current Assets 2,026,743 22,527
------------- -------------
Property and equipment (net of accumulated depreciation of
$1,082 and 0) 165,434 --
------------- -------------
Other Assets
Investment in Partnership 2,774,999 --
Licensed Intangibles and rights 400,000 --
Deferred financing costs, net of accumulated amortization -- 40,521
Excess of Purchase Price over Fair Market Value of Assets Acquired 2,611,055 --
Security deposits -- 7,700
Other Deferred Costs 18,108 --
------------- -------------
Total Other Assets 5,804,162 48,221
------------- -------------
TOTAL ASSETS $ 7,996,339 $ 70,748
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 194,540 $ 1,560,165
Accrued compensation 152,343 172,183
Notes and Loans Payable-Current 3,488,567 1,148,567
5% Convertible Debentures -- 944,000
10% Secured Convertible Debentures, net of discount of $36,977 150,523 --
Accrued Interest payable 46,343 242,407
Warranty Reserve 120,977 --
Other Liabilities 71,117 --
------------- -------------
Total Current Liabilities 4,224,410 4,067,322
------------- -------------
Long-Term Liabilities
10% Secured Convertible Debentures, net of discount of $130,729 -- 56,771
Notes and Loans Payable-Non Current 2,347,467 1,906,829
------------- -------------
Total Long Term Liabilities 2,347,467 1,963,600
------------- -------------
TOTAL LIABILITIES 6,571,877 6,030,922
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock, $.01 par value, 25,000 shares authorized:
Series A Convertible Preferred stock, $.01 par value, 4,200
shares issued 42 --
Series B Convertible Preferred stock, $.01 par value, 300 shares
issued 3 --
Common stock, no par value, 5,000,000,000 and 200,000,000
shares authorized, 1,994,365,845 and 198,852,622 shares
issued and outstanding, respectively 28,745,253 25,945,005
Additional Paid in Capital 4,056,455 --
Deferred commitment and equity financing fees, net of accumulated amortization (135,432) (187,500)
Accumulated deficit (31,241,859) (31,717,679)
------------- -------------
Total Stockholders' Equity (Deficiency) 1,424,462 (5,960,174)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 7,996,339 $ 70,748
============= =============
See accompanying notes to consolidated financial statements
F-2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
--------------- ---------------
REVENUE $ 605,468 $ --
COST OF SALES 400,265 --
--------------- ---------------
GROSS PROFIT ON SALES $ 205,203 $ --
--------------- ---------------
OPERATING EXPENSES
Depreciation and amortization 229,103 425,812
Professional and consulting fees 292,633 648,328
Impairment of Fixed Assets -- 14,274
Other selling, general and administrative
expenses 266,525 128,362
--------------- ---------------
TOTAL OPERATING EXPENSES 788,261 1,216,776
--------------- ---------------
Loss From Operations (583,058) (1,216,776)
--------------- ---------------
OTHER INCOME (EXPENSES)
Forgiveness of debt 780,938 --
Lawsuit settlements -- (223,494)
Distributable share of partnership income 439,999 --
Interest (expense), net (162,059) (428,761)
--------------- ---------------
TOTAL OTHER INCOME (EXPENSES) 1,058,878 (652,255)
--------------- ---------------
NET INCOME (LOSS) $ 475,820 $ (1,869,031)
=============== ===============
Net income (loss) per share-basic and dilutive $ 0.00 $ (0.012)
=============== ===============
Weighted average number of shares
outstanding during the period-basic and dilutive 1,084,885,437 152,960,499
=============== ===============
See accompanying notes to consolidated financial statements
F-3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
COMMON STOCK PREFERRED STOCK
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
BALANCE AT JUNE 30, 2002 114,102,622 $ 25,471,098 -- $--
------------- ------------- ------------- -------------
Stock issued for services 500,000 5,000 -- --
Stock issued for conversion
of convertible debt 84,250,000 218,907 -- --
Interest on beneficial
conversion-Convertible
Debentures -- 250,000 -- --
Amortization of deferred
commitment fees -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 2003 198,852,622 $ 25,945,005 -- $--
------------- ------------- ------------- -------------
Common Stock issued for
cash, net 361,956,145 648,557 -- --
Preferred Stock-Series A
issued for cash, net -- -- 4,200 42
Stock issued for conversion
of convertible debt -- -- -- --
and accrued interest 585,283,270 1,117,681 -- --
Amortization of deferred
commitment fees -- -- -- --
Stock issued for professional
services 16,000,000 17,810 -- --
Stock issued to settle trade
creditors 125,297,618 335,000 -- --
Stock issued to settle
creditor claims 26,976,190 56,200 -- --
Preferred Stock-Series
B issued for licensed
intangibles -- -- 300 3
Escrowed stock 162,999,640 -- -- --
Stock issued in partial
payment of short term note 517,000,360 625,000 -- --
Net income for the year -- -- -- --
------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 2004 1,994,365,845 $ 28,745,253 4,500 $ 45
============= ============= ============= =============
DEFERRED
ADDITIONAL COMMITMENT
PAID IN ACCUMULATED AND EQUITY
CAPITAL DEFICIT FINANCING FEES TOTAL
-------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ -- $ (29,848,648) $ (562,500) $ (4,940,050)
------------- ------------- ------------- -------------
Stock issued for services -- -- -- 5,000
Stock issued for conversion
of convertible debt -- -- -- 218,907
Interest on beneficial
conversion-Convertible
Debentures -- -- -- 250,000
Amortization of deferred
commitment fees -- -- 375,000 375,000
Net loss for the year -- (1,869,031) -- (1,869,031)
------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 2003 $ -- $ (31,717,679) $ (187,500) $ (5,960,174)
------------- ------------- ------------- -------------
Common Stock issued for
cash, net -- -- (135,432) 513,125
Preferred Stock-Series A
issued for cash, net 3,756,458 -- -- 3,756,500
Stock issued for conversion
of convertible debt -- -- -- --
and accrued interest -- -- -- 1,117,681
Amortization of deferred
commitment fees -- -- 187,500 187,500
Stock issued for professional
services -- -- -- 17,810
Stock issued to settle trade
creditors -- -- -- 335,000
Stock issued to settle
creditor claims -- -- -- 56,200
Preferred Stock-Series
B issued for licensed
intangibles 299,997 -- -- 300,000
Escrowed stock -- -- -- --
Stock issued in partial
payment of short term note -- -- -- 625,000
Net income for the year -- 475,820 -- 475,820
------------- ------------- ------------- -------------
BALANCE AT JUNE 30, 2004 $ 4,056,455 $ (31,241,859) $ (135,432) $ 1,424,462
============= ============= ============= =============
See accompanying notes to consolidated financial statements
F-4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 475,820 $(1,869,031)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 229,103 425,812
Stock issued in exchange for services 2,810 5,000
Impairment of Fixed Assets -- 14,274
Lawsuit settlements -- 223,494
Debt discount expense 93,752 119,271
Forgiveness of debt (780,938) --
Distributive share of partnership income (439,999) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Deferred Costs and Other Receivables (58,619) --
Inventory (483) --
Prepaid expense/security deposits 5,486 15,452
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (419,696) 637,672
Interest payable 62,989 304,490
----------- -----------
Net cash (used in) operating activities (829,775) (123,566)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in partnership (2,670,000) --
Partnership distributions 335,000 --
Purchase of business (3,484,571) --
Cash Acquired on business asset purchase 643,195 --
----------- -----------
Net cash flow (used) in investing activities (5,176,376) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loan -- 35,000
Proceeds from issuance of common stock, net 513,125 --
Proceeds from the issuance of Series A Preferred Stock, net 3,756,500 --
Proceeds from short term promissory note 3,000,000 --
Repayment of short term and installment debts (92,831) --
Proceeds from issuance of convertible debt -- 100,000
----------- -----------
Net cash provided by financing activities 7,176,794 135,000
----------- -----------
Net increase in cash $ 1,170,643 $ 11,434
Cash at beginning of year 22,527 11,093
----------- -----------
CASH AT END OF YEAR $ 1,193,170 $ 22,527
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ 6,043 $ 0
Income Taxes Paid $ 0 $ 0
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the fiscal year ended June 30, 2004, the Company recorded $391,200
representing 152,273,808 shares of restricted common stock issued for prior
unpaid accrued professional fees and various creditor settlements.
During the fiscal year ended June 30, 2004, debenture holders converted $944,000
and $173,681 of principal and interest, respectively, into 492,801,173 and
92,482,097 shares of common stock respectively in full payment of this debt.
During the fiscal year ended June 30, 2004, the 5% convertible debenture holders
forgave $85,372 of accrued interest.
During the fiscal year ended June 30, 2004, the Company issued 16,000,000 shares
of restricted common stock valued at $17,810 for professional services rendered,
of which $2,810 was expensed and $15,000 was capitalized as part of the Hy-Tech
acquisition.
During the year ended June 30, 2004, the Company issued 517,000,360 shares of
common stock for the repayment of $625,000 of short-term loans and escrowed
162,999,640 shares of common stock for future payment of such loan.
During the fiscal year ended June 30, 2003, the Company issued 4,250,000 shares
of restricted common stock valued at $100,407 in full settlement of the
September 1999 12% Senior Secured Convertible Debentures.
See accompanying notes to consolidated financial statements
F-5
During the fiscal year ended June 30, 2003, the Company issued 500,000 shares of
restricted common stock valued at $5,000 in partial satisfaction of unpaid prior
legal and consulting fees.
During the fiscal year ended June 30, 2003, the Company converted $125,000 of
accrued interest into 10% Secured Convertible Debentures and incurred $25,000 of
financing costs associated with the issuance of its 10% Convertible Debentures.
During the fiscal year ended June 30, 2003, the Company issued 17,500,000 and
62,500,000 shares of common stock valued at $56,000 and $62,500 on the
conversion of 5% convertible debentures and 10% convertible debentures,
respectively.
F-6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
NOTE 1. BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Unless the context requires otherwise, "we", "us", or "our" refers to Advanced
Communications Technologies, Inc. and its subsidiaries (the "Company") on a
consolidated basis.
Advanced Communications Technologies, Inc., a Nevada corporation, was
incorporated on April 30, 1998 and was inactive from its date of formation until
April 1999 when it merged with and into the Company, a Florida corporation, in a
reverse merger. In consideration for 90% of the stock of the Company, Advanced
Communications Technologies, Inc. (Nevada) (of which Roger May, our former
Chairman and CEO was the principal shareholder) transferred all of its assets,
which included all of the rights and interest in the SpectruCell technology for
the North and South American territories. For accounting purposes, the merger
was treated as an acquisition of all of the assets of the Company and as a
recapitalization of the Company. In July 1999, the Company formed Advanced
Global Communications, Inc. ("AGC") as a wholly owned subsidiary to conduct its
international telephone network distribution business. On July 1, 2001, AGC
ceased operations and has been inactive since this date. On January 31, 2000,
the Company acquired all of the then issued and outstanding shares of
SmartInvestment.com, Inc. ("Smart"), an inactive reporting company, for 200,000
shares of restricted common stock. The Company elected successor issuer status
to become a fully reporting company. On December 9, 2003 and December 17, 2003,
the Company formed Hudson Street Investments, Inc. ("Hudson Street") and
SpectruCell, Inc., respectively, both wholly owned subsidiaries. Hudson Street
was formed for the purpose of holding the Company's investment in Yorkville
Advisors Management LLC (see Note 3) and other future investments and
SpectruCell, Inc. was formed for the purpose of holding the Company's rights in
the SpectruCell technology acquired in the above-referenced merger. In May 2004,
the Company formed Encompass Group Affiliates, Inc, a Delaware corporation for
the purpose of acquiring the business and assets of Cyber-Test, Inc., based in
Longwood, Florida, and operating our core business as a vertically integrated
technology and service business.
Business Activity. The Company's wholly owned subsidiary, Cyber-Test, operates
as an independent service organization providing repair service for facsimile
machines, printers, scanners, monitors, laptop computers, PDAs and multifunction
units and other consumer electronics. The repairs are performed on entire
machines and/or circuit boards. A 90-day warranty is given for all machine
repairs and a one-year warranty for all circuit board repairs. Cyber-Test
provides office equipment dealers, original manufacturers and third party
warranty companies a turnkey alternative for additional revenue by providing
repair service for their customers. A majority of Cyber-Test's sales are from
customers in the U.S. with minor foreign sales.
Major Customers. During the fiscal year ended June 30, 2004, Cyber-Test sales to
two customers accounted for 70% of its sales from June 2, 2004 to June 30, 2004,
the period of our ownership of the Cyber-Test business.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
(C) USE OF ESTIMATES
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with the
Company's warranties. If the actual value of the Company's inventories differs
from these estimates, the Company's operating results could be adversely
impacted. The actual results with regard to warranty expenditures could also
have an adverse impact on the Company if the actual rate of repair failure or
the cost to re-repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
F-7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(D) INVENTORY
Inventory consists primarily of repair parts, consumable supplies for resale and
used machines that are held for resale, and are stated at the lower of weighted
average cost or market. The weighted average cost of inventory approximates the
first-in, first-out ("FIFO") method. Management performs periodic assessments to
determine the existence of obsolete, slow-moving and nonsalable inventory and
records necessary provisions to reduce such inventory to net realizable value.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets are depreciated using the
straight-line method for both financial statement and tax purposes based on the
following estimated useful lives:
Leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Maintenance and repairs are charged to expense when incurred.
(F) WARRANTY RESERVE
Refurbished peripheral computer equipment sold to customers and the repair of
customer owned equipment is guaranteed for a period of ninety days and a period
of 12 months for the repair of circuit boards. Any defective refurbished
equipment is replaced free of charge and customer owned equipment is repaired
without charge during the warranty period. Cyber-Test provides a reserve for
warranty repairs based on historical failure rates and the estimated cost to
repair.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's accounts payable, accrued liabilities,
debentures, and loans payable approximate fair value due to the relatively short
period to maturity for these instruments.
(H) ALLOWANCE FOR DOUBTFUL ACCOUNTS
We make judgments as to our ability to collect outstanding receivables and
provide allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. For those invoices not specifically reviewed, provisions
are provided at differing rates, based upon the age of the receivable. In
determining these percentages, we analyze our historical collection experience
and current economic trends. If the historical data we use to calculate the
allowance provided for doubtful accounts does not reflect our future ability to
collect outstanding receivables, additional provisions for doubtful accounts may
be needed and the future results of operations could be materially affected.
During the fiscal year ended June 30, 2004, the Company established an allowance
for doubtful accounts for $8,914. As of June 30, 2004, accounts receivable from
two major customers aggregated $253,847 or 63% of accounts receivable.
(I) LONG-LIVED ASSETS
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If such review indicates that the asset is impaired,
when the carrying amount of an asset exceeds the sum of its expected future cash
flows, on an undiscounted basis, the asset's carrying amount is written down to
fair value. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
(J) EXCESS OF COST OVER NET ASSETS ACQUIRED
In accordance with SFAS No. 141, the Company allocates the purchase price of its
acquisitions to the tangible assets, liabilities and intangible assets acquired
based on their estimated fair values. The excess purchase price over those fair
values is recorded as "Excess of Cost Over Net Assets Acquired". The fair value
assigned to intangible assets acquired is either based on valuations prepared by
independent third party appraisal firms using estimates and assumptions provided
by management or negotiated at arms-length between the Company and the seller of
the acquired assets. In accordance with SFAS No. 142, goodwill and purchased
intangibles with indefinite lives acquired after June 30, 2001 are not
amortized, but will be reviewed periodically for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
F-8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(K) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109 "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The Company has made no current provision (benefit) for Federal income taxes
because of financial statement and tax losses since its inception. A valuation
allowance has been used to offset the recognition of any deferred tax assets
arising from net operating loss carryforwards due to the uncertainty of future
realization. The use of any tax loss carryforward benefits may also be limited
as a result of changes in Company ownership.
(L) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
(M) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method, that could share in the
earnings of an entity. During the year ended June 30, 2004, shares of common
stock that could have been issued upon conversion of convertible debt were
excluded from the calculation of diluted earnings (loss) per share as their
effect would have been anti-dilutive.
(N) BUSINESS SEGMENTS
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". The
Company operates in one segment and therefore segment information is not
presented.
Management has determined that it is not meaningful to provide geographic
segment disclosures for revenues and long-lived assets because the Company
performs services for and generates revenue from customers throughout the U.S.
(O) REVENUE RECOGNITION
The Company recognizes revenue from the sale of refurbished computer equipment
and related products upon delivery of goods to a common carrier for delivery to
the customer. Revenue for the repair of customer owned equipment is recognized
upon completion of the repair. The Company assumes the risk of loss due to
damage or loss of products during shipment. The Company is reimbursed by the
common carriers for shipping damage and lost products. The Company also sells
extended warranty and product maintenance contracts. Revenue from these
contracts is deferred and recognized as income on a straight-line basis over the
life of the contract, which is typically for a period of one year. Service
warranty and product maintenance revenue represented less than 5% of the
Company's total revenue for the period June 2, 2004 through June 30, 2004, our
period of ownership.
F-9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(P) INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
The Company accounts for its investment in an unconsolidated partnership under
the equity method of accounting, as the Company does not have any management
control over this entity. This investment was recorded initially at cost and
subsequently adjusted for equity in net earnings and cash distributions (See
Note 3).
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the U.S. Securities and Exchange Commission's Office of the Chief
Accountant and the Division of Corporate Finance released Staff Accounting
bulletin ("SAB") No. 105, "Loan Commitments Accounted for as Derivative
Instruments". SAB No. 105 contains specific guidance on the inputs to a
valuation-recognition model to measure loan commitments accounted for at fair
value, and requires that fair-value measurement include only differences between
the guaranteed interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer relationship or
loan servicing. In addition, SAB No. 105 requires the disclosure of the
accounting policy for loan commitments, including methods and assumptions used
to estimate the fair value of loan commitments, and any associated hedging
strategies. SAB No. 105 is effective for derivative instruments entered into
subsequent to March 31, 2004 and should also be applied to existing instruments
as appropriate. The Company has not yet completed its evaluation of SAB No. 105,
but does not anticipate a material impact on the financial statements.
NOTE 2. PROPERTY AND EQUIPMENT
2004 2003
--------------------------------
Computer, office equipment and fixtures $ 38,123 $ 32,909
Machinery and equipment 16,652 --
Leasehold improvements 111,741 --
Less: Accumulated depreciation (1,082) (18,635)
Impairment loss -- (14,274)
--------------------------------
PROPERTY AND EQUIPMENT, NET $ 165,434 $ --
================================
Depreciation expense for the years ended June 30, 2004 and 2003 was $1,082 and
$3,000 respectively. The Company determined that certain fixed assets were no
longer used in its operations, and consequently recorded on impairment loss of
$14,274 during fiscal 2003.
NOTE 3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
On January 14, 2004, the Company's wholly owned subsidiary, Hudson Street
purchased, for $2,625,000 a minority interest in Yorkville Advisors Management
LLC, ("Yorkville") a privately owned investment management partnership and the
portfolio manager of Cornell Capital Partners, L.P. The purchase was effective
as of January 1, 2004. Hudson Street incurred $45,000 of legal and professional
fees associated with the purchase of the partnership interest that has been
capitalized. During the fiscal year ended June 30, 2004, Hudson Street received
$335,000 of cash distributions from this investment and recorded $439,999 as its
distributive share of partnership net earnings. As of June 30, 2004, Hudson
Street's investment in Yorkville amounted to $2,774,999 under the equity method
of accounting and is reflected on the consolidated balance sheet in "Other
Assets".
NOTE 4. CREDITOR SETTLEMENTS AND DEBT FORGIVENESS
During the fiscal year ended June 30, 2004, the Company negotiated, settled
and/or converted approximately $2,250,000 of accounts payable and accrued
liabilities and convertible debentures at a discount, generating $780,938 of
forgiveness of debt income. The Company settled these liabilities, in part, with
cash and in part, through the issuance of restricted common stock (See Note 9(B)
and (C)).
F-10
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
NOTE 5. NOTES AND LOAN PAYABLE
JUNE 30,
2004 2003
---- ----
CURRENT:
8% Note Payable-Current $ 57,831 $ 57,831
12% Note Payable -- 35,000
Loan Payable-Shareholder 1,055,736 1,055,736
Note Payable-Cornell Capital 2,375,000 --
---------- ----------
Notes Payable-Current $3,488,567 $1,148,567
========== ==========
LONG-TERM:
6% Unsecured Note $ 498,469 $ --
Note Payable-ACT Australia 1,791,166 1,791,166
8% Note Payable-Non Current 57,832 115,663
---------- ----------
Notes Payable-Long-Term $2,347,467 $1,906,829
========== ==========
Future maturities of long-term debt as of June 30, 2004, excluding the note
payable to ACT Australia, and the loan payable to shareholders are as follows:
DATE AMOUNT
------------- ------------
June 30, 2005 $ 2,598,988
June 30, 2006 223,987
June 30, 2007 166,157
------------
TOTAL $ 2,989,132
============
(A) 8% NOTE PAYABLE
On November 14, 2002, the Company settled its litigation with the Needham/DuPont
plaintiffs by agreeing to release the plaintiffs' stock from restriction and
issued a three-year 8% promissory note in the principal amount of $173,494 to
reimburse the plaintiffs for their legal costs. The note is payable in three
equal annual installments of principal and interest, the first of which was due
on December 1, 2003 with additional installments due on December 1, 2004 and
December 1, 2005. The current portion of the note payable of $57,831 has been
classified as a current liability on the balance sheet.
On November 24, 2003, the Company paid the first loan installment of $57,831
plus accrued interest of $4,855.
As of June 30, 2004, $115,662 is outstanding, of which $57,831 is recorded as a
current liability as 8% Note Payable Current Portion. Accrued interest of
$15,122, as of June 30, 2004, is included in Interest Payable.
(B) NOTE PAYABLE TO ADVANCED COMMUNICATIONS (AUSTRALIA)
The Company had a non-interest bearing and unsecured note payable to Advanced
Communications (Australia) of $7,500,000 as of April 5, 2000. The note was
payable in three equal monthly installments commencing on May 31, 2000. Under
the terms of an April 5, 2000 Stock Purchase Agreement with Advanced
Communications (Australia) (the `Stock Purchase Agreement"), the monthly
installment payments were extended indefinitely without interest to allow the
Company, on a best efforts basis, to raise the cash portion of the purchase
price through a private or public offering of securities. There are no default,
penalty or acceleration provisions under the terms of the Stock Purchase
Agreement. Upon raising funds pursuant to a private or public offering, the
Company was obligated to repay Advanced Communications (Australia)'s note with
those funds remaining after deduction for reserves needed for current
operations, working capital and the development and expansion of its operations
and the operations of its subsidiaries, as determined by the Company's Board of
Directors.
F-11
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
On November 11, 2002, Advanced Communications (Australia) issued a Notice of
Termination to the Company which stated that the Stock Purchase Agreement was
terminated immediately due to the Company's insolvency. The effect of the Notice
of Termination was to cancel the Company's stock interest in Advanced
Communications (Australia). Management is of the belief that as a result of
Advanced Communications (Australia)'s termination of the Stock Purchase
Agreement, no further money is owed, and we have no further obligation to
Advanced Communications (Australia). The financial statements reflect $1,791,166
as a long-term liability until such time as the Company obtains evidence that
the above amount has been extinguished. In February 2004, the Company filed suit
in Superior Court, Orange County, California, against Advanced Communications
(Australia), Mr. May, our former Chairman and CEO, Global Communications
Technologies, Limited and Global Communications Technologies Pty Ltd. to recover
damages incurred as a result of wrongful actions by such defendants against the
Company and to clarify the status of the Company's obligations to such
defendants under the above arrangement. In May and August 2004, the court issued
an entry of default judgment for the Company and against all of the above
defendants.
(C) LOAN PAYABLE TO SHAREHOLDER
As of June 30, 2004 and 2003, the Company owed Global Communications Technology
Pty, an Australian company wholly-owned by Mr. May, a former officer and
director of the Company, $1,055,736, for funds advanced to the Company to
provide working capital. This loan is non-interest bearing and unsecured, and
has no scheduled date for repayment. The Company believes that the loan is not
due upon demand. However, since the actual repayment terms are not known with
any specificity because the terms are not confirmed in a written document, the
loan has been classified as a current liability. In February 2004, the Company
filed suit in Superior Court, Orange County, California, against Advanced
Communications (Australia), Mr. May, Global Communications Technologies, Limited
and Global Communications Technologies Pty Ltd. to recover damages incurred as a
result of wrongful actions by such defendants against the Company and to clarify
the status of the Company's obligations to such defendants under the above
arrangement. In May and August 2004, the court issued an entry of default
judgment for the Company and against all of the above defendants.
(D) NOTE PAYABLE-CORNELL CAPITAL PARTNERS, L.P.
During January 2004, the Company entered into a six-month promissory note with
Cornell Capital Partners, L.P. in the amount of $3,000,000, of which the net
proceeds of $2,829,000 were used to purchase its minority interest in the
Yorkville Advisors partnership. Under the terms of the promissory note, the
Company agreed to repay the note either in cash or through the net proceeds to
be received by the Company under its Equity Line of Credit facility over a
24-week period commencing February 23, 2004. The promissory note is non-interest
bearing and only becomes interest-bearing, at the rate of 24% or the highest
rate permitted by law, if lower, in the event that the note is not repaid when
due. As of June 30, 2004, the Company repaid $625,000 of the note from proceeds
on the issuance of 517,000,360 shares of common stock under its Equity Line of
Credit facility. During July 2004, the Company repaid $75,000 of the note by
issuing 162,999,640 shares of common stock previously held in escrow. During
September 2004, the Company repaid an additional $25,000 by issuing 9,881,886
shares of common stock under the Equity Line of Credit facility. During
September and October 2004, the Company repaid an additional $275,000 of the
note payable in cash. No interest is accrued on or owed under the terms of the
original $3,000,000 short-term obligation.
(E) 6% UNSECURED NOTE PAYABLE
Pursuant to the terms of the Cyber-Test, Inc. acquisition (See Note 7), on June
2, 2004, the Company issued a $498,469 three year 6% unsecured installment note
to the shareholders of Cyber-Test, Inc. as part of the purchase of the
Cyber-Test assets. The note matures on June 2, 2007, and is payable in three
equal annual installments of $166,156 plus accrued interest.
F-12
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
NOTE 6. CONVERTIBLE DEBENTURES
(A) 5% CONVERTIBLE DEBENTURES DUE JANUARY 2004
In January 2002, the Company issued, in the aggregate, $1 million of 5%
convertible debentures due 2004 to Cornell Capital Partners, LP and 15 other
accredited individual investors.
These debentures were convertible into shares of common stock at a price equal
to either (a) an amount equal to 120% of the closing bid price of the common
stock as of the closing date or $.40, whichever is higher, or (b) an amount
equal to 80% of the average of the four lowest closing bid prices of the common
stock for the five trading days immediately preceding the conversion date. These
convertible debentures accrued interest at a rate of 5% per year, were
convertible at the holder's option and had a term of two years. The Company
incurred $80,000 of financing costs associated with the 5% convertible
debentures that have been amortized over the life of the debentures.
Amortization of $30,000 and $40,000 related to these debentures was expensed for
the fiscal years ended June 30, 2004 and 2003.
On October 28, 2003 and November 10, 2003, holders of the 5% convertible
debentures agreed to forgive $85,372 of accrued interest, in the aggregate.
During the year ended June 30, 2004, the bondholders elected to convert $944,000
of principal and $173,681 of accrued interest into 492,801,173 and 92,482,047
shares of common stock, respectively, which resulted in the complete liquidation
of the debt under the 5% debentures.
As of June 30, 2004 and 2003, interest of $37,997 and $221,056 has been expensed
on these debentures.
(B) 10% SECURED CONVERTIBLE DEBENTURES DUE NOVEMBER 2004
On November 22, 2002, the Company entered into a Securities Purchase Agreement
with Cornell Capital Partners, L.P., whereby it agreed to issue and sell Two
Hundred Fifty Thousand Dollars ($250,000) of 10% secured convertible debentures.
These secured convertible debentures have a term of two years and are
convertible into shares of common stock at a price equal to $.001 per share.
These secured convertible debentures accrue interest at a rate of 10% per year
and are convertible at the holder's option. At the Company's option, these
debentures may be paid in cash or redeemed at a 20% premium on or before
December 15, 2002 and at a 50% premium after December 15, 2002 and prior to
November 2004. In connection with the Securities Purchase Agreement, the Company
entered into a Security Agreement in favor of Cornell Capital Partners, L.P.
whereby it granted a security interest in all of its assets as security for its
obligations under the secured convertible debentures, as well as all other
obligations of the Company to Cornell Capital Partners, L.P. whether arising
before, on or after the date of the Security Agreement, including, without
limitation, those obligations of the Company to Cornell Capital Partners, L.P.
under the 5% convertible debentures dated January 2002.
The 10% convertible debentures contain a beneficial conversion feature computed
at its intrinsic value that is the difference between the conversion price and
the fair value on the debenture issuance date of the common stock into which the
debt is convertible, multiplied by the number of shares into which the debt is
convertible at the commitment date. The amount attributable to the beneficial
conversion feature of $250,000 is recorded as a discount on the debt and
accreted over a 24-month period as interest expense in accordance with EITF
00-27. For the fiscal years ended June 30, 2004 and 2003, the Company accreted
$93,752 and $61,979, respectively, of debt discount as interest expense.
The Company received $100,000 in cash from the sale of these debentures, paid
$125,000 in accrued interest due on the 5% convertible debentures and incurred
$25,000 of financing costs that has been amortized over the life of the 10%
secured convertible debentures. Amortization expense of $10,521 and $7,812
related to these debentures was recorded for the fiscal years ended June 30,
2004 and 2003, respectively.
On January 22, 2003, Cornell Capital Partners, L.P. elected to convert $62,500
of 10% secured convertible debentures at a conversion price of $.001 per share
into 62,500,000 shares of restricted common stock. As of June 30, 2004, the
$187,500 balance due on these debentures, after the aforementioned conversion,
net of the related debt discount in the amount of $36,977, is $150,523.
F-13
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
As of June 30, 2004 and 2003, interest of $31,221 and $12,522, is accrued on
these debentures, respectively.
NOTE 7. ACQUISITION OF CYBER-TEST, INC.
On June 2, 2004, our wholly owned subsidiary, Encompass Group Affiliates, Inc.
("Encompass"), acquired the business and assets of Cyber-Test, Inc., a
Florida-based, electronic equipment repair company. Cyber-Test became the core
operating business of Encompass with 85 employees and annual sales of
approximately $6,000,000. The Company accounted for this acquisition using the
purchase method of accounting in accordance with the provisions of SFAS 141.This
acquisition is the Company's first step in expanding the businesses of the
Company's subsidiaries into a vertically integrated technology and service
business. Under the terms of the Asset Purchase Agreement between Cyber-Test and
Encompass, Encompass acquired all of the operating assets, tangible and
intangible property, rights and licenses, good-will and business of Cyber-Test,
for a total purchase price of $3,498,469 consisting of $3,000,000 in cash, and a
$498,469 three year 6% unsecured installment note. The Company also incurred
$234,108 of capitalized transaction costs inclusive of $125,000 of broker fees
for a total acquisition cost of $3,732,577. In addition, under the terms of the
Asset Purchase Agreement, the Company has agreed to contingently increase the
purchase price by $500,000 by agreeing to issue to the sellers, 50,000,000
shares of restricted common stock priced at $.01 per share, to be earned on a
pro rata basis over the next three years based on Cyber-Test, Inc. meeting
certain revenue and earning milestones and certain events of forfeiture do not
occur (the "Contingent Stock Consideration"). Milestones mean the following
revenue and earnings before interest, taxes, depreciation and amortization
("EBITDA") goals of Cyber-Test for the applicable year:
FISCAL YEAR END REVENUES EBITDA
- --------------------------------------------------------------------------------
June 30, 2005 $ 6,600,000 $ 500,000
June 30, 2006 $ 8,600,000 $ 860,000
June 30, 2007 $11,600,000 $ 1,400,000
The Contingent Stock Consideration is subject to forfeiture in its entirety, at
any time, if the Chief Executive Officer of Cyber-Test is terminated for cause,
or resigns from the Company prior to June 30, 2007.
This acquisition has been accounted for by the purchase method of accounting
and, accordingly, the operating results have been included in the Company's
consolidated results of operations from the date of acquisition. The Company
acquired net tangible assets valued at $1,286,985. The excess of the
consideration given over the fair value of net assets acquired has been recorded
as goodwill of $2,445,592. The Company will account for the purchased goodwill
in accordance with the provisions of SFAS 142. The future liability, if any,
associated with any Contingent Stock Consideration issuable in conjunction with
this acquisition based on the achievement of certain revenue and EBITDA results
over a three year period will be recorded as additional goodwill in fiscal 2007
after all events of forfeiture lapse.
The purchase price allocation recorded for the acquisition of the assets and
liabilities assumed of Cyber-Test is as follows:
Cash $ 643,195
Accounts receivables, net 391,101
Inventory 350,480
Prepaid expenses and other assets 48,784
Property and equipment 166,516
----------
Total assets $1,600,076
----------
Liabilities assumed:
Accounts payable & accrued expenses 206,973
Accrued vacation pay 71,200
Other current liabilities 34,918
----------
Total liabilities assumed 313,091
----------
Excess of assets acquired over liabilities assumed 1,286,985
Purchase price 3,732,577
----------
Goodwill $2,445,592
==========
F-14
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of Cyber-Test had been made at the beginning of
the periods presented:
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
Net sales $ 6,096,547 $ 6,037,476
Net earnings (loss) $ 498,247 $(1,600,486)
Basic and diluted earnings (loss)
per common shares $ (.00) $ (.01)
The following unaudited pro forma consolidated balance sheet as of June 30,
2003, is presented as if the acquisition of Cyber-Test had been made at the
beginning of the fiscal year ended June 30, 2003:
CONSOLIDATED BALANCE SHEET DATA
Assets:
Cash $ 665,722
Accounts Receivable, Net 400,747
Inventory 350,963
Other receivables 81,863
-----------
Current Assets 1,499,295
-----------
Property and Equipment, Net 165,434
Prepaid Expenses and Other Assets 48,221
Excess of Cost Over Net Assets Acquired 2,445,592
-----------
Total Assets $ 4,158,542
===========
Liabilities:
Accounts Payable and Accrued Expenses $ 1,767,138
Accrued Compensation 172,183
Notes and Interest Payable 335,238
Vacation Pay 71,200
Loan Payable to Shareholder 1,055,716
5% Convertible Debentures 944,000
-----------
Current Liabilities 4,345,475
-----------
Long-Term Liabilities
10% Convertible Debentures 56,771
8% Note Payable-Non Current Portion 115,663
Note Payable ACT (Australia) 1,791,166
-----------
Total Liabilities 6,309,075
Stockholders' Deficiency (2,150,533)
-----------
Total Liabilities and Stockholders' Deficiency $ 4,158,542
===========
F-15
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the purchase been made at the
beginning of the periods presented or the future results of the combined
operations.
NOTE 8. LICENSED INTANGIBLES
On May 27, 2004 the Company's wholly-owned subsidiary, Encompass Group
Affiliates, Inc. entered into an Agreement with Hy-Tech Technology Group, Inc
and Hy-Tech Computer Systems, Inc (collectively "Hy-Tech") to license and use on
an exclusive, worldwide, royalty-free, perpetual, non-terminable and irrevocable
right basis various intangible assets of Hy-Tech including its customer lists
and corporate web addresses. In addition, and as part of the Agreement,
Encompass acquired all of Hy-Tech's rights to negotiate and acquire certain
business and assets of three independent companies in the technology and service
business as well as the exclusive right to extend an offer of employment to
Martin Nielson, to become an executive officer of Encompass. In exchange for the
above, Encompass agreed to assume $503,300 of Hy-Tech's convertible debentures.
On June 23, 2004, the Company closed on the Agreement and entered into an
Exchange Agreement with the Hy-Tech debenture holders wherein the Company paid
$203,300 to the debenture holders in cash and issued 300 shares of its
non-voting Convertible Preferred Shares having a liquidation value of $1,000 per
share in full satisfaction of the convertible debentures. See Note 9(E).
The Company recorded $400,000 of licensed intangibles and $165,463 of goodwill
(inclusive of $62,163 of capitalized transaction costs).
NOTE 9. STOCKHOLDERS' EQUITY
On July 9, 2003, the Company's stockholders authorized a change in the Company's
Articles of Incorporation increasing the authorized no par value common shares
from 200,000,000 to 5,000,000,000 shares. A Certificate of Amendment to the
Company's Articles of Incorporation reflecting the change was filed with the
Florida Secretary of State on July 10, 2003.
(A) EQUITY LINE OF CREDIT FACILITY
In July 2003, the Company entered into a $30 million Equity Line of Credit
facility with Cornell Capital Partners, LP. Pursuant to the Equity Line of
Credit, the Company may, at its discretion, periodically issue and sell to
Cornell Capital Partners, LP shares of common stock for a total purchase of $30
million. The amount of each advance is subject to an aggregate monthly maximum
advance amount of $2 million in any 30-day period. Cornell Capital Partners, LP
will purchase the shares of common stock for a 9% discount to the lowest closing
bid price of the Company's common stock during the 5 trading days after a notice
date. In addition, Cornell Capital Partners, LP will retain 3% of each advance
under the Equity Line of Credit, together with a one-time commitment fee of
$750,000, paid in 2,960,000 shares of common stock. Cornell Capital Partners, LP
intends to sell any shares under the Equity Line of Credit at the then
prevailing market price. On July 31, 2003, the SEC declared effective the
Company's Registration Statement.
F-16
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
For the fiscal years ended June 30, 2004 and 2003, the Company recorded
amortization expense of $187,500 and $375,000 respectively in connection with
the $750,000 two year commitment fee and the balance as of June 30, 2003 was
recorded as deferred commitment fees and classified as part of stockholders'
equity.
During the fiscal year ended June 30, 2004, the Company issued 361,956,145
shares of common stock under the Equity Line of Credit facility for $725,000.
The Company netted $684,125 from these issuances after deducting escrow agent
expenses and other direct costs totaling $40,875 that has been recorded as a
reduction of common stock as of June 30, 2004.
(B) STOCK ISSUED FOR CONVERTIBLE DEBENTURES
During the fiscal year ended June 30, 2004, the 5% convertible debenture holders
converted $944,000 of debentures and $173,681 of accrued interest into
492,801,173 and 92,482,097 shares of common stock, respectively.
(C) STOCK ISSUED FOR NOTE PAYABLE
During the fiscal year ended June 30, 2004, the Company issued 517,000,360
shares of common stock in partial repayment of the note payable due to Cornell
Capital Partners, L.P. (See Note 5(D)).
(D) STOCK ISSUED FOR SERVICES
During January 2004, the Company's Board of Directors approved the issuance of
1,000,000 shares of restricted common stock to a third party consultant having a
value of $2,810 in consideration of professional services rendered to the
Company. During June 2004 the Company's Board of Directors approved the issuance
of 15,000,000 shares of restricted common stock having a value of $15,000 to two
consultants for services rendered in connection with the Cyber-Test acquisition.
During the fiscal year ended June 30, 2004, the Company issued 152,273,808
shares of restricted common stock to various creditors, including certain
insiders, to settle prior unpaid accounts payable and creditor claims
aggregating $391,200.
(E) PREFERRED STOCK
o SERIES A CONVERTIBLE PREFERRED STOCK
The Company has 25,000 shares of preferred stock authorized for issuance in one
or more series, at a par value of $.01 per share. In conjunction with the
acquisition of the Cyber-Test business, the Company issued 4,200 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Shares") having a
liquidation value of $1,000 per share, to Cornell Capital Partners, L.P. (the
"Holder"). The Holder of the Series A Preferred Shares is entitled to receive
cash dividends on a cumulative basis, in arrears, at the annual rate of 5% when
and if a dividend is scheduled by the Company's board of directors. The Series A
Preferred Shares are convertible, in whole or in part, on or after May 21, 2005
into shares of common stock at the fixed price of $.01 per share or 100% of the
average of the three lowest closing bid prices for the ten trading days
immediately preceding the date of conversion, whichever is lower.
The Series A Preferred Shares are nonvoting and redeemable at the option of the
Company, in whole or in part, at any time at a 20% premium to liquidation value.
In any liquidation of the Company, each of the Series A Preferred Shares will be
entitled to a liquidation preference before any distribution may be made on the
Company's common stock or any series of capital stock that is junior to the
Series A Preferred Shares. In the event of a fundamental change in control of
the Company or its current management, the Holder of the Series A Preferred
Shares has the immediate right to convert their Series A Preferred Shares into
common stock of the Company.
o SERIES B CONVERTIBLE PREFERRED STOCK
F-17
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
During the fiscal year ended June 30, 2004 and in conjunction with the Company's
license of certain intangible assets (see Note 8) the Company issued 300 shares
of nonvoting Series B Convertible Preferred Stock (the "Series B Preferred
Shares"), having a liquidation value of $1,000 per share. The Series B Preferred
Shares have the same terms and privileges as the Series A Preferred Shares, but
are junior to the Series A Preferred Shares in the event of a liquidation of the
Company, and are convertible, in whole or in part, on or after June 24, 2005
into shares of common stock on the same terms of the Series A Preferred Shares.
NOTE 10. COMMITMENTS AND CONTINGENCIES
(A) LEGAL MATTERS
During the fiscal year ended June 30, 2004, the Company settled a majority of
its accounts payable and accrued liabilities at substantial discounts, the
financial results of which have been recorded in the Company's June 30, 2004
consolidated financial statements. The Company has been, and may in the future
be involved as, a party to various legal proceedings, which are incidental to
the ordinary course of business. Management regularly analyzes current
information and, as necessary, provides accruals for probable liabilities on the
eventual disposition of these matters. In the opinion of management, as of June
30, 2004, there were no threatened or pending legal matters that would have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
On February 5, 2004, the Company filed suit in Superior Court, Orange County,
California, against Advanced Communications (Australia), Roger May, Global
Communications Technologies Limited and Global Communications Technologies Pty
Ltd to recover damages incurred as a result of wrongful actions of such
defendants against the Company and to clarify the status of the Company's
obligations to such defendants under various agreements and other arrangements,
from which the Company believes it has been relieved of as a result of such
wrongful actions. In May and August 2004, the court issued an entry of default
judgment for the Company and against all of the above defendants.
(B) OPERATING LEASE COMMITMENT
Cyber-Test, the Company's operating subsidiary, leases on a triple net basis,
approximately 29,000 square feet of office and warehouse space in Longwood,
Florida. The lease period runs from August 1, 2004 through July 31, 2005 at the
rate of $13,500 per month or $162,000 for the remaining term of the lease.
NOTE 11. RELATED PARTIES
(A) LEGAL COUNSEL
Certain of the Company's legal counsel are stockholders and directors of the
Company. The Company has paid these attorneys, for current and prior legal
services, an aggregate of $150,004 in cash and $155,000 in stock during the
fiscal year 2004, and $0 in cash and $2,000 in stock during the fiscal year
2003. At June 30, 2004, the Company owes these attorneys an aggregate of
$67,636, which is included in accounts payable and accrued expenses.
(B) PRESIDENT AND CHIEF FINANCIAL OFFICER
The Company's President and Chief Financial Officer, who is also a director and
stockholder of the Company, and Managing Director and Founder of a separate
company, has been contracted to provide business and financial consulting
services to the Company. The Company paid this consultant, for current and prior
executive and financial services, $279,794 in cash and $150,000 in stock during
fiscal 2004, and $3,000 in cash and $1,000 in stock during fiscal 2003. At June
30, 2004, the Company does not owe an amount to this consultant.
(C) INDEPENDENT DIRECTORS
Certain of the Company's independent directors were contracted to provide
business services to the Company. The Company paid these independent directors,
for current and prior business services, an aggregate of $24,666 in cash and
$30,000 in stock during fiscal 2004, and $0 in cash and $2,000 in stock during
fiscal 2003. At June 30, 2004, the Company owes these independent directors an
aggregate of $23,406 which is included in accounts payable and accrued expenses.
F-18
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
NOTE 12. GOING CONCERN
The Company's consolidated financial statements for the fiscal year ended June
30, 2004, have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Company's negative cash flow from operations of
$829,775 and working capital deficiency of $2,197,667 as of June 30, 2004, raise
substantial doubt about its ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to resolve liquidity problems by generating sufficient
operating profits to provide an additional source of working capital.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-19
EXHIBIT 3.1.6
SIXTH AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.,
A FLORIDA CORPORATION (THE "CORPORATION")
WHEREAS, the Corporation's Articles of Incorporation, as amended, provide that
the Board of Directors of the Corporation may establish the rights, designations
and preferences of the Corporation's Preferred Stock, the undersigned hereby
adopts the following Articles of Amendment to the Articles of Incorporation of
the Corporation, pursuant to the terms of Section 607.0602 of the Florida
Business Corporation Act:
1. The name of the Corporation is Advanced Communications Technologies, Inc.
(the "Corporation"), filed with the Florida Department of State on March 6, 1997
and assigned document number P07000020967.
2. Article III of the Articles of Incorporation of the Corporation is hereby
amended to read as set forth on Exhibit A attached.
The foregoing amendment was adopted by unanimous written consent of the Board of
Directors of the Corporation on May 21, 2004 in accordance with the terms of
Section 607.0602 and 607.0821 of the Florida Business Corporation Act and
consequently, the number of votes cast in favor of the Amendment was sufficient
for its approval. The amendment was adopted by the Board of Directors without
shareholder action as shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment
this 21 day of May, 2004.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
BY: /s/ Wayne I. Danson
----------------------------------------
Wayne I. Danson, President
EXHIBIT A
ARTICLE III. CAPITAL STOCK
The maximum number of shares of stock that this Corporation is authorized to
have outstanding at any one time is 5,000,025,000 shares. Of such shares,
5,000,000,000 shall be common stock having no par value per share. The remaining
shares shall be shares of preferred stock, par value $.01 per share. The
preferred stock may be issued from time to time by authorization of the Board of
Directors of this Corporation with such rights, designations, preferences and
other terms as the Board of Directors shall determine from time to time.
2
CERTIFICATE OF DESIGNATION
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
(PAR VALUE $0.001 PER SHARE)
OF
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
The undersigned, a duly authorized officer of Advanced Communications
Technologies, Inc., a Florida corporation (the "Company"), in accordance with
the provisions of Section 607.0602 of the Florida Business Corporation Act, DOES
HEREBY CERTIFY that the following resolution was duly adopted by the Board of
Directors by unanimous written consent pursuant to Section 607.0821 of the
Florida Business Corporation Act on May 20, 2004:
RESOLVED, that the Board has determined that it is in the best interests of the
Company to provide for the designation and issuance of certain Series A
Convertible Preferred Stock, par value of $0.001 per share (the "Series A
Preferred Stock"), to consist of up to Four Thousand Two Hundred (4,200) shares,
and hereby fixes the powers, designations, preferences, and relative,
participating, optional and other special rights of the shares of such Series A
Preferred Stock, as follows:
SECTION 1
DESIGNATION AND RANK
1.1. Designation. This resolution shall provide for a single series of Preferred
Stock, the designation of which shall be "Series A Convertible Preferred Stock",
par value $0.001 per share. The number of authorized shares constituting the
Series A Preferred Stock is 4,200. The Series A Preferred Stock will have a
liquidation preference as determined in Section 3.1 below.
1.2. Rank. With respect to the payment of dividends and other distributions on
the capital stock of the Company, including distribution of the assets of the
Company upon liquidation, the Series A Preferred Stock shall be senior to the
common stock of the Company, par value $0.001 per share (the "Common Stock"),
and senior to all other series of preferred stock (the "Junior Stock").
SECTION 2
DIVIDEND RIGHTS
2.1. Dividends or Distributions. The holders of Series A Preferred Stock shall
be entitled to receive dividends or distributions on a pro rata basis according
to their holdings of shares of Series A Preferred Stock when and if declared by
the Board of Directors of the Company in the amount of five (5.0%) percent per
year. Dividends shall be paid in cash. Dividends shall be cumulative. No cash
dividends or distributions shall be declared or paid or set apart for payment on
the Common Stock in any calendar year unless cash dividends or distributions on
the Series A Preferred Stock for such calendar year are likewise declared and
paid or set apart for payment. No declared and unpaid dividends shall bear or
accrue interest. SECTION 3
LIQUIDATION RIGHTS
3.1. Liquidation Preference. Upon any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary (collectively, a "Liquidation"),
before any distribution or payment shall be made to any of the holders of Common
Stock or any series of preferred stock, the holders of Series A Preferred Stock
shall be entitled to receive out of the assets of the Company, whether such
assets are capital, surplus or earnings, an amount equal to $1,000 per share of
Series A Preferred Stock (the "Liquidation Amount") plus all declared and unpaid
dividends thereon, for each share of Series A Preferred Stock held by them.
3.2. Pro Rata Distribution. If, upon any Liquidation, the assets of the Company
shall be insufficient to pay the Liquidation Amount, together with declared and
unpaid dividends thereon, in full to all holders of Series A Preferred Stock,
then the entire net assets of the Corporation shall be distributed among the
holders of the Series A Preferred Stock, ratably in proportion to the full
amounts to which they would otherwise be respectively entitled and such
distributions may be made in cash or in property taken at its fair value (as
determined in good faith by the Company's Board of Directors), or both, at the
election of the Company's Board of Directors.
3.3. Merger, Consolidation or Reorganization. For purposes of this Section 3, a
Liquidation shall not be deemed to be occasioned by or to include the merger,
consolidation or reorganization of the Company into or with another entity
through one or a series of related transactions, or the sale, transfer or lease
of all or substantially all of the assets of the Company.
SECTION 4
CONVERSION RIGHTS
4.1. Conversion. The holders of Series A Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Each share of Series A Preferred Stock shall be convertible, at the option
of the holder thereof, at any time after the date of issuance of such share
(subject to Section 4.5 hereof), at the office of the Company or any transfer
agent for the Series A Preferred Stock into such number of fully paid and
non-assessable shares of Common Stock as is determined by dividing (a) the sum
of (i) the Liquidation Amount of the Series A Preferred Stock, plus (ii) all
accrued but unpaid dividends thereon, by (b) the "Conversion Price" then in
effect. The Conversion Price shall be equal to either (a) $0.01 per share (which
shall be adjusted in the event of a subdivision, or combination of shares), or
(b) 100.0% of the average of the three (3) lowest closing bid prices of the
Common Stock for the ten (10) trading days immediately preceding the date of
conversion, whichever is lower. The closing bid price shall be determined using
price quotations from Bloomberg LP.
2
(b) Each share of Series A Preferred Stock automatically shall convert into
shares of Common Stock at the Conversion Price then in effect immediately upon
the consummation of the occurrence of a stock acquisition, merger, consolidation
or reorganization of the Company into or with another entity through one or a
series of related transactions, or the sale, transfer or lease (but not
including a transfer by pledge or mortgage to a bona fide lender) of all or
substantially all of the assets of the Company.
4.2. Adjustments. The Conversion Price of the Series A Preferred Stock as
described in Section 4.1 above shall be adjusted from time to time as follows:
(a) In the event of any reclassification of the Common Stock or recapitalization
involving Common Stock (excluding a subdivision, or combination of shares or any
other event described in Sections 4.2(a) or (b)) the holders of the Series A
Preferred Stock shall thereafter be entitled to receive, and provision shall be
made therefor in any agreement relating to the reclassification or
recapitalization, upon conversion of the Series A Preferred Stock, the kind and
number of shares of Common Stock or other securities or property (including
cash) to which such holders of Series A Preferred Stock would have been entitled
if they had held the number of shares of Common Stock into which the Series A
Preferred Stock was convertible immediately prior to such reclassification or
recapitalization; and in any such case appropriate adjustment shall be made in
the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of the Series A Preferred Stock, to the
end that the provisions set forth herein shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares, other securities, or
property thereafter receivable upon conversion of the Series A Preferred Stock.
An adjustment made pursuant to this subparagraph (a) shall become effective at
the time at which such reclassification or recapitalization becomes effective.
(b) In the event the Company shall declare a distribution payable in securities
of other entities or persons, evidences of indebtedness issued by the Company or
other entities or persons, assets (excluding cash dividends) or options or
rights not referred to in Sections 4.2(a) above, the holders of the Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Company into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
shares of Common Stock of the Company entitled to receive such distribution or
if no such record date is fixed, as of the date such distribution is made.
4.3. Procedures for Conversion.
(a) In order to exercise conversion rights pursuant to Section 4.1(a) above, the
holder of the Series A Preferred Stock to be converted shall deliver an
irrevocable written notice of such exercise to the Company, at its principal
office. The holder of any shares of Series A Preferred Stock shall, upon any
conversion of such Series A Preferred Stock in accordance with this Section 4,
surrender certificates representing the Series A Preferred Stock to the Company,
at its principal office, and specify the name or names in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
In case such holder shall specify a name or names other than that of such
holder, such notice shall be accompanied by payment of all transfer taxes (if
transfer is to a person or entity other than the holder thereof) payable upon
the issuance of shares of Common Stock in such name or names. As promptly as
practicable, and, if applicable, after payment of all transfer taxes (if
transfer is to a person or entity other than the holder thereof), the Company
shall deliver or cause to be delivered certificates representing the number of
validly issued, fully paid and nonassessable shares of Common Stock to which the
holder of the Series A Preferred Stock so converted shall be entitled. Such
conversion, to the extent permitted by law, shall be deemed to have been
effected as of the date of receipt by the Company of any notice of conversion
pursuant to Section 4.1(a) above, or, in the case of an automatic conversion
pursuant to Section 4.1(b) above, upon the occurrence of any event specified
therein. Upon conversion of any shares of Series A Preferred Stock, such shares
shall cease to constitute shares of Series A Preferred Stock and shall represent
only a right to receive shares of common stock into which they have been
converted.
3
(b) In connection with the conversion of any shares of Series A Preferred Stock,
no fractions of shares of Common Stock shall be issued, but the Company shall
pay cash in lieu of such fractional interest in an amount equal to the product
of the Conversion Price and such fractional interest.
(c) The Company shall at all times reserve and keep available out of its
authorized Common Stock the full number of shares of Common Stock of the Company
issuable upon the conversion of all outstanding shares of Series A Preferred
Stock. In the event that the Company does not have a sufficient number of shares
of authorized but unissued Common Stock necessary to satisfy the full conversion
of the shares of Series A Preferred Stock, then the Company shall call and hold
a meeting of the shareholders within 30 days of such occurrence for the sole
purpose of increasing the number of authorized shares of Common Stock. The
Company's Board of Directors shall recommend to shareholders a vote in favor of
such proposal and shall vote all shares held by them, in proxy or otherwise, in
favor of such proposal. This remedy is not intended to limit the remedies
available to the holders of the Series A Preferred Stock, but is intended to be
in addition to any other remedies, whether in contract, at law or in equity.
4.4. Notices of Record Date. In the event that the Company shall propose at any
time: (a) to declare any dividend or distribution upon any class or series of
capital stock, whether in cash, property, stock or other securities; (b) to
effect any reclassification or recapitalization of its Common Stock outstanding
involving a change in the Common Stock; or (c) to merge or consolidate with or
into any other corporation, or to sell, lease or convey all or substantially all
of its property or business, or to liquidate, dissolve or wind up; then, in
connection with each such event, the Company shall mail to each holder of Series
A Preferred Stock:
(a) at least twenty (20) days' prior written notice of the date on which a
record shall be taken for such dividend or distribution (and specifying the date
on which the holders of the affected class or series of capital stock shall be
entitled thereto) or for determining the rights to vote, if any, in respect of
the matters referred to in clauses (b) and (c) in Section 4.4 above; and
4
(b) in the case of the matters referred to in Section 4.4 (b) and (c) above,
written notice of such impending transaction not later than twenty (20) days
prior to the shareholders' meeting called to approve such transaction, or twenty
(20) days prior to the closing of such transaction, whichever is earlier, and
shall also notify such holder in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction (and specify the date on which the
holders of shares of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon the occurrence of such
event) and the Company shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than
twenty (20) days after the Company has given the first notice provided for
herein or sooner than ten (10) days after the Company has given notice of any
material changes provided for herein.
4.5. Limitations of Conversion.
(a) Subject to the Termination Rights specified in Section 4.5(b) hereof, the
Conversion Rights specified herein shall be subject to the following
limitations:
(i) The holders of the shares of Series A Preferred Stock may exercise their
Conversion Rights at any time on or after May 21, 2005; and
(ii) No holder of the shares of Series A Preferred Stock shall be entitled to
convert the Series A Preferred Stock to the extent, but only to the extent, that
such conversion would, upon giving effect to such conversion, cause the
aggregate number of shares of Common Stock beneficially owned by such holder to
exceed 4.99% of the outstanding shares of Common Stock following such conversion
(which provision may be waived by such holder by written notice from such holder
to the Company, which notice shall be effective 61 days after the date of such
notice).
(b) The limitations on the Conversion Rights specified in Section 4.5(a) hereof
shall terminate (the "Termination Rights") if there is a Change in Control of
the Company (as defined below). For the purpose of hereof, a "Change in Control"
of the Company has occurred when: (i) any person (defined herein to mean any
person within the meaning of Section 13(d) of the Securities Exchange Act of
1934 (the "Exchange Act")), other than the Company, or an employee benefit plan
established by the Board of Directors of the Company, acquires, directly or
indirectly, the beneficial ownership (determined under Rule 13d-3 of the
regulations promulgated by the Securities and Exchange Commission under Section
13(d) of the Exchange Act) of securities issued by the Company having forty
percent (40%) or more of the voting power of all of the voting securities issued
by the Company in the election of directors at the meeting of the holders of
voting securities to be held for such purpose; or (ii) a majority of the
directors elected at any meeting of the holders of voting securities of the
Company are persons who were not nominated for such election by the Board of
Directors of the Company or a duly constituted committee of the Board of
Directors of the Company having authority in such matters; or (iii) the Company
merges or consolidates with or transfers substantially all of its assets to
another person; (iv) a change in the Chief Executive Officer of the Company from
that person that serves in such position on the date hereof.
5
SECTION 5
NO VOTING RIGHTS
5.1. General. The Series A Preferred Stock shall not have any voting rights,
except as required under the Florida Business Corporation Act.
SECTION 6
REDEMPTION RIGHTS
5.1. After providing 10 days prior written notice to the holders of the Series A
Preferred Stock, the Company shall have the right to redeem (unless otherwise
prevented by law) any outstanding shares of Series A Preferred Stock at an
amount equal to 120% of the Liquidation Amount, plus accrued but unpaid
dividends thereon (the "Redemption Price"). The Company shall consummate the
redemption and pay the Redemption Price within 20 days of the date of such
notice. The Redemption Price shall be paid in immediately available funds.
SECTION 7
MISCELLANEOUS
5.1. Headings of Subdivisions. The headings of the various Sections hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
5.2. Severability of Provisions. If any right, preference or limitation of the
Series A Preferred Stock set forth herein (as this resolution may be amended
from time to time) is invalid, unlawful or incapable of being enforced by reason
of any rule of law or public policy, all other rights, preferences and
limitations set forth in this resolution (as so amended) which can be given
effect without the invalid, unlawful or unenforceable right, preference or
limitation shall, nevertheless, remain in full force and effect, and no right,
preference or limitation herein set forth shall be deemed dependent upon any
other such right, preference or limitation unless so expressed herein.
6
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be
signed, under penalties of perjury, by Wayne Danson, its President.
Dated: May 20, 2004 ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
------------------------
Wayne I. Danson
President
7
SEVENTH AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
A FLORIDA CORPORATION (THE "CORPORATION")
WHEREAS, the Corporation's Articles of Incorporation, as amended, provide that
the Board of Directors of the Corporation may establish the rights, designations
and preferences of the Corporation's preferred Stock, the undersigned hereby
adopts the following Articles of Amendment to the Articles of Incorporation of
the Corporation, pursuant to the terms of Section 607.0602 of the Florida
Business Corporation Act:
1. The name of the Corporation is Advanced Communications Technologies, Inc.
(the "Corporation") filed with the Florida Department of State on March 6, 1997,
and assigned document number P07000020967.
2. Articles III of the Articles of Incorporation of the Corporation is hereby
amended to read as set forth on Exhibit A attached.
The foregoing Amendment was adopted by unanimous written consent of the Board of
Directors of the Corporation on May 25, 2004, in accordance with the terms of
Section 607.0602 and 607.0821 of the Florida Business Corporation Act and
consequently, the number of votes cast in favor of the Amendment was sufficient
for its approval. The Amendment was adopted by the Board of Directors without
shareholder action as shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment
this 26th day of August, 2004.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
---------------------------------------------
Wayne I. Danson, President
7
EXHIBIT 3.1.7
SEVENTH AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
A FLORIDA CORPORATION (THE "CORPORATION")
WHEREAS, the Corporation's Articles of Incorporation, as amended, provide that
the Board of Directors of the Corporation may establish the rights, designations
and preferences of the Corporation's preferred Stock, the undersigned hereby
adopts the following Articles of Amendment to the Articles of Incorporation of
the Corporation, pursuant to the terms of Section 607.0602 of the Florida
Business Corporation Act:
1. The name of the Corporation is Advanced Communications Technologies, Inc.
(the "Corporation") filed with the Florida Department of State on March 6, 1997,
and assigned document number P07000020967.
2. Articles III of the Articles of Incorporation of the Corporation is hereby
amended to read as set forth on Exhibit A attached.
The foregoing Amendment was adopted by unanimous written consent of the Board of
Directors of the Corporation on May 25, 2004, in accordance with the terms of
Section 607.0602 and 607.0821 of the Florida Business Corporation Act and
consequently, the number of votes cast in favor of the Amendment was sufficient
for its approval. The Amendment was adopted by the Board of Directors without
shareholder action as shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment
this 26th day of August, 2004.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
---------------------------------------------
Wayne I. Danson, President
EXHIBIT A
ARTICLE III. CAPITAL STOCK
The maximum number of shares of stock that this Corporation is authorized to
have outstanding at any one time is 5,000,025,000 shares. Of such shares,
5,000,000,000 shall be common stock having no par value per share. The remaining
shares shall be shares of preferred stock, par value $.01 per share. The
preferred stock may be issued from time to time by authorization of the Board of
Directors of this Corporation with such rights, designations, preferences and
other terms as the Board of Directors shall determine from time to time.
EXHIBIT "A"
CERTIFICATE OF DESIGNATION
OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
(Par Value $0.01 Per Share)
OF
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC
The undersigned, a duly authorized officer of Advanced Communications
Technologies, Inc., a Florida corporation (the "Company"), in accordance with
the provisions of Section 607.0821 of the Florida Business Corporation Act, DOES
HEREBY CERTIFY that the following resolution was duly adopted by the Board of
Directors by unanimous written consent pursuant to Section 607.0821 of the
Florida Business Corporation Act on May 25, 2004:
RESOLVED, that the Board has determined that it is in the best interests of the
Company to provide for the designation and issuance of certain Series B
Convertible Preferred Stock, par value of $0.01 per share (the "Series B
Preferred Stock"), to consist of up to Three Hundred (300) shares, and hereby
fixes the powers, designations, preferences, and relative, participating,
optional and other special rights of the shares of such Series B Preferred
Stock, as follows:
SECTION 1
DESIGNATION AND RANK
1.1. Designation. This resolution shall provide for a single series of Preferred
Stock, the designation of which shall be "Series B Convertible Preferred Stock,"
par value $0.01 per share. The number of authorized shares constituting the
Series B Preferred Stock is 300. The Series B Preferred Stock will have a
liquidation preference as determined in Section 3.1 below.
1.2. Rank. With respect to the payment of dividends and other distributions on
the capital stock of the Company, including distribution of the assets of the
Company upon liquidation, the Series B Preferred Stock shall be junior to the
Series A Convertible Preferred Stock of the Company, par value $0.01 per share
(the "Series A Preferred Stock"), and senior to the (i) common stock of the
Company, no par value per share (the "Common Stock"), and (ii) all series of
preferred stock of the Company, other than the Series A Preferred Stock (the
"Junior Stock").
SECTION 2
DIVIDEND RIGHTS
2.1. Dividends or Distributions. Subject to the rights of the Series A Preferred
Stock, the holders of Series B Preferred Stock shall be entitled to receive
dividends or distributions on a pro rata basis according to their holdings of
shares of Series B Preferred Stock when and if declared by the Board of
Directors of the Company in the amount of five (5.0%) percent per year.
Dividends shall be paid in cash. Dividends shall be cumulative. No cash
dividends or distributions shall be declared or paid or set apart for payment on
the Common Stock in any calendar year unless cash dividends or distributions on
the Series B Preferred Stock for such calendar year are likewise declared and
paid or set apart for payment. No declared and unpaid dividends shall bear or
accrue interest.
SECTION 3
LIQUIDATION RIGHTS
3.1. Liquidation Preference. Upon any liquidation, dissolution, or winding up of
the Company, whether voluntary or involuntary (collectively, a "Liquidation"),
after all required distributions and payments have been made to the holders of
Series A Preferred Stock, but before any distribution or payment shall be made
to any of the holders of Common Stock or any series of preferred stock, the
holders of Series B Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital, surplus or earnings, an
amount equal to $1,000 per share of Series Preferred Stock (the "Liquidation
Amount") plus all declared and unpaid dividends thereon, for each share of
Series B Preferred Stock held by them. Thereafter, no further distribution shall
be made to the holders of the Series B Preferred Stock
3.2. Pro Rata Distribution. If, upon any Liquidation, after payment of all
liquidation preferences to all holders of Series A Preferred Stock, the assets
of the Company shall be insufficient to pay the Liquidation Amount, together
with declared and unpaid dividends thereon, in full to all holders of Series B
Preferred Stock, then the entire remaining net assets of the Corporation shall
be distributed among the holders of the Series B Preferred Stock, ratably in
proportion to the full amounts to which they would otherwise be respectively
entitled and such distributions may be made in cash or in property taken at its
fair value (as determined in good faith by the Company's Board of Directors), or
both, at the election of the Company's Board of Directors.
3.3. Merger, Consolidation or Reorganization. For purposes of this Section 3, a
Liquidation shall not be deemed to be occasioned by or to include the merger,
consolidation or reorganization of the Company into or with another entity
through one or a series of related transactions, or the sale, transfer or lease
of all or substantially all of the determined of the Company.
SECTION 4
CONVERSION RIGHTS
4.1. Conversion. The holders of Series B Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) Each share of Series B Preferred Stock shall be convertible, at the option
of the holder thereof, at any time after the date of issuance of such share
(subject to Section 4.5 hereof), at the office of the Company or any transfer
agent for the Series B Preferred Stock into such number of fully paid and
non-assessable shares of Common Stock as is defined by
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dividing (a) the sum of (i) the Liquidation Amount of the Series B Preferred
Stock, plus (ii) all accrued but unpaid dividends thereon, by (b) the
"Conversion Price" then in effect. The Conversion Price shall be equal to either
(a) $0.01 per share (which shall be adjusted in the event of a subdivision, or
combination of shares), or (b) 100.0% of the average of the three (3) lowest
closing bid prices of the Common Stock for the ten (10) trading days immediately
preceding the date of conversion, whichever is lower. The closing bid price
shall be determined using price quotations from Bloomberg LP.
(b) Each share of Series B Preferred Stock automatically shall convert into
shares of Common Stock at the Conversion Price then in effect immediately upon
the consummation of the occurrence of a stock acquisition, consolidation or
reorganization of the Company into or with another entity through one or a
series of related transactions, or the sale, transfer or lease (but not
including a transfer by pledge or mortgage to a bona fide lender) of all or
substantially all of the assets of the Company.
4.2. Adjustments. The Conversion Price of the Series B Preferred Stock as
described in Section 4.1 above shall be adjusted from time to time as follows:
(a) In the event of any reclassification of the Common Stock or recapitalization
involving Common Stock (excluding a subdivision, or combination of shares or any
other event described in Sections 4.2(a) or (b)) the holders of the Series B
Preferred Stock shall thereafter be entitled to receive, and provision shall be
made therefor in any agreement relating to the reclassification or
recapitalization, upon conversion of the Series B Preferred Stock, the kind and
number of shares of Common Stock or other securities or property (including
cash) to which such holders of Series B Preferred Stock would have been entitled
if they had held the number of shares of Common Stock into which the Series B
Preferred Stock was convertible immediately prior to such reclassification or
recapitalization; and in any such case appropriate adjustment shall be made in
the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of the Series B Preferred Stock, to the
end that the provisions set forth herein shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares, other securities, or
property thereafter receivable upon conversion of the Series B Preferred Stock.
An adjustment made pursuant to this subparagraph (a) shall become effective at
the time at which such reclassification or recapitalization becomes effective.
(b) In the event the Company shall declare a distribution payable in securities
of other entities or persons, evidences of indebtedness issued by the Company or
other entities or persons, assets (excluding cash dividends) or options or
rights not referred to in Sections 4.2(a) above, the holders of the Series B
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Company into which their shares of Series B Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
shares of Common Stock of the Company entitled to receive such distribution or
if no such record date is fixed, as of the date such distribution is made.
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4.3. Procedures for Conversion.
(a) In order to exercise conversion rights pursuant to Section 4.1(a) above, the
holder of the Series B Preferred Stock to be converted shall deliver an
irrevocable written notice of such exercise to the Company, at its principal
office. The holder of any shares of Series B Preferred Stock shall, upon any
conversion of such Series B Preferred Stock in accordance with this Section 4,
surrender certificates representing the Series B Preferred Stock to the Company,
at its principal office, and specify the name or names in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
In case such holder shall specify a name or names other than that of such
holder, such notice shall be accompanied by payment of all transfer taxes (if
transfer is to a person or entity other than the holder thereof) payable upon
the issuance of shares of Common Stock in such name or names. As promptly as
practicable, and, if applicable, after payment of all transfer taxes (if
transfer is to a person or entity other than the holder thereof), the Company
shall deliver or cause to be delivered certificates representing the number of
validly issued, fully paid and nonassessable shares of Common Stock to which the
holder of the Series B Preferred Stock so converted shall be entitled. Such
conversion, to the extent permitted by law, shall be deemed to have been
effected as of the date of receipt by the Company of any notice of conversion
pursuant to Section 4.1(a) above, or, in the case of an automatic conversion
pursuant to Section 4.1(b) above, upon the occurrence of any event specified
therein. Upon conversion of any shares of Series B Preferred Stock, such shares
shall cease to constitute shares of Series B Preferred Stock and shall represent
only a right to receive shares of common stock into which they have been
converted.
(b) In connection with the conversion of any shares of Series B Preferred Stock,
no fractions of shares of Common Stock shall be issued, but the Company shall
pay cash in lieu of such fractional interest in an amount equal to the product
of the Conversion Price and such fractional interest.
(c) The Company shall at all times reserve and keep available out of its
authorized Common Stock the full number of shares of Common Stock of the Company
issuable upon the conversion of all outstanding shares of Series B Preferred
Stock. In the event that the Company does not have a sufficient number of shares
of authorized but unissued Common Stock necessary to satisfy the full conversion
of the shares of Series B Preferred Stock, then the Company shall call and hold
a meeting of the shareholders within 30 days of such occurrence for the sole
purpose of increasing the number of authorized shares of Common Stock. The
Company's Board of Directors shall recommend to shareholders a vote in favor of
such proposal and shall vote all shares held by them, in proxy or otherwise, in
favor of such proposal. This remedy is not intended to limit the remedies
available to the holders of the Series B Preferred Stock, but is intended to be
in addition to any other remedies, whether in contract, at law or in equity.
4.4. Notices of Record Date. In the event that the Company shall propose at any
time: (a) to declare any dividend or distribution upon any class or series of
capital stock, whether in cash, property, stock or other securities; (b) to
effect any reclassification or recapitalization of its Common Stock outstanding
involving a change in the Common Stock; or (c) to merge or consolidate with or
into any other corporation, or to sell, lease or convey all or substantially all
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of its property or business, or to liquidate, dissolve or wind up; then, in
connection with each such event, the Company shall mail to each holder of Series
B Preferred Stock:
(a) at least twenty (20) days' prior written notice of the date on which a
record shall be taken for such dividend or distribution (and specifying the date
on which the holders of the affected class or series of capital stock shall be
entitled thereto) or for determining the rights to vote, if any, in respect of
the matters referred to in clauses (b) and (c) in Section 4.4 above; and
(5) in the case of the matters referred to in Section 4.4 (b) and (c) above,
written notice of such impending transaction not later than twenty (20) days
prior to the shareholders' meeting called to approve such transaction, or twenty
(20) days prior to the closing of such transaction, whichever is earlier, and
shall also notify such holder in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction (and specify the date on which the
holders of shares of Common Stock shall be entitled to exchange their Common
Stock for securities or other property deliverable upon the occurrence of such
event) and the Company shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than
twenty (20) days after the Company has given the first notice provided for
herein or sooner than ten (10) days after the Company has given notice of any
material changes provided for herein.
4.5. Limitations of Conversion.
(a) Subject to the Termination Rights specified in Section 4.5(b) hereof, the
Conversion Rights specified herein shall be subject to the following
limitations:
(i) The holders of the shares of Series B Preferred Stock may exercise their
Conversion Rights at any time on or after June 23, 2005; and
(ii) No holder of the shares of Series B Preferred Stock shall be entitled to
convert the Series B Preferred Stock to the extent, but only to the extent, that
such conversion would, upon giving effect to such conversion, cause the
aggregate number of shares of Common Stock beneficially owned by such holder to
exceed 4.99% of the outstanding shares of Common Stock following such conversion
(which provision may be waived by such holder by written notice from such holder
to the Company, which notice shall be effective 61 days after the date of such
notice).
(b) The limitation on the Conversion Rights specified in Section 4.5(a) hereof
shall terminate (the "Termination Rights") if there is a Change in Control of
the Company (as defined below). For the purpose of hereof, a "Change in Control"
of the Company has occurred when: (i) any person (defined herein to mean any
person within the meaning of Section 13(d) of the Securities Exchange Act of
1934 (the "Exchange Act")), other than the Company, or an employee benefit plan
established by the Board of Directors of the Company, acquires, directly or
indirectly, the beneficial ownership (determined under Rule 13d-3 of the
regulations promulgated by the Securities and Exchange Commission under Section
13(d) of the Exchange Act) of securities issued by the Company having forty
percent (40%) or more of the voting
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power of all of the voting securities issued by the Company in the election of
directors at the meeting of the holders of voting securities to be held for such
purpose; or (ii) a majority of the directors elected at any meeting of the
holders of voting securities of the Company are persons who were not nominated
for such election by the Board of Directors of the Company or a duly constituted
committee of the Board of Directors of the Company having authority in such
matters; or (iii) the Company merges or consolidates with or transfers
substantially all of its assets to another person; (iv) a change in the Chief
Executive Officer of the Company from that person that serves in such position
on the date hereof.
SECTION 5
NO VOTING RIGHTS
5.1. General. The Series B Preferred Stock shall not have any voting rights,
except as required under the Florida Business Corporation Act.
SECTION 6
REDEMPTION RIGHTS
6.1. After providing 10 days prior written notice to the holders of the Series B
Preferred Stock, the Company shall have the right to redeem (unless otherwise
prevented by law) any outstanding shares of Series B Preferred Stock at an
amount equal to 120% of the Liquidation Amount, plus accrued but unpaid
dividends thereon (the "Redemption Price"). The Company shall consummate the
redemption and pay the Redemption Price within 20 days of the date of such
notice. The Redemption Price shall be paid in immediately available funds.
SECTION 7
MISCELLANEOUS
7.1. Heading of Subdivisions. The headings of the various Sections hereof are
for convenience of reference only and shall not affect the interpretation of any
of the provisions hereof.
7.2. Severability of Provisions. If any right, preference or limitation of the
Series B Preferred Stock set forth herein (as this resolution may be amended
from time to time) is invalid, unlawful or incapable of being enforced by reason
of any rule of law or public policy, all other rights, preferences and
limitations set forth in this resolution (as so amended) which can be given
effect without the invalid, unlawful or unenforceable right, preference or
limitation shall, nevertheless, remain in full force and effect, and no right,
preference or limitation herein set forth shall be deemed dependent upon any
other such right, preference or limitation unless so expressed herein.
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IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be
signed, under penalties of perjury, by Wayne I. Danson, its President.
Dated; June 23, 2004 ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
-----------------------------
Wayne I. Danson
President
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EXHIBIT 10.35
AMENDMENT NO. 1 TO 6% UNSECURED PROMISSORY NOTE
This Amendment No. 1 (the "Amendment") to 6% Unsecured Promissory Note (the
"Note") is made this 10th of August, 2004, by and between Cyber-Test, Inc., a
Delaware corporation ("Maker") and LLAB, Inc. (f/k/a Cyber-Test, Inc.), a
Florida corporation ("Payee").
BACKGROUND
A. Maker, Payee and the Shareholders of Payee entered into an Asset Purchase
Agreement, dated May 27, 2004, pursuant to which Maker purchased the assets of
Payee (the "Purchase Agreement").
B. In connection with the purchase of the assets, Maker issued to Payee the
Note, in the original principal amount of $547,000, to evidence a portion of the
purchase price for the assets.
C. In accordance with the terms of the Note and the Purchase Agreement, the
original principal amount of the Note is subject to certain post-closing
purchase price adjustments.
D. Maker and Payee have agreed on the amount of such post-closing adjustments.
NOW, THEREFORE, with the foregoing Background hereinafter deemed incorporated by
reference herein and made part hereof, the parties hereto, intending to be
legally bound, promise and agree as follows:
1. The Note is hereby amended by reducing the original principal amount thereof
from Five Hundred Forty-Seven Thousand Dollars ($547,000.00) to Four Hundred
Ninety-Eight Thousand Four Hundred Sixty-Nine Dollars ($498,469.00).
2. This Amendment does not represent in any way any new indebtedness or
satisfaction of the indebtedness evidenced by the Note.
3. All other terms and provisions of the Note will remain in full force and
effect.
4. This Amendment may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument.
5. Maker hereby directs Payee to attach an original counterpart of this
Amendment to the Note. The Note and this Amendment shall be deemed to be and
constitute a single instrument.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment the day
and year first above written.
CYBER-TEST, INC., A DELAWARE CORPORATION
BY:
Wayne I. Danson, President and Chief Executive Officer
LLAB, INC. (F/K/A CYBER-TEST, INC.), A
FLORIDA CORPORATION
BY:
Lisa Welton, President
EXHIBIT 10.36
EXECUTION COPY
AGREEMENT
AGREEMENT (the "Agreement"), dated as of May 27, 2004, by and between Encompass
Group Affiliates, Inc., a Delaware corporation ("Encompass"), and Hy-Tech
Technology Group, Inc., a Delaware corporation ("Hy-Tech Technology"), and
Hy-Tech Computer Systems, Inc., a Delaware corporation ("Hy-Tech Computer
Systems" and together with Hy-Tech Technology, "HYTT").
Recitals
WHEREAS, HYTT has been engaged in the business of supplying computer systems,
components and peripherals; and
WHEREAS, Martin Nielson is the Chairman and Chief Executive Officer of Hy-Tech
Technology ("Nielson"); ------- and
WHEREAS, HYTT has entered into a (i) memorandum of understanding (the "C-T
Memorandum") with Cyber-Test, Inc. ("C-T") to acquire the assets of C-T, (ii) a
memorandum of understanding (the "BCD Memorandum") with BCD 2000, Inc. ("BCD")
to acquire the assets of BCD, and (iii) a memorandum of understanding (the "PMIC
Memorandum" and together with the C-T Memorandum and BCD Memorandum, the
"Memoranda") with Pacific Magtron International, Inc. ("PMIC") whereby PMIC
would acquire the assets of HYTT; and
WHEREAS, HYTT no longer desires to consummate the transactions contemplated
under the Memoranda; and
WHEREAS, Encompass desires to enter into negotiations with each of C-T, BCD and
PMIC; and
WHEREAS, in connection with the negotiations with each of C-T, BCD and PMIC,
Encompass desires to employ Nielson as its President and Chief Executive Officer
upon consummation of the transactions contemplated by the negotiations (the
"Contemplated Transactions"); and
WHEREAS, in connection with the Contemplated Transactions, Encompass desires to
obtain certain rights and license certain assets from HYTT on the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the mutual agreements contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
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ARTICLE I. MEMORANDA OF UNDERSTANDING;
LICENSE AGREEMENTS
1.1 Memoranda of Understanding
(a) HYTT and its affiliates hereby (i) acknowledge that they no longer desire to
consummate the transactions contemplated by the Memoranda and have ceased all
negotiations in furtherance thereof and (ii) waive any and all rights they may
have, if any, with respect to Encompass' and its affiliates' pursuit of the
Contemplated Transactions.
(b) HYTT and its affiliates hereby further acknowledge that Encompass and its
affiliates desire to initiate negotiations with, and pursue inquiries and
solicit offers from, each of C-T, BCD and PMIC in furtherance of the
Contemplated Transactions; and Encompass and its affiliates shall have the right
to initiate, solicit, negotiate or pursue any such inquiry, proposal or offer
relating to the Contemplated Transactions.
(c) Neither HYTT nor any of its affiliates shall attempt to initiate, solicit,
negotiate or pursue any inquiry, proposal or offer with any of C-T, BCD and PMIC
relating to any acquisition and/or financing of any of the foregoing, whether by
purchase of assets or stock, by merger, by consolidation or other reorganization
or by any other transaction.
1.2 Offer of Employment. Upon consummation of the Closing (as defined below),
Encompass shall have the sole and exclusive right to extend an offer of
employment to Nielson, to become an executive officer of Encompass and its
affiliates as of the Closing, substantially on the terms and conditions
contained in an employment agreement to be entered into among Nielson, and
Encompass and its affiliates, the form of which is attached hereto as Exhibit
"A" (the "Employment Agreement"). Prior to the Closing, HYTT shall not engage in
any activity that would dissuade Nielson from accepting employment with
Encompass and its affiliates. Prior to the Closing, HYTT shall release Nielson
from any and all obligations under his employment agreement with HYTT, or at
law. At Closing, HYTT shall waive any and all rights with respect to Nielson's
employment, or the termination of Nielson's employment, including, without
limitation, any restriction on his employment or his activities. On and after
the Closing Date, HYTT shall not solicit, directly or indirectly, Nielson to
leave the employ of Encompass or any of its affiliates. At Closing, Nielson
shall resign from any and all positions as an officer and/or director of HYTT,
except that Executive may remain solely as an outside director of Hy-Tech
Technology, but not as Chairman of the Board.
1.3 Non-Compete. At the Closing, Encompass and HYTT shall enter into a
Non-Compete Agreement, substantially in the form of Exhibit "B" hereto (the
"Non-Compete Agreement"), whereby HYTT shall agree not to compete, directly or
indirectly, with the businesses of Encompass or its affiliates; provided that,
for a period of three (3) months after the Closing, HYTT shall be permitted to
sell, in the ordinary course of its business, any inventory of HYTT not sold on
or prior to the Closing.
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The rights of Encompass and its affiliates contained in Section 1.1, Section 1.2
and Section 1.3 hereof shall be collectively referred to as the "Rights".
1.4 License Agreements. On the Closing Date,
(a) HYTT shall enter into a license agreement, substantially in the form of
Exhibit "C" hereto (the "Customer Lists License Agreement"), with Encompass
pursuant to which HYTT shall grant to Encompass an exclusive, worldwide,
royalty-free, fully paid up, perpetual, non-terminable and irrevocable right and
license to use, in any manner determined by Encompass or its affiliates, the
customer lists of HYTT (the "Customer Lists"); and
(b) HYTT shall enter into a license agreement, substantially in the form of
Exhibit "D" hereto (the "Websites License Agreement" and together with the
Customer Lists License Agreement, the "License Agreements"), with Encompass
pursuant to which HYTT shall grant to Encompass an exclusive, worldwide,
royalty-free, fully paid up, perpetual, non-terminable and irrevocable right and
license to use, in any manner determined by Encompass, the following websites
and any and all derivatives thereof and intellectual property related thereto
(the "Websites"):
(i) www.e-hytech.com;
(ii) www.hy-tech.com;
(iii) www.pc-xpress.com;
(iv) www.PXCP.com; and
(v) www.computerliquidators.com.
1.5 Assumption of Liabilities. Subject to the terms and conditions of this
Agreement, at the Closing, Encompass shall assume and agree to perform, pay or
discharge all liabilities and obligations of HYTT under those certain
convertible debentures (the "Convertible Debentures") set forth in Schedule 1.5
hereto (the assumption of such liabilities shall be referred to herein as the
"Consideration") up to an amount not to exceed $503,300, pursuant to the
Assumption Agreement, substantially in the form of Exhibit "E" hereto (the
"Assumption Agreement"). Except as set forth in this Section 1.5 and the
Assumption Agreement, Encompass shall not assume or be responsible for any
liabilities or obligations of HYTT. On and after the Closing, HYTT shall
perform, pay or discharge all liabilities and obligations relating to the
Rights, the License Agreements, the Release and Waiver (as defined in Section
4.1 below), and any other rights and assets of HYTT, other than the Assumed
Liabilities.
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ARTICLE II. CLOSING
2.1 Closing. The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Eckert Seamans Cherin & Mellott,
LLC, 1515 Market Street, 9th Floor, Philadelphia, Pennsylvania 19102, at 10:00
A.M., on June 1, 2004 or such other time and date as Encompass and HYTT may
agree. The date on which the Closing actually occurs is referred to herein as
the "Closing Date."
2.2 Deliveries by HYTT.
(a) At the Closing, HYTT shall deliver to Encompass the following:
(i) an executed counterpart to each License Agreement;
(ii) the Customer Lists (which shall be delivered on CD Rom media in a file
format that is compatible with Microsoft Excel);
(iii) an executed counterpart of the Non-Compete Agreement;
(iv) a certificate, dated the Closing Date, executed by the Secretary of Hy-Tech
Technology, certifying as to Hy-Tech Technology's certificate of incorporation
(which shall be certified by the secretary of state of the state of its
jurisdiction of incorporation), bylaws or other governing documents and
resolutions adopted by Hy-Tech Technology's board of directors with respect to
the transactions contemplated hereby attached thereto;
(v) a certificate, dated the Closing Date, executed by the Secretary of Hy-Tech
Computer Systems, certifying as to Hy-Tech Computer Systems' certificate of
incorporation (which shall be certified by the secretary of state of the state
of its jurisdiction of incorporation), bylaws or other governing documents and
resolutions adopted by Hy-Tech Computer Systems' board of directors with respect
to the transactions contemplated hereby attached thereto;
(vi) a certificate of good standing for each of Hy-Tech Technology and Hy-Tech
Computer Systems from its jurisdiction of incorporation;
(vii) an opinion of Gottbetter & Partners, LLP, counsel to HYTT, dated the
Closing Date, in the form attached hereto as Exhibit "F";
(viii) all consents, approvals and authorizations of all third parties and
governmental bodies that are necessary in connection with (A) the execution and
delivery by HYTT of this Agreement or the Related Instruments, and (B) the
consummation by HYTT of the transactions contemplated hereby or thereby; and
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EXECUTION COPY
(ix) all other previously undelivered documents, instruments and writings
required to be delivered by HYTT to Encompass at or prior to the Closing
pursuant to this Agreement or otherwise required in connection herewith.
2.3 Deliveries by Buyer. At the Closing, Encompass shall deliver to HYTT the
following:
(a) the Assumption Agreement;
(b) an opinion of Eckert Seamans Cherin & Mellott, LLC, counsel to Encompass,
dated the Closing Date, in the form attached hereto as Exhibit "G"; and
(c) all other previously undelivered documents, instruments and writings
required to be delivered by Encompass to HYTT at or prior to the Closing
pursuant to this Agreement or otherwise required in connection herewith.
ARTICLE III. REPRESENTATIONS AND
WARRANTIES
3.1 Each party represents and warrants to the other as follows:
(a) Organization, Etc. Each party is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. Each party has the power and authority to conduct its business as
it is currently being conducted and to own and lease the property and assets
that it now owns and leases.
(b) Authorization. Each party has all requisite corporate power and authority to
enter into, execute, deliver and consummate the transactions contemplated by
this Agreement and any instruments and agreements contemplated herein required
to be executed and delivered by it pursuant to this Agreement (collectively, the
"Related Instruments"). The board of directors of each party has taken all
action required by law, the certificate of incorporation, bylaws or other
governing documents of each such party or otherwise to authorize the execution
and delivery of this Agreement and the Related Instruments and the consummation
of the transactions contemplated hereby and thereby.
(c) No Violation. Neither the execution and delivery by such party of this
Agreement or any of the Related Instruments, nor the consummation by such party
of the transactions contemplated hereby or thereby, will (i) violate any
provision of the laws of its jurisdiction of incorporation, or the certificate
of incorporation, bylaws or other governing documents of such party, or (ii)
violate, conflict with, or constitute a default (or an event or condition which,
with notice or lapse of time or both, would constitute a default) under, or
result in the termination of, or accelerate the performance required by, or
cause the acceleration of the maturity of any liability or obligation pursuant
to, or result in the creation or imposition of any security interest, lien,
charge or other encumbrance upon any of such party's assets under any note,
bond, mortgage, indenture, deed of trust, license, lease, contract, commitment,
understanding, arrangement, agreement or restriction of any kind to which such
party is a party or by which such party may be bound or affected or to which any
of such party's assets may be subject, or violate any statute or law or any
judgment, decree, order, writ, injunction, regulation or rule of any court or
governmental authority, except, in the case of clause (ii) above, for any such
event that would not, individually or in the aggregate, have a material adverse
effect or prohibit or restrict the consummation of the transactions contemplated
by this Agreement or the Related Instruments.
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(d) Litigation, Orders. There are no claims, actions, suits, proceedings,
investigations or inquiries pending before any court, arbitrator or governmental
or regulatory official or office, or, to such party's knowledge, threatened
against or affecting such party that questions the validity of this Agreement,
the transactions contemplated hereby or any action taken or to be taken by such
party pursuant to this Agreement, at law or in equity, before or by any federal,
state, local or foreign governmental authority; nor, to the knowledge of such
party, is there any valid basis for any such claim, action, suit, proceeding,
inquiry or investigation.
(e) Consents and Approvals. Other than consents previously obtained, no party is
required to obtain, transfer or cause to be transferred any consent, approval,
license, permit or authorization of, or make any declaration, filing or
registration with, any third party or any governmental authority in connection
with (a) the execution and delivery by such party of this Agreement or the
Related Instruments, or (b) the consummation by such party of the transactions
contemplated hereby or thereby.
(f) No Injunction. There is no effective injunction, writ, preliminary
restraining order or other order issued by a court of competent jurisdiction
restraining or prohibiting the consummation of the transactions contemplated
hereby.
3.2 Each of Hy-Tech Technology and Hy-Tech Computer Systems represents and
warrants to Encompass as follows:
(a) Websites.
(i) At Closing, upon release by the holders of the Convertible Debentures (the
"Holders") of the liens on the assets of HYTT, HYTT shall own, free and clear of
all liens, mortgages, security interests, charges and encumbrances and has good
and merchantable title to, or otherwise possesses all rights necessary to use
and license all Websites and all other intellectual property related thereto.
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(ii) No notice has been received by HYTT, and no claims have been asserted by
any person, challenging or questioning the ownership, validity, enforceability
or use by HYTT or any license thereof of any of the Websites and, to HYTT's
knowledge, there is no valid basis for any such claim, and the use or other
exploitation of the Websites by HYTT or Encompass and its affiliates does not
infringe on or dilute the rights of any person; and, to HYTT's knowledge, no
other person is infringing on the rights of HYTT with respect to any of the
Websites.
(b) Customer Lists.
(i) At Closing, upon release of the liens on the assets of HYTT by the Holders,
HYTT shall own, free and clear of all liens, mortgages, security interests,
charges and encumbrances and has good and merchantable title to, or otherwise
possesses all rights necessary to use and license the Customer Lists and all
rights related thereto.
(ii) The Customer Lists constitute true and accurate lists of all customers of
HYTT's business; HYTT has received no notice or other communication from, and
there has been no indication by, any such customer of an intention to
discontinue or change the terms of its relationship with HYTT.
(c) Convertible Debentures. The aggregate amount outstanding under the
Convertible Debentures set forth on Schedule 1.5 attached hereto represents the
entire amount due and owing to the Holders.
(d) Fair Value. Each of Hy-Tech Technology's and Hy-Tech Computer Systems'
boards of directors has determined that the Consideration represents fair value
for the Rights, the License Agreements and the Release and Waiver.
(e) No Brokers. Other than its engagement of Altos Bancorp, Inc., HYTT has not
taken any action that would give rise to any claim by any person for brokerage
commissions, finder's fees or similar payments relating to this Agreement or the
transactions contemplated hereby.
(f) Note Payable. That certain Promissory Note in the original principal amount
of $105,000, issued in April 2002 by HYTT to Bradley Conklin, Margaret Conklin
and Susan McNear (collectively, the "Note Holders"), has been paid in full and
HYTT has no further obligations, and the Note Holders have no further rights,
thereunder, payment or otherwise.
(g) Disclosure.
(i) No representation or warranty by HYTT contained in this Agreement, and no
statement contained in any document, list, certificate or other writing
furnished or to be furnished by or on behalf of HYTT to Encompass or any of its
representatives in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading.
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(ii) HYTT does not have knowledge of any fact that has specific application to
HYTT (other than general economic or industry conditions) that may materially
adversely affect the Rights, the License Agreements and the Release and Waiver,
which has not been set forth in this Agreement.
(iii) No investigation by, or knowledge of, Encompass or its agents shall affect
the representations and warranties given by HYTT.
3.3 Encompass represents and warrants to HYTT as follows:
(a) Brokers. Other than its engagement of Maximum Ventures, Inc. ("Maximum"),
Encompass has not taken any action that would give rise to any claim by any
person for brokerage commission, finder's fees or similar payments relating to
this Agreement or the transactions contemplated hereby.
ARTICLE IV. GENERAL RELEASE
4.1 Full Release and Waiver. Each of Hy-Tech Technology and Hy-Tech Computer
Systems, on behalf of itself and each of its current and former parents,
subsidiaries, affiliates, officers, shareholders, directors, members,
predecessors, successors, employees, agents, attorneys, assigns, heirs,
executors, receivers, trustees, personal representatives and administrators
(collectively, the "Related Persons"), hereby releases, waives, acquits and
forever discharges Encompass and each of its Related Persons from any and all
manner of actions and causes of action, lawsuits, charges, complaints,
liabilities, promises, covenants, agreements, judgments, damages, expenses,
suits, debts, claims and demands whatsoever in law or in equity, whether known
or unknown, direct or indirect, absolute or contingent (including, but not
limited to, claims for attorneys' fees and expenses whatsoever), which either of
Hy-Tech Technology and Hy-Tech Computer Systems and/or its Related Persons has
ever had, now has, or hereafter may have against Encompass and/or its Related
Persons arising out of, due to, or in any way related to this Agreement, the
Related Instruments and the transactions contemplated hereby and thereby, except
for Encompass' failure to perform, pay and/or discharge the Assumed Liabilities
or breach of this Agreement or the License Agreements (the "Release and
Waiver").
4.2 Covenant Not to Sue. Each of Hy-Tech Technology and Hy-Tech Computer
Systems, on behalf of itself and each of its Related Persons hereby covenants
that neither it nor any of its Related Persons will sue Encompass or any of its
Related Persons due to, or in any way related to this Agreement, the Related
Instruments and the transactions contemplated hereby and thereby, except for
Encompass' failure to perform, pay and/or discharge the Assumed Liabilities or
for breach of this Agreement or the License Agreements.
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4.3 Additional Documents. Each of Hy-Tech Technology and Hy-Tech Computer
Systems hereby agrees to cooperate fully and execute any and all supplementary
documents and to take any and all additional actions which may be necessary or
appropriate to give full force and effect to the terms and intent of the Release
and Waiver.
4.4 Third Party Beneficiaries. This Agreement shall inure to the benefit of
Encompass and its Related Persons, and each of their successors and assigns, all
of which are intended to be third-party beneficiaries hereunder.
4.5 C-T, BCD, PMIC. In the event Encompass and/or its affiliates consummate a
transaction with each of C-T, BCD and PMIC, effective upon the closing of each
such transaction with C-T, BCD and PMIC, respectively, each of Hy-Tech
Technology and Hy-Tech Computer Systems on behalf of itself and each of its
Related Persons hereby releases, waives, acquits and forever discharges C-T, BCD
and PMIC and each of their Related Persons from any and all manner of actions
and causes of action, lawsuits, charges, complaints, liabilities, promises,
covenants, agreements, judgments, damages, expenses, suits, debts, claims and
demands whatsoever in law or in equity, whether known or unknown, direct or
indirect, absolute or contingent (including, but not limited to, claims for
attorneys' fees and expenses whatsoever), which either of Hy-Tech Technology and
Hy-Tech Computer Systems and/or its Related Persons has ever had, now has, or
hereafter may have against C-T, BCD and PMIC and/or any of their Related Persons
arising out of, due to, or in any way related to the Memoranda and the
transactions contemplated thereby.
ARTICLE V. OTHER OBLIGATIONS OF HYTT AND ENCOMPASS
5.1 Prohibited Actions. Between the date of this Agreement and the Closing Date,
in the conduct of its business, HYTT shall not, except as otherwise agreed by
Encompass in writing:
(a) Incurrence of Liens. Subject to lien, security interest or any other
encumbrance any of the Websites or Customer Lists.
(b) Publicity; Advertisement. Except as required by law or in accordance with
Section 8.1 hereof, publicize, advertise or announce to any third party, except
as required pursuant to this Agreement to obtain the consent of such third
party, the entering into of this Agreement, the terms of this Agreement or the
transactions contemplated hereby.
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5.2 Additional Covenants. On and after the date hereof:
(a) Customer Lists; Websites. HYTT shall not sell, encumber or grant a license
or other right in and to, the Customer Lists and/or the Websites to any third
party.
(b) Dissolution. Neither of Hy-Tech Technology nor Hy-Tech Computer Systems will
voluntarily dissolve or file for bankruptcy.
(c) Brokers.
(i) HYTT shall pay, or cause to be paid, all fees and other amounts due and
owing to Altos Bancorp, Inc. and its affiliates in connection with the
Agreement.
(ii) Encompass shall pay, or cause to be paid, all fees and other amounts due
and owing to Maximum in accordance with that certain Advisory Agreement, dated
April 1, 2004, between and affiliate of Encompass and Maximum.
ARTICLE VI. CONDITIONS TO OBLIGATIONS OF EACH PARTY
6.1 The obligations of Encompass under this Agreement are subject to the
satisfaction, at or before the Closing, of each of the following conditions:
(a) Representations and Warranties. The representations and warranties of HYTT
contained herein, and the statements contained in any schedule, instrument,
list, certificate or writing delivered by HYTT pursuant to this Agreement shall
be true, complete and accurate as of the date when made and as of the Closing
Date as though such representations and warranties were made at and as of such
dates, except for any changes expressly permitted by this Agreement.
(b) Performance. HYTT shall have performed and complied in all material respects
with all covenants, agreements, obligations and conditions required by this
Agreement to be performed or complied with by HYTT at or prior to the Closing.
(c) Cyber Test, Inc. Encompass or an affiliate of Encompass shall have
simultaneously closed the acquisition of all, or substantially all, of the
assets of C-T on terms mutually agreeable to C-T and Encompass.
(d) Employment Matters. Nielson shall have entered into the Employment
Agreement.
(e) Debenture Holders. The holders of the Convertible Debentures (the "Holders")
(i) shall have agreed upon the exchange of the Convertible Debentures for
preferred stock of Encompass and cash, on terms mutually agreeable to Encompass
and the Holders, and (ii) shall have authorized Encompass to file financing
statements with the applicable governmental authority(ies) filing offices to
terminate the liens placed on the assets of HYTT by the Holders.
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(f) Other Acquisitions. In the event the BCD Memorandum and the PMIC Memorandum
shall not have already expired by their respective terms, HYTT shall have
terminated each of the BCD Memorandum and PMIC Memorandum and waived any and all
rights it may have thereunder; and PMIC shall have executed a letter of intent
with Encompass or an affiliate of Encompass.
(g) Consulting Agreements. Encompass and Maximum shall have agreed on a mutually
acceptable arrangement for advisory services to be provided by, and fees to be
paid to, Maximum which such arrangement shall supersede any prior arrangements
between Encompass and Maximum. AltosBanCorp., Inc. shall have released Encompass
from any obligation with respect to the transactions contemplated by this
Agreement.
(h) Landlord; Noteholders. Each of Lee Coast Enterprises, Inc., Brad Conklin,
Margaret Conklin and Susan McNear shall have delivered a release and waiver,
substantially in the form of Exhibit "H" attached hereto.
6.2 The obligations of HYTT under this Agreement are subject to the
satisfaction, at or before the Closing, of each of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Encompass contained herein, and the statements contained in any schedule,
instrument, list, certificate or writing delivered by Encompass pursuant to this
Agreement shall be true, complete and accurate as of the date when made and as
of the Closing Date as though such representations and warranties were made at
and as of such dates, except for any changes expressly permitted by this
Agreement.
(b) Performance. Encompass shall have performed and complied in all material
respects with all covenants, agreements, obligations and conditions required by
this Agreement to be performed or complied with by Encompass at or prior to the
Closing.
ARTICLE VII. TERMINATION
7.1 Termination of Agreement. This Agreement may be terminated:
(i) by the mutual consent of HYTT and Encompass;
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(ii) by HYTT or Encompass if the Closing has not taken place on or before June
8, 2004; provided, however, that no Party then in breach of any obligations
hereunder shall have the right to terminate;
(iii) by Encompass if any of the representations and warranties of HYTT
contained in Article III hereof were incorrect in any material respect when made
or become incorrect in any material respect; and
(iv) by HYTT if any of the representations and warranties of Encompass contained
in Article III hereof were incorrect in any material respect when made or become
incorrect in any material respect.
7.2 Limitations on Remedies. If this Agreement is terminated by HYTT or
Encompass as permitted under Section 7.1 and not as a result of a breach of a
representation or warranty or the failure of any party to perform its
obligations hereunder, such termination shall be without liability of any party.
If a party terminates this Agreement as a result of a breach of a representation
or warranty by the other party or the failure of the other party to perform its
obligations hereunder, the nonbreaching party shall, in addition to other
remedies provided by this Agreement, at law, or in equity, be entitled to
reimbursement from the breaching party for all expenses incurred by the
nonbreaching party in connection with this Agreement and the transactions
contemplated hereby.
ARTICLE VIII. MISCELLANEOUS
8.1 Press Releases and Public Announcements. Neither Encompass, on the one hand,
nor HYTT, on the other hand, shall issue any press release or make any public
announcement relating to the subject matter of this Agreement without the prior
written approval of the other parties. Encompass and HYTT shall agree upon the
text of, and jointly issue, a press release or other public communication
announcing the consummation of the transactions contemplated hereunder, a form
of which is attached hereto as Exhibit "I".
8.2 Further Assurances. From time to time, at Encompass' request and without
further consideration, HYTT shall execute and deliver to Encompass such
documents and take such other action as Encompass may reasonably request in
order to consummate more effectively the transactions contemplated hereby.
8.3 Parties in Interest. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by the respective successors and permitted
assigns of the parties hereto. The rights and obligations of HYTT hereunder may
not be assigned without the prior written consent of Encompass.
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8.4 Entire Agreement, Amendments and Waiver. This Agreement, the exhibits, the
schedules and other writings referred to herein or delivered pursuant hereto
that form a part hereof contain the entire understanding of the parties with
respect to its subject matter. This Agreement supersedes all prior
understandings and agreements. This Agreement may be amended only by a written
instrument duly executed by the parties. Any condition to a party's obligations
hereunder may be waived in writing by such party to the extent permitted by law.
8.5 Headings. The Article and Section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.6 Notices. All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
received (i) on the same business day if delivered personally or by confirmed
facsimile transmission, (ii) on the next business day if delivered by a
reputable and nationally recognized overnight courier, and (iii) on the third
business day if mailed (registered or certified mail, postage prepaid, return
receipt requested), as follows:
If to Encompass : c/o Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, New York 10170
Attention: Wayne I. Danson
Facsimile No.: 646-227-1666
with a copy to: Eckert Seamans Cherin & Mellott, LLC
1515 Market Street, 9th Floor
Philadelphia, Pennsylvania 19102
Attention: Gary A. Miller, Esquire
Facsimile No.: 215-851-8383
and
Levinson & Lichtman, LLP
120 E. Palmetto Park Road, Suite 100
Boca Raton, FL 33432
Attention: Jonathan J. Lichtman, Esquire
Facsimile No.: 561-869-3601
If to HYTT: Hy-Tech Technology Group, Inc.
1840 Boy Scout Drive
Ft. Myers, Florida
Attention: Martin Nielson
Facsimile No.: __________________
with a copy to: Gottbetter & Partners, LLP
488 Madison Avenue, 12th Floor
New York, New York 10022-5718
Attention: Adam Gottbetter, Esquire
Facsimile No.: 212-400-6901
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or to such other address as the person to whom notice is to be given may have
previously furnished to the others in writing in the manner set forth above,
provided that notice of a change of address shall be deemed given only upon
receipt.
8.7 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to its or any other jurisdiction's conflicts of laws principles. Any legal
action or proceeding with respect to this Agreement or for recognition and
enforcement of any judgment in respect hereof brought by any party hereto or its
successors or assigns may be brought and determined in the courts of the State
of Delaware or the federal district court for the District of Delaware, and each
party hereto submits with regard to any such action or proceeding for itself and
in respect to its property, generally and unconditionally, to the exclusive
jurisdiction of such courts, and agrees that service of process in any such
action or proceeding shall be effective if mailed to such party at the address
specified herein. Each party hereto irrevocably waives, and agrees not to
assert, by way of motion, as a defense, counterclaim or otherwise, in any action
or proceeding with respect to this Agreement (i) any claim that it is not
personally subject to the jurisdiction of such courts for any reason, (ii) that
it or its property is exempt or immune from jurisdiction of any court or from
any legal process commenced in such courts (whether through service of notice,
attachment prior to judgment, attachment in aid of execution of judgment,
execution of judgment or otherwise), and (iii) to the fullest extent permitted
by applicable law, that (a) the suit, action or proceeding in any such court is
brought in an inconvenient forum, (b) the venue of such suit, action or
proceeding is improper and (c) this Agreement, or the subject matter hereof, may
not be enforced in or by such courts.
8.8 Third Parties. Nothing herein expressed or implied is intended or shall be
construed to confer upon or give to any person, other than the parties hereto
and their successors or permitted assigns, any rights or remedies under or by
reason of this Agreement.
8.9 Counterparts. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission.
8.10 Expenses. Each party hereto will bear its own costs and expenses (including
fees and expenses of legal counsel, accountants, investment bankers, brokers or
other representatives or consultants) incurred in connection with this Agreement
and the transactions contemplated hereby.
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8.11 Construction. Encompass and HYTT have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement will be construed as
if drafted jointly by the parties hereto and no presumption or burden of proof
will arise favoring or disfavoring any party by virtue of the authorship of any
of the provisions of this Agreement. Any reference to any federal, state, local
or foreign statute or law will be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
duly authorized officers of each of the parties hereto on the date first written
above.
ENCOMPASS GROUP AFFILIATES, INC.
By:
Name:
Title:
HY-TECH TECHNOLOGY GROUP, INC.
By:
Name:
Title:
HY-TECH COMPUTER SYSTEMS, INC.
By:
Name:
Title:
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EXHIBIT A
EMPLOYMENT AGREEMENT
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EXHIBIT B
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
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EXHIBIT C
CUSTOMER LISTS LICENSE AGREEMENT
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EXHIBIT D
WEBSITES LICENSE AGREEMENT
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EXHIBIT E
ASSUMPTION AGREEMENT
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EXHIBIT F
GOTTBETTER OPINION
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EXHIBIT G
ESCM OPINION
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EXHIBIT H
RELEASE AND WAIVER
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EXHIBIT I
PRESS RELEASE
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SCHEDULE 1.5
CONVERTIBLE DEBENTURES
Name and Address Principal amount of Debenture
- --------------------------------------------------------------------------------
KT Capital, LP $100,000
237 Park Avenue South
New York, NY 10017
Attn: Jeffrey Kwit, Managing Partner
- --------------------------------------------------------------------------------
David H. Boshart & Elizabeth F. Boshart $100,000
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
David H. Boshart, Bruce H. Boshart & $100,000
Bethany Maahs-Hoagsberg
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
David H. Boshart $100,000
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
Maximum Ventures, Inc. $103,300
1175 Walt Whitman Road
Fort Myers, FL 33907
- --------------------------------------------------------------------------------
Total $503,300
- --------------------------------------------------------------------------------
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SCHEDULE 1.6
ALLOCATION OF PURCHASE PRICE
Rights and Release and Waiver-$103,300
Customer Lists License Agreement-$300,000 Websites License Agreement-$100,000
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LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "License Agreement") is effective as of June 24,
2004 (the "Effective Date") by and among Encompass Group Affiliates, Inc., a
Delaware corporation, located at 420 Lexington Avenue, Suite 2739, New York, New
York 10170 ("Licensee"), and Hy-Tech Technology Group, Inc. and Hy-Tech Computer
Systems, Inc., each a Delaware Corporation, located at 1840 Boy Scout Drive, Ft.
Myers, FL 33907 (together, "Licensors"). Licensee and each Licensor are
individually referred to as a "Party" and collectively referred to as the
"Parties."
RECITALS
WHEREAS, Licensee desires to license certain assets of Licensors and Licensors
desire to grant to Licensee a license in those assets on the terms and condition
contained herein.
NOW THEREFORE, in consideration of the mutual promises and covenants herein, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties agree as follows:
AGREEMENT
1. DEFINITIONS. The following terms shall have the following meaning as used in
this License Agreement:
"Affiliate" means, with respect to any legally recognizable entity, any other
such entity directly or indirectly Controlling, Controlled by, or under common
Control with such entity. "Control," as used in this definition, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a legally recognizable entity,
whether through the ownership of voting shares or other voting interests, by
contract, or otherwise. Where such entity is a partnership, limited liability
company, corporation, or similar entity and has partners, members, or
shareholders with equal ownership interests or equal control interests, by
contract or otherwise, then each such partner, member, or shareholder will be
deemed to possess, directly or indirectly, the power to direct or cause the
direction of the management and policies of that entity.
"Convertible Debenture" shall mean the 10% Senior Secured Convertible Debentures
described on Schedule I hereto.
"Customer Lists" shall mean those customers lists of Licensor delivered to
Licensee, on the date hereof, on CD ROM media in a file format that is
compatible with Microsoft Excel, which constitute true and accurate lists of all
of each Licensor's customers, and all rights related to the Customer Lists.
Other Terms. All other terms defined in the text of this Technology License
Agreement shall have the meanings set forth in such text.
2. LICENSE GRANTS, RIGHTS, AND OWNERSHIP.
2.1 Customer Lists License. Each Licensor on behalf of itself and its respective
Affiliates hereby grants Licensee and its Affiliates an exclusive, worldwide,
royalty free, fully paid up, perpetual, non-terminable and irrevocable right and
license to: (1) use, copy and modify the Customer Lists; and (2) sublicense to
third parties the foregoing rights in (1) above, including the right to
sublicense to further third parties (the "License").
License Agreement Page 1 of 6
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2.2 Ownership. Subject to the License, each Licensor shall retain all right,
title, and interest in and to its Customer List.
2.3 Covenant Not to Sue. In addition to the License, each Licensor on behalf of
itself and its Affiliates hereby covenant that neither it nor any of its
Affiliates will sue Licensee or any of its Affiliates or any of their respective
licensees, distributors, customers, or end users for infringement based on such
party's use of the Customer Lists.
3. FEES AND PAYMENT. In full and complete consideration for the License and
covenant not to sue set forth in Section 2, Licensee will assume and agree to
perform, pay or discharge a total of Three Hundred Thousand Dollars
(US$300,000.00) due and owing by Licensors under the Convertible Debenture.
4. WARRANTIES. Each Licensor represents and warrants that:
(i) Each Licensor owns all right, title, and interest in and to its Customer
List and has the sole, full unencumbered and clear title to and is the true and
lawful exclusive owner of its Customer List and associated good will;
(ii) This License Agreement is a legal, valid and binding obligation of each
Licensor and the execution, delivery and performance of this License Agreement
by each Licensor does not and will not conflict with any agreement, instrument
or understanding, oral or written, to which either Licensor is a party or by
which either Licensor may be bound, nor violate any laws, rules or regulations
of any court, governmental authority or administrative or other agency having
authority over either Licensor, the Customer Lists or the associated good will;
(iii) Neither Licensor has granted and neither will grant any rights in its
Customer List that are inconsistent with this License Agreement and the rights
granted to Licensee herein;
(iv) Each Licensor has all right, power and authority necessary to execute this
License Agreement and to grant Licensee the license rights set forth herein;
(v) Neither Licensor has knowledge nor has either received any notices or claims
that the use or licensing of the Customer Lists infringe upon the rights of any
third party; and
(vi) Neither Licensor has pledged, hypothecated, or otherwise encumbered its
Customer List; and the Customer Lists are not subject to any pledge, security
interest, or other encumbrance.
5. CONFIDENTIALITY. Each Licensor agrees that it will hold in strictest
confidence, and will not use or disclose to any third party, the existence,
terms and conditions of this License Agreement until such time as Licensee may
choose, in its sole discretion, to publicly disclose such information. Nothing
herein shall prevent or prohibit either Licensor from making any disclosure to
its legal counsel under obligations of confidentiality as necessary to
consummate the transactions contemplated herein or to its financial and tax
advisors under obligations of confidentiality as necessary to file either
Licensor's tax returns.
6. NOTICES. All notices and requests in connection with this License Agreement
shall be deemed given as of the day they are received by the intended recipient
via messenger, delivery service, or in the United States of America mails,
postage prepaid, certified or registered, return receipt requested, and
addressed as follows, or to such other address as the Party to receive the
notice or request so designates by written notice to the other:
License Agreement Page 2 of 6
EXECUTION COPY
To Licensee: To Licensors:
- ------------ -------------
Encompass : c/o HY-TECH Technology Group, Inc.
c/o Advanced Communications 1840 Boy Scout Drive
Technologies, Inc. Fort Myers, Florida 33907
420 Lexington Avenue, Suite 2739 Attention: Gary McNear
New York, New York 10170 Fax: _______________________
Attention: Wayne I. Danson
Facsimile No.: 646-227-1666
Copy to: Copy to:
- -------- --------
Eckert Seamans Cherin & Mellott LLC Gottbetter & Partners, LLP
1515 Market Street, 9th Floor 488 Madison Avenue, 12th Floor
Philadelphia, PA 19102 New York, NY 10022
Attention: Gary A. Miller, Esquire Attention: Adam S. Gottbetter, Esquire
Phone: (215) 851-8472 Phone: (212) 400-6900
Fax: (215) 851-8383 Fax: (212) 400-6901
8. AMENDMENTS/WAIVER. No amendment, waiver, or forbearance of any provision of
this License Agreement shall be effective unless the same shall be in a writing
signed by the Parties. Any such waiver or forbearance shall only be effective
for the specific purpose and in the specific instance given and not for other or
subsequent purposes or instances and no forbearance or waiver shall affect the
Parties' rights to refuse further forbearances or waivers.
9. INTERPRETATION. This License Agreement has been generated pursuant to the
equal negotiations and advice of the Parties and their counsel. Accordingly,
this License Agreement should not be construed or interpreted more favorably or
unfavorably as to any Party hereto.
10. GOVERNING LAW AND VENUE. This License Agreement shall be construed and
controlled by the laws of the State of Delaware, and the Parties consent to
exclusive jurisdiction and venue in the federal and state courts sitting in
Delaware. The Parties waive all defenses of lack of personal jurisdiction and
forum non conveniens. Process may be served on any Party in the manner
authorized by applicable law or court rule. In any action to enforce any right
or remedy under this License Agreement or to interpret any provision of this
License Agreement, the prevailing Party shall be entitled to recover its
reasonable attorneys' fees, costs and other expenses.
11. SEVERABILITY. If any provision, or portion thereof, of this License
Agreement is held by a court of competent jurisdiction to be invalid under any
applicable statute or rule of law, the Parties agree that such invalidity shall
not affect the validity of the remaining portions of this License Agreement and
further agree to substitute for the invalid provision a valid provision which
most closely approximates the intent and economic effect of the invalid
provision.
12. COUNTERPARTS. The signature pages of this License Agreement may be executed
in counterparts and by facsimile and all such pages shall constitute original
signature page(s) hereof and taken together all such counterparts shall be one
and the same instrument.
13. AUTHORITY. Licensee or each Licensor represents and warrants that it has the
authority and power to execute and deliver this License Agreement.
License Agreement Page 3 of 6
EXECUTION COPY
14. INDEPENDENT CONTRACTORS. The Parties hereunder are operating as independent
contractors, and nothing in this License Agreement shall be construed as
creating a partnership, franchise, joint venture, employer-employee or agency
relationship.
15. HEADINGS/CONSTRUCTION. The Section headings used in this License Agreement
are for convenience only and shall not be given substantive effect.
16. BINDING EFFECT; ASSIGNMENT. This License Agreement shall be binding upon and
inure to the benefit of the successors and assigns of each party hereto, and
their Affiliates, divisions, parents and subsidiaries. "Successors" shall
include, but not be limited to, heirs, executors, administrators and receivers,
and shall also include any new entity to which any substantial part of the
assets of a party are transferred in any manner, including, but not limited to
transfers by merger, consolidation, reorganization, or otherwise.
17. PROHIBITION ON ASSIGNMENT. Neither Licensor may assign this License
Agreement, or any rights or obligations hereunder, whether by operation of
contract, law or otherwise, except with the prior, express written consent of
Licensee, and any attempted assignment by either Licensor in violation of this
Section 17 shall be void.
18. TERM. The term of this License Agreement shall commence as of the Effective
Date and shall continue in perpetuity.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
License Agreement Page 4 of 6
EXECUTION COPY
IN WITNESS WHEREOF, the Parties have caused this License Agreement to be
executed by their duly authorized Representatives as of the Effective Date first
written above.
ENCOMPASS GROUP AFFILIATES, INC. HY-TECH TECHNOLOGY GROUP, INC.
By: By:
------------------------------ ---------------------------------
Name: Name:
Title: Title:
HY-TECH COMPUTER SYSTEMS, INC.
By:
--------------------------------
Name:
Title:
License Agreement Page 5 of 6
EXECUTION COPY
EXHIBIT C
Schedule I
Convertible Debenture
- --------------------------------------------------------------------------------
Name and Address Principal amount of Debenture
- --------------------------------------------------------------------------------
KT Capital, LP $ 60,000
237 Park Avenue South
New York, NY 10017
Attn: Jeffrey Kwit, Managing Partner
- --------------------------------------------------------------------------------
David H. Boshart & Elizabeth F. Boshart $ 60,000
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
David H. Boshart, Bruce H. Boshart & $ 60,000
Bethany Maahs-Hoagsberg
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
David H. Boshart $ 60,000
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
Maximum Ventures, Inc. $ 60,000
1175 Walt Whitman Road
Fort Myers, FL 33907
- --------------------------------------------------------------------------------
Total $300,000
- --------------------------------------------------------------------------------
License Agreement
License Agreement Page 5 of 5
EXHIBIT 10.38
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "License Agreement") is effective as of June 24,
2004 (the "Effective Date") by and among Encompass Group Affiliates, Inc., a
Delaware corporation, located at 420 Lexington Avenue, Suite 2739, New York, New
York 10170 ("Licensee"), and Hy-Tech Technology Group, Inc. and Hy-Tech Computer
Systems, Inc., each a Delaware Corporation, located at 1840 Boy Scout Drive, Ft.
Myers, FL 33907 (together, "Licensors"). Licensee and each Licensor are
individually referred to as a "Party" and collectively referred to as the
"Parties."
RECITALS
WHEREAS, Licensee desires to license certain assets of Licensors and Licensors
desire to grant to Licensee a license in those assets on the terms and condition
contained herein.
NOW THEREFORE, in consideration of the mutual promises and covenants herein, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties agree as follows:
AGREEMENT
1. DEFINITIONS. The following terms shall have the following meaning as used in
this License Agreement:
"Affiliate" means, with respect to any legally recognizable entity, any other
such entity directly or indirectly Controlling, Controlled by, or under common
Control with such entity. "Control," as used in this definition, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a legally recognizable entity,
whether through the ownership of voting shares or other voting interests, by
contract, or otherwise. Where such entity is a partnership, limited liability
company, corporation, or similar entity and has partners, members, or
shareholders with equal ownership interests or equal control interests, by
contract or otherwise, then each such partner, member, or shareholder will be
deemed to possess, directly or indirectly, the power to direct or cause the
direction of the management and policies of that entity.
"Convertible Debenture" shall mean the 10% Senior Secured Convertible Debentures
described on Schedule I hereto.
"Derivative Technology" means: (i) for copyrightable or copyrighted material,
any translation (including translation into other computer languages),
portation, modification, correction, addition, extension, upgrade, improvement,
compilation, abridgement or other form in which an existing work may be recast,
transformed or adapted; (ii) for patentable or patented material, any
improvement thereon; and (iii) for material which is protected by trade secret,
any new material derived from such existing trade secret material, including new
material which may be protected by copyright, patent and/or trade secret.
"Web Sites" means the collection of web pages comprising the Web sites located
at: (i) http://www.e-hytech.com; (ii) http://www.hy-tech.com; (iii)
www.pc-xpress.com; (iv) www.computerliquidators.com, (v) www.PCXP.com and (vi)
any other Web sites or domain names owned or operated by either Licensor.
"Web Site-Related Assets" means: (i) the Web Sites, including all portions
thereof and works in progress with respect thereto; (ii) all prior versions of
the Web Sites; (iii) all Web Site technology, materials, graphics, information,
data, and databases; (iv) the Web Sites' domain names ("Domain Names") for each
of the Web Sites; and (v) all Intellectual Property Rights related to any and
all of (i), (ii), (iii), and (iv); and any and all contract rights and causes of
action that either Licensor may have against any third party, excluding causes
of action whereby either Licensor may be liable for any amount.
Other Terms. All other terms defined in the text of this Technology License
Agreement shall have the meanings set forth in such text.
2. LICENSE GRANTS, RIGHTS, AND OWNERSHIP.
2.1 Websites License. Each Licensor on behalf of itself and its respective
Affiliates hereby grants Licensee and its Affiliates an exclusive, worldwide,
royalty free, fully paid up, perpetual, non-terminable and irrevocable right and
license to: (1) use, copy and modify the Websites; (2) create or have created
Derivative Technology of the Websites and (3) sublicense to third parties the
foregoing rights in (1) and (2) above, including the right to sublicense to
further third parties (the "License").
2.2 Ownership. Subject to the License, each Licensor shall retain all right,
title, and interest in and to its Websites.
2.3 Covenant Not to Sue. In addition to the License, each Licensor on behalf of
itself and its Affiliates hereby covenant that neither it nor any of its
Affiliates will sue Licensee or any of its Affiliates or any of their respective
licensees, distributors, customers, or end users for infringement based on such
party's use of the Websites.
3. FEES AND PAYMENT. In full and complete consideration for the License and
covenant not to sue set forth in Section 2, Licensee will assume and agree to
perform, pay or discharge a total of One Hundred Thousand Dollars
(US$100,000.00) due and owing by Licensors under the Convertible Debenture.
4. WARRANTIES. Each Licensor represents and warrants that:
(i) Licensors own all right, title, and interest in and to the Websites and have
the sole, full unencumbered and clear title to and are the true and lawful
exclusive owners of the Websites and associated good will;
(ii) This License Agreement is a legal, valid and binding obligation of each
Licensor and the execution, delivery and performance of this License Agreement
by each Licensor does not and will not conflict with any agreement, instrument
or understanding, oral or written, to which either Licensor is a party or by
which either Licensor may be bound, nor violate any laws, rules or regulations
of any court, governmental authority or administrative or other agency having
authority over either Licensor, the Websites or the associated good will;
(iii) Neither Licensor has granted and neither will grant any rights in the
Websites that are inconsistent with this License Agreement and the rights
granted to Licensee herein;
(iv) Each Licensor has all right, power and authority necessary to execute this
License Agreement and to grant Licensee the license rights set forth herein;
(v) Neither Licensor has knowledge nor has either received any notices or claims
that the use or licensing of the Websites infringe upon the rights of any third
party; and
(vi) Neither Licensor has pledged, hypothecated, or otherwise encumbered the
Websites; and the Websites are not subject to any pledge, security interest, or
other encumbrance.
5. CONFIDENTIALITY. Each Licensor agrees that it will hold in strictest
confidence, and will not use or disclose to any third party, the existence,
terms and conditions of this License Agreement until such time as Licensee may
choose, in its sole discretion, to publicly disclose such information. Nothing
herein shall prevent or prohibit either Licensor from making any disclosure to
its legal counsel under obligations of confidentiality as necessary to
consummate the transactions contemplated herein or to its financial and tax
advisors under obligations of confidentiality as necessary to file either
Licensor's tax returns.
6. NOTICES. All notices and requests in connection with this License Agreement
shall be deemed given as of the day they are received by the intended recipient
via messenger, delivery service, or in the United States of America mails,
postage prepaid, certified or registered, return receipt requested, and
addressed as follows, or to such other address as the Party to receive the
notice or request so designates by written notice to the other:
To Licensee: To Licensors:
- ----------- ------------
Encompass : c/o Hy-Tech Technology Group, Inc.
c/o Advanced Communications 1840 Boy Scout Drive
Technologies, Inc. Fort Myers, Florida 33907
420 Lexington Avenue, Suite 2739 Attention: Gary McNear
New York, New York 10170
Attention: Wayne I. Danson
Facsimile No.: 646-227-1666
Copy to: Copy to:
- ------- -------
Eckert Seamans Cherin & Mellott LLC Gottbetter & Partners, LLP
1515 Market Street, 9th Floor 488 Madison Avenue, 12th Floor
Philadelphia, PA 19102 New York, NY 10022
Attention: Gary A. Miller, Esquire Attention: Adam S. Gottbetter, Esquire
Phone: (215) 851-8472 Phone: (212) 400-6900
Fax: (215) 851-8383 Fax: (212) 400-6901
8. AMENDMENTS/WAIVER. No amendment, waiver, or forbearance of any provision of
this License Agreement shall be effective unless the same shall be in a writing
signed by the Parties. Any such waiver or forbearance shall only be effective
for the specific purpose and in the specific instance given and not for other or
subsequent purposes or instances and no forbearance or waiver shall affect the
Parties' rights to refuse further forbearances or waivers.
9. INTERPRETATION. This License Agreement has been generated pursuant to the
equal negotiations and advice of the Parties and their counsel. Accordingly,
this License Agreement should not be construed or interpreted more favorably or
unfavorably as to any Party hereto.
10. GOVERNING LAW AND VENUE. This License Agreement shall be construed and
controlled by the laws of the State of Delaware, and the Parties consent to
exclusive jurisdiction and venue in the federal and state courts sitting in
Delaware. The Parties waive all defenses of lack of personal jurisdiction and
forum non conveniens. Process may be served on any Party in the manner
authorized by applicable law or court rule. In any action to enforce any right
or remedy under this License Agreement or to interpret any provision of this
License Agreement, the prevailing Party shall be entitled to recover its
reasonable attorneys' fees, costs and other expenses.
11. SEVERABILITY. If any provision, or portion thereof, of this License
Agreement is held by a court of competent jurisdiction to be invalid under any
applicable statute or rule of law, the Parties agree that such invalidity shall
not affect the validity of the remaining portions of this License Agreement and
further agree to substitute for the invalid provision a valid provision which
most closely approximates the intent and economic effect of the invalid
provision.
12. COUNTERPARTS. The signature pages of this License Agreement may be executed
in counterparts and by facsimile and all such pages shall constitute original
signature page(s) hereof and taken together all such counterparts shall be one
and the same instrument.
13. AUTHORITY. Licensee or each Licensor represents and warrants that it has the
authority and power to execute and deliver this License Agreement.
14. INDEPENDENT CONTRACTORS. The Parties hereunder are operating as independent
contractors, and nothing in this License Agreement shall be construed as
creating a partnership, franchise, joint venture, employer-employee or agency
relationship.
15. HEADINGS/CONSTRUCTION. The Section headings used in this License Agreement
are for convenience only and shall not be given substantive effect.
16. BINDING EFFECT; ASSIGNMENT. This License Agreement shall be binding upon and
inure to the benefit of the successors and assigns of each party hereto, and
their Affiliates, divisions, parents and subsidiaries. "Successors" shall
include, but not be limited to, heirs, executors, administrators and receivers,
and shall also include any new entity to which any substantial part of the
assets of a party are transferred in any manner, including, but not limited to
transfers by merger, consolidation, reorganization, or otherwise.
17. PROHIBITION ON ASSIGNMENT. Neither Licensor may assign this License
Agreement, or any rights or obligations hereunder, whether by operation of
contract, law or otherwise, except with the prior, express written consent of
Licensee, and any attempted assignment by either Licensor in violation of this
Section 17 shall be void.
18. TERM. The term of this License Agreement shall commence as of the Effective
Date and shall continue in perpetuity.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
IN WITNESS WHEREOF, the Parties have caused this License Agreement to be
executed by their duly authorized Representatives as of the Effective Date first
written above.
ENCOMPASS GROUP AFFILIATES, INC. HY-TECH TECHNOLOGY GROUP, INC.
By: By:
---------------------------------- -------------------------------
Name: Name:
Title: Title:
HY-TECH COMPUTER SYSTEMS, INC.
By:
-------------------------------
Name:
Title:
Schedule I
Convertible Debenture
- --------------------------------------------------------------------------------
Name and Address Principal amount of Debenture
- --------------------------------------------------------------------------------
KT Capital, LP $ 20,000
237 Park Avenue South
New York, NY 10017
Attn: Jeffrey Kwit, Managing Partner
- --------------------------------------------------------------------------------
David H. Boshart & Elizabeth F. Boshart $ 20,000
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
David H. Boshart, Bruce H. Boshart & $ 20,000
Bethany Maahs-Hoagsberg
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
David H. Boshart $ 20,000
8504 Charter Club Circle, No. 10
Fort Myers, FL 33919
- --------------------------------------------------------------------------------
Maximum Ventures, Inc. $ 20,000
1175 Walt Whitman Road
Fort Myers, FL 33907
- --------------------------------------------------------------------------------
Total $100,000
- --------------------------------------------------------------------------------
EXHIBIT 10.39
EXECUTION COPY
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
NONCOMPETITON AND NONDISCLOSURE AGREEMENT (the "Non-Competition Agreement"),
made as of the 24th day of June 2004, by and among HY-Tech Technology Group,
Inc., a Delaware corporation ("Hy-Tech Technology"), Hy-Tech Computer Systems,
Inc., a Delaware corporation ("Hy-Tech Computer Systems" and together with
Hy-Tech Technology, "HYTT"), Gary McNear ("McNear") and Craig Conklin ("Conklin"
and collectively with McNear and HYTT, the "HYTT Parties") and Encompass Group
Affiliates, Inc., a Delaware corporation ("Encompass").
WITNESSETH:
WHEREAS, pursuant to that certain Agreement, dated May 27, 2004, among Encompass
and HYTT (the "Agreement"), HYTT has agreed to (i) refrain from pursuing certain
rights it may have (the "Rights") and (ii) license certain of its assets to
Encompass, in accordance with the terms of certain license agreements (the
"Licenses") to be entered into among Encompass and HYTT on the date hereof (the
"Closing").
WHEREAS, in order to protect the value of the Rights and the Licenses and to
protect the business of Encompass and its Affiliates, the parties hereto have
agreed that, for the consideration contained in the Agreement, the HYTT Parties
shall not compete with Encompass, in accordance with the terms and conditions
hereof; and
WHEREAS, the agreements of the HYTT Parties not to compete with Encompass as
provided herein are an integral part of the transactions contemplated by the
Agreement, and without such agreements, Encompass would not have entered into
the Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein, the payment of the consideration hereunder and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. Certain Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Agreement; provided, however,
that the following terms shall have the meanings set forth below irrespective of
the meanings such terms may have in the Agreement:
(a) "Affiliate" of any person means any other person, directly or indirectly,
through one or more intermediary persons, controlling, controlled by or under
common control with such person.
(b) "Business" means (i) the marketing, sale, integration, distribution or
repair of computer systems, components, equipment or peripherals, and any
related consulting work, and (ii) conducting any business of a nature (A) now or
anytime hereafter engaged in by Encompass or its current or future subsidiaries
or (B) engaged in by Hy-Tech Computer Systems or its subsidiaries at the time of
Closing, or (C) engaged in by any of BCD 2000, Inc., Cyber Test, Inc. or Pacific
Magtron International Corp. ("Potential Encompass Subsidiaries") at the time the
stock or assets of which are acquired by Encompass.
EXECUTION COPY
(c) "Confidential Information" means all information (i) heretofore or hereafter
developed or used by a HYTT Party relating to the Business, or the operations,
employees, customers, suppliers or distributors of HYTT relating to the Business
including, but not limited to, customer lists, customer orders, financial data,
pricing information and price lists, business plans and market strategies and
arrangements, all books, records, manuals, advertising materials, catalogues,
correspondence, mailing lists, production data, sales materials and records,
purchasing materials and records, personnel records, quality control records and
procedures included in or relating to the Business, and (ii) all such
information of Encompass, its Affiliates and the Potential Encompass
Subsidiaries obtained by the HYTT Parties prior to the date hereof.
(d) The term "control", with respect to any person, means the power to direct
the management and policies of such person, directly or indirectly, by or
through stock ownership, agency or otherwise, or pursuant to or in connection
with an agreement, arrangement or understanding (written or oral) with one or
more other persons by or through stock ownership, agency or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
(e) "Market" means the world.
(f) The term "person" means an individual, corporation, partnership, joint
venture, limited liability company, association, trust, unincorporated
organization or other entity, including a government or political subdivision or
an agency or instrumentality thereof.
(g) "Restricted Period" means the period commencing from and after the date of
this Non-Competition Agreement and ending on the fifth anniversary hereof.
2. Noncompetition in the Market.
(a) At all times from and after the date of this Non-Competition Agreement and
until the expiration of the Restricted Period, (i) no HYTT Party will own or
control, throughout the Market, any business or any person who is engaged in any
business, that competes, directly or indirectly, with the Business or is
otherwise engaged in activities competitive with the Business, (ii) no HYTT
Party shall directly, indirectly, and whether for itself or on behalf of any
other person (including any of its Affiliates), throughout the Market, directly
or indirectly, engage in, own, manage, operate, provide financing to, control or
participate in the ownership, management or control of, or otherwise have a
financial interest (whether, except as provided in Section 4, as a stockholder,
director, officer, representative, subcontractor, partner, consultant,
proprietor, member, agent or otherwise) in, or aid or assist anyone else in the
conduct of, any business or any person who is engaged in any business, that
competes, directly or indirectly, with the Business or is otherwise engaged in
activities competitive with the Business, and (iii) no HYTT Party shall, either
personally or by its agent or by letters, circulars or advertisements and
whether for itself or on behalf of any other person, canvass or solicit, or
enter into or effect (or cause or authorize to be solicited, entered into or
effected), directly or indirectly, for or on behalf of itself or any other
person, any business relating to the Business from any person who is, or has at
any time within five (5) years prior to the date of such action been, a customer
or supplier of the Business or Encompass or Encompass' Affiliates.
- 2 -
EXECUTION COPY
(b) Notwithstanding the foregoing, (i) for a period of three (3) months
following the Closing, Hy-Tech Computer Systems shall be permitted to sell, in
the ordinary course of its business, any inventory not sold on or prior to the
Closing and (ii) provided that HYTT acquires the business of Robotic Workspace
Technology, Inc. ("RWT"), for so long as RWT is engaged solely in the business
of developing and/or acquiring proprietary computer technology within the
robotics field, Encompass shall not deem the HYTT Parties to be competing with
the Business.
3. Excluded Investments and Activities by the HYTT Parties. Each of the parties
hereto acknowledges that nothing contained herein shall prohibit the HYTT
Parties from acquiring equity securities of a publicly held company engaged in
activities which are similar to, or competitive with, the Business, which in the
aggregate do not exceed 1% of the issued and outstanding equity securities of
such publicly held company.
4. Non-Disclosure of Confidential Information. Each HYTT Party acknowledges that
it is the policy of Encompass to maintain as secret and confidential all
Confidential Information. The parties hereto recognize that by reason of HYTT's
operation of its business prior to the Closing, and activities in connection
with the Agreement, the HYTT Parties have acquired Confidential Information.
Each HYTT Party recognizes that, effective upon the Closing, all such
Confidential Information is and shall remain the sole property of Encompass,
free of any rights of any HYTT Party, and acknowledges that Encompass has a
vested interest in assuring that all such Confidential Information remains
secret and confidential. Therefore, each HYTT Party agrees that at all times
from and after the date hereof, it/he will not, directly or indirectly, without
the prior written consent of Encompass, disclose to any person, firm, company or
other entity (other than Encompass or any of its Affiliates) any Confidential
Information, except to the extent that (i) any such Confidential Information
becomes generally available to the public or trade, other than as a result of a
breach by a HYTT Party of this Section 4, or (ii) any such Confidential
Information becomes available to a HYTT Party on a non-confidential basis from a
source other than Encompass; provided, that such source is not known by a HYTT
Party to be bound by a confidentiality agreement with, or other obligation of
secrecy to, Encompass or another party. In addition, it shall not be a breach of
the confidentiality obligations hereof if a HYTT Party is required by law or
legal process to disclose any Confidential Information; provided, that in such
case, the HYTT Parties shall (a) give Encompass the earliest notice possible
that such disclosure is or may be required, and (b) cooperate with Encompass, at
Encompass' expense, in protecting, to the maximum extent legally permitted, the
confidential or proprietary nature of the Confidential Information which must be
so disclosed. The obligations of each HYTT Party under this Section 4 shall
survive any termination of this Non-Competition Agreement.
- 3 -
EXECUTION COPY
5. Non-Solicitation. At all times from and after the date of this
Non-Competition Agreement and until the expiration of the Restricted Period, no
HYTT Party shall, directly, indirectly or otherwise, either by its/his agent or
by letters, circulars or advertisements, and whether for itself/himself or on
behalf of any other person:
(a) seek to persuade any employee of Encompass or any of its Affiliates to
discontinue his or her status or employment therewith or seek to persuade any
employee or former employee of Encompass or any of its Affiliates to become
employed or to provide consulting services or contract services in a business or
activities competitive with the Business, or
(b) solicit or employ or, directly or indirectly, cause to be solicited or
employed, or engage, directly or indirectly, the services of any employee or
former employee of Encompass or any of its Affiliates.
6. Right to Injunctive Relief. Each HYTT Party acknowledges that any breach or
threatened breach by it of any of the covenants or provisions contained herein
will result in irreparable and continuing harm to Encompass and its Affiliates
for which neither Encompass nor its Affiliates would have an adequate remedy at
law. Therefore, each HYTT Party acknowledges and agrees that, in addition to any
other remedy which Encompass or its Affiliates may have at law or in equity,
Encompass and its Affiliates shall be entitled to injunctive relief, temporary
and permanent restraining orders or other equitable remedies in the event of any
such breach or threatened breach. Each HYTT Party further acknowledges and
agrees that monetary damages would be insufficient to compensate Encompass and
its Affiliates in the event of a breach by any HYTT Party of any of the
covenants or provisions contained herein, and that in the event of a breach
thereof, Encompass and/or its Affiliates shall be entitled to specific
performance of the obligations hereunder without the obligation to post a bond
or to prove damages or that other remedies are insufficient.
7. Enforceability; Severability. If any provision of this Non-Competition
Agreement shall be adjudicated to be invalid or unenforceable, then such
provision shall be deemed modified, as to duration, territory or otherwise, so
as to be enforceable as similar as possible to the provision at issue, in order
to render the remainder of this Non-Competition Agreement valid and enforceable
and to the extent found necessary, such provisions shall be revised, reformed or
redrafted or a new agreement created by a court of competent jurisdiction to
accomplish the foregoing. The invalidity or unenforceability of any provision of
this Non-Competition Agreement shall not affect the other provisions hereof, and
this Non-Competition Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
8. Successors and Assigns. This Non-Competition Agreement shall be binding upon
and shall inure to the benefit of each party hereto and their respective
Affiliates, successors and assigns.
- 4 -
EXECUTION COPY
9. Entire Agreement. This Non-Competition Agreement, together with the Agreement
and the documents and instruments referenced herein and therein, contains the
entire understanding among the parties hereto with respect to the subject matter
hereof and supersedes all prior negotiations and understandings among Encompass,
Encompass' Affiliates and each HYTT Party with respect hereto. This
Non-Competition Agreement may not be amended or modified except by a written
instrument signed by the parties hereto.
10. Applicable Law; Submission to Jurisdiction.
(a) This Non-Competition Agreement and the rights, obligations and relations of
the parties hereto shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware.
(b) The parties hereto hereby, to the fullest extent permitted by law, (i) agree
to submit themselves, and any legal action or proceeding relating to this
Non-Competition Agreement or for recognition and enforcement of any judgment in
respect hereof, to the exclusive jurisdiction of the courts of the State of
Delaware, the courts of the United States District Court for the District of
Delaware, and appellate courts from any therefor, (ii) consent that any action
or proceeding shall be brought in such courts, and waive any objection that each
may now or hereafter have to the venue of any such action or proceeding in any
such court, (iii) agree that service of process of any such action or proceeding
may be effected by serving the appropriate party personally at its address as
set forth herein, and service made shall be deemed to be completed upon actual
receipt thereof, and (iv) agree that nothing herein shall affect the right to
effect service of process in any other manner permitted by law.
11. Notices.
(a) Except as provided in Section 10(b)(iii) with respect to service of process
which must be delivered personally, any notice or other communication required
or permitted hereunder shall be in writing and shall be delivered personally by
hand or by recognized overnight courier or mailed (by registered or certified
mail, postage prepaid) or telecopied, as follows:
(i) If to Encompass :
420 Lexington Avenue, Ste 2739 New York, NY 10170 Attention: Wayne I. Danson,
President Telecopier: 646-227-1666
with a simultaneous copy to:
Gary A. Miller, Esq.
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street, Ninth Floor
Philadelphia, Pennsylvania 19102
Telecopier: (215)851-8383
- 5 -
EXECUTION COPY
and
Jonathan Lichtman, Esquire
Levinson & Lichtman LLP
120 Palmetto Road East
Boca Raton, Florida 33166
Telecopier: (561) 869-260
(ii) If to a HYTT Party, one copy to:
c/o of Hy-Tech Technology Group, Inc.
1840 Boy Scout Dr.
Ft. Myers, FL Attention: Gary McNear
with a simultaneous copy to:
Adam S. Gottbetter, Esquire
Gottbetter & Partners, LLP
488 Madison Ave., 12th Fl
New York, NY 10022-5718
Telecopier: (212) 400-6901
(b) Each such notice or other communication shall be effective (i) if given by
telecopier, when such telecopy is transmitted to the telecopier number specified
in Section 11(a) (with confirmation of transmission), or (ii) if given by other
means, when delivered at the address specified in Section 11(a). Any party by
notice given in accordance with this Section 11 to the other party may designate
another address or person for receipt of notices hereunder. Notices by a party
may be given by counsel to such party.
12. Headings. The headings of sections and subsections of this Non-Competition
Agreement are for convenience only and are not to be considered in construing
this Non-Competition Agreement.
13. Execution in Counterparts. This Non-Competition Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original, but
all of which, when taken together, shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
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EXECUTION COPY
IN WITNESS WHEREOF, the parties hereto have caused this Non-Competition
Agreement to be executed as of the day and year first above written.
HY-TECH TECHNOLOGY, INC.
By:
Name:
Title:
HY-TECH COMPUTER SYSTEMS, INC.
By:
Name:
Title:
CRAIG CONKLIN
GARY MCNEAR
ENCOMPASS GROUP AFFILIATES, INC.
By:
Name:
Title:
EXHIBIT 10.40
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "Agreement") is dated as of June 23, 2004, by and
between ____________________________ (the "Buyer"), and ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., a Florida corporation (the "Company").
RECITALS:
WHEREAS, pursuant to that certain Agreement, dated May 27, 2004, among the
Company, Hy-Tech Technology Group, Inc. ("HYTT") and the other parties named
therein (the "HYTT Agreement"), the Company has agreed to assume the payment
obligations of HYTT under that certain 10% Secured Senior Convertible Debenture
with an outstanding balance of $100,000 (the "Outstanding Balance"), issued by
HYTT to Buyer (the "Convertible Debenture");
WHEREAS, the Company and the Buyer have reached an agreement pursuant to which
the Company shall have the right to cancel the Convertible Debenture in exchange
for (i) Forty Thousand Dollars ($40,000) in cash and (ii) 60 shares of the
Company's Series B Convertible Preferred Stock, par value $0.01 per share (the
"Series B Preferred Stock"), all in accordance with the terms hereof.
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual premises herein set forth and
certain other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. ISSUANCE OF SHARES AND RELATED TRANSACTIONS.
1.1. Payment by Company.
(a) Cash Payment.
(i) At Closing (as defined below), subject to the terms, restrictions and
conditions of this Agreement, the Company shall pay to Buyer Forty Thousand
Dollars ($40,000) by wire transfer of immediately available funds, of which
Fifteen Thousand Dollars ($15,000) shall be wired by the Company to an account
designated by Buyer and Twenty-Five Thousand Dollars ($25,000) (the "HYTT
Payment") shall be wired by the Company, on Buyer's behalf, to an account
designated by Gottbetter & Partners, LLP, Buyer's representative ("Gottbetter").
(ii) Buyer hereby (A) authorizes the Company to wire the HYTT Payment directly
to an account designated by Gottbetter and (B) agrees to execute and deliver the
General Release, attached hereto as EXHIBIT "A," pursuant to which the Buyer
shall release the Company from any and all liability, and waive and relinquish
any and all rights and claims, that may arise in connection the HYTT Payment.
(b) Issuance of Shares. At Closing , subject to the terms, restrictions and
conditions of this Agreement, the Buyer shall acquire, and the Company shall
sell, issue and deliver to the Buyer 60 shares of Series B Preferred Stock (the
"Buyer's Stock"), which shall have the right and designations set forth on
EXHIBIT "B" hereto. All Buyer's Stock and the Common Stock into which such
Buyer's Stock is convertible shall be free and clear of all liens, claims,
pledges, mortgages, restrictions, obligations, security interests and
encumbrances of any kind, nature and description (collectively, "Encumbrances").
1.2. Cancellation of Convertible Debenture. Effective upon the Closing, (i) the
Buyer shall accept the cash payment described in Section 1.1(a) above and the
Buyer's Stock in exchange for the Outstanding Balance; (ii) all of the
obligations of the Company under the Convertible Debenture shall be void and
extinguished and converted into the right to receive the Buyer's Stock; and
(iii) the Buyer shall waive, relinquish, and release any and all rights and
claims it may have under, and any of the obligations of the Company under, the
Convertible Debenture, including, without limitation, principal, interest (both
ordinary and default rates) expenses, fees, and any other amounts, damages,
liabilities, which were due or may have become due with respect to the
Convertible Debenture.
1.3. Closing. The parties to this Agreement shall consummate the transactions
contemplated by this Agreement at a closing (the "Closing") to be held no later
than June 23, 2004; provided, in no event shall the Closing occur prior to the
satisfaction of the conditions precedent set forth in SECTIONS 6, 7 AND 8
hereof. The date of Closing is referred to herein as the "Closing Date." The
Closing shall take place at the offices of counsel to the Company, or at such
other place as may be mutually agreed upon by the Buyer and the Company.
2. ADDITIONAL AGREEMENTS AND ACKNOWLEDGMENTS.
2.1. Agreement to Register the Common Stock. The Company hereby grants piggyback
registration rights to the Buyer, pursuant to which the Company shall register
the Common Stock underlying the Series B Preferred Stock with the SEC in any
registration statement filed from time to time by the Company after a minimum of
50 shares of Series B Preferred Stock have been converted; provided that such
piggyback registration rights shall be subject to customary underwriter's
cutbacks.
2.2. Commercially Reasonable Efforts. Subject to the terms and conditions
provided in this Agreement, each of the parties shall use commercially
reasonable efforts in good faith to take or cause to be taken as promptly as
practicable all reasonable actions that are within its power to cause to be
fulfilled those conditions precedent to its obligations or the obligations of
the other parties to consummate the transactions contemplated by this Agreement
that are dependent upon its actions.
2.3. Further Assurances. The parties shall deliver any and all other instruments
or documents required to be delivered pursuant to, or necessary or proper in
order to give effect to, the provisions of this Agreement, including, without
limitation, to issue the Buyer's Stock and to consummate the transactions
contemplated by this Agreement.
2
2.4. Asset Acquisition. The Buyer acknowledges that an indirect subsidiary of
the Company has entered into an Asset Purchase Agreement, dated May 27, 2004,
pursuant to which such subsidiary shall acquire substantially all of the assets
of a third party, other than HYTT (the "Asset Purchase Agreement") and the Buyer
consents to the consummation of the transaction contemplated by the Asset
Purchase Agreement, which such consent shall constitute the required consent
pursuant to any agreement, document or instrument under which the Buyer may have
a consent right.
2.5. Confidentiality. The Buyer acknowledges that in connection with the
transaction contemplated by this Agreement, it may receive material non-public
information about the Company. The Buyer shall not disclose such information to
any third party and shall not use such information for its personal benefit.
3. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY.
To induce Buyer to enter into this Agreement and to consummate the transactions
contemplated hereby, the Company represents and warrants to and covenants with
the Buyer as follows:
3.1. Organization; Compliance. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida.
The Company is: (a) entitled to own or lease its properties and to carry on its
business as and in the places where such business is now conducted, and (b) duly
licensed and qualified in all jurisdictions where the character of the property
owned by it or the nature of the business transacted by it makes such license or
qualification necessary, except where the failure to do so would not result in a
material adverse effect on the Company.
3.2. Capitalization and Related Matters.
(a) The Company has authorized capital consisting of 5,000,000,000 shares of
Common Stock and 25,000 shares of Preferred Stock, of which 1,979,365,845 shares
of Common Stock and 4,200 shares of Series A Convertible Preferred Stock (the
"Series A Preferred Stock") are issued and outstanding as of the date hereof
(excluding the Buyer's Stock). All Common Stock is duly and validly issued,
fully paid and nonassessable. No Common Stock (i) was issued in violation of the
preemptive rights of any shareholder, or (ii) is held as treasury stock.
(b) Except as set forth in (i) the Company's Form 10-QSB for the quarter ended
March 31, 2004, the Company's Form 10-KSB for the year ended June 30, 2003 and
any current reports filed by the Company with the Securities and Exchange
Commission since March 31, 2004 (collectively, the "SEC Documents") and (ii) the
Asset Purchase Agreement (including the agreements entered into in connection
therewith), and except for (i) the Series A Preferred Stock and (ii) the shares
of Common Stock issuable pursuant to that certain Employment Agreement between
Martin Neilson and the Company and its affiliates (the "Neilson Agreement"),
there are not outstanding any securities convertible into Common Stock or any
other capital stock of the Company nor any rights to subscribe for or to
purchase, or any options for the purchase of, or any agreements providing for
the issuance (contingent or otherwise) of, or any calls, commitments or claims
of any character relating to, such capital stock or securities convertible into
such capital stock (collectively, "Securities Rights"). Except in connection
with the Series A Preferred Stock, the Company:
(i) is not subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any of its capital stock; or (ii) has no liability
for dividends or other distributions declared or accrued, but unpaid, with
respect to any capital stock.
3
(c) Except for the Asset Purchase Agreement (including the agreements entered
into in connection therewith) and the Neilson Agreement, and except in
connection with the issuance of the Series A Preferred Stock, the Company is not
a party to any agreement, understanding or arrangement, direct or indirect,
relating to any class or series of the Company's capital stock, including,
without limitation, any voting agreement, restriction on resale, shareholder
agreement or registration rights agreement.
3.3. Subsidiaries and Investments.
(a) Except as set forth on Schedule 3.3 hereto, the SEC Documents disclose with
respect to each Subsidiary (as defined below) (i) its name, (ii) the
jurisdiction of its organization, (iii) the number of its authorized shares or
other equity interests, (iv) the number of its outstanding shares or other
equity interests of each class or series, and (v) the name of the owner and the
number and percentage of outstanding shares or other equity interests of each
class or series of such Subsidiary owned of record and, if different, owned
beneficially by the Company and any other person. All of the outstanding capital
stock and other equity interests of each of the Subsidiaries is validly issued,
fully paid and nonassessable and was issued in compliance with all applicable
federal and state securities or "blue sky" laws and regulations. There are no
Securities Rights relating to any shares of capital stock, other equity
interests or other securities of any of the Subsidiaries. The Company and the
Subsidiaries have good, marketable and exclusive title to the shares or other
equity interests disclosed in the SEC Documents as being owned by each of them,
free and clear of all Encumbrances. All rights and powers to vote such shares or
other equity interests are held exclusively by the Company, directly or
indirectly through one or more of the Subsidiaries, as the case may be. Each
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, and has the
corporate power and authority to own or lease its properties and to carry on its
business as now conducted. For the purposes hereof, a "Subsidiary" means any
corporation, limited liability company, partnership, joint venture or other
entity in which the Company owns, directly or indirectly, more than 20% of the
outstanding voting securities or equity interests.
(b) Except as disclosed in Schedule 3.3 and in the SEC Documents, the Company
does not own, nor has it ever owned, any equity interest in any corporation,
limited liability company, partnership, joint venture or other entity.
3.4. Execution; No Inconsistent Agreements; Etc.
(a) This Agreement is a valid and binding agreement of the Company, enforceable
in accordance with its terms, except as such enforcement may be limited by
bankruptcy or similar laws affecting the enforcement of creditors' rights
generally, and the availability of equitable remedies.
4
(b) The execution and delivery of this Agreement by the Company does not, and
the consummation of the transactions contemplated hereby will not, constitute a
breach or violation of the charter or bylaws of the Company, or a default under
any of the terms, conditions or provisions of (or an act or omission that would
give rise to any right of termination, cancellation or acceleration under) any
note, bond, mortgage, lease, indenture, agreement or obligation to which the
Company is a party, pursuant to which the Company otherwise receives benefits,
or to which any of the properties of the Company is subject.
3.5. Corporate Records. The statutory records, including the stock register and
minute books of the Company, fully reflect all issuances, transfers and
redemptions of its capital stock, correctly show and will correctly show the
total number of shares of its capital stock issued and outstanding on the date
hereof and on the Closing Date, the charter or other organizational documents
and all amendments thereto, and bylaws as amended and currently in force.
3.6. Financial Statements.
(a) The SEC Documents contain (i) the consolidated audited balance sheet of the
Company as of June 30, 2003, and the consolidated audited consolidated profit
and loss statement of the Company for the fiscal year ended June 30, 2003 and
(ii) the consolidated unaudited balance sheet of the Company as of March 31,
2004 and the consolidated unaudited profit and loss statement of the Company for
the six months ended March 31, 2004 (the balance sheet as of March 31, 2004 is
hereinafter referred to as the "2004 Company Balance Sheet"). All the foregoing
financial statements, and any financial statements delivered pursuant to
subsection (c) below, are referred to herein collectively as the "Company
Financial Statements."
(b) The Company Financial Statements have been and will be prepared in
accordance with U.S. GAAP, applied on a consistent basis (except that the
unaudited statements do not contain all the disclosures required by GAAP), and
fairly reflect and will reflect in all material respects the financial condition
of the Company as at the dates thereof and the results of the operations of the
Company for the periods then ended.
3.7. Liabilities. The Company has no material debt, liability or obligation of
any kind, whether accrued, absolute, contingent or otherwise, except: (a) those
reflected on the 2004 Company Balance Sheet, including the notes thereto, and
(b) liabilities incurred in the ordinary course of business since March 31,
2004, none of which have had or will have a material adverse effect on the
financial condition of the Company.
3.8. Absence of Changes. Except as described in the SEC Documents and in the
other Schedules to this Agreement, from March 31, 2004 to the date of this
Agreement:
(a) there has not been any adverse change in the business, assets, liabilities,
results of operations or financial condition of the Company or in its
relationships with suppliers, customers, employees, lessors or others other than
changes in the ordinary course of business, none of which, singularly or in the
aggregate, have had or will have a material adverse effect on the business,
properties or financial condition of the Company; and
5
(b) the Company has complied with the covenants and restrictions set forth in
SECTION 5 to the same extent as if this Agreement had been executed on, and had
been in effect since, March 31, 2004.
3.9. Title to Properties. The Company has good and marketable title to all of
its properties and assets, real and personal, including, but not limited to,
those reflected in the 2004 Company Balance Sheet (except as since sold or
otherwise disposed of in the ordinary course of business, or as expressly
provided for in this Agreement), free and clear of all Encumbrances of any kind
or character except: (a) those securing liabilities of the Company incurred in
the ordinary course (with respect to which no material default exists); (b)
liens of 2004 real estate and personal property taxes; and (c) imperfections of
title and Encumbrances, if any, which, in the aggregate (i) are not substantial
in amount; (ii) do not detract from the value of the property subject thereto or
impair the operations of the Company or; and (iii) do not have a material
adverse effect on the business, properties or assets of the Company.
3.10. Compliance With Law. The business and activities of the Company has at all
times been conducted in accordance with its articles of incorporation and bylaws
and any applicable law, regulation, ordinance, order, License (defined below),
permit, rule, injunction or other restriction or ruling of any court or
administrative or governmental agency, ministry, or body, except where the
failure to do so would not result in a material adverse effect on the Company.
3.11. Taxes. The Company has duly filed all material federal, state, local and
foreign tax returns and reports, and all returns and reports of all other
governmental units having jurisdiction with respect to taxes imposed on it or on
its income, properties, sales, franchises, operations or employee benefit plans
or trusts, all such returns were complete and accurate when filed, and all taxes
and assessments payable by the Company have been paid to the extent that such
taxes have become due. All taxes accrued or payable by the Company for all
periods through March 31, 2004 have been accrued or paid in full, whether or not
due and payable and whether or not disputed. The Company has withheld proper and
accurate amounts from its employees for all periods in full compliance with the
tax withholding provisions of applicable foreign, federal, state and local tax
laws. There are no waivers or agreements by the Company for the extension of
time for the assessment of any taxes. The tax returns of the Company have never
been examined by any authority or other administrative body or court of any
state or country. There are not now any examinations of the income tax returns
of the Company pending, or any proposed deficiencies or assessments against the
Company of additional taxes of any kind. The Company shall duly and timely
prepare and file all material federal, state, local and foreign tax returns and
reports for 2004, and all returns and reports of all other governmental units
having jurisdiction with respect to taxes imposed on the Company or on its
income, properties, sales, franchises, operations or employee benefit plans or
trusts, and all such returns will be complete and accurate when filed.
3.12. Real Properties. The Company does not have an interest in any real
property, except for the Leases (as defined below).
6
3.13. Leases of Real Property. All leases pursuant to which the Company is
lessee or lessor of any real property (the "Leases") are listed in the SEC
Documents and are valid and enforceable in accordance with their terms. There is
not under any of such leases (a) any material default or any claimed material
default by the Company or any event of default or event which with notice or
lapse of time, or both, would constitute a material default by the Company and
in respect to which the Company has not taken adequate steps to prevent a
default on its part from occurring, or (b) to the knowledge of the Company, any
material default by any lessee of the Company or any event of default or event
which with notice or lapse of time, or both, would constitute a material default
by any lessee. The copies of the Leases heretofore furnished to Buyer are true,
correct and complete, and such Leases have not been modified in any respect
since the date they were so furnished, and are in full force and effect in
accordance with their terms. The Company is lawfully in possession of all real
properties of which they are a lessee (the "Leased Properties").
3.14. Contingencies. Except as disclosed in the SEC Documents, there are no
actions, suits, claims or proceedings pending, or to the knowledge of the
Company threatened against, by or affecting, the Company in any court or before
any arbitrator or governmental agency that may have a material adverse effect on
the Company or which could materially and adversely affect the right or ability
of the Company to consummate the transactions contemplated hereby. To the
knowledge of the Company, there is no valid basis upon which any such action,
suit, claim, or proceeding may be commenced or asserted against it. There are no
unsatisfied judgments against the Company and no consent decrees or similar
agreements to which the Company is subject and which could have a material
adverse effect on the Company.
3.15. Products Liability; Warranties; Insurance. The Company will have not loss,
damage, liability, fine, penalty, cost and expense (each, a "Liability") that is
not fully covered by insurance relating to any product manufactured, distributed
or sold by the Company prior to the Closing, whether or not such Liability is
related to products that are defective or improperly designed or manufactured or
are in breach of any express or implied product warranty.
3.16. Intellectual Property Rights.
(a) The Company owns and possesses all right, title and interest in and to, or
has a valid license to use, all of the Proprietary Rights (as defined below)
necessary for the operation of its business as presently conducted and none of
such Proprietary Rights have been abandoned;
(b) no claim by any third party contesting the validity, enforceability, use or
ownership of any such Proprietary Rights has been made, is currently outstanding
or, to the knowledge of the Company, is threatened, and to the knowledge of the
Company there is no reasonable basis for any such claim;
(c) neither the Company nor any registered agent of any of the foregoing has
received any notice of, nor is the Company aware of any reasonable basis for an
allegation of, any infringement or misappropriation by, or conflict with, any
third party with respect to such Proprietary Rights, nor has the Company, or any
registered agent of any of them received any claim of infringement or
misappropriation of or other conflict with any Proprietary Rights of any third
party;
7
(d) the Company has not infringed, misappropriated or otherwise violated any
Proprietary Rights of any third parties, and the Company is not aware of any
infringement, misappropriation or conflict which will occur as a result of the
continued operation of the Company as presently operated and as contemplated to
be operated or as a result of the consummation of the transactions contemplated
hereby; and
(e) all employees who have contributed to or participated in the conception
and/or development of all or any part of the Proprietary Rights which are not
licensed to the Company from a third party either (i) have been party to a
"work-for-hire" arrangement or agreement with the Company, in accordance with
applicable federal and state law, that has accorded the Company full, effective,
exclusive, and original ownership of all tangible and intangible property
thereby arising, or (ii) have executed appropriate instruments of assignment in
favor of the Company as assignee that have conveyed to the Company full,
effective and exclusive ownership of all tangible and intangible property
thereby arising.
(f) As used herein, the term "Proprietary Rights" means all proprietary
information of the Company, as the case may be, including all patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice), all trademarks, service marks, trade dress,
trade names, corporate names, domain names, copyrights, all trade secrets,
confidential information, ideas, formulae, compositions, know-how, processes and
techniques, drawings, specifications, designs, logos, plans, improvements,
proposals, technical and computer data, documentation and software, financial,
business and marketing plans, and related information and all other proprietary,
industrial or intellectual property rights relating to the business of the
Company, including those proprietary, industrial or intellectual property rights
found at the Company's websites listed in the SEC Documents.
(g) The consummation of the transactions contemplated by this Agreement will not
adversely affect the right of the Company to continue to use the Proprietary
Rights. To the extent that the registration of any Proprietary Right is required
by law, such Proprietary Right has been duly and validly registered or filed,
and any fees that are necessary to maintain in force any Proprietary Rights or
registrations thereof have been paid. The SEC Documents sets forth a list and
description of the copyrights, trademarks, service marks, trade dress, trade
names and domain names used or held by the Company and, where appropriate, the
date, serial or registration number, and place of any registration thereof.
3.17. Material Contracts. Except for the Asset Purchase Agreement (including the
agreements entered into in connection therewith), the Neilson Agreement and
those agreements entered into in connection with the issuance of the Series A
Preferred Stock, the SEC Documents contain a complete list of all contracts of
the Company that involve consideration in excess of the equivalent of $25,000 or
have a term of one year or more (the "Material Contracts"). Except as disclosed
in the SEC Documents: (a) the Company has performed all material obligations to
be performed by them under all such contracts, and is not in material default
thereof, and (b) no condition exists or has occurred which with the giving of
notice or the lapse of time, or both, would constitute a material default by the
Company or accelerate the maturity of, or otherwise modify, any such contract,
and (c) all such contracts are in full force and effect. No material default by
any other party to any of such contracts is known or claimed by the Company to
exist.
8
3.18. Employee Benefit Matters.
(a) Except as disclosed in the SEC Documents, the Company does not provide, nor
is it obligated to provide, directly or indirectly, any benefits for employees
other than salaries, sales commissions and bonuses, including, but not limited
to, any pension, profit sharing, stock option, retirement, bonus,
hospitalization, insurance, severance, vacation or other employee benefits
(including any housing or social fund contributions) under any practice,
agreement or understanding.
(b) Each employee benefit plan maintained by or on behalf of the Company or any
other party (including any terminated pension plans) which covers or covered any
employees or former employees of the Company (collectively, the "Employee
Benefit Plan") is listed in the SEC Documents. The Company has delivered to
Buyer true and complete copies of all such plans and any related documents. With
respect to each such plan: (a) no litigation, administrative or other proceeding
or claim is pending, or to the knowledge of the Company, threatened or
anticipated involving such plan; (b) there are no outstanding requests for
information by participants or beneficiaries of such plan; and (c) such plan has
been administered in compliance in all material respects with all applicable
laws and regulations.
(c) The Company has timely made payment in full of all contributions to all of
the Employee Benefit Plans which the Company was obligated to make prior to the
date hereof; and there are no contributions declared or payable by the Company
to any Employee Benefit Plan which, as of the date hereof, has not been paid in
full.
3.19. Possession of Franchises, Licenses, Etc. The Company: (a) possesses all
material franchises, certificates, licenses, permits and other authorizations
(collectively, the "Licenses") from governmental authorities, political
subdivisions or regulatory authorities that are necessary for the ownership,
maintenance and operation of its business in the manner presently conducted; (b)
are not in violation of any provisions thereof; and (c) have maintained and
amended, as necessary, all Licenses and duly completed all filings and
notifications in connection therewith.
3.20. Environmental Matters. Except as disclosed in the SEC Documents: (i) the
Company is not in violation, in any material respect, of any Environmental Law
(as defined below); (ii) the Company has received all permits and approvals with
respect to emissions into the environment and the proper collection, storage,
transport, distribution or disposal of Wastes (as defined below) and other
materials required for the operation of its business at present operating
levels; and (iii) the Company is not liable or responsible for any material
clean up, fines, liability or expense arising under any Environmental Law, as a
result of the disposal of Wastes or other materials in or on the property of the
Company (whether owned or leased), or in or on any other property, including
property no longer owned, leased or used by the Company. As used herein, (a)
"Environmental Laws" means, collectively, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Superfund
Amendments and Reauthorization Act of 1986, the Resource Conservation and
Recovery Act, the Toxic Substances Control Act, as amended, the Clean Air Act,
as amended, the Clean Water Act, as amended, any other "Superfund" or
"Superlien" law or any other federal, or applicable state or local statute, law,
ordinance, code, rule, regulation, order or decree (foreign or domestic)
regulating, relating to, or imposing liability or standards of conduct
concerning, Wastes, or the environment; and (b) "Wastes" means and includes any
hazardous, toxic or dangerous waste, liquid, substance or material (including
petroleum products and derivatives), the generation, handling, storage,
disposal, treatment or emission of which is subject to any Environmental Law.
9
3.21. Agreements and Transactions with Related Parties. Except as disclosed on
the SEC Documents, the Company is not, and since January 1, 2003 has not been, a
party to any contract, agreement, lease or transaction with, or any other
commitment to, (a) a shareholder, (b) any person related by blood, adoption or
marriage to shareholder, (c) any director or officer of the Company, (d) any
corporation or other entity in which any of the foregoing parties has, directly
or indirectly, at least five percent (5.0%) beneficial interest in the capital
stock or other type of equity interest in such corporation or other entity, or
(e) any partnership in which any such party is a general partner or a limited
partner having a five percent (5%) or more interest therein (any or all of the
foregoing being herein referred to as a "Related Party" and collectively as the
"Related Parties"). Without limiting the generality of the foregoing, except as
set forth in the SEC Documents, (a) no Related Party, directly or indirectly,
owns or controls any assets or properties which are or have since January 1,
2003 been used in the business of the Company, and (b) no Related Party,
directly or indirectly, engages in or has any significant interest in or
connection with any business: (i) which is or which within the last two (2)
years has been a competitor, customer or supplier of, or has done business with,
the Company, or (ii) which as of the date hereof sells or distributes products
or provides services which are similar or related to the products or services of
the Company. 3.22. Business Practices. Except as disclosed in the SEC Documents,
the Company has not, at any time, directly or indirectly, made any contributions
or payment, or provided any compensation or benefit of any kind, to any
municipal, county, state, federal or foreign governmental officer or official,
or any other person charged with similar public or quasi-public duties, or any
candidate for political office. The Company's books, accounts and records
(including, without limitation, customer files, product packaging and invoices)
accurately describe and reflect, in all material respects, the nature and amount
of the Company's products, purchases, sales and other transactions. Without
limiting the generality of the foregoing, the Company has not engaged, directly
or indirectly, in: (a) the practice known as "double-invoicing" or the use or
issuance of pro-forma or dummy invoices; or (b) the incorrect or misleading
labeling, marketing or sale of refurbished goods as new goods.
3.23. Shareholder Matters. None of the matters set forth in this Agreement
require the approval of the Company's shareholders.
3.24. Full Disclosure. No representation or warranty of the Company contained in
this Agreement, and none of the statements or information concerning the Company
contained in this Agreement and the Schedules, contains or will contain any
untrue statement of a material fact nor will such representations, warranties,
covenants or statements taken as a whole omit a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
10
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
To induce the Company to enter into this Agreement and to consummate the
transactions contemplated hereby, the Buyer represents and warrants to and
covenants with the Company as follows:
4.1. Organization. The Buyer has all requisite power and authority to execute,
deliver and carry out the terms of this Agreement and the consummation of the
transactions contemplated herein.
4.2. Execution; No Inconsistent Agreements; Etc.
(a) The execution and delivery of this Agreement and the performance of the
transactions contemplated hereby have been duly and validly authorized and
approved by Buyer and this Agreement is a valid and binding agreement of Buyer,
enforceable against Buyer in accordance with its terms, except as such
enforcement may be limited by bankruptcy or similar laws affecting the
enforcement of creditors' rights generally, and the availability of equitable
remedies.
(b) The execution and delivery of this Agreement by Buyer does not, and the
consummation of the transactions contemplated hereby will not, constitute a
breach or violation of the charter or bylaws of Buyer, or a default under any of
the terms, conditions or provisions of (or an act or omission that would give
rise to any right of termination, cancellation or acceleration under) any
material note, bond, mortgage, lease, indenture, agreement or obligation to
which Buyer is a party, pursuant to which any of them otherwise receive
benefits, or by which any of their properties may be bound.
4.3. Securities Laws.
(a) The Buyer is purchasing the Series B Preferred Stock for investment purposes
and not with a view to the sale or distribution, by public or private sale or
other disposition, and the Buyer has no present intention of selling, granting
any participation in or otherwise distributing or disposing of any of the Series
B Preferred Stock.
(b) Investment Representations. The Buyer has reviewed the periodic and current
reports filed by the Company with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended. The Buyer has been offered the
opportunity to ask questions of, and receive answers from the Company's
management, and the Buyer has been given full and complete access to all
available information and data relating to the business and assets of the
Company and has obtained such additional information about the Company as the
Buyer has deemed necessary in order to evaluate the opportunities, both
financial and otherwise, with respect to the Company and, except as set forth
herein, has not relied on any representation, warranty or other statement
concerning the Company and its evaluation of the decision to consummate the
transactions contemplated herein. In its judgment, the Buyer is sufficiently
familiar with the Company to enable the Buyer to proceed with the transactions
contemplated hereby.
11
(c) The Buyer understands that except as may be effected pursuant to Buyer's
piggyback registration rights, the sale and resale of the shares of Series B
Preferred Stock have not been and are not being registered under the Securities
Act of 1933, as amended (the "Securities Act"), and such shares may not be
transferred unless (a) the resale of the shares of Series B Preferred Stock has
been registered thereunder; or (b) the Buyer shall have delivered to the Company
an opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; or (c) the shares of Series B Preferred Stock
are sold under Rule 144 promulgated under the Securities Act.
(d) The Buyer is an "accredited investor," as such term is defined in Rule 501
of Regulation D promulgated under the Securities Act of 1933, as amended .
(e) The Buyer is a sophisticated investor familiar with the type of risks
inherent in the acquisition of securities such as the shares of the Company and
the Buyer's financial position is such that the Buyer can afford to retain its
shares of Company Series B Preferred Stock for an indefinite period of time
without realizing any direct or indirect cash return on its investment.
4.4. Convertible Debentures. The Buyer is the sole owner of all right, title and
interest in and to the Convertible Debenture and the Buyer owns the Convertible
Debenture free and clear of all Encumbrances.
5. CONDUCT OF BUSINESS OF THE COMPANY PENDING CLOSING.
The Company covenants and agrees that between the date hereof and the Closing
Date:
5.1. No Material Changes. Except as contemplated in this Agreement, the Company
shall not materially alter its organization, capitalization, or financial
structure, practices or operations and without limiting the generality of the
foregoing, no change shall be made in the articles of incorporation and bylaws
of the Company.
5.2. Notification. Each party to this Agreement shall promptly notify the other
parties in writing of the occurrence, or threatened occurrence, of any event
that would constitute a breach or violation of this Agreement by any party or
that would cause any representation or warranty made by the notifying party in
this Agreement to be false or misleading in any respect. The Company will
promptly notify the Buyer of any event that could have a material adverse effect
on the business, assets, financial condition or prospects of the Company. The
Company shall have the right to update the Schedules to this Agreement
immediately prior to Closing; provided, if such update discloses any breach of a
representation, warranty, covenant or obligation of the Company, the Buyer shall
have the right to then exercise its available rights and remedies hereunder.
6. CONDITIONS TO OBLIGATIONS OF ALL PARTIES.
12
The obligation of Buyer and the Company to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, on or before the
Closing, of each of the following conditions; any or all of which may be waived
in whole or in part by the joint agreement of Buyer and the Company:
6.1. Absence of Actions. No action or proceeding shall have been brought or
threatened before any court or administrative agency to prevent the consummation
or to seek damages in a material amount by reason of the transactions
contemplated hereby, and no governmental authority shall have asserted that the
within transactions (or any other pending transaction involving Buyer or the
Company when considered in light of the effect of the within transactions) shall
constitute a violation of law or give rise to material liability on the part of
the Company or the Buyer.
6.2. Consents. The parties shall have received from any suppliers, lessors,
lenders, lien holders or governmental authorities, bodies or agencies having
jurisdiction over the transactions contemplated by this Agreement, or any part
hereof, such consents, authorizations and approvals as are necessary for the
consummation hereof.
7. CONDITIONS TO OBLIGATIONS OF THE BUYER.
All obligations of the Buyer to consummate the transactions contemplated by this
Agreement are subject to the fulfillment and satisfaction of each and every of
the following conditions on or prior to the Closing, any or all of which may be
waived in whole or in part by Buyer:
7.1. Representations and Warranties. The representations and warranties
contained in SECTION 3 of this Agreement and in any certificate, instrument,
schedule, agreement or other writing delivered by or on behalf of the Company in
connection with the transactions contemplated by this Agreement shall be true,
correct and complete in all material respects (except for representations and
warranties which are by their terms qualified by materiality, which shall be
true, correct and complete in all respects) as of the date when made and shall
be deemed to be made again at and as of the Closing Date and shall be true,
correct and complete at and as of such time in all material respects (except for
representations and warranties which are by their terms qualified by
materiality, which shall be true, correct and complete in all respects).
7.2. Compliance with Agreements and Conditions. The Company shall have performed
and complied with all material agreements and conditions required by this
Agreement to be performed or complied with by it prior to or on the Closing
Date.
7.3. Absence of Material Adverse Changes. No material adverse change in the
business, assets, financial condition, or prospects of the Company shall have
occurred, no substantial part of the assets of the Company not substantially
covered by insurance shall have been destroyed due to fire or other casualty,
and no event shall have occurred which has had or will have a material adverse
effect on the business, assets, financial condition or prospects of the Company.
7.4. Board Approval. The Company's Board of Directors shall have taken the
action required by them pursuant to this Agreement, including an amendment to
the Company's articles of incorporation to adopt the rights and preferences of
the Series B Preferred Stock, authorize issuance of the Series B Preferred Stock
and Common Stock to be issued upon conversion of the Series B Preferred Stock
and the reservation of the shares of Common Stock to be issued upon conversion
of the Series B Preferred Stock.
13
7.5. Other Documents. The Company shall have delivered to the Buyer such other
documents and instruments as the Buyer deems reasonably necessary or desirable
to consummate the transactions contemplated hereby.
All documents delivered to the Buyer shall be in form and substance reasonably
satisfactory to the Buyer.
8. CONDITIONS TO OBLIGATIONS OF THE COMPANY.
All of the obligations of the Company to consummate the transactions
contemplated by this Agreement are subject to the fulfillment and satisfaction
of each and every of the following conditions on or prior to the Closing, any or
all of which may be waived in whole or in part by the Company:
8.1. Representations and Warranties. The representations and warranties
contained in SECTION 4 of this Agreement and in any certificate, instrument,
schedule, agreement or other writing delivered by or on behalf of Buyer in
connection with the transactions contemplated by this Agreement shall be true
and correct in all material respects (except for representations and warranties
which are by their terms qualified by materiality, which shall be true, correct
and complete in all respects) when made and shall be deemed to be made again at
and as of the Closing Date and shall be true at and as of such time in all
material respects (except for representations and warranties which are by their
terms qualified by materiality, which shall be true, correct and complete in all
respects).
8.2. Compliance with Agreements and Conditions. Buyer shall have performed and
complied with all material agreements and conditions required by this Agreement
to be performed or complied with by Buyer prior to or on the Closing Date.
8.3. UCC-3 Authorization. Effective as of Closing, the Buyer hereby authorizes
the Company or its representatives to file, at or immediately following the
Closing, with the applicable filing offices, all UCC-3 termination statements
necessary to terminate and remove from the public records any and all UCC-1
financing statements evidencing the security interest of the Buyer in and to the
assets of HYTT and its affiliates.
9. INDEMNITY.
9.1. Indemnification by the Company. The Company (hereinafter collectively
called the "Company Indemnitor") shall defend, indemnify and hold harmless the
Buyer, its direct and indirect parent corporations, subsidiaries and affiliates,
their officers, members, directors, employees, attorneys and agents (hereinafter
collectively called "Buyer Indemnitees") against and in respect of any and all
loss, damage, liability, fine, penalty, cost and expense, including reasonable
attorneys' fees and amounts paid in settlement (collectively, "Buyer Losses"),
suffered or incurred by any Buyer Indemnitee by reason of, or arising out of:
14
(a) any misrepresentation, breach of warranty or breach or nonfulfillment of any
covenant, obligation or agreement of the Company contained in this Agreement or
in any certificate, schedule, instrument or document delivered to Buyer by or on
behalf of the Company pursuant to the provisions of this Agreement (without
regard to materiality thresholds contained therein); and
(b) any liabilities of the Company of any nature whatsoever (including tax
liability, penalties and interest), whether accrued, absolute, contingent or
otherwise, (i) existing as of the date of the 2004 Company Balance Sheet, and
required to be shown therein in accordance with GAAP, to the extent not
reflected or reserved against in full in the 2004 Company Balance Sheet; or (ii)
arising or occurring between March 31, 2004 and the Closing Date, except for
liabilities arising in the ordinary course of business, none of which shall have
a material adverse effect on the Company.
(c) Indemnification by Buyer. The Buyer (hereinafter called the "Buyer
Indemnitor") shall defend, indemnify and hold harmless the Company, its direct
and indirect parent corporations, subsidiaries and affiliates, their officers,
members, directors, employees, attorneys and agents (hereinafter called "Company
Indemnitee") against and in respect of any and all loss, damage, liability, cost
and expense, including reasonable attorneys' fees and amounts paid in settlement
(collectively, "Company Losses"), suffered or incurred by Company Indemnitee by
reason of or arising out of any misrepresentation, breach of warranty or breach
or non-fulfillment of any material covenant, obligation or agreement of Buyer
contained in this Agreement or in any other certificate, schedule, instrument or
document delivered to the Company by or on behalf of Buyer pursuant to the
provisions of this Agreement (without regard to materiality thresholds contained
therein).
9.2. Defense of Claims.
(a) Each party seeking indemnification hereunder (an "Indemnitee"): (i) shall
provide the other party or parties (the "Indemnitor") written notice of any
claim or action by a third party for which an Indemnitor may be liable under the
terms of this Agreement, within ten (10) days after such claim or action arises
and is known to Indemnitee, and (ii) shall give the Indemnitor a reasonable
opportunity to participate in any proceedings and to settle or defend any such
claim or action. The expenses of all proceedings, contests or lawsuits with
respect to such claims or actions shall be borne by the Indemnitor. If the
Indemnitor wishes to assume the defense of such claim or action, the Indemnitor
shall give written notice to the Indemnitee within ten (10) days after notice
from the Indemnitee of such claim or action, and the Indemnitor shall thereafter
assume the defense of any such claim or liability, through counsel reasonably
satisfactory to the Indemnitee, provided that Indemnitee may participate in such
defense at their own expense, and the Indemnitor shall, in any event, have the
right to control the defense of the claim or action. The failure of an
Indemnitee to give any notice required by this Section shall not affect any of
such party's rights under this Section or otherwise, except and to the extent
that such failure is actually prejudicial to the rights or obligations of the
Indemnitor.
(b) If the Indemnitor shall not assume the defense of, or if after so assuming
it shall fail to defend, any such claim or action, the Indemnitee may defend
against any such claim or action in such manner as they may deem appropriate and
the Indemnitees may settle such claim or litigation on such terms as they may
deem appropriate but subject to the Indemnitor's approval, such approval not to
be unreasonably withheld; provided, however, that any such settlement shall be
deemed approved by the Indemnitor if the Indemnitor fails to object thereto, by
written notice to the Indemnitee, within fifteen (15) days after the
Indemnitor's receipt of a written summary of such settlement. The Indemnitor
shall promptly reimburse the Indemnitee for the amount of all expenses, legal
and otherwise, incurred by the Indemnitee in connection with the defense and
settlement of such claim or action.
15
(c) If a non-appealable judgment is rendered against any Indemnitee in any
action covered by the indemnification hereunder, or any lien attaches to any of
the assets of any of the Indemnitee, the Indemnitor shall immediately upon such
entry or attachment pay such judgment in full or discharge such lien unless, at
the expense and direction of the Indemnitor, an appeal is taken under which the
execution of the judgment or satisfaction of the lien is stayed. If and when a
final judgment is rendered in any such action, the Indemnitor shall forthwith
pay such judgment or discharge such lien before any Indemnitee is compelled to
do so.
9.3. Waiver. The failure of any Indemnitee to give any notice or to take any
action hereunder shall not be deemed a waiver of any of the rights of such
Indemnitee hereunder, except to the extent that Indemnitor is actually
prejudiced by such failure.
10. TERMINATION.
10.1. Termination. This Agreement may be terminated at any time on or prior to
the Closing:
(a) By mutual consent of Buyer and the Company; or
(b) At the election of Buyer if: (i) a Company has breached or failed to perform
or comply with any of its representations, warranties, covenants or obligations
under this Agreement; or (ii) any of the conditions precedent set forth in
SECTION 6 OR 7 is not satisfied as and when required by this Agreement; or (iii)
the Closing has not been consummated by June 23, 2004; or
(c) At the election of the Company if: (i) Buyer has breached or failed to
perform or comply with any of its representations, warranties, covenants or
obligations under this Agreement; or (ii) any of the conditions precedent set
forth in SECTION 6 OR 8 is not satisfied as and when required by this Agreement;
or (iii) if the Closing has not been consummated by June 23, 2004.
10.2. Manner and Effect of Termination. Written notice of any termination
("Termination Notice") pursuant to this SECTION 10 shall be given by the party
electing termination of this Agreement ("Terminating Party") to the other party
or parties (collectively, the "Terminated Party"), and such notice shall state
the reason for termination. The party or parties receiving Termination Notice
shall have a period of ten (10) days after receipt of Termination Notice to cure
the matters giving rise to such termination to the reasonable satisfaction of
the Terminating Party. If the matters giving rise to termination are not cured
as required hereby, this Agreement shall be terminated effective as of the close
of business on the tenth (10th) day following the Terminated Party's receipt of
Termination Notice. Upon termination of this Agreement prior to the consummation
of the Closing and in accordance with the terms hereof, this Agreement shall
become void and of no effect, and none of the parties shall have any liability
to the others, except that nothing contained herein shall relieve any party
from: (a) its obligations under SECTIONS 2.1 AND 2.2; or (b) liability for its
intentional breach of any representation, warranty or covenant contained herein,
or its intentional failure to comply with the terms and conditions of this
Agreement or to perform its obligations hereunder. Notwithstanding the
foregoing, the Company shall not be required to provide notice to the Buyer in
the event this Agreement is terminated as a result of failure to consummate the
transaction contemplated by the HYTT Agreement by fault of any party other than
the Company.
16
11. MISCELLANEOUS.
11.1. Notices.
(a) All notices, requests, demands, or other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given upon receipt if delivered in person, or upon the expiration of two (2)
days after the date sent, if sent by federal express (or similar overnight
courier service) to the parties at the following addresses:
(i) If to Buyer:
c/o David H. Boshart iPoint-Media Ltd.
8504 Charter Club Circle, No. 10 2a Habarzel Street
Fort Myers, FL 33919 Tel-Aviv 61132, Israel
Telephone: 972-3-7657265
Telephone: Facsimile: 972-3-7657368
Facsimile:
with a copy to:
Attention: Attn:
Telephone: Telephone:
Facsimile: Facsimile:
17
(ii) If to the Company:
Advanced Communications Technologies, Inc. 420 Lexington Avenue, Suite 2739 New
York, New York 10170
Attention: Wayne Danson
Telephone: (646) 227-1600
Facsimile: (646) 227-1666
With a copy to:
Eckert Seamans Cherin Mellott LLC 1515 Market Street, 9th Floor Philadelphia,
Pennsylvania 19102
Attention: Gary A. Miller, Esquire
Telephone: (215) 851-8472
Facsimile: (215) 851-8383
and
Levinson & Lichtman, LLP
120 Palmetto Park Road, Suit 100 Boca Raton, Florida 33432
Attention: Jonathan Lichtman, Esq.
Telephone: (561) 869-3600
Facsimile: (561) 869-3601
(b) Notices may also be given in any other manner permitted by law, effective
upon actual receipt. Any party may change the address to which notices,
requests, demands or other communications to such party shall be delivered or
mailed by giving notice thereof to the other parties hereto in the manner
provided herein.
11.2. Survival. The representations, warranties, agreements and indemnifications
of the parties contained in this Agreement or in any writing delivered pursuant
to the provisions of this Agreement shall survive any investigation heretofore
or hereafter made by the parties and the consummation of the transactions
contemplated herein and shall continue in full force and effect after the
Closing.
11.3. Counterparts; Interpretation. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same instrument. This Agreement supersedes all
prior discussions and agreements between the parties with respect to the subject
matter hereof, and this Agreement contains the sole and entire agreement among
the parties with respect to the matters covered hereby. All Schedules hereto
shall be deemed a part of this Agreement. This Agreement shall not be altered or
amended except by an instrument in writing signed by or on behalf of all of the
parties hereto. No ambiguity in any provision hereof shall be construed against
a party by reason of the fact it was drafted by such party or its counsel. For
purposes of this Agreement: "herein", "hereby", "hereunder", "herewith",
"hereafter" and "hereinafter" refer to this Agreement in its entirety, and not
to any particular subsection or paragraph. References to "including" means
including without limiting the generality of any description preceding such
term. Nothing expressed or implied in this Agreement is intended, or shall be
construed, to confer upon or give any person other than the parties hereto any
rights or remedies under or by reason of this Agreement.
18
11.4. Governing Law; Jurisdiction. The validity and interpretation of this
Agreement shall be construed in accordance with, and governed by the internal
laws of the State of Delaware, without giving effect to principles of conflicts
of laws. All claims, disputes or causes of action relating to or arising out of
this Agreement shall be brought, heard and resolved solely and exclusively by
and in a federal or state court situated in the State of Delaware. Each of the
parties hereto agrees to submit to the jurisdiction of such courts shall be
proper for all purposes of this Agreement.
11.5. Successors and Assigns; Assignment. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
executors, legal representatives, and successors; provided, however, that
neither party may assign this Agreement or any rights hereunder, in whole or in
part.
11.6. Partial Invalidity and Severability. All rights and restrictions contained
herein may be exercised and shall be applicable and binding only to the extent
that they do not violate any applicable laws and are intended to be limited to
the extent necessary to render this Agreement legal, valid and enforceable. If
any terms of this Agreement not essential to the commercial purpose of this
Agreement shall be held to be illegal, invalid or unenforceable by a court of
competent jurisdiction, it is the intention of the parties that the remaining
terms hereof shall constitute their agreement with respect to the subject matter
hereof and all such remaining terms shall remain in full force and effect. To
the extent legally permissible, any illegal, invalid or unenforceable provision
of this Agreement shall be replaced by a valid provision which will implement
the commercial purpose of the illegal, invalid or unenforceable provision.
11.7. Waiver. Any term or condition of this Agreement may be waived at any time
by the party which is entitled to the benefit thereof, but only if such waiver
is evidenced by a writing signed by such party. No failure on the part of a
party hereto to exercise, and no delay in exercising, any right, power or remedy
created hereunder, shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or remedy by any such party preclude any
other future exercise thereof or the exercise of any other right, power or
remedy. No waiver by any party hereto to any breach of or default in any term or
condition of this Agreement shall constitute a waiver of or assent to any
succeeding breach of or default in the same or any other term or condition
hereof.
11.8. Headings. The headings as to contents of particular paragraphs of this
Agreement are inserted for convenience only and shall not be construed as a part
of this Agreement or as a limitation on the scope of any terms or provisions of
this Agreement.
11.9. Expenses. Except as otherwise expressly provided herein, all legal and
other costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the Buyer or the Company as
each party incurs such expenses.
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11.10. Finder's Fees. The Buyer represents to the Company that no broker, agent,
finder or other party has been retained by it in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Buyer to be paid for or on account of the transactions
contemplated hereby. Except for its relationship with Maximum Ventures, Inc.,
the Company represents to the Buyer that no broker, agent, finder or other party
has been retained by the Company in connection with the transactions
contemplated hereby and that no other fee or commission has been agreed by the
Company to be paid for or on account of the transactions contemplated hereby.
11.11. Gender. Where the context requires, the use of the singular form herein
shall include the plural, the use of the plural shall include the singular, and
the use of any gender shall include any and all genders.
11.12. Currency. All foreign currency amounts required to be converted to U.S.
Dollars for purposes of this Agreement shall be converted in accordance with
GAAP.
11.13. Acceptance by Fax. This Agreement shall be accepted, effective and
binding, for all purposes, when the parties shall have signed and transmitted to
each other, by telecopier or otherwise, copies of the signature pages hereto.
11.14. Attorneys Fees. If any legal action or other proceeding is brought for
the enforcement of this Agreement, or because of an alleged dispute, breach,
default or misrepresentation in connection with any provision of this Agreement,
the prevailing party shall be entitled to recover reasonable attorneys' fees,
court costs and all expenses (including, without limitation, all such fees,
costs and expenses incident to appellate, bankruptcy, post-judgment and
alternative dispute resolution proceedings), incurred in that action or
proceeding, in addition to any other relief to which such party may be entitled.
11.15. NO JURY TRIAL. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT AND ANY DOCUMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES' ACCEPTANCE OF THIS AGREEMENT.
20
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
BUYER:
COMPANY:
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By:
Wayne I. Danson, President
21
SCHEDULE 3.3
SUBSIDIARIES
Subsidiary Outstanding Capital Stock Owner
- ---------- ------------------------- -----
Encompass Group Affiliates, Inc. 100 shares of common stock the Company
("Encompass")
Cyber-Test, Inc. 100 shares of common stock Encompass
PMIC Acquisition Corp. 100 shares of common stock Encompass
EXHIBIT 10.41
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of the 24th day of June, 2004
("Effective Date"), by and among Encompass Group Affiliates, Inc., a newly
formed Delaware corporation ("Encompass"), Advanced Communication Technologies,
Inc., a Florida Corporation ("ACT"), and Martin Nielson, an individual whose
address is _________________________________ ("Executive"). Encompass and ACT,
together with any and all of their respective subsidiaries, shall be referred to
collectively herein as the "Company."
WITNESSETH
WHEREAS, Executive presently serves as President and Chief Executive Officer of
Hy-Tech Technology Group, Inc. ("Hy-Tech Technology");
WHEREAS, Encompass has entered into an Agreement with Hy-Tech Technology and
Hy-Tech Computer Systems, Inc., ("Hy-Tech Computer" and together with Hy-Tech
Technology, "HYTT") pursuant to which Encompass will, among other things,
license certain assets of HYTT;
WHEREAS, it is a condition of closing the transactions contemplated by the
Agreement that Executive accept employment with the Company.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT.
(a) Encompass hereby employs Executive, and Executive accepts employment with
Encompass, as Chief Executive Officer, or such other executive position with
similar responsibilities and duties of a chief executive officer of a company.
(b) ACT hereby employs Executive, and Executive hereby accepts employment with
ACT, as Senior Vice President, or such other executive position with similar
responsibilities and duties of a senior vice president of a company as may be
determined by the Board of Directors of ACT (the "Board") from time to time
during the Employment Period (as defined below).
(c) As soon as practicable after the date hereof, the Board shall authorize the
increase of the number of directors on the Board by one and, upon such increase,
shall appoint Executive to fill such vacancy.
(d) In addition to his duties set forth in this Paragraph 1 and in Paragraph 3
below, Executive shall at the request of the ACT CEO (as defined below) or the
Board serve as an officer or director of subsidiary of ACT, without additional
compensation and subject to any policy of the Compensation Committee of the
Board (the "Compensation Committee") with regard to directors' fees.
2. TERM. The initial term of this Agreement shall commence on the Effective Date
and expire on the second anniversary thereof (the "Initial Employment Period"),
unless earlier terminated in accordance with its terms; provided, however, that
the Company shall have the option of retaining the services of Executive, on the
terms set forth in this Agreement, for an additional one-year period by
providing Executive with written notice thereof not less than thirty (30) days
prior to the expiration of the Initial Employment Period (the "Option Period"
and together with the Initial Employment Period, the "Employment Period").
Unless earlier terminated in accordance herewith, upon expiration of the Option
Period, this Agreement shall be deemed to have been extended for additional
terms of successive one year periods commencing on the day after the expiration
of the then current Employment Period.
3. EMPLOYMENT AND DUTIES.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment Period shall be
that of Chief Executive Officer of Encompass and such senior executive position
of ACT to which the Board might appoint him. Executive shall directly report to
the Chief Executive Officer of ACT (the "ACT CEO"), or such other senior
executive officer of ACT, as determined from time to time by the Company. The
services to be rendered by Executive pursuant to this Agreement shall consist of
such services as defined and directed by the Board or the ACT CEO.
(b) During the Employment Period, Executive shall serve the Company faithfully
and to the best of his ability; shall devote his entire working time, attention,
energy and skill to his employment and the benefit and business of the Company;
and shall use his best efforts, skills and ability to promote its interests and
to perform such duties as from time to time may be reasonably assigned to him
and are consistent with his titles and positions with the Company.
(c) During the Employment Period, in addition to any other duties or
responsibilities the Company gives to Executive, Executive shall be required to
sign, and shall sign, all certifications and such other documents or instruments
required of an executive of a public company or otherwise by (i) the Securities
and Exchange Commission, (ii) any exchange or association on which the Company's
shares of capital stock are listed, (iii) any federal, state or local authority,
(iv) any other governmental, quasi-governmental or non-governmental entity or
organization (foreign or domestic) that regulates or has authority over the
Company, and/or (v) the Company in connection with any of the foregoing.
3.2 Observance of Rules and Regulations. Executive agrees to observe and comply
with all applicable laws and regulations, as well as the rules and regulations
of the Company, with respect to the performance of his duties.
3.3 Resignation from Other Positions. On or prior to the date hereof, Executive
shall resign from any and all other positions he may hold as an officer or
director with any other company, other than the Company; provided, however, that
notwithstanding the foregoing, Executive shall be permitted to remain as (i) an
outside director, but not as Chairman, of Hy-Tech Technology and Emerging Delta
Corp., and (ii) Chairman of Altos Bancorp, Inc. ("Altos") for so long as Altos
remains a privately held company that is not required to file periodic and other
reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended.
4. COMPENSATION; BENEFITS AND EXPENSES.
4.1 Acquisition Bonuses.
(a) Upon execution of this Agreement, ACT shall grant to Executive, and
Executive shall receive, 50,000,000 shares of ACT's restricted common stock,
priced at $.01 per share, of which (i) 12,500,000 shares will fully vest on July
1, 2005, and (ii) 37,500,000 shares will fully vest on July 1, 2006 (together,
the "ACT Shares"); provided, as to each vesting tranch, that Executive is then
employed by the Company; and provided further that the number of ACT Shares
shall be adjusted accordingly for stock splits, reverse stock splits and other
recapitalizations effected by ACT. Notwithstanding the foregoing, in the event
Executive's employment with the Company is terminated by the Company without
"cause" prior to the expiration of the Initial Employment Period, a pro-rata
amount of otherwise unvested ACT Shares, based on the number of days elapsed
during the applicable fiscal year, shall become fully vested and payable by the
Company.
(b) Within five (5) business days after the later to occur of (i) the
consummation of the transaction contemplated by that certain Asset Purchase
Agreement, dated May 27, 2004, by and between Cyber-Test, Inc., a Delaware
corporation, and Cyber-Test, Inc. a Florida corporation, and (ii) the
consummation of the transaction contemplated by that certain Agreement, dated
May 27, 2004, by and among Encompass and HYTT, the Company shall pay to
Executive $15,000 in cash.
(c) Within five (5) business days after the later to occur of (i) the
consummation of a merger with Pacific Magtron International Corp., and (ii) the
consummation of the acquisition of assets by the Company or an affiliate thereof
of the assets of BCD 2000, Inc., the Company shall pay to Executive $15,000 in
cash.
4.2 Base Salary. As compensation for the services to be rendered hereunder,
during the Initial Employment Period, the Company shall pay to Executive an
annual base salary (the "Base Salary") of $200,000; and during the Option
Period, the Base Salary shall be $225,000. The Base Salary shall be payable in
accordance with usual payroll practices of the Company.
4.3 Bonus.
(a) For each fiscal year or portion thereof after the Effective Date and during
the Employment Period, the Company shall pay to Executive an annual performance
bonus, in cash and/or restricted stock of ACT, in an amount determined at the
sole discretion of the Compensation Committee, taking into account Executive's
contribution to ACT's consolidated net earnings and stock appreciation during
such fiscal year (the "ACT Performance Bonus").
(b) Immediately following each fiscal year, the Company shall set aside for the
payment of Encompass executive bonuses, an amount equal to five percent (5%) of
net income of Encompass during such fiscal year (the "Encompass Bonus Pool").
For each fiscal year or portion thereof after the Effective Date and during the
Employment Period, the Company shall pay to Executive an annual performance
bonus, in cash and/or restricted stock of ACT, equal to a portion of the
Encompass Bonus Pool, as determined by the Compensation Committee, in its sole
discretion (the "Encompass Performance Bonus" and together with the ACT
Performance Bonus, the "Performance Bonuses").
For purposes hereof, "net income" shall mean, with respect to Encompass, for any
fiscal year, the net income (loss) of Encompass for such fiscal year, determined
on a consolidated basis (consolidated basis shall include Encompass and all of
its wholly-owned subsidiaries) in accordance with generally accepted accounting
principals, consistently applied; provided, however, that there shall be
excluded from net income (a) the net income (loss) of any person in which
Encompass has a joint interest with a third party, except to the extent such net
income is actually paid to Encompass by dividend or other distribution during
such fiscal year, (b) the net income (or loss) of any person accrued prior to
the date it becomes a subsidiary of Encompass or is merged into or becomes
consolidated with Encompass or its assets are purchased by Encompass, and (c)
the net income (if positive) of any subsidiary of Encompass to the extent that
the declaration or payment of dividends or similar distributions of such net
income by such subsidiary (i) is not at that time permitted by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order
statute, rule or governmental regulation or (ii) would be subject to any taxes
payable on such dividends or distributions.
(c) In addition to the Performance Bonuses, the Company may grant restricted
shares of common stock of ACT to Executive, with a vesting schedule and other
terms established by the Compensation Committee, in its sole discretion (the
"Incentive Bonus").
(d) Executive acknowledges that the amount of the Performance Bonuses and the
amount of the Incentive Bonus shall at all times be determined by the
Compensation Committee, in its sole discretion. The Company shall pay each of
the Performance Bonuses and the Incentive Bonus to Executive within thirty (30)
days after the Company's audited results for the applicable fiscal year are
delivered to the Company, but in no event later than October 15 of the
immediately following fiscal year.
4.4 Life Insurance.
(a) During the Employment Period, the Company shall provide Executive with term
life insurance with a death benefit equal to $1,000,000, provided that Executive
is insurable. The Company shall pay all premiums with respect to such life
insurance. Such life insurance may be provided either through the Company's
group life insurance programs, by an individual policy, or by a combination of
both group and individual policies. Executive shall at all times designate the
beneficiary(ies) of such life insurance.
(b) In addition to Section 4(a) above, the Company shall maintain "key man" life
insurance on the life of Executive with a death benefit equal to $2,000,000. The
Company shall pay all premiums with respect to such life insurance. The Company
shall at all times designate the beneficiary(ies) of such "key man" life
insurance.
4.5 Other Benefits. Executive shall also be eligible to participate in any life
and health insurance programs that the Company makes available to all of its
executives of similar seniority. Executive shall also be eligible to receive
discretionary performance based bonuses as approved and authorized by the
Compensation Committee, including any incentive stock programs approved by ACT's
shareholders.
4.6 Business Expenses. Executive will be reimbursed, in accordance with the
Company's expense reimbursement policy, for business expenses that have been
pre-approved by the Board or the ACT CEO upon presentation of vouchers or other
documents reasonably necessary to verify the expenditures and sufficient, in
form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
4.7 Vacation. Executive shall be entitled to take up to four (4) weeks of
vacation per calendar year, which shall be taken in accordance with the
Company's vacation policy in effect from time to time for executives of
comparable seniority.
5. NO COMPETITIVE ACTIVITIES; CONFIDENTIALITY; INVENTION
5.1 General Restriction. During the Employment Period and for a period of two
(2) years thereafter (the "Restricted Period"), Executive covenants and agrees
that, except on behalf of the Company, he will not, directly or indirectly:
(a) Competing Business. Own, manage, operate, control, participate in the
ownership, management, operation or control of, be employed by, or provide
services as a consultant to, any individual or business that is involved in
business activities that are the same as, similar to or in competition with,
directly or indirectly, with any business activities conducted, or actively
being planned, by the Company during the Restricted Period (it being
acknowledged that the Company's business is national in scope). The ownership of
less than one percent (1%) of the outstanding stock of any public corporation
shall not be deemed a violation of this provision.
(b) Soliciting Customers. Attempt in any manner to contact or solicit any
individual, firm, corporation or other entity (i) that is or has been, a
customer of the Company at any time during the Restricted Period, (ii) to which
a proposal has been made by the Company during the Restricted Period or (iii)
appearing on the Company's new business target list on the date of Executive's
termination (as such list has been prepared and maintained in accordance with
the Company's past practice), for the purpose of providing services or products
similar to the services and products provided by the Company, or engaging in any
activity which could be, directly or indirectly, competitive with the business
of the Company.
(c) Interfering with Other Relations. Persuade or attempt to persuade any
supplier, vendor, licensor or other entity or individual doing business with the
Company to discontinue or reduce its business with the Company or otherwise
interfere in any way with the business relationships and activities of the
Company.
(d) Employees. Attempt in any manner to solicit any individual, who is at the
time of such attempted solicitation, or at any time during the one (1) year
period preceding the termination of Executive's employment, an employee or
consultant of the Company, to terminate his or her employment or relationship
with the Company, or engage such individual, as an employee or consultant.
Cooperate with any other person in persuading, enticing or aiding, or attempting
to persuade, entice or aid, any employee of or consultant to the Company to
terminate his or her employment or business relationship with the Company, or to
become employed as an employee or retained as a consultant by any person other
than the Company.
5.2 Confidentiality Agreement. Executive shall not, either during the Employment
Period or at any time thereafter, use or disclose to any third person any
Confidential Information of the Company, other than at the direction of the
Company, or pursuant to a court order or subpoena, provided that Executive will
give notice of such court order or subpoena to the Company prior to such
disclosure. Upon the termination of Executive's employment with the Company for
any reason, Executive shall return any notes, records, charts, formulae or other
materials (whether in hard copy or computer readable form) containing
Confidential Information, and will not make or retain any copies of such
materials. Without limiting the generality of the foregoing, the parties
acknowledge that the Company from time to time may be subject to agreements with
its customers, suppliers or licensors to maintain the confidence of such other
persons' confidential information. The terms of such agreements may require that
the Company's employees, including Executive, be bound by such agreements, and
Executive shall be deemed so bound upon notice to him of the terms of such
agreements. The term "Confidential Information" as used herein shall mean any
confidential or proprietary information of the Company whether of a technical,
engineering, operational, financial or economic nature, including, without
limitation, all prices, discounts, terms and conditions of sale, trade secrets,
know-how, customers, inventions, business affairs or practices, systems,
products, product specifications, designs, plans, manufacturing and other
processes, data, ideas, details and other information of the Company.
Confidential Information shall not include information which can be proven by
Executive to have been developed by his own work as of the Effective Date
completely independent of its disclosure by the Company or which is in the
public domain, provided such information did not become available to the general
public as a result of Executive's breach of this Paragraph 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full written
disclosure to the Company and solely the Company of all writings, inventions,
processes, methods, plans, developments, improvements, procedures, techniques
and other innovations of any kind that Executive may make, develop or reduce to
practice, alone or jointly with others, at any time during the Employment Period
and for a period of one (1) year thereafter, whether during working hours or at
any other time and whether at the request or upon the suggestion of the Company
or otherwise, and whether or not they are eligible for patent, copyright,
trademark, trade secret or other legal protection (collectively, "Innovations").
Examples of Innovations shall include, but are not limited to, discoveries,
research, formulas, tools, know-how, marketing plans, new product plans,
production processes, advertising, packaging and marketing techniques and
improvements to computer hardware or software. The written disclosures provide
for herein shall be made to the ACT CEO or the Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be the sole
and exclusive property of the Company. Executive hereby assigns all rights,
title or interest in and to the Innovations to the Company. At the Company's
request and expense, during the Employment Period and at any time thereafter,
Executive will assist and cooperate with the Company in all respects and will
execute documents and give testimony to obtain, maintain, perfect and enforce
for the Company any and all patent, copyright, trademark, trade secret and other
legal protections for the Innovations.
5.5 Remedies. Executive acknowledges that the restrictions contained in the
foregoing paragraphs 5.1 through 5.4, in view of the nature of the business in
which the Company is engaged, are reasonable and necessary in order to protect
the legitimate interests of the Company, and that the legal remedies for a
breach of any of the provisions of this section 5 will be inadequate and that
such provisions may be enforced by restraining order, injunction, specific
performance or other equitable relief. Such equitable remedies shall be
cumulative and in addition to any other remedies which the injured party or
parties may have under applicable law, equity, this Agreement or otherwise.
Executive shall not, in any action or proceeding to enforce any of the
provisions of this Paragraph 5, assert the claim or defense that an adequate
remedy at law exists. The prevailing party shall be entitled to recover its
legal fees and expenses in any action or proceeding for breach of this section
5.
5.6 Company Property. All Confidential Information; all Innovations; and all
correspondence, files, documents, advertising, sales, manufacturers' and other
materials or articles or other information of any kind, in any media, form or
format furnished to Executive by the Company, which may not deemed confidential,
shall be and remain the sole property of the Company ("Company Property"). Upon
termination or at the Company's request, whichever is earlier, Executive shall
immediately deliver to the Company all such Company Property.
5.7 Public Policy/Severability. The parties do not wish to impose any undue or
unnecessary hardship upon Executive following his departure from the Company's
employment. The parties have attempted to limit the provisions of this section 5
to achieve such a result, and the parties expressly intend that all provisions
of this section 5 be construed to achieve such result. If, contrary to the
effort and intent of the parties, any covenant or other obligation contained in
this section 5 shall be found not to be reasonably necessary for the protection
of the Company, to be unreasonable as to duration, scope or nature of
restrictions, or to impose an undue hardship on Executive, then it is the desire
of the parties that such covenant or obligation not be rendered invalid thereby,
but rather that the duration, scope or nature of the restrictions be deemed
reduced or modified, with retroactive effect, to render such covenant or
obligation reasonable, valid and enforceable. The parties further agree that in
the event a court, despite the efforts and intent of the parties, declares any
portion of the covenants or obligations in this section 5 invalid, the remaining
provisions of this section 5 shall nonetheless remain valid and enforceable.
6. TERMINATION.
6.1 Termination For Cause. Notwithstanding anything to the contrary contained
herein, this Agreement may be terminated prior to the expiration of the
Employment Period upon seven (7) days' prior written notice from the Company to
Executive for "cause," at which time the Company shall have no further
obligations or liabilities to Executive whether under this Agreement or
otherwise and Executive's right to further compensation and benefits hereunder
(including, but not limited to, unvested stock) shall immediately cease, other
than payment to Executive of Base Salary accrued, and reimbursement of expenses
incurred in accordance with Paragraph 4.6, prior to the effective date of
termination of this Agreement (the "Termination Date"). As used herein and
throughout this Agreement, the term "cause" shall mean (i) any act or omission
by Executive that constitutes malfeasance, misfeasance or nonfeasance in the
course of Executive's duties hereunder, or in the judgment of the Board or the
ACT CEO, Executive has been grossly negligent (including habitual neglect of
duties), incompetent or insubordinate in carrying out his duties hereunder, (ii)
a material breach of this Agreement that is not cured within ten (10) days of
receipt of notice thereof, (iii) Executive's breach of a fiduciary duty owed to
the Company or its affiliates, or (iv) Executive's conviction of, or pleading
nolo contendere to, a criminal offense or crime constituting a misdemeanor or
felony, or conviction in respect to any act involving fraud, dishonesty or moral
turpitude (other than minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by the Company without cause
and for any reason or no reason prior to the expiration of the Employment Period
upon thirty (30) days' prior written notice from the Company to the Executive.
(b) Severance. In the event that the Company terminates Executive's employment
without cause, the Company shall pay to Executive (i) Base Salary accrued, and
expenses incurred in accordance with Paragraph 4.6, prior to the Termination
Date, (ii) any unpaid bonus owed to Executive for a prior fiscal year ((i) and
(ii) together, the "Accrued Payments"), which Accrued Payments shall be paid to
Executive in accordance with Sections 4.2, 4.3 and 4.6, as applicable, and (iii)
an additional amount of Base Salary which would have been payable to Executive
during the six (6) month period immediately following the Termination Date (the
"Severance Payment"), which Severance Payment shall be payable in cash to
Executive in equal monthly installments on the first business day of each
calendar month during the six (6) month period immediately following the
Termination Date. Except as provided in the preceding sentence, the Company
shall have no further obligations or liabilities to Executive whether under this
Agreement or otherwise and Executive's right to further compensation and
benefits hereunder (including, but not limited to, unvested stock) shall
immediately cease.
6.3 Termination of Other Positions. Upon the Termination Date, Executive hereby
resigns as Chief Executive Officer of Encompass and any and all other positions
as officer or director Executive may then hold with the Company, and as
fiduciary of any benefit plan of the Company. Executive shall promptly execute
any further documentation as requested by the Company and, if Executive is to
receive any payments from the Company, execution of such further documentation
shall be a condition thereof.
7. DISABILITY OR DEATH.
7.1 Disability. If, during the Employment Period, Executive becomes disabled or
incapacitated as determined under the Company's Long Term Disability Policy
("Permanently Disabled"), the Company shall have the right at any time
thereafter (but in no event less than 120 days after the event causing such
disability or incapacity), so long as Executive is then still Permanently
Disabled, to terminate this Agreement upon thirty (30) days' prior written
notice to Executive. In the event the Company does not have a Long Term
Disability Policy at the time of the event causing the Executive to become
Permanently Disabled, "Permanently Disabled" shall mean Executive's inability to
fully perform his duties and responsibilities hereunder to the full extent
required by the Company by reason of illness, injury or incapacity for 120
consecutive days or for more than six (6) months during any twelve (12) month
period. If the Company elects to terminate this Agreement in the event that
Executive becomes Permanently Disabled, the Company shall have no further
obligations or liabilities to Executive, whether under this Agreement or
otherwise (including, but not limited to, unvested stock) , other than payment
to Executive of the Accrued Payments, which Accrued Payments shall be paid to
Executive in accordance with Sections 4.2, 4.3 and 4.6, as applicable.
7.2 Death. If Executive dies during the Employment Period, this Agreement shall
automatically terminate as of the date of Executive's death, and the Company
shall have no further obligations or liabilities to Executive, whether under
this Agreement or otherwise (including, but not limited to, unvested stock),
other than payment to Executive's estate of the Accrued Payments, which Accrued
Payments shall be paid to Executive in accordance with Sections 4.2, 4.3 and
4.6, as applicable.
8. INDEMNIFICATION. Each of the Company and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their obligations contained in this Agreement. The
Company shall be obligated to indemnify Executive against those liabilities
incurred by him in connection with any proceeding to which he is made a party as
the result of his performing his duties hereunder solely in accordance with, and
as permitted by, the Company's bylaws. As soon as practicable, ACT shall use
commercially reasonable efforts to obtain directors' and officers' insurance in
amounts equal to amounts maintained by publicly companies similarly situated to
that of ACT.
9. GOVERNING LAW. This Agreement shall be governed by the internal laws of the
State of Delaware. Any action to enforce any term hereof shall be brought
exclusively within the state or federal courts of Delaware to which jurisdiction
and venue all parties hereby submit themselves.
10. BINDING EFFECT. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
11. ASSIGNMENT. Any assignee of the Company shall have the right to enforce the
restrictive covenants set forth in this Agreement, and the Company shall have
the right to assign this Agreement and the right to enforce such covenants to
any successor or assign of the Company.
12. NOTICES. All notices, designations, consents, offers, acceptances, waivers
or any other communication provided for herein, or required hereunder, shall be
sufficient if in writing and if sent by registered or certified mail, return
receipt requested, overnight courier, or delivered by hand to (i) Executive at
his last known address on the books of the Company or (ii) the Company at its
principal place of business.
13. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
14. COUNTERPARTS. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
15. ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement and
understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties concerning the subject matter hereto, which are not fully expressed
herein or in any supplemental written agreements of even or subsequent date
hereof.
16. SEVERABILITY. If any provision of this Agreement, or the application thereof
to any person or circumstances, shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected thereby,
but rather shall be enforced to the greatest extent permitted by law.
17. MODIFICATION. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
18. CONTRACT HEADINGS. All headings of the Paragraphs of this Agreement have
been inserted for convenience of reference only, are not to be considered a part
of this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
19. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
20. REPRESENTATION OF EXECUTIVE. Executive, with the full knowledge that the
Company is relying thereon, represents and warrants that he has not made any
commitment inconsistent with the provisions hereof and that he is not under any
disability which would prevent him from entering into this Agreement and
performing all of his obligations hereunder.
21. JOINT PARTICIPATION IN DRAFTING. Each party to this Agreement participated
in the drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party to
this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
ENCOMPASS GROUP, INC.
By:
Name:
Title:
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By:
Name:
Title:
EXECUTIVE:
MARTIN NIELSON
EXHIBIT 10.42
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of May 28,
2004 ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation (the
"Company"); the Buyer(s) listed on the Investment Agreement, dated the date
hereof (the "Investor(s)"), and BUTLER GONZALEZ, LLP, as Escrow Agent hereunder
(the "Escrow Agent").
BACKGROUND
WHEREAS, the parties hereto have entered into an Investment Agreement (the
"Investment Agreement") of even date herewith.
WHEREAS, this Agreement is a condition precedent of the Investment Agreement.
WHEREAS, to induce the Investor to execute and deliver the Investment Agreement,
the Company has agreed to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations there under,
or any similar successor statute (collectively, the "1933 Act"), and applicable
state securities laws.
WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds
deposited with it in accordance with the terms of this Agreement.
WHEREAS, in order to establish the escrow of funds and to effect the provisions
of the Securities Purchase Agreement, the parties hereto have entered into this
Agreement.
NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as
follows:
1. DEFINITIONS. The following terms shall have the following meanings when used
herein:
a. "Escrow Funds" shall mean the funds deposited with Escrow Agent pursuant to
this Agreement.
b. "Joint Written Direction" shall mean a written direction executed by the
Investor(s) and the Company directing Escrow Agent to disburse all or a portion
of the Escrow Funds or to take or refrain from taking any action pursuant to
this Agreement.
c. "Escrow Period" shall begin with the commencement of the Offering and shall
terminate upon the earlier to occur of the following dates:
(i) The date upon which Escrow Agent confirms that it has received in the Escrow
Account all of the proceeds of the sale of the Series A Convertible Preferred
Stock (the "Series A Preferred Stock"); (ii) The expiration of twenty (20) days
from the date of commencement of the Offering (unless extended by mutual written
agreement between the Company and the Investor(s) with a copy of such extension
to Escrow Agent); or
(iii) The date upon which a determination is made by the Company and the
Investor(s) to terminate the Offering prior to the sale of all the Convertible
Debentures.
During the Escrow Period, the Company and the Investor(s) are aware that they
are not entitled to any funds received into escrow and no amounts deposited in
the Escrow Account shall become the property of the Company or the Investor(s)
or any other entity, or be subject to the debts of the Company or the
Investor(s) or any other entity.
2. APPOINTMENT OF AND ACCEPTANCE BY ESCROW AGENT. The Investor(s) and the
Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow
Agent hereby accepts such appointment and, upon receipt by wire transfer of the
Escrow Funds in accordance with Section 3 below, agrees to hold, invest and
disburse the Escrow Funds in accordance with this Agreement.
a. The Company hereby acknowledges that the Escrow Agent is counsel to the
Investor(s) in connection with the transactions contemplated and referred
herein. The Company agrees that in the event of any dispute arising in
connection with this Escrow Agreement or otherwise in connection with any
transaction or agreement contemplated and referred herein, the Escrow Agent
shall be permitted to continue to represent the Investor(s) and the Company will
not seek to disqualify such counsel.
3. CREATION OF ESCROW FUNDS. On or prior to the date of the commencement of the
Offering, the parties shall establish an escrow account with the Escrow Agent,
which escrow account shall be entitled as follows: Advanced Communications
Technologies, Inc./Cornell Capital Partners, LP Escrow Account for the deposit
of the Escrow Funds. The Investor(s) will instruct subscribers to wire funds to
the account of the Escrow Agent as follows:
BANK: Wachovia Bank, N.A.
ROUTING #: 031201467
ACCOUNT #: 2030000803055
NAME ON ACCOUNT: Butler Gonzalez LLP, as Escrow Agent
NAME ON SUB-ACCOUNT: Advanced Communications Technologies, Inc./Cornell
Capital Partners, LP Escrow account
4. DEPOSITS INTO THE ESCROW ACCOUNT. The Investor(s) agrees that they shall
promptly deliver funds for the payment of the Convertible Debentures to Escrow
Agent for deposit in the Escrow Account.
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5. DISBURSEMENTS FROM THE ESCROW ACCOUNT.
a. The Escrow Agent will continue to hold such funds until Cornell Capital
Partners, LP on behalf of the Investor(s) and Company execute a Joint Written
Direction directing the Escrow Agent to disburse the Escrow Funds pursuant to
Joint Written Direction signed by the Company and the Investor(s). In disbursing
such funds, Escrow Agent is authorized to rely upon such Joint Written Direction
from the Company and the Investor(s) and may accept any signatory from the
Company listed on the signature page to this Agreement and any signature from
the Investor(s) that the Escrow Agent already has on file.
b. In the event Escrow Agent does not receive the amount of the Escrow Funds
from the Investor(s), Escrow Agent shall notify the Company and the Investor(s).
Upon receipt of payment instructions from the Company, Escrow Agent shall refund
to each subscriber without interest the amount received from each Investor(s),
without deduction, penalty, or expense to the subscriber. The purchase money
returned to each subscriber shall be free and clear of any and all claims of the
Company, the Investor(s) or any of their creditors.
c. In the event Escrow Agent does receive the amount of the Escrow Funds prior
to expiration of the Escrow Period, in no event will the Escrow Funds be
released to the Company until such amount is received by Escrow Agent in
collected funds. For purposes of this Agreement, the term "collected funds"
shall mean all funds received by Escrow Agent which have cleared normal banking
channels and are in the form of cash.
6. COLLECTION PROCEDURE. Escrow Agent is hereby authorized to deposit the
proceeds of each wire in the Escrow Account.
7. SUSPENSION OF PERFORMANCE: DISBURSEMENT INTO COURT. If at any time, there
shall exist any dispute between the Company and the Investor(s) with respect to
holding or disposition of any portion of the Escrow Funds or any other
obligations of Escrow Agent hereunder, or if at any time Escrow Agent is unable
to determine, to Escrow Agent's sole satisfaction, the proper disposition of any
portion of the Escrow Funds or Escrow Agent's proper actions with respect to its
obligations hereunder, or if the parties have not within thirty (30) days of the
furnishing by Escrow Agent of a notice of resignation pursuant to Section 9
hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent
may, in its sole discretion, take either or both of the following actions:
a. suspend the performance of any of its obligations (including without
limitation any disbursement obligations) under this Escrow Agreement until such
dispute or uncertainty shall be resolved to the sole satisfaction of Escrow
Agent or until a successor Escrow Agent shall be appointed (as the case may be);
provided however, Escrow Agent shall continue to invest the Escrow Funds in
accordance with Section 8 hereof; and/or
b. petition (by means of an interpleader action or any other appropriate method)
any court of competent jurisdiction in any venue convenient to Escrow Agent, for
instructions with respect to such dispute or uncertainty, and to the extent
required by law, pay into such court, for holding and disposition in accordance
with the instructions of such court, all funds held by it in the Escrow Funds,
after deduction and payment to Escrow Agent of all fees and expenses (including
court costs and attorneys' fees) payable to, incurred by, or expected to be
incurred by Escrow Agent in connection with performance of its duties and the
exercise of its rights hereunder.
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c. Escrow Agent shall have no liability to the Company, the Investor(s), or any
person with respect to any such suspension of performance or disbursement into
court, specifically including any liability or claimed liability that may arise,
or be alleged to have arisen, out of or as a result of any delay in the
disbursement of funds held in the Escrow Funds or any delay in with respect to
any other action required or requested of Escrow Agent.
8. INVESTMENT OF ESCROW FUNDS. Escrow Agent shall deposit the Escrow Funds in a
non-interest bearing account.
If Escrow Agent has not received a Joint Written Direction at any time that an
investment decision must be made, Escrow Agent shall maintain the Escrow Funds,
or such portion thereof, as to which no Joint Written Direction has been
received, in a non-interest bearing account.
9. RESIGNATION AND REMOVAL OF ESCROW AGENT. Escrow Agent may resign from the
performance of its duties hereunder at any time by giving thirty (30) days'
prior written notice to the parties or may be removed, with or without cause, by
the parties, acting jointly, by furnishing a Joint Written Direction to Escrow
Agent, at any time by the giving of ten (10) days' prior written notice to
Escrow Agent as provided herein below. Upon any such notice of resignation or
removal, the representatives of the Investor(s) and the Company identified in
Sections 13a.(iv) and 13b.(iv), below, jointly shall appoint a successor Escrow
Agent hereunder, which shall be a commercial bank, trust company or other
financial institution with a combined capital and surplus in excess of
$10,000,000.00. Upon the acceptance in writing of any appointment of Escrow
Agent hereunder by a successor Escrow Agent, such successor Escrow Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be
discharged from its duties and obligations under this Escrow Agreement, but
shall not be discharged from any liability for actions taken as Escrow Agent
hereunder prior to such succession. After any retiring Escrow Agent's
resignation or removal, the provisions of this Escrow Agreement shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall
transmit all records pertaining to the Escrow Funds and shall pay all funds held
by it in the Escrow Funds to the successor Escrow Agent, after making copies of
such records as the retiring Escrow Agent deems advisable and after deduction
and payment to the retiring Escrow Agent of all fees and expenses (including
court costs and attorneys' fees) payable to, incurred by, or expected to be
incurred by the retiring Escrow Agent in connection with the performance of its
duties and the exercise of its rights hereunder.
10. LIABILITY OF ESCROW AGENT.
a. Escrow Agent shall have no liability or obligation with respect to the Escrow
Funds except for Escrow Agent's willful misconduct or gross negligence. Escrow
Agent's sole responsibility shall be for the safekeeping, investment, and
disbursement of the Escrow Funds in accordance with the terms of this Agreement.
Escrow Agent shall have no implied duties or obligations and shall not be
charged with knowledge or notice or any fact or circumstance not specifically
set forth herein. Escrow Agent may rely upon any instrument, not only as to its
due execution, validity and effectiveness, but also as to the truth and accuracy
of any information contained herein, which Escrow Agent shall in good faith
believe to be genuine, to have been signed or presented by the person or parties
purporting to sign the same and conform to the provisions of this Agreement. In
no event shall Escrow Agent be liable for incidental, indirect, special, and
consequential or punitive damages. Escrow Agent shall not be obligated to take
any legal action or commence any proceeding in connection with the Escrow Funds,
any account in which Escrow Funds are deposited, this Agreement or the Purchase
Agreement, or to appear in, prosecute or defend any such legal action or
proceeding. Escrow Agent may consult legal counsel selected by it in any event
of any dispute or question as to construction of any of the provisions hereof or
of any other agreement or its duties hereunder, or relating to any dispute
involving any party hereto, and shall incur no liability and shall be fully
indemnified from any liability whatsoever in acting in accordance with the
opinion or instructions of such counsel. The Company and the Investor(s) jointly
and severally shall promptly pay, upon demand, the reasonable fees and expenses
of any such counsel.
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b. Escrow Agent is hereby authorized, in its sole discretion, to comply with
orders issued or process entered by any court with respect to the Escrow Funds,
without determination by Escrow Agent of such court's jurisdiction in the
matter. If any portion of the Escrow Funds is at any time attached, garnished or
levied upon under any court order, or in case the payment, assignment, transfer,
conveyance or delivery of any such property shall be stayed or enjoined by any
court order, or in any case any order judgment or decree shall be made or
entered by any court affecting such property or any part thereof, then and in
any such event, Escrow Agent is authorized, in its sole discretion, to rely upon
and comply with any such order, writ judgment or decree which it is advised by
legal counsel selected by it, binding upon it, without the need for appeal or
other action; and if Escrow Agent complies with any such order, writ, judgment
or decree, it shall not be liable to any of the parties hereto or to any other
person or entity by reason of such compliance even though such order, writ
judgment or decree may be subsequently reversed, modified, annulled, set aside
or vacated.
11. INDEMNIFICATION OF ESCROW AGENT. From and at all times after the date of
this Agreement, the parties jointly and severally, shall, to the fullest extent
permitted by law and to the extent provided herein, indemnify and hold harmless
Escrow Agent and each director, officer, employee, attorney, agent and affiliate
of Escrow Agent (collectively, the "Indemnified Parties") against any and all
actions, claims (whether or not valid), losses, damages, liabilities, costs and
expenses of any kind or nature whatsoever (including without limitation
reasonable attorney's fees, costs and expenses) incurred by or asserted against
any of the Indemnified Parties from and after the date hereof, whether direct,
indirect or consequential, as a result of or arising from or in any way relating
to any claim, demand, suit, action, or proceeding (including any inquiry or
investigation) by any person, including without limitation the parties to this
Agreement, whether threatened or initiated, asserting a claim for any legal or
equitable remedy against any person under any statute or regulation, including,
but not limited to, any federal or state securities laws, or under any common
law or equitable cause or otherwise, arising from or in connection with the
negotiation, preparation, execution, performance or failure of performance of
this Agreement or any transaction contemplated herein, whether or not any such
Indemnified Party is a party to any such action or proceeding, suit or the
target of any such inquiry or investigation; provided, however, that no
Indemnified Party shall have the right to be indemnified hereunder for liability
finally determined by a court of competent jurisdiction, subject to no further
appeal, to have resulted from the gross negligence or willful misconduct of such
Indemnified Party. If any such action or claim shall be brought or asserted
against any Indemnified Party, such Indemnified Party shall promptly notify the
Company and the Investor(s) hereunder in writing, and the Investor(s) and the
Company shall assume the defense thereof, including the employment of counsel
and the payment of all expenses. Such Indemnified Party shall, in its sole
discretion, have the right to employ separate counsel (who may be selected by
such Indemnified Party in its sole discretion) in any such action and to
participate and to participate in the defense thereof, and the fees and expenses
of such counsel shall be paid by such Indemnified Party, except that the
Investor(s) and/or the Company shall be required to pay such fees and expense if
(a) the Investor(s) or the Company agree to pay such fees and expenses, or (b)
the Investor(s) and/or the Company shall fail to assume the defense of such
action or proceeding or shall fail, in the sole discretion of such Indemnified
Party, to employ counsel reasonably satisfactory to the Indemnified Party in any
such action or proceeding, (c) the Investor(s) and the Company are the plaintiff
in any such action or proceeding or (d) the named or potential parties to any
such action or proceeding (including any potentially impleaded parties) include
both the Indemnified Party, the Company and/or the Investor(s) and the
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or additional to
those available to the Company or the Investor(s). The Investor(s) and the
Company shall be jointly and severally liable to pay fees and expenses of
counsel pursuant to the preceding sentence, except that any obligation to pay
under clause (a) shall apply only to the party so agreeing. All such fees and
expenses payable by the Company and/or the Investor(s) pursuant to the foregoing
sentence shall be paid from time to time as incurred, both in advance of and
after the final disposition of such action or claim. The obligations of the
parties under this section shall survive any termination of this Agreement, and
resignation or removal of the Escrow Agent shall be independent of any
obligation of Escrow Agent.
5
The parties agree that neither payment by the Company or the Investor(s) of any
claim by Escrow Agent for indemnification hereunder shall impair, limit, modify,
or affect, as between the Investor(s) and the Company, the respective rights and
obligations of Investor(s), on the one hand, and the Company, on the other hand,
under the Placement Agency Agreement.
12. EXPENSES OF ESCROW AGENT. Except as set forth in Section 11 the Company
shall reimburse Escrow Agent for all of its reasonable out-of-pocket expenses,
including attorneys' fees, travel expenses, telephone and facsimile transmission
costs, postage (including express mail and overnight delivery charges), copying
charges and the like. All of the compensation and reimbursement obligations set
forth in this Section shall be payable by the Company, upon demand by Escrow
Agent. The obligations of the Company under this Section shall survive any
termination of this Agreement and the resignation or removal of Escrow Agent.
13. WARRANTIES.
a. The Investor(s) makes the following representations and warranties to Escrow
Agent:
6
(i) The Investor(s) has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder.
(ii) This Agreement has been duly approved by all necessary corporate action of
the Investor(s), including any necessary shareholder approval, has been executed
by duly authorized officers of the Investor(s), enforceable in accordance with
its terms.
(iii) The execution, delivery, and performance of the Investor(s) of this
Agreement will not violate, conflict with, or cause a default under the
certificate of incorporation or bylaws of the Investor(s), any applicable law or
regulation, any court order or administrative ruling or degree to which the
Investor(s) is a party or any of its property is subject, or any agreement,
contract, indenture, or other binding arrangement.
(iv) Mark Angelo has been duly appointed to act as the representative of the
Investor(s) hereunder and has full power and authority to execute, deliver, and
perform this Escrow Agreement, to execute and deliver any Joint Written
Direction, to amend, modify, or waive any provision of this Agreement, and to
take any and all other actions as the Investor(s)'s representative under this
Agreement, all without further consent or direction form, or notice to, the
Investor(s) or any other party.
(v) No party other than the parties hereto and the Investor(s)s have, or shall
have, any lien, claim or security interest in the Escrow Funds or any part
thereof. No financing statement under the Uniform Commercial Code is on file in
any jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Funds or any part thereof.
(vi) All of the representations and warranties of the Investor(s) contained
herein are true and complete as of the date hereof and will be true and complete
at the time of any disbursement from the Escrow Funds.
b. The Company makes the following representations and warranties to the Escrow
Agent:
(i) The Company is a corporation duly organized, validly existing, and in good
standing under the laws of the State of New Jersey and has full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder.
(ii) This Agreement has been duly approved by all necessary corporate action of
the Company, including any necessary shareholder approval, has been executed by
duly authorized officers of the Company, enforceable in accordance with its
terms.
(iii) The execution, delivery, and performance by the Company of this Agreement
is in accordance with the Securities Purchase Agreement and will not violate,
conflict with, or cause a default under the certificate of incorporation or
bylaws of the Company, any applicable law or regulation, any court order or
administrative ruling or decree to which the Company is a party or any of its
property is subject, or any agreement, contract, indenture, or other binding
arrangement, including without limitation to the Securities Purchase Agreement,
to which the Company is a party.
7
(iv) Wayne I. Danson has been duly appointed to act as the representative of the
Company hereunder and has full power and authority to execute, deliver, and
perform this Agreement, to execute and deliver any Joint Written Direction, to
amend, modify or waive any provision of this Agreement and to take all other
actions as the Company's Representative under this Agreement, all without
further consent or direction from, or notice to, the Company or any other party.
(v) No party other than the parties hereto and the Investor(s)s have, or shall
have, any lien, claim or security interest in the Escrow Funds or any part
thereof. No financing statement under the Uniform Commercial Code is on file in
any jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Funds or any part thereof.
(vi) All of the representations and warranties of the Company contained herein
are true and complete as of the date hereof and will be true and complete at the
time of any disbursement from the Escrow Funds.
14. CONSENT TO JURISDICTION AND VENUE. In the event that any party hereto
commences a lawsuit or other proceeding relating to or arising from this
Agreement, the parties hereto agree that the United States District Court for
the District of New Jersey shall have the sole and exclusive jurisdiction over
any such proceeding. If all such courts lack federal subject matter
jurisdiction, the parties agree that the Superior Court Division of New Jersey,
Chancery Division of Hudson County shall have sole and exclusive jurisdiction.
Any of these courts shall be proper venue for any such lawsuit or judicial
proceeding and the parties hereto waive any objection to such venue. The parties
hereto consent to and agree to submit to the jurisdiction of any of the courts
specified herein and agree to accept the service of process to vest personal
jurisdiction over them in any of these courts.
15. NOTICE. All notices and other communications hereunder shall be in writing
and shall be deemed to have been validly served, given or delivered five (5)
days after deposit in the United States mails, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
delivered to any overnight courier, or when transmitted by facsimile
transmission and upon confirmation of receipt and addressed to the party to be
notified as follows:
If to Investor(s), to: Cornell Capital Partners, LP
101 Hudson Street - Suite 3700
Jersey City, NJ 07302
Attention: Mark Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
8
If to Escrow Agent, to: Butler Gonzalez LLP
1416 Morris Avenue, Suite 207
Union, NJ 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973
If to the Company, to: Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, New York 10170
Attention: Wayne I. Danson
Telephone: (646) 227-1600
Facsimile: (646) 227-1666
With a copy to: Levinson & Lichtman, LLP
120 Palmetto Park Road, Suit 100
Boca Raton, Florida 33432
Attention: Jonathan Lichtman
Telephone: (561) 869-3600
Facsimile: (561) 869-3601
Or to such other address as each party may designate for itself by like notice.
16. AMENDMENTS OR WAIVER. This Agreement may be changed, waived, discharged or
terminated only by a writing signed by the parties hereto. No delay or omission
by any party in exercising any right with respect hereto shall operate as
waiver. A waiver on any one occasion shall not be construed as a bar to, or
waiver of, any right or remedy on any future occasion.
17. SEVERABILITY. To the extent any provision of this Agreement is prohibited by
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition, or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
18. GOVERNING LAW. This Agreement shall be construed and interpreted in
accordance with the internal laws of the State of New Jersey without giving
effect to the conflict of laws principles thereof.
19. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between
the parties relating to the holding, investment, and disbursement of the Escrow
Funds and sets forth in their entirety the obligations and duties of the Escrow
Agent with respect to the Escrow Funds.
20. BINDING EFFECT. All of the terms of this Agreement, as amended from time to
time, shall be binding upon, inure to the benefit of and be enforceable by the
respective heirs, successors and assigns of the Investor(s), the Company, or the
Escrow Agent.
9
21. EXECUTION OF COUNTERPARTS. This Agreement and any Joint Written Direction
may be executed in counter parts, which when so executed shall constitute one
and same agreement or direction.
22. TERMINATION. Upon the first to occur of the disbursement of all amounts in
the Escrow Funds pursuant to Joint Written Directions or the disbursement of all
amounts in the Escrow Funds into court pursuant to Section 7 hereof, this
Agreement shall terminate and Escrow Agent shall have no further obligation or
liability whatsoever with respect to this Agreement or the Escrow Funds.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
10
IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day
and year above set forth.
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By:
Name: Wayne I. Danson Title: President
CORNELL CAPITAL PARTNERS, LP
BY: YORKVILLE ADVISORS, LLC
ITS: GENERAL PARTNER
By:
Name: Mark Angelo Title: Portfolio Manager
BUTLER GONZALEZ LLP
By:
Name: David Gonzalez, Esq.
Title: Partner
11
EXHIBIT 10.43
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT (the "Agreement") is dated as of May 28, 2004, by and
between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the
"Buyer"), and ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation
(the "Company").
RECITALS:
The parties have reached an agreement pursuant to which the Buyer shall make an
investment in the Company, and the Company shall issue and sell to the Buyer
shares of Series A Convertible Preferred Stock, par value $0.001 per share (the
"Series A Preferred Stock"), all in accordance with the terms hereof.
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual premises herein set forth and
certain other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. ISSUANCE OF SHARES AND RELATED TRANSACTIONS.
1.1. Issuance of Shares. At Closing (as defined below), subject to the terms,
restrictions and conditions of this Agreement, the Buyer shall acquire, and the
Company shall sell, issue and deliver to the Buyer 4,200 shares of Series A
Preferred Stock (the "Buyer's Stock"), which shall have the right and
designations set forth on EXHIBIT "A" hereto. All Buyer's Stock and the Common
Stock into which such Buyer's Stock is convertible shall be free and clear of
all liens, claims, pledges, mortgages, restrictions, obligations, security
interests and encumbrances of any kind, nature and description (collectively,
"Encumbrances").
1.2. Purchase Price. The purchase price (the "Purchase Price") for the Buyer's
Stock shall be equal to $4,200,000, which shall be paid to the Company in
immediately available funds on the Closing Date (as set forth in SECTION 1.3
hereof. The Purchase Price shall be reduced by the fees described in SECTION
11.9 hereof.
1.3. Closing. The parties to this Agreement shall consummate the transactions
contemplated by this Agreement at a closing (the "Closing") to be held no later
than May 28, 2004; provided, in no event shall the Closing occur prior to the
satisfaction of the conditions precedent set forth in SECTIONS 6, 7 AND 8
hereof. The date of Closing is referred to herein as the "Closing Date." The
Closing shall take place at the offices of counsel to the Buyer, or at such
other place as may be mutually agreed upon by the Buyer and the Company. At the
Closing, the Company shall deliver to the Buyer certificates representing the
Buyer's Stock.
2. ADDITIONAL AGREEMENTS.
2.1. Agreement to Register the Common Stock. The Company shall register the
Common Stock underlying the Series A Preferred Stock with the SEC pursuant to
the terms of a Registration Rights Agreement of even date herewith between the
Company and the Buyer.
2.2. Access and Inspection, Etc. The Company shall allow the Buyer and its
authorized representatives full access during normal business hours from and
after the date hereof and prior to the Closing Date to all of the properties,
books, contracts, commitments and records of the Company for the purpose of
making such investigations as the Buyer may reasonably request in connection
with the transactions contemplated hereby, and shall cause the Company to
furnish Buyer such information concerning its affairs as Buyer may reasonably
request. The Company has caused and shall cause its personnel to assist the
Buyer in making such investigation and shall use their best efforts to cause the
counsel, accountants, engineers and other non-employee representatives of the
Company to be reasonably available to Buyer for such purposes.
2.3. Public Announcements. The parties will consult with each other before
issuing any press releases or otherwise making any public statement with respect
to this Agreement or any of the transactions contemplated hereby and no party
will issue any such press release or make any such public statement without the
prior written consent of the other parties, except as may be required by law or
by the rules and regulations of any governmental authority or securities
exchange.
2.4. Best Efforts. Subject to the terms and conditions provided in this
Agreement, each of the parties shall use its best efforts in good faith to take
or cause to be taken as promptly as practicable all reasonable actions that are
within its power to cause to be fulfilled those conditions precedent to its
obligations or the obligations of the other parties to consummate the
transactions contemplated by this Agreement that are dependent upon its actions.
2.5. Further Assurances. The parties shall deliver any and all other instruments
or documents required to be delivered pursuant to, or necessary or proper in
order to give effect to, the provisions of this Agreement, including, without
limitation, to issue the Buyer's Stock and to consummate the transactions
contemplated by this Agreement.
3. REPRESENTATIONS, COVENANTS AND WARRANTIES OF THE COMPANY.
To induce Buyer to enter into this Agreement and to consummate the transactions
contemplated hereby, the Company represents and warrants to and covenants with
the Buyer as follows:
3.1. Organization; Compliance. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida.
The Company is: (a) entitled to own or lease its properties and to carry on its
business as and in the places where such business is now conducted, and (b) duly
licensed and qualified in all jurisdictions where the character of the property
owned by it or the nature of the business transacted by it makes such license or
qualification necessary, except where the failure to do so would not result in a
material adverse effect on the Company.
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3.2. Capitalization and Related Matters.
(a) The Company has an authorized capital consisting of 5,000,000,000 shares of
Common Stock and 25,000 shares of Preferred Stock, of which 1,979,365,845 shares
of Common Stock and no shares of Preferred Stock are issued and outstanding as
of the date hereof (excluding the Buyer's Stock). All Common Stock is duly and
validly issued, fully paid and nonassessable. No Common Stock (i) was issued in
violation of the preemptive rights of any shareholder, or (ii) is held as
treasury stock.
(b) Except as set forth in the Company's Form 10-QSB for the quarter ended
December 31, 2003 and the Company's Form 10-KSB for the year ended June 30, 2003
(the "SEC Documents"), there are no outstanding any securities convertible into
Common Stock or any other capital stock of the Company nor any rights to
subscribe for or to purchase, or any options for the purchase of, or any
agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any character relating to, such capital stock or
securities convertible into such capital stock (collectively, "Securities
Rights"). The Company: (i) is not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any of its capital
stock; or (ii) has no liability for dividends or other distributions declared or
accrued, but unpaid, with respect to any capital stock.
(c) The Company is not a party to any agreement, understanding or arrangement,
direct or indirect, relating to any class or series of the Company's capital
stock, including, without limitation, any voting agreement, restriction on
resale, shareholder agreement or registration rights agreement.
3.3. Subsidiaries and Investments.
(a) The SEC Documents disclose with respect to each Subsidiary (as defined
below) (i) its name, (ii) the jurisdiction of its organization, (iii) the number
of its authorized shares or other equity interests, (iv) the number of its
outstanding shares or other equity interests of each class or series, and (v)
the name of the owner and the number and percentage of outstanding shares or
other equity interests of each class or series of such Subsidiary owned of
record and, if different, owned beneficially by the Company and any other
person. All of the outstanding capital stock and other equity interests of each
of the Subsidiaries is validly issued, fully paid and nonassessable and was
issued in compliance with all applicable federal and state securities or "blue
sky" laws and regulations. There are no Securities Rights relating to any shares
of capital stock, other equity interests or other securities of any of the
Subsidiaries. The Company and the Subsidiaries have good, marketable and
exclusive title to the shares or other equity interests disclosed in the SEC
Documents as being owned by each of them, free and clear of all Encumbrances.
All rights and powers to vote such shares or other equity interests are held
exclusively by the Company, directly or indirectly through one or more of the
Subsidiaries, as the case may be. Each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization, and has the corporate power and authority to own
or lease its properties and to carry on its business as now conducted. For the
purposes hereof, a "Subsidiary" means any corporation, limited liability
company, partnership, joint venture or other entity in which the Company owns,
directly or indirectly, more than 20% of the outstanding voting securities or
equity interests.
3
(b) Except as disclosed in SEC Documents, the Company does not own, nor has it
ever owned, any equity interest in any corporation, limited liability company,
partnership, joint venture or other entity.
3.4. Execution; No Inconsistent Agreements; Etc.
(a) This Agreement is a valid and binding agreement of the Company, enforceable
in accordance with its terms, except as such enforcement may be limited by
bankruptcy or similar laws affecting the enforcement of creditors' rights
generally, and the availability of equitable remedies.
(b) The execution and delivery of this Agreement by the Company does not, and
the consummation of the transactions contemplated hereby will not, constitute a
breach or violation of the charter or bylaws of the Company, or a default under
any of the terms, conditions or provisions of (or an act or omission that would
give rise to any right of termination, cancellation or acceleration under) any
note, bond, mortgage, lease, indenture, agreement or obligation to which the
Company is a party, pursuant to which the Company otherwise receives benefits,
or to which any of the properties of the Company is subject.
3.5. Corporate Records. The statutory records, including the stock register and
minute books of the Company, fully reflect all issuances, transfers and
redemptions of its capital stock, correctly show and will correctly show the
total number of shares of its capital stock issued and outstanding on the date
hereof and on the Closing Date, the charter or other organizational documents
and all amendments thereto, and bylaws as amended and currently in force.
3.6. Financial Statements.
(a) The SEC Documents contain (i) the consolidated audited balance sheet of the
Company as of June 30, 2003, and the consolidated audited consolidated profit
and loss statement of the Company for the fiscal year ended June 30, 2003 and
(ii) the consolidated unaudited balance sheet of the Company as of December 31,
2003 and the consolidated unaudited profit and loss statement of the Company for
the six months ended December 31, 2003 (the balance sheet as of December 31,
2003 is hereinafter referred to as the "2003 Company Balance Sheet"). All the
foregoing financial statements, and any financial statements delivered pursuant
to subsection (c) below, are referred to herein collectively as the "Company
Financial Statements."
(b) The Company Financial Statements have been and will be prepared in
accordance with U.S. GAAP, applied on a consistent basis (except that the
unaudited statements do not contain all the disclosures required by GAAP), and
fairly reflect and will reflect in all material respects the financial condition
of the Company as at the dates thereof and the results of the operations of the
Company for the periods then ended.
4
3.7. Liabilities. The Company has no material debt, liability or obligation of
any kind, whether accrued, absolute, contingent or otherwise, except: (a) those
reflected on the 2003 Company Balance Sheet, including the notes thereto, and
(b) liabilities incurred in the ordinary course of business since December 31,
2003, none of which have had or will have a material adverse effect on the
financial condition of the Company.
3.8. Absence of Changes. Except as described in the SEC Documents and in the
other Schedules to this Agreement, from December 31, 2003 to the date of this
Agreement:
(a) there has not been any adverse change in the business, assets, liabilities,
results of operations or financial condition of the Company or in its
relationships with suppliers, customers, employees, lessors or others other than
changes in the ordinary course of business, none of which, singularly or in the
aggregate, have had or will have a material adverse effect on the business,
properties or financial condition of the Company; and
(b) the Company has complied with the covenants and restrictions set forth in
SECTION 5 to the same extent as if this Agreement had been executed on, and had
been in effect since, December 31, 2003.
3.9. Title to Properties. The Company has good and marketable title to all of
its properties and assets, real and personal, including, but not limited to,
those reflected in the 2003 Company Balance Sheet (except as since sold or
otherwise disposed of in the ordinary course of business, or as expressly
provided for in this Agreement), free and clear of all Encumbrances of any kind
or character except: (a) those securing liabilities of the Company incurred in
the ordinary course (with respect to which no material default exists); (b)
liens of 2004 real estate and personal property taxes; and (c) imperfections of
title and Encumbrances, if any, which, in the aggregate (i) are not substantial
in amount; (ii) do not detract from the value of the property subject thereto or
impair the operations of the Company or; and (iii) do not have a material
adverse effect on the business, properties or assets of the Company.
3.10. Compliance With Law. The business and activities of the Company has at all
times been conducted in accordance with its articles of incorporation and bylaws
and any applicable law, regulation, ordinance, order, License (defined below),
permit, rule, injunction or other restriction or ruling of any court or
administrative or governmental agency, ministry, or body, except where the
failure to do so would not result in a material adverse effect on the Company.
3.11. Taxes. The Company has duly filed all material federal, state, local and
foreign tax returns and reports, and all returns and reports of all other
governmental units having jurisdiction with respect to taxes imposed on it or on
its income, properties, sales, franchises, operations or employee benefit plans
or trusts, all such returns were complete and accurate when filed, and all taxes
and assessments payable by the Company have been paid to the extent that such
taxes have become due. All taxes accrued or payable by the Company for all
periods through December 31, 2003 have been accrued or paid in full, whether or
not due and payable and whether or not disputed. The Company has withheld proper
and accurate amounts from its employees for all periods in full compliance with
the tax withholding provisions of applicable foreign, federal, state and local
tax laws. There are no waivers or agreements by the Company for the extension of
time for the assessment of any taxes. The tax returns of the Company have never
been examined by any authority or other administrative body or court of any
state or country. There are not now any examinations of the income tax returns
of the Company pending, or any proposed deficiencies or assessments against the
Company of additional taxes of any kind. The Company shall duly and timely
prepare and file all material federal, state, local and foreign tax returns and
reports for 2004, and all returns and reports of all other governmental units
having jurisdiction with respect to taxes imposed on the Company or on its
income, properties, sales, franchises, operations or employee benefit plans or
trusts, and all such returns will be complete and accurate when filed.
5
3.12. Real Properties. The Company does not have an interest in any real
property, except for the Leases (as defined below).
3.13. Leases of Real Property. All leases pursuant to which the Company is
lessee or lessor of any real property (the "Leases") are listed in the SEC
Documents and are valid and enforceable in accordance with their terms. There is
not under any of such leases (a) any material default or any claimed material
default by the Company or any event of default or event which with notice or
lapse of time, or both, would constitute a material default by the Company and
in respect to which the Company has not taken adequate steps to prevent a
default on its part from occurring, or (b) to the knowledge of the Company, any
material default by any lessee of the Company or any event of default or event
which with notice or lapse of time, or both, would constitute a material default
by any lessee. The copies of the Leases heretofore furnished to Buyer are true,
correct and complete, and such Leases have not been modified in any respect
since the date they were so furnished, and are in full force and effect in
accordance with their terms. The Company is lawfully in possession of all real
properties of which they are a lessee (the "Leased Properties").
3.14. Contingencies. Except as disclosed in the SEC Documents, there are no
actions, suits, claims or proceedings pending, or to the knowledge of the
Company threatened against, by or affecting, the Company in any court or before
any arbitrator or governmental agency that may have a material adverse effect on
the Company or which could materially and adversely affect the right or ability
of the Company to consummate the transactions contemplated hereby. To the
knowledge of the Company, there is no valid basis upon which any such action,
suit, claim, or proceeding may be commenced or asserted against it. There are no
unsatisfied judgments against the Company and no consent decrees or similar
agreements to which the Company is subject and which could have a material
adverse effect on the Company.
3.15. Products Liability; Warranties; Insurance. The Company will have not loss,
damage, liability, fine, penalty, cost and expense (each, a "Liability") that is
not fully covered by insurance relating to any product manufactured, distributed
or sold by the Company prior to the Closing, whether or not such Liability is
related to products that are defective or improperly designed or manufactured or
are in breach of any express or implied product warranty.
6
3.16. Intellectual Property Rights.
(a) The Company owns and possesses all right, title and interest in and to, or
has a valid license to use, all of the Proprietary Rights (as defined below)
necessary for the operation of its business as presently conducted and none of
such Proprietary Rights have been abandoned;
(b) no claim by any third party contesting the validity, enforceability, use or
ownership of any such Proprietary Rights has been made, is currently outstanding
or, to the knowledge of the Company, is threatened, and to the knowledge of the
Company there is no reasonable basis for any such claim;
(c) neither the Company nor any registered agent of any of the foregoing has
received any notice of, nor is the Company aware of any reasonable basis for an
allegation of, any infringement or misappropriation by, or conflict with, any
third party with respect to such Proprietary Rights, nor has the Company, or any
registered agent of any of them received any claim of infringement or
misappropriation of or other conflict with any Proprietary Rights of any third
party;
(d) the Company has not infringed, misappropriated or otherwise violated any
Proprietary Rights of any third parties, and the Company is not aware of any
infringement, misappropriation or conflict which will occur as a result of the
continued operation of the Company as presently operated and as contemplated to
be operated or as a result of the consummation of the transactions contemplated
hereby; and
(e) all employees who have contributed to or participated in the conception
and/or development of all or any part of the Proprietary Rights which are not
licensed to the Company from a third party either (i) have been party to a
"work-for-hire" arrangement or agreement with the Company, in accordance with
applicable federal and state law, that has accorded the Company full, effective,
exclusive, and original ownership of all tangible and intangible property
thereby arising, or (ii) have executed appropriate instruments of assignment in
favor of the Company as assignee that have conveyed to the Company full,
effective and exclusive ownership of all tangible and intangible property
thereby arising.
(f) As used herein, the term "Proprietary Rights" means all proprietary
information of the Company, as the case may be, including all patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice), all trademarks, service marks, trade dress,
trade names, corporate names, domain names, copyrights, all trade secrets,
confidential information, ideas, formulae, compositions, know-how, processes and
techniques, drawings, specifications, designs, logos, plans, improvements,
proposals, technical and computer data, documentation and software, financial,
business and marketing plans, and related information and all other proprietary,
industrial or intellectual property rights relating to the business of the
Company, including those proprietary, industrial or intellectual property rights
found at the Company's websites listed in the SEC Documents.
7
(g) The consummation of the transactions contemplated by this Agreement will not
adversely affect the right of the Company to continue to use the Proprietary
Rights. To the extent that the registration of any Proprietary Right is required
by law, such Proprietary Right has been duly and validly registered or filed,
and any fees that are necessary to maintain in force any Proprietary Rights or
registrations thereof have been paid. The SEC Documents sets forth a list and
description of the copyrights, trademarks, service marks, trade dress, trade
names and domain names used or held by the Company and, where appropriate, the
date, serial or registration number, and place of any registration thereof.
3.17. Material Contracts. The SEC Documents contain a complete list of all
contracts of the Company that involve consideration in excess of the equivalent
of $25,000 or have a term of one year or more (the "Material Contracts"). Except
as disclosed in the SEC Documents: (a) the Company has performed all material
obligations to be performed by them under all such contracts, and is not in
material default thereof, and (b) no condition exists or has occurred which with
the giving of notice or the lapse of time, or both, would constitute a material
default by the Company or accelerate the maturity of, or otherwise modify, any
such contract, and (c) all such contracts are in full force and effect. No
material default by any other party to any of such contracts is known or claimed
by the Company to exist.
3.18. Employee Benefit Matters.
(a) Except as disclosed in the SEC Documents, the Company does not provide, nor
is it obligated to provide, directly or indirectly, any benefits for employees
other than salaries, sales commissions and bonuses, including, but not limited
to, any pension, profit sharing, stock option, retirement, bonus,
hospitalization, insurance, severance, vacation or other employee benefits
(including any housing or social fund contributions) under any practice,
agreement or understanding.
(b) Each employee benefit plan maintained by or on behalf of the Company or any
other party (including any terminated pension plans) which covers or covered any
employees or former employees of the Company (collectively, the "Employee
Benefit Plan") is listed in the SEC Documents. The Company has delivered to
Buyer true and complete copies of all such plans and any related documents. With
respect to each such plan: (a) no litigation, administrative or other proceeding
or claim is pending, or to the knowledge of the Company, threatened or
anticipated involving such plan; (b) there are no outstanding requests for
information by participants or beneficiaries of such plan; and (c) such plan has
been administered in compliance in all material respects with all applicable
laws and regulations.
(c) The Company has timely made payment in full of all contributions to all of
the Employee Benefit Plans which the Company was obligated to make prior to the
date hereof; and there are no contributions declared or payable by the Company
to any Employee Benefit Plan which, as of the date hereof, has not been paid in
full.
3.19. Possession of Franchises, Licenses, Etc. The Company: (a) possesses all
material franchises, certificates, licenses, permits and other authorizations
(collectively, the "Licenses") from governmental authorities, political
subdivisions or regulatory authorities that are necessary for the ownership,
maintenance and operation of its business in the manner presently conducted; (b)
are not in violation of any provisions thereof; and (c) have maintained and
amended, as necessary, all Licenses and duly completed all filings and
notifications in connection therewith.
8
3.20. Environmental Matters. Except as disclosed in the SEC Documents: (i) the
Company is not in violation, in any material respect, of any Environmental Law
(as defined below); (ii) the Company has received all permits and approvals with
respect to emissions into the environment and the proper collection, storage,
transport, distribution or disposal of Wastes (as defined below) and other
materials required for the operation of its business at present operating
levels; and (iii) the Company is not liable or responsible for any material
clean up, fines, liability or expense arising under any Environmental Law, as a
result of the disposal of Wastes or other materials in or on the property of the
Company (whether owned or leased), or in or on any other property, including
property no longer owned, leased or used by the Company. As used herein, (a)
"Environmental Laws" means, collectively, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Superfund
Amendments and Reauthorization Act of 1986, the Resource Conservation and
Recovery Act, the Toxic Substances Control Act, as amended, the Clean Air Act,
as amended, the Clean Water Act, as amended, any other "Superfund" or
"Superlien" law or any other federal, or applicable state or local statute, law,
ordinance, code, rule, regulation, order or decree (foreign or domestic)
regulating, relating to, or imposing liability or standards of conduct
concerning, Wastes, or the environment; and (b) "Wastes" means and includes any
hazardous, toxic or dangerous waste, liquid, substance or material (including
petroleum products and derivatives), the generation, handling, storage,
disposal, treatment or emission of which is subject to any Environmental Law.
3.21. Agreements and Transactions with Related Parties. Except as disclosed on
the SEC Documents, the Company is not, and since January 1, 2003 has not been, a
party to any contract, agreement, lease or transaction with, or any other
commitment to, (a) a shareholder, (b) any person related by blood, adoption or
marriage to shareholder, (c) any director or officer of the Company, (d) any
corporation or other entity in which any of the foregoing parties has, directly
or indirectly, at least five percent (5.0%) beneficial interest in the capital
stock or other type of equity interest in such corporation or other entity, or
(e) any partnership in which any such party is a general partner or a limited
partner having a five percent (5%) or more interest therein (any or all of the
foregoing being herein referred to as a "Related Party" and collectively as the
"Related Parties"). Without limiting the generality of the foregoing, except as
set forth in the SEC Documents, (a) no Related Party, directly or indirectly,
owns or controls any assets or properties which are or have since January 1,
2003 been used in the business of the Company, and (b) no Related Party,
directly or indirectly, engages in or has any significant interest in or
connection with any business: (i) which is or which within the last two (2)
years has been a competitor, customer or supplier of, or has done business with,
the Company, or (ii) which as of the date hereof sells or distributes products
or provides services which are similar or related to the products or services of
the Company.
3.22. Business Practices. Except as disclosed in the SEC Documents, the Company
has not, at any time, directly or indirectly, made any contributions or payment,
or provided any compensation or benefit of any kind, to any municipal, county,
state, federal or foreign governmental officer or official, or any other person
charged with similar public or quasi-public duties, or any candidate for
political office. The Company's books, accounts and records (including, without
limitation, customer files, product packaging and invoices) accurately describe
and reflect, in all material respects, the nature and amount of the Company's
products, purchases, sales and other transactions. Without limiting the
generality of the foregoing, the Company has not engaged, directly or
indirectly, in: (a) the practice known as "double-invoicing" or the use or
issuance of pro-forma or dummy invoices; or (b) the incorrect or misleading
labeling, marketing or sale of refurbished goods as new goods.
9
3.23. Shareholder Matters. None of the matters set forth in this Agreement
require the approval of the Company's shareholders.
3.24. Full Disclosure. No representation or warranty of the Company contained in
this Agreement, and none of the statements or information concerning the Company
contained in this Agreement and the Schedules, contains or will contain any
untrue statement of a material fact nor will such representations, warranties,
covenants or statements taken as a whole omit a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
To induce the Company to enter into this Agreement and to consummate the
transactions contemplated hereby, the Buyer represents and warrants to and
covenants with the Company as follows:
4.1. Organization. Buyer is a limited liability company duly organized, validly
existing and in good standing under the laws of Delaware. The Buyer has all
requisite power and authority to execute, deliver and carry out the terms of
this Agreement and the consummation of the transactions contemplated herein.
4.2. Execution; No Inconsistent Agreements; Etc.
(a) The execution and delivery of this Agreement and the performance of the
transactions contemplated hereby have been duly and validly authorized and
approved by Buyer and this Agreement is a valid and binding agreement of Buyer,
enforceable against Buyer in accordance with its terms, except as such
enforcement may be limited by bankruptcy or similar laws affecting the
enforcement of creditors' rights generally, and the availability of equitable
remedies.
(b) The execution and delivery of this Agreement by Buyer does not, and the
consummation of the transactions contemplated hereby will not, constitute a
breach or violation of the charter or bylaws of Buyer, or a default under any of
the terms, conditions or provisions of (or an act or omission that would give
rise to any right of termination, cancellation or acceleration under) any
material note, bond, mortgage, lease, indenture, agreement or obligation to
which Buyer is a party, pursuant to which any of them otherwise receive
benefits, or by which any of their properties may be bound.
10
4.3. Securities Laws.
(a) The Buyer is purchasing the Series A Preferred Stock for investment purposes
and not with a view to the sale or distribution, by public or private sale or
other disposition, and the Buyer has no present intention of selling, granting
any participation in or otherwise distributing or disposing of any of the Series
A Preferred Stock.
(b) Investment Representations. The Buyer has been offered the opportunity to
ask questions of, and receive answers from the Company's management, and the
Buyer has been given full and complete access to all available information and
data relating to the business and assets of the Company and has obtained such
additional information about the Company as the Buyer has deemed necessary in
order to evaluate the opportunities, both financial and otherwise, with respect
to the Company and, except as set forth herein, has not relied on any
representation, warranty or other statement concerning the Company and its
evaluation of the decision to consummate the transactions contemplated herein.
In its judgment, the Buyer is sufficiently familiar with the Company to enable
the Buyer to proceed with the transactions contemplated hereby.
(c) The Buyer is an "accredited investor," as such term is defined in Rule 501
of Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act").
(d) The Buyer is a sophisticated investor familiar with the type of risks
inherent in the acquisition of securities such as the shares of the Company and
the Buyer's financial position is such that the Buyer can afford to retain its
shares of Company Series A Preferred Stock for an indefinite period of time
without realizing any direct or indirect cash return on its investment.
5. CONDUCT OF BUSINESS OF THE COMPANY PENDING CLOSING.
The Company covenants and agrees that between the date hereof and the Closing
Date:
5.1. Business in the Ordinary Course. Except as set forth in the SEC Documents,
the business of the Company shall be conducted only in the ordinary course, and
consistent with past practice. Without limiting the generality of the foregoing,
and except as set forth in the SEC Documents or as otherwise approved by Buyer:
(a) Except for the transaction contemplated hereby, the Company shall not enter
into any contract, agreement or other arrangement which would constitute a
Material Contract, except for contracts to sell or supply goods or services to
customers in the ordinary course of business at prices and on terms
substantially consistent with the prior operating practices of the Company;
(b) except for sales of personal property in the ordinary course of its
business, the Company shall not sell, assign, transfer, mortgage, convey,
encumber or otherwise dispose of, or cause the sale, assignment, transfer,
mortgage, conveyance, encumbrance or other disposition of any of the assets or
properties of the Company or any interest therein;
11
(c) the Company shall not acquire any material assets, except expenditures made
in the ordinary course of business as reasonably necessary to enable the Company
to conduct its normal business operations and to maintain its normal inventory
of goods and materials, at prices and on terms substantially consistent with
current market conditions and prior operating practices;
(d) the books, records and accounts of the Company shall be maintained in the
usual, regular and ordinary course of business on a basis consistent with prior
practices and in accordance with GAAP;
(e) the Company shall use its best efforts to preserve its business
organization, to preserve the good will of its suppliers, customers and others
having business relations with the Company, and to retain the services of key
employees and agents of the Company;
(f) except as it may terminate in accordance with the terms of this Agreement,
the Company shall keep in full force and effect, and not cause a default of any
of its obligations under, each of their contracts and commitments;
(g) the Company shall duly comply in all material respects with all laws
applicable to it and to the conduct of its business;
(h) the Company shall not create, incur or assume any liability or indebtedness,
except in the ordinary course of business consistent with past practices;
(i) other than as contemplated in this Agreement, the Company shall not apply
any of its assets to the direct or indirect payment, discharge, satisfaction or
reduction of any amount payable directly or indirectly to or for the benefit of
any shareholder or any Related Party; and
(j) the Company shall not take or omit to take any action which would render any
of the representations or warranties untrue or misleading, or which would be a
breach of any of the covenants.
5.2. No Material Changes. Except as contemplated in this Agreement, the Company
shall not materially alter its organization, capitalization, or financial
structure, practices or operations. Without limiting the generality of the
foregoing:
(a) no change shall be made in the articles of incorporation and bylaws of the
Company;
(b) no change shall be made in the authorized or issued capital stock of the
Company;
12
(c) the Company shall not issue or grant any right or option to purchase or
otherwise acquire any of its capital stock or other securities;
(d) no dividend or other distribution or payment shall be declared or made with
respect to any of the capital stock of the Company; and
(e) no change shall be made affecting the banking arrangements of the Company.
5.3. Notification. Each party to this Agreement shall promptly notify the other
parties in writing of the occurrence, or threatened occurrence, of any event
that would constitute a breach or violation of this Agreement by any party or
that would cause any representation or warranty made by the notifying party in
this Agreement to be false or misleading in any respect. The Company will
promptly notify the Buyer of any event that could have a material adverse effect
on the business, assets, financial condition or prospects of the Company. The
Company shall have the right to update the Schedules to this Agreement
immediately prior to Closing; provided, if such update discloses any breach of a
representation, warranty, covenant or obligation of the Company, the Buyer shall
have the right to then exercise its available rights and remedies hereunder.
6. CONDITIONS TO OBLIGATIONS OF ALL PARTIES.
The obligation of Buyer and the Company to consummate the transactions
contemplated by this Agreement are subject to the satisfaction, on or before the
Closing, of each of the following conditions; any or all of which may be waived
in whole or in part by the joint agreement of Buyer and the Company:
6.1. Absence of Actions. No action or proceeding shall have been brought or
threatened before any court or administrative agency to prevent the consummation
or to seek damages in a material amount by reason of the transactions
contemplated hereby, and no governmental authority shall have asserted that the
within transactions (or any other pending transaction involving Buyer or the
Company when considered in light of the effect of the within transactions) shall
constitute a violation of law or give rise to material liability on the part of
the Company or the Buyer.
6.2. Consents. The parties shall have received from any suppliers, lessors,
lenders, lien holders or governmental authorities, bodies or agencies having
jurisdiction over the transactions contemplated by this Agreement, or any part
hereof, such consents, authorizations and approvals as are necessary for the
consummation hereof.
7. CONDITIONS TO OBLIGATIONS OF THE BUYER.
All obligations of the Buyer to consummate the transactions contemplated by this
Agreement are subject to the fulfillment and satisfaction of each and every of
the following conditions on or prior to the Closing, any or all of which may be
waived in whole or in part by Buyer:
13
7.1. Representations and Warranties. The representations and warranties
contained in SECTION 3 of this Agreement and in any certificate, instrument,
schedule, agreement or other writing delivered by or on behalf of the Company in
connection with the transactions contemplated by this Agreement shall be true,
correct and complete in all material respects (except for representations and
warranties which are by their terms qualified by materiality, which shall be
true, correct and complete in all respects) as of the date when made and shall
be deemed to be made again at and as of the Closing Date and shall be true,
correct and complete at and as of such time in all material respects (except for
representations and warranties which are by their terms qualified by
materiality, which shall be true, correct and complete in all respects).
7.2. Compliance with Agreements and Conditions. The Company shall have performed
and complied with all material agreements and conditions required by this
Agreement to be performed or complied with by it prior to or on the Closing
Date.
7.3. Absence of Material Adverse Changes. No material adverse change in the
business, assets, financial condition, or prospects of the Company shall have
occurred, no substantial part of the assets of the Company not substantially
covered by insurance shall have been destroyed due to fire or other casualty,
and no event shall have occurred which has had or will have a material adverse
effect on the business, assets, financial condition or prospects of the Company.
7.4. Board Approval. The Company's Board of Directors shall have taken the
action required by them pursuant to this Agreement, including an amendment to
the Company's articles of incorporation to adopt the rights and preferences of
the Series A Preferred Stock, authorize issuance of the Series A Preferred Stock
and Common Stock to be issued upon conversion of the Series A Preferred Stock
and the reservation of the shares of Common Stock to be issued upon conversion
of the Series A Preferred Stock.
7.5. Other Agreements. The Company shall have executed and delivered to the
Buyer a Registration Rights Agreement, Escrow Agreement and Irrevocably Transfer
Agent Instructions, all in a form acceptable to the Buyer.
7.6. Other Documents. The Company shall have delivered to the Buyer such other
documents and instruments as the Buyer deems reasonably necessary or desirable
to consummate the transactions contemplated hereby.
All documents delivered to the Buyer shall be in form and substance reasonably
satisfactory to the Buyer.
8. CONDITIONS TO OBLIGATIONS OF THE COMPANY.
All of the obligations of the Company to consummate the transactions
contemplated by this Agreement are subject to the fulfillment and satisfaction
of each and every of the following conditions on or prior to the Closing, any or
all of which may be waived in whole or in part by the Company:
8.1. Representations and Warranties. The representations and warranties
contained in SECTION 4 of this Agreement and in any certificate, instrument,
schedule, agreement or other writing delivered by or on behalf of Buyer in
connection with the transactions contemplated by this Agreement shall be true
and correct in all material respects (except for representations and warranties
which are by their terms qualified by materiality, which shall be true, correct
and complete in all respects) when made and shall be deemed to be made again at
and as of the Closing Date and shall be true at and as of such time in all
material respects (except for representations and warranties which are by their
terms qualified by materiality, which shall be true, correct and complete in all
respects).
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8.2. Compliance with Agreements and Conditions. Buyer shall have performed and
complied with all material agreements and conditions required by this Agreement
to be performed or complied with by Buyer prior to or on the Closing Date.
9. INDEMNITY.
9.1. Indemnification by the Company. The Company (hereinafter collectively
called the "Company Indemnitor") shall defend, indemnify and hold harmless the
Buyer, its direct and indirect parent corporations, subsidiaries and affiliates,
their officers, members, directors, employees, attorneys and agents (hereinafter
collectively called "Buyer Indemnitees") against and in respect of any and all
loss, damage, liability, fine, penalty, cost and expense, including reasonable
attorneys' fees and amounts paid in settlement (collectively, "Buyer Losses"),
suffered or incurred by any Buyer Indemnitee by reason of, or arising out of:
(a) any misrepresentation, breach of warranty or breach or nonfulfillment of any
covenant, obligation or agreement of the Company contained in this Agreement or
in any certificate, schedule, instrument or document delivered to Buyer by or on
behalf of the Company pursuant to the provisions of this Agreement (without
regard to materiality thresholds contained therein); and
(b) any liabilities of the Company of any nature whatsoever (including tax
liability, penalties and interest), whether accrued, absolute, contingent or
otherwise, (i) existing as of the date of the 2003 Company Balance Sheet, and
required to be shown therein in accordance with GAAP, to the extent not
reflected or reserved against in full in the 2003 Company Balance Sheet; or (ii)
arising or occurring between December 31, 2003 and the Closing Date, except for
liabilities arising in the ordinary course of business, none of which shall have
a material adverse effect on the Company.
(c) Indemnification by Buyer. The Buyer (hereinafter called the "Buyer
Indemnitor") shall defend, indemnify and hold harmless the Company, its direct
and indirect parent corporations, subsidiaries and affiliates, their officers,
members, directors, employees, attorneys and agents (hereinafter called "Company
Indemnitee") against and in respect of any and all loss, damage, liability, cost
and expense, including reasonable attorneys' fees and amounts paid in settlement
(collectively, "Company Losses"), suffered or incurred by Company Indemnitee by
reason of or arising out of any misrepresentation, breach of warranty or breach
or non-fulfillment of any material covenant, obligation or agreement of Buyer
contained in this Agreement or in any other certificate, schedule, instrument or
document delivered to the Company by or on behalf of Buyer pursuant to the
provisions of this Agreement (without regard to materiality thresholds contained
therein).
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9.2. Defense of Claims.
(a) Each party seeking indemnification hereunder (an "Indemnitee"): (i) shall
provide the other party or parties (the "Indemnitor") written notice of any
claim or action by a third party for which an Indemnitor may be liable under the
terms of this Agreement, within ten (10) days after such claim or action arises
and is known to Indemnitee, and (ii) shall give the Indemnitor a reasonable
opportunity to participate in any proceedings and to settle or defend any such
claim or action. The expenses of all proceedings, contests or lawsuits with
respect to such claims or actions shall be borne by the Indemnitor. If the
Indemnitor wishes to assume the defense of such claim or action, the Indemnitor
shall give written notice to the Indemnitee within ten (10) days after notice
from the Indemnitee of such claim or action, and the Indemnitor shall thereafter
assume the defense of any such claim or liability, through counsel reasonably
satisfactory to the Indemnitee, provided that Indemnitee may participate in such
defense at their own expense, and the Indemnitor shall, in any event, have the
right to control the defense of the claim or action. The failure of an
Indemnitee to give any notice required by this Section shall not affect any of
such party's rights under this Section or otherwise, except and to the extent
that such failure is actually prejudicial to the rights or obligations of the
Indemnitor.
(b) If the Indemnitor shall not assume the defense of, or if after so assuming
it shall fail to defend, any such claim or action, the Indemnitee may defend
against any such claim or action in such manner as they may deem appropriate and
the Indemnitees may settle such claim or litigation on such terms as they may
deem appropriate but subject to the Indemnitor's approval, such approval not to
be unreasonably withheld; provided, however, that any such settlement shall be
deemed approved by the Indemnitor if the Indemnitor fails to object thereto, by
written notice to the Indemnitee, within fifteen (15) days after the
Indemnitor's receipt of a written summary of such settlement. The Indemnitor
shall promptly reimburse the Indemnitee for the amount of all expenses, legal
and otherwise, incurred by the Indemnitee in connection with the defense and
settlement of such claim or action.
(c) If a non-appealable judgment is rendered against any Indemnitee in any
action covered by the indemnification hereunder, or any lien attaches to any of
the assets of any of the Indemnitee, the Indemnitor shall immediately upon such
entry or attachment pay such judgment in full or discharge such lien unless, at
the expense and direction of the Indemnitor, an appeal is taken under which the
execution of the judgment or satisfaction of the lien is stayed. If and when a
final judgment is rendered in any such action, the Indemnitor shall forthwith
pay such judgment or discharge such lien before any Indemnitee is compelled to
do so.
9.3. Waiver. The failure of any Indemnitee to give any notice or to take any
action hereunder shall not be deemed a waiver of any of the rights of such
Indemnitee hereunder, except to the extent that Indemnitor is actually
prejudiced by such failure.
10. TERMINATION.
10.1. Termination. This Agreement may be terminated at any time on or prior to
the Closing:
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(a) By mutual consent of Buyer and the Company; or
(b) At the election of Buyer if: (i) a Company has breached or failed to perform
or comply with any of its representations, warranties, covenants or obligations
under this Agreement; or (ii) any of the conditions precedent set forth in
SECTION 6 OR 7 is not satisfied as and when required by this Agreement; or (iii)
the Closing has not been consummated by May 28, 2004; or
(c) At the election of the Company if: (i) Buyer has breached or failed to
perform or comply with any of its representations, warranties, covenants or
obligations under this Agreement; or (ii) any of the conditions precedent set
forth in SECTION 6 OR 8 is not satisfied as and when required by this Agreement;
or (iii) if the Closing has not been consummated by May 28, 2004.
10.2. Manner and Effect of Termination. Written notice of any termination
("Termination Notice") pursuant to this SECTION 10 shall be given by the party
electing termination of this Agreement ("Terminating Party") to the other party
or parties (collectively, the "Terminated Party"), and such notice shall state
the reason for termination. The party or parties receiving Termination Notice
shall have a period of ten (10) days after receipt of Termination Notice to cure
the matters giving rise to such termination to the reasonable satisfaction of
the Terminating Party. If the matters giving rise to termination are not cured
as required hereby, this Agreement shall be terminated effective as of the close
of business on the tenth (10th) day following the Terminated Party's receipt of
Termination Notice. Upon termination of this Agreement prior to the consummation
of the Closing and in accordance with the terms hereof, this Agreement shall
become void and of no effect, and none of the parties shall have any liability
to the others, except that nothing contained herein shall relieve any party
from: (a) its obligations under SECTIONS 2.3 AND 2.4; or (b) liability for its
intentional breach of any representation, warranty or covenant contained herein,
or its intentional failure to comply with the terms and conditions of this
Agreement or to perform its obligations hereunder.
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11. MISCELLANEOUS.
11.1. Notices.
(a) All notices, requests, demands, or other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given upon receipt if delivered in person, or upon the expiration of two (2)
days after the date sent, if sent by federal express (or similar overnight
courier service) to the parties at the following addresses:
(i) If to Buyer:
Cornell Capital Partners, LP 101 Hudson Street -Suite 3700 Jersey City, NJ 07302
Attention: Mark Angelo
Portfolio Manager
Telephone: (201) 985-8300 Facsimile:
(201) 985-8266
with a copy to:
Cornell Capital Partners, LP 101 Hudson Street -Suite 3700 Jersey City, NJ 07302
Attention: Troy J. Rillo, Esq.
Senior Vice President
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
(ii) If to the Company:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739 New York, New York 10170
Attention:
Wayne Danson
Telephone: (646) 227-1600
Facsimile: (646) 227-1666
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With a copy to:
Levinson & Lichtman, LLP
120 Palmetto Park Road, Suit 100
Boca Raton, Florida 33432
Attention: Jonathan Lichtman, Esq.
Telephone: (561) 869-3600
Facsimile: (561) 869-3601
(b) Notices may also be given in any other manner permitted by law, effective
upon actual receipt. Any party may change the address to which notices,
requests, demands or other communications to such party shall be delivered or
mailed by giving notice thereof to the other parties hereto in the manner
provided herein.
11.2. Survival. The representations, warranties, agreements and indemnifications
of the parties contained in this Agreement or in any writing delivered pursuant
to the provisions of this Agreement shall survive any investigation heretofore
or hereafter made by the parties and the consummation of the transactions
contemplated herein and shall continue in full force and effect after the
Closing.
11.3. Counterparts; Interpretation. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same instrument. This Agreement supersedes all
prior discussions and agreements between the parties with respect to the subject
matter hereof, and this Agreement contains the sole and entire agreement among
the parties with respect to the matters covered hereby. All Schedules hereto
shall be deemed a part of this Agreement. This Agreement shall not be altered or
amended except by an instrument in writing signed by or on behalf of all of the
parties hereto. No ambiguity in any provision hereof shall be construed against
a party by reason of the fact it was drafted by such party or its counsel. For
purposes of this Agreement: "herein", "hereby", "hereunder", "herewith",
"hereafter" and "hereinafter" refer to this Agreement in its entirety, and not
to any particular subsection or paragraph. References to "including" means
including without limiting the generality of any description preceding such
term. Nothing expressed or implied in this Agreement is intended, or shall be
construed, to confer upon or give any person other than the parties hereto any
rights or remedies under or by reason of this Agreement.
11.4. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New Jersey without regard to the
principles of conflict of laws. The parties further agree that any action
between them shall be heard exclusively in Hudson County, New Jersey, and
expressly consent to the jurisdiction and venue of the Superior Court of New
Jersey, sitting in Hudson County, New Jersey and the United States District
Court of New Jersey, sitting in Newark, New Jersey, for the adjudication of any
civil action asserted pursuant to this paragraph. Each party hereby irrevocably
waives, to the fullest extent it may effectively do so, the defense of an
inconvenient forum to the maintenance of any such action in the forum selected
hereby.
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11.5. Successors and Assigns; Assignment. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
executors, legal representatives, and successors; provided, however, that the
Company may not assign this Agreement or any rights hereunder, in whole or in
part.
11.6. Partial Invalidity and Severability. All rights and restrictions contained
herein may be exercised and shall be applicable and binding only to the extent
that they do not violate any applicable laws and are intended to be limited to
the extent necessary to render this Agreement legal, valid and enforceable. If
any terms of this Agreement not essential to the commercial purpose of this
Agreement shall be held to be illegal, invalid or unenforceable by a court of
competent jurisdiction, it is the intention of the parties that the remaining
terms hereof shall constitute their agreement with respect to the subject matter
hereof and all such remaining terms shall remain in full force and effect. To
the extent legally permissible, any illegal, invalid or unenforceable provision
of this Agreement shall be replaced by a valid provision which will implement
the commercial purpose of the illegal, invalid or unenforceable provision.
11.7. Waiver. Any term or condition of this Agreement may be waived at any time
by the party which is entitled to the benefit thereof, but only if such waiver
is evidenced by a writing signed by such party. No failure on the part of a
party hereto to exercise, and no delay in exercising, any right, power or remedy
created hereunder, shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or remedy by any such party preclude any
other future exercise thereof or the exercise of any other right, power or
remedy. No waiver by any party hereto to any breach of or default in any term or
condition of this Agreement shall constitute a waiver of or assent to any
succeeding breach of or default in the same or any other term or condition
hereof.
11.8. Headings. The headings as to contents of particular paragraphs of this
Agreement are inserted for convenience only and shall not be construed as a part
of this Agreement or as a limitation on the scope of any terms or provisions of
this Agreement.
11.9. Expenses.
11.9.1. Legal Fees. Except as otherwise expressly provided herein, all legal and
other costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the Buyer or the Company as
each party incurs such expenses.
11.9.2. Structuring Fees. The Company shall pay to the Buyer, directly out of
the Purchase Price, a fee of $17,500 for structuring this transaction. The fee
shall be deemed fully earned on the date hereof, and the payment shall be offset
against the Purchase Price.
11.9.3. Commitment Fees. The Company shall pay to Yorkville Advisors Management,
LLC and Stone Street Asset Management LLC commitment fees of 8% and 2%,
respectively, of the Purchase Price. The commitment fees shall be deemed fully
earned on the date hereof, and the payment shall be offset against the Purchase
Price.
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11.10. Finder's Fees. The Buyer represents to the Company that no broker, agent,
finder or other party has been retained by it in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Buyer to be paid for or on account of the transactions
contemplated hereby. The Company represents to the Buyer that no broker, agent,
finder or other party has been retained by the Company in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Company to be paid for or on account of the transactions
contemplated hereby.
11.11. Gender. Where the context requires, the use of the singular form herein
shall include the plural, the use of the plural shall include the singular, and
the use of any gender shall include any and all genders.
11.12. Currency. All foreign currency amounts required to be converted to U.S.
Dollars for purposes of this Agreement shall be converted in accordance with
GAAP.
11.13. Acceptance by Fax. This Agreement shall be accepted, effective and
binding, for all purposes, when the parties shall have signed and transmitted to
each other, by telecopier or otherwise, copies of the signature pages hereto.
11.14. Attorneys Fees. If any legal action or other proceeding is brought for
the enforcement of this Agreement, or because of an alleged dispute, breach,
default or misrepresentation in connection with any provision of this Agreement,
the prevailing party shall be entitled to recover reasonable attorneys' fees,
court costs and all expenses (including, without limitation, all such fees,
costs and expenses incident to appellate, bankruptcy, post-judgment and
alternative dispute resolution proceedings), incurred in that action or
proceeding, in addition to any other relief to which such party may be entitled.
11.15. NO JURY TRIAL. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT AND ANY DOCUMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION
HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES' ACCEPTANCE OF THIS AGREEMENT.
21
IN WITNESS WHEREOF, the parties have executed this Investment Agreement or
caused this Investment Agreement to be duly executed by their duly authorized
officers as of the day and year first above written.
BUYER:
CORNELL CAPITAL PARTNERS, LP
BY: YORKVILLE ADVISORS, LLC
ITS: GENERAL PARTNER
By:
Name: Mark Angelo
Title: Portfolio Manager
COMPANY:
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By:
Name: Wayne I Danson
Title: President
22
EXHIBIT 10.44
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 28, 2004,
by and among ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation
(the "Company"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited
partnership (the "Investor").
WHEREAS:
A. The parties hereto have entered into an Investment Agreement (the "Investment
Agreement") of even date herewith.
B. This Agreement is a condition precedent of the Investment Agreement.
C. To induce the Investor to execute and deliver the Investment Agreement, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations there under, or any
similar successor statute (collectively, the "1933 Act"), and applicable state
securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Investor
hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Person" means a corporation, a limited liability company, an association, a
partnership, an organization, a business, an individual, a governmental or
political subdivision thereof or a governmental agency.
(b) "Register," "registered," and "registration" refer to a registration
effected by preparing and filing one or more Registration Statements (as defined
below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933
Act or any successor rule providing for offering securities on a continuous or
delayed basis ("Rule 415"), and the declaration or ordering of effectiveness of
such Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
(c) "Registrable Securities" means the shares of Common Stock issuable to the
Investor upon conversion of (i) the Series A Convertible Preferred Stock (the
"Series A Preferred Stock") pursuant to the Investment Agreement.
(d) "Registration Statement" means a registration statement under the 1933 Act
which covers the Registrable Securities. 2. REGISTRATION.
(a) Subject to the terms and conditions of this Agreement, the Company shall
prepare and file, no later than one hundred twenty (120) days from the date
hereof (the "Scheduled Filing Deadline"), with the SEC a registration statement
on Form S-1 or SB-2 (or, if the Company is then eligible, on Form S-3) under the
1933 Act (the "Initial Registration Statement") for the registration for the
resale by the Investor of the shares of the Company's Common Stock to be issued
upon conversion of the Series A Preferred Stock issued pursuant to the
Investment Agreement. The Company shall cause the Registration Statement to
remain effective until all of the Registrable Securities have been sold.
(b) Effectiveness of the Initial Registration Statement. The Company shall use
its best efforts (i) to have the Initial Registration Statement declared
effective by the SEC no later than ninety (90) days after the filing thereof
(the "Scheduled Effective Deadline") and (ii) to insure that the Initial
Registration Statement and any subsequent Registration Statement remains in
effect until all of the Registrable Securities have been sold, subject to the
terms and conditions of this Agreement. It shall be an event of default
hereunder if the Initial Registration Statement is not declared effective by the
SEC within one hundred twenty (120) days after filing thereof.
(c) Failure to File or Obtain Effectiveness of the Registration Statement. In
the event the Registration Statement is not filed by the Scheduled Filing
Deadline or is not declared effective by the SEC on or before the Scheduled
Effective Deadline, or if after the Registration Statement has been declared
effective by the SEC, sales cannot be made pursuant to the Registration
Statement (whether because of a failure to keep the Registration Statement
effective, failure to disclose such information as is necessary for sales to be
made pursuant to the Registration Statement, failure to register sufficient
shares of Common Stock or otherwise) then as partial relief for the damages to
any holder of Registrable Securities by reason of any such delay in or reduction
of its ability to sell the underlying shares of Common Stock (which remedy shall
not be exclusive of any other remedies at law or in equity), the Company will
pay as liquidated damages (the "Liquidated Damages") to the holder, at the
holder's option, either a cash amount or shares of the Company's Common Stock
equal to two percent (2%) of the Liquidation Amount (as defined in the
Certificate of Designation of Series A Convertible Preferred Stock) outstanding
as Liquidated Damages for each thirty (30) day period or any part thereof after
the Scheduled Filing Deadline or the Scheduled Effective Deadline as the case
may be. Any Liquidated Damages payable hereunder shall not limit, prohibit or
preclude the Investor from seeking any other remedy available to it under
contract, at law or in equity. The Company shall pay the Investor the Liquidated
Damages within three (3) business days of the Investor making written demand.
(d) Liquidated Damages. The Company and the Investor hereto acknowledge and
agree that the sums payable under subsection 2(c) above shall constitute
liquidated damages and not penalties and are in addition to all other rights of
the Investor, including the right to call a default. The parties further
acknowledge that (i) the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, (ii) the amounts specified in
such subsections bear a reasonable relationship to, and are not plainly or
grossly disproportionate to the probable loss likely to be incurred in
connection with any failure by the Company to obtain or maintain the
effectiveness of a Registration Statement, (iii) one of the reasons for the
Company and the Investor reaching an agreement as to such amounts was the
uncertainty and cost of litigation regarding the question of actual damages, and
(iv) the Company and the Investor are sophisticated business parties and have
been represented by sophisticated and able legal counsel and negotiated this
Agreement at arm's length.
2
3. RELATED OBLIGATIONS.
(a) The Company shall keep the Registration Statement effective pursuant to Rule
415 at all times until the date on which the Investor shall have sold all the
Registrable Securities covered by such Registration Statement (the "Registration
Period"), which Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(b) The Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
prospectus used in connection with such Registration Statement, which prospectus
is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be
necessary to keep such Registration Statement effective at all times during the
Registration Period, and, during such period, comply with the provisions of the
1933 Act with respect to the disposition of all Registrable Securities of the
Company covered by such Registration Statement until such time as all of such
Registrable Securities shall have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
such Registration Statement. In the case of amendments and supplements to a
Registration Statement which are required to be filed pursuant to this Agreement
(including pursuant to this Section 3(b)) by reason of the Company's filing a
report on Form 10-KSB, Form 10-QSB or Form 8-K or any analogous report under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), the Company shall
incorporate such report by reference into the Registration Statement, if
applicable, or shall file such amendments or supplements with the SEC on the
same day on which the 1934 Act report is filed which created the requirement for
the Company to amend or supplement the Registration Statement.
(c) The Company shall furnish to the Investor whose Registrable Securities are
included in any Registration Statement, without charge, (i) at least one (1)
copy of such Registration Statement as declared effective by the SEC and any
amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference, all exhibits and each preliminary
prospectus, (ii) ten (10) copies of the final prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents as such Investor may reasonably request from time to time in order to
facilitate the disposition of the Registrable Securities owned by such Investor.
3
(d) The Company shall use its best efforts to (i) register and qualify the
Registrable Securities covered by a Registration Statement under such other
securities or "blue sky" laws of such jurisdictions in the United States as any
Investor reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (w) make any
change to its certificate of incorporation or by-laws, (x) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify each Investor who holds
Registrable Securities of the receipt by the Company of any notification with
respect to the suspension of the registration or qualification of any of the
Registrable Securities for sale under the securities or "blue sky" laws of any
jurisdiction in the United States or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.
(e) As promptly as practicable after becoming aware of such event or
development, the Company shall notify each Investor in writing of the happening
of any event as a result of which the prospectus included in a Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (provided that in no event shall such notice contain any
material, nonpublic information), and promptly prepare a supplement or amendment
to such Registration Statement to correct such untrue statement or omission, and
deliver ten (10) copies of such supplement or amendment to each Investor. The
Company shall also promptly notify each Investor in writing (i) when a
prospectus or any prospectus supplement or post-effective amendment has been
filed, and when a Registration Statement or any post-effective amendment has
become effective (notification of such effectiveness shall be delivered to each
Investor by facsimile on the same day of such effectiveness), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement or
related prospectus or related information, and (iii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.
(f) The Company shall use its best efforts to prevent the issuance of any stop
order or other suspension of effectiveness of a Registration Statement, or the
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction within the United States of America and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify each Investor who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
(g) At the reasonable request of any Investor, the Company shall furnish to such
Investor, on the date of the effectiveness of the Registration Statement and
thereafter from time to time on such dates as an Investor may reasonably request
(i) a letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
and (ii) an opinion, dated as of such date, of counsel representing the Company
for purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the Investor.
4
(h) Upon five (5) days prior written notice by the Investor, which notice shall
not be given more than one (1) time per calendar quarter, the Company shall make
available for inspection by (i) any Investor and (ii) one (1) firm of
accountants or other agents retained by the Investor (collectively, the
"Inspectors") all pertinent financial and other records, and pertinent corporate
documents and properties of the Company (collectively, the "Records"), as shall
be reasonably deemed necessary by each Inspector, and cause the Company's
officers, directors and employees to supply all information which any Inspector
may reasonably request; provided, however, that each Inspector shall agree, and
each Investor hereby agrees, to hold in strict confidence and shall not make any
disclosure (except to an Investor) or use any Record or other information which
the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement or is otherwise required under the 1933 Act, (b) the
release of such Records is ordered pursuant to a final, non-appealable subpoena
or order from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement of which
the Inspector and the Investor has knowledge. Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential.
(i) The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
(j) The Company shall use its best efforts either to cause all the Registrable
Securities covered by a Registration Statement (i) to be listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or (ii) the
inclusion for quotation on the National Association of Securities Dealers, Inc.
OTC Bulletin Board for such Registrable Securities. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(j).
5
(k) The Company shall cooperate with the Investor who hold Registrable
Securities being offered and, to the extent applicable, to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such denominations or amounts,
as the case may be, as the Investor may reasonably request and registered in
such names as the Investor may request.
(l) The Company shall use its best efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to consummate the disposition of such Registrable Securities.
(m) The Company shall make generally available to its security holders as soon
as practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the 1933 Act) covering a twelve (12) month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement.
(n) The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
(o) Within two (2) business days after a Registration Statement which covers
Registrable Securities is declared effective by the SEC, the Company shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investor
whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by the
SEC in the form attached hereto as Exhibit A.
(p) The Company shall take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of Registrable Securities pursuant to
a Registration Statement.
4. OBLIGATIONS OF THE INVESTOR.
The Investor agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e), such Investor will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or receipt of
notice that no supplement or amendment is required. Notwithstanding anything to
the contrary, the Company shall cause its transfer agent to deliver unlegended
certificates for shares of Common Stock to a transferee of an Investor in
accordance with the terms of the Investment Agreement in connection with any
sale of Registrable Securities with respect to which an Investor has entered
into a contract for sale prior to the Investor's receipt of a notice from the
Company of the happening of any event of the kind described in Section 3(f) or
the first sentence of 3(e) and for which the Investor has not yet settled.
6
5. EXPENSES OF REGISTRATION.
All expenses incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers, legal and accounting
fees shall be paid by the Company.
6. INDEMNIFICATION.
With respect to Registrable Securities which are included in a Registration
Statement under this Agreement:
(a) To the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend each Investor, the directors, officers,
partners, employees, agents, representatives of, and each Person, if any, who
controls any Investor within the meaning of the 1933 Act or the 1934 Act (each,
an "Indemnified Person"), against any losses, claims, damages, liabilities,
judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts
paid in settlement or expenses, joint or several (collectively, "Claims")
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("Indemnified Damages"), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other "blue sky" laws of any jurisdiction in which Registrable Securities are
offered ("Blue Sky Filing"), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; (ii) any untrue statement or alleged untrue statement of
a material fact contained in any final prospectus (as amended or supplemented,
if the Company files any amendment thereof or supplement thereto with the SEC)
or the omission or alleged omission to state therein any material fact necessary
to make the statements made therein, in light of the circumstances under which
the statements therein were made, not misleading; or (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation there under relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement (the matters in the foregoing
clauses (i) through (iii) being, collectively, "Violations"). The Company shall
reimburse the Investor and each such controlling person promptly as such
expenses are incurred and are due and payable, for any legal fees or
disbursements or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto; (y) shall not be
available to the extent such Claim is based on a failure of the Investor to
deliver or to cause to be delivered the prospectus made available by the
Company, if such prospectus was timely made available by the Company pursuant to
Section 3(c); and (z) shall not apply to amounts paid in settlement of any Claim
if such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Notwithstanding anything to
the contrary herein or in any other agreement entered into between the Company
and the Investor, the Company acknowledges and agrees that it is solely
responsible and shall indemnify each Indemnified Person for the contents of any
registration statement, prospectus or other filing made with the SEC or
otherwise used in the offering of the Company's securities (except as such
disclosure relates solely to the Investor and then only to the extent that such
disclosure conforms with information furnished in writing by the Investor to the
Company), even if the Investor or its agents as an accommodation to the Company
participate or assist in the preparation of such registration statement,
prospectus or other SEC filing. The Company shall retain its own legal counsel
to review, edit, confirm and do all things such counsel deems necessary or
desirable to such registration statement, prospectus or other SEC filing to
ensure that it does not contain an untrue statement or alleged untrue statement
of material fact or omit or alleged to omit a material fact necessary to make
the statements made therein, in light of the circumstances under which the
statements were made, not misleading. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Investor pursuant to Section 9 hereof.
7
(b) In connection with a Registration Statement, each Investor agrees to
severally and not jointly indemnify, hold harmless and defend, to the same
extent and in the same manner as is set forth in Section 6(a), the Company, each
of its directors, each of its officers, employees, representatives, or agents
and each Person, if any, who controls the Company within the meaning of the 1933
Act or the 1934 Act (each an "Indemnified Party"), against any Claim or
Indemnified Damages to which any of them may become subject, under the 1933 Act,
the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise
out of or is based upon any Violation, in each case to the extent, and only to
the extent, that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by such Investor expressly for use
in connection with such Registration Statement; and, subject to Section 6(d),
such Investor will reimburse any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) and the
agreement with respect to contribution contained in Section 7 shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim or Indemnified
Damages as does not exceed the net proceeds to such Investor as a result of the
sale of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investor pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any prospectus shall
not inure to the benefit of any Indemnified Party if the untrue statement or
omission of material fact contained in the prospectus was corrected and such new
prospectus was delivered to each Investor prior to such Investor's use of the
prospectus to which the Claim relates.
8
(c) Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one (1) counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent; provided, however, that
the indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the prior written consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment or
enter into any settlement or other compromise which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability in
respect to such claim or litigation. Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
(d) The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or Indemnified Damages are incurred.
(e) The indemnity agreements contained herein shall be in addition to (i) any
cause of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
9
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investor the benefits of Rule 144
promulgated under the 1933 Act or any similar rule or regulation of the SEC that
may at any time permit the Investor to sell securities of the Company to the
public without registration ("Rule 144") the Company agrees to:
(a) make and keep public information available, as those terms are understood
and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 4(c) of the
Investment Agreement) and the filing of such reports and other documents as are
required by the applicable provisions of Rule 144; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investor to
sell such securities pursuant to Rule 144 without registration.
9. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investor who
then hold at least two-thirds (2/3) of the Registrable Securities. Any amendment
or waiver effected in accordance with this Section 9 shall be binding upon each
Investor and the Company. No such amendment shall be effective to the extent
that it applies to fewer than all of the holders of the Registrable Securities.
No consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any provision of any of this Agreement unless the same
consideration also is offered to all of the parties to this Agreement.
10
10. MISCELLANEOUS.
(a) A Person is deemed to be a holder of Registrable Securities whenever such
Person owns or is deemed to own of record such Registrable Securities. If the
Company receives conflicting instructions, notices or elections from two (2) or
more Persons with respect to the same Registrable Securities, the Company shall
act upon the basis of instructions, notice or election received from the
registered owner of such Registrable Securities.
(b) Any notices, consents, waivers or other communications required or permitted
to be given under the terms of this Agreement must be in writing and will be
deemed to have been delivered: (i) upon receipt, when delivered personally; (ii)
upon receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one (1) business day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company, to: Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, New York 10170
Attention: Wayne Danson
Telephone: (646) 227-1600
Facsimile: (646) 227-1666
With a copy to: Levinson & Lichtman, LLP
120 Palmetto Park Road, Suit 100
Boca Raton, Florida 33432
Attention: Jonathan Lichtman
Telephone: (561) 869-3600
Facsimile: (561) 869-3601
If to an Investor, to its address and facsimile number on the Schedule of
Investor attached hereto, with copies to such Investor's representatives as set
forth on the Schedule of Investor or to such other address and/or facsimile
number and/or to the attention of such other person as the recipient party has
specified by written notice given to each other party five (5) days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
(c) Failure of any party to exercise any right or remedy under this Agreement or
otherwise, or delay by a party in exercising such right or remedy, shall not
operate as a waiver thereof.
11
(d) The laws of the State of New Jersey shall govern all issues concerning the
relative rights of the Company and the Investor as its stockholders. All other
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
Jersey, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New Jersey or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of New Jersey. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the Superior Courts of the State of New Jersey, sitting in
Hudson County, New Jersey and federal courts for the District of New Jersey
sitting Newark, New Jersey, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
(e) This Agreement, the Irrevocable Transfer Agent Instructions, the Investment
Agreement and related documents, and the Escrow Agreement of even date hereof by
and among the Company, the Investor and Butler Gonzalez LLP (the "Escrow
Agreement") and the Security Agreement dated the date hereof (the "Security
Agreement") constitute the entire agreement among the parties hereto with
respect to the subject matter hereof and thereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein and therein. This Agreement, the Irrevocable Transfer Agent Instructions,
the Investment Agreement and related documents including the Convertible
Debenture, the Escrow Agreement and the Security Agreement supersede all prior
agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
(f) This Agreement shall inure to the benefit of and be binding upon the
permitted successors and assigns of each of the parties hereto.
(g) The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
(h) This Agreement may be executed in identical counterparts, each of which
shall be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other party hereto by facsimile transmission of a copy of this Agreement bearing
the signature of the party so delivering this Agreement.
12
(i) Each party shall do and perform, or cause to be done and performed, all such
further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
The language used in this Agreement will be deemed to be the language chosen by
the parties to express their mutual intent and no rules of strict construction
will be applied against any party.
(j) This Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.
IN WITNESS WHEREOF, the parties have caused this Investor Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY:
ADVANCED TECHNOLOGIES
COMMUNICATIONS, INC.
By:
Name: Wayne I. Danson Title: President
13
SCHEDULE I
SCHEDULE OF BUYERS
ADDRESS/FACSIMILE
NAME SIGNATURE NUMBER OF BUYER
- -------------------------------- --------------------------------------------- -------------------------------
Cornell Capital Partners, LP By: Yorkville Advisors, LLC 101 Hudson Street - Suite 3700
Its: General Partner Jersey City, NJ 07303
Facsimile: (201) 985-8266
By: With a Copy to:
----------------------------------------- Troy J. Rillo
Name: Mark A. Angelo
Its: Portfolio Manager
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
INSERT
Attention:
Re: ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
Ladies and Gentlemen:
We are counsel to Advanced Communications Technologies, Inc., a Florida
corporation (the "Company"), and have represented the Company in connection with
that certain Investment Agreement (the "Investment Agreement") entered into by
and among the Company and the Investor named therein (collectively, the
"Investor") pursuant to which the Company issued to the Investor shares of its
Common Stock, par value $0.001 per share (the "Common Stock"). Pursuant to the
Purchase Agreement, the Company also has entered into a Registration Rights
Agreement with the Investor (the "Investor Registration Rights Agreement")
pursuant to which the Company agreed, among other things, to register the
Registrable Securities (as defined in the Registration Rights Agreement) under
the Securities Act of 1933, as amended (the "1933 Act"). In connection with the
Company's obligations under the Registration Rights Agreement, on ____________
____, the Company filed a Registration Statement on Form ________ (File No.
333-_____________) (the "Registration Statement") with the Securities and
Exchange SEC (the "SEC") relating to the Registrable Securities which names each
of the Investor as a selling stockholder there under.
In connection with the foregoing, we advise you that a member of the SEC's staff
has advised us by telephone that the SEC has entered an order declaring the
Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[COMPANY COUNSEL]
By:
cc: [LIST NAMES OF INVESTOR]
EXHIBIT 14.1
CODE OF BUSINESS CONDUCT AND ETHICS
FOR
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
INTRODUCTION
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. (the "Company") is committed to the
highest standards of legal and ethical conduct. This Code of Business Conduct
and Ethics (the "Code") sets forth the Company's policies with respect to the
way we conduct ourselves individually and operate our business. The provisions
of this Code are designed to deter wrongdoing and to promote honest and ethical
conduct among our employees, officers and directors.
In the course of performing our various roles in the Company, each of us will
encounter ethical questions in different forms and under a variety of
circumstances. Moments of ethical uncertainty may arise in our dealings with
fellow employees of the Company, with customers, or with other parties such as
government entities or members of our community. In achieving the high ground of
ethical behavior, compliance with governmental laws is not enough. Our employees
should never be content with simply obeying the letter of the law, but must also
strive to comport themselves in an honest and ethical manner. This Code provides
clear rules to assist our employees, directors and officers in taking the proper
actions when faced with an ethical dilemma.
The reputation of the Company is our greatest asset and its value relies on the
character of its employees. In order to protect this asset, the Company will not
tolerate unethical behavior by employees, officers or directors. Those who
violate the standards in this Code will be subject to disciplinary action. If
you are concerned about taking an action that may violate the Code or are aware
of a violation by another employee, an officer or a director, follow the
guidelines set forth in Sections 10 and 11 of this Code.
This Code applies equally to all employees, officers and directors of the
Company. All references to employees contained in this Code should be understood
as referring to officers and directors as well.
1. COMPLIANCE WITH LAWS, RULES AND REGULATIONS
Company policy requires that the Company, as well as all employees, officers and
directors of the Company, comply fully with both the spirit and the letter of
all laws, rules and regulations. Whenever an applicable law, rule or regulation
is unclear or seems to conflict with either another law or any provision of this
Code, all employees, officers and directors are urged to seek clarification from
their supervisor, the appropriate compliance official or the Chief Executive
Officer. See Section 11 for contact information. Beyond mere compliance with the
law, we should always conduct our business with the highest standards of honesty
and integrity - wherever we operate.
2. CONFLICTS OF INTEREST
Every employee has a primary business responsibility to the Company and must
avoid conflicts of interest. A conflict of interest arises when an employee
takes actions or enters into relationships that oppose the interests of the
Company, harm the Company's reputation or interfere with the employee's
performance or independent judgment when carrying out any actions on behalf of
the Company. The Company strictly prohibits its employees from taking any action
or entering into any relationship, personal or professional, that creates, or
even appears to create, a conflict of interest.
A conflict situation can arise when a director, officer or employee takes
actions or has interests that may make it difficult to perform his or her work
for the Company objectively and effectively. Conflicts of interests may also
arise when a director, officer or employee, or a member of his or her family,
receives an improper personal benefit as a result of his or her position with
the Company. It may be a conflict of interest for a director, officer or
employee to work simultaneously for a competitor, customer or supplier. The best
policy is to avoid any direct or indirect business connection with our
customers, suppliers or competitors, except on our behalf. Employees must be
sensitive to potential conflicts of interest that may arise and use their best
efforts to avoid the conflict.
In particular, except as provided below, no director, officer or employee shall:
o be a consultant to, or a director, officer or employee of, or otherwise
operate an outside business that:
>> markets products or services in competition with our current or
potential products and services;
>> supplies products or services to the Company; or
>> purchases products or services from the Company;
o accept any personal loan or guarantee of obligations from the
Company, except to the extent such arrangements have been approved
by the Chief Executive Officer and are legally permissible; or
o conduct business on behalf of the Company with immediate family
members, which include your spouse, children, parents, siblings and
persons sharing your same home whether or not legal relatives.
Directors, officers and employees must notify the Chief Executive Officer of the
existence of any actual or potential conflict of interest. With respect to
officers or directors, the Board may make a determination that a particular
transaction or relationship will not result in a conflict of interest covered by
this policy. With respect to all other employees or agents, the Chief Executive
Officer, acting alone, or the Board may make such a determination. Any waivers
of this policy as to an officer or director may only be approved by the Board of
Directors.
2
Any employee, officer or director who is aware of a transaction or relationship
that could reasonably be expected to give rise to a conflict of interest in
violation of this section must inform the appropriate personnel in accordance
with the procedures set forth in Section 12 of this Code. If an employee has any
questions regarding the Company's policy on conflicts of interest or needs
assistance in avoiding a potential conflict of interest, he or she is urged to
seek the advice of a supervisor or the Chief Executive Officer.
3. CORPORATE OPPORTUNITIES
Employees, officers and directors are prohibited from taking for themselves
personally opportunities that are discovered through the use of Company
property, Company information or their position in the Company. Furthermore,
employees may not use Company property, information or influence or their
position in the Company for improper personal gain. Finally, employees have a
duty to advance the Company's legitimate interests when the opportunity to do so
arises. Consequently, employees are not permitted to compete with the Company.
4. CONFIDENTIALITY
Employees must maintain the confidentiality of confidential information
entrusted to them by the Company or its customers or suppliers, except when
disclosure is authorized by the Company or required by applicable laws or
regulations. Confidential information includes proprietary information of the
Company, as well as all non-public information that might be of use to
competitors, or harmful to the Company or its customers, if disclosed. This
confidentiality requirements is in additional to any other obligations imposed
by the Company to keep information confidential.
5. INSIDER TRADING
Employees, officers and directors will frequently become aware of confidential
non-public information concerning the Company and the parties with which the
Company does business. As set forth in more detail in the Company's Insider
Trading Policy, the Company prohibits employees from using such confidential
information for personal financial gain, such as for purposes of stock trading,
or for any other purpose other than the conduct of our business. Employees must
maintain the confidentiality of such information and may not make disclosures to
third parties, including members of the employee's family. All non-public
information about the Company should be treated as confidential information. To
use non-public information for personal financial benefit or to "tip" others who
may make stock trades on the basis of this information is not only unethical but
also illegal. This policy also applies to trading in the securities of any other
company, including our customers or suppliers, if employees have material,
non-public information about that company which the employee obtained in the
course of their employment by the Company. In addition to possible legal
sanctions, any employee, officer or director found to be in violation of the
Company's insider trading policy will face decisive disciplinary action.
Employees are encouraged to contact the Company's Chief Executive Officer with
any questions concerning this policy.
3
6. PROTECTION AND PROPER USE OF COMPANY ASSETS
All Company assets should be used for legitimate business purposes and all
employees, officers and directors must make all reasonable efforts to protect
the Company's assets and ensure their efficient use. Theft, carelessness, and
waste have a direct impact on the Company's profitability and must therefore be
avoided. The suspected occurrence of fraud or theft should be immediately
reported to the appropriate person in accordance with the procedures set forth
in Section 11 of this Code.
An employee's obligation to protect the Company's assets extends to the
Company's proprietary information. Proprietary information includes intellectual
property such as patents, trademarks, copyrights and trade secrets. An employee
who uses or distributes such proprietary information without the Company's
authorization will be subject to disciplinary measures as well as potential
legal sanctions.
7. FAIR DEALING
Although the success of our Company depends on our ability to outperform our
competitors, the Company is committed to achieving success by fair and ethical
means. We seek to maintain a reputation for fair dealing among our competitors
and the public alike. In light of this aim, the Company prohibits employees from
engaging in any unethical or illegal business practices. An exhaustive list of
unethical practices cannot be provided. Instead, the Company relies on the
judgment of each individual employee to avoid such practices. Furthermore, each
employee should endeavor to deal fairly with the Company's customers, suppliers,
competitors and employees. No employee should take unfair advantage of anyone
through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts, or any other unfair business practice.
8. DISCLOSURES
It is Company policy to make full, fair, accurate, timely and understandable
disclosure in compliance with all applicable laws, rules and regulations in all
reports and documents that the Company files with, or submits to, the Securities
and Exchange Commission and in all other public communications made by the
Company. Employees shall endeavor in good faith to assist the Company in such
efforts.
9. WAIVERS
The Company expects all employees, officers and directors to comply with the
provisions of this Code. Any waiver of this Code for executive officers,
directors or employees may be made only by the Board of Directors or a Board
committee and will be promptly disclosed to the public as required by law and
stock exchange regulations.
4
10. COMPLIANCE GUIDELINES AND RESOURCES
In some situations, our employees may not be certain how to proceed in
compliance with this Code. This uncertainty may concern the ethical nature of
the employee's own acts or the employee's duty to report the unethical acts of
another. When faced with this uncertainty, the employee should carefully analyze
the situation and make use of Company resources when determining the proper
course of action. The Company also encourages employees to talk to their
supervisors, or other personnel identified below, when in doubt about the best
course of action.
1. Gather all the facts. Do not take any action that may violate the Code until
you have gathered all the facts that are required to make a well-informed
decision and, if necessary, you have consulted with your supervisor, or the
Chief Executive Officer.
2. Is the action illegal or contrary to policy? If the action is illegal or
contrary to the provision of this Code, you should not carry out the act. If you
believe that the Code has been violated by an employee, an officer or a
director, you must promptly report the violation in accordance with the
procedures set forth in Section 11.
3. Discuss the problem with your supervisor. It is your supervisor's duty to
assist employees in complying with this Code. Feel free to discuss a situation
that raises ethical issues with your supervisor if you have any questions. You
will suffer no retaliation for seeking such guidance.
4. Additional resources. The Chief Executive Officer is available to speak with
you about problematic situations if you do not feel comfortable approaching your
direct supervisor. If you prefer, you may request assistance in writing by
sending a request to the Chief Executive Officer.
11. REPORTING PROCEDURES
All employees have a duty to report any violations of this Code, as well as
violations of any laws, rules, or regulations. The Company does not permit
retaliation of any kind against employees for good faith reports of ethical
violations.
If you believe that the Code has been violated by an employee you must promptly
report the violation to your direct supervisor or the Chief Executive Officer.
If a report is made to a supervisor, the supervisor must in turn report the
violation to the Chief Executive Officer. All violations by an officer or
director of the Company must be reported directly to the entire Board of
Directors.
CONTACT INFORMATION
Reports may be made in person, by telephone or in writing by sending a
description of the violation and the names of the parties involved to the
appropriate personnel mentioned in the preceding paragraph. The contact
information is as follows:
Wayne I. Danson
President and Chief Financial Officer
420 Lexington Avenue New York, New York 10170
(646) 227-1600
5
12. DISCIPLINARY ACTION
Employees, officers and directors of the Company will be held accountable for
adherence to this Code. The penalty for a particular violation of this Code will
be decided on a case-by-case basis and will depend on the nature and severity of
the violation as well as the employee's history of non-compliance and
cooperation in the disciplinary process. Significant penalties will be imposed
for violations resulting from intentional or reckless behavior. Penalties may
also be imposed when an employee fails to report a violation due to the
employee's indifference, deliberate ignorance or reckless conduct. All
violations of this Code will be treated seriously and will result in the prompt
imposition of penalties which may include (1) an oral or written warning, (2) a
reprimand, (3) suspension, (4) termination and/or (5) restitution.
13. NO RIGHTS CREATED
This Code is a statement of certain fundamental principles, policies and
procedures that govern the Company's officers, directors and employees in the
conduct of the Company's business. It is not intended to and does not create any
rights in any employee, supplier, competitor, shareholder or any other person or
entity.
6
EXHIBIT 21.1
SUBSIDIARIES OF
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
AT JUNE 30, 2004
ENCOMPASS GROUP AFFILIATES, INC.
420 Lexington Avenue
New York, NY 10170
EIN: 20-1088535
State of Incorporation: Delaware
HUDSON STREET INVESTMENTS, LLC
420 Lexington Avenue
New York, NY 10170
EIN: 54-2137152
State of Incorporation: Delaware
CYBER-TEST, INC.
448 Commerce Way
Longwood, FL 32750
EIN: 20-1106218
State of Incorporation: Delaware
SPECTRUCELL, INC.
420 Lexington Avenue
New York, NY 10170
EIN: 56-2425121
State of Incorporation: Delaware
ADVANCED GLOBAL COMMUNICATIONS, INC.
420 Lexington Avenue
New York, NY 10170
EIN: 58-2486173
State of Incorporation: Florida
* * * *
EXHIBIT 31.1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
OFFICER'S CERTIFICATE PURSUANT TO SECTION 302
I, Wayne I. Danson, the President and Chief Financial Officer of Advanced
Communications Technologies, Inc. certify that:
1. I have reviewed this Form 10-KSB of Advanced Communications Technologies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Omitted;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: November 3, 2004
/s/ Wayne I. Danson
- ---------------------------------------
Wayne I. Danson
President and Chief Financial Officer
The introductory paragraph of Section 4 of this certification that refers to the
certifying officers' responsibility for establishing and maintaining internal
control over financial reporting for the company, as well as paragraph 4(b),
have been omitted in accordance with Release No. 33-8238 (June 5, 2003) because
the compliance period has been extended for small business issuers until the
first fiscal year ending on or after April 15, 2005.
EXHIBIT 32.1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Advanced Communications Technologies,
Inc. (the Company) on Form 10-KSB for the period ended June 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the Report), I,
Wayne I. Danson, President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to Advanced Communications Technologies, Inc. and will be retained by
Advanced Communications Technologies, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: November 3, 2004
/s/ Wayne I. Danson
- ---------------------------------------
Wayne I. Danson
President and Chief Financial Officer
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(check one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended September 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
Commission File Number 000-30486
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Florida
(State or other jurisdiction
of incorporation or organization)
65-0738251
(IRS Employer Identification No.)
420 Lexington Avenue, New York, NY 10170
(Address of principal executive offices)
(646)-227-1600
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 3 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of November 15, 2004, there were 2,004,247,731 shares of the registrant's no
par value common stock issued and outstanding
Transmittal Small Business Disclosure Format (check one):
Yes |_| No |X|
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
INDEX TO FORM 10-QSB
Part I-Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets As Of September 30, 2004 (Unaudited) And
June 30, 2004
Condensed Consolidated Statements Of Operations For The Three Months Ended
September 30, 2004 And 2003 (Unaudited)
Condensed Consolidated Statement Of Stockholders' Equity For The Three Months
Ended September 30, 2004 (Unaudited)
Condensed Consolidated Statements Of Cash Flows For The Three Months Ended
September 30, 2004 And 2003 (Unaudited)
Notes To Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Item 3. Controls And Procedures
Part II-Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission Of Matters To A Vote Of Security Holders
Item 5. Other Information
Item 6. Exhibits And Reports On Form 8-K
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the "Management's Discussion and Analysis of Financial
Conditions and Results of Operation" and elsewhere in this quarterly report
constitute "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act")) relating to us and our
business, which represent our current expectations or beliefs including, but not
limited to, statements concerning our operations, performance, financial
condition and growth. The Act may, in certain circumstances, limit our liability
in any lawsuit based on forward-looking statements we have made. All statements,
other than statements of historical facts, included in this quarterly report
that address activities, events or developments that we expect or anticipate
will or may occur in the future, including such matters as our projections,
future capital expenditures, business strategy, competitive strengths, goals,
expansion, market and industry developments and the growth of our businesses and
operations are forward looking statements. Without limiting the generality of
the foregoing, words such as "may," "anticipation," "intend," "could,"
"estimate," or "continue" or the negative or other comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, such as credit losses,
dependence on management and key personnel, variability of quarterly results,
our ability to continue our growth strategy and competition, certain of which
are beyond our control. Any or all of our forward-looking statements may turn
out to be wrong. They may be affected by inaccurate assumptions that we might
make or by known or unknown risks or uncertainties. Should one or more of these
risks or uncertainties materialize or should the underlying assumptions prove
incorrect, actual outcomes and results could differ materially from those
indicated in the forward-looking statements.
Because of the risks and uncertainties associated with forward-looking
statements, you should not place undo reliance on them. Further, any
forward-looking statement speaks only as of the date on which it is made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
i
September 30, June 30, 2004
2004 (Unaudited)
------------ ------------
ASSETS
Current Assets
Cash $ 1,111,289 $ 1,193,170
Accounts Receivable (less allowance for doubtful accounts of $12,219 and
$8,914) 313,955 400,747
Inventory 342,701 350,963
Other Receivables and Prepaid Expenses 49,483 81,863
------------ ------------
Total Current Assets 1,817,428 2,026,743
------------ ------------
Property and equipment (net of accumulated depreciation of $4,328 and
$1,082) 166,843 165,434
------------ ------------
Other Assets
Investment in Partnership 2,860,232 2,774,999
Investment in marketable securities 91,618 --
Licensed Intangibles and
rights 400,000 400,000
Excess of Purchase Price over Fair Market Value of Assets Acquired 2,611,055 2,611,055
Other Deferred Costs 38,834 18,108
------------ ------------
Total Other Assets 6,001,739 5,804,162
------------ ------------
TOTAL ASSETS $ 7,986,010 $ 7,996,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 373,919 $ 194,540
Accrued compensation 127,751 152,343
Notes and Loans Payable-Current 3,308,568 3,488,567
10% Secured Convertible Debentures, net of discount of $13,539 and
$36,977 173,961 150,523
Accrued Interest payable 63,234 46,343
Warranty Reserve 119,597 120,977
Other Liabilities -- 71,117
------------ ------------
Total Current Liabilities 4,167,030 4,224,410
------------ ------------
Long-Term Liabilities
Notes and Loans Payable-Non Current 2,347,467 2,347,467
------------ ------------
Total Long Term Liabilities 2,347,467 2,347,467
------------ ------------
TOTAL LIABILITIES 6,514,496 6,571,877
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 25,000 shares authorized: Series A
Convertible Preferred stock, $.01 par value, 4,200 shares
issued 42 42
Series B Convertible Preferred stock, $.01 par value, 300 shares issued 3 3
Common stock, no par value, 5,000,000,000 shares authorized, ,004,247,731 and
21,994,365,845 shares issued and outstanding, respectively 28,839,381 28,745,253
Additional Paid in Capital 4,556,455 4,056,455
Deferred commitment and equity financing fees, net of accumulated
amortization (125,000) (135,432)
Deferred compensation, net of amortization of $62,500 (437,500) --
Accumulated deficit (31,361,867) (31,241,859)
------------ ------------
Total Stockholders' Equity 1,471,514 1,424,462
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,986,010 $ 7,996,339
============ ============
See accompany notes to condensed consolidated financial statements
1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
2004 2003
----------------------------------
REVENUE $ 1,825,184 $ --
COST OF SALES 1,151,428 --
--------------- ---------------
GROSS PROFIT $ 673,756 $ --
--------------- ---------------
OPERATING EXPENSES
Depreciation and amortization 70,306 106,875
Professional and consulting fees 212,159 69,020
Other selling, general and administrative expenses 687,266 38,023
--------------- ---------------
TOTAL OPERATING EXPENSES 969,731 213,918
--------------- ---------------
Loss From Operations (295,975) (213,918)
--------------- ---------------
OTHER INCOME (EXPENSES)
Forgiveness of debt -- 6,853
Distributable share of partnership income 215,233 --
Interest (expense), (39,266) (63,277)
net --
TOTAL OTHER INCOME (EXPENSE) 175,967 (56,424)
--------------- ---------------
NET LOSS $ (120,008) $ (270,342)
=============== ===============
Net loss per share-basic and dilutive $ (0.00) $ (0.001)
=============== ===============
Weighted average number of shares
outstanding during the period-basic and dilutive 1,996,621,493 210,796,603
=============== ===============
See accompany notes to condensed consolidated financial statements
2
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
COMMON STOCK PREFERRED STOCK
-----------------------------------------------------------ADDITIONAL PAID
SHARES AMOUNT SHARES AMOUNT IN CAPITAL
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 1,994,365,845 $ 28,745,253 4,500 $ 45 $ 4,056,455
-------------------------------------------------------------------------
Reversal of escrowed stock
issued to pay short-term debt (162,999,640) -- -- -- --
Stock issued in partial payment
of short-term note 172,881,526 100,000 -- -- --
Deferred Compensation -- -- -- -- 500,000
Amortization of deferred
compensation -- -- -- -- --
Amortization of deferred
commitment & financing fees -- (5,872) -- -- --
Net loss for the period -- -- -- -- --
-------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2004 2,004,247,731 $ 28,839,381 4,500 $ 45 $ 4,556,455
=========================================================================
DEFERRED
COMMITMENT AND
ACCUMULATED EQUITY DEFERRED
DEFICIT FINANCING FEES COMPENSATION TOTAL
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 $ (31,241,859) $ (135,432) $ -- $ 1,424,462
-------------------------------------------------------------------------
Reversal of escrowed stock
issued to pay short-term debt -- -- -- --
Stock issued in partial payment
of short-term note -- -- -- 100,000
Deferred Compensation -- -- (500,000) --
Amortization of deferred
compensation -- -- 62,500 62,500
Amortization of deferred
commitment & financing fees -- 10,432 -- 4,560
Net loss for the period (120,008) -- -- (120,008)
-------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2004 $ (31,361,867) $ (125,000) $ (437,500) $ 1,471,514
=========================================================================
See accompany notes to condensed consolidated financial statements
3
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net operating loss $ (120,008) $ (270,342)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 70,306 106,875
Debt discount expense 23,438 23,438
Forgiveness of debt -- (6,853)
Distributive share of partnership income (215,233) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Deferred Costs and Other Receivables 96,931 --
Inventory 8,262 --
Prepaid expense/security deposits 1,515 --
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 82,290 (254,029)
Interest payable 16,891 39,839
Common stock to be issued -- 240,000
----------- -----------
Net cash used in operating activities (35,608) (121,072)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities (91,618) --
Partnership distributions 130,000 --
Purchase of business assets (4,655) --
----------- -----------
Net cash flow provided by investing activities 33,727 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 50,000
Proceeds from common stock to be issued -- 50,000
Repayment of short term note (80,000) --
----------- -----------
Net cash provided by (used in) financing activities (80,000) 100,000
----------- -----------
Net decrease in cash $ (81,881) $ (21,072)
Cash at beginning of period 1,193,170 22,527
----------- -----------
CASH AT END OF PERIOD $ 1,111,289 $ 1,455
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended September 30, 2004, the Company issued 172,881,526
shares of common stock in partial repayment of the short-term note payable due
to Cornell Capital Partners, L.P.
During the three months ended September 30, 2003, the Company recorded $240,000
representing 85,714,285 shares of common stock to be issued for prior unpaid
accrued professional fees.
On September 4, 2003, debenture holders converted $82,375 of debentures into
59,692,027 shares of common stock.
See accompany notes to condensed consolidated financial statements
4
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1. BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Unless the context requires otherwise, "we", "us", or "our" refers to Advanced
Communications Technologies, Inc. and its subsidiaries (the "Company") on a
consolidated basis.
Advanced Communications Technologies, Inc., a Nevada corporation, was
incorporated on April 30, 1998 and was inactive from its date of formation until
April 1999 when it merged with and into the Company, a Florida corporation, in a
reverse merger. For accounting purposes, the merger was treated as an
acquisition of all of the assets of the Company and as a recapitalization of the
Company. In July 1999, the Company formed Advanced Global Communications, Inc.
("AGC") as a wholly owned subsidiary to conduct its international telephone
network distribution business. On July 1, 2001, AGC ceased operations and has
been inactive since this date. On January 31, 2000, the Company acquired all of
the then issued and outstanding shares of SmartInvestment.com, Inc. ("Smart"),
an inactive reporting company, for 200,000 shares of restricted common stock.
The Company elected successor issuer status to become a fully reporting company.
On December 9, 2003 and December 17, 2003, the Company formed Hudson Street
Investments, Inc. ("Hudson Street") and SpectruCell, Inc., respectively, both
wholly owned subsidiaries. Hudson Street was formed for the purpose of holding
the Company's investment in Yorkville Advisors Management LLC and other future
investments and SpectruCell, Inc. was formed for the purpose of holding the
Company's rights in the SpectruCell technology. In May 2004, the Company formed
Encompass Group Affiliates, Inc. (Encompass"), a Delaware corporation for the
purpose of (i) acquiring the business and assets of Cyber-Test, Inc.
("Cyber-Test"), a Delaware corporation based in Longwood, Florida; (ii)
acquiring certain assets of Hy-Tech Technology Group, Inc.; and (iii) to pursue
other acquisitions.
We are a New York City-based diversified public holding company. We focus on
high growth-potential businesses through both our wholly owned operating
subsidiaries in the technology services industry and our strategic investments
in diverse industries. Through our wholly owned subsidiary and principal
operating unit Encompass, we own Cyber-Test, an electronic equipment repair
company, and our core operating business. Additionally, through our wholly owned
subsidiary Hudson Street, an investment vehicle, we own a minority interest in
Yorkville Advisors Management, LLC, an investment management partnership, and
through our wholly owned subsidiary SpectruCell, Inc., we hold the North and
South American marketing and distribution rights, which we acquired in 1999, to
SpectruCell, a software-defined, radio-based wireless technology that is
currently under development in Australia by an unrelated third party.
Cyber-Test operates as an independent service organization providing repair
service for facsimile machines, printers, scanners, monitors, laptop computers,
PDAs and multifunction units and other consumer electronics. The repairs are
performed on entire machines and/or circuit boards. A 90-day warranty is given
for all machine repairs and a one-year warranty for all circuit board repairs.
Cyber-Test provides office equipment dealers, original manufacturers and third
party warranty companies a turnkey alternative for additional revenue by
providing repair service for their customers.
(B) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany transactions and balances have been eliminated in consolidation.
(C) Use of Estimates
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with the
Company's warranties. If the actual value of the Company's inventories differs
from these estimates, the Company's operating results could be adversely
impacted. The actual results with regard to warranty expenditures could also
have an adverse impact on the Company if the actual rate of repair failure or
the cost to re-repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
5
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(D) Inventory
Inventory consists primarily of repair parts, consumable supplies for resale and
used machines that are held for resale, and are stated at the lower of weighted
average cost or market. The weighted average cost of inventory approximates the
first-in, first-out ("FIFO") method. Management performs periodic assessments to
determine the existence of obsolete, slow-moving and nonsalable inventory and
records necessary provisions to reduce such inventory to net realizable value.
(E) Property and Equipment
Property and equipment are stated at cost. Assets are depreciated using the
straight-line method for both financial statement and tax purposes based on the
following estimated useful lives:
Leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Maintenance and repairs are charged to expense when incurred.
(F) Warranty Reserve
Refurbished peripheral computer equipment sold to customers and the repair of
customer owned equipment is guaranteed for a period of ninety (90) days and the
repair of circuit boards for a period of twelve (12) months. Any defective
refurbished equipment is replaced free of charge and customer owned equipment is
repaired without charge during the warranty period. Cyber-Test provides a
reserve for warranty repairs based on historical failure rates and the estimated
cost to repair.
(G) Fair Value of Financial Instruments
The carrying amounts of the Company's cash, accounts receivable, accounts
payable, accrued liabilities, debentures, and loans payable approximate fair
value due to the relatively short period to maturity for these instruments.
(H) Allowance for Doubtful Accounts
We make judgments as to our ability to collect outstanding trade receivables and
provide allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. For those invoices not specifically reviewed, provisions
are provided at differing rates, based upon the age of the receivable. In
determining these percentages, we analyze our historical collection experience
and current economic trends. If the historical data we use to calculate the
allowance provided for doubtful accounts does not reflect our future ability to
collect outstanding receivables, additional provisions for doubtful accounts may
be needed and the future results of operations could be materially affected.
(I) Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If such review indicates that the asset is impaired,
when the carrying amount of an asset exceeds the sum of its expected future cash
flows, on an undiscounted basis, the asset's carrying amount is written down to
fair value. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
(J) Excess of Cost Over Net Assets Acquired
In accordance with SFAS No. 141, the Company allocates the purchase price of its
acquisitions to the tangible assets, liabilities and intangible assets acquired
based on their estimated fair values. The excess purchase price over those fair
values is recorded as "Excess of Cost Over Net Assets Acquired". The fair value
assigned to intangible assets acquired is either based on valuations prepared by
independent third party appraisal firms using estimates and assumptions provided
by management or negotiated at arms-length between the Company and the seller of
the acquired assets. In accordance with SFAS No. 142, goodwill and purchased
intangibles with indefinite lives acquired after June 30, 2001 are not
amortized, but will be reviewed periodically for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
6
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(K) Income Taxes
The Company accounts for income taxes under SFAS No. 109 "Accounting for Income
Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
The Company has made no current provision (benefit) for Federal income taxes
because of financial statement and tax losses since its inception. A valuation
allowance has been used to offset the recognition of any deferred tax assets
arising from net operating loss carryforwards due to the uncertainty of future
realization. The use of any tax loss carryforward benefits may also be limited
as a result of changes in Company ownership.
(L) Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
(M) Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method, that could share in the
earnings of an entity. During the three months ended September 30, 2004, shares
of common stock that could have been issued upon conversion of convertible debt
were excluded from the calculation of diluted earnings (loss) per share as their
effect would have been anti-dilutive.
(N) Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". The
Company operates in one segment and therefore segment information is not
presented.
Management has determined that it is not meaningful to provide geographic
segment disclosures for revenues and long-lived assets because the Company
performs services for and generates revenue from customers throughout the U.S.
(O) Revenue Recognition
The Company recognizes revenue from the sale of refurbished computer equipment
and related products upon delivery of goods to a common carrier for delivery to
the customer. Revenue for the repair of customer owned equipment is recognized
upon completion of the repair. The Company assumes the risk of loss due to
damage or loss of products during shipment. The Company is reimbursed by the
common carriers for shipping damage and lost products. The Company also sells
extended warranty and product maintenance contracts. Revenue from these
contracts is deferred and recognized as income on a straight-line basis over the
life of the contract, which is typically for a period of one year. Service
warranty and product maintenance revenue represented less than 5% of the
Company's total revenue for the quarter.
7
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
(P) Investment in Unconsolidated Partnership
The Company accounts for its investment in an unconsolidated partnership under
the equity method of accounting, as the Company does not have any management
control over this entity. This investment was recorded initially at cost and
subsequently adjusted for equity in net earnings and cash distributions (See
Note 3).
NOTE 2...PROPERTY AND EQUIPMENT
9/30/04 6/30/04
--------- ---------
Computer, office equipment and fixtures $ 38,444 $ 38,123
Machinery and equipment 20,228 16,652
Leasehold improvements 112,499 111,741
Less: Accumulated depreciation (4,328) (1,082)
--------- ---------
Property and equipment, net $ 166,843 $ 165,434
========= =========
Depreciation expense for the three months ended September 30, 2004 was $3,246.
NOTE 3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
On January 14, 2004, the Company's wholly owned subsidiary, Hudson Street,
purchased a minority interest in Yorkville Advisors Management LLC,
("Yorkville"), a privately owned investment management partnership and the
portfolio manager of Cornell Capital Partners, L.P., for a purchase price of
$2,625,000. The purchase was effective as of January 1, 2004. Hudson Street
incurred $45,000 of legal and professional fees associated with the purchase of
the partnership interest, which have been capitalized. During the three months
ended September 30, 2004, Hudson Street received $130,000 of cash distributions
from this investment and recorded $215,233 as its distributive share of
partnership net earnings. As of September 30, 2004, Hudson Street's investment
in Yorkville amounted to $2,860,232 under the equity method of accounting and is
reflected on the consolidated balance sheet in "Other Assets."
NOTE 4. NOTES AND LOAN PAYABLE
September 30, June 30,
2004 2004
--------- -----------
Current:
8% Note Payable-Current $ 57,831 $ 57,831
Loan Payable-Shareholder 1,055,736 1,055,736
Note Payable-Cornell Capital 2,195,000 2,375,000
--------- -----------
Notes Payable-Current $3,308,568 $3,488,567
========== ==========
Long-Term:
6% Unsecured Note $ 498,469 $ 498,469
Note Payable-ACT Australia 1,791,166 1,791,166
8% Note Payable-Non Current 57,832 57,832
----------- ---------
Notes Payable-Long-Term $2,347,467 $2,347,467
========== ==========
Future maturities of long-term debt as of September 30, 2004, excluding the note
payable to ACT Australia, and the loan payable to shareholders are as follows:
Date Amount
------------- -----------
June 30, 2005 $2,418,988
June 30, 2006 223,988
June 30, 2007 166,156
-----------
Total $2,809,132
===========
8
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 5. CONVERTIBLE DEBENTURES
10% Secured Convertible Debentures Due November 2004
On November 22, 2002, the Company entered into a Securities Purchase Agreement
with Cornell Capital Partners, L.P., whereby it agreed to issue and sell Two
Hundred Fifty Thousand Dollars ($250,000) of 10% secured convertible debentures.
These secured convertible debentures have a term of two years and are
convertible into shares of common stock at a conversion price equal to $.001 per
share. These secured convertible debentures accrue interest at a rate of 10% per
year and are convertible at the holder's option. At the Company's option, these
debentures may be paid in cash or redeemed at a 50% premium prior to November
2004. In connection with the Securities Purchase Agreement, the Company entered
into a Security Agreement in favor of Cornell Capital Partners, L.P. whereby the
Company granted to Cornell a security interest in all of its assets as security
for its obligations under the secured convertible debentures, as well as all
other obligations of the Company to Cornell Capital Partners, L.P. whether
arising before, on or after the date of the Security Agreement.
The 10% convertible debentures contain a beneficial conversion feature computed
at its intrinsic value, which is equal to the difference between the conversion
price of the debentures and the fair market value, at the date of issuance of
the debentures, of the shares of common stock issuable upon conversion of the
debentures, multiplied by the number of shares into which the debentures are
convertible at the commitment date. The amount attributable to the beneficial
conversion feature of $250,000 is recorded as a discount on the debt and
accreted over a 24-month period as interest expense in accordance with EITF
00-27. For the three months ended September 30, 2004 the Company accreted
$23,438 of debt discount as interest expense.
The balance of the note payable of $187,500 ($173,961 net of discount) plus
accrued interest of $35,947 as of September 30, 2004 will be paid in full and
cancelled upon maturity.
NOTE 6. STOCKHOLDERS' EQUITY
Stock Issued for Note Payable to Cornell Capital Partners, L.P.
During the three months ended September 30, 2004, the Company issued 172,881,526
shares of common stock in partial repayment of the short-term note payable due
to Cornell Capital Partners, L.P.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company has been, and may in the future be involved as, a party to various
legal proceedings, which are incidental to the ordinary course of its business.
Management regularly analyzes current information and, as necessary, provides
accruals for probable liabilities on the eventual disposition of these matters.
In the opinion of management, as of September 30, 2004, there were no threatened
or pending legal matters that would have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
On February 5, 2004, the Company filed suit in Superior Court, Orange County,
California, against Advanced Communications (Australia), Roger May, Global
Communications Technologies Limited and Global Communications Technologies Pty
Ltd to recover damages incurred as a result of wrongful actions of such
defendants against the Company and to clarify the status of the Company's
obligations to such defendants under various agreements and other arrangements,
from which the Company believes it has been relieved as a result of such
wrongful actions. In May and August 2004, the court issued an entry of default
judgment in favor of the Company and against all of the above defendants. On
October 22, 2004, the court held a hearing for final determination of the above
action. The court has not yet issued its final determination based on that
hearing.
Employment Agreement
On June 24, 2004, we entered into a two-year employment agreement with Martin
Nielson, our Senior Vice President-Acquisitions (the "Nielson Agreement"). Under
the terms of the Nielson Agreement, Mr. Nielson is employed as Encompass'
President and Chief Executive Officer and Senior Vice
9
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
President-Acquisitions of the Company. Mr. Nielson is entitled to a $200,000
annual salary and the right to earn up to 50,000,000 shares of our restricted
common stock valued at $.01 per share, or $500,000, to vest over a two-year
period. Mr. Nielson is also entitled to receive an Incentive Bonus determined at
the discretion of our Compensation Committee based on his contribution to our
overall performance as well as a bonus based on the overall separate business
and financial performance of Encompass and its wholly-owned operating
subsidiaries. In addition, we have provided Mr. Nielson with a $1 million life
insurance policy for his benefit and also insure Mr. Nielson under a $2 million
key man life insurance policy. The agreement contains standard confidentiality,
noncompete and work-for-hire provisions.
The Company recorded $62,500 of amortization expense for the three months ended
September 30, 2004 in connection with Mr. Nielson's employment agreement.
NOTE 8. GOING CONCERN
The Company's condensed consolidated financial statements for the three months
ended September 30, 2004, have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The Company's negative cash flow from operations of
$35,608 and working capital deficiency of $2,349,602 as of September 30, 2004,
raise substantial doubt about its ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to resolve liquidity problems by generating sufficient
operating profits to provide an additional source of working capital. During
October 2004, the Company reduced its contractual obligations by making a cash
payment of $195,000 on its short-term note to Cornell Capital Partners, L.P.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis by management provides information with
respect to the Company's financial condition and results of operations for the
three-month periods ended September 30, 2004 and 2003. The discussion should be
read in conjunction with the information in the consolidated financial
statements and the notes pertaining thereto contained in the Company's Annual
Report on Form 10-KSB for the year ended June 30, 2004 ("2004 10-KSB"), the
information in the consolidated financial statements and the notes pertaining
thereto contained in Item 1 - Financial Statements - in this Report on Form
10-QSB and the information discussed in our 2004 10-KSB under Risk Factors.
Unless the context otherwise requires, all references herein to the "Company"
refer to Advanced Communications Technologies, Inc. and its subsidiaries.
Operating results for the three months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2005.
In the following Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this quarterly report on Form 10-Q, words
such as "estimates," "expects," "anticipates," "believes," "intends," "will,"
"seek" and other similar expressions, are intended to identify forward-looking
information that involves risks and uncertainties. In addition, any statements
that refer to expectations or other characterizations of future events or
circumstances are forward-looking statements. Actual results and outcomes could
differ materially as a result of important factors including, among other
things, general economic conditions, geopolitical considerations, the Company's
ability to renew or replace key supply and credit agreements, fluctuations in
operating results, committed backlog, public market and trading issues, risks
associated with dependence on key personnel, competitive market conditions in
the Company's existing lines of business and technological obsolescence, as well
as other risks and uncertainties.
GENERAL
We are a New York City-based diversified public holding company. We focus on
high growth-potential businesses through our wholly owned operating subsidiaries
in the technology services industry and our strategic investments in diverse
industries. Through our wholly owned subsidiary and principal operating unit,
Encompass Group Affiliates, Inc. ("Encompass"), we own Cyber-Test, Inc., a
Delaware corporation ("Cyber-Test"). Cyber-Test is an electronic equipment
repair company based in Longwood, Florida, and is our core operating business.
Additionally, through our wholly-owned subsidiary, Hudson Street Investments,
Inc., an investment vehicle, we own a minority interest in Yorkville Advisors
Management, LLC, an investment management partnership, and through our
wholly-owned subsidiary, SpectruCell, Inc., we hold the North and South American
marketing and distribution rights, which we acquired in 1999, to SpectruCell, a
software-defined, radio-based wireless technology that is currently under
development in Australia by an unrelated third party.
Through our wholly owned subsidiaries, we specialize in the repair of computer
peripheral products and other electronic equipment, and seek to make strategic
minority investments in privately held companies in diverse industries.
We intend to pursue the acquisition of, and investment in, technology and/or
brand differentiated companies with significant growth-potential. We seek to
make the process of growth, through both organic and inorganic means, a core
competency of each company that we acquire or in which we invest.
We have three principal means of diversifying our business, each of which is
designed to give shareholders a strong value driver. Encompass, our principal
operating subsidiary, intends to acquire synergistic companies in the
technologies and services arena so that it becomes a vertically integrated
distribution, service and Internet based solutions provider. Hudson Street is a
minority partner in the management firm of an institutional investment company
and continues to make minority investments in privately held companies in
technology and other diverse industries. The Company itself also seeks to make
minority investments in technology specific or highly differentiated companies
with significant growth-potential
Results of Operations-Comparison of the Three Months Ended September 30, 2004 to
the Three Months Ended September 30, 2003
11
Summary of Results of Operations
Quarter Ended Period to Period
September 30, 2004 September 30, 2003 % Change
---------------------------------------- ------------
Net income from Cyber-Test operations $ 131,077 $ -- --
Net income from investments 215,233 -- --
Parent company and Encompass overhead (427,052) (213,918) 100%
Net interest expense (39,266) (63,277) (38%)
Forgiveness of debt -- 6,853 --
------------ ------------ ------------
Net Loss $ (120,008) $ (270,342) (56%)
============ ============ ============
Overview of First Quarter Results
The three months ended September 30, 2004 was the first full reporting period
reflecting Encompass' ownership of Cyber-Test`s operating business. During this
period, Cyber-Test recorded $1,825,184 of sales relating to the repair, service
and warranty and exchange of various office equipment such as facsimile
machines, printers and scanners and computer peripheral products such as PDAs,
laptop computers, monitors and multi-functional units. A gross profit of
$673,756 or 37% of sales for the quarter was realized after deducting cost of
sales in the amount of $1,151,428. For the three months ended September 30,
2004, Cyber-Test generated net profit from operations of $131,077 or 7.2% of
sales, which when taking into account the numerous disruptions in Cyber-Test's
operations during August and September because of the unprecedented hurricane
season throughout Florida, was above our expectations. Although Cyber-Test
experienced an increase in order fulfillment and an increase in backorders due
to power outages resulting from three hurricanes and the delays associated with
returning to full production, as of September 30, 2004 Cyber-Test has restored
its backorder and order fulfillment time to normal levels. Management expects no
long-term effects to its business. Conversely, during the three months ended
September 30, 2004, Cyber-Test was successful in negotiating several new
customer service agreements and has taken the necessary steps to implement this
new business during the remainder of fiscal year 2005.
For the three months ended September 30, 2004, we reported an overall loss from
operations of $295,975 because of consolidated overhead costs at the parent and
Encompass levels versus a $213,918 loss for the three months ended September 30,
2003. These overhead costs amounted to $427,052 and include $206,134 of
professional fees and costs, $67,060 of amortization of deferred compensation
and depreciation and $153,858 of general and administrative costs. Our overall
loss from operations was offset by $215,233 of other investment income from our
investment in Yorkville Advisors Management, LLC. Our overall net loss of
$120,008 for the three months ended September 30, 2004 was 56% less than our
overall net loss of $270,342 for the comparative three-month period ended
September 30, 2003.
Revenue
Revenue for the three months ended September 30, 2004 was $1,825,184 and was
entirely attributable to Cyber-Test's operations. We did not recognize any
revenue for the three months ended September 30, 2003. All revenue from
Cyber-Test's operations was from the repair and service of office equipment and
computer peripheral products, extended warranty sales and the sale of computer
parts and accessories.
Cost of Sales
Our cost of sales during the three months ended September 30, 2004, was
$1,151,428 and was comprised principally of purchased supplies and parts in the
amount of $340,134, direct labor costs of $327,011 and freight and shipping
expense in the amount of $345,650.
Gross Profit
Gross profit was 37% of gross sales from Cyber-Test's operations for the three
months ended September 30, 2004, which resulted in an operating income margin of
7.2% of sales. Our gross profit percentage increased slightly from Cyber-Test's
one-month operations during June 2004 due to a reduction in the number of
replacement machines and parts required to fulfill orders during the quarter,
enhanced by the implementation of lower delivery charges which were negotiated
in June 2004. Also contributing to the slight increase in gross profit
percentage was Cyber-Test's successful hiring and training of new repair
technicians, allowing more orders to be fulfilled.
12
Operating Expenses
Total operating expenses for the three months ended September 30, 2004 and 2003
were $969,731 and $213,918, respectively, representing a $755,813 or 353%
increase for the three months ended September 30, 2004 as compared to the three
months ended September 30, 2003. This increase was attributable to an increase
in professional fees in the amount of $143,139 during the three months ended
September 30, 2004 versus the same period in 2003 due to the increase in
investment and acquisition activity during the quarter, as well as an increase
in selling, general and administrative costs of $649,243 due to the addition of
the Encompass and Cyber-Test operations.
Depreciation and amortization expense for the three months ended September 30,
2004 decreased by $36,569 to $70,306 from $106,875 from the three months ended
September 30, 2003 due to deferred commitment fees and financing costs being
fully amortized in fiscal year 2004 and the quarterly amortization of deferred
compensation for the three months ended September 30, 2004 in the amount of
$62,500.
Other general and administrative expenses amounted to $687,266 for the three
months ended September 30, 2004, which is a $649,243 increase from the
comparative prior period due principally to the addition of the Cyber-Test
operating business overhead during the quarter. Such overhead expenses include
the overhead operation and cost associated with employing approximately 90
employees and operating a 29,000 square foot office and warehouse facility. The
following is a breakdown of the components of other selling, general and
administrative costs:
Three Months Ended
September 30, Period to Period
2004 2003 % Change
------------------------ --------
Salaries and wages $376,286 $ -- --
Building facilities expense 76,701 -- --
Payroll and Unemployment taxes 28,040 -- --
Telephone and utilities 27,167 -- --
Marketing and Promotion 24,722 -- --
Other SG&A costs 154,350 38,023 305%
-------- -------- --------
$687,266 $ 38,023 1,707%
======== ======== ========
Other Income (Expenses)
During the three months ended September 30, 2004, we realized $175,967 of net
other income due to the favorable results of our investment in Yorkville
Advisors, which generated $215,233 of income during the quarter ended September
30, 2004. This investment income was offset, in part by, net interest expense of
$39,266 inclusive of accrued interest on our 10% Secured Convertible Debentures,
our 8% Note Payable, our 6% Note Payable and $23,438 of debt discount expense,
net of $650 of interest income.
Interest expense incurred for the three months ended September 30, 2003 was
$63,277 and was attributable to quarterly interest on the Company's 10% Secured
Convertible Debentures, the 5% $1,000,000 Convertible Debentures and the 8% Note
Payable. Forgiveness of debt income of $6,853 for the three months ended
September 30, 2003 was attributable to the favorable settlement of certain
accounts payable.
Overall net interest expense decreased by $24,011 to $39,266 from $63,277 for
the three months ended September 30, 2004 to 2003. This decrease was due
primarily to the lower levels of interest bearing debt.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us. In addition, Financial
Reporting Release No. 61 was recently released by the Securities and Exchange
Commission to require all companies to include a discussion to address, among
other things, liquidity, off-balance sheet arrangements, contractual obligations
and commercial commitments.
13
Use of Estimates
The preparation of the consolidated financial statements of the Company in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, significant estimates
are required to value inventory and estimate the future cost associated with the
Company's warranties. If the actual value of the Company's inventories differs
from these estimates, the Company's operating results could be adversely
impacted. The actual results with regard to warranty expenditures could also
have an adverse impact on the Company if the actual rate of repair failure or
the cost to re-repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
Inventory
Inventory consists primarily of repair parts, consumable supplies for resale and
used machines that are held for repair and/or resale, and are stated at the
lower of weighted average cost or market. The weighted average cost of inventory
approximates the first-in, first-out ("FIFO") method. Management performs
periodic assessments to determine the existence of obsolete, slow-moving and
nonsalable inventory and records necessary provisions to reduce such inventory
to net realizable value.
Property and Equipment
Property, plant and equipment are stated at cost. Assets are depreciated using
the straight-line method for both financial statement and tax purposes based on
the following estimated useful lives:
Leasehold improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Maintenance and repairs are charged to expense when incurred.
Warranty Reserve
Refurbished peripheral computer equipment sold to customers and the repair of
customer owned equipment is guaranteed for a period of ninety days and the
repair of circuit boards is guaranteed for a period of 12 months. Any defective
refurbished equipment is replaced free of charge and customer owned equipment is
repaired without charge during the warranty period. Cyber-Test provides a
reserve for warranty repairs based on historical failure rates and the estimated
cost to repair.
Allowance for Doubtful Accounts
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. For those invoices not specifically reviewed, provisions
are provided at differing rates, based upon the age of the receivable. In
determining these percentages, the Company analyzes its historical collection
experience and current economic trends. If the historical data the Company uses
to calculate the allowance provided for doubtful accounts does not reflect the
future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If such review indicates that the asset is impaired,
when the carrying amount of an asset exceeds the sum of its expected future cash
flows, on an undiscounted basis, the asset's carrying amount is written down to
fair value. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
Excess of Cost Over Net Assets Acquired
14
In accordance with SFAS No. 141, the Company allocates the purchase price of its
acquisitions to the tangible assets, liabilities and intangible assets acquired
based on their estimated fair values. The excess purchase price over those fair
values is recorded as "Excess of Cost Over Net Assets Acquired". The fair value
assigned to intangible assets acquired is either based on valuations prepared by
independent third party appraisal firms using estimates and assumptions provided
by management or negotiated at arms-length between the Company and the seller of
the acquired assets. In accordance with SFAS No. 142, goodwill and purchase
intangibles with indefinite lives acquired after June 30, 2001, are not
amortized but will be reviewed periodically for impairment. Purchased
intangibles with finite lives will be amortized on a straight-line basis over
their respective useful lives.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities, using the treasury stock method that could share in the
earnings of an entity. Shares of common stock that could have been issued upon
conversion of convertible debt were excluded from the calculation of diluted
earnings (loss) per share, as their effect would have been anti-dilutive.
Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information". During
the three months ended September 30, 2004, the Company operated in one segment
and therefore segment information is not presented.
Management has determined that it is not meaningful to provide geographic
segment disclosures for revenues and long-lived assets because the Company
performs services for and generates revenue from customers throughout the U.S.
Revenue Recognition
The Company recognizes revenue from the sale of refurbished computer equipment
and related products upon delivery of goods to a common carrier for delivery to
the customer. Revenue for the repair of customer owned equipment is recognized
upon completion of the repair. The Company assumes the risk of loss due to
damage or loss of products during shipment. The Company is reimbursed by the
common carriers for shipping damage and lost products. The Company sells
extended warranty and product maintenance contracts. Revenue from these
contracts is deferred and recognized as income on a straight-line basis over the
life of the contract, which typically is for a period of one year. Service
warranty and product maintenance revenue represented less than 5% of the
Company's total revenue for the three months ended September 30, 2004.
Investment in Unconsolidated Partnership
The Company accounts for its investment in an unconsolidated partnership under
the equity method of accounting, as the Company does not have any management
control over this entity. This investment is recorded initially at cost and
subsequently adjusted for equity in net earnings and cash distributions.
LIQUIDITY AND CAPITAL RESOURCES
On July 16, 2003, we entered into an Equity Line of Credit Agreement with
Cornell Capital Partners, L.P., a private limited partnership ("Cornell
Capital"). Pursuant to the Equity Line of Credit, the Company may, at its
discretion, periodically sell to Cornell Capital shares of our common stock for
a total purchase price of up to $30,000,000. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay 91% of the
lowest closing bid price of our common stock on the Over-the-Counter Bulletin
Board, or such other principal market on which common stock is traded, for the
five (5) trading days immediately following the date we give notice to Cornell
Capital of a requested draw down. The effectiveness of the sale of the shares
under the Equity Line of Credit is conditioned upon us registering the shares of
common stock with the Securities and Exchange Commission. On July 31, 2003, the
Securities and Exchange Commission declared effective our registration statement
filed on Form SB-2. In accordance with the terms of the Equity Line of Credit,
Cornell Capital is not permitted to own more than 9.99% of our outstanding
common stock at any one time; however Cornell Capital is permitted to waive such
restriction, which waiver is effective on the 61st day after delivery of the
waiver to us.
15
We have financed our acquisitions and investments principally with short-term
borrowings through our equity line with Cornell Capital and cash received in
exchange for the issuance of 4,200 shares of our Series A Preferred Stock to
Cornell Capital. We have funded our ongoing operations through cash
distributions received from (i) our investment in Yorkville Advisors, an
investment management partnership, and (ii) working capital generated by
Cyber-Test, our core operating business. Our cash and cash equivalents totaled
$1,111,289 at September 30, 2004.
We are currently in the process of exploring various alternative sources of
financing to reduce our reliance on the Equity Line of Credit with Cornell
Capital and the dilutive effect such facility has on our stock price. We are
also currently in discussions with Cornell Capital, banking institutions and
other institutional investors to secure up to a $20 million acquisition debt
facility to be used by us for the purpose of acquiring private and/or public
companies in the technology and service industry that we believe will be
accretive to our business. These discussions are in the preliminary stages.
During the three months ended September 30, 2004, we made advances under the
Equity Line of Credit in the aggregate amount of $100,000 in exchange for
issuing 172,881,526 shares of common stock to Cornell Capital Partners. These
advances were used to pay down our short-term note to Cornell Capital Partners,
L.P. Also during the quarter, Hudson Street received $130,000 of partnership
cash distributions from Yorkville Advisors. We believe that our existing sources
of liquidity including cash resources and cash provided by operating activities,
supplemented by distributions from Hudson Street's investment will provide
sufficient resources to meet our present and future working capital and cash
requirements for at least the next 12 months.
We had total liabilities of $6,514,496 as of September 30, 2004 versus
$6,040,942 as of September 30, 2003. Included in the total for September 30,
2004 are contractual obligations of $3,667,594. These contractual obligations,
along with the dates on which such payments are due, are described below:
Payments Due by Period (from September 30, 2004)
-----------------------------------------------------------------------------------
1 2-3 4-5 After 5
Contractual Obligations Total Year or Less Years Years Years
- ------------------------------------------- ------------ ------------- -------------- ------------ ----------
Notes Payable and Interest Thereon $2,836,419* $2,430,992 $ 405,427 $ -- $ --
Convertible Debentures and Interest Thereon 209,908 209,908 -- -- --
Accounts Payable and Accrued Expenses 501,670 501,670 -- -- --
Other Current Liabilities 119,597 119,597 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $3,667,594 $3,262,167 $ 405,427 $ -- $ --
========== ========== ========== ========== ==========
* Excludes $1,791,166 due to Advanced Communications (Australia) under the Stock
Purchase Agreement dated April 5, 2000. The Company believes that this
obligation is not enforceable as a result of Advanced Communications
(Australia)'s improper unilateral revocation of the Stock Purchase Agreement and
other wrongful acts of Advanced Communications (Australia), Roger May and
related parties. Also excludes $1,055,736 due to Roger May and/or Global
Communications Technologies Limited and/or Global Communications Technologies
Pty Ltd for monies provided to the Company. The Company believes it is not
obligated to pay these amounts as a result of wrongful acts of such parties
against the Company. On February 5, 2004, the Company filed suit in Superior
Court, Orange County, California seeking a judgment against Advanced
Communications (Australia), Roger May, Global Communications Technologies
Limited and Global Communications Technologies Pty Ltd to recover damages
related to their wrongful acts against the Company. The Company's damages claims
exceed the $2,846,902 allegedly due such defendants. The Company also seeks in
the action to have its obligations under the Stock Purchase Agreement and other
arrangements clarified as to such defendants. In May and August 2004, the court
issued an entry of default judgment in favor of the Company and against all of
the above defendants. On October 22, 2004, the court held a hearing for final
determination of the above action. The court has not yet issued its final
determination based on that hearing.
During the three months ended September 30, 2004, the Company reduced its
contractual obligations by $57,380 through cash payments. At September 30, 2004,
we had a working capital deficiency of $2,349,602. In October 2004, the Company
repaid $195,000 of its short-term note payable to Cornell Capital Partners, L.P.
through the payment of cash.
Below is a discussion of our sources and uses of funds for the three months
ended September 30, 2004:
Overall Net Change In Cash Flow For The Three Months Ended September 30, 2004
During the quarter, we had an overall net decrease in cash in the amount of
$81,881. This overall net decrease in cash was due to the payment of $80,000 on
our short-term note to Cornell Capital Partners, L.P. Our negative cash flow
from operations in the amount of $35,608 was offset by $33,727 of net cash flow
from our investment activities.
16
Net Cash Used In Operating Activities
Net cash used in operating activities was $35,608 for the three months ended
September 30, 2004. The use of cash in operating activities for the three months
ended September 30, 2004 was principally the result of our consolidated net loss
of $120,008 offset by non-cash charges for amortization and debt discount
expense in the aggregate amount of $93,744. Net cash used in operating
activities was $121,072 for the three months ended September 30, 2003 and was
principally the result of net losses during the period together with a reduction
in accounts payable, offset by non cash charges for depreciation and
amortization, debt discount expense and common stock to be issued in the
aggregate amount of $370,313.
Net Cash From Investing Activities
Cash provided from investing activities of $33,727 for the three months ended
September 30, 2004 was attributable to $130,000 of cash distributions from our
partnership investment offset by $4,655 for the purchase of business assets by
Cyber-Test and the purchase by Hudson Street of $91,618 of marketable investment
securities in public and private companies. No cash was provided by or used in
investing activities for the three months ended September 30, 2003.
Net Cash From (Used In) Financing Activities
Net cash of $80,000 used in financing activities for the three months ended
September 30, 2004 was from the repayment of our short-term note to Cornell
Capital Partners, L.P. Net cash from financing activities of $100,000 for the
three months ended September 30, 2003 was from proceeds on the sale of common
stock to Cornell Capital Partners, L.P., under the Company's Equity Line of
Credit facility.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
COMPANY QUARTERLY STOCK PRICE
Price Range of Common Stock
Our common stock is currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "ADVC". As of November 15, 2004, there were
2,004,247,731 common shares outstanding and approximately 550 holders of record.
We believe that the number of beneficial owners is substantially greater than
the number of record holders because a large portion of our common stock is held
in "broker" or "street names".
The following table sets forth, for the fiscal periods indicated, the bid price
range of our common stock:
High Bid Low Bid
-------- -------
2005
Quarter Ended September 30, 2004 $ .00119 $ .0005
2004
Quarter Ended September 30, 2003 $ .007 $.00163
Quarter Ended December 31, 2003 .00363 .00169
Quarter Ended March 31, 2004 .0025 .00131
Quarter Ended June 30, 2004 .0015 .00081
Such market quotations reflect the inter-dealer prices as reflected by the OTCBB
without retail mark-up, markdown or commissions and may not necessarily
represent actual transactions.
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2004, we carried out an evaluation, under the supervision
and with the participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief
17
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic reports that are filed with
the Securities and Exchange Commission. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote. In addition, we reviewed our internal controls, and
there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
our last evaluation.
18
PART II
OTHER INFORMATION
The statements in this quarterly report, Form 10-QSB, that are not historical
constitute "forward-looking statements". Such forward-looking statements involve
risks and uncertainties that may cause the actual results, performance or
achievements of the Company and its subsidiary to be materially different from
any future results, performances or achievements, express or implied by such
forward-looking statements. These forward-looking statements are identified by
their use of such terms and phrases as "expects", "intends", "goals",
"estimates", "projects", "plans", "anticipates", "should", "future", "believes",
and "scheduled".
ITEM 1. LEGAL PROCEEDINGS
On February 5, 2004, the Company filed suit in Superior Court, Orange County,
California, against Advanced Communications (Australia), Roger May, Global
Communications Technologies Limited and Global Communications Technologies Pty
Ltd to recover damages incurred as a result of wrongful actions of such
defendants against the Company and to clarify the status of the Company's
obligations to such defendants under various agreements and other arrangements,
from which the Company believes it has been relieved of as a result of such
wrongful actions. In May and August 2004, the court issued an entry of default
judgment in favor of the Company and against all of the above defendants. On
October 22, 2004, the court held a hearing for final determination of the above
action. The court has not yet issued its final determination based on that
hearing.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
1.1 Exchange Agreement between MRC Legal Services Incorporated by reference to Exhibit 1.1 to
Corporation and Advanced Communications Technologies, Company's Form 8-K filed on February 4, 2000
Inc. dated as of January 31, 2000
2.1 Asset Purchase Agreement dated May 27, 2004, by and
between Cyber-Test, Inc., a Delaware corporation and Incorporated by reference to Exhibit 10.1 to
Cyber-Test, Inc., a Florida corporation. the Company's Form 8-K filed on June 3, 2004
3.1.1 Articles of Incorporation of Media Forum Incorporated by reference to Exhibit 2.1 to
International, Inc. the Company's Form S-8 filed on February 9,
2000
19
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
3.1.2 Second Amendment to Articles of Incorporation of Incorporated by reference to Exhibit 2.2 to
Telenetworx, Inc. the Company's Form S-8 filed on February 9,
2000
3.1.3 Third Amendment to Articles of Incorporation of Media Incorporated by reference to Exhibit 2.3 to
Forum International, Inc. the Company's Form S-8 filed on February 9,
2000
3.1.4 Fourth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.7 to
the Form SB-2 filed with the SEC on March 5,
2002
3.1.5 Fifth Amendment to Articles of Incorporation Incorporated by reference to Exhibit 2.8 to
the Form SB-2 filed with the SEC on July 16,
2003
3.1.6 Sixth Amendment to Articles of Incorporation Incorporated by reference to the Company's
Form 10-KSB filed on November 3, 2004
3.1.7 Seventh Amendment to Articles of Incorporation Incorporated by reference to the Company's
Form 10-KSB filed on November 3, 2004
3.2 Bylaws of the Company Incorporated by reference to Exhibit 2.4 to
the Company's Form S-8 filed on February 9,
2000
10.1 Lease Agreement dated as of November 27, 2001 between Incorporated by reference to Exhibit 10.1 to
the Company and Continental Development, L.P. II the Form SB-2 filed with the SEC on March 5,
2002
10.2 Stock Purchase Agreement between Advanced Incorporated by reference to Exhibit 10.2 to
Communications Technologies, Inc. and Advanced the Form S-1 Registration Statement filed on
Communications Technologies (Australia) Pty Ltd. August 14, 2001
10.3 Agreement dated June 27, 2000, between Ladenburg Incorporated by reference to Exhibit 10.3 to
Thalmann & Co. and the Company the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.4 Common Stock Purchase Agreement dated December 14, Incorporated by reference to Exhibit 10.4 to
2000, between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.5 Registration Rights Agreement dated December 14, Incorporated by reference to Exhibit 10.5 to
2000, between the Company and Wanquay Ltd. the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.6 Escrow Agreement dated December 14, 2000, among the Incorporated by reference to Exhibit 10.6 to
Company, Wanquay Ltd. and Epstein Becker & Green the Company's Form S-1 Registration Statement
filed on August 14, 2001
10.7 Consulting Agreement with M. Richard Cutler dated Incorporated by reference to Exhibit 10.1 to
January 31, 2000 the Company's Form S-8 filed on February 9,
2000
20
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.8 Stock Purchase Agreement dated April 5, 2000, between Incorporated by reference to Exhibit 10.5 to
Advanced Communications Technologies, Inc. and the Company's Form 10-QSB filed on May 24,
Advanced Communications Technologies Pty Ltd. 2000
10.9 Securities Purchase Agreement dated January 10, 2002, Incorporated by referenced to Exhibit 10.9 to
by and among Advanced Communications Technologies, the Company's Form 10-QSB filed on February
Inc. and Buyers 12, 2002
10.10 Investor Registration Rights Agreement dated January Incorporated by reference to Exhibit 10.10 to
10, 2002, by and among Advanced Communications the Company's Form 10-QSB filed on February
Technologies, Inc. and Investors 12, 2002
10.11 Transfer Agent Instructions Incorporated by reference to Exhibit 10.11 to
the Company's Form 10-QSB filed on February
12, 2002
10.12 Escrow Agreement dated January 10, 2002, by and among Incorporated by reference to Exhibit 10.12 to
Advanced Communications Technologies, Inc., Buyers the Company's Form 10-QSB filed on February
and First Union National Bank 12, 2002
10.13 Equity Line of Credit Agreement dated July 2003, by Incorporated by reference to Exhibit 10.13 to
and between Cornell Capital Partners, LP and Advanced the Form SB-2 filed with the SEC on July 16,
Communications Technologies, Inc. 2003
10.14 Registration Rights Agreement dated July 2003, by and Incorporated by reference to Exhibit 10.14 to
between Advanced Communications Technologies, Inc. the Form SB-2 filed with the SEC on July 16,
2003
10.15 Placement Agent Agreement dated July 2003, by and Incorporated by reference to Exhibit 10.15 to
between Advanced Communications Technologies, Inc. the Form SB-2 filed with the SEC on July 16,
and Westrock Advisors, Inc. 2003
10.16 Escrow Agreement dated July 2003, by and among Incorporated by reference to Exhibit 10.16 to
Advanced Communications Technologies, Inc., Cornell the Form SB-2 filed with the SEC on July 16,
Capital Partners, LP, Butler Gonzalez LLP and First 2003
Union National Bank
10.17 License and Distribution Agreement dated as of Incorporated by reference to Exhibit 10.17 to
July 5, 2000, between Advanced Communications the Company's Amendment to Form 10-KSB filed
Technologies, Inc. and Advanced Communications on May 23, 2002
Technologies (Australia) Pty. Ltd.
10.18 Letter of Intent dated September 7, 2001 re: Purchase Incorporated by reference to Exhibit 10.18 to
of Advanced Communications (Australia) Amendment No. 1 to the Company's Form 10-QSB
for the quarter ended December 31, 2001
21
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.19 Securities Purchase Agreement, dated November 2002, Incorporated by reference to Exhibit 10.19 to
by and among Advanced Communications and Buyers the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.20 Investor Registration Rights Agreement, dated Incorporated by reference to Exhibit 10.20 to
November 2002, by and among Advanced Communications the Company's Form 10-KSB for the year ended
and Investors June 30, 2002 filed on December 6, 2002
10.21 Secured Convertible Debenture Incorporated by reference to Exhibit 10.21 to
the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.22 Escrow Agreement, dated November 2002, by and among Incorporated by reference to Exhibit 10.22 to
Advanced Communications, Buyers, and Wachovia Bank, the Company's Form 10-KSB for the year ended
N.A. June 30, 2002 filed on December 6, 2002
10.23 Irrevocable Transfer Agent Instructions, dated Incorporated by reference to Exhibit 10.23 to
November 2002 the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.24 Security Agreement, dated November 2002, by and among Incorporated by reference to Exhibit 10.24 to
Advanced Communications and Buyers the Company's Form 10-KSB for the year ended
June 30, 2002 filed on December 6, 2002
10.25 Middletons Lawyers Letter, dated November 11, 2002, Incorporated by reference to Exhibit 10.25 to
terminating the April 2000 Stock Purchase Agreement the Company's Form 10-KSB for the year ended
between Advanced Communications Technologies, Inc. June 30, 2002 filed on December 6, 2002
and Advanced Communications (Australia)
10.26 Consulting Agreement dated July 1, 2002, between Incorporated by reference to Exhibit 10.26 to
Advanced Communications and Randall H. Prouty the Company's Third Amended Form 10-KSB for
the year ended June 30, 2002 filed on
June 13, 2003
10.27 Proxy Statement, dated March 25, 1999 Incorporated by reference to Exhibit 10.27 to
the Company's Third Amended Form 10-KSB for
the year ended June 30, 2002 filed on June 13,
2003
10.28 Termination of Lease Agreement, dated November 25,
2003, by and between Continental Development, L.P. II Incorporated by reference to Exhibit 10.28 to
(Lessor) and Advanced Communications the Company's Form 10-QSB filed on February
13, 2004
10.29 6% Senior Unsecured Promissory Note, in the original
principal amount of $547,000 issued on June Incorporated by reference to Exhibit 10.2 to
3, 2004 by Cyber-Test, Inc., a Delaware corporation the Company's Form 8-K filed on June 3, 2004
in favor of Cyber-Test, Inc., a Florida corporation.
10.30 Escrow Agreement, June 3, 2004, by and between
Cyber-Test, Inc., a Delaware corporation and Incorporated by reference to Exhibit 10.3 to
Cyber-Test, Inc., a Florida corporation. the Company's Form 8-K filed on June 3, 2004
22
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.31 NonCompetition Agreement, June 3, 2004, by and
between Cyber-Test, Inc., a Delaware corporation, and Incorporated by reference to Exhibit 10.4 to
Cyber-Test, Inc., a Florida corporation and the the Company's Form 8-K filed on June 3, 2004
shareholders of Cyber-Test Florida.
10.32 Employment Agreement, June 3, 2004, by and between
Cyber-Test, Inc., a Delaware corporation and Lisa Incorporated by reference to Exhibit 10.5 to
Welton. the Company's Form 8-K filed on June 3, 2004
10.33 Employment Agreement, June 3, 2004, by and between
Cyber-Test, Inc., a Delaware corporation and Thomas Incorporated by reference to Exhibit 10.6 to
Sutlive. the Company's Form 8-K filed on June 3, 2004
10.34 [RESERVED]
10.35 Amendment No. 1 to 6% Unsecured Promissory Note dated
August 10, 2004 Incorporated by reference to the Company's
------------------------------------------------------ Form 10-KSB filed on November 3, 2004
10.36 Agreement, dated May 27, 2004, by and among
Encompass Group Affiliates, Inc. , Hy-Tech Technology Incorporated by reference to the Company's
Group, Inc. and Hy-Tech Computer Systems, Inc. Form 10-KSB filed on November 3, 2004
10.37 Customers Lists License Agreement, dated June 24,
2004, by and among Encompass Group Affiliates, Inc., Incorporated by reference to the Company's
Hy-Tech Technology Group, Inc. and Hy-Tech Computer Form 10-KSB filed on November 3, 2004
Systems, Inc.
10.38 Websites License Agreement, dated June 24, 2004, by
and among Encompass Group Affiliates, Inc. , Hy-Tech Incorporated by reference to the Company's
Technology Group, Inc. and Hy-Tech Computer Systems, Form 10-KSB filed on November 3, 2004
Inc.
10.39 NonCompetition and Nondisclosure Agreement by and
among Encompass Group Affiliates, Inc. , Hy-Tech Incorporated by reference to the Company's
Technology Group, Inc. and Hy-Tech Computer Systems, Form 10-KSB filed on November 3, 2004
Inc.
10.40 Form of Exchange Agreement, dated June 24, 2004, by
and between Advanced Communication and certain Incorporated by reference to the Company's
debenture holders of Hy-Tech Technology Group, Inc. Form 10-KSB filed on November 3, 2004
10.41 Employment Agreement dated June 24, 2004 by and Incorporated by reference to the Company's
between Encompass Group Affiliates, Inc., Advanced Form 10-KSB filed on November 3, 2004
Communications Technologies, Inc. and Martin Nielson
10.42 Escrow Agreement dated May 28, 2004 by and among Incorporated by reference to the Company's
Advanced Communications Technologies, Inc., Buyers Form 10-KSB filed on November 3, 2004
and Butler Gonzalez, LLP, Escrow Agent
10.43 Investment Agreement dated May 28, 2004 by and among Incorporated by reference to the Company's
Advanced Communications Technologies, Inc. and Form 10-KSB filed on November 3, 2004
Cornell Capital Partners, L.P.
23
Exhibit No. Description Location
----------------------------------------------------- -------------------------------------------
10.44 Registration Rights Agreement dated May 28, 2004 by Incorporated by reference to the Company's
and among Advanced Communications Technologies, Inc. Form 10-KSB filed on November 3, 2004
and Cornell Capital Partners, L.P.
14.1 Code of Business Conduct and Ethics for Advanced
Communications Incorporated by reference to the Company's
Form 10-KSB filed on November 3, 2004
31.1 Certification by President and Chief Financial
Officer pursuant to Sarbanes-Oxley Section 302 Provided herewith
32.1 Certification by President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350: Provided herewith
(b) Reports on Form 8-K.
None.
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
-----------------------------------------------
Name: Wayne I. Danson
Title: President (Principal Executive Officer), Chief
Financial Officer (Principal Accounting
Officer) and Director
Date: November 18, 2004
25
EXHIBIT 31.1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
OFFICER'S CERTIFICATE PURSUANT TO SECTION 302
I, Wayne I. Danson, the President and Chief Financial Officer of Advanced
Communications Technologies, Inc. certify that:
1. I have reviewed this Form 10-QSB of Advanced Communications Technologies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Omitted;
(c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal
control over financial reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record,
process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's internal
control over financial reporting.
Date: November 18, 2004
/s/ Wayne I. Danson
-------------------------------------
Wayne I. Danson
President and Chief Financial Officer
The introductory paragraph of Section 4 of this certification that refers to the
certifying officers' responsibility for establishing and maintaining internal
control over financial reporting for the company, as well as paragraph 4(b),
have been omitted in accordance with Release No. 33-8238 (June 5, 2003) because
the compliance period has been extended for small business issuers until the
first fiscal year ending on or after April 15, 2005.
EXHIBIT 32.1
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Advanced Communications Technologies,
Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2004 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Wayne I. Danson, President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been
provided to Advanced Communications Technologies, Inc. and will be retained by
Advanced Communications Technologies, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: November 18, 2004
/s/ Wayne I. Danson
-------------------------------------
Wayne I. Danson
President and Chief Financial Officer
A signed original of this written statement required by Section 906, or other
document authentications, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to Advanced Communications
Technologies, Inc. and will be retained by Advanced Communications Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
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 3, 2004
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 000-30486 65-0738251
- --------------------------------------------------------------------------------
(State or other Jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
420 Lexington Avenue, New York, New York 10170
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (646) 227-1600
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 3, 2004 (the "Closing"), an indirect subsidiary of Advanced
Communications Technologies, Inc. ("ACT"), Cyber-Test, Inc. ("C-T Delaware"),
purchased substantially all of the assets of Cyber-Test, Inc., a privately held
Florida corporation ("C-T Florida"). C-T Delaware is a newly formed Delaware
corporation and a wholly-owned subsidiary of Encompass Group Affiliates, Inc.,
which is a wholly-owned subsidiary of ACT ("Encompass" and collectively with ACT
and C-T Delaware, the "Company").
C-T Florida's principal executive offices, which will be the principal executive
offices of C-T Delaware, are located in Longwood, Florida. C-T Florida was
engaged in the business of providing warranty and other office equipment
services on behalf of sellers of office equipment. All of the assets of C-T
Florida shall remain with C-T Delaware and C-T Delaware will carry on the
business of C-T Florida going forward. Although the transaction closed on June
3, 2004, the parties had signed the Asset Purchase Agreement on May 27, 2004
(the "Asset Purchase Agreement").
The purchase price for the assets of C-T Florida (the "Purchase Price") was
determined as a result of arm's length negotiations between C-T Florida and C-T
Delaware. Neither C-T Florida nor its principals were, prior to the consummation
of this transaction, affiliated with the Company and neither the Company nor any
of its affiliates has any ownership interest in C-T Florida.
The Purchase Price consists of three components, as follows:
(a) a fixed payment of $3,000,000 paid in cash at Closing;
(b) a 6% senior unsecured promissory note in the original principal amount of
$547,000 (the "Note"), the principal of which shall be repaid in three (3) equal
annual installments of $182,333.33 on the first, second and third anniversary of
the date of issuance of the Note, together with all unpaid interest accrued
prior to such payment date; and
(c) a right to earn shares of ACT's common stock, to be earned as follows:
On June 30 of each year during the three (3) year period commencing July 1, 2004
and ending June 30, 2007, C-T Florida has the right to receive 16,666,667 shares
of ACT's common stock (the "Earn-Out Shares"), provided that C-T Delaware
achieves the Milestones (as defined below) during such year. In the event that
C-T Delaware does not achieve the Milestones during any year, the Earn-Out
Shares for such year are forfeited and, except as provided below, C-T Florida
has no right to re-earn such Earn-Out Shares in a future year. Notwithstanding
the foregoing, in the event the Milestones are not achieved in a given year, the
board of directors of ACT has the right, in its sole and absolute discretion, to
grant to C-T Florida all or a portion of the Earn-Out Shares that could have
been earned during such year.
Upon earning the Earn-Out Shares, if applicable, the Earn-Out Shares will be
placed in escrow to be held by an escrow agent and released upon Lisa Welton's
completion of the original three (3) year term of her employment agreement (as
described below), all in accordance with the terms of an escrow agreement
entered into between C-T Delaware and C-T Florida. Upon release from escrow, the
Earn-Out Shares will have piggyback registration rights, subject to customary
underwriters' cutbacks.
"Milestones" means the following revenue and EBIDTA (earnings before interest,
depreciation, taxes and amortization) goals of C-T Delaware for the applicable
year:
- --------------------------------------------------------------------------------
Fiscal Year End Revenues EBIDTA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
June 30, 2005 $ 6,600,000 $ 500,000
- --------------------------------------------------------------------------------
June 30, 2006 $ 8,600,000 $ 860,000
- --------------------------------------------------------------------------------
June 30, 2007 $ 11,600,000 $1,400,000
- --------------------------------------------------------------------------------
At Closing, C-T Florida delivered its final Closing balance sheet to C-T
Delaware, with "net working capital" $47,000 in excess of the net working
capital assumed in determining the original purchase price. Accordingly,
pursuant to the terms of the Asset Purchase Agreement, the original principal
amount of the Note was increased from $500,000 to $547,000 at Closing. C-T
Delaware is entitled, for a period of sixty (60) days after Closing, to review
the final Closing balance sheet, and to request, on or prior to the expiration
of the sixty (60) day period, a Purchase Price reduction if it does not agree
with the net working capital on the final Closing balance sheet. In the event
C-T Delaware and C-T Florida cannot agree on the net working capital, they will
retain an independent accounting firm to determine the net working capital,
which determination will be binding on both parties.
In connection with the transaction, Lisa Welton, the President of C-T Florida
("Welton"), entered into an employment agreement with the Company, and Thomas
Sutlive, the Vice-President of C-T Florida ("Sutlive"), entered into and
employment agreement with C-T Delaware. Welton has been with C-T Florida since
1992 and Sutlive has been with C-T Florida since 1994.
In accordance with the terms of Welton's employment agreement, Welton will hold
the offices of President and Chief Executive Officer, and be a director, of C-T
Delaware, as well as hold the office of Executive Vice-President of Encompass.
The term of Welton's employment agreement is three (3) years. In addition,
Welton's employment agreement provides that if her employment is terminated for
any reason, other than "without cause" by the Company, prior to the end of the
original term, all Earn-Out Shares, whether earned or unearned, shall be
forfeited by C-T Florida. In accordance with the terms of Sutlive's employment
agreement, Sutlive will hold the office of Vice-President of C-T Delaware. The
term of Sutlive's employment agreement is three (3) years. Both agreements
contain standard confidentiality, noncompete and work-for-hire provisions.
In connection with the transaction, C-T Florida and each shareholder of C-T
Florida signed a noncompetition agreement with C-T Delaware, and C-T Florida
changed its name to one not resembling the name "Cyber-Test."
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements
The financial statements required pursuant to Article 3 of Regulation S-X are
attached hereto as Exhibit 99.2.
(b) Pro Forma Financial Statements
The Pro Forma financial statements required pursuant to Article 11 of Regulation
S-X will be filed by amendment to this initial report on Form 8-K, no later than
60 days after the date that this Report must be filed.
(c) Exhibits
10.1 Asset Purchase Agreement, dated May 27, 2004, by and between Cyber-Test,
Inc., a Delaware corporation and Cyber-Test, Inc., a Florida corporation.
10.2 6% Senior Unsecured Promissory Note, in the original principal amount of
$547,000 issued on June 3, 2004 by Cyber-Test, Inc., a Delaware corporation in
favor of Cyber-Test, Inc., a Florida corporation.
10.3 Escrow Agreement, June 3, 2004, by and between Cyber-Test, Inc., a Delaware
corporation and Cyber-Test, Inc., a Florida corporation.
10.4 NonCompetition Agreement, June 3, 2004, by and between Cyber-Test, Inc., a
Delaware corporation, and Cyber-Test, Inc., a Florida corporation and the
shareholders of Cyber-Test Florida.
10.5 Employment Agreement, June 3, 2004, by and between Cyber-Test, Inc., a
Delaware corporation and Lisa Welton.
10.6 Employment Agreement, June 3, 2004, by and between Cyber-Test, Inc., a
Delaware corporation and Thomas Sutlive.
23.1 Consent of Chatham, Seland & Lashley, P.A., independent auditors of
Cyber-Test, Inc., a Florida corporation
99.1 Press Release dated June 8, 2004.
99.2 Audited Financial Statements of Cyber-Test, Inc., a Florida corporation,
for calendar year 2002 and 2003.
SIGNATURE
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.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
------------------------------------------
Wayne I. Danson, President and
Chief Executive Officer
EXHIBIT INDEX
10.1 Asset Purchase Agreement, dated May 27, 2004, by and between Cyber-Test,
Inc., a Delaware corporation and Cyber-Test, Inc., a Florida corporation.
10.2 6% Senior Unsecured Promissory Note, in the original principal amount of
$547,000 issued on June 3, 2004 by Cyber-Test, Inc., a Delaware corporation in
favor of Cyber-Test, Inc., a Florida corporation.
10.3 Escrow Agreement, June 3, 2004, by and between Cyber-Test, Inc., a Delaware
corporation and Cyber-Test, Inc., a Florida corporation.
10.4 NonCompetition Agreement, June 3, 2004, by and between Cyber-Test, Inc., a
Delaware corporation, and Cyber-Test, Inc., a Florida corporation and the
shareholders of Cyber-Test Florida.
10.5 Employment Agreement, June 3, 2004, by and between Cyber-Test, Inc., a
Delaware corporation and Lisa Welton.
10.6 Employment Agreement, June 3, 2004, by and between Cyber-Test, Inc., a
Delaware corporation and Thomas Sutlive.
23.1 Consent of Chatham, Seland & Lashley, P.A., independent auditors of
Cyber-Test, Inc., a Florida corporation
99.1 Press Release dated June 8, 2004.
99.2 Audited Financial Statements of Cyber-Test, Inc., a Florida corporation,
for calendar year 2002 and 2003.
EXHIBIT 10.1
ASSET PURCHASE AGREEMENT
BY AND AMONG
CYBER-TEST, INC., A DELAWARE CORPORATION
("PURCHASER")
CYBER-TEST, INC., A FLORIDA CORPORATION
("SELLER")
AND THE SHAREHOLDERS
IDENTIFIED HEREIN
MAY 27, 2004
EXECUTION COPY
TABLE OF CONTENTS
ARTICLE I CERTAIN DEFINITIONS
1.1 Accounts Receivable
1.2 Accrued Expenses
1.3 ACT
1.4 Affiliate
1.5 Agreement
1.6 Ancillary Agreements
1.7 Articles of Amendment
1.8 Assignment and Assumption Agreement
1.9 Assumed Liabilities
1.10 Balance Sheet
1.11 Balance Sheet Date
1.12 Bill of Sale\
1.13 Books and Records
1.14 Closing
1.15 Closing Balance Sheet
1.16 Closing Date
1.17 Closing Date Net Working Capital
1.18 Closing Inventory
1.19 Code
1.20 Confidential Information
1.21 Earn Out Shares
1.22 EBIDA
1.23 Employee
1.24 Encumbrance
1.25 Environmental Law
1.26 Environmental Losses
1.27 ERISA
1.28 ERISA Plans
1.29 Escrow Agreement
EXECUTION COPY
i
1.30 Excluded Assets
1.31 Final Net Working Capital
1.32 GAAP
1.33 Indemnified Liabilities
1.34 Indemnified Party
1.35 Inventory
1.36 Knowledge
1.37 Leased Property
1.38 Losses
1.39 Material Adverse Effect
1.40 Net Working Capital
1.41 Net Working Capital Adjustment
1.42 Net Working Capital Certificate
1.43 Non-Compete Agreement
1.44 Party
1.45 Payables
1.46 Permits
1.47 Permitted Encumbrances
1.48 Person
1.49 Prepaid Expenses
1.50 Products
1.51 Proprietary Rights
1.52 Purchase Price
1.53 Purchased Assets
1.54 Purchaser
1.55 Purchaser General Liabilities
1.56 Purchaser Indemnified Party
1.57 Purchaser Note
1.58 Regulated Substance
1.59 Seller
1.60 Seller General Liabilities
1.61 Seller Indemnified Party
EXECUTION COPY
ii
1.62 Shareholder
1.63 Sutlive
1.64 Sutlive Employment Agreement
1.65 Shareholder
1.66 Taxes
1.67 WARN Act
1.68 Welton
1.69 Welton Employment Agreement
1.70 Usage
ARTICLE II TRANSFER OF ASSETS AND PROPERTIES; CLOSING
2.1 Purchased Assets
2.2 Excluded Assets
2.3 Closing; Effective Time
ARTICLE III PURCHASE PRICE
3.1 Purchase Price
3.2 Allocation of Purchase Price
3.3 Certain Price Adjustments
3.4 Transfer Taxes
3.5 Related Matters
ARTICLE IV ASSUMPTION OF LIABILITIES; EMPLOYEE MATTERS
4.1 General Limitation on Assumption of Liabilities
4.2 Assumed Liabilities and Obligations
4.3 Offer of Employment
4.4 Vacation Liability
4.5 Other Employee Benefits
ARTICLE V CLOSING
5.1 Deliveries by Seller
5.2 Deliveries by Purchaser
5.3 Other Deliveries
EXECUTION COPY
iii
5.4 DELIVERY of Possession
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF
SELLER AND THE SHAREHOLDERS
6.1 Organization, Good Standing and Power
6.2 Enforceability and AUTHORIZATION OF AGREEMENT
6.3 No Violation; Consents
6.4 Financial Statements
6.5 Accounts Receivable
6.6 Inventory
6.7 Absence of Certain Changes or Events
6.8 Title to Properties; Absence of Liens and Encumbrances
6.9 Proprietary Rights
6.10 Contracts and Commitments
6.11 Permits, Licenses
6.12 Compliance with Laws
6.13 Legal Proceedings
6.14 Absence of Undisclosed Liabilities
6.15 Books and Records
6.16 Employees
6.17 Labor Disputes
6.18 ERISA
6.19 No Finder
6.20 Interest in Business
6.21 Condition of Assets
6.22 Affiliate Transactions
6.23 Environmental Matters
6.24 Insurance
6.25 No Significant Items Excluded
6.26 No Material Adverse Change
6.27 Solvency
6.28 Securities Law Matters
6.29 Taxes
EXECUTION COPY
iv
6.30 Completeness and Accuracy
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF PURCHASER
7.1 Organization, Good Standing, Power
7.2 Authorization of Agreement and Enforceability
7.3 No Violations; Consents
7.4 Legal Proceedings
7.5 Financial Capacity
7.6 No Finder
ARTICLE VIII COVENANTS OF SELLER PRIOR TO CLOSING DATE
8.1 Required Actions
8.1.1 Access to Information
8.1.2 Conduct of Business
8.1.3 Maintenance of Properties
8.1.4 Maintenance of Books and Records
8.1.5 Compliance with Applicable Law
8.1.6 Performance of Obligations
8.1.7 Approvals, Consents
8.1.8 Notice of Material Damage
8.1.9 Advise of Changes
8.1.10 Update Schedules
8.1.11 Pay Employees to Closing Date
8.1.12 Termination; WARN Act
8.1.13 Compliance with Agreement
8.2 Prohibited Actions
8.2.1 Sale of Purchased Assets
8.2.2 Business Changes
8.2.3 Incurrence of Material Obligations
8.2.4 Incurrence of Liens
8.2.5 Change in Employee Compensation and Benefits
8.2.6 Publicity; Advertisement
8.2.7 No Release
8.2.8 No Termination or Modification
8.3 No Merger, Etc.
ARTICLE IX COVENANTS OF PURCHASER PRIOR TO CLOSING DATE
9.1 Required Actions
9.1.1 Confidentiality
9.1.2 Advise of Changes
EXECUTION COPY
v
9.1.3 Compliance with Agreement
9.2 Investigation
9.3 Approvals, Consents
ARTICLE X CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
10.1 Accuracy of Representations and Warranties
10.2 Performance of Agreement
10.3 Consents
10.4 Seller's Certificate
10.5 Secretary's Certificate
10.6 Injunction
10.7 Actions and Proceedings
10.8 Net Working Capital
10.9 Financing
10.10 Opinion of Counsel
10.11 Escrow Agreement
10.12 Non-Compete Agreement
10.13 Articles of Amendment
10.14 Nielson Employment Agreement
10.15 Welton Employment Agreement.
10.16 Sutlive Employment Agreement.
10.17 Arrangements with Employees
10.18 Hy-Tech Memo of Understanding
10.19 Appraisal Rights
10.20 Release
10.21 GMAC Loan
ARTICLE XI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
11.1 Accuracy of Representations and Warranties
11.2 Performance of Agreement
11.3 Consents
11.4 Purchaser's Certificate
11.5 Secretary's Certificate
EXECUTION COPY
vi
11.6 Injunction
11.7 Actions or Proceedings
11.8 Opinion of Counsel
ARTICLE XII OBLIGATIONS AFTER THE CLOSING DATE
12.1 Confidentiality
12.2 Final Net Working Capital
12.3 Transition of Employees
12.4 Further Assurances of Seller
12.5 Further Assurances of Purchaser
12.6 Accounts Receivable Payment
ARTICLE XIII TERMINATION
13.1 Termination of Agreement
13.2 Return of Documents
13.3 Limitations on Remedies
ARTICLE XIV SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
14.1 Survival of Representations and Warranties
14.2 Indemnification by Seller
14.3 Limitations on Seller's and Shareholders' Obligations to
Indemnify
14.4 Indemnification by Purchaser
14.5 Limitations on Purchaser's Obligation to Indemnify
14.6 Procedures for Indemnification
14.7 Payment of Indemnification Obligations
14.8 Interest on Unpaid Obligations
14.9 Set-Off
14.10 Other Remedies
ARTICLE XV GENERAL
15.1 Expenses
15.2 Press Releases and Public Announcements
15.3 Waivers
EXECUTION COPY
vii
15.4 Binding Effect; Benefits
15.5 Notices
15.6 Entire Agreement
15.7 Counterparts
15.8 Headings
15.9 Governing Law and Choice of Forum
15.10 Cooperation
15.11 Severability
15.12 Attorneys' Fees
15.13 Successors and Assigns
EXHIBIT A - Purchaser Note
EXHIBIT B - Bill Of Sale
EXHIBIT C - Assignment and Assumption Agreement
EXHIBIT D - Escrow Agreement
EXHIBIT E - Non-Compete Agreement
EXHIBIT F - Welton Employment Agreement
EXHIBIT G - Sutlive Employment Agreement
EXHIBIT H - Opinion of Barrett, Chapman & Ruta, P.A. EXHIBIT I - Press Release
EXECUTION COPY
viii
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of the 27th day of May 2004 by and among
CYBER-TEST, INC., a Delaware corporation ("PURCHASER"), CYBER-TEST, INC., a
Florida corporation ("SELLER"), and the shareholders of Seller identified on the
signature pages of this Agreement (the "SHAREHOLDERS").
RECITALS:
This Agreement sets forth the terms and conditions upon which Purchaser has
agreed to purchase from Seller, and Seller has agreed to sell to Purchaser,
substantially all of the assets used by Seller in the conduct of its business.
In consideration of the mutual agreements, covenants, representations and
warranties contained herein, and in reliance thereon, Purchaser, Seller and the
Shareholders, intending to be legally bound, hereby agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS
As used herein, the following terms shall have the following meanings:
1.1 "ACCOUNTS RECEIVABLE" shall mean as of any date all accounts receivable
associated with Seller's business as of such date in accordance with GAAP
consistently applied, other than from an Affiliate of Seller.
1.2 "ACCRUED EXPENSES" shall mean as of any date accrued payroll and benefits
and other accrued expenses as would appear on a balance sheet of Seller's
business as of such date prepared in accordance with GAAP consistently applied,
including those described in SCHEDULE 1.2, but excluding any amounts payable to
Affiliates of Seller and any compensation to Employees or others contingent upon
or payable as a result of the transactions contemplated hereby.
1.3 "ACT" shall mean Advanced Communications Technologies, Inc.
1.4 "AFFILIATE" shall mean any company or other entity which controls, is
controlled by or is under common control with the designated Party. For purposes
of the foregoing, ownership, directly or indirectly, of twenty percent (20%) or
more of the voting stock or other equity interest in a business shall be deemed
to constitute control.
1.5 "AGREEMENT" shall mean this Asset Purchase Agreement.
6
EXECUTION COPY
1.6 "ANCILLARY AGREEMENTS" shall mean the documents referred to in Sections
5.1.1, 5.1.2, 5.1.6, 5.1.7, 5.1.10 and 5.3.1.
1.7 "ARTICLES OF AMENDMENT" shall have the meaning given such term in Section
3.5.2.
1.8 "ASSIGNMENT AND ASSUMPTION AGREEMENT" shall have the meaning given to it in
Section 5.1.2.
1.9 "ASSUMED LIABILITIES" shall have the meaning given to such term in Section
4.2.
1.10 "BALANCE SHEETS" shall have the meaning given such term in Section 6.4.
1.11 "BALANCE SHEET DATE" shall have the meaning given such term in Section 6.4.
1.12 "BILL OF SALE" shall have the meaning given to such term in Section 5.1.1.
1.13 "BOOKS AND RECORDS" shall have the meaning given to it in Section 6.15.
1.14 CLOSING" shall have the meaning given to such term in Section 2.3.
1.15 "CLOSING BALANCE SHEET" means the balance sheet of Seller as at 11:59 p.m.
EST on the day immediately preceding the Closing Date prepared by Seller in
accordance with GAAP reflecting the Purchased Assets and Assumed Liabilities at
Closing.
1.16 "CLOSING DATE" shall have the meaning given to such term in Section 2.3.
1.17 "CLOSING DATE NET WORKING CAPITAL" shall mean the Net Working Capital of
Seller based on the Closing Balance Sheet.
1.18 "CLOSING INVENTORY" shall mean all Inventory of Seller on the Closing Date.
1.19 "CODE" shall mean the Internal Revenue Code of 1986, as it may be amended
from time to time, and any successor thereto. Any reference herein to a specific
section or sections of the Code shall be deemed to include a reference to any
corresponding provision of future law.
1.20 "CONFIDENTIAL INFORMATION" shall have the meaning given to such term in
Section 12.1.
1.21 "EARN-OUT SHARES" shall have the meaning given such term in Section
3.5.1.1.
2
EXECUTION COPY
1.22 "EBIDTA" shall mean earnings before interest, depreciation, taxes and
amortization.
1.23 "EMPLOYEE" shall mean any individual employed by Seller as listed on
SCHEDULE 1.23 (such Schedule being subject to change between the date hereof and
the Closing Date as a result of employee changes in the ordinary course of
business consistent with past practices).
1.24 "ENCUMBRANCE" shall mean any claim, lien, pledge, option, charge, easement,
security interest, deed of trust, mortgage, right-of-way, encroachment, building
or use restriction, conditional sales agreement, encumbrance or other right of
third parties, whether voluntarily incurred or arising by operation of law, and
includes any agreement to give any of the foregoing in the future, and any
contingent sale or other title retention agreement or lease in the nature
thereof.
1.25 "ENVIRONMENTAL LAW" shall mean any federal (including, but not limited to,
the Clean Water Act, 33 U.S.C. Sections 1251 ET SEQ., the Toxic Substances
Control Act, 15 U.S.C. Sections 2601 ET SEQ., the Clean Air Act, 42 U.S.C.
Sections 7401 ET SEQ., the Safe Drinking Water Act, 42 U.S.C. Sections 300f ET
SEQ., the Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. Sections 9601 ET SEQ., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 ET SEQ., the River and Harbor Act, 33 U.S.C. Section 407,
and the Occupational Safety and Health Act, 29 U.S.C.
Section 651 ET SEQ.), state or local statute, ordinance or promulgated rule or
regulation, any judicial or administrative order or judgment (whether or not by
consent), any duties imposed by common law and any provision or condition of any
permit, license or other operating authorization relating to (i) the protection
of the environment or the public welfare from actual or potential exposure (or
the effects of exposure) to any actual or potential release, discharge, disposal
or emission (whether past or present) of any Regulated Substance or (ii) the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of any Regulated Substance.
1.26 "ENVIRONMENTAL LOSSES" shall mean (i) all Losses imposed or incurred under
Environmental Law resulting from the storage or disposal or the emission,
discharge, release or threatened release into the environment, by any Person of
any Regulated Substance at the Leased Property at any time prior to the Closing
Date, (ii) all Losses resulting from the presence of any Regulated Substance at
any location other than the Leased Property at any time prior to the Closing
Date and (iii) all Losses resulting from the migration, leaking, leaching,
flowing, emitting or other movement of Regulated Substances from the Leased
Property or any such location at anytime prior to the Closing Date, in each case
requiring investigation, removal or remediation under Environmental Law.
1.27 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
3
EXECUTION COPY
1.28 "ERISA PLANS" shall mean defined benefit pension plans and defined
contribution pension plans qualified under Section 401(a) of the Code.
1.29 "ESCROW AGREEMENT" shall have the meaning given such term in Section 5.1.6.
1.30 "EXCLUDED ASSETS" shall mean those assets that are not included in the sale
contemplated hereby and as are further defined in Section 2.2.
1.31 "FINAL NET WORKING CAPITAL" shall mean the Net Working Capital of Seller on
the Closing Date as determined by Purchaser after Closing in accordance with
Section 3.3.3.
1.32 "GAAP" shall mean, as of the applicable date, generally accepted accounting
principles in the United States of America, consistently applied.
1.33 "INDEMNIFIED LIABILITIES" shall mean, collectively, Seller's Indemnified
Liabilities and Purchaser's Indemnified Liabilities.
1.34 "INDEMNIFIED PARTY" shall mean either a Seller Indemnified Party or a
Purchaser Indemnified Party, as the context so requires.
1.35 "INVENTORY" shall mean the inventory of Seller, including raw materials,
supplies, work in process and finished goods.
1.36 "KNOWLEDGE" or "TO THE KNOWLEDGE" of a party (or similar phrases) means to
the extent of matters (i) which are actually known by such party or (ii) which,
based on facts of which such party is aware, would be known to a reasonable
Person in similar circumstances, and when used in the context of Seller shall be
deemed to include the knowledge of each of its executive officers.
1.37 "LEASED PROPERTY" shall mean the real property leased by Seller pursuant to
leases set forth on SCHEDULE 2.1.2 hereto.
1.38 "LOSSES" shall mean all losses, costs, diminution in value, claims,
liabilities, fines, penalties, damages and expenses, including interest which
may be imposed in connection therewith and court costs and reasonable fees and
disbursements of counsel and consultants, but after taking into account any
insurance proceeds received by the party incurring the Losses (net of any
premium increases resulting therefrom), any net tax benefits to such party
resulting therefrom and any reserves on the books and records relating thereto.
1.39 "MATERIAL ADVERSE EFFECT" shall have the meaning given to such term in
Section 6.3.
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1.40 "NET WORKING CAPITAL" shall have the meaning given to such term in Section
3.3.4.
1.41 "NET WORKING CAPITAL ADJUSTMENT" shall mean the Final Net Working Capital
less the Closing Date Net Working Capital.
1.42 "NET WORKING CAPITAL CERTIFICATE" shall have the meaning given to such term
in Section 3.3.3.
1.43 "NON-COMPETE AGREEMENT" shall have the meaning given to such term in
Section 5.1.7.
1.44 "PARTY" shall mean either Seller, a Shareholder, or Purchaser,
individually, as the context so requires, and the term "PARTIES" shall mean
Seller, the Shareholders and Purchaser together.
1.45 "PAYABLES" as of any date shall mean any of the accounts payable and notes
payable of Seller as of such date in accordance with GAAP consistently applied,
other than to an Affiliate of Seller.
1.46 "PERMITS" shall have the meaning given to such term in Section 6.11.
1.47 "PERMITTED ENCUMBRANCES" shall mean those Encumbrances as specifically set
forth on SCHEDULE 1.47 hereto.
1.48 "PERSON" shall mean any person or entity, whether an individual, trustee,
corporation, limited liability company, general partnership, limited
partnership, trust, unincorporated organization, business association, firm,
joint venture, governmental agency or authority or any similar entity.
1.49 "PREPAID EXPENSES" as of any date shall mean payments made by Seller, other
than to an Affiliate of Seller, which constitute prepaid expenses of Seller in
accordance with GAAP consistently applied.
1.50 "PRODUCTS" shall mean any of the products manufactured, marketed, and/or
sold by Seller as of the Closing Date.
1.51 "PROPRIETARY RIGHTS" shall have the meaning given to such term in Section
6.9.1.
1.52 "PURCHASE PRICE" shall have the meaning given to such term in Section 3.1.
1.53 "PURCHASED ASSETS" shall have the meaning given to such term in Section
2.1.
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1.54 "PURCHASER" shall have the meaning given to such term in the preamble of
this Agreement.
1.55 "PURCHASER GENERAL LIABILITIES" shall have the meaning given to such term
in Section 14.4.
1.56 "PURCHASER INDEMNIFIED PARTY" shall have the meaning given to such term in
Section 14.2.
1.57 "PURCHASER NOTE" shall have the meaning given to such term in Section
3.1.1.2.
1.58 "REGULATED SUBSTANCE" shall mean any substance that is identified (by
listing or characteristic) and regulated (or the clean-up of which can be
required) by any federal, state or local law or regulation intended to protect
the environment or the public health or welfare, including, but not limited to,
the statutes, ordinances or regulations relating to clean air, clean water,
hazardous and solid waste disposal, safe drinking water, endangered species,
occupational safety and health, oil spill prevention, groundwater protection and
toxic substances control, among others.
1.59 "SELLER" shall have the meaning given to such term in the preamble of this
Agreement.
1.60 "SELLER GENERAL LIABILITIES" shall have the meaning given to such term in
Section 14.2.
1.61 "SELLER INDEMNIFIED PARTY" shall have the meaning given to such term in
Section 14.4.
1.62 "SHAREHOLDER" shall have the meaning given to such term in the preamble of
this Agreement.
1.63 "SUTLIVE" shall have the meaning given to such term in Section 4.3.2
1.64 "SUTLIVE EMPLOYMENT AGREEMENT" shall have the meaning given to such term in
Section 5.3.2
1.65 "TARGET NET WORKING CAPITAL" shall mean the Net Working Capital of Seller
in the amount of $1,122,000.00.
1.66 "TAXES" shall mean all taxes, duties, charges, fees, levies or other
assessments imposed by any taxing authority, including, without limitation,
income, gross receipts, value -added, excise, withholding, personal property,
real estate, sale, use, ad valorem, license, lease, service, severance, stamp,
transfer, payroll, employment, customs, duties, alternative, add-on, minimum,
estimated and franchise taxes (including any interest, penalties or additions
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attributable to or imposed on or with respect to any such assessment).
1.67 "WARN ACT" shall mean the Worker Adjustment and Retraining Notification
Act, 29 U.S.C. Sections 1201 ET SEQ.
1.68 "WELTON" shall have the meaning given to such term in Section 4.3.1.
1.69 "WELTON EMPLOYMENT AGREEMENT" shall have the meaning given to such term in
Section 5.3.1.
1.70 USAGE.
1.70.1 INTERPRETATION. In this Agreement, unless a clear contrary intention
appears:
(i) the singular number includes the plural number and vice versa;
(ii) reference to any Person includes such Person's successors and assigns but,
if applicable, only if such successors and assigns are not prohibited by this
Agreement, and reference to a Person in a particular capacity excludes such
Person in any other capacity or individually;
(iii) reference to any gender includes each other gender;
(iv) reference to any agreement, document or instrument means such agreement,
document or instrument as amended or modified and in effect from time to time in
accordance with the terms thereof;
(v) reference to any legal requirement means such legal requirement as amended,
modified, codified, replaced or reenacted, in whole or in part, and in effect
from time to time, including rules and regulations promulgated thereunder, and
reference to any section or other provision of any legal requirement means that
provision of such legal requirement from time to time in effect and constituting
the substantive amendment, modification, codification, replacement or
reenactment of such section or other provision;
(vi) "hereunder," "hereof," "hereto," and words of similar import shall be
deemed referenced to this Agreement as a whole and not to any particular Article
Section or other provision hereof, unless otherwise stipulated;
(vii) "including" (and with correlative meaning "include") means including
without limiting the generality of any description preceding such term;
(viii)"or" is used in the inclusive sense of "and/or";
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(ix) with respect to the determination of any period of time, "from" means "from
and including" and "to" means "to but excluding"; and
(x) references to documents, instruments or agreements shall be deemed to refer
as well to all addenda, exhibits, schedules or amendments thereto.
1.70.2 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein,
all accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with GAAP.
1.70.3 LEGAL REPRESENTATION OF THE PARTIES. This Agreement was negotiated by the
parties with the benefit of legal representation, and any rule of construction
or interpretation otherwise requiring this Agreement to be construed or
interpreted against any party shall not apply to any construction or
interpretation hereof.
ARTICLE II.
TRANSFER OF ASSETS AND PROPERTIES; CLOSING
2.1 PURCHASED ASSETS. Subject to the terms and conditions of this Agreement, and
based upon the representations and warranties contained in this Agreement, at
the Closing, Seller shall sell and convey to Purchaser, free and clear of all
Encumbrances (other than Permitted Encumbrances), and Purchaser shall purchase
from Seller, all of Seller's right, title and interest in and to the assets,
properties and rights of every kind and description, real, personal and mixed,
tangible and intangible, wherever situated which are used or useful in the
conduct of Seller's business (the "PURCHASED ASSETS"), including, without
limitation, the following:
2.1.1 all machinery, equipment, leasehold improvements, trucks, automobiles,
supplies, materials, office furniture and office equipment, computing and
telecommunications equipment and other items of personal property that are owned
or leased by Seller and used in connection with Seller's business, wherever
located;
2.1.2 all of the leases and agreements identified in SCHEDULE 2.1.2 hereto;
2.1.3 all customer lists, sales data, catalogs, brochures, suppliers, names,
mailing lists, art work, photographs and advertising material that relate to
Seller's business, whether in electronic form or otherwise;
2.1.4 all governmental permits, licenses, registrations, orders and approvals
relating to Seller's business, including those listed in SCHEDULE 2.1.4 hereto,
to the extent such permits, licenses, registrations, orders and approvals are
transferable to Purchaser;
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2.1.5 all trade secrets, secret processes and procedures, engineering,
production, assembly, design, installation, other technical drawings and
specifications, working notes and memos, market studies, consultants' reports,
technical and laboratory data, competitive samples, engineering prototypes, and
all similar property of any nature, tangible or intangible, of Seller relating
to its business;
2.1.6 all patents, trademarks, trademark registrations, trade names, service
marks, copyrights and copyright registrations including, without limitation,
those described in SCHEDULE 2.1.6;
2.1.7 all other records of Seller, including property records and copies of
personnel records of Employees who become employees of Purchaser;
2.1.8 all right, title and interest of Seller in and to the goodwill incident to
its business;
2.1.9 all Closing Inventory;
2.1.10 all Accounts Receivable existing on the Closing Date;
2.1.11 all deposits and prepaid expenses, claims for refunds and rights to
offset of, or for the benefit of, Seller's business on the Closing Date;
2.1.12 any insurance policies maintained by Seller with respect to its business;
2.1.13 All accounts receivable from Affiliates of Seller existing on the Closing
Date;
2.1.14 cash and cash equivalents on hand or in bank accounts and all short-term
investments;
2.1.15 assets constituting any pension or other funds for the benefit of
Employees;
2.1.16 all computer applications software, owned or licensed, whether for
general business usage (e.g., accounting, word processing, graphics, spreadsheet
analysis, etc.) or specific, unique-to-the-business usage (e.g., order
processing, manufacturing, process control, shipping, etc.) and all computer
operating, security or programming software, owned or licensed by Seller; and
2.1.17 all other assets (including all causes of action, rights of action,
contract rights and warranty and product liability claims against third parties,
all telephone numbers, telecopier numbers, websites, domain
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names, and email addresses) relating to the Purchased Assets or Seller's
business, regardless of whether any value is ascribed thereto in Seller's
financial statements.
Notwithstanding the foregoing provisions of this Section 2.1, the transfer of
the Purchased Assets pursuant to this Agreement shall not include the assumption
of any liability or obligation related to the Purchased Assets, unless such
liability or obligation is expressly included in the Assumed Liabilities.
2.2 EXCLUDED ASSETS. Notwithstanding Section 2.1, the following assets of Seller
(collectively, the "EXCLUDED ASSETS") shall be excluded from this Agreement, and
shall not be assigned or transferred to Purchaser:
2.2.1 the consideration paid to Seller pursuant to this Agreement;
2.2.2 corporate minute books, stock books and corporate seals;
2.2.3 any shares of capital stock of Seller held in treasury;
2.2.4 any shares of capital stock of any other Person owned by Seller;
2.2.5 any claims and rights against third parties (including, without
limitation, insurance carriers), to the extent they relate to liabilities or
obligations that are not assumed by Purchaser hereunder (except to the extent
Purchaser shall have incurred costs and expenses with respect to such claims and
rights);
2.2.6 claims for refunds of Taxes and other governmental charges to the extent
such refunds relate to periods ending on or prior to the Closing Date;
2.2.7 all Books and Records that Seller is required by law to retain in its
possession;
2.2.8 assets listed on SCHEDULE 2.2.8; and
2.2.9 all rights of Seller under this Agreement and the Ancillary Agreements.
2.3 CLOSING; EFFECTIVE TIME. Subject to the satisfaction or waiver, if
permissible, of the conditions set forth in Articles X and XI, the closing of
the transactions contemplated by this Agreement (the "CLOSING") shall take place
at the offices of Eckert Seamans Cherin & Mellott, LLC, 1515 Market Street, 9th
Floor, Philadelphia, PA 19102, on June 1, 2004, or on such other date as may be
agreed upon by Purchaser and Seller (the "CLOSING DATE"). The parties agree that
the Closing can be accomplished via overnight delivery of executed documents by
representatives of Seller, together with other procedural safeguards. The
conveyance of the Purchased Assets shall be effective as of 7:00 a.m. local
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time, at the respective locations of such Purchased Assets, on the Closing Date
(the "EFFECTIVE TIME").
ARTICLE III.
PURCHASE PRICE
3.1 PURCHASE PRICE. Subject to any adjustments pursuant to Section 3.3, as and
for the purchase price for the Purchased Assets (the "PURCHASE PRICE"):
3.1.1 Purchaser shall pay and deliver to Seller the following at the Closing:
3.1.1.1 The sum of Three Million Dollars ($3,000,000.00) in immediately
available funds, by wire transfer to Seller's designated bank account; and
3.1.1.2 A senior unsecured 6% promissory note of Purchaser in the original
principal amount of Five Hundred Thousand Dollars ($500,000.00) substantially in
the form of EXHIBIT "A" hereto (the "PURCHASER NOTE").
3.1.2 Purchaser shall issue and deliver to Seller 50,000,000 shares of
restricted common stock of ACT (priced at $.01 per share or $500,000 in the
aggregate) in accordance with Section 3.5, provided that the conditions set
forth in Section 3.5.1 are satisfied.
3.2 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated in
accordance with SCHEDULE 3.2. After the Closing, the parties shall make
consistent use of the allocation, fair market value and useful lives specified
in SCHEDULE 3.2 for all Tax purposes and in all filings, declarations, and
reports with the Internal Revenue Service, including reports required to be
filed under Section 1060 of the Code. Purchaser shall prepare and deliver IRS
Form 8594 to Seller within forty-five (45) days after the Closing to be filed
with the Internal Revenue Service. Seller shall have ten (10) business days upon
receipt of the IRS Form 8594 to confirm the accuracy of the allocation before
the form is submitted to the IRS. In any proceeding related to the determination
of any Tax, neither Purchaser nor Seller shall contend or represent that such
allocation is not a correct allocation.
3.3 CERTAIN PRICE ADJUSTMENTS.
3.3.1 On the Closing Date, Seller shall deliver to Purchaser a Closing Balance
Sheet and a certificate setting forth the Closing Date Net Working Capital,
which shall in no event be less than $750,000.00.
3.3.2 In the event the Closing Date Net Working Capital is less than the Target
Net Working Capital, the cash portion of the Purchase Price shall be decreased
dollar-for-dollar by the amount of the difference. In the event the Closing Date
Net Working Capital is greater than the Target Net
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Working Capital, the original principal amount of the Purchaser Note shall be
increased by such amount.
3.3.3 As soon as practicable following the Closing Date, but not later than
sixty (60) days thereafter, Purchaser shall review the Closing Balance Sheet and
the Closing Date Net Working Capital, shall prepare or cause to be prepared, and
shall submit to Seller a certificate (the "NET WORKING CAPITAL CERTIFICATE")
setting forth (i) the Final Net Working Capital and (ii) the Net Working Capital
Adjustment, if any. In the event there is a Net Working Capital Adjustment,
Purchaser and Seller shall immediately execute an amendment to the Purchaser
Note (i) decreasing the original principal amount thereof, if the Net Working
Capital Adjustment is negative, or (ii) increasing the original principal amount
thereof, if the Net Working Capital Adjustment is positive. In either event,
accrued interest on the principal amount of the Purchaser Note shall be adjusted
accordingly.
3.3.4 For purposes of this Agreement, "NET WORKING CAPITAL" as of any date shall
be deemed to be the aggregate dollar value determined in accordance with GAAP
represented by: (i) cash and cash equivalents, (ii) Accounts Receivable (net of
an allowance for bad debts determined in accordance with GAAP), (iii) Inventory
and (iv) Prepaid Expenses, less (y) Payables and (z) Accrued Expenses.
3.3.5 In the event Seller does not agree with the Final Net Working Capital and
the Net Working Capital Adjustment, within five (5) days after delivery of the
Net Working Capital Certificate, the Parties shall (i) retain as arbitrator an
independent accounting firm as may be mutually agreed upon by the Parties to
review such matters as to which written agreement has not be reached and (ii)
request such arbitrator to act as promptly as practicable in accordance with its
own rules to resolve all such disputed matters within ten (10) days after being
retained by the Parties. Upon resolution by such arbitrator to its satisfaction
of all such disputed matters, such arbitrator shall cause to be prepared and
shall deliver to the Parties a certificate setting forth the amount of Net
Working Capital as of the Closing Date. The decision of such arbitrator shall be
final, non-appealable and binding on Seller and Purchaser, and the fees and
expenses, if any, of such arbitrator shall be paid in full by the non-prevailing
Party. Seller and Purchaser hereby stipulate to the value of the inventory and
receivables set forth on SCHEDULE 3.3.5 hereto.
3.4 TRANSFER TAXES. Each of Purchaser and Seller shall bear and be responsible
for the payment of one half of all Taxes (excluding Taxes based on or measured
by income) that are or may be imposed by any government or political subdivision
thereof and that are payable or arise as a result of this transfer of the
Purchased Assets, notwithstanding the Party upon which such Taxes are actually
imposed. Purchaser shall furnish to Seller properly completed sales tax resale
exemption certificates for any Taxes from which Purchaser claims to be exempt as
provided in Rule 12A-1.038, Florida Administrative Code or related statutory
provisions.
3.5 RELATED MATTERS.
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3.5.1 EARN-OUT
3.5.1.1 EARN-OUT SHARES. On June 30 of each year during the three (3) year
period commencing July 1, 2004 and ending June 30, 2007, Seller shall have the
right to receive 16,666,667 shares of ACT's common stock at a price per share of
$.01 (the "EARN-OUT SHARES"), provided that Purchaser achieves the Milestones
(as defined below) during such year. In the event that Purchaser does not
achieve the Milestones during any year, the Earn-Out Shares for such year shall
be forfeited and, except as provided below, Seller shall have no right to
re-earn such Earn-Out Shares in a future year; provided further that such number
of Earn-Out Shares shall be adjusted accordingly for stock-splits, reverse
stock-splits and other recapitalizations effected by ACT. Notwithstanding the
foregoing, in the event the Milestones are not achieved in a given year, the
board of directors of ACT shall have the right in its sole and absolute
discretion, to grant to Seller all or a portion of the Earn-Out Shares that
could have been earned during such year.
For purposes hereof, "MILESTONES" shall mean the following revenue and EBIDTA
goals of Purchaser for the applicable year:
FISCAL YEAR END REVENUES EBIDTA
- --------------- ------------ ----------
June 30, 2005 $ 6,600,000 $ 500,000
June 30, 2006 $ 8,600,000 $ 860,000
June 30, 2007 $ 11,600,000 $1,400,000
That Parties agree that Purchaser shall be a stand alone entity for purposes of
calculating EBIDTA and that extraordinary expenses of any Affiliate of Purchaser
shall not be considered in calculating EBIDTA. Notwithstanding the foregoing,
extraordinary expenses of Purchaser for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, in an amount not to exceed $25,000, shall not be
considered for purposes of calculating EBIDTA for the 12-month period ending
June 30, 2005. Moreover, neither the repayment of the Purchaser Note nor any
interest or expenses incurred by Purchaser in connection with the Purchase Price
shall be included in the calculation of EBIDTA for purposes of determining
whether the Milestones have been met.
3.5.1.2 WELTON EMPLOYMENT. In the event that Welton's employment with Purchaser
or any of its Affiliates is terminated for any reason other than (i) by the
Company without "cause" (as defined in the Welton Employment Agreement) or (ii)
due to Welton's death or disability (as provided in the Welton Employment
Agreement) prior to the expiration of the initial Employment Period (as defined
in the Welton Employment Agreement), all of the Earn-Out Shares shall be
forfeited by Seller in their entirety, and Purchaser and its Affiliates shall
have no further obligations to Seller with respect to the Earn-Out Shares. In
the event Welton's employment with Purchaser and its Affiliates is terminated
(i) by Purchaser and its Affiliates without "cause" or (ii) due to Welton's
death or disability prior to the expiration of the initial Employment Period,
Seller shall be permitted to retain solely those Earn-Out Shares previously
earned by Seller and placed in escrow up to and including the
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fiscal year of Purchaser immediately preceding the year of termination of
Welton's employment with Purchaser and its Affiliates. In no event shall Seller
have the right to receive any Earn-Out Shares for the fiscal year during, or any
fiscal year after, which Welton's employment with Purchaser and its Affiliates
is terminated.
3.5.1.3 ESCROW. Upon earning the Earn-Out Shares, if applicable, the Earn-Out
Shares shall be placed in escrow with a mutually agreeable escrow agent, to be
held by the escrow agent and released in accordance with the terms of the Escrow
Agreement. Upon release from escrow, the Earn-Out Shares shall have piggyback
registration rights, subject to customary underwriters' cutbacks.
3.5.2 USE OF NAME. Immediately following the Closing, Seller shall cause an
amendment to its Articles of Incorporation to be filed with the Secretary of
State of the State of Florida (the "ARTICLES OF AMENDMENT"), changing Seller's
name to a name bearing no resemblance to "Cyber-Test, Inc." At Closing, Seller
shall deliver to Purchaser a duplicate original of such amendment, duly executed
and suitable for filing. After the Closing, neither Seller nor any Shareholder
shall use, or permit any of its or their Affiliates to use, the name
"Cyber-Test, Inc." or any variant or derivative thereof. Seller shall execute
and deliver to Purchaser, at or before the Closing, all consents requested by
Purchaser to enable it to use the name "Cyber-Test" and will otherwise cooperate
with Purchaser in connection therewith.
3.5.3 NON-COMPETE. At Closing, each of Seller and each Shareholder shall deliver
an executed counterpart to the Non-Compete Agreement.
ARTICLE IV.
ASSUMPTION OF LIABILITIES; EMPLOYEE MATTERS
4.1 GENERAL LIMITATION ON ASSUMPTION OF LIABILITIES. Except for Permitted
Encumbrances and as otherwise provided in Sections 4.2 and 4.4 below, Seller
shall transfer the Purchased Assets to Purchaser free and clear of all
Encumbrances, and without any assumption of liabilities and obligations, and
Purchaser shall not, by virtue of its purchase of the Purchased Assets or
otherwise, assume or become responsible for any liabilities or obligations of
Seller or any other Person. For purposes of this Section 4.1, the phrase
"liabilities and obligations" shall include, without limitation, any direct or
indirect indebtedness, guaranty, endorsement, claim, loss, damage, deficiency,
cost, expense, obligation or responsibility, fixed or unfixed, known or unknown,
asserted or unasserted, choate or inchoate, liquidated or unliquidated, secured
or unsecured.
4.2 ASSUMED LIABILITIES AND OBLIGATIONS. Subject to the other provisions hereof,
on the Closing Date, Purchaser shall assume and thereafter discharge the
following, and only the following, liabilities and obligations,
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excluding any liabilities and obligations to Affiliates of Seller (collectively,
the "ASSUMED LIABILITIES"):
4.2.1 all obligations of Seller accruing subsequent to the Closing Date under
the contracts, leases, agreements, orders, guarantees and commitments identified
in SCHEDULE 2.1.2; PROVIDED that the rights thereunder have been duly and
effectively assigned to Purchaser; PROVIDED FURTHER, that Purchaser shall not
assume or discharge any obligation relating to a breach of the terms of a
contract, lease, agreement, order, guarantee or commitment caused by the
assignment thereof to Purchaser at the Closing;
4.2.2 all obligations of Seller accruing after the Closing Date under the
permits and licenses identified in SCHEDULE 2.1.4; PROVIDED that the rights
thereunder have been duly and effectively assigned to Purchaser;
4.2.3 the Payables and Accrued Expenses reflected on the books of Seller at the
Closing Date and included in the calculation of the Net Working Capital pursuant
to Section 3.3.4 hereof; and
4.2.4 service obligations and express warranty obligations of Seller to repair
or replace defective goods sold by Seller under the terms of any written
contract, commitment or sale transaction entered into in the ordinary course of
business relating to products shipped not more than ninety (90) days prior to
the Closing Date; PROVIDED, that Purchaser assumes no obligation of Seller for
incidental or consequential damages or for any personal injury, or for
intellectual property infringement, the sole warranty obligation of Purchaser
assumed hereunder being the obligation to repair or replace defective goods.
Except for the obligations expressly assumed by Purchaser pursuant to the
foregoing provisions of this Section 4.2, it is understood and agreed that
Purchaser does not and will not assume or become obligated to pay or perform
with respect to third parties any debts, liabilities, contracts or other
obligations of Seller or its Affiliates, whether now existing or hereafter
arising, for which Seller or any of its Affiliates is or may become liable
however arising, including, without limitation, obligations arising pursuant to
the law of contracts, tort, strict liability or other applicable laws, rules,
regulations, or ordinances.
4.3 OFFER OF EMPLOYMENT.
4.3.1 At Closing, Lisa Welton ("WELTON") shall be required to execute and
deliver an employment agreement to serve, for an initial term of three (3)
years, as Executive Vice President of Encompass Group Affiliates, Inc.,
President and Chief Executive Officer of Purchaser, and such other executive
and/or board positions of ACT or its respective subsidiaries, as may be
determined by mutual agreement by Welton and ACT, in accordance with the terms
of the Welton Employment Agreement. Prior to Closing, Seller shall release
Welton from any obligations under her employment agreement with Seller, or at
law. At Closing, Seller shall waive any and all rights with respect to Welton
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employment, or the termination of Welton's employment, including, without
limitation, any restriction on her employment or her activities.
4.3.2 At closing, Tom Sutlive ("SUTLIVE") shall be required to execute and
deliver an employment agreement to serve, for an initial term of three (3)
years, in executive and/or board positions of Purchaser or its Affiliates, in
accordance with the terms of the Sutlive Employment Agreement. Prior to Closing,
Seller shall release Sutlive from any obligations under his employment agreement
with Seller, or at law. At Closing, Seller shall waive any and all rights with
respect to Sutlive's employment, or the termination of Sutlive's employment,
including, without limitation, any restriction on his employment or his
activities.
4.3.3 Purchaser shall have the right, but shall not be obligated, to offer
employment to such other employees of Seller, as Purchaser deems appropriate in
its sole discretion.
4.4 VACATION LIABILITY. Purchaser shall assume liability for the vacation
entitlement that each Employee who becomes an employee of Purchaser has accrued
as of the Closing Date. Purchaser shall pay each such Employee's wages or salary
during his or her vacation entitlement from Purchaser, when taken.
4.5 OTHER EMPLOYEE BENEFITS. Seller agrees that, with respect to claims for
workers' compensation and all claims under Seller's employee benefit programs by
persons working for Seller arising out of events occurring prior to the Closing,
whether reported or unreported as of the Closing and whether insured or
uninsured (including, but not limited to, workers' compensation, life insurance,
medical and disability programs), Seller shall, at its own expense, honor or
cause its insurance carriers to honor such claims in accordance with the terms
and conditions of such programs or applicable workers' compensation statutes.
Without limiting the scope of the preceding sentence, Seller shall be
responsible for any and all claims and liabilities arising out of or relating to
(i) its employment of the Employees, (ii) the termination by Seller of such the
employment of any such Employee and (iii) the provision of any employee benefits
to such Employees (and their beneficiaries and eligible dependents) attributable
to their employment with, or their participation in any plans or programs
maintained or contributed to by, Seller or any of its Affiliates.
ARTICLE V.
CLOSING
5.1 DELIVERIES BY SELLER. At the Closing, Seller and each Shareholder, as
applicable, shall execute and deliver the following instruments:
5.1.1 a general bill of sale substantially in the form of EXHIBIT "B" hereto
(the "BILL OF SALE"), transferring to Purchaser good and indefeasible title to
all of the tangible personal property included in the Purchased Assets,
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subject only to Permitted Encumbrances and the Assumed Liabilities;
5.1.2 an instrument of assignment and assumption substantially in the form of
EXHIBIT "C" hereto (the "ASSIGNMENT AND ASSUMPTION AGREEMENT"), assigning to
Purchaser all of Seller's right, title and interest in each of the contracts,
leases, licenses and other agreements included in the Purchased Assets, together
with all consents of third parties that are required to make each such
assignment effective as to such third parties;
5.1.3 Seller's Certificate referred to in Section 10.4 hereof;
5.1.4 the Secretary's Certificate referred to in Section 10.5 hereof;
5.1.5 executed consents referred to in Section 10.3 hereof;
5.1.6 an executed counterpart to an escrow agreement in substantially the form
of EXHIBIT "D" hereto (the "ESCROW AGREEMENT");
5.1.7 an executed counterpart to a non-compete agreement in substantially the
form of EXHIBIT "E" hereto (the "NON-COMPETE AGREEMENT");
5.1.8 the Articles of Amendment;
5.1.9 Such additional instruments of conveyance and transfer as Purchaser may
reasonably require in order to more effectively vest in it, and put it in
possession of, the Purchased Assets.
5.2 DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver the
following to Seller:
5.2.1 the cash portion of the Purchase Price required by Section 3.1.1;
5.2.2 the Purchaser Note; and
5.2.3 the Assignment and Assumption Agreement.
5.3 OTHER DELIVERIES. At the Closing,
5.3.1 Welton shall deliver to Purchaser an executed counterpart of an employment
agreement in substantially the form of EXHIBIT "F" hereto (the "WELTON
EMPLOYMENT AGREEMENT").
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5.3.2 Sutlive shall deliver to Purchaser an executed counterpart of an
employment agreement in substantially the form of EXHIBIT "G" hereto (the
"SUTLIVE EMPLOYMENT AGREEMENT").
5.4 DELIVERY OF POSSESSION. Prior to the Closing Date, Seller shall take such
actions as may be necessary or appropriate so that on the Closing Date,
Purchaser shall be placed in actual possession and control of all of the
Purchased Assets.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
To induce Purchaser to enter into this Agreement, Seller and the Shareholders
hereby jointly and severally make, as of the date hereof and as of the Closing
Date, the following representations and warranties to Purchaser, except as
otherwise set forth in written disclosure schedules (the "SCHEDULES") delivered
to Purchaser on or prior to the date hereof, a copy of which is attached hereto.
The Schedules are numbered to correspond to the various sections of this Article
VI setting forth certain exceptions to the representations and warranties
contained in this Article VI and certain other information required by this
Agreement. Unless otherwise specified, no disclosure made in any particular
Schedule shall be deemed made in any other Schedule unless expressly made
therein.
6.1 ORGANIZATION, GOOD STANDING AND POWER. Seller is a corporation duly
organized, validly existing an in good standing under the laws of the State of
Florida, and has all requisite corporate power and authority to own and lease
the Purchased Assets and to carry on its business, to own or use the properties
and assets that it purports to own and use, to perform all its obligations under
contracts to which it is, or may become, a party, to execute and deliver this
Agreement and the Ancillary Agreements, to consummate the transactions
contemplated hereby and thereby and to perform all the terms and conditions
hereof and thereof to be performed by it. Seller is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which either the ownership or use of the
properties owned or used by it, or the nature of the activities conducted by it,
requires such qualification. SCHEDULE 6.1 contains a complete and accurate list
of jurisdictions in which Seller is required to be qualified, and/or is
qualified, to do business as a foreign corporation. Seller has no subsidiaries
and does not own any shares of capital stock or other securities of any Person.
6.2 ENFORCEABILITY AND AUTHORIZATION OF AGREEMENT . This Agreement constitutes,
and the Ancillary Agreements to which Seller and each Shareholder is a party,
upon Seller's and each Shareholder's execution and delivery thereof, will
constitute, the legal, valid and binding obligations of Seller and each
Shareholder, enforceable against each of them in accordance with their
respective terms. Seller has the absolute and unrestricted right, power and
authority to execute and deliver this Agreement and each Ancillary Agreement to
which is it a party; and Seller has taken all necessary corporate action to
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authorize the execution and delivery of this Agreement and the Ancillary
Agreements, the performance by it of all terms and conditions hereof and thereof
to be performed by it and the consummation of the transactions contemplated
hereby and thereby. Each Shareholder has all necessary legal capacity to enter
into this Agreement and the Ancillary Documents to which they are a party and to
perform his or her obligations hereunder and thereunder. There are no
shareholders of Seller, other than the Shareholders, and the Shareholders have
waived any and all appraisal rights they may have under Florida law.
6.3 NO VIOLATION; CONSENTS. The execution, delivery and performance by Seller of
this Agreement and the Ancillary Agreements, and the consummation of the
transactions contemplated hereby and thereby will not (with or without the
giving of notice or the lapse of time, or both) (i) violate any provision of the
articles of incorporation, as amended, or bylaws of Seller or resolutions of
Seller's board of directors or shareholders, (ii) cause Purchaser to become
subject to, or become liable for the payment of any Tax, (iii) violate, require
any consent, authorization or approval of, or exemption by, or filing under any
provision of any law, statute, rule or regulation to which Seller, its business
or the Purchased Assets are subject, (iv) violate any judgment, order, writ or
decree of any court applicable to Seller, its business or the Purchased Assets,
(v) conflict with, result in a breach of, constitute a default under, or
accelerate or permit the acceleration of the performance required by, or require
any consent, authorization or approval under any contract, agreement or
instrument to which Seller is a party or any of the Purchased Assets is bound or
(vi) result in the creation or imposition of any Encumbrance upon the Purchased
Assets, which violation, conflict, breach, default, acceleration or Encumbrance,
or the failure to make or obtain such filing, consent, authorization or
approval, with respect to the matters specified in clauses (iii) through (vi)
could, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the condition (financial or other), business,
earnings or prospects of Seller or owning of the Purchased Assets (a "MATERIAL
ADVERSE EFFECT") or prevent or delay the consummation of the transactions
contemplated by this Agreement. Neither Seller nor any Shareholder is required
to give any notice to or obtain any consent from any Person in connection with
the execution or the consummation or performance of any of the transactions
contemplated hereby.
6.4 FINANCIAL STATEMENTS. Seller has delivered to Purchaser true and complete
copies of (i) the balance sheets of Seller's business at December 31, 2003 (the
"DECEMBER BALANCE SHEET"), 2002 and 2001 and the related statements of income
and cash flows for the years then ended, certified by Chatham, Seland & Lashley,
P.A., independent public accountants; and (ii) unaudited balance sheets of
Seller at March 31, 2004 (the "MARCH BALANCE SHEET" and together with the
December Balance Sheet, the "BALANCE SHEETS") and 2002 and related statements of
income and cash flows for the periods then ended. True and correct copies of
such financial statements are attached hereto as SCHEDULE 6.4. The foregoing
financial statements have been, and the Closing Balance Sheet will be, prepared
in accordance with GAAP consistently applied throughout the periods involved
except as may be noted therein. Such financial statements, including the related
notes, fairly present, and the Closing Balance Sheet will fairly present, the
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financial position of Seller's business at the dates indicated and the results
of operations and cash flows of Seller's business for the periods then ended in
accordance with GAAP. References in this Agreement to the "BALANCE SHEET DATE"
shall be deemed to refer to December 31, 2003.
6.5 ACCOUNTS RECEIVABLE. All Accounts Receivable as set forth on the Balance
Sheets and the Closing Balance Sheet (i) have or will have arisen only in the
ordinary course of business consistent with past practice for goods sold and
delivered or services performed and (ii) are or will be collectible in full at
the recorded amounts thereof (subject to no defenses, setoffs or counterclaims)
in the ordinary course of business (without resort to litigation or assignment
to a collection agency) no later than ninety (90) days after the Closing Date,
net of any allowance for bad debts reflected on the Balance Sheets.
6.6 INVENTORY. The Inventory as set forth on the Balance Sheets and the Closing
Balance Sheet was or will be acquired and maintained in accordance with the
regular business practices of Seller's business, consists or will consist of
new, defective and unused items of a quality and quantity useable or saleable in
the ordinary course of business consistent with past practice, and is or will be
valued in accordance with GAAP consistently applied and, with respect to
Inventory intended for sale, was or will be saleable at prices at least equal to
the value thereof on the books of Seller. Seller is not in possession of any
inventory not owned by Seller, including goods already sold.
6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Balance Sheet Date, in its
conduct of its business, Seller has not:
6.7.1 amended in any material respect or terminated any contract other than in
the ordinary course of its business consistent with past practice;
6.7.2 suffered the occurrence of any events that, individually or in the
aggregate, have had, or could reasonably be expected to have, a Material Adverse
Effect;
6.7.3 incurred any damage or destruction having a Material Adverse Effect by
fire, storm, or similar casualty, whether or not covered by insurance;
6.7.4 sold, transferred, replaced or leased any of the Purchased Assets or sold
any Inventory at a discount, except for transactions in the ordinary course of
its business consistent with past practice;
6.7.5 waived or released any material rights with respect to the Purchased
Assets or its business;
6.7.6 transferred or granted any rights to any Proprietary Rights;
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6.7.7 entered into any transaction or made any commitments (for capital
expenditures or otherwise) other than in the ordinary course of its business
consistent with past practice;
6.7.8 changed its methods of accounting;
6.7.9 increased the compensation of Employees, except following normal review
procedures or as reasonably deemed necessary in the ordinary course of its
business consistent with past practice; or
6.7.10 materially altered its conduct in its relations with suppliers or
customers.
6.8 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES. Seller owns and will
transfer to Purchaser at the Closing good, marketable and indefeasible title to
all of the Purchased Assets, free and clear of all Encumbrances, other than
Permitted Encumbrances. Each of the leases covering real property is in full
force and effect and constitutes the legal, valid and binding obligation of the
lessor thereunder, enforceable in accordance with its terms.
6.9 PROPRIETARY RIGHTS.
6.9.1 SCHEDULE 2.1.6 hereto sets forth a correct and complete list of all
patents, logos, trademarks, trade names, service marks and applications or
registrations therefor used in and material to Seller's business, and SCHEDULE
6.9 sets forth a correct list of all inventions, intellectual property and trade
secret assets used in and material to Seller's business (collectively, the
"PROPRIETARY RIGHTS").
6.9.2 Seller owns or possesses adequate licenses or other valid right, title and
intent to use (without the making of any payment to others or the obligation or
grant rights to others in exchange) all the Proprietary Rights free and clear of
all Encumbrances. The Proprietary Rights included in the Purchased Assets
constitute all such rights necessary to conduct its business in accordance with
past practice and are being conveyed to Purchaser together with the other
Purchased Assets. The validity of the Proprietary Rights and the rights therein
of Seller has not been questioned in any litigation to which Seller is a party,
nor has any such litigation been threatened. The conduct of Seller's business
does not conflict with patent rights, licenses, trademark rights, trade name
rights, copyrights or other intellectual property rights of others; and Seller
has not received any notice from any third party that the Proprietary Rights
conflict with any Person's intellectual property rights.
6.9.3 No use of any Proprietary Rights owned by Seller has heretofore been, or
is now being, made by any Person other than Seller. Seller has no Knowledge of
any infringement of any Proprietary Rights owned or licensed by Seller. No
present or former director or officer or employee, or consultant
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of Seller or any Affiliate of Seller has any interest in any of the Proprietary
Rights.
6.9.4 All personnel, including employees, agents, consultants, and contractors,
who have contributed to or participated in the conception and development of the
Proprietary Rights on behalf of Seller either (1) have been party to a
"work-for-hire" arrangement or agreement with Seller, in accordance with
applicable federal and state law, that has accorded Seller full, effective,
exclusive, and original ownership of all tangible and intangible property
thereby arising, or (2) have executed appropriate instruments of assignment in
favor of Seller as assignee that have conveyed to Seller full, effective, and
exclusive ownership of all tangible and intangible property thereby arising.
6.10 CONTRACTS AND COMMITMENTS. Seller is not, with respect to the Purchased
Assets or its business, a party to any written or oral:
6.10.1 agreement, contract or commitment for the future purchase of, or payment
for, supplies or products, or for the performance of services by another party,
involving in any one case $5,000 or more;
6.10.2 agreement, contract or commitment to sell or supply products or to
perform services, involving in any one case $5,000 or more;
6.10.3 agreement, contract or commitment continuing over a period of more than
six months from the date hereof or exceeding $5,000 in value;
6.10.4 representative, sales agency, dealer or distributor agreement, contract
or commitment;
6.10.5 lease under which Seller is either lessor or lessee other than the leases
included in the Purchased Assets;
6.10.6 note, debenture, bond, conditional sale agreement, equipment trust
agreement, letter of credit agreement, loan agreement or other contract or
commitment for the borrowing or lending of money (including, without limitation,
loans to or from employees) or guarantee, pledge or undertaking of the
indebtedness of any other Person;
6.10.7 agreement, contract or commitment for any charitable or political
contribution;
6.10.8 agreement, contract or commitment limiting or restraining Seller or any
successor or assign from engaging or competing in any lines of business with any
Person;
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6.10.9 license, franchise, distributorship or other agreement, including those
that relate in whole or in part to any patent, trademark, trade name, service
mark or copyright or to any ideas, technical assistance or other know-how of or
used in Seller's business; or
6.10.10 agreement, contract or commitment involving a sharing of profits,
Losses, costs or liabilities by Seller with any other Person;
6.10.11 agreement, contract or commitment that contains or provides for an
express undertaking by Seller to be responsible for consequential or incidental
damages; or
6.10.12 any other material agreement, contract or commitment not made in the
ordinary course of Seller's business.
Each of the agreements, contracts, commitments, leases and other instruments,
documents and undertakings listed on SCHEDULE 2.1.2 is valid and enforceable in
accordance with its terms, the parties thereto are in compliance with the
provisions thereof, no party is in default in the performance, observance or
fulfillment of any material obligation, covenant or condition contained therein,
and no event has occurred that with or without the giving of notice or lapse of
time, or both, would constitute a default thereunder. No such agreement,
contract, commitment, lease or other instrument, document or undertaking
contains any contractual requirement with which there is a reasonable likelihood
Seller or any other party thereto will be unable to comply. Each party to each
of the agreements, contracts, commitments, leases and other instruments,
documents and undertakings listed on SCHEDULE 2.1.2 is, and has been, in
compliance with all terms and requirements applicable to each such party. No
event has occurred or circumstance exists that (with or without notice or lapse
of time) may contravene, conflict with or result in a breach of, or give Seller
or any other Person the right to declare a default or exercise any remedy under,
or to accelerate the maturity or performance of, or payment under, or to cancel,
terminate or modify, any agreement, contract, commitment, lease or other
instrument, document or undertaking listed on SCHEDULE 2.1.2. No event has
occurred or circumstance exists under or by virtue of any agreement, contract,
commitment, lease or other instrument, document or undertaking listed on
SCHEDULE 2.1.2 that (with or without notice or lapse of time) would cause the
creation of any Encumbrance affecting any of the Purchased Assets. There are no
renegotiations of, attempts to renegotiate or outstanding rights to renegotiate
any material amounts paid or payable to Seller under any agreement, contract,
commitment, lease or other instrument, document or undertaking listed on
SCHEDULE 2.1.2 with any Person having the contractual or statutory right to
demand or require such renegotiation and no such Person has made any demand for
such renegotiation. Each agreement, contract, commitment, lease or other
instrument, document or undertaking listed on SCHEDULE 2.1.2 has been entered
into in the ordinary course of Seller's business and has been entered into
without the commission of any act alone or in concert with any other Person, or
any consideration having been paid or promised, that is or would be in violation
of any law, rule or regulation of any federal, state or local authority or
agency. No advance payments have been received by Seller by or on behalf of any
party to any of the agreements, contracts, commitments, leases and other
instruments listed on SCHEDULE 2.1.2 for services to be rendered or products to
be delivered to such party after the Closing Date. No consent or approval of any
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party to any agreement, contract, commitment, lease or other instrument,
document or undertaking listed on SCHEDULE 2.1.2 is required for the execution
of this Agreement or the consummation of the transactions contemplated hereby.
6.11 PERMITS, LICENSES. Seller has all material permits, licenses,
registrations, orders and approvals of federal, state or local government or
regulatory bodies that are required to operate its business (including, without
limitation, those required under any Environmental Law) (collectively, the
"PERMITS") and Seller is in compliance with the material terms and conditions of
the Permits. SCHEDULE 2.1.4 hereto sets forth a correct and complete list of all
material Permits, each one of which is in full force and effect. No suspension
or cancellation of any of the Permits has been threatened and no cause exists
for such suspension or cancellation. Any Permits that cannot be transferred are
identified as such on SCHEDULE 2.1.4 hereto.
6.12 COMPLIANCE WITH LAWS. Seller has at all times conducted, and is presently
conducting, its business so as to comply with all laws, rules, ordinances and
regulations applicable to the conduct or operation of its business or the
ownership or use of the Purchased Assets, in each case except where the failure
to comply would not, individually or in the aggregate, have a Material Adverse
Effect. No event has occurred or circumstance exists that (with or without
notice or lapse of time) may constitute or result in a violation by Seller of,
or a failure on the part of Seller to comply with, any laws, rules, ordinances
or regulations applicable to it, or may give rise to any obligation on the part
of Seller to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature.
6.13 LEGAL PROCEEDINGS. There is no claim, action, suit, proceeding,
investigation or inquiry pending before any federal, state or other court or
governmental or administrative agency or threatened against Seller's business or
any of the Purchased Assets, or relating to the transactions contemplated by
this Agreement that could reasonably be expected to have a Material Adverse
Effect, nor does Seller know or have reasonable grounds to know of any basis for
any such claim, action, suit, proceeding, investigation, or inquiry. Seller is
not a party to or subject to the provisions of any judgment, order, writ,
injunction, decree or award of any court, arbitrator or governmental, regulatory
or administrative official, body or authority that relates to the Purchased
Assets or its business or that might affect the transactions contemplated by
this Agreement. No event has occurred or circumstance exists that is likely to
give rise to or serve as a basis for the commencement of any such claim, action,
suit, proceeding, investigation or inquiry.
6.14 ABSENCE OF UNDISCLOSED LIABILITIES. Seller has no liabilities or
obligations (as defined in Section 4.1) relating to its business except (i)
those liabilities and obligations set forth on the December Balance Sheet or the
March Balance Sheet and not heretofore paid or discharged; (ii) those
liabilities and obligations arising in the ordinary course of business
consistent with past practice under any agreement, contract or commitment
specifically disclosed on SCHEDULE 2.1.2 hereto; and (iii) those liabilities and
obligations incurred in the ordinary course of its business consistent with past
practice since March 31, 2004.
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6.15 BOOKS AND RECORDS. All material books of account and other financial
records of Seller relating to its business (the "BOOKS AND RECORDS") are
complete and correct in all material respects and have been made available to
Purchaser. All of the Books and Records have been prepared and maintained in
accordance with good business practices and, where applicable, in conformity
with GAAP (except as otherwise stated therein) and in compliance in all material
respects with applicable laws, regulations and other requirements.
6.16 EMPLOYEES. SCHEDULE 1.23 sets forth a true and correct list of all
individuals employed by Seller in the conduct of its business and their present
position and rate of compensation. No officer, director, agent, employee,
consultant or contractor of Seller is bound by any contract, agreement or other
investment that purports to limit the ability of such officer, director, agent,
employee, consultant or contractor to (i) engage in or continue to perform any
conduct, activity, duties or practice relating to Seller's business or (ii) to
assign to Seller or Purchaser any rights to any invention, improvement or
discovery. Seller has not violated, and upon consummation of the transaction
contemplated hereunder will not violate, the WARN Act or any similar state or
local requirement. During the ninety (90) day period prior to the date of this
Agreement, Seller has terminated six (6) of its employees, whose names are
listed on SCHEDULE 6.16 hereto. No terminated employees have filed a claim, or
have a basis for any claim, against Seller.
6.17 LABOR DISPUTES. Seller has complied in all respects with all legal
requirements relating to employment practices, terms and conditions of
employment, equal employment opportunity, nondiscrimination, immigration, wages,
hours, benefits, collective bargaining and other requirements under all
applicable legal requirements, the payment of social security taxes and
occupational safety and health. Seller is not liable for the payment of any
Taxes, fines, penalties or other amounts, however designated, for failure to
comply with any applicable legal requirement. There are no discrimination
complaints nor any other kind of employment or labor related disputes against
Seller in connection with its business pending before or threatened before any
federal, state or local court or agency, and no dispute respecting minimum wage
or overtime claims or other conditions or terms of employment exists. Seller's
business has not experienced any labor disputes or any work stoppage due to
labor disagreements within the past three years. With respect to its business
(i) there is no unfair labor practice charge or complaint against Seller pending
or threatened before the National Labor Relations Board; (ii) there is no labor
strike, slowdown or stoppage pending or threatened against or affecting Seller;
and (iii) no question concerning representation has been raised within the past
three years or is threatened respecting the Employees.
6.18 ERISA.
6.18.1 SCHEDULE 6.18 sets forth an accurate and complete list of each employee
benefit plan at any time maintained, sponsored, or contributed to by Seller or
with respect to which Seller has any liability (each a "PLAN" and collectively
the "PLANS").
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6.18.2 Except as disclosed on SCHEDULE 6.18, Seller does not maintain,
contribute to or have any liability under (or with respect to) any "defined
benefit plan" (as such term is defined in ERISA ss. 3(35)), or any
"multiemployer plan" (as such term is defined in ERISA ss. 3(37)). No asset of
Seller is subject to any lien under ERISA or the Code. There are no pending or
threatened actions, suits, investigations or claims with respect to any Plan
(other than routine claims for benefits).
6.18.3 Each Plan that is intended to be qualified under Code ss. 401(a) has
received a determination from the Internal Revenue Service ("IRS") that such
Plan is so qualified, and nothing has occurred since the date of such
determination that could adversely affect the qualified status of such Plan.
6.18.4 Each of the Plans and all related trusts, insurance contracts and funds
have been maintained, funded and administered in compliance with their terms and
in compliance with the applicable provisions of ERISA, the Code and any other
applicable laws. With respect to each Plan, all required payments, premiums,
contributions, distributions, or reimbursements for all periods ending prior to
or as of the Closing Date have been made or properly accrued.
6.18.5 Neither Seller nor any other "disqualified person" (within the meaning of
Code ss. 4975) or any "party in interest" (within the meaning of ERISA ss.
3(14)) has engaged in any "prohibited transaction" (within the meaning of Code
ss. 4975 or ERISA ss. 406) with respect to any of the Plans which could subject
any of the Plans, Seller, or any officer, director or employee of any of the
foregoing to a penalty or Tax under ERISA ss. 502(i) or Code ss. 4975.
6.18.6 Each Plan which is subject to the health care continuation requirements
of Part 6 of Subtitle B of Title I of ERISA or Code ss. 4980B ("COBRA") has been
administered in compliance with such requirements. No Plan provides medical or
life or other welfare benefits to any current or future retired or terminated
employee (or any dependent thereof) of Seller other than as required pursuant to
COBRA.
6.18.7 With respect to each Plan, Seller has provided the Buyer with true,
complete and correct copies of (to the extent applicable): (i) all documents
pursuant to which any Plan is maintained, funded and administered (including the
plan and trust documents, any amendments thereto, the summary plan descriptions,
and any insurance contracts or service provider agreements); (ii) the three most
recent annual reports (Form 5500 series) filed with the IRS (with applicable
attachments); and (iii) the most recent determination letter received from the
IRS.
6.18.8 Neither Seller nor any ERISA Affiliate of Seller has incurred any
liability on account of a "partial withdrawal" or a "complete withdrawal"
(within the meaning of ERISA ss.ss. 4205 and 4203, respectively) from a
"multiemployer plan" (as such term is defined in ERISA ss. 3(37)), no such
liability has been asserted, and there are no events and circumstances which
could result in any such partial or complete withdrawal. Neither Seller
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nor any ERISA Affiliate is bound by any contract or agreement or has any
obligation or liability described in ERISA ss. 4204.
6.19 NO FINDER. Except as set forth on SCHEDULE 6.19, Seller has not taken any
action that would give to any Person a right to a finder's fee or any type of
brokerage commission, contingent or otherwise, in relation to, or in connection
with, the transactions contemplated by this Agreement.
6.20 INTEREST IN BUSINESS. Seller has not granted, and there is not outstanding,
any option, right, agreement or other obligation pursuant to which any Person
could claim a right to acquire in any way all or any part of, or interest in,
Seller's business.
6.21 CONDITION OF ASSETS. All tangible assets and properties which are part of
the Purchased Assets are in good operating condition and repair and are suitable
for immediate use in the ordinary course of Seller's business consistent with
past practice and conform in all material respects to all applicable laws and
regulations relating to their construction, use and operation.
6.22 AFFILIATE TRANSACTIONS. SCHEDULE 6.22 hereto sets forth a summary of all
purchases and sales of goods or services between Seller and Affiliates of Seller
for the three years ended December 31, 2003 and all other transactions between
Seller and its Affiliates during such three (3) year period. Except as set forth
in SCHEDULE 6.22 hereto, Seller and its Affiliates provide no services or
products to Seller's business.
6.23 ENVIRONMENTAL MATTERS.
6.23.1 Seller has not received any notice relating to its business or the Leased
Property alleging any violation of any Environmental Law or any written request
for information from any governmental agency or other Person pursuant to any
Environmental Law and it is, with respect to its business and the Leased
Property, in compliance in all material respects with all applicable
Environmental Law.
6.23.2 Except as authorized by any valid permit issued pursuant to an
Environmental Law, there are no Regulated Substances released by Seller or any
other Person on or beneath the Leased Property in quantities or concentrations
that could give rise to obligations, responsibilities, liabilities or debts of
Seller or Purchaser under any Environmental Law.
6.23.3 Seller has not received any notice or order from any governmental agency
or private or public entity in connection with its business advising it that
Seller is responsible for or potentially responsible for remediation or paying
for the cost of investigation or remediation of any Regulated Substance, and
Seller has not entered into any agreements pertaining thereto;
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6.24 INSURANCE. SCHEDULE 6.24 sets forth a complete list of all insurance
policies maintained by Seller or its Affiliates and all insurance policies known
by Seller to have been maintained by any other Person which may provide any
coverage for Losses, including, without limitation, Environmental Losses. All
policies of insurance to which Seller is a party or that provide coverage to
Seller (i) are valid, outstanding and enforceable, (ii) are issued by an insurer
that is financially sound and reputable, (iii) provide adequate insurance
coverage for the Purchased Assets and the operations of Seller for all risks to
which Seller is normally exposed, and (iv) are sufficient for compliance with
all legal requirements applicable to Seller and all contracts and agreements to
which Seller is a party. Seller has not received any refusal of coverage or any
notice that a defense will be afforded with reservation of rights or any notice
of cancellation. Seller has paid all premiums due, and has otherwise performed
all of its obligations, under each such insurance policy.
6.25 NO SIGNIFICANT ITEMS EXCLUDED. Except for Excluded Assets, there are no
assets or properties of Seller or agreements, contract or commitments to which
Seller is a party that would be used or useful to the ongoing operation of
Seller's business by Purchaser.
6.26 NO MATERIAL ADVERSE CHANGE. Since the Balance Sheet Date, there has not
been any material adverse change in the business, operations, prospects, assets,
results of operations or condition (financial or other) of Seller, and no event
has occurred or circumstance exists that may result in such a material adverse
change
6.27 SOLVENCY.
6.27.1 Seller is not now insolvent and will not be rendered insolvent by any of
the transactions contemplated hereunder. As used in this section, "insolvent"
means that the sum of the debts and other probable liabilities of Seller exceeds
the present fair saleable value of Seller's assets.
6.27.2 Immediately after giving effect to the consummation of the transactions
contemplated hereunder: (i) Seller will be able to pay its liabilities as they
become due in the usual course of its business; (ii) Seller will not have
unreasonably small capital with which to conduct its present or proposed
business; (iii) Seller will have assets (calculated at fair market value) that
exceed its liabilities; and (iv) taking into account all pending and threatened
litigation, final judgments against Seller in actions for money damages are not
reasonably anticipated to be rendered at a time when, or in amounts such that,
Seller will be unable to satisfy any such judgments promptly in accordance with
their terms (taking into account the maximum probable amount of such judgments
in any such actions and the earliest reasonable time at which such judgments
might be rendered) as well as all other obligations of Seller. The cash
available to Seller, after taking into account all other anticipated uses of the
cash, will be sufficient to pay all such debts and judgments promptly in
accordance with their terms.
6.28 SECURITIES LAW MATTERS.
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6.28.1 Seller is acquiring the Purchaser Note and, if applicable, the Earn-Out
Shares for its own account and not with a view to its distribution with the
meaning of Section 2(11) of the Securities Act of 1933, as amended.
6.28.2 Each Seller and each Shareholder confirms that Purchaser has made
available to Seller, each Shareholder and its and their respective
representatives the opportunity to ask questions of the officers and management
employees of Purchaser and to acquire such additional information about the
business and financial condition of Purchaser as Seller has requested, and all
such information has been received.
6.29 TAXES.
6.29.1 Seller has timely filed (including any applicable extension periods) all
tax reports, returns and forms required to be filed by applicable federal,
state, local or foreign tax laws on or before the Closing Date, and all such
reports, returns and forms are correct and complete; copies of such tax returns
have been delivered by Seller to Purchaser and all such returns are listed on
SCHEDULE 6.29.1.
6.29.2 Neither the Internal Revenue Service nor the Florida Department of
Revenue or other state or local taxing authority (each, an "AUTHORITY"), has
asserted any deficiencies with respect to any such tax returns. No state of
facts exists or has existed that would constitute grounds for the assessment of
any tax liability with respect to (i) the periods covered thereby not set forth
on such tax returns or (ii) the period from the last such filed tax return to
and including the Closing Date. There are no outstanding agreements or waivers
extending the statutory period of limitation applicable to any federal, state or
local tax return for any period.
6.29.3 Seller has timely paid all federal, state, local and foreign Taxes to be
due on or before the Closing Date from Seller by the Internal Revenue Service or
any Authority. No tax liens have been filed on any property or assets of Seller
and no claims are being asserted with respect to any Taxes.
6.29.4 Except as set forth on SCHEDULE 6.29.4, Seller has complied with all
applicable laws, rules and regulations relating to the payment and withholding
of Taxes and has withheld all amounts required by law to be withheld from the
wages or salaries of employees who are employed in Seller's business, and is not
liable for any Taxes or other charges for failure to comply with such laws,
rules and regulations.
6.30 COMPLETENESS AND ACCURACY. All information set forth on any Schedule hereto
is true, correct and complete. No representation or warranty of Seller contained
in this Agreement contains or will contain any untrue statement of material
fact, or omits or will omit to state any material fact necessary to make the
statements made therein not misleading. All contracts, permits and
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other documents and instruments furnished or made available to Purchaser by
Seller are or will be true, complete and accurate originals or copies of
originals and include all amendments, supplements, waivers and modifications
thereto. There is no fact, development or threatened development (excluding
general economic factors affecting business in general) that Seller has not
disclosed to Purchaser in writing that has had a Material Adverse Effect or, so
far as Seller can now foresee, could have a Material Adverse Effect.
ARTICLE VII.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
To induce Seller to enter into this Agreement, Purchaser hereby makes, as of the
date hereof and as of the Closing Date, the following representations and
warranties to Seller:
7.1 ORGANIZATION, GOOD STANDING, POWER. Purchaser is a corporation duly
organized, validly existing an in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own and lease
the Purchased Assets and to carry on its business, to own or use the properties
and assets that it purports to own and use, to perform all its obligations under
contracts to which it is, or may become, a party to execute and deliver this
Agreement and the Ancillary Agreements, to consummate the transactions
contemplated hereby and thereby and to perform all the terms and conditions
hereof and thereof to be performed by it. Purchaser is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which either the ownership or use of the
properties owned or used by it, or the nature of the activities conducted by it,
requires such qualification.
7.2 AUTHORIZATION OF AGREEMENT AND ENFORCEABILITY. This Agreement constitutes,
and the Ancillary Agreements to which Purchaser is a party, upon Purchaser's
execution and delivery thereof, will constitute, the legal, valid and binding
obligations of Purchaser, enforceable against it in accordance with their
respective terms. Purchaser has taken all necessary corporate action to
authorize the execution and delivery of this Agreement and the Ancillary
Agreements, the performance by it of all terms and conditions hereof and thereof
to be performed by it and the consummation of the transactions contemplated
hereby and thereby.
7.3 NO VIOLATIONS; CONSENTS. The execution, delivery and performance by
Purchaser of this Agreement and the Ancillary Agreements, and the consummation
of the transactions contemplated hereby and thereby will not (with or without
the giving of notice or the lapse of time, or both) (i) violate any provision of
the charter or bylaws of Purchaser or resolutions of Purchaser's board of
directors or shareholders, (ii) violate, require any consent, authorization or
approval of, or exemption by, or filing under any provision of any law, statute,
rule or regulation to which Purchaser, its business or its assets are subject,
(iii) violate any judgment, order, writ or decree of any court applicable to
Purchaser, its business or its assets, (iv) conflict with, result in a breach
of, constitute a default under, or accelerate or permit the acceleration of the
performance required by, or require any consent, authorization or approval under
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any contract, agreement or instrument to which Purchaser is a party or any of
its assets is bound or (v) result in the creation or imposition of any
Encumbrance upon its assets, which violation, conflict, breach, default,
acceleration or Encumbrance, or the failure to make or obtain such filing,
consent, authorization or approval, with respect to the matters specified in
clauses (ii) through (v) could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on any of the assets of Purchaser or
the results of operations of Purchaser's business or prevent or delay the
consummation of the transactions contemplated by this Agreement.
7.4 LEGAL PROCEEDINGS. There is no claim, action, suit, proceeding,
investigation or inquiry pending before any federal, state or other court or
governmental or administrative agency or threatened against Purchaser or any of
Purchaser's properties, assets, operations or businesses that might prevent or
delay the consummation of the transactions contemplated hereby.
7.5 FINANCIAL CAPACITY. Purchaser has received a commitment letter from Cornell
Capital Partners, L.P. providing for the borrowing by Purchaser of an amount
sufficient to allow it to perform in a timely manner all of its obligations
under this Agreement.
7.6 NO FINDER. Except as set forth in SCHEDULE 7.6, Purchaser has not taken any
action which would give to any Person a right to a finder's fee or any type of
brokerage commission in relation to, or in connection with, the transactions
contemplated by this Agreement.
ARTICLE VIII.
COVENANTS OF SELLER PRIOR TO CLOSING DATE
8.1 REQUIRED ACTIONS. Between the date of this Agreement and the Closing Date,
Seller covenants that it will, in the conduct of its business, except as
otherwise agreed by Purchaser in writing:
8.1.1 ACCESS TO INFORMATION. Give to Purchaser and its counsel, accountants,
consultants and other representatives, at their sole expense and risk,
reasonable access, during normal business hours, to such of the properties,
books, accounts, contracts and records of Seller as are relevant to the
Purchased Assets and Seller's business, and furnish or otherwise make available
to Purchaser all such information concerning the Purchased Assets and its
business as Purchaser may reasonably request, provided that the confidentiality
of any data or information so acquired shall be maintained as confidential by
Purchaser and its representatives in accordance with Section 9.1.1.
8.1.2 CONDUCT OF BUSINESS. Operate its business only in the usual, regular and
ordinary manner as the business was conducted prior to the date hereof and, to
the extent consistent with such operation, use its best efforts until the
Closing Date to (i) preserve and keep intact its business, (ii) keep available
the services of the Employees and (iii) preserve its
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relationships with customers, suppliers and others having business dealings with
Seller in connection with its business.
8.1.3 MAINTENANCE OF PROPERTIES. Maintain the Purchased Assets, whether owned or
leased, in good repair, order and condition, in accordance with manufacturers'
instructions and Seller's past practices, reasonable wear and tear excepted.
8.1.4 MAINTENANCE OF BOOKS AND RECORDS. Maintain the Books and Records in the
usual, regular and ordinary manner, on a basis consistent with past practice.
8.1.5 COMPLIANCE WITH APPLICABLE LAW. Comply in all material respects with all
laws applicable to the Purchased Assets and to the conduct of its business.
8.1.6 PERFORMANCE OF OBLIGATIONS. Perform all the material obligations of Seller
relating to the Purchased Assets and its business in accordance with the past
practices of Seller.
8.1.7 APPROVALS, CONSENTS. Use its best efforts to obtain in writing as promptly
as possible all other approvals and consents required to be obtained by Seller
in order to effectuate the transactions contemplated hereby and deliver to
Purchaser copies of such approvals and consents.
8.1.8 NOTICE OF MATERIAL DAMAGE. Give to Purchaser prompt written notice of any
material damage by fire or other casualty upon the Purchased Assets or Seller's
business.
8.1.9 ADVISE OF CHANGES. Give prompt notice to Purchaser of (i) the occurrence,
or failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty of Seller contained in this Agreement to be
untrue or inaccurate in any respect and (ii) any material failure of Seller to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; PROVIDED, HOWEVER, that such disclosure shall not
be deemed to cure any breach of a representation, warranty, covenant or
agreement or to satisfy any condition. Seller shall promptly notify Purchaser of
any development that occurs before the Closing that could reasonably be expected
to result in a material adverse change to the Purchased Assets or Seller's
business.
8.1.10 UPDATE SCHEDULES. Promptly disclose to Purchaser any information
contained in the representations and warranties of Seller contained in Article
VI or in the Schedules to this Agreement which is no longer complete or correct
(including furnishing updated financial statements); PROVIDED that no such
disclosure shall be deemed to modify, amend or supplement Seller's
representations and warranties.
8.1.11 PAY EMPLOYEES TO CLOSING DATE. Pay all wages, salaries and other sums due
Employees through the close of business on the day prior to the Closing Date.
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8.1.12 TERMINATION; WARN ACT. Terminate the employment of all Employees as of
the Closing Date. Comply, at its sole cost and expense, with the provisions of
(i) the WARN Act and (ii) state laws, if any, applicable to such termination of
employment.
8.1.13 COMPLIANCE WITH AGREEMENT. Not undertake any course of action
inconsistent with satisfaction of the conditions applicable to it set forth in
this Agreement, and do all such acts and take all such measures as may be
reasonably necessary to comply with the representations, agreements, conditions
and other provisions of this Agreement.
8.2 PROHIBITED ACTIONS. Between the date of this Agreement and the Closing Date,
in the conduct of its business, Seller shall not, except as otherwise agreed by
Purchaser in writing:
8.2.1 SALE OF PURCHASED ASSETS. Sell, transfer, assign, lease, encumber or
otherwise dispose of any of the Purchased Assets other than in the ordinary
course of its business consistent with past practices.
8.2.2 BUSINESS CHANGES. Change in any respect the character of its business.
8.2.3 INCURRENCE OF MATERIAL OBLIGATIONS. Incur any fixed or contingent
obligation or enter into any agreement, commitment or other transaction or
arrangement that is not in the ordinary course of its business consistent with
past practices.
8.2.4 INCURRENCE OF LIENS. Subject to lien, security interest or any other
Encumbrance, other than Permitted Encumbrances, any of the Purchased Assets.
8.2.5 CHANGE IN EMPLOYEE COMPENSATION AND BENEFITS. Increase the rate of
compensation paid, or pay any bonus, to anyone connected with its business,
except for those increases or bonuses planned, in the ordinary course of
business consistent with past practices, or establish or adopt any new pension
or profit-sharing plan, deferred compensation agreement or employee benefit
arrangement of any kind whatsoever covering or affecting Employees.
8.2.6 PUBLICITY; ADVERTISEMENT. Except as required by law, publicize, advertise
or announce to any third party, except as required pursuant to this Agreement to
obtain the consent of such third party, the entering into of this Agreement, the
terms of this Agreement or the transactions contemplated hereby.
8.2.7 NO RELEASE. Except in the ordinary course of its business consistent with
past practices, cancel, release or relinquish any debts of or claims against
others held by Seller with respect to its business or waive any rights relating
to its business.
8.2.8 NO TERMINATION OR MODIFICATION. Terminate or materially modify any lease,
contract, governmental license, permit or other authorization or agreement
affecting its business or the Purchased Assets or the operation thereof.
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8.3 NO MERGER, ETC. Seller shall not directly or indirectly, (a) solicit any
inquiries or proposals or enter into or continue any discussions, negotiations
or agreements relating to (i) the sale or exchange of Seller's capital stock,
(ii) the merger of Seller with, or the direct or indirect disposition of the
Purchased Assets or its business to, any Person other than Purchaser or (iii)
the licensing of Seller's Proprietary Rights or the Purchased Assets to any
Person other than in the ordinary course of business consistent with past
practice or (b) provide any assistance or any information to or otherwise
cooperate with any Person in connection with any such inquiry, proposal or
transaction. Seller hereby represents that neither Seller nor any of its
Affiliates is now engaged in discussions or negotiations with any party other
than Purchaser with respect to any transaction of the kind described in clauses
(a) (i) through (a) (iii) of the preceding sentence (a "PROPOSED ACQUISITION
TRANSACTION"). Seller agrees not to, and to cause each of its Affiliates not to,
release any third party from, or waive any provision of, any confidentiality or
standstill agreement to which any of them is a party. Seller shall (w)
immediately notify Purchaser (orally and in writing) if any offer is made, any
discussions or negotiations are sought to be initiated, any inquiry, proposal or
contact is made or any information is requested with respect to any Proposed
Acquisition Transaction, (x) promptly notify Purchaser of the terms of any
proposal which it may receive in respect of any such Proposed Acquisition
Transaction, including, without limitation, the identity of the prospective
purchaser or soliciting party, (y) promptly provide Purchaser with a copy of any
such offer, if written, or a written summary (in reasonable detail) of such
offer, if not in writing, and (z) keep Purchaser informed of the status of such
offer and the offeror's efforts and activities with respect thereto. In the
event that Seller shall breach this Section, in addition to any other remedies
which Purchaser may have under this Agreement, in law or in equity, Seller shall
immediately upon written request of Purchaser, pay to Purchaser in cash or by
wire transfer an amount equal to all costs, expenses (including all accounting
and attorneys' fees), losses or liabilities incurred by Purchaser in connection
with the preparation, negotiation and consummation of this Agreement and the
transactions contemplated hereby, including, but not limited to, the due
diligence review of Seller, the Purchased Assets, and Seller's business and
obtaining the financing necessary to the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE IX.
COVENANTS OF PURCHASER PRIOR TO CLOSING DATE
9.1 REQUIRED ACTIONS. Between the date of this Agreement and the Closing Date,
Purchaser shall, except as otherwise agreed by Seller in writing:
9.1.1 CONFIDENTIALITY. Not publish or disclose and not authorize or permit any
of its officers, employees, directors, agents or representatives or any third
party to publish or disclose any trade secrets or other Confidential Information
or any data or business or financial books, records or other information of or
pertaining to Seller, which have been furnished to Purchaser by Seller or to
which Purchaser, or any of its officers, employees, directors, agents, attorneys
or accountants, or any financial institution have
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had access during any investigation made in connection with this Agreement and
which is not otherwise available to Purchaser, except as required by law.
9.1.2 ADVISE OF CHANGES. Advise Seller promptly in writing of any fact that, if
known at the Closing Date, would have been required to be set forth or disclosed
in or pursuant to this Agreement, or which would result in the breach in any
material respect by Purchaser of any of its representations, warranties,
covenants or agreements hereunder.
9.1.3 COMPLIANCE WITH AGREEMENT. Not undertake any course of action inconsistent
with satisfaction of the conditions applicable to it set forth in this
Agreement, and do all such acts and take all such measures as may be reasonably
necessary to comply with the representations, agreements, conditions and other
provisions of this Agreement (including using commercially reasonable efforts to
satisfy the conditions set forth in the commitment letter referred to in Section
7.5).
9.2 INVESTIGATION. Prior to the Closing, Purchaser shall use reasonable efforts
to conduct its investigation of Seller's business in such a manner as to prevent
disruption of relations with the employees, customers and suppliers of Seller.
9.3 APPROVALS, CONSENTS. Assist Seller in fulfilling its covenants in
Section 8.1.7.
ARTICLE X.
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser hereunder are subject to the fulfillment at or
prior to the Closing of each of the following conditions:
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller and the Shareholders contained in this Agreement shall have
been true in all material respects (except those that contain an express
materiality qualification which shall have been true in all respects) on the
date hereof and on and as of the Closing Date with the same force and effect as
though made on and as of the Closing Date, without giving effect to any
supplement to the Schedules.
10.2 PERFORMANCE OF AGREEMENT. Seller and Shareholders shall have performed in
all material respects all obligations and agreements and complied in all
material respects with all covenants and conditions contained in this Agreement
to be performed or complied with by it or them at or prior to the Closing Date.
10.3 CONSENTS. Any third-party and governmental consents, approvals or
authorizations necessary for the conveyance of the Purchased Assets or valid
consummation of the transactions contemplated hereby shall have been obtained,
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including, without limitation, the consent of WAM Enterprises to the assignment
to Purchaser of that certain Lease dated July 31, 2001, between Seller and WAM
Enterprises.
10.4 SELLER'S CERTIFICATE. Purchaser shall have received a certificate from
Seller and the Shareholders, dated as of the Closing Date, reasonably
satisfactory in form and substance to Purchaser and its counsel, certifying as
to the matters specified in Section 10.1, Section 10.2 and Section 10.3 hereof.
The matters set forth in such certificate shall constitute representations and
warranties hereunder.
10.5 SECRETARY'S CERTIFICATE. Purchaser shall have received a certificate, dated
the Closing Date, of the Secretary of Seller (i) with respect to the incumbency
and specimen signature of each officer or representative of Seller executing
this Agreement, the certificate referred to in Section 10.4 and the Ancillary
Agreements to which Seller is a party and (ii) certifying as to (a) the Articles
of Incorporation of Seller, which shall be certified by the Secretary of State
of Seller's state of incorporation not more than five (5) business days prior to
the Closing Date, (b) the Bylaws of Seller, (c) resolutions duly adopted by the
board of directors of Seller and the Shareholders with respect to the
transactions contemplated hereby and (d) a good standing certificate issued by
the Secretary of State of Seller's state of incorporation not more than five (5)
business days prior to the Closing Date.
10.6 INJUNCTION. On the Closing Date, there shall be no injunction, writ,
preliminary restraining order or any order of any nature in effect issued by a
court of competent jurisdiction directing that the transactions provided for
herein, or any of them, not be consummated as herein provided and no suit,
action, investigation, inquiry or other legal or administrative proceeding by
any governmental body or other Person shall have been instituted or threatened
which questions the validity or legality of the transactions contemplated hereby
or which if successfully asserted might otherwise have a Material Adverse Effect
or impose any additional financial obligation on, or require the surrender of
any right by, Purchaser.
10.7 ACTIONS AND PROCEEDINGS. All corporate actions, proceedings, instruments
and documents required to carry out the transactions contemplated by this
Agreement or incidental thereto and all other related legal matters shall be
reasonably satisfactory to counsel for Purchaser, and such counsel shall have
been furnished with such certified copies of such corporate actions and
proceedings and such other instruments and documents as it shall have reasonably
requested.
10.8 NET WORKING CAPITAL. The Closing Date Net Working Capital shall not be less
than $750,000.00.
10.9 FINANCING. Purchaser shall have received, on terms that shall be
satisfactory to Purchaser in its sole discretion, the proceeds of financing in
an amount sufficient to enable Purchaser to pay the cash portion of Purchase
Price required by Section 3.1.1.
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10.10 OPINION OF COUNSEL. Purchaser shall have received the favorable opinion of
Barrett, Chapman & Ruta, P.A., counsel for Seller, in substantially the form of
EXHIBIT "H" hereto.
10.11 ESCROW AGREEMENT. Seller shall have executed and delivered an executed
counterpart to the Escrow Agreement.
10.12 NON-COMPETE AGREEMENT. Seller and each Shareholder shall have delivered
executed counterparts to the Non-Compete Agreement.
10.13 ARTICLES OF AMENDMENT. Seller shall have delivered a duplicate original of
the Articles of Amendment.
10.14 NIELSON EMPLOYMENT AGREEMENT. Martin Nielson shall have executed and
delivered a counterpart to an employment agreement with Purchaser and its
Affiliates containing terms and conditions acceptable to Purchaser and its
Affiliates, in their respective sole discretion; and Nielson shall have resigned
from any and all positions as an executive officer and/or director of HYTT.
10.15 WELTON EMPLOYMENT AGREEMENT. Welton shall have executed and delivered a
counterpart to the Welton Employment Agreement.
10.16 SUTLIVE EMPLOYMENT AGREEMENT. Sutlive shall have executed and delivered a
counterpart to the Sutlive Employment Agreement.
10.17 ARRANGEMENTS WITH EMPLOYEES. Purchaser shall have entered into
arrangements with key Employees of Seller satisfactory to Purchaser in its sole
discretion.
10.18 HY-TECH MEMO OF UNDERSTANDING. Seller shall have delivered evidence
satisfactory to Purchaser that the Memorandum of Understanding between Seller
and Hy-Tech Technology Group, Inc. has expired or has been terminated and that
neither party thereto has any further rights or obligations thereunder.
10.19 APPRAISAL RIGHTS. Shareholders shall have waived any appraisal rights they
may have under Florida law.
10.20 RELEASE. Robert Heynssens ("HEYNSSENS") shall have delivered a release and
waiver satisfactory to Purchaser, (i) releasing Purchaser from any and all
obligations to pay Heynssens any amount that may be due and owing Heynssens for
services previously rendered to Seller or otherwise, and (ii) waiving any and
all rights to receive any amounts from Purchaser, other than a pro rata portion
of the Purchase Price. Purchaser shall prepare the document it wishes Heynssens
to execute and submit at Closing.
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10.21 GMAC LOAN. Seller shall have delivered a payoff letter from GMAC Financing
evidencing payment in full of that certain loan in the original principal amount
of $36,217.44 provided by GMAC to Seller.
ARTICLE XI.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
The obligations of Seller are subject to the fulfillment at or prior to the
Closing of each of the following conditions:
11.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser contained in this Agreement shall have been true in all
material respects (except those that contain an express materiality
qualification which shall have been true in all respects) on the date hereof and
on and as of the Closing Date with the same force and effect as though made on
and as of the Closing Date, without giving effect to any supplement to the
Schedules.
11.2 PERFORMANCE OF AGREEMENT. Purchaser shall have performed in all material
respects all obligations and agreements and complied in all material respects
with all covenants and conditions contained in this Agreement to be performed or
complied with by it at or prior to the Closing Date.
11.3 CONSENTS. Any third-party and governmental consents, approvals or
authorizations necessary for the purchase of the Purchased Assets or the valid
consummation of the transactions contemplated hereby shall have been obtained.
11.4 PURCHASER'S CERTIFICATE. Seller shall have received a certificate from
Purchaser, dated as of the Closing Date, reasonably satisfactory in form and
substance to Seller and its counsel, certifying as to the fulfillment of all
matters specified in Section 11.1, Section 11.2 and Section 11.3 hereof. The
matters set forth in such certificate shall constitute representations and
warranties hereunder.
11.5 SECRETARY'S CERTIFICATE. Seller shall have received a certificate, dated
the Closing Date, of the Secretary of Purchaser with respect to the incumbency
and specimen signature of each officer or representative of Purchaser executing
this Agreement, the certificate referred to in Section 11.4 and the Ancillary
Agreements to which Purchaser is a party.
11.6 INJUNCTION. On the Closing Date, there shall be no injunction, writ,
preliminary restraining order or any order of any nature in effect issued by a
court of competent jurisdiction directing that the transactions provided for
herein, or any of them, not be consummated as herein provided.
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11.7 ACTIONS OR PROCEEDINGS. All corporate actions, proceedings, instruments and
documents required to carry out the transactions contemplated by this Agreement
or incidental thereto and all other related legal matters shall be reasonably
satisfactory to counsel for Seller, and such counsel shall have been furnished
with such certified copies of such corporate actions and proceedings and such
other instruments and documents as it shall have reasonably requested.
11.8 OPINION OF COUNSEL. Seller shall have received the favorable opinion of
Eckert Seamans Cherin & Mellott, LLC, counsel for Purchaser, satisfactory to
Seller and its counsel as to the matters set forth in Sections 7.1, 7.2 and 7.3
hereof.
ARTICLE XII.
OBLIGATIONS AFTER THE CLOSING DATE
12.1 CONFIDENTIALITY. Seller and Shareholders hereby covenant and agree that,
except as may be required by law, rule or regulation or court order, it and they
will not at any time reveal, divulge or make known to any Person (other than
Purchaser or its agents or Affiliates) any information that relates to this
Agreement, the transactions contemplated hereby or Seller's business (whether
now possessed by Seller or furnished by Purchaser after the Closing Date),
including, but not limited to, customer lists or other customer information,
trade secrets or formulae, marketing plans or proposals, financial information
or any data, written material, records or documents used by or relating to
Seller's business that are of a confidential nature (collectively, the
"CONFIDENTIAL INFORMATION").
12.2 FINAL NET WORKING CAPITAL. Seller and Shareholders shall assist Purchaser,
in any manner requested by Purchaser, in calculating the Final Net Working
Capital and the Net Working Capital Adjustment.
12.3 TRANSITION OF EMPLOYEES. From and after the Closing Date, Purchaser and
Seller shall cooperate to ensure an orderly transition of the Employees who
accept employment with Purchaser.
12.4 FURTHER ASSURANCES OF SELLER. From and after the Closing Date, Seller
shall, at the request of Purchaser, execute, acknowledge and deliver to
Purchaser, without further consideration, all such further assignments,
conveyances, endorsements, deeds, special powers of attorney, consents and other
documents, and take such other action, as Purchaser may reasonably request (i)
to transfer to and vest in Purchaser, and protect its rights, title and interest
in, all the Purchased Assets and (ii) otherwise to consummate the transactions
contemplated by this Agreement. In addition, from and after the Closing Date,
Seller shall afford Purchaser and its attorneys, accountants and other
representatives access, during normal business hours, to any Books and Records
that Seller may retain as may reasonably be required in connection with the
preparation of financial information or tax returns of Purchaser.
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12.5 FURTHER ASSURANCES OF PURCHASER. From and after the Closing Date, Purchaser
shall afford to Seller and its attorneys, accountants and other representatives
access, during normal business hours, to such Books and Records as may
reasonably be required in connection with the preparation of financial
information for periods concluding on or prior to the Closing Date. Purchaser
shall cooperate in all reasonable respects with Seller with respect to its
former interest in its business and in connection with financial account closing
and reporting and claims and litigation asserted by or against third parties,
including, but not limited to, making employees available to assist with, or
provide information in connection with financial account closing and reporting
and claims and litigation, PROVIDED, that Seller reimburses Purchaser for its
reasonable out-of-pocket expenses (including costs of employees so assisting) in
connection therewith.
12.6 ACCOUNTS RECEIVABLE PAYMENT. In the event that either Party hereto at any
time receives any funds from any third party that are properly payable to the
other Party hereto, the Party receiving such funds shall promptly remit such
funds to the Party entitled to such funds.
ARTICLE XIII.
TERMINATION
13.1 TERMINATION OF AGREEMENT. This Agreement may be terminated:
(i) by the mutual consent of Seller and Purchaser;
(ii) by Seller or Purchaser if the Closing has not taken place on or before June
8, 2004; PROVIDED, HOWEVER, that no Party then in breach of any obligations
hereunder shall have the right to terminate;
(iii) by Purchaser if any of the representations and warranties of Seller
contained in Article VI hereof were incorrect in any material respect when made
or become incorrect in any material respect; and
(iv) by Seller if any of the representations and warranties of Purchaser
contained in Article VII hereof were incorrect in any material respect when made
or become incorrect in any material respect.
13.2 RETURN OF DOCUMENTS. If this Agreement is terminated for any reason
pursuant to this Article XIII, each Party shall return to the other Party all
documents and copies thereof which shall have been furnished to it by such other
Party or, with the agreement of the other Party, shall destroy all such
documents and copies thereof and certify in writing to the other Party any such
destruction.
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13.3 LIMITATIONS ON REMEDIES. If this Agreement is terminated by Seller or
Purchaser as permitted under Section 13.1 and not as a result of a breach of a
representation or warranty or the failure of any Party to perform its
obligations hereunder, such termination shall be without liability of any Party.
If a Party terminates this Agreement as a result of a breach of a representation
or warranty by the other Party or the failure of the other Party to perform its
obligations hereunder, the nonbreaching Party shall, in addition to other
remedies provided by this Agreement, at law, or in equity, be entitled to
reimbursement from the breaching Party for all expenses incurred by the
nonbreaching Party in connection with this Agreement and the transactions
contemplated hereby.
ARTICLE XIV.
SURVIVAL OF REPRESENTATIONS
AND WARRANTIES; INDEMNIFICATION
14.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties
and agreements of the Parties shall survive for two years after the Closing
Date; PROVIDED, HOWEVER, that any representation, warranty or agreement with
respect to taxes, employee benefit matters and product liability claims shall
survive the Closing for a period equal to the applicable statute of limitations;
PROVIDED FURTHER, HOWEVER, that there shall be no termination of any such
representation or warranty as to which a claim has been asserted prior to the
termination of such survival period. Except as otherwise expressly provided in
this Agreement, all covenants, agreements, undertakings and indemnities set
forth in this Agreement shall survive indefinitely. No investigation made by any
Parties hereto (whether prior to, on or after the Closing Date) shall in any way
limit the representations and warranties of the other Parties.
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14.2 INDEMNIFICATION BY SELLER. "SELLER GENERAL LIABILITIES" shall mean all
Losses resulting from, arising out of, or incurred by any of Purchaser or its
Affiliates, or any of their respective successors or assigns and their
respective directors, officers and employees (each a "PURCHASER INDEMNIFIED
PARTY") after the Closing Date in connection with (i) any breach of any of the
representations or warranties made by Seller or the Shareholders in this
Agreement, (ii) any material default by Seller in respect of any of the
covenants or agreements made by Seller or any Shareholder in this Agreement or
(iii) any attempt (whether or not successful) by any Person to cause or require
Purchaser to pay any liability of, or claim against, Seller or any Shareholder
of any kind in respect of the operation of Seller's business prior to the
Closing Date, to the extent not specifically assumed or subject to an indemnity
by Purchaser under the terms of this Agreement. Subject to the further
provisions of this Article XIV, Seller and Shareholders jointly and severally
covenant and agree to pay, and to indemnify all Purchaser Indemnified Parties,
and hold them harmless from, against and in respect of, any and all Seller
General Liabilities.
14.3 LIMITATIONS ON SELLER'S AND SHAREHOLDERS' OBLIGATIONS TO INDEMNIFY.
14.3.1 Seller and Shareholders shall have no obligation to indemnify any
Purchaser Indemnified Party based upon any breach by Seller or Shareholders of
any representation or warranty as to any claim which did not arise within two
years after the Closing Date. In addition, the Shareholders, other than Welton,
shall have no obligation to indemnify any Purchaser Indemnified Party for claims
UNRELATED to representations and warranties made by Shareholders (i) in this
Agreement or (ii) in any agreement entered into in connection herewith to which
any Shareholder is a party.
14.3.2 Nothing herein shall be deemed to limit or restrict in any manner any
rights or remedies available at law, in equity or otherwise against Seller and
Shareholders based on a willful misrepresentation or willful breach of any
warranty by Seller or Shareholders hereunder.
14.4 INDEMNIFICATION BY PURCHASER. "PURCHASER GENERAL LIABILITIES" shall mean
all Losses resulting from, arising out of, or incurred by any of Seller or its
Affiliates, or any of their respective successors or assigns and their
respective directors, officers and employees (each a "SELLER INDEMNIFIED PARTY")
after the Closing Date in connection with (i) any breach of any of the
representations or warranties made by Purchaser in this Agreement, (ii) any
material default by Purchaser in respect of any of the covenants or agreements
made by Purchaser in this Agreement, (iii) any attempt (whether or not
successful) by any Person to cause or require Seller to pay or discharge any
Assumed Liability or any liability of, or claim against, Purchaser of any kind
in respect of the operation of Seller's business on or after the Closing Date to
the extent not specifically subject to an indemnity by Seller under the terms of
this Agreement. Subject to the further provisions of this Article XIV, Purchaser
covenants and agrees with Seller that Purchaser shall pay, and shall indemnify
all Seller Indemnified Parties, and hold them harmless from, against and in
respect of, any and all Purchaser General Liabilities.
14.5 LIMITATIONS ON PURCHASER'S OBLIGATION TO INDEMNIFY. Purchaser shall have no
obligation to indemnify any Seller Indemnified Party based upon any breach by
Purchaser of any representation or warranty as to any claim which did not arise
within two years after the Closing Date.
14.6 PROCEDURES FOR INDEMNIFICATION.
14.6.1 Each Indemnified Party shall promptly give notice hereunder to the
indemnifying Party after becoming aware of any claim as to which recovery may be
sought against the indemnifying Party because of the indemnity in this Article
XIV, and, if such indemnity shall arise from the claim of a third party, shall
permit the indemnifying Party to assume the defense of any such claim and any
litigation or other proceeding resulting from such claim; PROVIDED, that any
Indemnified Party may, in any event, at its own expense, monitor and participate
in, but not control, the defense of any such claim or litigation.
Notwithstanding the foregoing, the right to indemnification
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hereunder shall not be affected by any failure of an Indemnified Party to give
such notice (or by delay by an Indemnified Party in giving such notice) unless,
and then only to the extent that, the rights and remedies of the indemnifying
Party shall have been prejudiced as a result of the failure to give, or delay in
giving, such notice. The notice required hereunder shall specify the basis for
the claim for indemnification to the extent ascertainable at the time of the
notice. Failure by the indemnifying Party to notify an Indemnified Party of its
election to defend any such claim or action by a third party within thirty (30)
days after notice thereof shall have been given to the indemnifying Party shall
be deemed a waiver by the indemnifying Party of its right to defend such claim
or action. Nothing herein shall be deemed to prevent an Indemnified Party from
making a contingent claim for indemnification hereunder, provided the
Indemnified Party has reasonable grounds to believe that the claim or demand for
indemnification will be made and sets forth the estimated amount of such claim
to the extent then ascertainable.
14.6.2 The indemnifying Party shall not, in the defense of such claim or any
litigation resulting therefrom, consent to entry of any judgment (other than a
judgment of dismissal on the merits without costs) or enter into any settlement,
except with the written consent, which consent shall not be unreasonably
withheld, of the Indemnified Party, which does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to the Indemnified
Party a release from all liability in respect of such claim or litigation.
14.6.3 If the indemnifying Party shall not assume the defense of any such claim
by a third party, or litigation resulting therefrom, after receipt of notice
from the Indemnified Party, the Indemnified Party may defend against such claim
or litigation in such manner as it deems appropriate.
14.6.4 If the indemnifying Party shall not, within thirty (30) days after its
receipt of the notice required by Section 14.7.1 hereof, advise the Indemnified
Party that the indemnifying Party denies the right of the Indemnified Party to
indemnity in respect of the claim, then the amount of such claim shall be deemed
to be finally determined between the Parties hereto. If the indemnifying Party
shall notify the Indemnified Party that it disputes any claim made by the
Indemnified Party, then the Parties hereto shall endeavor to settle and
compromise such claim, and if unable to agree on any settlement or compromise,
such claim for indemnification shall be settled by appropriate litigation, and
any liability established by reason of such settlement, compromise or litigation
shall be deemed to be finally determined. Any claim that is finally determined
in the manner set forth above shall be paid promptly by the indemnifying Party
in cash.
14.7 PAYMENT OF INDEMNIFICATION OBLIGATIONS. Each Party shall pay promptly to
any Indemnified Party the amount of all damages, losses, deficiencies,
liabilities, costs, expenses, claims and other obligations to which the
foregoing provisions of this Article XIV relates. Shareholders shall promptly
pay to any Purchaser Indemnified Party upon demand any amount not so
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promptly paid by Seller including, without limitation, amounts payable by Seller
under Section 14.7 hereof.
14.8 INTEREST ON UNPAID OBLIGATIONS. If all or part of any indemnification
obligation under this Agreement is not paid when due, the indemnifying Party
shall pay the Indemnified Party interest on the unpaid amount of such obligation
for each day from the date the amount became due until it is paid in full,
payable on demand, at the rate equal to the lower of (i) the maximum rate
permitted by law or (ii) two percent (2%) per annum plus the "Prime Rate" as
published from time to time in THE WALL STREET JOURNAL.
14.9 SET-OFF. If Seller or any Shareholder is obligated to pay Purchaser or its
Affiliates any amount under this Article XIV, Purchaser shall have the right to
set-off such amounts all amounts due and owing by Purchaser under the Purchaser
Note.
14.10 OTHER REMEDIES. The indemnification rights of any Indemnified Party under
this Article XIV are independent of and in addition to such rights and remedies
as such Indemnified Party may have at law, in equity or otherwise for any
misrepresentation, breach of warranty or failure to fulfill any covenant or
agreement under or in connection with this Agreement on the part of any Party,
none of which rights or remedies shall be affected or diminished hereby.
ARTICLE XV.
GENERAL
15.1 EXPENSES. Except as otherwise provided in this Agreement, and whether or
not the transactions herein contemplated shall be consummated, Purchaser and
Seller shall pay their own fees, expenses and disbursements, including the fees
and expenses of their respective counsel, accountants and other experts, in
connection with the subject matter of this Agreement and all other costs and
expenses incurred in performing and complying with all conditions to be
performed under this Agreement.
15.2 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. Neither Purchaser, on the one
hand, nor Seller, on the other hand, shall issue any press release or make any
public announcement relating to the subject matter of this Agreement without the
prior written approval of the other parties. Purchaser and Seller shall agree
upon the text of, and jointly issue, a press release or other public
communication announcing the consummation of the transactions contemplated
hereunder, a form of which is attached hereto as EXHIBIT "I".
15.3 WAIVERS. The waiver by either Party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach.
15.4 BINDING EFFECT; BENEFITS. This Agreement shall inure to the benefit of the
Parties hereto, and shall be binding upon the Parties hereto and their
respective successors and assigns. Except for the express provisions of
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Article XIV, nothing in this Agreement, express or implied, is intended to
confer on any Person other than the Parties hereto, or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
15.5 NOTICES. All notices, requests, demands, elections and other communications
which either Party to this Agreement may desire or be required to give hereunder
shall be in writing and shall be deemed to have been received (i) on the same
business day, if delivered personally or by confirmed facsimile transmission,
(ii) on the next business day, if delivered by a reputable courier service which
requires a signature upon delivery, and (iii) on the third business day, if
mailed by registered or certified first class mail, postage prepaid, return
receipt requested to the Party to whom the same is so given or made.
If to Seller or Shareholders, to:
Cyber-Test, Inc.
448 Commerce Way, Suite 100
Florida Central Commerce Park
Longwood, Florida 32750
Attention: Lisa Welton, President
Facsimile: 407.260.0922
With a copy to:
Barrett, Chapman & Ruta, P.A.
18 Wall Street
Orlando, Florida 32801
Attention: Victor Chapman, Esquire
Facsimile: 407.648.1190
If to Purchaser, to:
Cyber-Test, Inc.
c/o Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
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With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
and
Levinson & Lichtman, LLP
120 E. Palmetto Park Road, Suite 100
Boca Raton, FL 33432
Attention: Jonathan J. Lichtman, Esquire
Facsimile No.: 561-869-3601
or to such other address as such Party shall have specified by notice to the
other Party hereto.
15.6 ENTIRE AGREEMENT. This Agreement (including the Exhibits and Schedules
hereto) and the documents delivered pursuant hereto constitute the entire
agreement and understanding between the Parties hereto as to the matters set
forth herein and supersede and revoke all prior agreements and understandings,
oral and written, between the Parties hereto or otherwise with respect to the
subject matter hereof, including, without limitation, that certain Letter of
Intent, dated May 3, 2004, by and among Purchaser, Seller and the other parties
named therein. No change, amendment, termination or attempted waiver of any of
the provisions hereof shall be binding upon any Party unless set forth in an
instrument in writing signed by the Party to be bound or their respective
successors in interest.
15.7 COUNTERPARTS. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
15.8 HEADINGS. The article, section and other headings contained in this
Agreement are for reference purposes only and shall not be deemed to be a part
of this Agreement or to affect the meaning or interpretation of this Agreement.
15.9 GOVERNING LAW AND CHOICE OF FORUM. The validity and interpretation of this
Agreement shall be construed in accordance with, and governed by the internal
laws of the State of Delaware, without giving effect to principles of conflicts
of laws. All claims, disputes or causes of action (with the exception of those
to be arbitrated in accordance with Section 3.3.5) relating to or arising out of
this Agreement shall be brought, heard and resolved solely and exclusively by
and in a federal or state court situated in the State of Delaware. Each of the
parties hereto agrees to submit to the jurisdiction of such courts shall be
proper for all purposes of this Agreement.
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15.10 COOPERATION. The Parties hereto shall cooperate fully at their own
expense, except as otherwise provided in this Agreement, with each other and
their respective counsel and accountants in connection with all steps to be
taken as part of their obligations under this Agreement.
15.11 SEVERABILITY. If any term, covenant, condition or provision of this
Agreement or the application thereof to any circumstance shall be invalid or
unenforceable to any extent, the remaining terms, covenants, conditions and
provisions of this Agreement shall not be affected thereby and each remaining
term, covenant, condition and provision of this Agreement shall be valid and
shall be enforceable to the fullest extent permitted by law. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only as broad as is enforceable.
15.12 ATTORNEYS' FEES. If a dispute arises among the Parties as a result of
which an action is commenced to interpret or enforce any of the terms of this
Agreement, the losing Party shall pay to the prevailing Party reasonable
out-of-pocket attorneys' fees, costs and expenses incurred in connection with
the prosecution or defense of such action.
15.13 SUCCESSORS AND ASSIGNS. The covenants, agreements and conditions contained
herein or granted hereby shall be binding upon and shall inure to the benefit of
Parties hereto and each of their respective successors and permitted assigns.
Neither Seller nor Purchaser shall assign, or otherwise transfer any interest in
this Agreement to any other Person except for a Person which is an Affiliate of
Purchaser or a purchaser of the Purchased Assets from Purchaser.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed
as of the date first written above.
PURCHASER:
CYBER-TEST, INC., a Delaware corporation
By: /s/ Wayne I. Danson
--------------------
Wayne I. Danson, President
SELLER:
CYBER-TEST, INC., a Florida corporation
By: /s/ Lisa Welton
--------------------------
Lisa Welton, President
SHAREHOLDERS:
/s/ Lisa Welton
--------------------------
Lisa Welton
/s/ Robert Heynssens
--------------------------
Robert Heynssens
/s/ Alan Heynssens
--------------------------
Alan Heynssens
/s/ Lori Peterson
--------------------------
Lori Peterson
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EXHIBIT A
TO
ASSET PURCHASE AGREEMENT
Purchaser Note
--------------
EXECUTION COPY
EXHIBIT B
TO
ASSET PURCHASE AGREEMENT
Bill of Sale
------------
EXECUTION COPY
EXHIBIT C
TO
ASSET PURCHASE AGREEMENT
Assignment and Assumption Agreement
-----------------------------------
EXECUTION COPY
EXHIBIT D
TO
ASSET PURCHASE AGREEMENT
Escrow Agreement
----------------
EXECUTION COPY
EXHIBIT E
TO
ASSET PURCHASE AGREEMENT
Non-Compete Agreement
---------------------
EXECUTION COPY
EXHIBIT F
TO
ASSET PURCHASE AGREEMENT
Welton Employment Agreement
---------------------------
EXECUTION COPY
EXHIBIT G
TO
ASSET PURCHASE AGREEMENT
Sutlive Employment Agreement
----------------------------
EXECUTION COPY
EXHIBIT H
TO
ASSET PURCHASE AGREEMENT
Opinion of Barrett, Chapman & Ruta, P.A.
----------------------------------------
EXECUTION COPY
EXHIBIT I
TO
ASSET PURCHASE AGREEMENT
Press Release
-------------
EXHIBIT 10.2
6% SENIOR UNSECURED PROMISSORY NOTE
$500,000.00 New York, New York June 3, 2004
FOR VALUE RECEIVED, the undersigned, Cyber-Test, Inc., a Delaware corporation
("Maker"), hereby promises to pay to LLAB, Inc. (f/k/a Cyber-Test, Inc.), a
Florida corporation, located at 540 Wekiva Landing Drive, Apopka, Florida 32712
("Payee"), the principal sum of Five Hundred Forty-Seven Thousand Dollars
($547,000.00), together with simple interest at a rate of six percent (6%) PER
ANNUM calculated on the basis of a 365/6 day calendar year, on the dates and in
the manner set forth herein.
So long as no default in payment shall have occurred hereunder and so long as
any amount due hereunder shall remain outstanding, such principal and interest
shall be due and payable as follows:
(a) Principal shall be payable in three (3) equal annual installments of
$166,666.67 on the first, second and third anniversary of the date hereof,
together with all unpaid interest accrued prior to such payment date.
(b) All payments of principal and interest shall be made to Payee at the address
set forth above or at such other address as Payee shall direct. If any payment
or action to be made or taken hereunder shall be stated to be or become due on a
Saturday, Sunday or on any other day which is a legal bank holiday under the
laws of the State of New York, such payment or action shall be or become due on
the next succeeding business day and such extension of time shall be included in
computing the interest due in connection with such payment.
This Note has been issued pursuant to the terms of that certain Asset Purchase
Agreement by and among Maker, Payee and the shareholders of Seller, dated May
27, 2004 (the "Purchase Agreement") and all of the terms, covenants and
conditions of the Purchase Agreement (including all schedules and exhibits
thereto) and all other instruments either evidencing this indebtedness of Maker
to Payee are made a part of this Note and are deemed incorporated in full into
this Note.
In the event Maker fails to make payment of any amount due and payable hereunder
within ten (10) days following receipt of written notice from Payee of such
failure to make payment, such failure to make payment shall constitute a
"Default" for purposes of this Note. In the event of a Default, interest on any
such overdue payment of principal due hereunder shall accrue and be payable at a
rate of interest equal to six percent (6%) PER ANNUM in excess of the rate set
forth above, based on the actual number of days elapsed from the date of Default
to the date of actual payment.
EXHIBIT 10.2
Maker waives demand, presentment for payment, notice of dishonor, protest and
notice of protest and diligence in collection and bringing suit and Payee may
extend the time for payment, accept partial payment, take security therefor, or
exchange or release any collateral, without discharging or releasing Maker.
This Note is subject to Maker's right of setoff as set forth in the Purchase
Agreement, including without limitation, Sections 3.3 and 14.9 thereof.
Maker shall have the right at any time to prepay all, or any part of, the
outstanding principal amount of this Note without prepayment premium or penalty
of any kind. Any partial prepayments of this Note shall be applied to the next
principal installment due under this Note.
In the event that Maker shall (i) make a general assignment for the benefit of
creditors; (ii) be adjudicated as bankrupt or insolvent; (iii) file a voluntary
petition in bankruptcy; (iv) have a petition or proceeding filed against it
under any bankruptcy or insolvency law or statute of the United States of
America or any state or jurisdiction thereof, which petition or proceeding is
not dismissed within ninety (90) days from the date of commencement thereof; or
(vi) have a receiver, trustee, custodian, conservator or other person appointed
by any court to take charge of Maker's affairs, assets or business and such
appointment is not vacated or discharged within ninety (90) days thereafter;
then, and upon the happening of any such event, the Payee, at Payee's option, by
written notice to the Maker, may declare the entire indebtedness evidenced by
this Note immediately due and payable, whereupon the same shall forthwith mature
and become immediately due and payable without presentment, demand, protest or
further notice.
This Note shall bind Maker and its successors and assigns, and the benefits
hereof shall inure to the benefit of Payee and its successors and assigns.
Neither Maker nor Payee may assign this Note without the prior written consent
of the other party. All references herein to "Maker" and "Payee" shall be deemed
to apply to Maker and Payee, respectively, and their respective permitted
successors and assigns.
All agreements between Maker and Payee are expressly limited to provide that in
no contingency or event whatsoever, whether by reason of acceleration of
maturity of the indebtedness evidenced hereby or otherwise, shall the amount
paid or agreed to be paid to Payee for the use, forbearance or detention of the
indebtedness evidenced hereby exceed the maximum amount which Payee is permitted
to receive under applicable law. If, from any circumstances whatsoever,
fulfillment of any provision hereof, at the time performance of such provision
shall be due, shall involve transcending the limit of validity prescribed by
law, then, without the necessity of any action by Payee or Maker, the obligation
to be fulfilled shall automatically be reduced to the limit of such validity,
and if from any circumstance Payee should ever receive as interest an amount
which would exceed the highest lawful rate, such amount which would be excessive
interest shall be applied to the reduction of the principal balance hereof, and
not to the payment of interest. As used herein, the term "applicable law" shall
mean the law in effect as of the date hereof. This provision shall control every
other provision of all agreements between the Maker and Payee.
Payee has no claim against any Person (as defined in the Purchase Agreement)
that is an Affiliate (as defined in the Purchase Agreement) of Maker in respect
of any amounts owing under or in respect of this Note and no Person
2
EXHIBIT 10.2
that is an Affiliate of Maker shall have any liability for any amounts owing
under this Note.
Payee may not transfer, convey, assign or other wise dispose of this Note (a
"Transfer") to any other Person (other than the shareholders of Seller who are
parties to the Purchase Agreement or their heirs at law) without first obtaining
the written consent of Maker, which Maker may withhold in the exercise of
reasonable discretion. Maker shall maintain a register showing the Payee(s). A
Transfer may be effected only by surrender of this Note to Maker and the
reissuance by Maker of a replacement Note or Notes to the transferee(s), which
Note(s) shall be substantially identical (except for stated principal amount) to
this Note. Any Transfer or attempted Transfer in violation of any provision of
this Note shall be null and void, and Maker shall not record such Transfer on
its books or register or treat any purported transferee as the owner of this
Note for any purpose.
After all principal and interest owed under this Note have been paid in full,
this Note shall be surrendered to Maker for cancellation and shall not be
reissued.
The construction, validity and interpretation of this Note and the rights and
obligations of Maker and Payee(s) shall be governed by and construed and
enforced in accordance with the domestic laws of the State of Delaware without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Delaware or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Delaware.
Payee(s) by accepting this Note submits to the exclusive jurisdiction of the
state and federal courts of Delaware.
For purposes hereof, this "Note" shall mean this Note and any Note issued by
Maker upon a Transfer in accordance with this Note.
3
EXHIBIT 10.2
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed and
delivered as of the date first written above.
CYBER-TEST, INC., A DELAWARE CORPORATION
By: /s/ Wayne I. Danson
----------------------------------------
Wayne I. Danson, President
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE'S SECURITIES ACT (THE "ACTS") AND MAY NOT BE SOLD, TRANSFERRED,
EXCHANGED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE ACTS OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
EXHIBIT 10.2
EXHIBIT 10.3
ESCROW AGREEMENT
This ESCROW AGREEMENT (the "Escrow Agreement") is dated as of June 3, 2004, by
and between Cyber-Test, Inc., a Delaware corporation ("Purchaser"), Cyber-Test,
Inc., a Florida corporation ("Seller") and Eckert Seamans Cherin & Mellott, LLC
(the "Escrow Agent").
W I T N E S S E T H:
--------------------
WHEREAS, Purchaser and Seller are parties to that certain Asset Purchase
Agreement, dated as of May 27, 2004 (the "Purchase Agreement"), pursuant to
which Purchaser has agreed to purchase from Seller substantially all of the
assets of Seller; and
WHEREAS, a portion of the purchase price otherwise payable to Seller pursuant to
the Purchase Agreement is 50,000,000 shares of common stock of Advanced
Communications Technologies, Inc., priced at $.01 per share, to be earned by
Seller during the three year period commencing fiscal year July 1, 2004 and
ending fiscal year June 30, 2007 (the "Escrow Period"), in accordance with the
terms of the Purchase Agreement (the "Shares"); and
WHEREAS, upon earning the Shares, the Shares shall be deposited with, and held
and released by, Escrow Agent in accordance with the terms of this Escrow
Agreement; and
WHEREAS, all of the initially capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to them in the
Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, and intending to be legally bound, the parties hereto hereby agree as
follows:
1. Appointment of Escrow Agent. Seller and Purchaser hereby appoint Escrow Agent
to act as escrow agent under this Escrow Agreement, and Escrow Agent hereby
accepts such appointment, for the purpose of receiving, holding, and releasing
the Shares, all in accordance with the terms and conditions set forth in this
Escrow Agreement.
2. Establishment of Escrow Fund; Delivery of Shares; Dividend and Voting Rights.
2.1 Deposit of Shares.
(a) In the event Purchaser achieves the Milestones in any fiscal year during the
Escrow Period, no later than September 30 of the immediately following fiscal
year Purchaser shall deposit, or cause to be deposited, with Escrow Agent a
certificate or certificates representing 16,666,667 Shares.
EXHIBIT 10.3
(b) The certificates representing the Shares shall be issued in the name of
Seller. Seller shall be entitled to vote the Shares on all matters submitted to
a vote of shareholders of Purchaser.
(c) All dividends or distributions in respect of the Shares held by Escrow
Agent, whether in the form of cash, securities or other property, shall be paid
to Seller.
2.2 Escrow Agent agrees to carry out all of the provisions of this Escrow
Agreement to be performed by it hereunder.
3. Release of Shares.
3.1 Escrow Agent shall hold the Shares until authorized to release them in
accordance with this Section 3.
(a) Release of Shares Per Joint Instructions. Escrow Agent shall release the
Shares at any time pursuant to the joint written instructions of Purchaser and
Seller (which may be executed and/or transmitted in counterparts).
(b) Disbursement to Seller. Upon its receipt of the written instructions of
Purchaser to disburse the Shares to Seller, Escrow Agent shall deliver to Seller
at Seller's address set forth in Section 7 hereof all certificates representing
the Shares then held by Escrow Agent.
(c) Disbursement to Purchaser. In the event that Purchaser desires to have the
Shares disbursed to Purchaser, Purchaser shall deliver written instructions to
Escrow Agent, with a copy to Seller, instructing Escrow Agent to deliver to
Purchaser all certificates representing the Shares then held by Escrow Agent.
If on or prior to 5:00 p.m., New York City time, on the fifth business day
following the business day on which Escrow Agent received the instructions
described in this Paragraph 3.1(c), Seller shall not have provided Escrow Agent
with a written notice (the "Dispute Notice") that it disputes the disbursement
of the Shares to Purchaser, Escrow Agent shall thereafter deliver to Purchaser
at Purchaser's address set forth in Section 7 hereof all certificates
representing the Shares then held by Escrow Agent.
(d) Dispute as to Disbursement of Shares. If Seller shall have timely delivered
a Dispute Notice to Escrow Agent, Purchaser and Seller shall thereafter attempt
to resolve the matter and Escrow Agent shall thereafter act only in accordance
with this Paragraph 3.1(d) or Paragraph 3.1(e). It is understood and agreed that
should any dispute arise with respect to the delivery and/or ownership or right
of possession of the Shares held by Escrow Agent hereunder, Escrow Agent is
authorized and directed in Escrow Agent's sole discretion (i) to retain in
Escrow Agent's possession, without liability to anyone, all or any part of the
Shares until such dispute shall have been settled either by mutual written
agreement of the parties concerned by a final order, decree or judgment of a
board of arbitration or a court of competent jurisdiction after the time for
appeal has expired and no appeal has been perfected, but Escrow Agent shall be
under no duty whatsoever to institute or
EXHIBIT 10.3
defend any such proceedings, or (ii) to deliver the Shares held by Escrow Agent
hereunder to a state or Federal court having competent subject matter
jurisdiction and located in the Commonwealth of Pennsylvania, City of
Philadelphia, or at Escrow Agent's option, the State and City of New York, in
accordance with the applicable procedure therefore. Upon delivery to such court,
this Escrow Agreement shall terminate and Escrow Agent shall be relieved of all
further duties hereunder.
(e) Court Order. Notwithstanding any provision in this Escrow Agreement to the
contrary, Escrow Agent shall disburse the Shares in accordance with a final
judgment or final court order from a court of competent jurisdiction directing
disposition of the Shares (a "Court Order"). A judgment or order under any
provision of this Escrow Agreement shall not be deemed to be final until the
time within which an appeal may be taken therefrom has expired and no appeal has
been taken, or until the entry of a judgment or order from which no appeal may
be taken. Escrow Agent shall be entitled to receive and may conclusively rely on
an opinion of counsel to the presenting party to the effect that a Court Order
as referred to in this Section is final and nonappealable and from a court of
competent jurisdiction.
3.2 Expiration of Escrow Period.
(a) If on or prior to October 31, 2007, Escrow Agent shall not have received any
instructions with respect to the Shares, Seller shall have the right to deliver
written instructions to Escrow Agent, with a copy to Purchaser, instructing
Escrow Agent to deliver to Seller all certificates representing the Shares then
held by Escrow Agent.
(b) If on or prior to 5:00 p.m., New York City time, on the fifth business day
following the business day on which Escrow Agent received the instructions
described in this Paragraph 3.2, Purchaser shall not have provided Escrow Agent
with a Dispute Notice, Escrow Agent shall thereafter deliver to Seller at
Seller's address set forth in Section 7 hereof all certificates representing the
Shares then held by Escrow Agent.
(c) If Purchaser shall have timely delivered a Dispute Notice to Escrow Agent,
Purchaser and Seller shall thereafter attempt to resolve the matter and
Paragraphs 3.1(d) and 3.1(e) hereof shall control with respect to the release of
the Shares.
4. Escrow Agent.
(a) Escrow Agent undertakes to perform only such duties as are expressly set
forth herein.
(b) Escrow Agent may rely and shall be protected in acting or refraining from
acting upon any notice, instruction or request furnished to it in writing
hereunder and reasonably believed by it to be genuine and to have been signed or
presented by the proper party or parties.
EXHIBIT 10.3
(c) Escrow Agent shall not be liable for any action taken by it in good faith
without gross negligence, and may consult with counsel of its own choice and
shall have full and complete authorization and protection for any reasonable
action taken or suffered by it hereunder in good faith and in accordance with
the written opinion of such counsel.
(d) Escrow Agent may resign and be discharged from its duties or obligations
hereunder by giving notice in writing of such resignation specifying a date (not
less than thirty (30) days after the giving of such notice) when such
resignation shall take effect, and by transferring all certificates representing
Shares then held by it pursuant to this Escrow Agreement to the successor escrow
agent. Promptly after such notice, Purchaser and Seller shall by mutual
agreement appoint a successor escrow agent, such escrow agent to hold the Shares
upon the resignation date specified in such notice. If a successor escrow agent
is not appointed within thirty (30) days, Escrow Agent shall have the right to
petition any court of competent jurisdiction for the appointment of a successor
escrow agent. Purchaser and Seller may by mutual agreement at any time
substitute a new escrow agent by giving fifteen (15) days' notice thereof to
Escrow Agent then acting. Escrow Agent shall continue to serve until its
successor accepts the escrow and receives delivery of the Shares.
(e) Purchaser and Seller agree, jointly and severally, to indemnify Escrow Agent
for, and to hold it harmless against, any loss, liability or expense incurred by
it, arising out of or in connection with its entering into this Escrow Agreement
and carrying out its duties hereunder, including the costs and expenses of
defending itself against any claim of liability in the premises, other than as
incurred by reason of its willful or reckless misconduct or bad faith. The
provisions of this section shall survive the resignation or removal of Escrow
Agent and the termination of this Escrow Agreement.
(f) Escrow Agent's duties hereunder may be altered, amended, modified or revoked
only by a writing signed by Purchaser, Seller and Escrow Agent.
(g) Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case Escrow Agent obeys or complies with any such order, judgment or
decree, Escrow Agent shall not be liable to any of the parties hereto or to any
other person, firm or corporation by reason of such decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been entered
without jurisdiction.
(h) ESCROW AGENT HAS ACTED AS LEGAL COUNSEL FOR PURCHASER, AND MAY CONTINUE TO
ACT AS LEGAL COUNSEL FOR PURCHASER, FROM TIME TO TIME, NOTWITHSTANDING ITS
DUTIES AS ESCROW AGENT HEREUNDER. SELLER CONSENTS TO ESCROW AGENT ACTING IN SUCH
CAPACITY AS LEGAL COUNSEL FOR PURCHASER AND WAIVES ANY CLAIM THAT SUCH
REPRESENTATION REPRESENTS A CONFLICT OF INTEREST ON THE PART OF ESCROW AGENT.
SELLER UNDERSTANDS THAT PURCHASER AND ESCROW AGENT ARE RELYING EXPLICITLY ON THE
FOREGOING PROVISION IN ENTERING INTO THIS ESCROW AGREEMENT. NOTWITHSTANDING THE
FOREGOING, ESCROW AGENT SHALL NOT REPRESENT PURCHASER IN ANY PROCEEDING
RESULTING FROM ESCROW AGENT'S DELIVERY OF THE SHARES INTO COURT AS CONTEMPLATED
IN PARAGRAPHS 3(D) AND 3(E).
EXHIBIT 10.3
5. Termination. This Escrow Agreement shall terminate upon the release from
escrow of the Shares and delivery of the Shares in accordance with this Escrow
Agreement.
6. Representations. Each of Escrow Agent, Purchaser and Seller hereby represents
and warrants to the other parties (a) that this Escrow Agreement has been duly
executed by it and constitutes the valid and legally binding obligation of it,
enforceable against it in accordance with the terms hereof, except as may be
limited by any bankruptcy, insolvency, reorganization, moratorium and other
similar laws and equitable principles relating to or limiting creditors' rights
generally and (b) that the execution, delivery and performance of this Escrow
Agreement does not and will not violate any applicable law or regulation. Escrow
Agent hereby represents and warrants that the Shares, at all times when held by
Escrow Agent, will not be subject to any lien, claim or other encumbrance
arising from the escrow.
7. General.
(a) Notices. All notices and other communications hereunder shall be in writing
and shall be deemed given upon receipt if delivered personally or sent by
facsimile transmission (receipt of which is confirmed mechanically, personally
or by email), or the day after when sent by courier service promising overnight
delivery (with delivery confirmed the next day) or three (3) business days after
deposit in the U.S. mails, first class postage prepaid. Notices shall be
addressed as follows:
(i) if to Seller:
Cyber-Test, Inc.
448 Commerce Way, Suite 100
Florida Central Commerce Park
Longwood, Florida 32750
Attention: Lisa Welton, President
Facsimile: 407.260.5600
With a copy to:
Barrett, Chapman & Ruda, P.C.
18 Wall Street
Orlando, Florida 32801
Attention: Victor Chapman, Esquire
Facsimile:
(ii) if to Purchaser:
EXHIBIT 10.3
Cyber-Test, Inc.
c/o Advanced Communications Technologies, Inc. 420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Financial Officer Facsimile: 646.227.1666
with a copy to Escrow Agent
and
Levinson & Lichtman, LLP
120 E. Palmetto Park Road, Suite 100
Boca Raton, FL 33432
Attention: Jonathan J. Lichtman, Esq.
Facsimile No.: 561-869-3601
(iii) if to Escrow Agent:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street, Ninth Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: (215) 851-8383
(b) Entire Agreement. This Escrow Agreement, the Purchase Agreement, and the
other documents entered into in connection herewith and therewith, constitute
the entire agreement between the parties with respect to the transactions
contemplated hereby and thereby and supersede all written or verbal
representations, warranties, commitments and other understandings prior to the
date hereof. No reference shall be made to any draft of this Escrow Agreement,
any other document or any Schedule or Exhibit hereto for purposes of
interpretation or resolution of ambiguity or otherwise.
(c) Counterparts. This Escrow Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(d) Severability. If any provision of this Escrow Agreement shall be held to be
unenforceable or invalid by any court of competent jurisdiction or as a result
of future legislative action, such holding or action shall be strictly construed
and shall not alter the enforceability, validity or effect of any other
provision of this Escrow Agreement.
(e) Assignability. This Escrow Agreement shall be binding upon and shall inure
to the benefit of the successors and permitted assigns of the parties hereto.
Neither this Escrow Agreement nor any of the rights, interests
EXHIBIT 10.3
or obligations hereunder shall be assigned, directly or indirectly, by any party
hereto without the prior written consent of the other parties hereto.
(f) Third Party Beneficiaries. The terms and provisions of this Escrow Agreement
are intended solely for the benefit of each of the parties hereto and their
respective successors and permitted assigns, and it is not the intention of the
parties hereto to confer third party beneficiary rights.
(g) Captions. The descriptive headings herein are inserted for convenience only
and are not intended to be part of or to affect the meaning or interpretation of
this Escrow Agreement.
(h) Governing Law. This Escrow Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to any
principles of conflict of laws.
(i) Amendment and Waiver. This Escrow Agreement may be amended, modified,
supplemented or waived only by an instrument in writing signed by Purchaser,
Seller and Escrow Agent.
(j) Limited Liability. Escrow Agent shall have only those duties as are
specifically provided herein, which shall be deemed purely ministerial in
nature, and shall under no circumstance be deemed a fiduciary for any of the
parties to this Escrow Agreement. Escrow Agent shall neither be responsible for,
nor chargeable with, knowledge of the terms and conditions of any other
agreement, instrument or document between the other parties hereto, in
connection herewith, including, without limitation, the Purchase Agreement. This
Escrow Agreement sets forth all matters pertinent to the escrow contemplated
hereunder, and no additional obligations of Escrow Agent shall be inferred from
the terms of this Escrow Agreement or any other agreement. IN NO EVENT SHALL
ESCROW AGENT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL LOSSES OR DAMAGES OF ANY KIND WHATSOEVER (INCLUDING BUT NOT
LIMITED TO LOST PROFITS), EVEN IF ESCROW AGENT HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH LOSSES OR DAMAGES.
[SIGNATURE PAGE FOLLOWS]
EXHIBIT 10.3
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement the
day and year first written above.
PURCHASER:
CYBER-TEST, INC., a Delaware corporation
By: /s/ Wayne I. Danson
------------------------------------
Wayne I. Danson, President
SELLER:
CYBER-TEST, INC., a Florida corporation
By: /s/ Lisa Welton
------------------------------------
Lisa Welton, President
ESCROW AGENT:
ECKERT SEAMANS CHERIN & MELLOTT, LLC
By: Gary A. Miller
--------------
Gary A. Miller, Member
EXHIBIT 10.4
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
NONCOMPETITON AND NONDISCLOSURE AGREEMENT (the "AGREEMENT"), made as of the 3rd
day of June, 2004, by and between Cyber-Test, Inc., a Florida corporation
("CYBER-TEST"), Lisa Welton, Robert Heynssens, Alan Heynssens and Lori Peterson
(collectively, "SELLERS") and Cyber-Test, Inc., a Delaware corporation
("PURCHASER").
W I T N E S S E T H:
WHEREAS, Purchaser has acquired (the "ACQUISITION") effective as of June 3, 2004
(the "CLOSING DATE") substantially all of the assets of Cyber-Test, pursuant to
the terms and conditions of an Asset Purchase Agreement dated May 27, 2004 (the
"PURCHASE AGREEMENT") among Sellers and Purchaser; and
WHEREAS, in order to protect the value of the Purchased Assets (as defined in
the Purchase Agreement) being acquired by Purchaser pursuant to the Purchase
Agreement and to protect the business of Purchaser, the parties hereto have
agreed that, for the consideration contained in the Purchase Agreement, Sellers
shall not compete with Purchaser, in accordance with the terms and conditions
hereof; and
WHEREAS, the agreements of Sellers not to compete with Purchaser as provided
herein are an integral part of the transactions contemplated by the Purchase
Agreement, and without such agreements, Purchaser would not have entered into
the Purchase Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements contained
herein, the payment of the consideration hereunder and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Purchase Agreement; PROVIDED,
HOWEVER, that the following terms shall have the meanings set forth below
irrespective of the meanings such terms may have in the Purchase Agreement:
(a) "AFFILIATE" of any person means any other person, directly or indirectly,
through one or more intermediary persons, controlling, controlled by or under
common control with such person.
EXHIBIT 10.4
(b) "BUSINESS" means (i) the marketing, sale, integration, distribution or
repair of computer systems, components, equipment or peripherals, and any
related consulting work, and (ii) conducting any business of a nature engaged in
by Purchaser or its subsidiaries or Sellers at the time of Closing, or engaged
in by any of BCD 2000, Inc. or Pacific Magtron International, Inc. ("POTENTIAL
PURCHASER SUBSIDIARIES") at the time the stock or assets of which are acquired
by Purchaser.
(c) "CONFIDENTIAL INFORMATION" means all information (i) heretofore or hereafter
developed or used by Sellers relating to the Business, or the operations,
employees, customers, suppliers or distributors of Sellers relating to the
Business including, but not limited to, customer lists, customer orders,
financial data, pricing information and price lists, business plans and market
strategies and arrangements, all books, records, manuals, advertising materials,
catalogues, correspondence, mailing lists, production data, sales materials and
records, purchasing materials and records, personnel records, quality control
records and procedures included in or relating to the Business, and (ii) all
such information of Purchaser, its Affiliates and the Potential Purchaser
Subsidiaries obtained by Sellers prior to the date hereof.
(d) The term "CONTROL", with respect to any person, means the power to direct
the management and policies of such person, directly or indirectly, by or
through stock ownership, agency or otherwise, or pursuant to or in connection
with an agreement, arrangement or understanding (written or oral) with one or
more other persons by or through stock ownership, agency or otherwise; and the
terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing.
(e) "MARKET" means the world.
(f) The term "PERSON" means an individual, corporation, partnership, joint
venture, limited liability company, association, trust, unincorporated
organization or other entity, including a government or political subdivision or
an agency or instrumentality thereof.
(g) "RESTRICTED PERIOD" means the period commencing from and after the date of
this Agreement and ending on the fifth anniversary hereof.
2. NONCOMPETITION IN THE MARKET. At all times from and after the date of this
Agreement and until the expiration of the Restricted Period, (a) Sellers will
not own or control, throughout the Market, any business or any person who is
engaged in any business, that competes, directly or indirectly, with the
Business or is otherwise engaged in activities competitive with the Business,
(b) Sellers shall not directly, indirectly, and whether for itself or on behalf
of any other person (including any of its Affiliates), throughout the Market,
directly or indirectly, engage in, own, manage, operate, provide financing to,
control or participate in the ownership, management or control of, or otherwise
have a financial interest (whether, except as provided in Section 4, as a
stockholder, director, officer, representative, subcontractor, partner,
consultant, proprietor, member, agent or otherwise) in, or aid or assist anyone
else in the conduct of, any business or any person who is engaged in any
business, that competes, directly or indirectly, with the Business or is
otherwise engaged in activities competitive with the Business, and (c) Sellers
shall not, either personally or by its agent or by letters, circulars or
advertisements and whether for itself or on behalf of any other person, canvass
2
or solicit, or enter into or effect. (or cause or authorize to be solicited,
entered into or effected), directly or indirectly, for or on behalf of itself or
any other person, any business relating to the Business from any person who is,
or has at any time within five (5) years prior to the date of such action been,
a customer or supplier of the Business or Purchaser or Purchaser's Affiliates.
3. EXCLUDED INVESTMENTS AND ACTIVITIES BY SELLERS. Each of the parties hereto
acknowledges that nothing contained herein shall prohibit Sellers from acquiring
equity securities of a publicly held company engaged in activities which are
similar to, or competitive with, the Business, which in the aggregate do not
exceed 1% of the issued and outstanding equity securities of such publicly held
company.
4. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Sellers acknowledge that it is
the policy of Purchaser to maintain as secret and confidential all Confidential
Information. The parties hereto recognize that by reason of Sellers' operation
of the Business prior to the Closing, and activities in connection with the
Purchase Agreement, Sellers have acquired Confidential Information. Sellers
recognize that, effective upon the Closing, all such Confidential Information is
and shall remain the sole property of Purchaser, free of any rights of Sellers,
and acknowledges that Purchaser has a vested interest in assuring that all such
Confidential Information remains secret and confidential. Therefore, Sellers
agree that at all times from and after the date hereof, they will not, directly
or indirectly, without the prior written consent of Purchaser, disclose to any
person, firm, company or other entity (other than Purchaser or any of its
Affiliates) any Confidential Information, except to the extent that (i) any such
Confidential Information becomes generally available to the public or trade,
other than as a result of a breach by Sellers of this Section 4, or (ii) any
such Confidential Information becomes available to Sellers on a non-confidential
basis from a source other than Purchaser; PROVIDED, that such source is not
known by Sellers to be bound by a confidentiality agreement with, or other
obligation of secrecy to, Purchaser or another party. In addition, it shall not
be a breach of the confidentiality obligations hereof if Sellers are required by
law or legal process to disclose any Confidential Information; PROVIDED, that in
such case, Sellers shall (a) give Purchaser the earliest notice possible that
such disclosure is or may be required, and (b) cooperate with Purchaser, at
Purchaser's expense, in protecting, to the maximum extent legally permitted, the
confidential or proprietary nature of the Confidential Information which must be
so disclosed. The obligations of Sellers under this Section 4 shall survive any
termination of this Agreement.
5. NON-SOLICITATION. At all times from and after the date of this Agreement and
until the expiration of the Restricted Period, Sellers shall not, directly,
indirectly or otherwise, either personally or through agents, employees,
officers or Shareholders or by letters, circulars or advertisements, and whether
for itself or on behalf of any other person:
(a) seek to persuade any employee of Purchaser or any of its Affiliates to
discontinue his or her status or employment therewith or seek to persuade any
employee or former employee of Purchaser or any of its Affiliates to become
employed or to provide consulting services or contract services in a business or
activities competitive with the Business, or
3
(b) solicit or employ or, directly or indirectly, cause to be solicited or
employed, or engage, directly or indirectly, the services of any employee or
former employee of Purchaser or any of its Affiliates.
6. RIGHT TO INJUNCTIVE RELIEF. Sellers acknowledge that any breach or threatened
breach by it of any of the covenants or provisions contained herein will result
in irreparable and continuing harm to Purchaser and its Affiliates for which
neither Purchaser nor its Affiliates would have an adequate remedy at law.
Therefore, Sellers acknowledge and agrees that, in addition to any other remedy
which Purchaser or its Affiliates may have at law or in equity, Purchaser and
its Affiliates shall be entitled to injunctive relief, temporary and permanent
restraining orders or other equitable remedies in the event of any such breach
or threatened breach. Sellers further acknowledge and agree that monetary
damages would be insufficient to compensate Purchaser and its Affiliates in the
event of a breach by Sellers of any of the covenants or provisions contained
herein, and that in the event of a breach thereof, Purchaser and/or its
Affiliates shall be entitled to specific performance of the obligations
hereunder without the obligation to post a bond or to prove damages or that
other remedies are insufficient.
7. ENFORCEABILITY; SEVERABILITY. If any provision of this Agreement shall be
adjudicated to be invalid or unenforceable, then such provision shall be deemed
modified, as to duration, territory or otherwise, so as to be enforceable as
similar as possible to the provision at issue, in order to render the remainder
of this Agreement valid and enforceable and to the extent found necessary, such
provisions shall be revised, reformed or redrafted or a new agreement created by
a court of competent jurisdiction to accomplish the foregoing. The invalidity or
unenforceability of any provision of this Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provision were omitted.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure
to the benefit of Sellers, Purchaser and their respective Affiliates, successors
and assigns.
9. ENTIRE AGREEMENT. This Agreement, together with the Purchase Agreement and
the documents and instruments referenced therein, contains the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersedes all prior negotiations and understandings among Purchaser,
Purchaser's Affiliates and Sellers with respect hereto. This Agreement may not
be amended or modified except by a written instrument signed by the parties
hereto.
10. APPLICABLE LAW; SUBMISSION TO JURISDICTION.
(a) This Agreement and the rights, obligations and relations of the parties
hereto shall be governed by and construed and enforced in accordance with the
laws of the State of Delaware.
(b) The parties hereto hereby, to the fullest extent permitted by law, (i) agree
to submit themselves, and any legal action or proceeding relating to this
Agreement or for recognition and enforcement of any judgment in respect hereof,
to the exclusive jurisdiction of the courts of the State of
4
Delaware, the courts of the United States District Court for the District of
Delaware, and appellate courts from any therefor, (ii) consent that any action
or proceeding shall be brought in such courts, and waive any objection that each
may now or hereafter have to the venue of any such action or proceeding in any
such court, (iii) agree that service of process of any such action or proceeding
may be effected by serving the appropriate party personally at its address as
set forth herein, and service made shall be deemed to be completed upon actual
receipt thereof, and (iv) agree that nothing herein shall affect the right to
effect service of process in any other manner permitted by law.
11. NOTICES.
(a) Except as provided in Section 10(b)(iii) with respect to service of process
which must be delivered personally, any notice or other communication required
or permitted hereunder shall be in writing and shall be delivered personally by
hand or by recognized overnight courier or mailed (by registered or certified
mail, postage prepaid) or telecopied, as follows:
(i) If to Purchaser:
420 Lexington Avenue, Ste 2739 New York, NY 10170 Attention: Wayne I. Danson,
President Telecopier: 646-227-1666
with a simultaneous copy to:
Gary A. Miller, Esq.
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street, Ninth Floor
Philadelphia, Pennsylvania 19102
Telecopier: (215)851-8383
(ii) If to Sellers, one copy to:
448 Commerce Way, Suite 100 Florida Central Commerce Park Longwood, FL 32750
Attention: President Telecopier: ______________________________
with a simultaneous copy to:
Victor Chapman, Esquire Barrett, Chapman & Ruda, P.C.
18 Wall Street
Orlando, FL 32801
Telecopier: ______________________________
5
(b) Each such notice or other communication shall be effective (i) if given by
telecopier, when such telecopy is transmitted to the telecopier number specified
in Section 11(a) (with confirmation of transmission), or (ii) if given by other
means, when delivered at the address specified in Section 11(a). Any party by
notice given in accordance with this Section 11 to the other party may designate
another address or person for receipt of notices hereunder. Notices by a party
may be given by counsel to such party.
12. HEADINGS. The headings of sections and subsections of this Agreement are for
convenience only and are not to be considered in construing this Agreement.
13. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which,
when taken together, shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day and year first above written.
SELLER:
CYBER-TEST, INC., a Florida corporation
By: /s/ Lisa Welton
--------------------------
Lisa Welton, President
/s/ Lisa Welton
--------------------------
Lisa Welton
/s/ Robert Heynssens
--------------------------
Robert Heynssens
/s/ Alan Heynssens
--------------------------
Alan Heynssens
/s/ Lori Peterson
--------------------------
Lori Peterson
PURCHASER:
CYBER-TEST, INC., a Delaware corporation
By: /s/ Wayne I. Danson
---------------------------
Wayne I. Danson, President
EXHIBIT 10.5
EXECUTION COPY
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of the 3rd day of June 2004
("Effective Date"), by and among Cyber-Test, Inc., a newly formed Delaware
corporation ("Cyber-Test"), Encompass Group, Inc., a Delaware corporation
("Encompass"), Advanced Communication Technologies, Inc., a Florida Corporation
("ACT"), and Lisa Welton, an individual whose address is 540 Wekiva Landing
Drive, Apopka, Florida 32712 ("Executive"). Cyber-Test, Encompass and ACT shall
be referred to collectively herein as the "Company."
WITNESSETH
WHEREAS, Executive presently serves as President of Cyber-Test, Inc., a Florida
corporation ("Cyber-Test Florida");
WHEREAS, Cyber-Test, a newly formed subsidiary of Encompass, has entered into an
Asset Purchase Agreement (the "Asset Purchase Agreement") with Cyber-Test
Florida, pursuant to which Cyber-Test will buy substantially all of the assets
of Cyber-Test Florida (the "Acquisition"); and
WHEREAS, it is a condition of the Acquisition that Executive accept employment
with the Company as of the consummation of the Acquisition.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT.
1.1 Encompass. Encompass hereby employs Executive, and Executive accepts
employment with Encompass, as Executive Vice President, or such other executive
position with similar responsibilities and duties of an executive vice president
of a company.
1.2 Cyber-Test. Cyber-Test hereby employs Executive, and Executive hereby
accepts employment with Cyber-Test, as President and Chief Executive Officer, or
such other senior executive position as may be determined by the Board of
Directors of ACT (the "Board") from time to time during the Employment Period
(as defined below). For purposes of this Agreement, "senior executive position"
shall mean a position of Vice President or a more senior position. In addition
to her duties set forth in this Paragraph 1 and Paragraph 3 below, Executive
shall at the request of the Encompass CEO (as defined below) or the Board
consider serving as an officer or director of ACT, or any subsidiary of ACT,
without additional compensation and subject to any policy of the Compensation
Committee of the Board (the "Compensation Committee") with regard to directors'
fees.
PAGE 1 OF 11
2. TERM.
2.1 Initial Term; Renewal. The initial term of this Agreement shall commence on
the Effective Date and expire on the third anniversary thereof (the "Employment
Period"), unless earlier terminated in accordance with its terms. Unless earlier
terminated in accordance herewith, this Agreement shall be deemed to have been
extended for additional terms of successive one year periods commencing on the
day of the expiration of the then current Employment Period.
2.2 Earn-Out Shares. Executive hereby acknowledges that a portion of the
purchase price paid by Cyber-Test to Cyber-Test consists of 50,000,000 shares of
ACT's common stock to be earned by Cyber-Test pro-rata each year during the
Employment Period in accordance with the terms and conditions of the Asset
Purchase Agreement (the "Earn-Out Shares"). Executive hereby further
acknowledges that in the event Executive's employment with the Company is
terminated, for any reason, other than (i) by the Company without "cause" (as
defined in Section 6.1 hereof) or (ii) due to Executive's death or disability in
accordance with Section 7 hereof, prior to the expiration of the Employment
Period, the Earn-Out Shares shall be forfeited by Cyber-Test in their entirety,
and the Company shall have no further obligations to Cyber-Test with respect to
the Earn-Out Shares; provided, however, that in the event Executive's employment
with the Company is terminated (i) by the Company without "cause" or (ii) due to
Executive's death or disability prior to the expiration of the Employment
Period, Cyber-Test shall be permitted to retain only those Earn-Out Shares
previously earned by Cyber-Test and placed in escrow up to and including the
fiscal year of the Company immediately preceding the year of termination of
Executive's employment with the Company. In no event shall Cyber-Test have the
right to receive any Earn-Out Shares for the fiscal year during, or any fiscal
year after, which Executive's employment with the Company is terminated due to
Executive's death or disability prior to the expiration of the Employment
Period.
3. EMPLOYMENT AND DUTIES.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment Period shall be
that of Executive Vice President of Encompass and President and Chief Executive
Officer of Cyber-Test. Executive shall directly report to the Chief Executive
Officer of Encompass (the "Encompass CEO"), or such other senior executive
officer of Encompass or ACT, as determined from time to time by the Company. The
services to be rendered by Executive pursuant to this Agreement shall consist of
such services as defined and directed by the Board or the Encompass CEO.
(b) During the Employment Period, Executive shall serve Cyber-Test and Encompass
faithfully and to the best of her ability; shall devote her entire working time,
attention, energy and skill to her employment and the benefit and business of
these entities; and shall use her best efforts, skills and ability to promote
their interests and to perform such duties as from time to time may be
reasonably assigned to her and are consistent with her titles and positions with
these entities.
PAGE 2 OF 11
(c) During the Employment Period, in addition to any other duties or
responsibilities Encompass or Cyber-Test may give to Executive, Executive shall
be required to sign, and shall sign, all certifications and such other documents
or instruments requested by the Board, the Chief Executive Officer of ACT, or
the Encompass CEO in connection with ACT's obligations under or to (i) the
Securities and Exchange Commission, (ii) any exchange or association on which
the Company's shares of capital stock are listed, (iii) any federal, state or
local authority, and/or (iv) any other governmental, quasi-governmental or
non-governmental entity or organization (foreign or domestic) that regulates or
has authority over ACT. In addition, in the event Executive, in her current
position or in any position Executive accepts in the future, becomes obligated
to sign certifications and such other documents or instruments as may be
required by the rules and regulations promulgated by any of (i) through (iv)
above, Executive shall sign all such certifications and other documents or
instruments as required thereby.
3.2 Observance of Rules and Regulations. Executive agrees to observe and comply
with all applicable laws and regulations, as well as the rules and regulations
of Encompass and Cyber-Test with respect to the performance of her duties.
4. COMPENSATION; BENEFITS AND EXPENSES.
4.1 Base Salary. As compensation for the services to be rendered hereunder,
during the Employment Period, Cyber-Test shall pay to Executive an annual base
salary (the "Base Salary") of $120,000.00. The Base Salary shall be payable in
accordance with usual payroll practices of Cyber-Test. Executive's Base Salary
shall be reviewed annually by the Compensation Committee during the Employment
Period and may be increased, but not decreased, from time to time by the
Compensation Committee in its sole discretion.
4.2 Bonus.
(a) Immediately following each fiscal year, the Company shall set aside for the
payment of Encompass executive bonuses, an amount equal to five percent (5%) of
net income of Encompass during such fiscal year (the "Encompass Bonus Pool").
For each fiscal year or portion thereof after the Effective Date and during the
Employment Period, the Company shall pay to Executive an annual performance
bonus, in cash and/or restricted stock of ACT, equal to a portion of the
Encompass Bonus Pool, as determined by the Compensation Committee, in its sole
discretion, taking into account Executive's contribution to Encompass' overall
performance during such fiscal year (the "Encompass Performance Bonus").
For purposes hereof, "net income" shall mean, with respect to Encompass, for any
fiscal year, the net income (loss) of Encompass for such fiscal year, determined
on a consolidated basis in accordance with generally accepted accounting
principals, consistently applied; provided, however, that there shall be
excluded from net income (a) the net income (loss) of any person in which
Encompass has a joint interest with a third party, except to the extent such net
income is actually paid to Encompass by dividend or other distribution during
such fiscal year, (b) the net income (or loss) of any person accrued prior to
the date it becomes a subsidiary of Encompass or is merged into or becomes
consolidated with Encompass or its assets are purchased by Encompass, and (c)
the net income (if positive) of any subsidiary of Encompass to the extent that
PAGE 3 OF 11
the declaration or payment of dividends or similar distributions of such net
income by such subsidiary (i) is not at that time permitted by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order
statute, rule or governmental regulation or (ii) would be subject to any taxes
payable on such dividends or distributions.
(b) Immediately following each fiscal year, the Company shall set aside for the
payment of Cyber-Test executive bonuses, an amount equal to ten percent (10%) of
net income of Cyber-Test during such fiscal year (the "Cyber-Test Bonus Pool").
For each fiscal year or portion thereof after the Effective Date and during the
Employment Period, the Company shall pay to Executive an annual performance
bonus, in cash and/or restricted stock of ACT, equal to a portion of the
Cyber-Test Bonus Pool, as determined by the Compensation Committee, in its sole
discretion (the "Cyber-Test Performance Bonus" and together with the Encompass
Performance Bonus, the "Performance Bonuses").
For purposes hereof, "net income" shall mean, with respect to Cyber-Test, for
any fiscal year, the net income (loss) of Cyber-Test for such fiscal year,
determined in accordance with generally accepted accounting principals,
consistently applied; provided, however, that there shall be excluded from net
income (a) the net income (loss) of any person in which Cyber-Test has a joint
interest with a third party, except to the extent such net income is actually
paid to Cyber-Test by dividend or other distribution during such fiscal year,
(b) the net income (or loss) of any person accrued prior to the date it becomes
a subsidiary of Cyber-Test or is merged into or becomes consolidated with
Cyber-Test or its assets are purchased by Cyber-Test, and (c) the net income (if
positive) of any subsidiary of Cyber-Test to the extent that the declaration or
payment of dividends or similar distributions of such net income by such
subsidiary (i) is not at that time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order statute, rule or
governmental regulation or (ii) would be subject to any taxes payable on such
dividends or distributions.
(c) In addition to the Performance Bonuses, the Company may grant restricted
shares of common stock of ACT to Executive, with a vesting schedule and other
terms established by the Compensation Committee, in its sole discretion (the
"Incentive Bonus").
(d) Executive acknowledges that the amount of the Performance Bonuses and the
amount of the Incentive Bonus shall at all times be determined by the
Compensation Committee, in its sole discretion. The Company shall pay each of
the Performance Bonuses and the Incentive Bonus to Executive within thirty (30)
days after the Company's audited results for the applicable fiscal year are
delivered to the Company, but in no event later than September 30 of the
immediately following fiscal year.
4.3 Other Benefits. Executive shall also be eligible to participate in any life
and health insurance programs that the Company makes available to all of its
executives of similar seniority. Executive shall also be eligible to receive
discretionary performance based bonuses as approved and authorized by the
Compensation Committee, including any incentive stock programs approved by ACT's
shareholders.
PAGE 4 OF 11
4.4 Business Expenses. Executive will be reimbursed, in accordance with the
Company's expense reimbursement policy, for business expenses that have been
pre-approved by the Board or the Encompass CEO upon presentation of vouchers or
other documents reasonably necessary to verify the expenditures and sufficient,
in form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
4.5 Vacation. Executive shall be entitled to take up to four (4) weeks of
vacation per calendar year, which shall be taken in accordance with the
Company's vacation policy in effect from time to time for executives of
comparable seniority.
5. NO COMPETITIVE ACTIVITIES; CONFIDENTIALITY; INVENTION
5.1 General Restriction. During the Employment Period and for a period of two
(2) years thereafter (the "Restricted Period"), Executive covenants and agrees
that, except on behalf of the Company, she will not, directly or indirectly:
(a) Competing Business. Own, manage, operate, control, participate in the
ownership, management, operation or control of, be employed by, or provide
services as a consultant to, any individual or business that is involved in
business activities that are the same as, similar to or in competition with,
directly or indirectly, any business activities conducted, or actively being
planned, by the Company during the Restricted Period and anywhere in the United
States and Canada (it being acknowledged that the Company's business is national
in scope). The ownership of less than one percent (1%) of the outstanding stock
of any public corporation shall not be deemed a violation of this provision.
(b) Soliciting Customers. Attempt in any manner to contact or solicit any
individual, firm, corporation or other entity (i) that is or has been, a
customer of the Company at any time during the Restricted Period, (ii) to which
a proposal has been made by the Company during the Restricted Period or (iii)
appearing on the Company's new business target list on the date of Executive's
termination (as such list has been prepared and maintained in accordance with
the Company's past practice), for the purpose of providing services or products
similar to the services and products provided by the Company, or engaging in any
activity which could be, directly or indirectly, competitive with the business
of the Company.
(c) Interfering with Other Relations. Persuade or attempt to persuade any
supplier, vendor, licensor or other entity or individual doing business with the
Company to discontinue or reduce its business with the Company or otherwise
interfere in any way with the business relationships and activities of the
Company.
(d) Employees. Attempt in any manner to solicit any individual, who is at the
time of such attempted solicitation, or was at any time during the one (1) year
period preceding the termination of Executive's employment, an employee or
consultant of the Company, to terminate his or her employment or relationship
with the Company, or engage such individual, as an employee or consultant.
Cooperate with any other person in persuading, enticing or aiding, or attempting
to persuade, entice or aid, any employee of or consultant to the Company to
terminate his or her employment or business relationship with the
PAGE 5 OF 11
Company, or to become employed as an employee or retained as a consultant by any
person other than the Company.
5.2 Confidentiality Agreement. Executive shall not, either during the Employment
Period or at any time thereafter, use or disclose to any third person any
Confidential Information (as defined below) of the Company, other than at the
direction of the Company, or pursuant to a court order or subpoena, provided
that Executive will give notice of such court order or subpoena to the Company
prior to such disclosure. Upon the termination of Executive's employment with
the Company for any reason, Executive shall return any notes, records, charts,
formulae or other materials (whether in hard copy or computer readable form)
containing Confidential Information, and will not make or retain any copies of
such materials. Without limiting the generality of the foregoing, the parties
acknowledge that the Company from time to time may be subject to agreements with
its customers, suppliers or licensors to maintain the confidence of such other
persons' confidential information. The terms of such agreements may require that
the Company's employees, including Executive, be bound by such agreements, and
Executive shall be deemed so bound upon notice to her of the terms of such
agreements. The term "Confidential Information" as used herein shall mean any
confidential or proprietary information of the Company whether of a technical,
engineering, operational, financial or economic nature, including, without
limitation, all prices, discounts, terms and conditions of sale, trade secrets,
know-how, customers, inventions, business affairs or practices, systems,
products, product specifications, designs, plans, manufacturing and other
processes, data, ideas, details and other information of the Company.
Confidential Information shall not include information which can be proven by
Executive to have been developed by her own work as of the Effective Date
completely independent of its disclosure by the Company or which is in the
public domain, provided such information did not become available to the general
public as a result of Executive's breach of this Paragraph 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full written
disclosure to the Company and solely the Company of all writings, inventions,
processes, methods, plans, developments, improvements, procedures, techniques
and other innovations of any kind that Executive may make, develop or reduce to
practice, alone or jointly with others, at any time during the Employment Period
and for a period of one (1) year thereafter, whether during working hours or at
any other time and whether at the request or upon the suggestion of the Company
or otherwise, and whether or not they are eligible for patent, copyright,
trademark, trade secret or other legal protection (collectively, "Innovations").
Examples of Innovations shall include, but are not limited to, discoveries,
research, formulas, tools, know-how, marketing plans, new product plans,
production processes, advertising, packaging and marketing techniques and
improvements to computer hardware or software. The written disclosures provided
for herein shall be made to the Encompass CEO or the Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be the sole
and exclusive property of the Company. Executive hereby assigns all rights,
title or interest in and to the Innovations to the Company. At the Company's
request and expense, during the Employment Period and at any time thereafter,
Executive will assist and cooperate with the Company in all respects and will
execute documents and give testimony to obtain, maintain, perfect and enforce
for the Company any and all patent, copyright, trademark, trade secret and other
legal protections for the Innovations.
PAGE 6 OF 11
5.5 Remedies. Executive acknowledges that the restrictions contained in the
foregoing paragraphs 5.1 through 5.4, in view of the nature of the business in
which the Company is engaged, are reasonable and necessary in order to protect
the legitimate interests of the Company, and that the legal remedies for a
breach of any of the provisions of this section 5 will be inadequate and that
such provisions may be enforced by restraining order, injunction, specific
performance or other equitable relief. Such equitable remedies shall be
cumulative and in addition to any other remedies which the injured party or
parties may have under applicable law, equity, this Agreement or otherwise.
Executive shall not, in any action or proceeding to enforce any of the
provisions of this Paragraph 5, assert the claim or defense that an adequate
remedy at law exists. The prevailing party shall be entitled to recover its
legal fees and expenses in any action or proceeding for breach of this section
5.
5.6 Company Property. All Confidential Information; all Innovations; and all
correspondence, files, documents, advertising, sales, manufacturers' and other
materials or articles or other information of any kind, in any media, form or
format furnished to Executive by the Company, which may not deemed confidential,
shall be and remain the sole property of the Company ("Company Property"). Upon
termination or at the Company's request, whichever is earlier, Executive shall
immediately deliver to the Company all such Company Property.
5.7 Public Policy/Severability. The parties do not wish to impose any undue or
unnecessary hardship upon Executive following her departure from the Company's
employment. The parties have attempted to limit the provisions of this section 5
to achieve such a result, and the parties expressly intend that all provisions
of this section 5 be construed to achieve such result. If, contrary to the
effort and intent of the parties, any covenant or other obligation contained in
this section 5 shall be found not to be reasonably necessary for the protection
of the Company, to be unreasonable as to duration, scope or nature of
restrictions, or to impose an undue hardship on Executive, then it is the desire
of the parties that such covenant or obligation not be rendered invalid thereby,
but rather that the duration, scope or nature of the restrictions be deemed
reduced or modified, with retroactive effect, to render such covenant or
obligation reasonable, valid and enforceable. The parties further agree that in
the event a court, despite the efforts and intent of the parties, declares any
portion of the covenants or obligations in this section 5 invalid, the remaining
provisions of this section 5 shall nonetheless remain valid and enforceable.
6. TERMINATION.
6.1 Termination For Cause. Notwithstanding anything to the contrary contained
herein, this Agreement may be terminated immediately for "cause," at which time
the Company shall have no further obligations or liabilities to Executive
whether under this Agreement or otherwise and Executive's right to further
compensation and benefits hereunder (included, but not limited to, unvested
stock) shall immediately cease, other than payment to Executive of Base Salary
accrued, and reimbursement of expenses incurred in accordance with Paragraph
4.4, prior to the effective date of termination of this Agreement (the
"Termination Date"). As used herein and throughout this Agreement, the term
"cause" shall mean (i) any act or omission by Executive that constitutes
malfeasance or misfeasance in the course of Executive's duties hereunder, or in
the objectively reasonable judgment of the Board or the Encompass CEO, Executive
has been grossly negligent (including habitual neglect of duties), incompetent
PAGE 7 OF 11
or insubordinate in carrying out her duties hereunder, (ii) a material breach of
this Agreement that is not cured within ten (10) days of receipt of notice
thereof, (iii) Executive's breach of a fiduciary duty owed to the Company or its
affiliates, or (iv) Executive's conviction of, or pleading nolo contendere to, a
criminal offense or crime constituting a misdemeanor or felony, or conviction in
respect to any act involving fraud, dishonesty or moral turpitude (other than
minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by the Company without cause
and for any reason or no reason prior to the expiration of the Employment Period
upon thirty (30) days' prior written notice from the Company to the Executive.
(b) Severance. In the event that the Company terminates Executive's employment
without cause, the Company shall pay to Executive (i) Base Salary accrued, and
expenses incurred in accordance with Paragraph 4.4, prior to the Termination
Date, (ii) any unpaid bonus owed to Executive for a prior fiscal year ((i) and
(ii) together, the "Accrued Payments"), which Accrued Payments shall be paid to
Executive in accordance with Section 4.1, Section 4.2 and Section 4.4, as
applicable, and (iii) an additional amount of Base Salary which would have been
payable to Executive during the six (6) month period immediately following the
Termination Date (the "Severance Payment"), which Severance Payment shall be
payable in cash to Executive in equal monthly installments on the first business
day of each calendar month during the six (6) month period immediately following
the Termination Date. Except as provided in the preceding sentence, the Company
shall have no further obligations or liabilities to Executive whether under this
Agreement or otherwise and Executive's right to further compensation and
benefits hereunder (included, but not limited to, unvested stock) shall
immediately cease.
6.3 Termination of Other Positions. Upon the Termination Date, Executive hereby
resigns as Executive Vice President of Encompass, President and Chief Executive
Officer of Cyber-Test and any and all other positions as officer or director
Executive may then hold with the Company, and as fiduciary of any benefit plan
of the Company. Executive shall promptly execute any further documentation as
requested by the Company and, if Executive is to receive any payments from the
Company, execution of such further documentation shall be a condition thereof.
7. DISABILITY OR DEATH.
7.1 Disability. If, during the Employment Period, Executive becomes disabled or
incapacitated as determined under the Company's Long Term Disability Policy
("Permanently Disabled"), the Company shall have the right at any time
thereafter (but in no event less than 120 days after the event causing such
disability or incapacity), so long as Executive is then still Permanently
Disabled, to terminate this Agreement upon thirty (30) days' prior written
notice to Executive. In the event the Company does not have a Long Term
Disability Policy at the time of the event causing the Executive to become
Permanently Disabled, "Permanently Disabled" shall mean Executive's inability to
fully perform her duties and responsibilities hereunder to the full extent
PAGE 8 OF 11
required by the Company by reason of illness, injury or incapacity for 120
consecutive days or for more than six (6) months during any twelve (12) month
period. If the Company elects to terminate this Agreement in the event that
Executive becomes Permanently Disabled, the Company shall have no further
obligations or liabilities to Executive, whether under this Agreement or
otherwise (included, but not limited to, unvested stock), other than payment to
Executive of the Accrued Payments, which Accrued Payments shall be paid to
Executive in accordance with Section 4.1, Section 4.2 and Section 4.4, as
applicable.
7.2 Death. If Executive dies during the Employment Period, this Agreement shall
automatically terminate as of the date of Executive's death, and the Company
shall have no further obligations or liabilities to Executive, whether under
this Agreement or otherwise (included, but not limited to, unvested stock),
other than payment to Executive's estate of the Accrued Payments, which Accrued
Payments shall be paid to Executive in accordance with Section 4.1, Section 4.2
and Section 4.4, as applicable.
8. INDEMNIFICATION. Each of the Company and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their obligations contained in this Agreement.
9. GOVERNING LAW. This Agreement shall be governed by the internal laws of the
State of Florida. Any action to enforce any term hereof shall be brought
exclusively within the state or federal courts of Florida to which jurisdiction
and venue all parties hereby submit themselves.
10. BINDING EFFECT. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
11. ASSIGNMENT. Any assignee of the Company shall have the right to enforce the
restrictive covenants set forth in this Agreement, and the Company shall have
the right to assign this Agreement, including the right to enforce such
covenants to any successor or assign of the Company.
12. NOTICES. All notices, designations, consents, offers, acceptances, waivers
or any other communication provided for herein, or required hereunder, shall be
sufficient if in writing and if sent by registered or certified mail, return
receipt requested, overnight courier, or delivered by hand or confirmed
facsimile transmission to (i) Executive at her last known address on the books
of the Company or (ii) the Company at its principal place of business.
13. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
PAGE 9 OF 11
14. COUNTERPARTS. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
15. ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement and
understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof, including, without limitation,
that certain Letter of Intent, dated May 3, 2004, by and among Executive, the
Company and the other parties named therein. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties concerning the subject matter hereto, which are not fully expressed
herein or in any supplemental written agreements of even or subsequent date
hereof.
16. SEVERABILITY. If any provision of this Agreement, or the application thereof
to any person or circumstances, shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected thereby,
but rather shall be enforced to the greatest extent permitted by law.
17. MODIFICATION. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
18. CONTRACT HEADINGS. All headings of the Paragraphs of this Agreement have
been inserted for convenience of reference only, are not to be considered a part
of this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
19. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
20. REPRESENTATION OF EXECUTIVE. Executive, with the full knowledge that the
Company is relying thereon, represents and warrants that she has not made any
commitment inconsistent with the provisions hereof and that she is not under any
disability which would prevent her from entering into this Agreement and
performing all of her obligations hereunder.
21. JOINT PARTICIPATION IN DRAFTING. Each party to this Agreement participated
in the drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party to
this Agreement.
[SIGNATURE PAGE FOLLOWS]
PAGE 10 OF 11
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
CYBER-TEST, INC., a Delaware corporation
By: /s/ Wayne I. Danson
------------------------------------
Wayne I. Danson, President
ENCOMPASS GROUP AFFILIATES, INC., a
Delaware corporation
By: /s/ Wayne I. Danson
------------------------------------
Wayne I. Danson, President
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., a Florida corporation
By: /s/ Wayne I. Danson
-------------------------------------
Wayne I. Danson, President and Chief
Executive Officer
EXECUTIVE:
/s/ Lisa Welton
-----------------------------------------
LISA WELTON
PAGE 11 OF 11
EXHIBIT 10.6
EXECUTION COPY
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of the 3rd day of June 2004
("Effective Date"), by and between Cyber-Test, Inc., a newly formed Delaware
corporation ("Cyber-Test") and Thomas Sutlive, an individual whose address is
227 Twelve League Circle, Casselberry, Florida ("Executive").
WITNESSETH
WHEREAS, Executive presently serves as Vice-President of Cyber-Test, Inc., a
Florida corporation ("Cyber-Test Florida");
WHEREAS, Cyber-Test has entered into an Asset Purchase Agreement (the "Asset
Purchase Agreement") with Cyber-Test Florida, pursuant to which Cyber-Test will
buy substantially all of the assets of Cyber-Test Florida (the "Acquisition");
and
WHEREAS, it is a condition of the Acquisition that Executive accept employment
with Cyber-Test as of the consummation of the Acquisition.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT. Cyber-Test hereby employs Executive, and Executive hereby accepts
employment with Cyber-Test, as Vice-President, or such other senior executive
position as may be determined by the Board of Directors of Cyber-Test (the
"Board") from time to time during the Employment Period (as defined below). For
purposes of this Agreement, "senior executive position" shall mean a position of
Vice President or a more senior position. In addition to his duties set forth in
this Paragraph 1 and Paragraph 3 below, Executive shall at the request of the
Cyber-Test CEO (as defined below) or the Board consider serving as an officer or
director of Cyber-Test, or any of its affiliates, without additional
compensation and subject to any policy of the Compensation Committee (the
"Compensation Committee") of the board of directors of Advanced Communications
Technologies, Inc. ("ACT") with regard to directors' fees.
2. TERM. The initial term of this Agreement shall commence on the Effective Date
and expire on the third anniversary thereof (the "Employment Period"), unless
earlier terminated in accordance with its terms. Unless earlier terminated in
accordance herewith, this Agreement shall be deemed to have been extended for
additional terms of successive one year periods commencing on the day of the
expiration of the then current Employment Period.
PAGE 1 OF 10
3. EMPLOYMENT AND DUTIES.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment Period shall be
that of Vice-President of Cyber-Test. Executive shall directly report to the
Chief Executive Officer of Cyber-Test (the "C-T CEO"), or such other senior
executive officer of Cyber-Test or its affiliates, as determined from time to
time by the Board or the Cyber-Test CEO. The services to be rendered by
Executive pursuant to this Agreement shall consist of such services as defined
and directed by the Board or the Cyber-Test CEO.
(b) During the Employment Period, Executive shall serve Cyber-Test faithfully
and to the best of his ability; shall devote his entire working time, attention,
energy and skill to his employment and the benefit and business of these
entities; and shall use his best efforts, skills and ability to promote their
interests and to perform such duties as from time to time may be reasonably
assigned to him and are consistent with his titles and positions with these
entities.
(c) During the Employment Period, in addition to any other duties or
responsibilities Cyber-Test or its affiliates may give to Executive, Executive
shall be required to sign, and shall sign, all certifications and such other
documents or instruments requested by the Board or the Cyber-Test CEO, in
connection with Cyber-Test's or its affiliates obligations under or to (i) the
Securities and Exchange Commission, (ii) any exchange or association on which
Cyber-Test's or its affiliates' shares of capital stock are listed, (iii) any
federal, state or local authority, and/or (iv) any other governmental,
quasi-governmental or non-governmental entity or organization (foreign or
domestic) that regulates or has authority over Cyber-Test or its affiliates. In
addition, in the event Executive, in his current position or in any position
Executive accepts in the future, becomes obligated to sign certifications and
such other documents or instruments as may be required by the rules and
regulations promulgated by any of (i) through (iv) above, Executive shall sign
all such certifications and other documents or instruments as required thereby.
3.2 Observance of Rules and Regulations. Executive agrees to observe and comply
with all applicable laws and regulations, as well as the rules and regulations
of Cyber-Test and its affiliates with respect to the performance of his duties.
4. COMPENSATION; BENEFITS AND EXPENSES.
4.1 Base Salary. As compensation for the services to be rendered hereunder,
during the Employment Period, Cyber-Test shall pay to Executive an annual base
salary (the "Base Salary") of $110,000.00. The Base Salary shall be payable in
accordance with usual payroll practices of Cyber-Test. Executive's Base Salary
shall be reviewed annually by the Compensation Committee during the Employment
Period and may be increased, but not decreased, from time to time by the
Compensation Committee in its sole discretion.
PAGE 2 OF 10
4.2 Bonus.
(a) Immediately following each fiscal year, Cyber-Test shall set aside for the
payment of Cyber-Test executive bonuses, an amount equal to ten percent (10%) of
net income of Cyber-Test during such fiscal year (the "Bonus Pool"). For each
fiscal year or portion thereof after the Effective Date and during the
Employment Period, Cyber-Test shall pay to Executive an annual performance
bonus, in cash and/or restricted stock of ACT, equal to a portion of the Bonus
Pool, as determined by the Compensation Committee, in its sole discretion (the
"Performance Bonus").
For purposes hereof, "net income" shall mean, with respect to Cyber-Test, for
any fiscal year, the net income (loss) of Cyber-Test for such fiscal year,
determined in accordance with generally accepted accounting principals,
consistently applied; provided, however, that there shall be excluded from net
income (a) the net income (loss) of any person in which Cyber-Test has a joint
interest with a third party, except to the extent such net income is actually
paid to Cyber-Test by dividend or other distribution during such fiscal year,
(b) the net income (or loss) of any person accrued prior to the date it becomes
a subsidiary of Cyber-Test or is merged into or becomes consolidated with
Cyber-Test or its assets are purchased by Cyber-Test, and (c) the net income (if
positive) of any subsidiary of Cyber-Test to the extent that the declaration or
payment of dividends or similar distributions of such net income by such
subsidiary (i) is not at that time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order statute, rule or
governmental regulation or (ii) would be subject to any taxes payable on such
dividends or distributions.
(c) In addition to the Performance Bonus, Cyber-Test may grant restricted shares
of common stock of ACT to Executive, with a vesting schedule and other terms
established by the Compensation Committee, in its sole discretion (the
"Incentive Bonus").
(d) Executive acknowledges that the amount of the Performance Bonus and the
amount of the Incentive Bonus shall at all times be determined by the
Compensation Committee, in its sole discretion. Cyber-Test shall pay each of the
Performance Bonus and the Incentive Bonus to Executive within thirty (30) days
after ACT's audited results for the applicable fiscal year are delivered to the
ACT, but in no event later than September 30 of the immediately following fiscal
year.
4.3 Other Benefits. Executive shall also be eligible to participate in any life
and health insurance programs that Cyber-Test makes available to all of its
executives of similar seniority. Executive shall also be eligible to receive
discretionary performance based bonuses as approved and authorized by the
Compensation Committee, including any incentive stock programs approved by ACT's
shareholders.
4.4 Business Expenses. Executive will be reimbursed, in accordance with
Cyber-Test's expense reimbursement policy, for business expenses that have been
pre-approved by the Board or the Cyber-Test CEO upon presentation of vouchers or
other documents reasonably necessary to verify the expenditures and sufficient,
in form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
PAGE 3 OF 10
4.5 Vacation. Executive shall be entitled to take up to four (4) weeks of
vacation per calendar year, which shall be taken in accordance with Cyber-Test's
vacation policy in effect from time to time for executives of comparable
seniority.
5. NO COMPETITIVE ACTIVITIES; CONFIDENTIALITY; INVENTION
5.1 General Restriction. During the Employment Period and for a period of two
(2) years thereafter (the "Restricted Period"), Executive covenants and agrees
that, except on behalf of Cyber-Test, he will not, directly or indirectly:
(a) Competing Business. Own, manage, operate, control, participate in the
ownership, management, operation or control of, be employed by, or provide
services as a consultant to, any individual or business that is involved in
business activities that are the same as, similar to or in competition with,
directly or indirectly, any business activities conducted, or actively being
planned, by Cyber-Test or its affiliates during the Restricted Period and
anywhere in the United States and Canada (it being acknowledged that
Cyber-Test's and its affiliates' business is national in scope). The ownership
of less than one percent (1%) of the outstanding stock of any public corporation
shall not be deemed a violation of this provision.
(b) Soliciting Customers. Attempt in any manner to contact or solicit any
individual, firm, corporation or other entity (i) that is or has been, a
customer of Cyber-Test or its affiliates at any time during the Restricted
Period, (ii) to which a proposal has been made by Cyber-Test or its affiliates
during the Restricted Period or (iii) appearing on Cyber-Test's or its
affiliates' new business target list on the date of Executive's termination (as
such list has been prepared and maintained in accordance with Cyber-Test's or
its affiliates' past practice), for the purpose of providing services or
products similar to the services and products provided by Cyber-Test or its
affiliates, or engaging in any activity which could be, directly or indirectly,
competitive with the business of Cyber-Test or its affiliates.
(c) Interfering with Other Relations. Persuade or attempt to persuade any
supplier, vendor, licensor or other entity or individual doing business with
Cyber-Test or its affiliates to discontinue or reduce its business with
Cyber-Test or its affiliates or otherwise interfere in any way with the business
relationships and activities of Cyber-Test or its affiliates.
(d) Employees. Attempt in any manner to solicit any individual, who is at the
time of such attempted solicitation, or was at any time during the one (1) year
period preceding the termination of Executive's employment, an employee or
consultant of Cyber-Test or its affiliates, to terminate his or her employment
or relationship with Cyber-Test or its affiliates, or engage such individual, as
an employee or consultant. Cooperate with any other person in persuading,
enticing or aiding, or attempting to persuade, entice or aid, any employee of or
consultant to Cyber-Test or its affiliates to terminate his or her employment or
business relationship with Cyber-Test or its affiliates, or to become employed
as an employee or retained as a consultant by any person other than Cyber-Test
or its affiliates.
5.2 Confidentiality Agreement. Executive shall not, either during the Employment
Period or at any time thereafter, use or disclose to any third person any
Confidential Information (as defined below) of Cyber-Test or its affiliates,
PAGE 4 OF 10
other than at the direction of Cyber-Test, or pursuant to a court order or
subpoena, provided that Executive will give notice of such court order or
subpoena to Cyber-Test prior to such disclosure. Upon the termination of
Executive's employment with Cyber-Test for any reason, Executive shall return
any notes, records, charts, formulae or other materials (whether in hard copy or
computer readable form) containing Confidential Information, and will not make
or retain any copies of such materials. Without limiting the generality of the
foregoing, the parties acknowledge that Cyber-Test or its affiliates from time
to time may be subject to agreements with its or their customers, suppliers or
licensors to maintain the confidence of such other persons' confidential
information. The terms of such agreements may require that Cyber-Test's or its
affiliates' employees, including Executive, be bound by such agreements, and
Executive shall be deemed so bound upon notice to him of the terms of such
agreements. The term "Confidential Information" as used herein shall mean any
confidential or proprietary information of Cyber-Test or its affiliates whether
of a technical, engineering, operational, financial or economic nature,
including, without limitation, all prices, discounts, terms and conditions of
sale, trade secrets, know-how, customers, inventions, business affairs or
practices, systems, products, product specifications, designs, plans,
manufacturing and other processes, data, ideas, details and other information of
Cyber-Test or its affiliates. Confidential Information shall not include
information which can be proven by Executive to have been developed by his own
work as of the Effective Date completely independent of its disclosure by
Cyber-Test or its affiliates or which is in the public domain, provided such
information did not become available to the general public as a result of
Executive's breach of this Paragraph 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full written
disclosure to Cyber-Test and solely Cyber-Test of all writings, inventions,
processes, methods, plans, developments, improvements, procedures, techniques
and other innovations of any kind that Executive may make, develop or reduce to
practice, alone or jointly with others, at any time during the Employment Period
and for a period of one (1) year thereafter, whether during working hours or at
any other time and whether at the request or upon the suggestion of Cyber-Test
or otherwise, and whether or not they are eligible for patent, copyright,
trademark, trade secret or other legal protection (collectively, "Innovations").
Examples of Innovations shall include, but are not limited to, discoveries,
research, formulas, tools, know-how, marketing plans, new product plans,
production processes, advertising, packaging and marketing techniques and
improvements to computer hardware or software. The written disclosures provided
for herein shall be made to the Cyber-Test CEO or the Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be the sole
and exclusive property of Cyber-Test. Executive hereby assigns all rights, title
or interest in and to the Innovations to Cyber-Test. At Cyber-Test's request and
expense, during the Employment Period and at any time thereafter, Executive will
assist and cooperate with Cyber-Test or its affiliates in all respects and will
execute documents and give testimony to obtain, maintain, perfect and enforce
for Cyber-Test and its affiliates any and all patent, copyright, trademark,
trade secret and other legal protections for the Innovations.
5.5 Remedies. Executive acknowledges that the restrictions contained in the
foregoing paragraphs 5.1 through 5.4, in view of the nature of the business in
which Cyber-Test and its affiliates are engaged, are reasonable and necessary in
order to protect the legitimate interests of Cyber-Test and its affiliates, and
that the legal remedies for a breach of any of the provisions of
PAGE 5 OF 10
this section 5 will be inadequate and that such provisions may be enforced by
restraining order, injunction, specific performance or other equitable relief.
Such equitable remedies shall be cumulative and in addition to any other
remedies which the injured party or parties may have under applicable law,
equity, this Agreement or otherwise. Executive shall not, in any action or
proceeding to enforce any of the provisions of this Paragraph 5, assert the
claim or defense that an adequate remedy at law exists. The prevailing party
shall be entitled to recover its legal fees and expenses in any action or
proceeding for breach of this section 5.
5.6 Cyber-Test Property. All Confidential Information; all Innovations; and all
correspondence, files, documents, advertising, sales, manufacturers' and other
materials or articles or other information of any kind, in any media, form or
format furnished to Executive by Cyber-Test or its affiliates, which may not
deemed confidential, shall be and remain the sole property of Cyber-Test or such
affiliate ("Cyber-Test Property"). Upon termination or at Cyber-Test's request,
whichever is earlier, Executive shall immediately deliver to Cyber-Test all such
Cyber-Test Property.
5.7 Public Policy/Severability. The parties do not wish to impose any undue or
unnecessary hardship upon Executive following his departure from Cyber-Test's
employment. The parties have attempted to limit the provisions of this section 5
to achieve such a result, and the parties expressly intend that all provisions
of this section 5 be construed to achieve such result. If, contrary to the
effort and intent of the parties, any covenant or other obligation contained in
this section 5 shall be found not to be reasonably necessary for the protection
of Cyber-Test or its affiliates, to be unreasonable as to duration, scope or
nature of restrictions, or to impose an undue hardship on Executive, then it is
the desire of the parties that such covenant or obligation not be rendered
invalid thereby, but rather that the duration, scope or nature of the
restrictions be deemed reduced or modified, with retroactive effect, to render
such covenant or obligation reasonable, valid and enforceable. The parties
further agree that in the event a court, despite the efforts and intent of the
parties, declares any portion of the covenants or obligations in this section 5
invalid, the remaining provisions of this section 5 shall nonetheless remain
valid and enforceable.
5.8 Termination Without Cause. Notwithstanding anything contained in this
Section 5 to the contrary, in the event that Cyber-Test terminates Executive's
employment without "cause" (as defined in Section 6.1) prior to the expiration
of the Employment Period, the Restricted Period shall extend for a period of six
(6) months after the Termination Date.
6. TERMINATION.
6.1 Termination For Cause. Notwithstanding anything to the contrary contained
herein, this Agreement may be terminated immediately for "cause," at which time
Cyber-Test shall have no further obligations or liabilities to Executive whether
under this Agreement or otherwise and Executive's right to further compensation
and benefits hereunder (included, but not limited to, unvested stock) shall
immediately cease, other than payment to Executive of Base Salary accrued, and
reimbursement of expenses incurred in accordance with Paragraph 4.4, prior to
the effective date of termination of this Agreement (the "Termination Date"). As
used herein and throughout this Agreement, the term "cause" shall mean (i) any
act or omission by Executive that constitutes malfeasance or misfeasance in the
course of Executive's duties hereunder, or in
PAGE 6 OF 10
the objectively reasonable judgment of the Board or the Cyber-Test CEO,
Executive has been grossly negligent (including habitual neglect of duties),
incompetent or insubordinate in carrying out his duties hereunder, (ii) a
material breach of this Agreement that is not cured within ten (10) days of
receipt of notice thereof, (iii) Executive's breach of a fiduciary duty owed to
Cyber-Test or its affiliates, or (iv) Executive's conviction of, or pleading
nolo contendere to, a criminal offense or crime constituting a misdemeanor or
felony, or conviction in respect to any act involving fraud, dishonesty or moral
turpitude (other than minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by Cyber-Test without cause
and for any reason or no reason prior to the expiration of the Employment Period
upon thirty (30) days' prior written notice from Cyber-Test to the Executive.
(b) Severance. In the event that Cyber-Test terminates Executive's employment
without cause, Cyber-Test shall pay to Executive (i) Base Salary accrued, and
expenses incurred in accordance with Paragraph 4.4, prior to the Termination
Date, (ii) any unpaid bonus owed to Executive for a prior fiscal year ((i) and
(ii) together, the "Accrued Payments"), which Accrued Payments shall be paid to
Executive in accordance with Section 4.1, Section 4.2 and Section 4.4, as
applicable, and (iii) an additional amount of Base Salary which would have been
payable to Executive during the six (6) month period immediately following the
Termination Date (the "Severance Payment"), which Severance Payment shall be
payable in cash to Executive in equal monthly installments on the first business
day of each calendar month during the six (6) month period immediately following
the Termination Date. Except as provided in the preceding sentence, Cyber-Test
shall have no further obligations or liabilities to Executive whether under this
Agreement or otherwise and Executive's right to further compensation and
benefits hereunder (included, but not limited to, unvested stock) shall
immediately cease.
6.3 Termination of Other Positions. Upon the Termination Date, Executive hereby
resigns as Vice-President of Cyber-Test and any and all other positions as
officer or director Executive may then hold with Cyber-Test or its affiliates,
and as fiduciary of any benefit plan of Cyber-Test or its affiliates. Executive
shall promptly execute any further documentation as requested by Cyber-Test or
its affiliates and, if Executive is to receive any payments from Cyber-Test or
its affiliates, execution of such further documentation shall be a condition
thereof.
7. DISABILITY OR DEATH.
7.1 Disability. If, during the Employment Period, Executive becomes disabled or
incapacitated as determined under Cyber-Test's Long Term Disability Policy
("Permanently Disabled"), Cyber-Test shall have the right at any time thereafter
(but in no event less than 120 days after the event causing such disability or
incapacity), so long as Executive is then still Permanently Disabled, to
terminate this Agreement upon thirty (30) days' prior written notice to
Executive. In the event Cyber-Test does not have a Long Term Disability Policy
at the time of the event causing the Executive to become Permanently Disabled,
"Permanently Disabled" shall mean Executive's inability to fully perform his
duties and responsibilities hereunder to the full extent
PAGE 7 OF 10
required by Cyber-Test by reason of illness, injury or incapacity for 120
consecutive days or for more than six (6) months during any twelve (12) month
period. If Cyber-Test elects to terminate this Agreement in the event that
Executive becomes Permanently Disabled, Cyber-Test shall have no further
obligations or liabilities to Executive, whether under this Agreement or
otherwise (included, but not limited to, unvested stock), other than payment to
Executive of the Accrued Payments, which Accrued Payments shall be paid to
Executive in accordance with Section 4.1, Section 4.2 and Section 4.4, as
applicable.
7.2 Death. If Executive dies during the Employment Period, this Agreement shall
automatically terminate as of the date of Executive's death, and Cyber-Test
shall have no further obligations or liabilities to Executive, whether under
this Agreement or otherwise (included, but not limited to, unvested stock),
other than payment to Executive's estate of the Accrued Payments, which Accrued
Payments shall be paid to Executive in accordance with Section 4.1, Section 4.2
and Section 4.4, as applicable.
8. INDEMNIFICATION. Each of Cyber-Test and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their obligations contained in this Agreement.
9. GOVERNING LAW. This Agreement shall be governed by the internal laws of the
State of Florida. Any action to enforce any term hereof shall be brought
exclusively within the state or federal courts of Florida to which jurisdiction
and venue all parties hereby submit themselves.
10. BINDING EFFECT. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
11. ASSIGNMENT. Any assignee of Cyber-Test shall have the right to enforce the
restrictive covenants set forth in this Agreement, and Cyber-Test shall have the
right to assign this Agreement, including the right to enforce such covenants to
any successor or assign of Cyber-Test.
12. NOTICES. All notices, designations, consents, offers, acceptances, waivers
or any other communication provided for herein, or required hereunder, shall be
sufficient if in writing and if sent by registered or certified mail, return
receipt requested, overnight courier, or delivered by hand or confirmed
facsimile transmission to (i) Executive at his last known address on the books
of Cyber-Test or (ii) Cyber-Test at its principal place of business.
13. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
PAGE 8 OF 10
14. COUNTERPARTS. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
15. ENTIRE AGREEMENT. This Agreement contains the sole and entire agreement and
understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof. There are no representations,
agreements, arrangements or understandings, oral or written, between or among
the parties concerning the subject matter hereto, which are not fully expressed
herein or in any supplemental written agreements of even or subsequent date
hereof.
16. SEVERABILITY. If any provision of this Agreement, or the application thereof
to any person or circumstances, shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected thereby,
but rather shall be enforced to the greatest extent permitted by law.
17. MODIFICATION. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
18. CONTRACT HEADINGS. All headings of the Paragraphs of this Agreement have
been inserted for convenience of reference only, are not to be considered a part
of this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
19. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
20. REPRESENTATION OF EXECUTIVE. Executive, with the full knowledge that
Cyber-Test is relying thereon, represents and warrants that he has not made any
commitment inconsistent with the provisions hereof and that he is not under any
disability which would prevent him from entering into this Agreement and
performing all of his obligations hereunder.
21. JOINT PARTICIPATION IN DRAFTING. Each party to this Agreement participated
in the drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party to
this Agreement.
[SIGNATURE PAGE FOLLOWS]
PAGE 9 OF 10
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
CYBER-TEST, INC., a Delaware corporation
By: /s/ Wayne I. Danson
------------------------------------
Wayne I. Danson, President
EXECUTIVE:
By: /s/ Thomas Sutlive
------------------------------------
THOMAS SUTLIVE
PAGE 10 OF 10
EXHIBIT 23.1
CS&L Chatham, Seland & Lashley, P.A.
Certified Public Accountants
June 18, 2004
Advanced Communications Technologies, Inc. (the "Company") 420 Lexington Avenue,
Suite 2739 New York, New York 10170
Attention: Wayne I. Danson, Chief Executive Officer
Dear Wayne:
The undersigned hereby consents to the inclusion of the calendar years 2002 and
2003 audited financial statements of Cyber-Test, Inc., a Florida corporation
("Cyber-Test"), in the Current Report on Form 8-K to be filed by the Company in
connection with the acquisition of the assets of Cyber-Test by a wholly-owned
subsidiary of the Company.
Very Truly Yours,
/s/Chatham, Seland & Lashley, P.A.
Chatham, Seland & Lashley, P.A.
[LOGO] ADVANCED COMMUNICATIONS TECHNOLOGIES
EXHIBIT 99.1
FOR IMMEDIATE RELEASE:
ADVANCED COMMUNICATIONS CLOSES ON CYBER-TEST ACQUISITION
NEW YORK, NY, June 8, 2004, Advanced Communications Technologies, Inc.
(OTCBB:ADVC) (the "Company") announced today that it has closed the acquisition
of Cyber-Test, Inc. ("Cyber-Test"), purchasing all of the operating assets and
core business of Cyber-Test, an established electronic equipment repair company
with annual revenues of approximately $6 million. The Company has formed
Encompass Group Affiliates, Inc. ("Encompass Group"), a new wholly owned
subsidiary to be the direct parent of Cyber-Test.
Wayne Danson, the Company's President and Chief Financial Officer said, "We have
made a strategic decision to diversify our business operations by expanding into
multiple markets and industries, and this acquisition is the first step in
achieving that vision."
Based on trailing 12 month historical results, the Company forecasts
consolidated revenue from operations and investments in the amount of $7.4
million for fiscal 2005, and EBIDTA of $600,000. Cyber-Test's contribution to
consolidated EBIDTA is forecasted to be $500,000. When asked to comment on the
Company's new financial position Danson said, "We are now a solid, revenue
generating company moving towards becoming a vertically integrated service and
technology business with strategic minority investments in other diverse
industries. This acquisition improves our financial stability." Danson concluded
with, "We are delighted to be able to demonstrate so quickly to shareholders how
we can use our management expertise to add value to the Company. With the
Cyber-Test acquisition, the Company now has approximately $7 million in assets."
In accordance with the Cyber-Test closing, Encompass Group acquired all of the
operating assets, tangible and intangible property, rights and licenses,
goodwill, trade name and business of Cyber-Test, for a total purchase price
consisting of $3,000,000 in cash, $500,000 in a three year unsecured installment
note and 50,000,000 shares of restricted Company common stock to be earned
prorata over a three year period based on Cyber-Test meeting certain revenue and
earning milestones.
The Company is in the process of establishing a new website that describes the
Company's, Encompass' and Cyber-Test's business and investment activities. The
newly designed website will be launched over the next sixty days.
For more information on the Company's new management team structure, see the
press release dated June 2, 2004, conveniently accessed through the Company's
newsroom link below.
ABOUT CYBER-TEST, INC.
Cyber-Test, Inc. ("Cyber-Test"), a Florida-based corporation owned by Encompass
Group Affiliates, Inc. with 85 employees is an established electronic equipment
repair company. Specializing in the repair of computer peripheral products,
Cyber-Test is uniquely positioned as a strategic partner for OEMs (Original
Equipment Manufacturers), warranty companies, dealers and end-users. The
versatile Cyber-Test service model enables its customers to support virtually
any electronic product. Cyber-Test provides a multitude of services that offer
service support at any level from repair, warranty exchange, to end-of-life
product support.
Cyber-Test offers the flexibility to deliver exactly what its customers need.
Whether it is to outsource entire service departments, or just choose one of the
many services offered, Cyber-Test can provide a multitude of service
infrastructures to fit the needs of its clients. Cyber-Test's menu of services
includes: i) Call Center/Help Desk; ii) Depot Repair; iii) New Product Sales;
iv) Parts Sales; v) Spare Parts Sales; vi) Advance Exchange; vii) Product Return
and Warranty Support; viii) Service Contract Billing and Administration; ix)
Logistics; x) Detailed Tracking Analysis and Service Data Analysis; and xi) Exit
Strategy and End-of-Life Product Support.
Current customers of Cyber-Test include national and regional reinsurance
companies and major office and electronic retail super stores. For more
information on Cyber-Test, visit www.equipfix.com.
ABOUT ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
Advanced Communications Technologies, Inc. (the "Company") is a holding company
that, through its wholly owned subsidiary Encompass Group Affiliates, Inc., owns
Cyber-Test, Inc., an established electronic equipment repair company based in
Orlando, Florida. The Company also owns a minority interest in Yorkville
Advisors Management, LLC, an investment management partnership, through its
wholly owned subsidiary Hudson Street Investments, Inc.
THIS RELEASE CONTAINS 'FORWARD-LOOKING STATEMENTS' WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
ACT OF 1934. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
SUCH STATEMENTS ARE REASONABLE, NO ASSURANCES CAN BE GIVEN THAT THEY WILL PROVE
CORRECT. THE COMPANY REMAINS EXPOSED TO RISK FACTORS OUTLINED IN THE COMPANY'S
REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
JULY 16, 2003. STATEMENTS MADE HEREIN ARE NOT A GUARANTEE OF FUTURE CORPORATE OR
STOCK PERFORMANCE.
For Further Information Contact:
Wayne I. Danson
President & Chief Financial Officer
(P) 646-227-1600
2
CYBER-TEST, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
TABLE OF CONTENTS
Page No.
AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
BALANCE SHEETS 2-3
STATEMENT OF INCOME AND RETAINED EARNINGS 4
STATEMENT OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6-9
SUPPLEMENTAL SCHEDULES 10-11
CS&L - CHATHAM, SELAND & LASHLEY, P.A.
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Cyber-Test, Inc.
448 Commerce Way #100
Longwood, Florida 32750
We have audited the accompanying balance sheets of Cyber-Test, Inc. as of
December 31, 2003 and 2002, and the related statements of income, retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards reaquire that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cyber-Test, Inc. as of December
31, 2003 and 2002, and the results of its operations and its cash flows for the
yeasrs then ended in conformity with accounting principles generally accepted in
the United States of America.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Supplemental Schedules are presented
for the purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
CHATHAM, SELAND & LASHLEY, P.A.
/s/ CHATHAM, SELAND & LASHLEY, P.A.
March 15, 2004
CYBER-TEST, INC.
BALANCE SHEETS
As of December 31, 2003 and 2002
ASSETS
------
2003 2002
---------- ----------
CURRENT ASSETS
Cash $ 676,407 $1,041,879
Accounts receivable (net of allowance
for doubtful amounts of $14,457 and $6,000) 459,831 398,208
Inventories 306,263 268,166
Prepaid expenses 20,113 12,324
---------- ----------
TOTAL CURRENT ASSETS $1,462,614 $1,720,577
PROPERY AND EQUIPMENT 175,120 201,523
---------- ----------
OTHER ASSETS
Deposits 20,978 41,434
Other Assets 224,325 107,887
---------- ----------
TOTAL OTHER ASSETS $ 245,303 149,321
---------- ----------
TOTAL ASSETS $1,883,037 $2,071,421
========== ==========
Read the accompanying Notes
2
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
2003 2002
---- ----
CURRENT LIABILITIES
Accounts payable $ 1,435 $ 77,159
Accrued expenses 85,330 74,572
Unearned revenue 113,716 122,457
Other liabilities 60,634 93,398
---------- ----------
TOTAL CURRENT LIABILITIES 261,115 367,586
---------- ----------
LONG TERM DEBT -- --
TOTAL LIABILITIES 261,115 367,586
---------- ----------
SHAREHOLDERS' EQUITY
Common stock (1000 shares authorized,
100 shares issued and outstanding,
$10 par value) 1,000 1,000
Additional paid in capital 49,000 49,000
Retained earnings 1,571,922 1,653,835
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,621,922 1,703,835
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,883,037 $2,071,421
========== ==========
Read the accompanying Notes
3
CYBER-TEST, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the Years Ended December 31, 2003 and 2002
2003 2002
---- ----
SALES $ 5,182,106 $ 6,828,135
COST OF SALES 2,978,076 4,142,117
----------- -----------
GROSS PROFIT ON SALES 2,204,030 2,686,018
----------- -----------
EXPENSES
Personnel 1,391,630 1,498,455
Occupancy 288,909 290,163
General and administrative 413,562 417,775
----------- -----------
TOTAL EXPENSES 2,094,101 2,206,393
----------- -----------
INCOME FROM OPERATIONS 109,929 479,625
----------- -----------
OTHER INCOME (EXPENSES)
Interest Income 8,043 12,358
Director's compensation (96,699) (96,569)
Other (10,982) 4,840
----------- -----------
TOTAL OTHER INCOME (EXPENSES) (99,638) (79,371)
----------- -----------
NET INCOME 10,291 400,254
RETAINED EARNINGS: BEGINNING OF YEAR 1,653,835 1,393,356
DISTRIBUTIONS (92,204) (139,775)
----------- -----------
RETAINED EARNINGS: END OF YEAR $ 1,571,922 $ 1,653,835
=========== ===========
Read the accompanying Notes
4
CYBER-TEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,291 $ 400,254
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 56,318 49,718
Changes in assets and liabilities:
(Increase) Decrease in acounts receivable (61,623) (189,299)
(Increase) Decrease in inventories (38,097) 260,950
(Increase) Decrease in prepaid expenses (7,789) 5,812
(Increase) Decrease in other assets (95,982) 164,391
(Increase) Decrease in accounts payable (75,724) 2,316
(Increase) Decrease in accrued expensse 10,758 18,032
(Increase) Decrease in other liabilities (32,764) 37,029
(Increase) Decrease in deferred revenue (8,741) 49,988
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (243,353) 799,191
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (29,915) (73,883)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (29,915) (73,883)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to shareholders (92,204) (139,775)
Increase in amount due from Shareholder -- (7,500)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (92,204) (147,275)
----------- -----------
NET INCREASE (DECREASE) IN CASH (365,472) 578,033
CASH AT BEGINNING OF PERIOD 1,041,879 463,846
----------- -----------
CASH AT END OF PERIOD $ 676,407 $ 1,041,879
----------- -----------
Read the Accompanying Notes
5
CYBER-TEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
This summary of significant accounting policies of Cyber-Test, Inc. is presented
to assist in the understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management, which is
responsible for their integrity and objectivity. These accounting policies
conform to accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the financial
statements.
BUSINESS ACTIVITY - The Company operates as an independent service organization
providing repair service for facsimile machines, printers, scanners, monitors
and multi-function units. The repairs are performed on entire machines and/or
circuit boards. A 90-day warranty is given to all entire machine repairs and a
one-year warranty to circuit boards. The company provides office equipment
dealers, original manufacturers, and third-party warranty companies a turnkey
alternative for additional revenue by providing repairs to their customers. To
help answer questions or give advice for technical problems the dealer or end
user may have, a toll free number is available for select customers. Repair
turn-around time averages two days. Most sales are in the eastern section of the
United States, but sales are made to all geographic sections of the Unites
States and there are some foreign sales. At December 31, 2003 the company had a
customer base of approximately 5,000 dealers and repair shops.
The company's future growth potential centers on three distinct areas:
1. Diversification of repair capabilities to other types of electronic business
equipment
2. Providing repair services for manufacturers of facsimile machines as part of
their warranty and post-warranty program.
3. Selling a warranty service to the end user who does not already have an
extended service warranty.
MAJOR CUSTOMERS - During the years ended December 31, 2003 and 2002 the Company
had sales to one customer that accounted for 31% and 48% of total sales,
respectively.
6
CYBER-TEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- ---------------------------------------------------------------
ACCOUNTS RECEIVABLE - The allowance for doubtful accounts is based on
management's evaluation of outstanding accounts receivable. During the year
ended December 31, 2003, accounts in the amount of $6,543 were determined to be
uncollectible and were charged to the allowance for doubtful acounts. As of
December 31, 2003, accounts receivable from the one major customer was $158,376,
for a total of 33% of all accounts receivable. As of December 31, 2002, accounts
receivable from one major customer was $208,658, or 52% of all accounts
receivable.
INVENTORIES - Inventories consist primarily or repair parts, consumable supplies
for resale and used machines that are held for resale. Inventory is stated at
the lower of cost or market.
MANAGEMENT ESTIMATES - The preparation of financial statements requires
management to make the estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Unless otherwise indicated, the fair
values of all reported assets and liabilities which represent financial
instruments (none of which are held for trading purposes) approximate the
carrying values of such amounts.
PROPERTY AND DEPRECIATION - Property, plant and equipment are stated at cost.
Assets are depreciated using straight-line and accelerated methods for financial
statements and tax purposes, based on the following estimated usefullives:
Building and improvements 15 to 40 years
Machinery and equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
INCOME TAXES - The Company with the consent of its shareholders has elected to
be taxed as as S corporation, which provides that income is passed through to
the shareholders. Therefore there is no provision or liability for income taxes
reflected in the financial statements.
7
CYBER-TEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consist of the following:
2003 2002
---- ----
Office equipment $ 389,785 $ 468,197
Leaseholder improvements 109,696 106,344
Machinery and equipment 91,662 95,976
Vehicle 36,217 36,217
--------- ---------
627,360 706,734
Less: Accumulated depreciation and amortization (452,240) (505,211)
--------- ---------
Net Book Value $ 175,120 $ 201,523
========= =========
Depreciation and amortization expense for the years ended December 31, 2003 and
2002 was $56,318 and $49,718, respectively.
NOTE 3 - OPERATING LEASE COMMENTS
- ---------------------------------
The Company is obligated under a lease for the premises located on Commerce Way,
Longwood, Florida. The lease expires on July 31, 2004.
Lease expense under this lease for the years ended December 31, 2003 and 2002
was $170,719 and $166,225, respectively.
NOTE 4 -RELATED PARTY LOAN
- --------------------------
Included in other assets is a $75,000 unsecured note receivable from a major
shareholder.
8
CYBER-TEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
NOTE 5 - ADDITIONAL DISCLOSURES FOR CASH FLOWS
- ----------------------------------------------
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
2003 2002
---- ----
Cash paid during the first year for interest $ -- $ --
Cash paid during the year for income taxes $ -- $ --
NOTE 6 - OTHER LIABILITIES
- --------------------------
During 2002 the Company acquired a vehicle through a zero interest loan. The
balance at December 31, 2003, is $16.097. Future principal payments are $12,072
for 2004 and $4,025 for 2005.
NOTE 7 - CONCENTRATION OF CREDIT RISK
- -------------------------------------
The Company places cash balances in excess of the limit insured by the Federal
Deposit Insurance Corporation with high credit quality financial institutions.
The excess amounts are therefore at risk of loss, although management believes
the likelihood of loss is remote.
9
CYBER-TEST, INC.
SUPPLEMENTARY SCHEDULES
For the Years Ended December 31, 2003 and 2002
SUPPLEMENTARY SCHEDULES
-----------------------
2003 2002
---- ----
SCHEDULE #1 - COST OF SALES
- ---------------------------
Purchase - parts $ 902,909 $1,397,005
Labor and benefits 924,992 1,220,727
Shipping 690,627 935,840
Other 459,548 588,545
---------- ----------
TOTAL $2,978,076 $4,142,117
========== ==========
SCHEDULE #2 - PERSONNEL COSTS
- -----------------------------
Officers $ 205,965 $ 303,975
Employees 973,999 940,998
Employee taxes and benefits 211,666 253,482
---------- ----------
TOTAL $1,391,630 $1,498,455
========== ==========
SCHEDULE #3 - OCCUPANCY EXPENSES
- --------------------------------
Rent and Utilities $ 288,909 $ 290,163
---------- ----------
TOTAL $ 288,909 $ 290,163
========== ==========
10
CYBER-TEST, INC.
SUPPLEMENTARY SCHEDULES
For the Years Ended December 31, 2003 and 2002
SUPPLEMENTARY SCHEDULES
-----------------------
SCHEDULE #4 - GENERAL AND ADMINISTRATIVE EXPENSES
- -------------------------------------------------
2003 2002
---- ----
Advertising $ 40,898 $ 69,973
Depreciation and amortization 56,318 49,718
Credit card fees 29,549 21,464
Printing 4,655 8,643
Subscriptions and internet connection 5,636 3,708
Meals and entertainment 10,316 13,519
Taxes and licenses 4,123 2,905
Insurance 23,413 14,383
Repairs and maintenance 14,256 21,301
Professional fees 53,929 65,756
Telephone 116,792 90,404
Office 9,600 18,717
Postage 7,242 7,701
Vehicle expense 5,952 3,228
Training and seminars 150 693
Travel 30,733 25,662
-------- --------
TOTAL $413,562 $414,775
======== ========
11
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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): December 10, 2004
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Florida 000-30486 65-0738251
--------- --------- ----------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification
Incorporation) Number)
420 Lexington Avenue, New York, New York 10170
- ---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (646) 227-1600
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement
Item 3.02 Unregistered Sales of Equity Securities
On December 10, 2004, Advanced Communications Technologies, Inc. (the "Company")
entered into a Stock Purchase Agreement with Theodore S. Li and Hui Cynthia Lee
(collectively, the "Stockholders") pursuant to which the Company has agreed to
purchase from the Stockholders, and the Stockholders have agreed to sell to the
Company, an aggregate of 6,454,300 shares of the common stock of Pacific Magtron
International Corp. (the "PMIC Shares") for the aggregate purchase price of
$500,000 (the "Stock Purchase Agreement"). The PMIC Shares represent 61.56% of
the currently issued and outstanding common stock of Pacific Magtron
International Corp. ("PMIC"). PMIC is primarily engaged in the business of
distributing computer peripheral products, such as components and multimedia and
systems networking products, through its wholly-owned subsidiaries. PMIC's
common stock trades on the Over the Counter Bulletin Board, and PMIC files
periodic reports with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended.
The Stock Purchase Agreement contemplates that payment of the purchase price for
the PMIC Shares will be made pursuant to the terms of two convertible promissory
notes (the "Notes") in the principal amounts of $166,889 and $333,111 to be
delivered by the Company to Mr. Li and Ms. Lee, respectively, at the closing of
the transactions contemplated by the Stock Purchase Agreement (the "Closing").
The Notes will mature on the first anniversary of the Closing and no principal
or interest payments will be required prior to such date. The Notes will bear
interest at 6.0% per annum. Upon the occurrence and during the continuation of
any event of default (as specified in the Notes), the interest rate will
increase to 10.0% per annum. The Company will be able to redeem all or a portion
of Mr. Li's Note on or prior to the maturity date at 110.0% of the principal
amount redeemed, plus all accrued and unpaid interest thereon. The Company will
be able to redeem all or a portion of Ms. Lee's Note prior to the six month
anniversary of the Closing at 105.0% of the principal amount redeemed or
thereafter prior to the maturity date at 110.0% of the principal amount
redeemed, in each case, plus all accrued and unpaid interest thereon. The
holders of the Notes, at their option, will be able to convert, at any time and
from time to time, until payment in full of all amounts due and owing under
their Note, any unpaid principal amount of their Note into shares of common
stock of the Company at a conversion price per share of $0.01. If the Notes were
converted in full, this would result in the issuance of an aggregate of
50,000,000 shares of the Company's common stock. The conversion ratio is,
however, subject to adjustment for stock splits, reverse stock splits and other
recapitalizations effected by the Company. The Company's payment obligations
under the Notes will be secured by the PMIC Shares pursuant to a Custodial and
Stock Pledge Agreement to be entered into among the Company, the Stockholders
and Quarles & Brady Streich Lang LLP (the "Pledge Agreement").
The Stock Purchase Agreement contains customary representations, warranties,
covenants and indemnities of the parties, and the Closing is subject to the
satisfaction or waiver of various conditions, including (i) receipt of certain
third-party consents and approvals; (ii) the Company's satisfaction with its due
diligence investigation and review of the financial condition, business and
operations of PMIC; (iii) entry into employment agreements by Theodore S. Li and
Hui Cynthia Lee with the Company, Encompass Group Affiliates, Inc., a
wholly-owned subsidiary of the Company ("Encompass"), and PMIC, pursuant to
which Mr. Li and Ms. Lee would be employed by PMIC following the Closing (the
"Employment Agreements"); (iv) execution and delivery by the Company and
Encompass of an Indemnity Agreement with Mr. Li and Ms. Lee and their respective
spouses pursuant to which the Company and Encompass would agree to indemnify Mr.
Li, Ms. Lee and their respective spouses against certain liabilities Mr. Li and
Ms. Lee may incur in connection with personal guaranties they have given
relating to PMIC's inventory financing facility (the "Indemnity Agreement"); (v)
execution and delivery of the Pledge Agreement; (vi) execution and delivery by
Mr. Li and Ms. Lee of a Release (the "Release"); (vii) execution and delivery of
resignations of certain officers and directors of PMIC; and (viii) closing of
the transaction contemplated by that certain agreement, dated December 10, 2004,
between PMIC and the holder of the Series A Redeemable Convertible Preferred
Stock of PMIC, whereby the terms of the Series A Preferred Stock will be
modified, including a reduction in the principal amount of the Series A
Preferred Stock.
2
The proposed Employment Agreements with Mr. Li and Ms. Lee each contemplate a
signing bonus of $225,000 and other bonus and earn-out provisions which may be
paid in shares of common stock of the Company. While any bonus paid in Company
common stock will be at the discretion of the Compensation Committee of the
Company's Board of Directors, the earn-out provisions are set forth in the
Employment Agreements and are based on achievement of certain financial
milestones. Under the earn-out provisions, Mr. Li and Ms. Lee may earn the right
to receive up to 66,666,666 shares and 33,333,333 shares of the Company's common
stock, respectively, which share amounts are subject to adjustment for any stock
splits or other recapitalizations effected by the Company; provided that, the
percentage of the outstanding common stock that Mr. Li or Ms. Lee would have had
the right to receive prior to the adjustment shall not be changed by any such
adjustment. Upon earning the earn-out shares, the earn-out shares will be placed
in escrow, pursuant to the terms of an escrow agreement to be entered into among
the Company, Mr. Li and Ms. Lee. In the event that Mr. Li's or Ms. Lee's
employment is terminated for "cause" (as defined in the applicable Employment
Agreement) prior to the expiration of the initial term of the applicable
Employment Agreement, all of the earn-out shares earned or to be earned by Mr.
Li or Ms. Lee, as applicable, will be forfeited. If, however, Mr. Li's or Ms.
Lee's employment is terminated for other than "cause" prior to the expiration of
the initial term of the applicable Employment Agreement, Mr. Li and Ms. Lee, as
the case may be, will be entitled to receive any of the earn-out shares earned
and placed in escrow prior to such termination.
The Company currently expects that Martin Nielson, Senior Vice
President-Acquisitions and a director of the Company, will become a director and
Chief Executive Officer of PMIC following the Closing and that the company will
consolidate the financial results of PMIC with those of the Company and its
other subsidiaries.
The Stock Purchase Agreement may be terminated (i) by mutual consent of the
parties or (ii) by either the Company or the Stockholders (as a group) if (a) a
default or breach shall be made by the other party with respect to the due and
timely performance of any of its covenants and agreements in the Stock Purchase
Agreement, or with respect to the due compliance with any of its representations
warranties and covenants, and such default cannot be cured and has not been
waived; (b) if all conditions specified in the Stock Purchase Agreement to be
performed by the other party shall not have been satisfied at the time the
Closing would otherwise occur or if satisfaction of such condition becomes
impossible, other that through failure of the terminating party to comply fully
with its obligations under the Stock Purchase Agreement, and shall not have been
waived by the terminating party on or before such date; or (c) if the Closing
does not occur, other than through the failure of the terminating party to
fulfill its obligations under the Stock Purchase Agreement, on or before January
10, 2005 or such later date as may be agreed upon in writing by the parties.
To the extent that entry into the Stock Purchase Agreement may be deemed to be
sale of the Notes, the shares of Company common stock into which the Notes may
be converted or the shares of Company common stock that may be issued under the
Employment Agreements, such sales were exempt from the registration provisions
of the Securities Act of 1933, as amended, under Section 4(2) thereof and
Regulation D thereunder as none of the transactions involved a public offering,
the intended recipients of such securities are all "accredited investors," as
defined in Regulation D, and each intended recipient has represented to the
Company that he or she will be acquiring the securities for his or her own
account and not with a view to their distribution.
The foregoing summary of the Stock Purchase Agreement and the transactions
contemplated thereby is qualified in its entirety by reference to the Stock
Purchase Agreement, a copy of which is filed as Exhibit 2.1 to this Report on
Form 8-K and incorporated herein by reference.
3
Item 9.01. Financial Statements and Exhibits
(c) Exhibits
Exhibit
No. Description of Exhibit
2.1 Stock Purchase Agreement, dated as of December 10, 2004, among
Advanced Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee.
99.1 Press Release dated December 10, 2004.
Forward-Looking Statements
Certain statements in this Form 8-K constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are
protected under the safe harbor created thereby. Forward looking statements are
typically identified by words such as "will," "would" and "expects" and similar
expressions. In addition, any statements that refer to expectations or other
characterizations of future events or circumstances are forward-looking
statements. Readers are cautioned that any such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
actual events to be materially different from any future events expressed or
implied by such forward-looking statements. Such factors include the various
conditions to Closing discussed above and in the Exhibits hereto. The Company
undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise.
4
SIGNATURE
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.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
Dated: December 14, 2004 By: /s/ Wayne I. Danson
-------------------------------------
President and Chief Financial Officer
5
Exhibit Index
Exhibit No. Description
2.1 Stock Purchase Agreement, dated as of December 10, 2004, among
Advanced Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee.
99.1 Press Release dated December
6
STOCK PURCHASE AGREEMENT
DATED DECEMBER 10, 2004
BY AND AMONG
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
AND
THEODORE S. LI AND HUI CYNTHIA LI
Table Of Contents
PAGE
NO.
ARTICLE I - DEFINITIONS.......................................................1
ARTICLE II - SALE AND TRANSFER OF SHARES; CLOSING.............................10
2.1 Shares...............................................................10
2.2 Purchase Price.......................................................10
2.3 Closing..............................................................11
2.4 Closing Deliveries...................................................11
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLERS ......................12
3.1 Organization And Good Standing.......................................12
3.2 Authority; No Conflict...............................................12
3.3 Capitalization.......................................................14
3.4 Reports; Financial Statements........................................14
3.5 Books And Records....................................................15
3.6 Title To Properties; Encumbrances....................................15
3.7 Condition And Sufficiency Of Assets..................................16
3.8 Accounts Receivable..................................................17
3.9 Inventory............................................................17
3.10 No Undisclosed Liabilities...........................................17
3.11 Taxes................................................................17
3.12 No Material Adverse Change...........................................18
3.13 Benefit Plans........................................................18
3.14 Compliance With Legal Requirements; Governmental Authorizations......22
3.15 Legal Proceedings; Orders............................................23
3.16 Absence Of Certain Changes And Events................................24
3.17 Contracts; No Defaults...............................................25
3.18 Insurance............................................................27
3.19 Environmental Matters................................................28
3.20 Employees............................................................29
3.21 Labor Disputes; Compliance...........................................30
3.22 Intellectual Property................................................30
3.23 Certain Payments.....................................................32
3.24 Relationships With Related Persons...................................33
3.25 Brokers Or Finders...................................................33
3.26 Nevada Statutes......................................................33
3.27 Disclosure...........................................................33
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ARTICLE IV - REPRESENTATIONS AND WARRANTIES BY BUYER..........................34
4.1 Organization And Good Standing.......................................34
4.2 Authority; No Conflict...............................................34
4.3 Investment Intent....................................................35
4.4 Brokers Or Finders ..................................................35
4.5 Capitalization.......................................................35
4.6 Reports; Financial Statements........................................36
ARTICLE V - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER..................36
5.1 Representation And Warranties True At The Closing Date...............36
5.2 No Material Adverse Change ..........................................37
5.3 Sellers' Performance
5.4 Opinion Of Sellers' Counsel..........................................37
5.5 Ownership Of Shares .................................................37
5.6 No Prohibition Of Transaction........................................37
5.7 Compliance With Law .................................................37
5.8 Documentation And Consents ..........................................37
5.9 Employment Agreements ...............................................38
5.10 Consents To Assignments..............................................38
5.11 Resignations.........................................................38
5.12 Sellers' Release.....................................................38
5.13 Due Diligence........................................................38
5.14 Inventory Facility...................................................38
5.15 Series A Preferred Stock.............................................39
5.16 Consent..............................................................39
5.17 Records..............................................................39
5.18 Opinion Of Nevada Counsel............................................39
5.19 Other Documents And Aspects Of The Transaction.......................39
5.20 Actions Satisfactory.................................................39
5.21 Shares...............................................................39
5.22 UCC Financing Statements.............................................39
ARTICLE VI - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS...............39
6.1 Representations And Warranties True At The Closing Date..............40
6.2 Indemnity Agreement..................................................40
6.3 Pledge Agreement.....................................................40
6.4 Buyer's Performance..................................................40
6.5 Opinion Of Buyer's Counsel...........................................40
6.6 Revolving Line Of Credit ...........................................40
6.7 Continued Listing ...................................................40
ARTICLE VII - COVENANTS OF SELLERS PRIOR TO CLOSING DATE......................40
7.1 Access And Investigation.............................................40
7.2 Operation Of The Businesses Of The Acquired Companies................41
7.3 Negative Covenant....................................................41
7.4 Approvals Of Governmental Bodies.....................................41
7.5 Notification.........................................................41
7.6 Payment Of Indebtedness By Related Persons...........................41
7.7 No Negotiation.......................................................41
7.8 SEC Reports..........................................................42
7.9 Series A Preferred Stock.............................................42
7.10 Best Efforts.........................................................42
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ARTICLE VIII - COVENANTS OF BUYER PRIOR TO CLOSING DATE.......................42
8.1 Approvals Of Governmental Bodies ....................................42
8.2 Notification.........................................................42
8.3 Best Efforts.........................................................42
ARTICLE IX - COVENANTS OF SELLERS AND BUYER SUBSEQUENT TO THE
CLOSING DATE ....................................................42
9.1 Further Assurances...................................................42
9.2 Further Consents.....................................................43
9.3 SEC Reports..........................................................43
9.4 SEC Reports..........................................................43
9.5 Textron Facility.....................................................43
ARTICLE X - MUTUAL COVENANTS..................................................43
10.1 Expenses.............................................................43
10.2 Public Announcements.................................................43
10.3 Confidentiality......................................................44
ARTICLE XI - INDEMNIFICATION; REMEDIES........................................44
11.1 Survival.............................................................44
11.2 Time Limitations.....................................................44
11.3 Indemnification By Sellers...........................................45
11.4 Indemnification By Buyer.............................................45
11.5 Procedure For Indemnification -- Third Party Claims..................45
ARTICLE XII - TERMINATION ....................................................46
12.1 Termination Events...................................................46
12.2 Effect Of Termination................................................47
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ARTICLE XIII - MISCELLANEOUS..................................................47
13.1 Notices..............................................................47
13.2 Governing Law And Venue; Waiver Of Jury Trial........................48
13.3 Further Assurances...................................................49
13.4 Waiver...............................................................49
13.5 Entire Agreement And Modification....................................49
13.6 Assignments, Successors And No Third-Party Rights....................50
13.7 Severability.........................................................50
13.8 Section Headings, Construction.......................................50
13.9 Time Of Essence......................................................50
13.10 Counterparts.........................................................50
EXHIBITS
Exhibit 2.1 Custodial and Stock Pledge Agreement
Exhibit 2.4(i) 6% Secured Convertible Promissory Note issuable to
Theodore S. Li
Exhibit 2.4(i) 6% Secured Convertible Promissory Note issuable to
Hui Cynthia Lee
Exhibit 2.4(i) Indemnity Agreement
Exhibit 5.9(a) Employment Agreement with Theodore S. Li
Exhibit 5.9(b) Employment Agreement with Hui Cynthia Lee
Exhibit 5.12 Sellers' Release
DISCLOSURE LETTER
Section 3.1 Organization and Good Standing
Section 3.2 Authority; No Conflict
Section 3.3 Capitalization
Section 3.4 Reports; Financial Statements
Section 3.5 Books and Records
Section 3.6 Title to Properties; Encumbrances
Section 3.8 Accounts Receivable
Section 3.9 Inventory
Section 3.10 No Undisclosed Liabilities
Section 3.11 Taxes
Section 3.12 No Material Adverse Change
Section 3.13 Benefit Plans
Section 3.14 Compliance with Legal Requirements; Governmental
Authorizations
Section 3.15 Legal Proceedings; Orders
Section 3.16 Absence of Certain Changes and Events
Section 3.17 Contracts; No Defaults
Section 3.18 Insurance
Section 3.19 Environmental Matters
Section 3.20 Employees
Section 3.21 Labor Disputes; Compliance
Section 3.22 Intellectual Property
Section 3.24 Relationships with Related Persons
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STOCK PURCHASE AGREEMENT
Stock Purchase Agreement (hereinafter called, this "Agreement"), dated as of
December 10, 2004 among ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida
corporation ("Buyer"), THEODORE S. LI, an individual residing in California
("Li"), HUI CYNTHIA LEE ("Lee"), an individual residing in California. Li and
Lee shall be collectively referred to hereinafter as "Sellers."
Sellers own 6,454,300 shares (the "Shares") of the common stock, par value
$0.001 per share, of Pacific Magtron International Corp., a Nevada corporation
(the "Company"), which constitute 61.56% of the issued and outstanding shares of
capital stock of the Company. Sellers desire to sell, and Buyer desires to
purchase, the Shares for the consideration and on the terms set forth in this
Agreement.
The parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the meanings
specified or referred to in this Section 1:
"Acquired Companies" -- the Company and its Subsidiaries, collectively; each of
the foregoing is an "Acquired Company."
"Audit Date" -- as defined in Section 3.4.
"Balance Sheet" -- as defined in Section 3.4(a).
"Best Efforts" -- the efforts that a prudent Person desirous of achieving a
result would use under similar circumstances to ensure that such result is
achieved as expeditiously as possible.
"Buyer" -- as defined in the first paragraph of this Agreement.
"Buyer Audit Date" -- as defined in Section 4.6.
"Buyer Common Stock" -- as defined in Section 4.5.
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"Buyer's Disclosure Letter" - the disclosure letter delivered by Buyer to
Sellers concurrently with the execution and delivery of this Agreement.
"Buyer Material Adverse Effect" - means any circumstance(s) or event(s), the
result of which would have, or reasonably could be expected to have,
individually or in the aggregate, a material adverse effect on the business,
assets, results of operations, or condition (financial or otherwise) of Buyer
and its Subsidiaries or on the Contemplated Transactions.
"Buyer Preferred Shares" -- as defined in Section 4.5.
"Buyer Reports" -- as defined in Section 4.6.
"Buyer Stock Plans" -- as defined in Section 4.5.
"Closing" -- as defined in Section 2.3.
"Closing Date" -- shall mean January __, 2005, or such other date and time
mutually agreed to among the parties hereto.
"Code" -- the Internal Revenue Code of 1986, as amended from time to time, or
any successor law.
"Company" -- as defined in the second paragraph of this Agreement.
"Consent" -- any approval, consent, ratification, permission, waiver or other
authorization (including any Governmental Authorization).
"Contemplated Transactions" -- all of the transactions contemplated by this
Agreement, including, but not limited to:
(i) the sale of the Shares by Sellers to Buyer;
(ii) the execution, delivery and performance of the Promissory Notes, the
Employment Agreements, the Indemnity Agreement, the Pledge Agreement and the
Releases;
(iii) the performance by Buyer and Sellers of their respective covenants and
obligations hereunder;
(iv) Buyer's acquisition and exercise of control over the Acquired Companies;
and
(v) any change in the directors, officers or other key employees of the Acquired
Companies.
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"Contract" -- any agreement, contract, instrument, indenture, guaranty, power of
attorney, commitment, promise, assurance, obligation or undertaking.
"Conversion Shares" -- as defined in Section 3.2.
"Copyrights" -- as defined in Section 3.22.
"Damages" -- as defined in Section 11.3.
"Director's Plans" -- as defined in Section 3.13(a).
"Disclosure Letter" -- the disclosure letter delivered by Sellers to Buyer
concurrently with the execution and delivery of this Agreement; provided that on
or prior to 12:00 noon (Phoenix, Arizona time) Saturday, December 11, 2004,
Sellers shall have the right to update the Disclosure Letter solely with respect
to (i) cross referencing information contained in the Disclosure Letter
delivered to Buyer concurrently with the execution and delivery of this
Agreement with the appropriate section numbers of the Agreement, (ii) compiling
Exhibits referenced in the Disclosure Letter delivered to Buyer concurrently
with the execution and delivery of this Agreement, and (iii) disclosing consents
that Sellers are required to obtain from third parties who are parties to
agreements set forth in the Disclosure Letter delivered to Buyer concurrently
with the execution and delivery of this Agreement.
"Employment Agreements" -- as defined in Section 5.9.
"Encumbrance" -- any lien, pledge, hypothecation, charge, mortgage, deed of
trust, security interest, encumbrance, equity, trust, equitable interest, claim,
easement, right-of-way, servitude, right of possession, lease tenancy, license,
encroachment, intrusion, covenant, infringement, interference, Order, proxy,
option, right of first refusal, community property interest, legend, defect,
impediment, exception, reservation, limitation, impairment, imperfection of
title, condition or restriction of any kind, including, but not limited to,
restriction on the use, voting (in the case of any security), transfer, receipt
of income or other exercise of any other attribute of ownership.
"Environment" -- soil, surface or subsurface land, strata, surface waters
(including navigable waters and ocean waters), groundwaters, drinking water
supply, stream sediments, ambient air, plant and animal life and any other
environmental medium or natural resource.
"Environmental, Health and Safety Liabilities" --any loss, cost, expense, claim,
demand, liability, obligation or other responsibility of whatever kind or
otherwise, based upon Environmental Laws, relating to:
(i) any environmental, health or safety matters or conditions (including, but
not limited to, on-site or off-site contamination, occupational safety and
health, and regulation of chemical substances or products);
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(ii) fines, penalties, judgments, awards, settlements, legal or administrative
proceedings, damages, losses, claims, demands and response, remedial or
inspection costs and expenses arising under Environmental Law;
(iii) financial responsibility under Environmental Law for cleanup costs or
corrective action, including for any removal, remedial or other response
actions, and for any natural resource damages;
(iv) any other compliance, corrective or remedial measures required under
Environmental Law.
The terms "removal," "remedial" and "response" action shall include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended
("CERCLA").
"Environmental Law" -- any provision of past, present or future, national,
federal, state, local or any other governmental law, directive, statute,
ordinance, rule, regulation, code, standard or other legal requirement, or
common law (including, but not limited to, common law that may impose strict
liability) or any judgment, order, writ, notice, decree, permit, license,
authorization approval, consent, injunction, or agreement with a Governmental
Body, relating to any environmental, health or safety matters or conditions,
Hazardous Materials, pollution, protection, preservation or restoration of the
Environment, including, but not limited to, on-site or off-site contamination,
occupational safety and health and regulation of chemical substances or
products, emissions, discharges, releases or threatened release of pollutants,
contaminants, chemicals, or industrial, toxic, radioactive or Hazardous
Materials or wastes into the Environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, pollutants, contaminants,
chemicals, or industrial, toxic, radioactive or hazardous substances or wastes.
Environmental Laws include, but are not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
ss. 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42
U.S.C. ss. 6901 et seq., the Clean Air Act, as amended, 42 U.S.C. ss. 7401 et
seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss. 1251 et
seq., the Toxic Substances Control Act, as amended, 15 U.S.C. ss. 2601 et seq.,
the Hazardous Materials Transportation Act, as amended 49 U.S.C. ss. 1471 et
seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C. ss.
11001 et seq., and the Safe Drinking Water Act, 42 U.S.C. ss. 300f et seq.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as amended from
time to time, or any successor law.
t 6 0 Exchange Act" - shall mean the Securities Exchange Act of 1934, as amended
from time to time, or any successor law.
"Facilities" -- any real property, leaseholds or other interests currently or
formerly owned or operated by any Acquired Company (or any predecessor Person)
and/or any buildings, plants, structures or equipment of any Acquired Company
(or any predecessor Person).
4
"GAAP" -- generally accepted United States accounting principles applied on a
basis consistent with the basis on which financial statements referred to in
Section 3.4 were prepared.
"Governmental Authorization" -- any permit, license, franchise, approval,
consent, ratification, permission, confirmation, endorsement, waiver,
certification, registration, qualification or other authorization issued,
granted, given or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement.
"Governmental Body" -- any:
(i) nation, kingdom, republic, confederation, principality, state, commonwealth,
province, territory, canton, country, parish, city, town, township,
municipality, village, hamlet, borough, district or other jurisdiction of any
nature;
(ii) federal, state, local, municipal, foreign or other government;
(iii) governmental or quasi-governmental authority of any nature (including any
governmental division, subdivision, department, agency, ministry, service,
system, corps, administration, bureau, branch, office, commission, council,
board, instrumentality, officer, official, representative, organization, unit,
organ, body or entity and any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, entitled or purporting to exercise, any executive,
legislative, judicial, administrative, regulatory, police or taxing authority or
power of any nature.
"Hazardous Materials" -- any substance which presently or may in the future be
listed, defined, designated or classified as, or otherwise determined to be,
hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including any material
containing any such substance as a component, and includes, but shall not be
limited to, any (i) "hazardous substance," "pollutant" or "contaminant" (as
defined in Sections 101(14), (33) of CERCLA, 42 U.S.C. ss.ss. 9601(14), (33) or
the regulations designated pursuant to Section 102 of CERCLA, 42 U.S.C. ss. 9602
and found at 40 C.F.R. Part 302), including any element, compound, mixture,
solution, or substance which is or may be designated pursuant to Section 102 of
CERCLA; (ii) substance which is or may be designated pursuant to Section
311(b)(2)(A) of the Federal Water Pollution Control Act, 33 U.S.C. ss.ss. 1251,
1321(b)(2)(A), as amended ("FWPCA"); (iii) hazardous waste having the
characteristics which are identified under or listed pursuant to Section 3001 of
the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901,6921, as
amended ("RCRA") or having such characteristics which shall subsequently be
considered under RCRA to constitute a hazardous waste; (iv) substance containing
5
petroleum, as that term is defined in Section 9001(8) of RCRA, 42 U.S.C. ss.
991(8) or 40 C.F.R. Part 280; (v) toxic pollutant which is or may be listed
under Section 307(a) of the FWPCA, 33 U.S.C. ss. 1317(a); (vi) hazardous air
pollutant which is or may be listed under Section 112 of the Clean Air Act, 42
U.S.C. ss.ss. 7401, 7412, as amended; (vii) imminently hazardous chemical
substance or mixture with respect to which action has been or may be taken
pursuant to Section 7 of the Toxic Substances Control Act, 15 U.S.C. ss.ss.
2601, 2606, as amended; (viii) waste oil and other petroleum products; (ix)
asbestos, asbestos containing material or urea formaldehyde or material which
contains it; or (x) source, special nuclear or by-product material as defined by
the Atomic Energy Act of 1954, as amended, 42 U.S.C. ss. 3011 et seq. "Hazardous
Materials" does not include small quantities of consumer products, office
cleaning products or other office supplies as are customarily used in compliance
with applicable Environmental Laws in the ordinary course in a general office
facility.
"Indemnified Persons" -- as defined in Section 11.3.
"Indemnity Agreement" -- as defined in Section 2.4(b)(iv).
"Intellectual Property Assets" -- as defined in Section 3.22.
"Interim Balance Sheet" -- as defined in Section 3.4.
"Knowledge" -- an individual shall be deemed to have "Knowledge" of a particular
fact or other matter if:
(i) such individual is actually aware of such fact or other matter; or
(ii) a prudent individual could be expected to discover or otherwise become
aware of such fact or other matter in the course of conducting a reasonably
comprehensive investigation concerning the truth or existence of such fact or
other matter.
A Person (other than an individual) shall be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, or employee of such Person (or in any
similar capacity) has, or at any time had, Knowledge of such fact or other
matter.
"Legal Requirement" -- any federal, state, local, municipal, foreign or other
law, statute, legislation, bill, act, enactment, constitution, resolution,
proposition, initiative, canon, ordinance, code, edict, decree, proclamation,
treaty, convention, rule, regulation, ruling, directive, guideline, or
interpretation issued, enacted, adopted, passed, approved, ratified, endorsed,
promulgated, made, entered, rendered, published or implemented by or under the
authority of any Governmental Body or by the eligible voters of any
jurisdiction.
"Marks" -- as defined in Section 3.22.
6
"Material Adverse Effect" - means any circumstance(s) or event(s), the result of
which would have, or reasonably could be expected to have, individually or in
the aggregate, a material adverse effect on the business, assets, results of
operations, or condition (financial or otherwise) of any Acquired Company or on
the Contemplated Transactions.
"Nevada Statutes" -- as defined in Section 3.26.
"Order" -- any order, judgment, injunction, edict, decree, ruling,
pronouncement, determination, decision, opinion, sentence, subpoena, writ or
award issued, made, entered or rendered by any court, administrative agency or
other Governmental Body or by any arbitrator.
"Ordinary Course of Business" -- an action taken by a Person shall be deemed to
have been taken in the "Ordinary Course of Business" only if:
(i) such action is recurring in nature, is consistent with the past practices of
such Person and is taken in the ordinary course of the normal day-to-day
operations of such Person;
(ii) such action is not required to be authorized by the board of directors of
such Person (or by any Person or group of Persons exercising similar authority),
is not required to be authorized by the parent company (if any) of such Person
and does not require any other separate or special authorization of any nature;
and
(iii) such action is similar in nature and magnitude to actions customarily
taken, without any separate or special authorization, in the ordinary course of
the normal day-to-day operations of other Persons that are in the same line of
business as such Person.
"Organizational Documents" -- (i) the articles or certificate of incorporation
and the bylaws of a corporation; (ii) the partnership agreement and any
statement of partnership of a general partnership; (iii) the limited partnership
agreement and the certificate of limited partnership of a limited partnership;
(iv) any charter or similar document adopted or filed in connection with the
formation, creation, constitution or organization of a Person; and (v) any
amendment to any of the foregoing.
"Patents" -- as defined in Section 3.22.
"PBGC" -- the Pension Benefit Guaranty Corporation, or any successor thereto.
"Person" -- any individual, corporation (including any non-profit corporation),
general partnership, limited partnership, joint venture, estate, trust,
cooperative, foundation, union, syndicate, league, consortium, coalition,
committee, society, firm, company or other enterprise, association, organization
or other entity or Governmental Body.
"Plan" -- any "employee benefit plan," as defined in Section 3(3) of ERISA, that
covers any employee or former employee of any of the Companies.
7
"Pledge Agreement" - As defined in Section 2.1(b).
"Proceeding" -- any action, suit, litigation, arbitration, proceeding (including
any civil, criminal, administrative, investigative or appellate proceeding and
any informal proceeding), prosecution, contest, hearing, inquiry, inquest,
audit, examination, investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"Promissory Notes" -- as defined in Section 2.4(b)(i).
"Purchase Price" -- as defined in Section 2.2.
"Quarles" -- as defined in Section 2.1(b).
"Related Person" -- with respect to a particular individual:
(i) each other member of such individual's Family;
(ii) any Person that is directly or indirectly controlled by any one or more
members of such individual's Family;
(iii) any Person in which members of such individual's Family hold (individually
or in the aggregate) a Material Interest; and
(iv) any Person with respect to which one or more members of such individual's
Family serves as a director, officer, employee, general partner, executor or
trustee (or in a similar capacity).
(for purposes of this definition, the "Family" of an individual includes (i)
such individual, (ii) the individual's spouse, (iii) any other natural person
who is related to the individual or the individual's spouse within the second
degree, and (iv) any other natural person who resides with such individual and
"Material Interest" means direct or indirect beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934) of voting securities or
other voting interests representing at least twenty percent (20%) of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least twenty percent (20%) of the outstanding equity
securities or equity interests in a Person).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or indirectly
controlled by or is directly or indirectly under common control with such
specified Person;
(b) any Person that holds a Material Interest in such specified Person;
8
(c) each Person that serves as a director, officer, employee, general partner,
executor or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material Interest; and
(e) any Person with respect to which such specified Person serves as a general
partner or a trustee (or in a similar capacity).
"Release" -- any releasing, spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, depositing, disposing,
dumping or emplacement into the Environment.
"Reports" -- as defined in Section 3.4.
"Rights in Mask Works" -- as defined in Section 3.22.
"SEC" -- as defined in Section 3.4.
"Securities Act" -- the Securities Act of 1933, as amended from time to time, or
any successor law.
"Sellers" -- as defined in the first paragraph of this Agreement.
"Sellers' Release" -- as defined in Section 5.12.
"Series A Preferred Stock" -- as defined in Section 3.3(a).
"Series A Transaction" -- as defined in Section 5.15.
"Shares" -- as defined in the second paragraph of this Agreement.
"Subsidiary" -- with respect to any Person ("owner"), any corporation or other
Person of which securities or other interests having the power to elect a
majority of that corporation's or other Person's board of directors or similar
governing body, or otherwise having the power to direct the business and
policies of that corporation or other Person (other than securities or other
interests having that power only upon the happening of a contingency that has
not occurred) are held by owner or one or more of its Subsidiaries; when used
without reference to a particular Person, "Subsidiary" means Subsidiary of the
Company.
"Tax" -- any tax (including any income tax, franchise tax, capital gains tax,
gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax,
transfer tax, stamp tax, sales tax, use tax, property tax, inventory tax,
occupancy tax, withholding tax, payroll tax, gift tax, estate tax or inheritance
tax), levy, assessment, tariff, impost, imposition, toll, duty (including any
customs duty), deficiency or fee, and any related charge or amount (including
any fine, penalty or interest), imposed, assessed or collected by or under the
authority of any Governmental Body or payable pursuant to any tax-sharing
agreement or pursuant to any other Contract relating to the sharing or payment
of any such tax, levy, assessment, tariff, impost, imposition, toll, duty,
deficiency or fee.
9
"Tax Return" -- any return (including any information return), report,
statement, declaration, schedule, notice, notification, form, certificate or
other document or information filed with or submitted to, or required to be
filed with or submitted to, any Governmental Body in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with any
Legal Requirement relating to any Tax.
"Textron" -- as defined in Section 5.14.
"Textron Facility" -- as defined in Section 5.14.
"Threat of Release" -- a substantial likelihood of a Release which might require
action in order to prevent or mitigate damage to the Environment that might
result from such Release.
"Threatened" -- a claim, Proceeding, dispute, action or other matter shall be
deemed to have been "Threatened" if any demand or statement shall have been made
(orally or in writing) or any notice shall have been given (orally or in
writing), or if any other event shall have occurred or any other circumstances
shall exist, that might lead a prudent Person to conclude that such a claim,
Proceeding, dispute, action or other matter might be asserted, commenced, taken
or otherwise pursued in the future.
"Trade Secrets" -- as defined in Section 3.22.
"VEBA's" -- as defined in Section 3.13(a).
ARTICLE II
SALE AND TRANSFER OF SHARES; CLOSING.
2.1 SHARES.
(a) Subject to the terms and conditions of this Agreement, at the Closing,
Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, the Shares.
(b) The Shares shall be delivered to and held by Quarles & Brady Streich Lang
LLP ("Quarles") in accordance with that certain Custodial and Pledge Agreement
by and among Sellers, Buyer and Quarles in substantially the form of Exhibit 2.1
attached hereto (the "Pledge Agreement").
2.2 PURCHASE PRICE. The purchase price (the "Purchase Price") for the Shares
shall be $500,000.
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2.3 CLOSING. The purchase and sale (the "Closing") provided for in this
Agreement shall take place at the offices of Eckert Seamans Cherin & Mellott,
LLC, 1515 Market Street - 9th Floor, Philadelphia, Pennsylvania, counsel for
Buyer, at 1:00 p.m. (Philadelphia time) on January 10, 2005, or at such other
time and place as the parties hereto shall mutually agree. Subject to the
provisions of Section 12, failure to consummate the purchase and sale provided
for in this Agreement on the date and time and at the place determined pursuant
to this Section 2.3 shall not result in the termination of this Agreement and
shall not relieve any parties to this Agreement of any obligation hereunder.
2.4 CLOSING DELIVERIES. At the Closing:
(a) Sellers shall deliver, or cause to be delivered, to Buyer:
(i) certificates representing the Shares, duly endorsed (or accompanied by duly
executed stock powers), with signatures guaranteed by a commercial bank or by a
member firm of the New York Stock Exchange, for transfer to Buyer, together with
instructions to the transfer agent of the Company requesting that a new
certificate or certificates representing the Shares be issued in Buyer's name;
(ii) the opinion of Sellers' counsel required pursuant to Section 5.4 hereof and
the opinion of Nevada counsel required pursuant to Section 5.18 hereof;
(iii) the Employment Agreements;
(iv) the Sellers' Release; and
(v) such other documents, instruments, certificates and opinions as may be
required by this Agreement or as may be reasonably requested by Buyer; and
(b) Buyer shall deliver, or cause to be delivered, to Sellers:
(i) promissory notes payable to Li and Lee in the respective principal amounts
of $166,889.00 and $333,111.00 each in the form of Exhibit 2.4(i) (the
"Promissory Notes");
(ii) the opinion of Buyer's counsel required pursuant to Section 6.5 hereof;
(iii) the Pledge Agreement;
(iv) an Indemnity Agreement in substantially the form of Exhibit 2.4(iv)
attached hereto (the "Indemnity Agreement"); and
(v) such other documents instruments, certificates and opinions as may be
required by this Agreement or as may be reasonably requested by Sellers.
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(c) Buyer shall deliver, or cause to be delivered, to Quarles, the certificates
representing the Shares to be held by Quarles in accordance with the terms of
the Pledge Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING. (a) The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada with full corporate power and authority to carry on its business as it is
now being conducted, to own or hold under lease the properties and assets which
it owns or holds under lease and perform all its obligations under the
agreements and instruments to which it is a party or by which it is bound. The
Company is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which the
ownership or leasing of the properties owned by it or the nature of the
activities conducted by it requires such qualification. Section 3.1(a) of the
Disclosure Letter lists each such jurisdiction. Section 3.1(a) of the Disclosure
Letter lists each Subsidiary of the Company.
(b) Section 3.1(b) of the Disclosure Letter sets forth as to each Subsidiary its
name, jurisdiction of incorporation, other jurisdictions in which authorized to
do business, and capitalization. Each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation as set forth in Section 3.1(b) of the Disclosure
letter, with full corporate power and authority to carry on its business as it
is now being conducted, to own or hold under lease the properties and assets
which it owns or holds under lease and perform all its obligations under the
agreements and instruments to which it is a party or by which it is bound, is
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which the ownership or
leasing of the properties owned by it or the nature of the activities conducted
by it requires such qualification. Section 3.1(b) of the Disclosure Letter lists
each such jurisdiction. None of the Acquired Companies is an "investment
company" within the meaning of the Investment Company Act of 1940. Sellers have
made available to Buyer copies of the Organizational Documents of each Acquired
Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT. This Agreement constitutes the legal, valid and
binding obligation of Sellers, enforceable against Sellers in accordance with
its terms. Upon the execution and delivery by Sellers of the Employment
Agreements and the Releases, those documents will constitute the legal, valid
and binding obligations of Sellers, enforceable against Sellers in accordance
with their respective terms. Sellers have the absolute and unrestricted right,
power, authority and capacity to execute and deliver this Agreement, the
Employment Agreements, the Releases and each other document contemplated
hereunder or thereunder and to perform their obligations hereunder and
thereunder. Except as set forth in Section 3.2 of the Disclosure Letter, neither
the execution and delivery of this Agreement nor the consummation or performance
of any of the Contemplated Transactions will, directly or indirectly:
12
(a) contravene, conflict with or result (with or without notice or lapse of
time) in a violation of (i) any of the provisions of the Organizational
Documents of the Acquired Companies or (ii) any resolution adopted by the board
of directors or the stockholders of any Acquired Company;
(b) contravene, conflict with or result (with or without notice or lapse of
time) in a violation of any Legal Requirement or any Order to which any Acquired
Company or either Seller, or any of the assets owned or used by any Acquired
Company, may be subject, except that, which could not have a Material Adverse
Effect;
(c) cause Buyer or any Acquired Company to become subject to, or to become
liable for the payment of, any Tax;
(d) cause any of the assets owned by any Acquired Company to be reassessed or
revalued by any taxing authority or other Governmental Body;
(e) contravene, conflict with or result (with or without notice or lapse of
time) in a violation of any of the terms or requirements of, or give any
Governmental Body the right (with or without notice or lapse of time) to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Authorization
that is held by any Acquired Company or that otherwise relates to the business
of, or any of the assets owned or used by, any Acquired Company, except that,
which could not have a Material Adverse Effect;
(f) contravene, conflict with or result (with or without notice or lapse of
time) in a violation or breach of any of the provisions of, or give any Person
the right (with or without notice or lapse of time) to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of or
cancel, terminate or modify, any Contract to which any Acquired Company or any
Seller is a party or under which any Acquired Company has any rights, or by
which any Acquired Company or any Seller, or any of the assets owned or used by
any Acquired Company, may be bound, except that, which could not have a Material
Adverse Effect; or
(g) result (with or without notice or lapse of time) in the imposition or
creation of any Encumbrance upon or with respect to any of the assets owned or
used by any Acquired Company.
Except as disclosed in Section 3.2 of the Disclosure Letter, no Acquired Company
is or will be required to give any notice to or obtain any Consent from, and no
Seller is or will be required to give any notice to or obtain any Consent from,
any Person in connection with the execution and delivery of this Agreement or
the consummation or performance of any of the Contemplated Transactions. Sellers
are acquiring the Promissory Notes and, if applicable, the shares of Buyer's
common stock issuable upon conversion of the Promissory Notes (the "Conversion
Shares") for their own account and not with a view to their distribution within
the meaning of Section 2.11 of the Securities Act. Each Seller is an "accredited
investor," as such term is defined in Rule 501(a) promulgated pursuant to the
Securities Act. Each Seller acknowledges that such Seller has had the
13
opportunity to ask questions of and receive answers from, or obtain additional
information from, the executive officers of Buyer concerning the financial and
other affairs of Buyer, and to the extent deemed necessary in light of such
personal knowledge of the Buyer's affairs, such Seller has asked such questions
and received answers to the full satisfaction of such Seller. Each Seller
understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation or
endorsement of the Promissory Notes or Conversion Shares or the fairness of
suitability of the investment in the Promissory Notes or Conversion Shares nor
have such authorities passed upon or endorsed the merits of the offering of the
Promissory Notes or Conversion Shares.
3.3 CAPITALIZATION. The authorized capital stock of the Company consists of (i)
25,000,000 shares of Common Stock, par value $0.001 per share, of which
10,485,062 shares are issued and outstanding, of which 6,454,300 constitute the
Shares and (ii) 5,000,000 shares of Preferred Stock, par value $0.001 per share,
of which 1,000 shares are designated Series A Redeemable Convertible Preferred
Stock, of which 600 shares are issued and outstanding (the "Series A Preferred
Stock"). Sellers are and will be on the Closing Date the record and beneficial
owners and holders of the Shares, free and clear of all Encumbrances. Li owns
2,154,300 of the Shares and Lee owns 4,300,000 of the Shares. Except as set
forth in Section 3.3 of the Disclosure Letter, with the exception of the Shares
(which are owned by Sellers) and the other outstanding shares of common stock of
the Company, all of the outstanding equity securities of each Acquired Company
are owned of record and beneficially by one or more Acquired Companies. Except
as set forth in Section 3.3 of the Disclosure Letter, no legend or other
reference to any purported Encumbrance appears upon any certificate representing
equity securities of any Acquired Company. All of the outstanding equity
securities of each Acquired Company have been duly authorized and validly issued
and are fully paid and nonassessable. Except as set forth in Section 3.3 of the
Disclosure Letter and except for the Series A Preferred Stock, there are no
outstanding options, rights, conversion rights, agreements or commitments of any
kind relating to the issuance, sale or transfer of any equity securities or
other securities of any Acquired Company. None of the outstanding equity
securities or other securities of any Acquired Company was issued in violation
of the Securities Act or the securities or blue sky Legal Requirements of any
state or other jurisdiction. No Acquired Company owns, or has any option, right,
agreement or commitment of any kind to acquire, any equity securities or other
securities of any Person (other than Acquired Companies) or any direct or
indirect equity or ownership interest in any other business.
3.4 REPORTS; FINANCIAL STATEMENTS.
(a) Sellers have made available to Buyer, each registration statement, report,
proxy statement or information statement prepared by the Company since December
31, 2003 (the "Audit Date"), including the Company's Annual Report on Form 10-K
for the year ended December 31, 2003 (the "10-K") and the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and
September 30, 2004 respectively (collectively, the "10-Q"), in the forms,
including exhibits, annexes and any amendments thereto, filed with the
Securities and Exchange Commission (the "SEC") (collectively, including any such
reports filed subsequent to the date hereof, its "Reports"). Except as set forth
in Section 3.4(a) of the Disclosure Letter, as of their respective dates, to the
Knowledge of each Seller, the Company's Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading. Each of the consolidated
balance sheets included in or incorporated by reference into the Company's
Reports (including the related notes and schedules) fairly presents the
consolidated financial position of the Company and its Subsidiaries as of such
Report's date and each of the consolidated statements of income and of cash
flows included in or incorporated by reference into its Reports
14
(including any related notes and schedules) fairly presents the consolidated
results of operations, retained earnings and cash flows, as the case may be, of
the Company and its Subsidiaries for the periods set forth therein (subject, in
the case of unaudited statements, to notes and normal year-end audit adjustments
that will not be material in amount or effect), in each case in accordance with
GAAP consistently applied during the periods involved, except as may be noted
therein (the 10-K balance sheet being referred to hereinafter as the "Balance
Sheet" and the balance sheet contained in the Form 10-Q filed by the Company for
the period ended September 30, 2004 being referred to hereinafter as the
"Interim Balance Sheet"). Since the Audit Date, the Company and each Subsidiary
required to make filings under any Legal Requirement has filed with the
applicable Governmental Bodies all material forms, statements, reports and
documents (including exhibits, annexes and any amendments thereto) required to
be filed by them, and each such filing complied in all material respects with
all applicable laws, rules and regulations, other than such failures to file and
non-compliance that could not have a Material Adverse Effect. Except as set
forth in applicable filings with the SEC, to any Seller's Knowledge, as of the
date hereof, no Person or "group" "beneficially owns" 5% or more of its
outstanding voting securities, with the terms "beneficially owns" and "group"
having the meanings ascribed to them under Rule 13d-3 and Rule 13d-5 under the
Exchange Act. Except as set forth in Section 3.4(a) of the Disclosure Letter, to
any Seller's Knowledge, any Person or "group" "beneficially owning" 5% or more
of the Company's securities has filed with the SEC all statements required to be
filed by it or them under Rules 13d-1 and 13d-2 of the Exchange Act.
(b) As of the date hereof, there are no reports or statements on file with the
SEC to which the SEC has provided comments and the Company has not responded. As
of the date hereof, there are no registration statements on file with the SEC
for which a formal withdrawal should have been delivered to the SEC by the
Company, but for which a formal withdrawal has not been so delivered.
3.5 BOOKS AND RECORDS. The books of account, minute books, stock record books
and other records of the Acquired Companies, all of which have been made
available to Buyer, are complete and correct in all material respects and have
been maintained in accordance with sound business practices and the requirements
of Section 13(b)(2) of the Exchange Act (regardless of whether or not the
Acquired Companies are subject to that Section), including, but not limited to,
the maintenance of an adequate system of internal controls. Except as set forth
in Section 3.5 of the Disclosure Letter, the minute books of the Acquired
Companies containing records of all meetings held of, and corporate action taken
by, the stockholders, the Boards of Directors and committees of the Board of
Directors of the Acquired Companies are accurate and complete in all material
respects and no meeting of any such stockholders, Board of Directors or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of the Acquired Companies.
15
3.6 TITLE TO PROPERTIES; ENCUMBRANCES. Section 3.6 of the Disclosure Letter
lists all real property, leaseholds or other interests therein owned by the
Acquired Companies. Sellers have made available to Buyer copies of the deeds and
other instruments (as recorded) by which the Acquired Companies acquired such
real property and interests, and copies of all title insurance policies,
opinions, abstracts and surveys in the possession of Sellers or the Acquired
Companies and relating to such property or interests. The Acquired Companies own
(with good and marketable title in the case of real property, subject only to
the matters permitted by the following sentence) all the properties and assets
(real, personal and mixed, tangible and intangible) that they purport to own,
including, but not limited to, all the properties and assets reflected in the
Balance Sheet and the Interim Balance Sheet (except for assets held under
capitalized leases disclosed in Section 3.6 of the Disclosure Letter and
personal property sold since the date of the Balance Sheet and the Interim
Balance Sheet, as the case may be, in the Ordinary Course of Business), and all
the properties and assets purchased or otherwise acquired by the Acquired
Companies since the date of the Balance Sheet (except for personal property
acquired and sold since the date of the Balance Sheet in the Ordinary Course of
Business and consistent with past practice), which subsequently purchased or
acquired properties and assets (other than inventory and short term investments)
are listed in Section 3.6 of the Disclosure Letter. All properties and assets
reflected in the Balance Sheet and the Interim Balance Sheet are free and clear
of all Encumbrances and are not, in the case of real property, subject to any
rights of way, building use restrictions, exceptions, variances, reservations or
limitations of any nature whatsoever except, with respect to all such properties
and assets, (a) mortgages or security interests shown on the Balance Sheet or
the Interim Balance Sheet as securing specified liabilities or obligations, with
respect to which no default (or event which, with notice or lapse of time or
both, would constitute a default) exists, (b) mortgages or security interests
incurred in connection with the purchase of property or assets after the date of
the Interim Balance Sheet (such mortgages and security interests being limited
to the property or assets so acquired), with respect to which no default (or
event which, with notice or lapse of time or both, would constitute a default)
exists, (c) liens for current taxes not yet due, and (d) as to real property,
(i) minor imperfections of title, if any, none of which is substantial in
amount, materially detracts from the value or impairs the use of the property
subject thereto, or impairs the operations of any Acquired Company and (ii)
zoning laws and other land use restrictions that do not impair the present or
anticipated use of the property subject thereto. All buildings, plants and
structures owned by the Acquired Companies lie wholly within the boundaries of
the real property owned by the Acquired Companies and do not encroach upon the
property of, or otherwise conflict with the property rights of, any other
Person.
3.7 CONDITION AND SUFFICIENCY OF ASSETS. The buildings, plants, structures and
equipment of the Acquired Companies are structurally sound with no defects of
which the Sellers or the Acquired Companies have Knowledge, are in good
operating condition and repair and are adequate for the uses to which they are
being put, and none of such buildings, plants, structures or equipment is in
need of maintenance or repairs, except for ordinary, routine maintenance and
repairs that are not material in nature or cost. The building, plants,
structures and equipment of the Acquired Companies are sufficient for the
continued conduct of the Acquired Companies' business after the Closing in
substantially the same manner as conducted prior to the Closing.
16
3.8 ACCOUNTS RECEIVABLE. All accounts receivable of the Acquired Companies that
are reflected on the Balance Sheet or the Interim Balance Sheet or on the
accounting records of the Acquired Companies as of the Closing Date (referred to
collectively as the "Accounts Receivable") represent or will represent valid
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business. Unless paid prior to the Closing Date, the
Accounts Receivable are or will be as of the Closing Date current and, to the
Knowledge of each Seller, collectible net of the respective reserves shown on
the Balance Sheet or the Interim Balance Sheet or on the accounting records of
the Acquired Companies as of the Closing Date (which reserves are adequate and
calculated consistent with past practice and, in the case of the reserve as of
the Closing Date, will not represent a greater percentage of the Accounts
Receivable as of the Closing Date than the reserve reflected in the Interim
Balance Sheet represented of the accounts receivable reflected therein and will
not represent a material adverse change in the composition of such Accounts
Receivable in terms of aging). Subject to such reserves, each of the Accounts
Receivable either has been or is scheduled to be collected in full, without any
setoff, within 90 days after the day on which it first becomes due and payable.
Except as set forth in Section 3.8 of the Disclosure Letter, there is no
contest, claim or right of set-off, other than returns in the Ordinary Course of
Business, contained in any agreement with any maker of an Accounts Receivable
relating to the amount or validity of such Accounts Receivable. The Acquired
Companies have made available to the Buyer a list of all Accounts Receivable of
the Corporation as of the date of the Interim Balance Sheet, which list is
correct and complete in all material respects and sets forth the aging of such
Accounts Receivable.
3.9 INVENTORY. Except as set forth in Section 3.9 of the Disclosure Letter, all
inventory of the Acquired Companies, whether or not reflected in the Balance
Sheet or the Interim Balance Sheet, consists of a quality and quantity usable
and salable in the Ordinary Course of Business, except for obsolete items and
items of below-standard quality, all of which have been written off or written
down to net realizable value in the Balance Sheet or the Interim Balance Sheet
or on the accounting records of the Acquired Companies as of the Closing Date,
as the case may be. All inventories not written off have been priced at the
lower of cost or market on a first in, first out basis. The quantities of each
type of inventory (whether raw materials, work-in-process, or finished goods)
are not excessive, but are reasonable and warranted in the present circumstances
of the Acquired Companies. All work in process and finished-goods inventory is
free of any defect or other deficiency.
3.10 NO UNDISCLOSED LIABILITIES. Except as set forth in Section 3.10 of the
Disclosure Letter, the Acquired Companies have no liabilities or obligations of
any nature (known or unknown, absolute, accrued, contingent or otherwise) that
were not fully reflected or reserved against in the Balance Sheet or the Interim
Balance Sheet.
3.11 TAXES. The Acquired Companies have filed or caused to be filed (on a timely
basis) all Tax Returns that are or were required to be filed by or with respect
to any of them, either separately or as a member of a group of corporations,
pursuant to the Legal Requirements of each Governmental Body with taxing power
over them or their assets. Sellers have made available to Buyer copies of, and
Section 3.11 of the Disclosure Letter lists, all such Tax Returns filed since
fiscal year ended December 31, 2000. The Acquired Companies have
17
paid, or made provision for the payment of, all Taxes that have or may have
become due pursuant to those Tax Returns, or otherwise, or pursuant to any
assessment received by Sellers or any of the Acquired Companies, except such
Taxes, if any, as are set forth in Section 3.11 of the Disclosure Letter and are
being contested in good faith and as to which adequate reserves (determined in
accordance with GAAP) have been provided in the Balance Sheet and the Interim
Balance Sheet. The United States federal and state income and franchise Tax
Returns of each Acquired Company subject to such Taxes have been audited by the
Internal Revenue Service or relevant state tax authorities or are closed by the
applicable statute of limitations for all taxable years through December 31,
2003. All deficiencies proposed as a result of such audits have been paid,
reserved against, settled, or, as described in Section 3.11 of the Disclosure
Letter, are being contested in good faith by appropriate proceedings. Section
3.11 of the Disclosure Letter describes all adjustments to the United States
federal income Tax Returns filed by any Acquired Company or any group of
corporations, including any Acquired Company for all taxable years since
December 31, 2003, and the resulting deficiencies proposed by the Internal
Revenue Service. Except as set forth in Section 3.11 of the Disclosure Letter,
none of Sellers or any Acquired Company has given or been requested to give
waivers or extensions (or is or would be subject to a waiver or extension given
by any other Person) of any statute of limitations relating to the payment of
Taxes of any Acquired Company or for which any Acquired Company may be liable.
The charges, accruals and reserves with respect to Taxes on the respective books
of each Acquired Company are adequate (determined in accordance with GAAP).
There exists no proposed tax assessment against any Acquired Company, except as
disclosed in the Balance Sheet or in Section 3.11 of the Disclosure Letter. All
Taxes that any Acquired Company is or was required by Legal Requirements to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Body or other Person, except
where the failure to withhold, collect or pay could not have a Material Adverse
Effect. All Tax Returns filed by (or which include on a consolidated basis) any
Acquired Company are true, correct and complete in all material respects. There
is no tax sharing agreement that will require any payment by any Acquired
Company after the date of this Agreement.
3.12 NO MATERIAL ADVERSE CHANGE. Except as set forth in Section 3.12 of the
Disclosure Letter, since the date of the Balance Sheet, there has not been any
material adverse change in the business, operations, properties, prospects,
assets or condition of any Acquired Company or any event, condition or
contingency that is likely to result in such a material adverse change.
3.13 BENEFIT PLANS. (a) Section 3.13(a) of the Disclosure Letter includes a
complete and accurate list of all pension, retirement, profit sharing, Section
401(k), thrift-savings, individual retirement account, excess benefit plan,
deferred compensation, incentive compensation, stock bonus, stock option,
restricted stock, cash bonus, employee stock ownership (including, without
limitation, payroll related employee stock ownership), severance pay, cafeteria,
flexible compensation, life insurance, medical, dental, disability, welfare, or
18
vacation plans or arrangements of any kind and any other Employee Pension
Benefit Plan or Employee Welfare Benefit Plan (as defined in Section 3 of
ERISA), incentive compensation plan or fringe benefit or any combination of the
foregoing established, maintained, sponsored, contributed to or otherwise
participated in by any Acquired Company (including, for this purpose and for the
purpose of all of the representations in this Section 3.13, all employers,
whether or not incorporated, which by reason of common control are treated
together with Sellers and the Acquired Companies as a single employer within the
meaning of Section 414 of the Code) for any of the employees or past employees
of the Acquired Companies at any time prior to the Closing Date, copies of each
of which have heretofore been delivered by Sellers to Buyer. Section 3.13(a) of
the Disclosure Letter also includes a complete and accurate list of all
voluntary employees' beneficiary associations and related trusts ("VEBA's"), and
a complete and accurate list of all current and deferred compensation, pension,
stock option and other incentive compensation plans, agreements or other
arrangements, welfare plans or fringe benefits covering the members of the
Boards of Directors of the Acquired Companies ("Directors Plans") to whom
payments are being made or are scheduled to be made in the future.
(b) Section 3.13(b) of the Disclosure Letter lists all outstanding employment or
consulting, severance or termination agreements or other similar commitments
which cover any past, present or retired director, officer or employee of the
Acquired Companies and a list of prerequisites and other fringe benefits being
made available, or scheduled to be made, to them, copies of each of which have
heretofore been delivered to Buyer.
(c) Except for liabilities to the PBGC pursuant to Section 4007 of ERISA, all of
which have been fully paid, each Acquired Company has no liability to the PBGC,
nor has any Acquired Company ceased operations at any facility or withdrawn from
any such Plan in a manner which would subject it or Sellers to liability under
Section 4062(e), 4063 or 4064 of ERISA, and neither Sellers nor the Acquired
Companies know of any facts or circumstances which might give rise to any
liability of Sellers, the Acquired Companies or Buyer to the PBGC under Title IV
or ERISA which could result in any claims being made against Buyer with respect
to the Acquired Companies by the PBGC.
(d) The Acquired Companies have no liability and Sellers have no liability with
respect to the Acquired Companies to the Internal Revenue Service with respect
to any pension plan qualified under Section 401 of the Code or any funded
welfare benefit plan, including any liability imposed by Sections 412, 4971,
4972, 4976, 4977, 4978, 4978A, 4979, 4979A and 4980 of the Code.
(e) The Acquired Companies do not, and Sellers do not with respect to the
Acquired Companies, maintain or contribute to, and have not participated in or
agreed to participate in, a Multi-employer plan as defined in Section 4001(a)(3)
of ERISA and no event has occurred, and there exists no condition or set of
circumstances, which presents a risk of the occurrence of any withdrawal from or
the partition, termination, reorganization or insolvency of any Multi-employer
Plan which could result in any liability of the Acquired Companies or Buyer with
respect to the Acquired Companies to a Multi-Employer Plan.
(f) All "Employee Benefit Plans," as defined in Section 3(3) of ERISA, that
cover one or more employees employed by the Acquired Companies (each
individually, a "Plan" and collectively the "Plans") are in material compliance
with ERISA and, where applicable for tax-qualified or tax-favored treatment,
with the Code. To the Knowledge of any Seller or any Acquired Company, all of
the Plans have been administered in material compliance with the requirements of
ERISA and have complied with the reporting and disclosure requirements of Title
19
I of ERISA and the Code, and none of the Acquired Companies or any administrator
or fiduciary of any Plan (or agent of any of the foregoing) has engaged in any
transaction or acted or failed to act in any manner which would subject any
Acquired Company to any liability for a breach of fiduciary duty under ERISA.
Each Employee Pension Benefit Plan sponsored, maintained or contributed to by
any Acquired Company which is intended to be qualified under Section 401(a) of
the Code is qualified under Section 401(a) of the Code; all related trusts are
exempt from federal income tax under Section 501(a) of the Code (or has been
adopted using a prototype plan which has received an opinion letter from the
Internal Revenue Service); each such Plan has received a determination letter
from the Internal Revenue Service stating that the Plan is qualified under
Section 401(a) of the Code and all related trusts are exempt from federal income
tax under Section 501(a) of the Code; and nothing has occurred since the date of
the last such determination which resulted in, or is likely to result in, the
revocation of such determination. Sellers and the Acquired Companies have made
all required contributions under any Plan for all periods through and including
the date hereof or proper accruals have been made and are reflected on its
balance sheet and book and records. All such Plans that are subject to the
minimum funding standards of Section 412 of the Code and Section 302 of ERISA
meet those standards and have not incurred any accumulated funding deficiency
within the meaning of Section 412 or 418B of the Code or have applied for or
obtained from the Internal Revenue Service a waiver of any minimum funding
requirement under Section 412 of the Code. All required installments under
Section 412 of the Code and Section 302 of ERISA have been paid on or before the
applicable due date. There has been no misstatement of pension liabilities that
would result in the imposition of tax under Section 6659A of the Code. To the
Knowledge of any Seller or any Acquired Company, no representations or
communications, oral or written, with respect to participation, eligibility for
benefits, vesting, benefit accrual or coverage under any Plan have been made to
employees of the Acquired Companies, which (a) are not in accordance with the
terms and conditions of such Plan and/or (b) could have any adverse economic
consequences to the Acquired Companies. Neither any Plan nor any fiduciary or
administrator thereof has engaged in a "prohibited transaction" within Section
406 of ERISA or, where applicable, Section 4975 of the Code, for which no
exemption is applicable, nor otherwise breached any of the responsibilities or
obligations imposed upon fiduciaries under Title I of ERISA or taken any other
action which would subject the Plan or such fiduciary or administrator to any
tax, penalty or such liability for prohibited transactions or which would result
in any claim being made under, or by or on behalf of, any such Plans by any
party with standing to make such claim or which may have any adverse economic
consequences to the Acquired Companies or Buyer. There have been no "reportable
events" within the meaning of Section 4043 of ERISA for which the 30-day notice
requirement of ERISA has not been waived by the PBGC. No proceeding or other
action has been initiated by the PBGC to terminate any Employee Pension Benefit
Plan, and no written notice has been given to Seller or the Acquired Companies
of an intention to commence or seek the commencement of any such proceeding or
action.
(g) All Directors' Plans have been administered according to their terms and no
representations or communications, oral or otherwise, with respect to
participation, vesting, benefit accrual or coverage have been made to any
current or former director not in accordance with the terms and conditions of
such Directors' Plan and/or could have any adverse consequences to the Acquired
Companies.
20
(h) All VEBA's are exempt from federal income tax under Section 501(a) of the
Code, have received a determination from the Internal Revenue Service
recognizing their tax exempt status under Section 501(c)(9) of the Code, and
nothing has occurred since the date of the last such determination which
resulted in, or is likely to result in, a revocation of such determination or
loss of tax exempt status. All VEBA's have filed all required returns of exempt
organizations, and properly reported and paid any tax imposed on any unrelated
trade or business income by Section 511 of the Code.
(i) Section 3.13(i) of the Disclosure Letter lists, and Sellers have made
available to Buyer a true and complete set of copies of, (a) all Employee
Benefit Plans, VEBA's and related trusts as in effect with respect to the
Acquired Companies immediately prior to the Closing Date, together with all
amendments thereto which will become effective at a later date; (b) the latest
Internal Revenue Service determination letter obtained with respect to any such
Employee Benefit Plan or VEBA qualified or exempt under Section 401 or 501 of
the Code; (c) Form 5500's and certified financial statements for the most recent
completed three fiscal years for each Employee Benefit Plan of the Acquired
Companies required to file such form with respect to each defined benefit
pension plan or VEBA, together with the most full actuarial report by the Plan's
or VEBA's enrolled actuary; (d) all Summary Plan Descriptions for each Employee
Benefit Plan of the Acquired Companies required to prepare, file and distribute
Summary Plan Descriptions; (e) all summaries furnished employees, officers and
directors of the Acquired Companies of all incentive compensation, other plans
and fringe benefits for which a Summary Plan Description is not required; (f)
all personnel and employment policies and manuals of she Acquired Companies; (g)
current registration statements on Form 5-8 and amendments; and (h) the
notifications to employees of their rights under Section 4980B of the Code.
(j) Benefits under all Employee Benefit Plans, incentive compensation plans and
fringe benefits of the Acquired Companies (including all Directors' Plans) are
as represented and have not been increased subsequent to the date of the Interim
Balance Sheet.
(k) Sellers and the Acquired Companies have complied with the provisions of
Section 4980B of the Code and Sections 601 to 608 of ERISA, Title III of the
Public Health Service Act and the applicable provisions of the Social Security
Act since the effective date of those provisions to the applicable group health
plans maintained, sponsored or contributed to by the Acquired Companies.
(l) No payment made to any officer, director or employee or agent of the
Acquired Companies pursuant to any employment or severance Contract or other
arrangement will be non-deductible to the Companies because of the applicability
of Sections 280G and 4999 of the Code, nor will the Companies be required to
"gross up" or otherwise compensate any recipient because of the imposition of
any excise tax (including any interest or penalties related thereto) because of
the applicability of Sections 2806 and 4999 to the payment.
21
(m) Sellers and the Acquired Companies have provided Buyer with their estimate
of the liability created for providing retiree life and medical benefits
coverage to the Companies' active and retired employees together with the
assumptions used in estimating that liability. The Companies have the right to
modify and to terminate benefits to retirees (other than pensions) with respect
to both retired and active employees.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth in Section 3.14 of the Disclosure Letter:
(i) each Acquired Company is, and at all times has been, in full compliance with
each Legal Requirement that is or was applicable to it or to the conduct or
operation of its business or the ownership or use of any of its assets, except
where such failure to comply could not result in a Material Adverse Effect;
(ii) no event has occurred, and no condition or circumstance exists, that might
(with or without notice or lapse of time) constitute or result directly or
indirectly in a violation by any Acquired Company of, or a failure on the part
of any Acquired Company to comply with, any Legal Requirement, except where such
violation or failure could not result in a Material Adverse Effect; and
(iii) no Acquired Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible or potential violation of, or
failure to comply with, any term or requirement of any Governmental
Authorization or (B) any actual, alleged, possible or potential revocation on
the part of any Acquired Company to undertake, or to bear all or any portion of
the cost of, any remedial action of any nature.
(b) Section 3.14 of the Disclosure Letter identifies each Governmental
Authorization that is held by any Acquired Company or that otherwise relates to
the business of, or to any of the assets owned or used by, any Acquired Company.
Each Governmental Authorization identified or required to be identified in
Section 3.14 of the Disclosure Letter is valid and in full force and effect.
Except as set forth in Section 3.14 of the Disclosure Letter:
(i) each Acquired Company is, and at all times, has been in full compliance with
all of the terms and requirements of each Governmental Authorization identified
or required to be identified in Section 3.14 of the Disclosure Letter;
(ii) no event has occurred, and no condition or circumstance exists, that might
(with or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or requirement
of any Governmental Authorization identified or required to be identified in
Section 3.14 of the Disclosure Letter or (B) result directly or indirectly in
the revocation, withdrawal, suspension, cancellation or termination of, or any
modification to, any Governmental Authorization identified or required to be
identified in Section 3.14 of the Disclosure Letter;
22
(iii) no Acquired Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible or potential violation of or failure
to comply with any term or requirement of any Governmental Authorization or (B)
any actual, proposed, possible or potential revocation, withdrawal, suspension,
cancellation or termination of, or modification to, any Governmental
Authorization which, with respect to (A) and (B) could result in a Material
Adverse Effect; and
(iv) all applications required to have been filed for the renewal of the
Governmental Authorizations required to be identified in Section 3.14 of the
Disclosure Letter have been duly filed on a timely basis with the appropriate
Governmental Bodies, and all other filings required to have been made with
respect to such Governmental Authorizations have been duly made on a timely
basis with the appropriate Governmental Bodies, except where such failure could
not result in a Material Adverse Effect.
The Governmental Authorizations identified in Section 3.14 of the Disclosure
Letter collectively constitute all of the Governmental Authorizations necessary
to permit the Acquired Companies to conduct and operate their businesses in the
manner in which such businesses are currently conducted and operated and to
permit the Companies to own and use their assets in the manner in which such
assets are currently owned and used.
3.15 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Section 3.15 of the Disclosure Letter, there is no
pending Proceeding:
(i) that has been commenced by or against any Acquired Company or that otherwise
relates to or might affect the business of, or any of the assets owned or used
by, any Acquired Company; or
(ii) that challenges, or that might have the effect of preventing, delaying,
making illegal or otherwise interfering with, any of the Contemplated
Transactions.
To the Knowledge of each Seller and the Acquired Companies, (1) no such
Proceeding has been Threatened and (2) no event has occurred, and no condition
or circumstance exists, that might give rise to or serve as a basis for the
commencement of any such Proceeding. Sellers have made available to Buyer copies
of all pleadings, correspondence and other documents relating to each Proceeding
identified in Section 3.15 of the Disclosure Letter. The Proceedings identified
in Section 3.15 of the Disclosure Letter will not have a Material Adverse
Effect.
(b) Except as set forth in Section 3.15 of the Disclosure Letter:
23
(i) there is no Order to which any of the Acquired Companies, or any of the
assets owned or used by any of the Acquired Companies, is subject;
(ii) neither Seller is subject to any Order that relates to the business of, or
to any of the assets owned or used by, any Acquired Company; and
(iii) no officer, director or employee of any Acquired Company is subject to any
Order that prohibits such officer, director or employee from engaging in or
continuing any conduct, activity or practice relating to the business of any of
the Companies.
(c) Except as set forth in Section 3.15 of the Disclosure Letter:
(i) each Acquired Company is, and at all times has been, in full compliance with
all of the terms and requirements of each Order to which it, or any of the
assets owned or used by it, is or has been subject, except where such failure to
comply could not result in a Material Adverse Effect;
(ii) no event has occurred, and no condition or circumstance exists, that might
(with or without notice or lapse of time) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or requirement
of any Order to which any Acquired Company, or any of the assets owned or used
by any Acquired Company, is subject, except where such violation or failure
could not result in a Material Adverse Effect; and
(iii) no Acquired Company has received any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding any actual, alleged, possible or potential violation of, or failure to
comply with, any term or requirement of any Order to which any Acquired Company,
or any of the assets owned or used by any Acquired Company, is or has been
subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. (a) Except as set forth in
Section 3.16 of the Disclosure Letter, since the Audit Date, the Acquired
Companies have conducted their businesses only in the Ordinary Course of
Business and there has not been any:
(i) change in any Acquired Company's authorized or issued capital stock; grant
of any stock option or right to purchase shares of capital stock of any Acquired
Company; issuance of any security convertible into such capital stock; grant of
any registration rights; purchase, redemption, retirement or other acquisition
by any Acquired Company of any shares of any such capital stock; or declaration
or payment of any dividend or other distribution or payment in respect of shares
of capital stock;
(ii) amendment to the Organizational Documents of any Acquired Company;
(iii) payment or increase by any Acquired Company of any bonuses, salaries, or
other compensation to any director, officer, employee, or stockholder (except to
directors, officers, employees, or stockholders in the Ordinary Course of
Business) or entry into any employment, severance, or similar Contract with any
director, officer, or employee;
24
(iv) adoption of, or increase in, any profit sharing, bonus, deferred
compensation, savings, insurance, pension, retirement, or other employee benefit
plan for or with any employees of any Acquired Company;
(v) damage, destruction, or loss to any asset or property of any Acquired
Company, whether or not covered by insurance, affecting materially and adversely
the properties, assets, business, financial condition, or prospects of the
Acquired Company, taken as a whole;
(vi) entry into, termination, or receipt of notice of termination of (a) any
license, distributorship, dealer, sales representative, joint venture, credit,
or similar agreement, or (b) any Contract or transaction involving a total
remaining commitment by any Acquired Company of at least $25,000;
(vii) sale (other than sales of inventory in the Ordinary Course of Business),
lease, or other disposition of any asset or property of any Acquired Company or
mortgage, pledge, or imposition of any lien or other encumbrance on any material
asset or property of any Acquired Company, including, without limitation, the
sale, lease, or other disposition of any Intellectual Property Assets;
(viii) cancellation or waiver of any claims or rights with a value to any
Acquired Company in excess of $25,000;
(ix) conduct of business or entering into any transaction, other than in the
Ordinary Course of Business of the Acquired Companies;
(x) material change in the accounting methods followed by any Acquired Company;
and
(xi) agreement, whether or not in writing, to do any of the foregoing by any
Acquired Company.
3.17 CONTRACTS; NO DEFAULTS. (a) Except as set forth in Section 3.17 of the
Disclosure Letter, Sellers have delivered to Buyer copies of all Contracts
described in (i) through (xv) below to which any Acquired Company is a party or
by which any Acquired Company is bound. Section 3.17 of the Disclosure Letter
also sets forth reasonably complete details concerning such Contracts,
including, among other things, the parties to the Contracts, the amount of the
remaining commitment of the Acquired Companies thereunder, and the Acquired
Companies' office where details relating to the Contract are located.
25
(i) Each Contract that involves performance of services or delivery of goods
and/or materials by any of the Acquired Companies of an amount or value in
excess of $25,000;
(ii) Each Contract that involves performance of services or delivery of goods
and/or materials to any Acquired Company of an amount or value in excess of
$25,000;
(iii) Each Contract not in the Ordinary Course of Business involving
expenditures or receipts of the Acquired Companies in excess of $25,000;
(iv) Each lease, rental or occupancy agreement, license, installment and
conditional sale agreement, and other Contract affecting the ownership of,
leasing of, title to, use of, or any leasehold or other interest in, any real or
personal property (except personal property leases and installment and
conditional sales agreements having a value per item or aggregate payments of
less than $25,000 and with terms of less than one year);
(v) Each licensing agreement or other Contract with respect to patents,
trademarks, copyrights, or other intellectual property, including agreements
with current or former employees, consultants, or contractors regarding the
appropriation or the non-disclosure of Intellectual Property Assets;
(vi) Each Contract to which any employee, consultant, or contractor of any
Acquired Company is bound which in any manner purports to (A) restrict such
employee's, consultant's, or contractor's freedom to engage in any line of
business or to compete with any other Person, or (B) assign to any other Person
such employee's, consultant's, or contractor's rights to any invention,
improvement, or discovery;
(vii) Each collective bargaining agreement or other Contract to or with any
labor union or other employee representative of a group of employees relating to
wages, hours, and other conditions of employment;
(viii) Each joint venture, partnership or other Contract (however named)
involving a sharing of profits, losses, costs, or liabilities by any Acquired
Company with any other Person;
(ix) Each Contract containing covenants which in any way purport to restrict any
Acquired Company's business activity or purport to limit the freedom of any
Acquired Company to engage in any line of business or to compete with any
Person;
(x) Each Contract providing for payments to or by any Person based on sales,
purchases or profits, other than direct payments for goods;
(xi) Each power of attorney which is currently effective and outstanding;
26
(xii) Each Contract entered into other than in the Ordinary Course of Business
which contains or provides for an express undertaking by any Acquired Company to
be responsible for consequential damages;
(xiii) Each Contract for capital expenditures in excess of $25,000;
(xiv) Each written warranty, guaranty or other similar undertaking with respect
to contractual performance extended by any Acquired Company other than in the
Ordinary Course of Business; and
(xv) Each amendment, supplement, and modification (whether written or oral) in
respect of any of the foregoing.
(b) Except as set forth in Section 3.17 of the Disclosure Letter, all of the
Contracts listed in the Disclosure Letter pursuant to paragraph (a) hereof are
in full force and effect, are valid and enforceable in accordance with their
terms, and no condition exists or event has occurred which, with notice or lapse
of time or both, would constitute a default or a basis for force majeure or
other claim of excusable delay or non-performance thereunder, other than that
which could not cause a Material Adverse Effect. The terms and conditions of all
such Contracts are reasonable and customary in the industries and trades in
which the Acquired Companies operate, and there are no extraordinary terms
contained therein.
(c) There are no renegotiations of, or attempts to renegotiate, or outstanding
rights to renegotiate, any material amounts paid or payable to any Acquired
Company under current or completed Contracts with any Person having the
contractual or statutory right to demand or require such renegotiation. No such
Person has made written demand for such renegotiation.
(d) The Contracts relating to the sale, design, manufacture, or provision of
products or services by the Companies have been entered into in the Ordinary
Course of Business and have been entered into without the commission of any act
alone or in concert with another Person, or any consideration having been paid
or promised, which is or would be in violation of any Legal Requirement.
3.18 INSURANCE. (a) Section 3.18(a) of the Disclosure Letter contains an
accurate and complete description of all policies of property, fire and
casualty, product liability, workers compensation, and other forms of insurance
owned or held by any Acquired Company. Such description provides reasonably
complete details concerning such policies, identifying among other things, (i)
the issuer of each such policy, (ii) the amount of coverage still available and
outstanding under each such policy, (iii) whether each such policy is a "claims
made" or an "occurrences" policy, and (iv) any provision for reimbursement to
the insurer or retrospective premium adjustments. Copies of such policies have
been made available to Buyer or are attached to the Disclosure Letter.
(b) Except as set forth in Section 3.18(b) of the Disclosure Letter, all
policies described in paragraph (a) hereof (i) are issued by insurance companies
reasonably believed by the Acquired Companies to be financially sound and
reputable, (ii) are sufficient for material compliance with all Legal
Requirements and Contracts to which any Acquired Company is a party or by which
any of them is bound, (iii) are valid, outstanding, and enforceable policies,
(iv) provide adequate insurance coverage for the assets and the operations of
the Acquired Companies for all material risks normally insured against by a
Person carrying on the same business or businesses as the Acquired Companies,
and (v) will not in any way be affected by, terminate, or lapse by reason of,
the Contemplated Transactions.
27
(c) Except as set forth in Section 3.18(c) of the Disclosure Letter, neither
Sellers nor any Acquired Company has received, (i) any notice of cancellation of
any policy described in paragraph (a) hereof or refusal of coverage thereunder,
(ii) any notice that any issuer of such policy has filed for protection under
applicable bankruptcy laws or is otherwise in the process of liquidating or has
been liquidated, or (iii) any other indication that such policies are no longer
in full force or effect or that the issuer of any such policy is no longer
willing or able to perform its obligations thereunder.
3.19 ENVIRONMENTAL MATTERS. Except as disclosed in Schedule 3.19 of the
Disclosure Letter:
(a) Neither the Sellers nor any Acquired Company, nor any other Person for whose
conduct they are or may be held responsible, has, or has any basis to expect,
any Environmental, Health and Safety Liabilities with respect to the Facilities
or with respect to any other properties and assets (real, personal and mixed,
tangible and intangible) in which Sellers or any Acquired Company (or any
predecessor), has or had an interest.
(b) Set forth in Section 3.19(b) of the Disclosure Letter are all the consents,
licenses, permits, approvals, and certificates held by the Acquired Companies on
the date hereof which constitute all of the consents, licenses, permits,
approvals, and certificates required under Environmental Laws for the Acquired
Companies to lawfully own, operate, use, and maintain their assets and to
conduct their businesses. Sellers and the Acquired Companies have, at all times
prior to Closing, maintained the assets and conducted the businesses of the
Acquired Companies in full compliance with the terms and conditions of all such
consents, licenses, permits, approvals, and certificates, and all required
filings and all required applications with respect to and for renewal thereof
have been timely made and filed. All such consents, licenses, permits,
approvals, and certificates are in full force and effect and there are no
proceedings pending or, to the Knowledge of each Seller or of the Acquired
Companies, threatened that seek the revocation, cancellation, suspension, or
adverse modification thereof.
(c) (i) There are no Hazardous Materials on or in the Facilities; and (ii)
neither the Sellers nor any Acquired Company, nor any other Person for whose
conduct they are or may be held responsible, has generated, manufactured,
refined, transported, treated, stored, handled, disposed, transferred, produced,
imported, used or processed any Hazardous Materials.
(d) There has been no Release or Threat of Release, of any Hazardous Materials
at or from the Facilities or at any other locations where any Hazardous
Materials were generated, manufactured, refined, transferred, produced,
imported, used or processed from or by the Facilities, or from or by any other
properties and assets (real, personal and mixed, tangible and intangible) in
which Sellers or any Acquired Company has or had an interest, whether by the
Sellers, any Acquired Company or by any other Person for whose conduct they are
or may be held responsible.
28
(e) There are no claims, liens, encumbrances, or any other restrictions of any
nature whatsoever, resulting from any Environmental, Health or Safety
Liabilities or arising under or pursuant to any Environmental Law, with respect
to or affecting any of the Facilities or any other properties and assets (real,
personal and mixed, tangible and intangible) in which Sellers or any Acquired
Company has an interest.
3.20 EMPLOYEES. Section 3.20 of the Disclosure Letter contains a current list
setting forth the following information for each employee or director of the
Acquired Companies, including, without limitation, each employee on leave of
absence or layoff status: employer; name; job title; current compensation paid
or payable and showing any change in compensation since the Audit Date; vacation
accrued and service credited for purposes of vesting and eligibility to
participate under the Acquired Companies' pension, retirement, profit-sharing,
thrift-savings, deferred compensation, stock bonus, stock option, cash bonus,
employee stock ownership (including, without limitation, investment credit or
payroll stock ownership) severance pay, insurance, medical, welfare and vacation
plans, other or any director plan. To the Knowledge of each Seller, no former or
current employee or current or former director of the Acquired Companies is a
party to, or is otherwise bound by, any agreement or arrangement, including,
without limitation, any confidentiality, non-competition or proprietary rights
agreement between such employee or director and any other entity or person
("Proprietary Rights Agreement") which in any way adversely affected, affects or
will affect (i) the performance of his duties as an employee or director of the
Acquired Companies or (ii) the Acquired Companies' ability to conduct the
Acquired Companies' business, including, without limitation, any Proprietary
Rights Agreement with Sellers or the Acquired Companies by any such employee or
director. At Buyer's request, Sellers shall assign to Buyer or, at Buyer's
request, Sellers shall use their Best Efforts to enforce, at Sellers' expense,
any or all of their rights under any Proprietary Rights Agreements against
Sellers' former and current employees or former or current directors with
respect to the Acquired Companies' business. To each Seller's Knowledge, no
director, officer or other key employee of the Acquired Companies intends to
terminate his employment with the Acquired Companies. At Buyer's request,
Sellers shall (and prior to the Closing Date shall cause the Acquired Companies
to) use their Best Efforts in order that Buyer may enjoy to the extent permitted
by law the Acquired Companies' record rating and benefits under the worker's
compensation laws and unemployment compensation laws of the states and countries
in which there is coverage of employees of the Acquired Companies, any of whom
may be employees of the Acquired Companies after the Closing Date.
Sellers have set forth in Section 3.20 of the Disclosure Letter a current list
setting forth the following for each retired employee or director or their
dependents of the Acquired Companies receiving benefits or scheduled to receive
benefits in the future: name, pension benefit, pension option election, retiree
medical insurance coverage, retiree life insurance coverage, and other benefits.
29
3.21 LABOR DISPUTES; COMPLIANCE. None of the Acquired Companies has been, or is
a party to any collective bargaining or other labor Contract. There has not
been, and there is not presently pending or existing, any strike, slowdown,
picketing, work stoppage, labor arbitration or proceeding in respect of the
grievance of any employee, an application or complaint filed by an employee or
union with the National Labor Relations Board or any comparable Governmental
Body, organizational activity or other labor dispute against or affecting the
Acquired Companies or the premises of any of them, or to the best of Sellers'
Knowledge threatened, and no application for certification of a collective
bargaining agent is pending, or to the best of Sellers' Knowledge threatened. No
facts or circumstances exist which could provide the basis for any work stoppage
or other labor dispute. There is no lockout of any employees by the Acquired
Companies, nor is any such action contemplated by any of them. The Acquired
Companies have complied in all respects with all Legal Requirements relating to
employment, equal employment opportunity, nondiscrimination, immigration, wages,
hours, benefits, collective bargaining, the payment of social security and
similar taxes, occupational safety and health and plant closing. None of the
Acquired Companies is liable for the payment of taxes, fines, penalties or other
amounts, however designated, for failure to comply with any of the foregoing
Legal Requirements.
3.22 INTELLECTUAL PROPERTY. (a) Intellectual Property Assets: The term
"Intellectual Property Assets" shall include each Acquired Company's name, all
fictitious business names, trade names, registered and unregistered trademarks,
service marks and applications (collectively "Marks"), all patents and patent
applications (collectively "Patents"), all copyrights in both published works
and unpublished works which are material to the business ("Copyrights"), all
rights in mask works (collectively "Rights in Mask Works"), and all know-how,
trade secrets, confidential information, software, technical information,
process technology, plans, drawings and blue prints ("Trade Secrets") owned,
used or licensed by any Acquired Company as licensee or licensor.
(b) Agreements: Except for any license implied by the sale of a product and
common software programs with a value of less than $25,000, Section 3.22 of the
Disclosure Letter is an accurate and complete listing and summary description,
including any royalties paid or received by the Acquired Companies, of all
agreements relating to the Intellectual Property Assets to which any Acquired
Company is a party. There are no outstanding and, to the Knowledge of each
Seller, no threatened disputes or disagreements with respect to any such
agreement.
(c) Know-How Necessary for the Business:
(i) The Intellectual Property Assets are all those necessary for the operation
of the Acquired Companies' business as it is currently conducted. The Acquired
Companies are the owners of all right, title and interest in and to each of the
Intellectual Property Assets free and clear of all liens, security interests,
charges, encumbrances, equities and other adverse claims and has the right to
use without payment to a third party all the Intellectual Property Assets.
30
(ii) All employees of any Acquired Company have executed written agreements with
one or more of the Acquired Companies which assign to one or more of the
Acquired Companies all rights to any inventions, improvements, discoveries or
information which relate to the business of the Acquired Companies. No employee
of any Acquired Company has entered into any agreement which restricts or limits
in any way the scope or type of work in which the employee may be engaged or
requires the employee to transfer, assign or disclose information concerning his
work to anyone other than one or more of the Acquired Companies.
(d) Patents:
(i) Section 3.22 of the Disclosure Letter is an accurate and complete listing
and summary description of all Patents. One or more of the Acquired Companies is
the owner of all right, title and interest in and to each of the Patents free
and clear of all liens, security interests, charges, encumbrances, equities and
other adverse claims.
(ii) All the Patents are currently in compliance with formal legal requirements
(including payment of filing, examination and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within 90 days after the date
of Closing.
(iii) No Patent has been or is now involved in any interference, reissue,
re-examination or opposition proceeding. Seller is not aware of any potentially
interfering patent or patent application of any third party.
(iv) No Patent is infringed, or to each Seller's Knowledge, has been challenged
or threatened in any way. None of the products manufactured and sold, nor any
processes or know-how used, by Seller infringe or to each Seller's Knowledge,
are alleged to infringe any patent or other proprietary right of any other
Person.
(e) Trademarks:
(i) Section 3.22 of the Disclosure Letter is an accurate and complete listing
and summary of all Marks. Seller is the owner of all right, title and interest
in and to each of the Marks free and clear of all liens, security interests,
charges, encumbrances, equities and other adverse claims.
(ii) All the Marks have been registered and are currently in compliance with
formal legal requirements (including the payment of filing, examination and
maintenance fees and proofs of working or use), are valid and enforceable and
are not subject to any maintenance fees or taxes or actions falling due within
90 days after the date of Closing.
(iii) No Mark has been or is now involved in any opposition, invalidation or
cancellation proceeding nor, to each Seller's Knowledge, is any such action
threatened with respect to any of the Marks.
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(iv) Seller is not aware of any potentially interfering trademark or trademark
application of any third party.
(v) No Mark is infringed or, to each Seller's Knowledge, has been challenged or
threatened in any way. None of the Marks used by Seller infringe or to each
Seller's Knowledge, are alleged to infringe any trade name, trademark or service
mark of any third party.
(f) Copyrights:
(i) Section 3.22 of the Disclosure Letter is an accurate and complete listing
and summary description of all Copyrights. One or more of the Acquired Companies
is the owner of all right, title and interest in and to each of the Copyrights
free and clear of all liens, security interests, charges, encumbrances, equities
and other adverse claims.
(ii) All the Copyrights have been registered and are currently in compliance
with formal legal requirements (including the payment of filing, examination and
maintenance fees and proofs of working or use), are valid and enforceable and
are not subject to any maintenance fees or taxes or actions falling due within
90 days after the date of Closing.
(iii) No Copyright is infringed or, to each Seller's Knowledge, has been
challenged or threatened in any way. None of the Copyrights infringe or to each
Seller's Knowledge, are alleged to infringe any copyright of any third party.
(g) Trade Secrets:
(i) With respect to each Trade Secret the documentation relating to such Trade
Secret is current, accurate and sufficient in detail and content to identify and
explain it, and to allow its full and proper use without reliance on the special
knowledge or memory of others.
(ii) Sellers and the Acquired Companies have taken all reasonable precautions to
protect the secrecy, confidentiality and value of its Trade Secrets.
(iii) One or more of the Acquired Companies has good title and an absolute
(although not necessarily exclusive) right to use the Trade Secrets. The Trade
Secrets are not part of the public knowledge or literature, nor to the best
knowledge of Seller have they been used, divulged, or appropriated for the
benefit of any Person other than one or more of the Acquired Companies or to the
detriment of the Acquired Companies. No Trade Secret is subject to any adverse
claim nor has any Trade Secret been challenged or threatened in any way.
3.23 CERTAIN PAYMENTS. Neither the Acquired Companies nor any director, officer,
agent or employee of the Acquired Companies has and no other Person associated
with or acting for or on behalf of the Acquired Companies has directly or
indirectly (a) made any contribution, gift, bribe, rebate, payoff influence
payment, kickback or other payment to any Person, private or public, regardless
of form whether in money, property or services (i) to obtain favorable treatment
in securing business, (ii) to pay for favorable treatment for business secured
or (iii) to obtain special concessions or for special concessions already
obtained for or in respect of the Acquired Companies or any Affiliate of the
Acquired Companies or (b) established or maintained any fund or asset which has
not been recorded in the books of the Acquired Companies.
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3.24 RELATIONSHIPS WITH RELATED PERSONS. Sellers do not have, and no Related
Person of Sellers or the Acquired Companies has, (nor since January 1, 2002 had)
any interest in any property, real or personal, tangible or intangible, used in
or pertaining to the business of the Acquired Companies. Since January 1, 2002,
neither Sellers nor any Related Person of Sellers or the Acquired Companies,
individually or collectively, has, or owns or has owned of record or as a
beneficial owner an equity interest or any other financial or profit interest in
any Person which has, (i) had business dealings or a material financial interest
in any transaction with the Acquired Companies, or (ii) engaged in competition
with the Acquired Companies with respect to any line of the products or services
of the Acquired Companies (a "Competing Business") in any market presently
served by the Acquired Companies, except for less than one percent of the
outstanding capital stock of any Competing Business that is publicly traded on
any recognized exchange or in the over-the-counter market. None of the Sellers
is party to any Contract with, or has any claim or right against, any Acquired
Company, except as set forth in Section 3.24 of the Disclosure Letter.
3.25 BROKERS OR FlNDERS. Sellers and their agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other like payment in connection with this Agreement and will
indemnify and hold Buyer harmless from any such payment alleged to be due by or
through Sellers as a result of the action of Sellers or its agents.
3.26 NEVADA STATUTES. Provided that Buyer does not amend the Company's
Organizational Documents for at least eleven (11) days after the Closing,
Sellers have caused the Company to take all action necessary to render Sections
78.378 to 78.3793 and Sections 78.411 to 78.444 of the General Corporation Law
of Nevada (the "Nevada Statutes") inapplicable to the Company. The Nevada
Statutes will not apply to the Contemplated Transactions.
3.27 DISCLOSURE.
(a) No representation or warranty of Sellers contained in this Agreement or
statement in the Disclosure Letter contains any untrue statement. No
representation or warranty of Sellers contained in this Agreement or statement
in the Disclosure Letter omits to state a material fact necessary in order to
make the statements herein or therein, in light of the circumstances under which
they were made, not misleading.
(b) No notice given pursuant to Section 7.5 will contain any untrue statement or
will omit to state a material fact necessary in order to make the statements
therein or in this Agreement, in light of the circumstances under which they
were made, not misleading.
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(c) There is no fact known to any Seller which has specific application to any
Seller or the Acquired Companies (other than general economic or industry
conditions) and which materially adversely affects or, so far as any Seller can
reasonably foresee, materially threatens, the assets, business, prospects,
financial condition or results of operations of the Acquired Companies
considered as a whole which has not been set forth in this Agreement or the
Disclosure Letter.
(d) The disclosures in the Disclosure Letter, and those in any supplement
thereto, shall relate only to the representations and warranties in the Section
of the Agreement to which they expressly relate and to no other representation
or warranty in this Agreement.
(e) In the event of any inconsistency between the statements in the body of this
Agreement and those in the Disclosure Letter (other than an exception expressly
set forth as such is in the Disclosure Letter in relation to a specifically
identified representation or warranty), those in this Agreement shall control.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida.
4.2 AUTHORITY; NO CONFLICT. Buyer has full corporate power and authority to
execute and deliver this Agreement, the Promissory Notes, the Indemnity
Agreement, and the Pledge Agreement and to perform its obligations hereunder and
thereunder and each of Buyer and Encompass Group Affiliates, Inc. has full
corporate power and authority to execute and deliver the Employment Agreements
and to perform its obligations thereunder. This Agreement has been, and the
Promissory Notes, the Indemnity Agreement, the Pledge Agreement and the
Employment Agreements will be, duly authorized, executed, and delivered by
Buyer, and Encompass with respect to the Employment Agreements, and constitute,
or will constitute, as the case may be, the legal, valid and binding obligation
of Buyer enforceable against Buyer, and Encompass with respect to the Employment
Agreements, in accordance with their respective terms. Neither the execution and
delivery of this Agreement, the Promissory Notes, the Indemnity Agreement, the
Pledge Agreement and the Employment Agreements by Buyer, and Encompass with
respect to the Employment Agreements, nor the consummation of the Contemplated
Transactions will:
(a) violate or conflict with any provision of the Organizational Documents of
Buyer or its Subsidiaries;
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(b) violate or conflict with any provision of any Legal Requirement binding upon
Buyer and its Subsidiaries, except that which could not have a Buyer Material
Adverse Effect; or
(c) result in a breach of, or constitute a default under (or with notice or
lapse of time or both result in a breach of or constitute a default under) or
otherwise give any Person the right to terminate, any Contract to which Buyer or
its Subsidiaries is a party or by which it is bound, except that which could not
have a Buyer Material Adverse Effect.
Buyer and its Subsidiaries are not required to give prior notice to, or obtain
any Consent of, any Person in connection with Buyer's execution and delivery of
this Agreement, the Promissory Notes, the Indemnity Agreement, the Pledge
Agreement and the Employment Agreements or the consummation of the Contemplated
Transactions.
4.3 INVESTMENT INTENT. Buyer is acquiring the Shares for its own account, and
not with a view to their distribution within the meaning of Section 2.11 of the
Securities Act. Buyer is an "accredited investor," as such term is defined in
Rule 501(a) promulgated pursuant to the Securities Act.
4.4 BROKERS OR FINDERS. Except as contemplated by that certain Advisory
Agreement, dated April 1, 2004, between Buyer and Maximum Ventures, Inc., Buyer
and its officers and agents have incurred no obligation or liability, contingent
or otherwise, for brokerage or flinders' fees or agents' commissions or other
like payment in connection with this Agreement and will indemnify and hold
sellers harmless from any such payment alleged to be due by or through Buyer as
a result of the action of Buyer, its officers and agents.
4.5 CAPITALIZATION. The authorized capital stock of Buyer consists of (i)
5,000,000,000 shares of Common Stock, no par value per share (the "Buyer Common
Stock"), of which 2,016,247,731 shares were issued and outstanding and no shares
were held in treasury as of the close of business on December 1, 2004, and (ii)
25,000 shares of preferred stock, par value $.01 per share (the "Buyer Preferred
Shares") of which (A) 4,200 Buyer Preferred Shares designated Series A and (B)
300 Buyer Preferred Shares designated Series B were issued and outstanding on
December 1, 2004. All of the outstanding shares of Buyer Common Stock and Buyer
Preferred Shares have been duly authorized and are validly issued, fully paid
and nonassessable. Except as set forth in Section 4.5 of Buyer's Disclosure
Letter, Buyer has no shares of Buyer Common Stock or Buyer Preferred Shares
reserved for or subject to issuance. Except as set forth in Section 4.5 of
Buyer's Disclosure Letter, as of December 1, 2004, Buyer was not obligated to
issue any shares of Buyer Common Stock pursuant to any stock ownership plan,
stock incentive plan, stock option plan or any other qualified retirement plan
(the "Buyer Stock Plans"). Each of the outstanding shares of capital stock of
each of Buyer's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by Buyer or a direct or indirect wholly-owned subsidiary
of Buyer, free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as set forth in Section 4.5 of Buyer's Disclosure Letter,
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there are no preemptive or other outstanding rights, options, warrants,
conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements or commitments to issue or to sell any shares
of capital stock or other securities of Buyer or any of its Subsidiaries or any
securities or obligations convertible or exchangeable into or exercisable for,
or giving any Person a right to subscribe for or acquire, any securities of
Buyer or any of its Subsidiaries, and no securities or obligation evidencing
such rights are authorized, issued or outstanding. Buyer does not have
outstanding any bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for securities
having the right to vote) with the stockholders of Buyer on any matter.
4.6 REPORTS; FINANCIAL STATEMENTS. Buyer has made available to each Seller, each
registration statement, report, proxy statement or information statement
prepared by it since June 30, 2004 (the "Buyer Audit Date"), including its
Annual Report on Form 10-K for the year ended June 30, 2004, in the form
(including exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed subsequent to the date hereof,
the "Buyer Reports"). As of their respective dates, to the Knowledge of Buyer,
the Buyer Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they were
made, not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Buyer Reports (including the related notes
and schedules) fairly presents the consolidated financial position of Buyer and
its Subsidiaries as of its date and each of the consolidated statements of
income and of cash flows included in or incorporated by reference into the Buyer
Reports (including any related notes and schedules) fairly presents the
consolidated results of operations, retained earnings and cash flows, as the
case may be, of it and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to notes and normal year-end
audit adjustments that will not be material in amount or effect), in each case
in accordance with consistently applied during the periods involved, except as
may be noted therein. Since the Buyer Audit Date, Buyer and each of its
Subsidiaries required to make filings under any Legal Requirement has filed with
the applicable Governmental Bodies all material forms, statements, reports and
documents (including exhibits, annexes and any amendments thereto) required to
be filed by them, and each such filing complied in all material respects with
all applicable laws, rules and regulations, other than such failures to file and
non-compliance that could not have a Buyer Material Adverse Effect. Except as
set forth in applicable filings with the SEC, to Buyer's Knowledge, as of the
date hereof, no Person or "group" "beneficially owns" 5% or more of its
outstanding voting securities, with the terms "beneficially owns" and "group"
having the meanings ascribed to them under Rule 13d-3 and Rule 13d-5 under the
Exchange Act.
ARTICLE V
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER.
The obligations of Buyer to effect the transactions contemplated under this
Agreement at the Closing are subject to the fulfillment on or prior to the
Closing Date of the following conditions, any one or more of which may be waived
in whole or in part by Buyer in writing:
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5.1 REPRESENTATION AND WARRANTIES TRUE AT THE CLOSING DATE. The representations
and warranties of Sellers contained in this Agreement and the Disclosure Letter
(without giving effect to any updating or corrective information provided
pursuant to Article VII or otherwise) shall have been true and correct in all
material respects (except for those representations and warranties qualified as
to materiality, which shall be true and correct in all respects) when made and
as of the Closing Date, and Sellers shall have delivered to Buyer a certificate,
executed by each Seller and dated the Closing Date, to the foregoing effect.
5.2 NO MATERIAL ADVERSE CHANGE. During the period from the date of the Interim
Balance Sheet to the Closing Date, there shall not have been any material
adverse change in the financial condition, results of operations, business or
prospects of any Acquired Company, individually or taken as a whole, nor any
material loss or damage to its assets, whether or not insured, which materially
affects the ability of any Acquired Company, individually or taken as a whole,
to conduct its business; Sellers shall have delivered to Buyer a certificate,
executed by each Seller and dated the Closing Date, to the foregoing effect.
5.3 SELLERS' PERFORMANCE. Each of the Sellers shall have performed and complied
with all covenants and agreements required by this Agreement and each other
agreement entered into in connection herewith to be performed or complied with
by that Sellers on or before the Closing Date. At the Closing, each Seller shall
have delivered to Buyer a certificate, dated the Closing Date, to the foregoing
effect.
5.4 OPINION OF SELLERS' COUNSEL. Sellers shall have delivered to Buyer an
opinion of counsel to Sellers, dated the Closing Date, in a form reasonably
acceptable to Buyer's counsel.
5.5 OWNERSHIP OF SHARES. Sellers shall have transferred all the Shares to Buyer,
free and clear of all Encumbrances. No claim shall have been filed, made or
threatened by any Person asserting that such Person is entitled to any part of
the Purchase Price paid for the Shares. The parties agree that Buyer's purchase
of the Shares pursuant to the terms and conditions of this Agreement will not
trigger any transfer taxes.
5.6 NO PROHIBITION OF TRANSACTION. No Proceeding or regulation or legislation
shall have been instituted, threatened or proposed before, nor any Order issued
by, any Governmental Body to enjoin, restrain, prohibit or obtain substantial
damage (a) in respect of, or which is related to, or arises out of, this
Agreement or the consummation of the Contemplated Transactions, or (b) which, in
the reasonable judgment of the Buyer, could have a Material Adverse Effect.
5.7 COMPLIANCE WITH LAW. There shall have been obtained any and all permits,
approvals and consents of any Governmental Body which counsel for Buyer may
reasonably deem necessary or appropriate so that consummation of the
Contemplated Transactions will be in compliance with applicable Legal
Requirements.
5.8 DOCUMENTATION AND CONSENTS. Sellers shall have made all deliveries required
pursuant to Section 2.4 (a) of this Agreement. In addition, Sellers shall have
delivered all assignments, consents, approvals and other documents, certificates
and instruments as the Buyer may reasonably request for the purpose of (a)
enabling its counsel to provide the opinion required under this Agreement, (b)
evidencing the accuracy and completeness of any representations or warranties,
the performance of any covenants and agreements of the Sellers, or the
satisfaction any conditions, all as contained or referred to in this Agreement
or (c) effectuating or confirming the conveyance and transfer of the Shares to
Buyer.
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5.9 EMPLOYMENT AGREEMENTS. Each of Li and Lee shall have executed and delivered
to Buyer employment agreements (the "Employment Agreements") in the forms of
Exhibits 5.9(a) and 5.9(b), respectively.
5.10 CONSENTS TO ASSIGNMENTS. On or prior to the Closing Date, Sellers shall
have furnished Buyer with evidence of consents as Sellers shall know or Buyer
shall determine to be required to enable Buyer to continue to enjoy the benefit
of any Contract or Governmental Authorization to or of which any Acquired
Company is a party or a beneficiary and which can, by its terms (with consent)
and consistent with applicable Legal Requirements, be so enjoyed after the
transfer of the Shares to the Buyer. If there is in existence any Governmental
Authorization that by its terms or applicable Legal Requirements, expires,
terminates, or is otherwise rendered invalid upon the transfer of the Shares to
the Buyer acquired Company to continue to be conducted following the transfer of
the Shares, Buyer shall have obtained or been furnished by Sellers an equivalent
of that license or permit, effective as of and after the Closing Date.
5.11 RESIGNATIONS. Buyer shall have received the resignation of Li as Chief
Executive Officer of the Company, the resignation of Lee as a director of the
Company and the resignations of all other individuals who are officers or
directors of any Acquired Company immediately prior to the Closing that Buyer
deems appropriate.
5.12 SELLERS' RELEASE. Buyer shall have received a release in the form of
Exhibit 5.12 executed by each of the Sellers and such other employees of any
Acquired Company as Buyer may designate (the "Sellers' Release").
5.13 DUE DILIGENCE. Buyer shall have been satisfied, in its sole and absolute
discretion, with its due diligence investigation and review of the financial
condition, business and operations of the Company, including, without
limitation, Buyer's review of the Company's medical plans; provided, however,
that Buyer's due diligence investigation with respect to (i) Encumbrances on or
against the personal property of the Company existing prior to the date hereof
and (ii) judgments against the Company existing prior to the date hereof shall
be limited to searches through the website of LexisNexis, www.lexis.com;
provided further, however, that the foregoing shall in no way limit Sellers'
obligation hereunder to disclose to Buyer information of which either Seller
becomes aware related to (i) and (ii) above.
5.14 INVENTORY FACILITY. The Company's $3,500,000 inventory financing facility,
including the $1,000,000 standby letter of credit facility (the "Textron
Facility"), provided by Textron Financial Corporation ("Textron"), shall remain
in full force and effect with the consent of Textron, or the Textron Facility
shall have been refinanced by a third party on terms and conditions satisfactory
to Buyer, in its sole discretion.
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5.15 SERIES A PREFERRED STOCK. The closing of the transaction contemplated by
that certain agreement entered into, or to be entered into, by and among the
Company and the holders of the shares of Series A Preferred Stock shall have
occurred simultaneously with the Closing (the "Series A Transaction").
5.16 CONSENT. Buyer shall have received the consent of KPMG, the Company's
independent auditors, to the inclusion of the Company's financials in any Form
8-K filed to disclose the Contemplated Transactions and any other reports
required to be filed by the Company, Buyer or any of their affiliates on or
after the Closing.
5.17 RECORDS. The Acquired Companies shall retain possession of all corporate,
accounting, business and tax records of each such Acquired Company.
5.18 OPINION OF NEVADA COUNSEL. Sellers shall have delivered to Buyer an opinion
of counsel, authorized to practice law in the State of Nevada, that the Nevada
Statutes will not apply to the Contemplated Transactions.
5.19 OTHER DOCUMENTS AND ASPECTS OF THE TRANSACTION. Buyer shall have received
such other documents, instruments, certificates and opinions as may be required
by this Agreement or as may be reasonably requested by Buyer.
5.20 ACTIONS SATISFACTORY. All certificates, opinions and other documents to be
delivered by Sellers and all other matters to be accomplished prior to or at the
Closing shall be satisfactory in the reasonable judgment of Buyer and its
counsel.
5.21 SHARES. The Shares shall continue to be eligible for trading on the
Over-The-Counter Bulletin Board or NASDAQ.
5.22 UCC FINANCING STATEMENTS. Except for Micro Technology Concept, Inc.,
Textron Financial Corporation and Wells Fargo Bank National Association, Sellers
shall have (i) filed, or shall have obtained authorizations from the applicable
creditors to file, in the proper filing offices, UCC-3 Financing Statements
terminating all UCC-1 Financing Statements, and amendments thereto, set forth in
Section 3.8 of the Disclosure Letter, or (ii) demonstrated that the obligation
underlying the UCC-1 has been satisfied to the reasonable satisfaction of Buyer.
ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS
The obligations of Sellers to effect the transactions contemplated under this
Agreement at the Closing are subject to the fulfillment on or prior to the
Closing Date of the following conditions, any one or more of which may be waived
in whole or in part by Sellers in writing:
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6.1 REPRESENTATIONS AND WARRANTIES TRUE AT THE CLOSING DATE. The representations
and warranties of Sellers contained in Section 4 of this Agreement shall have
been true and correct when made and as of the Closing Date, and Buyer shall have
delivered to Sellers a certificate, executed by an executive officer of Buyer
and at the Closing Date, to the foregoing effect.
6.2 INDEMNITY AGREEMENT. Buyer shall have delivered to Sellers the Indemnity
Agreement.
6.3 PLEDGE AGREEMENT. Buyer shall have delivered to Quarles the Pledge Agreement
and the certificates representing the Shares.
6.4 BUYER'S PERFORMANCE. Buyer shall have performed and complied with all
covenants and agreements required by this Agreement to be performed or complied
with by Buyer on or before the Closing Date. At the Closing, Buyer shall have
delivered to Sellers a certificate, signed by an executive officer of Buyer and
dated the Closing Date, to the foregoing effect.
6.5 OPINION OF BUYER'S COUNSEL. Buyer shall have delivered to Sellers an opinion
of counsel to Buyer, dated the Closing Date, in a form reasonably acceptable to
Sellers' counsel.
6.6 REVOLVING LINE OF CREDIT. Buyer shall have used commercially reasonable
efforts to obtain a $1,000,000 to $2,000,000 revolving line of credit for bulk
wholesale purchases and resales for the Company.
6.7 CONTINUED LISTING. Buyer's Common Stock shall continue to be eligible for
trading on the Over-The-Counter Bulletin Board or NASDAQ.
ARTICLE VII
COVENANTS OF SELLERS PRIOR TO CLOSING DATE
7.1 ACCESS AND INVESTIGATION. During the period from the date of this Agreement
to the Closing Date, Sellers shall, and shall cause each Acquired Company and
its officers, employees, agents and representatives to, afford Buyer and its
representatives (including legal counsel, financial and other advisors,
consultants and independent accountants) full and free access to each Acquired
Company's personnel, properties, contracts, books and records and other
documents and data, including tax returns, and shall furnish Buyer with copies
of all documents and with such additional financial and operating data and other
information as Buyer shall, from time to time, reasonably request for the
purpose of enabling Buyer to investigate the affairs of each Acquired Company
and the accuracy of the representations and warranties of Sellers made in this
Agreement. During such investigation, Buyer and its representatives shall have
the right to make copies of such contracts, books and records, tax returns and
other documents and data as it may deem advisable. The furnishing of such
information to Buyer any such investigation by Buyer shall not affect Buyer's
right to rely on any of the representations and warranties made in this
Agreement.
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7.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. During the period the
date of this Agreement to the Closing Date, Sellers shall cause each Acquired
Company to conduct its business only in the ordinary course and in a manner
consistent with the past practices of such Acquired Company; use its Best
Efforts to preserve intact its current business organization, keep available the
services of its current officers, employees and agents, and maintain its
relations and good will with suppliers, customers, landlords, creditors,
employees, agents and others having business relationships with it; confer with
Buyer concerning operational matters of material nature; and report periodically
to Buyer concerning the status of the business, operations and finances of the
Acquired Companies.
7.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by this
Agreement, Sellers shall not, without the prior consent of Buyer, take any
action described in Section 3.16 of this Agreement.
7.4 APPROVALS OF GOVERNMENTAL BODIES. Between the date of this Agreement the
Closing Date, Sellers will use their Best Efforts, and will cooperate with Buyer
in taking all steps necessary, promptly to (i) make any filing and (ii) obtain
any consent, approval or authorization of any Governmental Body, in each case
required by Legal Requirements to allow the consummation of this Agreement and
the Contemplated Transactions.
7.5 NOTIFICATION. Between the date of this Agreement and the Closing Date, each
Seller will promptly notify Buyer in writing if such Seller or any Acquired
Company becomes aware of any fact or condition which makes untrue any
representation or breaches any warranty made by Sellers in this Agreement or if
he, she or any Acquired Company becomes aware of the occurrence after the date
of this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) make untrue any such representation or breach
any such warranty had such representation or warranty been made as of the time
of occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Disclosure Letter if such Disclosure Letter
were dated the date of the occurrence or discovery of any such fact or
condition, Sellers shall deliver to Buyer a Supplement to the Disclosure Letter
specifying such change. Delivery of such Supplements shall be for information
purposes only and shall not modify in any such respect any representation,
warranty, covenant or condition contained herein. During the same period, each
Seller will promptly notify Buyer of the occurrence of any breach of any
covenant of Sellers set forth in this Section 7 or of the occurrence of any
event that may make the satisfaction of the conditions set forth in Section 5
impossible or unlikely.
7.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS. Except as expressly provided
herein, Sellers shall cause all indebtedness of any Related Person to any
Acquired Company to be paid in full prior to Closing.
7.7 NO NEGOTIATION. Until such time, if any, as this Agreement is terminated
pursuant to Section 12.1, Sellers shall not, and shall cause each of the
Acquired Companies not to, solicit or entertain offers from, negotiate with, or
in any manner discuss, encourage, recommend or agree to any proposal of, any
other potential buyer or buyers of the assets or stock of any of the Acquired
Companies.
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7.8 SEC REPORTS. After the date hereof, Sellers shall file, and cause the
Company to file, with the SEC all reports and/or statements required to be filed
by them or it under applicable Legal Requirements, including, without
limitation, such reports and statements required to be filed as a result of each
Seller's execution of this Agreement, and such reports and/or statements shall
be filed within the time periods provided for under such Legal Requirements.
7.9 SERIES A PREFERRED STOCK. Each Seller shall use his or her Best Efforts to
assist Buyer and the Company with closing the Series A Transaction.
7.10 BEST EFFORTS. Between the date of this Agreement and the Closing Date,
Sellers will use their Best Efforts to cause the conditions specified in Article
V to be satisfied.
ARTICLE VIII
COVENANTS OF BUYER PRIOR TO CLOSING DATE.
8.1 APPROVALS OF GOVERNMENTAL BODIES. Between the date of this Agreement and the
Closing Date, Buyer will use its Best Efforts, and will cooperate with Sellers
in taking all steps necessary, promptly to (i) make any filing and (ii) obtain
any consent, approval or authorization of any Governmental Body, in each case
required by Legal Requirements to allow the consummation of this Agreement and
the Contemplated Transactions, provided that nothing herein shall require Buyer
to dispose of, or make any change in, any portion of its business or to incur
any other burden in order to obtain any consent, approval or authorization.
8.2 NOTIFICATION. Between the date of this Agreement and the Closing Date, Buyer
will promptly notify Sellers in writing if it becomes aware of any fact or
condition which makes untrue any representation or breaches any warranty made by
Buyer in this Agreement or if it becomes aware of the occurrence after the date
of this Agreement of any fact or condition that would (except as expressly
contemplated by this Agreement) make untrue any such representation or breach
any such warranty had such representation or warranty been made as of the time
of occurrence or discovery of such fact or condition.
8.3 BEST EFFORTS. Between the date of this Agreement and the Closing Date, Buyer
will use its Best Efforts to cause the condition specified in Article VI hereof
to be satisfied.
ARTICLE IX
COVENANTS OF SELLERS AND BUYER SUBSEQUENT TO THE CLOSING DATE.
9.1 FURTHER ASSURANCES. Sellers will, upon request of Buyer from time to time
after the Closing, execute and deliver, and use their Best Efforts to cause
other Persons to execute and deliver, to Buyer all such further documents and
instruments, and will do or use their Best Efforts to cause to be done such
other acts, as Buyer may reasonably request more completely to consummate and
make effective the Contemplated Transactions.
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9.2 FURTHER CONSENTS. If the transfer of the Shares to the Buyer at the Closing
without the consent or approval of a third Person would constitute a breach of
any Contract to which the Company is a party or by which it or any of its
properties are bound or create in any third Person the right to declare a
default in respect of, or to cancel or terminate, any such Contract or any
Governmental Authorization of the Company and if such consent or approval (or an
effective waiver thereof) is not obtained prior to the Closing, then Buyer shall
have the right by an instrument executed in writing and delivered to the Sellers
at the Closing to cause the transfer of the Shares not to carry with it an
assignment of the item or items that necessitate such consent or approval until
such consent or approval (or an effective waiver thereof) shall have been
obtained. In such an event, the Sellers will continue after Closing to use their
Best Efforts promptly to obtain such consents and approvals, or effective
waivers thereof, and will cooperate with Buyer in any reasonable arrangement
designed to provide Buyer with the benefit of the Company's rights thereunder.
9.3 SEC REPORTS. On and after the Closing Date, Sellers shall timely file, and
cause Sellers' counsel to timely file on behalf of the Company, with the SEC,
such reports and/or statements required to be filed by them or it in connection
with the consummation of the Contemplated Transactions.
9.4 SEC REPORTS. On and after the Closing Date, Buyer shall timely file, or
cause to be timely filed, with the SEC, such reports and/or statements required
to be filed by it in connection with the consummation of the Contemplated
Transactions.
9.5 TEXTRON FACILITY. In the event that on or prior to the Closing Date, each of
Li's and Lee's personal guarantee of the Textron Facility shall not have been
terminated, or the Textron Facility shall not have been refinanced by the
Company with a third party not requiring the personal guarantees of Li and Lee,
not later than the date which is 300 days after the Closing Date, Buyer shall
cause the personal guarantee of each of Li and Lee to be terminated.
ARTICLE X
MUTUAL COVENANTS
10.1 EXPENSES. Except as expressly otherwise provided herein, each party to this
Agreement shall bear its respective expenses incurred in connection with the
preparation, execution and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel and accountants. In the case of termination of this Agreement, the
obligation of each party to pay its own expenses shall be subject to any rights
of such party arising from a breach of this Agreement by another party.
43
10.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity,
including any reports or statements required to be filed with the SEC with
respect to this Agreement or the Contemplated Transactions shall be issued, if
at all, at such time and in such manner as Buyer and Sellers shall mutually
determine; provided that the parties agree that (i) a press release announcing
the signing of this Agreement shall be issued and filed by each of the Company
and Buyer within 24 hours of execution of this Agreement by Buyer and Sellers
and (ii) a Form 8-K shall be filed by each of the Buyer and the Company and a
Schedule 13D, as deemed necessary to comply with Rule 13d-1 promulgated under
the Exchange Act, shall be filed by each of Buyer and each Seller, within the
time frames provided under the applicable rules and regulation of the Securities
and Exchange Commission. Unless consented to by the Buyer in advance or required
by Legal Requirements, prior to the Closing, Sellers shall, and shall cause the
Acquired Companies to, keep the provisions of this Agreement strictly
confidential and make no disclosure thereof to any Person. Sellers and Buyer
will consult with each other concerning the means by which the Company's
employees, customers and suppliers and others having dealings with the Company
will be informed of the Contemplated Transactions, and Buyer shall have the
right to be present for any such communication.
10.3 CONFIDENTIALITY. Between the date of this Agreement and the Closing Date,
each party will maintain in confidence, and cause its directors, officers,
employees, agents and advisors to maintain in confidence, and not use to the
detriment of another party or the Company any written, oral or other information
obtained in confidence from another party or the Company in connection with this
Agreement or the Contemplated Transactions unless such information is already
known to such party or to others not bound by a duty of confidentiality or
unless such information becomes publicly available through no fault of such
party, unless the use of such information is necessary or appropriate in making
any filing or obtaining any consent or approval required for the consummation of
the Contemplated Transactions or unless the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings.
If the transactions contemplated by this Agreement are not consummated, each
party will return or destroy as much of such written information as may
reasonably be requested. Whether or not the Closing takes place, Sellers waive,
and will upon request cause the Company to waive, any cause of action, right or
claim arising out of the access of Buyer or its representatives to any trade
secrets or other confidential information of the Company except for the
intentional competitive misuse by the Buyer of such trade secrets or
confidential information.
ARTICLE XI
INDEMNIFICATION; REMEDIES
11.1 SURVIVAL. All representations, warranties and agreements contained in this
Agreement or in any certificate delivered pursuant to this Agreement shall
survive the Closing notwithstanding any investigation conducted with respect
thereto or any knowledge acquired as to the accuracy or inaccuracy of any such
representation or warranty.
11.2 TIME LIMITATIONS. If the Closing occurs, Sellers shall have no liability
(for indemnification or otherwise) with respect to any representation or
warranty, or agreement to be performed and complied with prior to the Closing
Date, unless on or before the date that is eighteen (18) months after the
Closing Date Sellers are given notice asserting a claim with respect thereto and
specifying the factual basis of that claim in reasonable detail to the extent
then known by Buyer; provided, however, a claim with respect to Sections 3.3,
3.11, 3.13 and 3.19, or a claim for indemnification not based upon any
representation or warranty or agreement to be performed and complied with prior
to the Closing Date, may be made at any time. If the Closing occurs, Buyer shall
have no liability (for indemnification or otherwise) with respect to any
representation or warranty, or agreement to be performed and complied with prior
to the Closing Date, unless on or before the date that is eighteen (18) months
after the Closing Date Buyer is given notice of a claim with respect thereto and
specifying the factual basis of that claim in reasonable detail to the extent
then known by Sellers.
44
11.3 INDEMNIFICATION BY SELLERS. Sellers, jointly and severally, shall indemnify
and hold harmless Buyer, the Acquired Companies and their respective agents,
representatives, employees, officers, directors, stockholders, controlling
persons and affiliates (collectively, the "Indemnified Persons"), and shall
reimburse the Indemnified Persons for, any loss, liability, claim, damage,
expense (including, but not limited to, costs of investigation and defense and
reasonable attorneys fees) or diminution of value, whether or not involving a
third-party claim (collectively, "Damages") arising from or in connection with
(a) any inaccuracy in any of the representations and warranties of Sellers in
this Agreement or in any certificate delivered by Sellers pursuant to this
agreement (for this purpose, the qualification as to materiality in the
certificate delivered pursuant to Section 5.1 shall be disregarded), or any
actions, omissions or state of facts inconsistent with any such representation
or warranty, (b) any failure by Sellers to perform or comply with any agreement
in this Agreement, or (c) any claim by any Person for brokerage or finder's fees
or commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either Seller or any Acquired
Company (or any Person acting on their behalf) in connection with any of the
Contemplated Transactions. Notwithstanding the foregoing, the aggregate
liability of Sellers to the Indemnified Persons under this Article XI shall not
exceed $1,000,000.
11.4 INDEMNIFICATION BY BUYER. Buyer shall indemnify and hold harmless Sellers,
and shall reimburse Sellers for, any Damages arising from or in connection with
(a) any inaccuracy in any of the representations and warranties of Buyer in this
Agreement or in any certificate delivered by Buyer pursuant to this Agreement,
or any actions, omissions or state of facts inconsistent with any such
representation or warranty, (b) any failure by Buyer to perform or comply with
any agreement in this Agreement, or (c) any claim by any Person for brokerage or
finder's fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by such Person with Buyer (or any Person
acting on its behalf) in connection with any of the Contemplated Transactions.
Notwithstanding the foregoing, the aggregate liability of Buyer to Sellers under
this Article XI shall not exceed $1,000,000.
11.5 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS. Promptly after receipt
by an indemnified party under Section 11.3 or 11.4 of notice of the commencement
of any Proceeding against it, such indemnified party shall, if a claim in
respect thereof is to be made against an indemnifying party under such Section,
give notice to the indemnifying party of the commencement thereof, but the
failure so to notify the indemnifying party shall not relieve it of any
liability that it may have to any indemnified party except to the extent the
indemnifying party demonstrates that the defense of such action is prejudiced
thereby. In case any such Proceeding shall be brought against an indemnified
party and it shall give notice to the indemnifying party of the commencement
thereof, the indemnifying party shall, unless the claim involves Taxes, be
entitled to participate therein and, to the extent that it shall wish (unless
45
(i) the indemnifying party is also a party to such Proceeding and the
indemnified party determines in good faith that joint representations would be
inappropriate or (ii) the indemnifying party fails to provide reasonable
assurance to the indemnified party of its financial capacity to defend such
Proceeding and provide indemnification with respect thereto), to assume the
defense thereof with counsel satisfactory to such indemnified party and, after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party under such Section for any fees of other counsel or any
other expenses with respect to the defense of such Proceeding, in each case
subsequently incurred by such indemnified party in connection with the defense
thereof, other than reasonable costs of investigation. If an indemnifying party
assumes the defense of such a Proceeding, (a) no compromise or settlement
thereof may be effected by the indemnified party without the indemnified party's
consent unless (i) there is no finding or admission of any violation of Legal
Requirements or any violation of the rights of any Person and no effect on any
other claims that may be made against the indemnified party and (ii) the sole
relief provided is monetary damages that are paid in full by the indemnifying
party and (b) the indemnifying party shall have no liability with respect to any
compromise or settlement thereof effected without its consent. If notice is
given to an indemnifying party of the commencement of any Proceeding and it does
not, within ten days after the indemnified party's notice is given, give notice
to the indemnified party of its election to assume the defense thereof, the
indemnifying party shall be bound by any determination made in such action or
any compromise or settlement thereof effected by the indemnified party.
Notwithstanding the foregoing, if an indemnified party determines in good faith
that there is a reasonable probability that a Proceeding may adversely affect it
or its affiliates other than as a result of monetary damages, such indemnified
party may, by notice to the indemnifying party, assume the exclusive right to
defend, compromise or settle such Proceeding, but the indemnifying party shall
not be bound by any determination of a Proceeding so defended or any compromise
or settlement thereof effected without its consent (which shall not be
unreasonably withheld).
ARTICLE XII
TERMINATION
12.1 TERMINATION EVENTS. Subject to the provisions of Section 12.2, this
Agreement may, by written notice given at or prior to the Closing in the manner
hereinafter provided, be terminated:
(a) by either Buyer or Sellers if a default or breach shall be made by the other
party hereto with respect to the due and timely performance of any of its
covenants and agreements contained herein, or with respect to the due compliance
with any of its representations, warranties or covenants, and such default
cannot be cured and has not been waived;
46
(b) (i) by Buyer if all of the conditions set forth in Article V shall not have
been satisfied at the time the Closing would otherwise occur or if satisfaction
of such a condition is or becomes impossible, other than through failure of
Buyer to fully comply with its obligations hereunder, and shall not have been
waived by Buyer on or before such date; or
(ii) by Sellers, if all of the conditions set forth in article VI shall not have
been satisfied at the time the Closing would otherwise occur or if satisfaction
of such a condition is or becomes impossible, other than through failure of
Sellers to fully comply with its obligations hereunder, and shall not have been
waived by Sellers on or before such date;
(c) by mutual consent of Buyer and Sellers; or
(d) by either Buyer or Sellers if the Closing shall not have occurred, other
than through failure of any such party to fulfill its obligations hereunder, on
or before January 10, 2005 or such later date as may be agreed upon in writing
by the parties. Each party's right of termination hereunder is in addition to
any other rights it may have hereunder or otherwise and the exercise of a right
of termination shall not be an election of remedies.
12.2 EFFECT OF TERMINATION. In the event this Agreement is terminated pursuant
to Section 12.1, all further obligations of the parties hereunder shall
terminate, except that the obligations set forth in Sections 10.1 and 10.3 shall
survive; provided that, if this Agreement is so terminated by a party because
one or more of the conditions to such party's obligations hereunder is not
satisfied as a result of the other party's willful failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies for breach of contract or otherwise, including, without
limitation, damages relating thereto, shall also survive such termination
unimpaired.
ARTICLE XIII
MISCELLANEOUS
13.1 NOTICES. Notices. Notices, requests, instructions or other documents to be
in given under this Agreement shall be in writing and shall be deemed given and
received, (i) when sent if sent by facsimile, provided that the fax is promptly
confirmed by telephone confirmation thereof, (ii) when delivered, if delivered
personally to the intended recipient, and (iii) one business day later, if sent
by overnight delivery via a national courier service, and in each case,
addressed to a party at the following address for such party:
47
if to Buyer:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC 1515 Market Street - 9th Floor
Philadelphia, PA 19102 Attention: Gary A. Miller, Esquire Facsimile:
215.851.8383
if to any Shareholder:
to the address set forth below such Seller's
name on the signature pages hereto
with copies to:
Quarles & Brady Streich Lang LLP Renaissance One Two N. Central Avenue Phoenix,
Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
13.2 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The
parties hereby irrevocably submit to the jurisdiction of the Federal courts of
the United States of America and the state courts located in the State of New
York solely in respect of the interpretation and enforcement of the provisions
of this Agreement and of the documents referred to in this Agreement, and in
respect of the transactions contemplated hereby, and hereby waive, and agree not
to assert, as a defense in any action, suit or proceeding for the interpretation
or enforcement hereof or of any such document, that it is not subject thereto or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement or any such document may not be enforced in or by such courts, and the
parties hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such a Federal or state court. The
parties hereby consent to and grant any such court jurisdiction over the Person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 13.1 or in such other manner as may
be permitted by law, shall be valid and sufficient service thereof.
48
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 13.2.
13.3 FURTHER ASSURANCES. The parties hereto agree (i) to furnish upon request to
each other such further information, (ii) to execute and deliver to each other
such other documents, and (iii) to do such other acts and things, all as the
other party hereto may at any time reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to herein.
13.4 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay on the part of
any party in exercising any right, power or privilege under this Agreement or
the documents referred to herein shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or privilege preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. To the maximum extent permitted by applicable law, (i) no claim or
right arising out of this Agreement or the documents referred to herein can be
discharged by one party hereto, in whole or in part, by a waiver or renunciation
of the claim or right unless in writing signed by the other party hereto; (ii)
no waiver which may be given by a party hereto shall be applicable except in the
specific instance for which it is given; and (iii) no notice to or demand on one
party hereto shall be deemed to be a waiver of any obligation of such party or
of the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents referred
to herein.
13.5 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all prior
agreements among the parties with respect to its subject matter (including, but
not limited to, any letter of intent among Buyer and Sellers and is intended
(with the documents referred to herein) as a complete and exclusive statement of
the terms of the agreement among the parties with respect thereto. This
Agreement may not be changed or terminated, except by a written agreement
executed by Buyer and Sellers.
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13.6 ASSIGNMENTS, SUCCESSORS AND NO THIRD-PARTY RIGHTS. This Agreement shall
apply to and be binding in all respects upon, and shall inure to the benefit of,
the successors and assigns of the parties hereto. Nothing expressed or referred
to in this Agreement is intended or shall be construed to give any Person other
than the parties to this Agreement any legal or equitable right, remedy or claim
under or with respect to this Agreement, or any provision hereof, it being the
intention of the parties hereto that this Agreement and all of its provisions
and conditions are for the sole and exclusive benefit of the parties to this
Agreement, their successors and assigns, and for the benefit of no other Person.
13.7 SEVERABILITY. In the event any provisions of this Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provisions hereof. Any
provision of this Agreement held invalid or unenforceable only in part or degree
shall remain in full force and effect to the extent no held invalid or
unenforceable.
13.8 SECTION HEADINGS, CONSTRUCTION. The headings of Sections contained in this
Agreement are provided for convenience only. They form no part of this Agreement
and shall not affect its construction or interpretation. All references to
Sections in this Agreement refer to the corresponding Sections of this
Agreement. All words used herein shall be construed to be of such gender or
number as the circumstances require. Unless otherwise specifically noted, the
words "herein," "hereof," "hereby," "hereinabove," "hereinbelow," "hereunder,"
and words of similar import, refer to this Agreement as a whole and not to any
particular Section, subsection, paragraph, clause or other subdivision hereof.
13.9 TIME OF ESSENCE. With regard to all dates and time periods set forth or
referred to in this Agreement, time is of the essence.
13.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original copy of this Agreement, and all
of which, when taken together, shall be deemed to constitute but one and the
same agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
duly authorized officers of the parties hereto as of the date first written
above.
/s/ Theodore S. Li
------------------------------------
THEODORE S. LI
Address:
/s/ Hui Cynthia Lee
------------------------------------
HUI CYNTHIA LEE
Address:
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
------------------------------------
Name: Wayne I. Danson
Title: President and Chief Financial Officer
51
CONSENT OF SPOUSE OF THEODORE S. LI
The undersigned, the spouse of Theodore S. Li, consents to the transactions
contemplated hereby and acknowledges that the Purchase Price being paid for Mr.
Li's Shares hereunder is adequate, and after the Closing the undersigned shall
have no interest in Mr. Li's Shares.
/s/ Catherine Hwa
---------------------------
52
CONSENT OF SPOUSE OF HUI CYNTHIA LEE
The undersigned, the spouse of Hui Cynthia Lee, consents to the transactions
contemplated hereby and acknowledges that the Purchase Price being paid for Ms.
Lee's Shares hereunder is adequate, and after the Closing the undersigned shall
have no interest in Ms. Lee's Shares:
/s/ Jey Hsin
---------------------------
53
Contact Information Hawk Associates, Inc. Frank N. Hawkins, Jr. or Julie
Marshall Phone: 305-852-2383 E-mail: info@hawkassociates.com
FOR IMMEDIATE RELEASE:
Advanced Communications Agrees to Acquire
Controlling Interest in Pacific Magtron
Transaction Will Be A Major Step In Creating New Vertically Integrated
Technology Service Business
New York, NY, December 10, 2004 -- Advanced Communications Technologies, Inc.
(OTCBB: ADVC), a holding company with subsidiaries specializing in the repair of
computers, peripherals and consumer electronics, and Pacific Magtron
International Corp. (OTCBB: PMIC), a California-based distributor and reseller
of computer systems, components, peripherals and software, announced today that
Advanced Communications has agreed to acquire a 62% interest in the outstanding
common stock of Pacific Magtron, pursuant to the terms of a stock purchase
agreement among Advanced Communications and Ted Li and Cynthia Lee, controlling
shareholders and executive officers of Pacific Magtron.
Under the terms of the agreement, Advanced Communications will purchase
6,454,300 shares of Pacific Magtron's common stock from Li and Lee at $0.077 per
share, for a total purchase price of $500,000 payable by Advanced
Communications' issuance of one-year promissory notes convertible into shares of
Advanced Communications.
The parties expect the acquisition to close within the next 30 days. Completion
of the transaction is subject to customary closing conditions, and to the
conclusion of certain arrangements currently being negotiated with holders of
the Series A Convertible Preferred Stock issued by Pacific Magtron, which is
expected to include some principal reduction as well as adjustments to the terms
of the convertible preferred stock. If the transaction closes on or before
December 31, 2004, Advanced Communications would, on a consolidated basis,
report consolidated assets of approximately $22 million.
Li co-founded Pacific Magtron in 1990 and has been its CEO since 1995. He has
over 25 years of experience in the computer software and hardware arena and is
responsible for Pacific Magtron's operations, financial activities and technical
functions. Li will remain with Pacific Magtron as chief financial officer and
chief operating officer under a three-year employment agreement.
Lee, who co-founded Pacific Magtron with Li, has over 20 years of experience in
the computer manufacturer and reseller's marketplace and is responsible for
Pacific Magtron's sales and purchasing operations. Lee will remain with Pacific
Magtron as executive vice president under a two-year employment contract,
primarily focusing on product procurement and business development in the Asian
market and the Pacific Rim.
Wayne Danson, Advanced Communication's president and chief financial officer,
said, "This represents another constructive step toward Advanced Communications'
evolvement into a national vertically integrated service and technology
business. Pacific Magtron complements our technology repair business,
Cyber-Test, and this affiliation gives us the opportunity to improve our product
sourcing, expand our customer base and strengthen our logistics. We expect the
transaction will be accretive and will significantly strengthen our long-term
growth prospects."
Li said, "We believe this affiliation offers outstanding prospects for all
parties. We anticipate that it will broaden Pacific Magtron's opportunities for
its customers and shareholders, and present significant opportunities for
growth."
Lee added, "Building a stronger team is the way of the future. We believe that
becoming a strong teammate of the Advanced Communications group will help us to
strengthen our product offerings, provide additional resources and allow Pacific
Magtron to better serve its customers."
Martin Nielson, president and chief executive officer of Encompass Group
Affiliates, Advanced Communications' operating subsidiary, will assume the title
of president and chief executive officer of Pacific Magtron upon closing of the
stock purchase. Nielson said, "Pacific Magtron has had an excellent reputation
as a major multimedia and storage peripheral distributor in Silicon Valley since
its inception in 1990, has provided over 1,800 different microcomputer products
to over 8,000 system integrators in the United States and abroad. Plus, it has a
solid online reselling presence, livewarehouse.com, and a systems integration
business in Georgia. An affiliation with Pacific Magtron and access to its
network will give us a distribution engine that spans from East to West coast,
an Asian presence and an expanded services offering."
"We intend to aggressively implement commercial programs between the companies
to take full advantage of the synergistic opportunities, although Pacific
Magtron will continue to operate as a separate public company and its stock will
continue to trade on the over-the-counter bulletin board under the PMIC symbol
upon completion of the transaction. We believe both companies will realize the
expected commercial benefits and synergies of improved sales and profits, along
with a reduction of costs. So we think this acquisition perfectly serves our
stated expansion goals of becoming a leader in integrated technology and
service," Nielson said.
In connection with the transaction, Pacific Magtron also announced that it has
hired Rick Martin as executive vice president in charge of strategic business
development and marketing. Martin has over 25 years of experience in product
management, marketing, and distribution channel development with such companies
as Compaq Computer, BusinessLand and Gap Stores. Most recently, Martin served as
chairman and chief executive officer of Positive Communications, a privately
held national wireless services provider.
2
About Pacific Magtron International Corp.
Pacific Magtron International Corp., based in Milpitas, Calif., is a publicly
traded distributor, e-commerce reseller and system/solution provider of a wide
range of systems, hardware components and software products, with online sales.
Its customer base includes a wide spectrum of technology-based suppliers to the
consumer, corporate, educational and government markets. Pacific Magtron offers
over 1,800 different computer products from more than 50 vendors including a
line of peripherals sold under its trademarked "EZ-Media" brand name. It has
long-standing relationships with many of the industry's most recognizable and
innovative computer peripheral manufacturers, including Microsoft, Sony,
Plextor, Creative Labs, Adaptec, ATI, Kingston and Logitech, among others.
Pacific Magtron also maintains and operates a system integration facility
located in Norcross, Georgia. For more information, visit Pacific Magtron's
website at http://www.pacificmagtron.com
About Advanced Communications Technologies, Inc. Advanced Communications
Technologies, Inc. is a New York City-based public holding company that, through
its wholly owned subsidiary and principal operating unit Encompass Group
Affiliates, Inc., owns Cyber-Test, Inc., an established electronic equipment
repair company based in Longwood, Fla. Through its wholly owned investment
subsidiary Hudson Street Investments, Inc., Advanced Communications also owns a
minority interest in Yorkville Advisors Management, LLC, an investment
management partnership. For more information, visit Advanced Communications'
website at http://www.advancedcomtech.net.
A profile for investors on Advanced Communications may be found at the website
http://www.hawkassociates.com/advancedcommunications/profile.htm.
An online investor kit containing Advanced Communications' press releases, SEC
filings, current price Level II quotes, interactive Java stock charts and other
useful information for investors can be found at http://www.hawkassociates.com
and http://www.hawkmicrocaps.com.
This release and oral statements made from time to time by the Company's
representatives concerning the same subject matter may contain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements can be identified by introductory words such as
"expects," "plans," "intends," "believes," "will," "estimates," "forecasts,"
"projects" or words of similar meaning, and by the fact that they do not relate
strictly to historical or current facts. Many factors may cause actual results
to differ from forward-looking statements, including inaccurate assumptions and
a broad variety of risks and uncertainties, some of which are known and others
of which are not. Known risks and uncertainties include those identified from
time to time in the reports filed by the Company with the Securities and
Exchange Commission, which should be considered together with any forward
looking statement. No forward looking statement is a guarantee of future results
or events, and one should avoid placing undue reliance on such statements.
3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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): December 30, 2004
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Florida 000-30486 65-0738251
- --------------- ---------- ---------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification
Incorporation) Number)
420 Lexington Avenue, New York, New York 10170
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (646) 227-1600
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement Item 2.01 Completion of
Acquisition or Disposition of Assets Item 2.03 Creation of a Direct Financial
Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a
Registrant Item 3.02 Unregistered Sales of Equity Securities Item 8.01 Other
Events
On December 30, 2004 (the "Closing"), Advanced Communications Technologies, Inc.
(the "Company") completed the acquisition of 6,454,300 shares of the common
stock of Pacific Magtron International Corp. (the "PMIC Shares") for the
aggregate purchase price of $500,000 from Theodore S. Li and Hui Cynthia Lee
(collectively, the "Stockholders") pursuant to the terms of a Stock Purchase
Agreement, dated December 10, 2004, among the Company, Mr. Li and Ms. Lee (the
"Stock Purchase Agreement"). The PMIC Shares represent 61.56% of the currently
issued and outstanding common stock of Pacific Magtron International Corp.
("PMIC"). PMIC is primarily engaged in the business of distributing computer
peripheral products, such as components and multimedia and systems networking
products, through its wholly-owned subsidiaries. PMIC's common stock trades on
the Over the Counter Bulletin Board, and PMIC files periodic reports with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended.
The Company paid the purchase price for the PMIC Shares by delivering two
convertible promissory notes (the "Notes") in the principal amounts of $166,889
and $333,111 to Mr. Li and Ms. Lee, respectively. The Notes will mature on
December 29 ,2005 and no principal or interest payments will be required prior
to such date. The Notes bear interest at 6.0% per annum. Upon the occurrence and
during the continuation of any Event of Default (as specified in the Notes), the
interest rate will increase to 10.0% per annum and the holders of the Notes may
declare the principal amount of the Notes and all accrued and unpaid interest
thereon to be immediately due and payable. The Company will be able to redeem
all or a portion of Mr. Li's Note on or prior to the maturity date at 110.0% of
the principal amount redeemed, plus all accrued and unpaid interest thereon. The
Company will be able to redeem all or a portion of Ms. Lee's Note prior to six
months following the Closing at 105.0% of the principal amount redeemed or
thereafter prior to the maturity date at 110.0% of the principal amount
redeemed, in each case, plus all accrued and unpaid interest thereon. The
holders of the Notes, at their option, may convert, at any time and from time to
time, until payment in full of all amounts due and owing under their Note, any
unpaid principal amount of their Note into shares of common stock of the Company
at a conversion price per share of $0.01. If the full original principal amount
of the Notes were converted, this would result in the issuance of an aggregate
of 50,000,000 shares of the Company's common stock to the Stockholders. The
conversion ratio is subject to customary adjustments for stock splits, reverse
stock splits and other recapitalizations effected by the Company. The Company
currently expects to use funds out of working capital to repay any and all
amounts due and owing under the Notes. The Company's payment obligations under
the Notes (the "Obligations") are secured by the PMIC Shares pursuant to a
Custodial and Stock Pledge Agreement, dated December 30, 2004, among the
Company, the Stockholders and Quarles & Brady Streich Lang LLP, as custodian
(the "Pledge Agreement").
Under the Pledge Agreement, the Company has pledged to the Stockholders all of
the PMIC Shares acquired under the Stock Purchase Agreement and has granted to
the Stockholders a lien upon and a continuing security interest in such PMIC
Shares, subject to the terms and conditions of the Pledge Agreement. Until such
time all amounts due and owing under the Notes are paid in full or until their
earlier release in accordance with the terms of the Pledge Agreement, as the
case may be, the certificates representing the PMIC Shares will be held in
escrow by the custodian in accordance with the terms of the Pledge Agreement.
If the Company becomes entitled to receive or shall receive with respect to the
PMIC Shares (i) any additional shares of capital stock of PMIC; (ii) any stock
certificate, including without limitation, any certificate representing a stock
dividend or in connection with any increase or reduction of capital,
reclassification, merger, consolidation, sale of assets, combination of shares,
stock split or other recapitalization; (iii) any option, warrant or right,
2
whether as an addition to, in substitution of or in exchange for any of the PMIC
Shares, or otherwise; or (iv) any dividend or other distribution payable in
property, or securities issued by a person other than PMIC, then the Company
will receive and accept the same, in trust, as trustee for the Stockholders, and
shall deliver them to the custodian. Any cash distributions received by the
Company in respect of the PMIC Shares may be applied to reduce such of the
Obligations as the Company may determine in its sole discretion.
Unless and until an Event of Default under the Notes shall have occurred, the
Company shall be entitled to exercise all voting and other corporate rights in
respect of the PMIC Shares (except for the right to receive dividends and
distributions payable in kind, which are to be delivered to the custodian),
including, without limitation, all rights and privileges of conversion, exchange
and subscription, as though the Company were the absolute owner of the PMIC
Shares, subject to the pledge in the Pledge Agreement. Notwithstanding the
foregoing, the Company has agreed that it will not vote any of the PMIC Shares
in any way inconsistent with the provisions or intent of the Pledge Agreement.
All rights of the Company to vote and give consents, waivers and ratifications,
and to convert, exchange or subscribe (collectively referred to as the
"Corporate Rights"), shall cease if an Event of Default shall occur. If an Event
of Default shall occur, whether or not the PMIC Shares shall have been
registered in the Stockholders' names, the Stockholders then shall have the
right to exercise all Corporate Rights with respect to the PMIC Shares.
The Company has agreed that until all of the Obligations have been satisfied in
full it shall not sell, convey or otherwise dispose of any of the PMIC Shares or
any interest in the PMIC Shares, or create, incur or permit to exist any pledge,
mortgage, lien, charge or encumbrance or any security interest whatsoever in or
with respect to any of the PMIC Shares, other than that created by the Pledge
Agreement, nor attempt to do any of the foregoing.
In connection with the Closing of the transactions contemplated by the Stock
Purchase Agreement, at Closing, each of Mr. Li and Ms. Lee entered into an
employment agreement with the Company, Encompass Group Affiliates, Inc., a
wholly-owned subsidiary of the Company ("Encompass"), and PMIC, pursuant to
which Mr. Li and Ms. Lee are to be employed by PMIC (the "Employment
Agreements"). Unless terminated sooner, the initial term of Mr. Li's Employment
Agreement expires on the three year anniversary of the Closing, and the initial
term of Ms. Lee's Employment Agreement expires on the two year anniversary of
the Closing. The employment agreements also contain non-compete provisions for a
period of two years post termination. Either employment agreement may be
terminated by the Company at any time upon thirty days prior written notice. In
addition, Mr. Li or Ms. Lee, as the case may be, may terminate their employment
agreement immediately for any reason or for "Good Reason" (as defined in each
Employment Agreement). In the event of termination without cause (as defined in
each Employment Agreement) or for Good Reason, Mr. Li or Ms. Lee, as the case
may be, shall receive, in addition to accrued, but unpaid compensation and other
benefits, six months severance.
Under the terms of each Employment Agreement, each of Mr. Li and Ms. Lee shall
receive a signing bonus of $225,000 within thirty days of the Closing. The
Employment Agreements also contemplate an annual salary of not less than
$120,000 and other bonus and earn-out provisions which may be paid in shares of
common stock of the Company. While any bonus paid in Company common stock will
be at the discretion of the Compensation Committee of the Company's Board of
Directors, the earn-out provisions are set forth in the Employment Agreements
and are based on achievement of certain financial milestones by certain
operating subsidiaries of PMIC. Under the earn-out provisions, Mr. Li and Ms.
Lee may earn the right to receive up to 66,666,666 shares and 33,333,333 shares
of the Company's common stock, respectively, which share amounts are subject to
adjustment for any stock splits or other recapitalizations effected by the
Company; provided that, the percentage of the outstanding common stock that Mr.
Li or Ms. Lee would have had the right to receive prior to the adjustment shall
not be changed by any such adjustment. Upon earning any earn-out shares, the
3
shares will be placed in escrow pursuant to the terms of an Escrow Agreement
entered into among the Company, Mr. Li and Ms. Lee at Closing. In the event that
Mr. Li's or Ms. Lee's employment is terminated for "cause" (as defined in the
applicable Employment Agreement) prior to the expiration of the initial term of
the Employment Agreement all of the earn-out shares earned or to be earned by
Mr. Li or Ms. Lee, as applicable, will be forfeited. If, however, Mr. Li's or
Ms. Lee's employment is terminated for reasons other than "cause" prior to the
expiration of the initial term of the applicable Employment Agreement, Mr. Li
and Ms. Lee, as the case may be, will be entitled to receive any of the earn-out
shares earned and placed in escrow prior to such termination. Upon release from
escrow, the holders of earn-out shares will have certain rights to request the
Company to register the shares for resale under the Securities Act of 1933, as
amended (the "Securities Act").
At the time of the Closing, Mr. Li resigned as Chief Executive Officer of PMIC
and any office held by him with any subsidiary of PMIC and now holds the
positions of Chief Financial Officer and Chief Operating Officer as well as a
director of PMIC. Martin Nielson, Senior Vice President-Acquisitions and a
director of the Company, has become a director and Chief Executive Officer of
PMIC, and John Donahue has also become a director of PMIC. Ms. Lee has been
retained as a Senior Vice President of PMIC and she and Jey Hsin Yao, Hank C. Ta
and Raymond Crouse have each resigned as a director of PMIC and each office and
directorship held by any of them with any subsidiary of PMIC.
To the extent that the Closing involved the sale of the Notes, the shares of
Company common stock into which the Notes may be converted or the shares of
Company common stock that may be issued under the Employment Agreements, such
sales were exempt from the registration provisions of the Securities Act under
Section 4(2) thereof and Regulation D thereunder as none of the transactions
involved a public offering, the recipients of such securities are all
"accredited investors," as defined in Regulation D, and each recipient has
represented to the Company that he or she has or will be acquiring the
securities for his or her own account and not with a view to their distribution.
At Closing, each Stockholder signed a Release pursuant to which it agreed to
hold the Company, PMIC and each of their respective individual, joint or mutual,
past, present and future representatives, affiliates, stockholders, controlling
persons, Subsidiaries, successors and assigns from any and all claims, demands,
proceedings, causes of action, orders, obligations, contacts, agreements, debts
and liabilities whatsoever, other than those contemplated by the above described
transaction documents.
Additionally, in connection with the Closing of the transactions contemplated by
the Stock Purchase Agreement, the Company entered into an Indemnity Agreement at
Closing pursuant to which it agreed to fully indemnify each Stockholder and each
of their respective spouses for any and all amounts paid by each such
Stockholder under the terms of individual guarantees previously entered into by
the Stockholders, which guarantees a $3,500,000 inventory financing facility
provided by Textron Financial Corporation to PMIC. In the event PMIC defaults on
the facility and Textron forecloses on the guarantees, each Stockholder and
his/her spouse may exercise his/her right under the Indemnity Agreement to
require the Company to reimburse such indemnitee for all amounts paid by such
indemnitee under the applicable guarantee.
The foregoing summary of the Stock Purchase Agreement, the Notes, the Pledge
Agreement, the Employment Agreements, and the Indemnity Agreement and the
transactions contemplated thereby is qualified in its entirety by reference to
the such agreements, copies of which are filed as Exhibits to this Report on
Form 8-K and incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
It is impracticable to provide the required financial statements of Pacific
Magtron International Corp. at the time of filing of this report. The required
financial statements of Pacific Magtron International Corp. will be filed within
the time period required in accordance with applicable regulations to the
Securities Exchange of 1934, as amended.
(b) Pro Forma Financial Information
It is impracticable to provide the required pro forma financial information of
Advanced Communications Technologies, Inc. at the time of the filing of this
report. The pro forma financial information will be filed within the time period
required in accordance with applicable regulations under the Securities Exchange
Act of 1934, as amended.
4
(c) Exhibits
Exhibit No. Description of Exhibit
2.1 Stock Purchase Agreement, dated as of December 10, 2004, among
Advanced Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed on December 14,
2004).
10.1 6% Secured Convertible Promissory Note, dated December 30, 2004,
issued to Theodore S. Li.
10.2 6% Secured Convertible Promissory Note, dated December 30, 2004,
issued to Hui Cynthia Lee.
10.3 Custodial and Stock Pledge Agreement, dated December 30, 2004,
among Advanced Communications Technologies, Inc., Theodore S. Li
and Hui Cynthia Lee, and Quarles & Brady Streich Lang LLP.
10.4 Employment Agreement, dated December 30, 2004, among Pacific
Magtron International Corp., Advanced Communications Technologies,
Inc., Encompass Group Affiliates, Inc., and Theodore S. Li.
10.5 Employment Agreement, dated December 30, 2004, among Pacific
Magtron International Corp., Advanced Communications Technologies,
Inc., Encompass Group Affiliates, Inc., and Hui Cynthia Lee.
10.6 Indemnity Agreement, dated December 30, 2004, among Advanced
Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee.
99.1 Press Release dated January 3, 2005.
5
SIGNATURE
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.
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
Dated: January 5, 2005 By: /s/ Wayne I. Danson
----------------------------------------
President and Chief Financial Officer
6
Exhibit Index
Exhibit No. Description
- ----------- -------------
2.1 Stock Purchase Agreement, dated as of December 10, 2004, among
Advanced Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed on December 14,
2004).
10.1 6% Secured Convertible Promissory Note, dated December 30, 2004,
issued to Theodore S. Li.
10.2 6% Secured Convertible Promissory Note, dated December 30, 2004,
issued to Hui Cynthia Lee.
10.3 Custodial and Stock Pledge Agreement, dated December 30, 2004,
among Advanced Communications Technologies, Inc., Theodore S. Li
and Hui Cynthia Lee, and Quarles & Brady Streich Lang LLP.
10.4 Employment Agreement, dated December 30, 2004, among Pacific
Magtron International Corp., Advanced Communications Technologies,
Inc., Encompass Group Affiliates, Inc., and Theodore S. Li.
10.5 Employment Agreement, dated December 30, 2004, among Pacific
Magtron International Corp., Advanced Communications Technologies,
Inc., Encompass Group Affiliates, Inc., and Hui Cynthia Lee.
10.6 Indemnity Agreement, dated December 30, 2004, among Advanced
Communications Technologies, Inc., Theodore S. Li and Hui
Cynthia Lee.
99.1 Press Release dated January 3, 2005.
7
THIS SECURED CONVERTIBLE PROMISSORY NOTE, AND THE SECURITIES INTO WHICH IT IS
CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND REGULATION D THEREUNDER. THE SECURITIES ARE "RESTRICTED" AND MAY NOT
BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND
APPLICABLE STATE LAW OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS THEREOF AND THE COMPANY IS PROVIDED WITH AN OPINION OF COUNSEL OR
OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
EXEMPTIONS ARE AVAILABLE.
SECURED CONVERTIBLE PROMISSORY NOTE
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
6% Secured Convertible Promissory Note
Due December 29, 2005
No. 1 $166,889.00
This Secured Convertible Promissory Note (this "Note") is issued by
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation (the
"Company"), to THEODORE S. LI (together with his permitted successors and
assigns, the "Holder") pursuant to exemptions from registration under the
Securities Act of 1933, as amended. Capitalized terms not otherwise defined
herein shall have the meanings given such terms in that certain Stock Purchase
Agreement of even date herewith by and between the Company, the initial Holder
and the other parties named therein (the "Purchase Agreement").
ARTICLE I.
Section 1.01 Principal and Interest. For value received on December 30, 2004
(the "Issue Date"), the Company hereby promises to pay on December 29, 2005 (the
"Maturity Date") to the order of the Holder in lawful money of the United States
of America and in immediately available funds the principal sum of One Hundred
Sixty-Six Thousand Eight Hundred Eight-Nine Dollars (US $166,889.00), together
with accrued and unpaid interest on the unpaid principal of this Note at the
annual simple rate of six percent (6%) (computed on the basis of a 365/6-day
year and the actual days elapsed) from the Issue Date until all amounts due and
owing hereunder by the Company to the Holder have been paid in full. Upon the
occurrence and during the continuance of an Event of Default (as defined below)
interest on the unpaid principal amount of this Note shall accrue at the annual
simple rate of ten percent (10%) (computed on the basis of a 365/6-day year and
the actual days elapsed). Section 1.02 Optional Conversion. On or after the
Issue Date, the Holder shall be entitled, at its option, to convert, at any time
and from time to time, until payment in full of all amounts due and owing under
this Note, all or any part of the unpaid principal amount of the Note, into
shares (the "Conversion Shares") of the Company's common stock, no par value per
share, ("Common Stock"), at a price per share (the "Conversion Price") equal to
$0.01, subject to adjustment for stock splits, reverse stock splits and other
recapitalizations effected by the Company. To convert this Note, the Holder
shall deliver written notice thereof, substantially in the form of Exhibit "A"
to this Note, with appropriate insertions (the "Conversion Notice"), to the
Company in accordance with Section 6.01 hereof. The date set forth in the
Conversion Notice shall be deemed to be the date upon which the conversion shall
be effective (the "Conversion Date").
Section 1.03 Right of Repurchase/Redemption. At any time on or prior to the
Maturity Date, the Company shall, at its option, have the right to redeem, upon
three (3) business days prior written notice to the Holder (the "Redemption
Notice"), a portion or all of the outstanding amount due and owing under this
Note (the "Redemption Right"). The redemption price shall be one hundred ten
percent (110%) of the principal amount redeemed. Upon redemption, the Company
shall also pay all accrued and unpaid interest thereon. The third business day
after the Holder's receipt of the Redemption Notice shall be referred to herein
as the "Redemption Date." Once the Company has issued to the Holder a Redemption
Notice, the Holder may continue to execute conversions at any time, and from
time to time, on or prior to the business day immediately preceding the
Redemption Date. Notwithstanding the foregoing, payment by the Company on or
after the Maturity Date of all amounts due and owing hereunder shall not be
deemed an exercise by the Company of its Redemption Right.
ARTICLE II.
Section 2.01 Amendments and Waiver of Default. This Note may be amended solely
with the written consent of the Holder and the Company.
ARTICLE III.
Section 3.01 Events of Default. An Event of Default is defined as follows:
the Company shall (i) make a general assignment for the benefit of creditors;
(ii) be adjudicated as bankrupt or insolvent; (iii) file a voluntary petition in
bankruptcy; (iv) have a petition or proceeding filed against it under any
bankruptcy or insolvency law or statute of the United States of America or any
state or jurisdiction thereof, which petition or proceeding is not dismissed
within ninety (90) days from the date of commencement thereof; or (v) have a
receiver, trustee, custodian, conservator or other person appointed by any court
to take charge of the Company's affairs, assets or business and such appointment
is not vacated or discharged within ninety (90) days thereafter.
2
Section 3.02 Remedy. Upon the occurrence of an Event of Default, the Holder may
declare the principal amount hereof, and all accrued and unpaid interest, to be
forthwith due and payable whereupon the same shall immediately become due and
payable.
ARTICLE IV.
Section 4.01 Re-issuance of Note. If and whenever the Holder elects to convert a
part of the Note pursuant to Section 1.02 hereof, the Company shall reissue a
new Note in the same form as this Note to reflect the new principal amount.
Section 4.02 Termination of Conversion Rights. The Holder's right to convert all
or any portion of the unpaid principal amount under this Note into Conversion
Shares in accordance with Section 1.02 hereof shall terminate on the date that
all amounts due and owing hereunder are paid in full.
ARTICLE V.
Section 5.01 Security Interest. To secure the Company's payment obligations
hereunder, the Company hereby grants to the Holder a security interest in and to
those Shares delivered by the Holder pursuant to the Purchase Agreement and the
Pledge Agreement. Such security interest will be a first priority lien provided
there are no Encumbrances on the Shares on the Closing Date.
ARTICLE VI.
Section 6.01 Notices. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Note must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon confirmation of receipt, when sent by facsimile;
(iii) three (3) business days after being sent by U.S. certified mail, return
receipt requested; or (iv) one (1) business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
if to the Company:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
3
if to the Holder:
Theodore S. Li
[Address]
-------
with a copy to:
Quarles & Brady Streich Lang LLP Renaissance One Two N. Central Avenue Phoenix,
Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
Section 6.02 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of choice of law or conflicts of laws that would defer to the substantive law of
another jurisdiction. The Company and the Holder irrevocably consent to the
jurisdiction of the United States federal courts and the state courts located in
the State of New York in any suit or proceeding based on or arising under this
Note and irrevocably agree that any and all claims arising out of this Note or
related to the transactions contemplated by this Note shall be determined
exclusively in such courts. The Company and the Holder irrevocably waive the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The Company and the Holder further agree that service of process mailed by first
class mail shall be deemed in every respect effective service of process in any
such suit or proceeding. Nothing herein shall affect the right of either the
Company or the Holder to serve process in any other manner permitted by law. The
Company and the Holder agree that a final non-appealable judgment in any such
suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
Section 6.03 Severability. The invalidity of any of the provisions of this Note
shall not invalidate or otherwise affect any of the other provisions of this
Note, which shall remain in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
IN WITNESS WHEREOF, with the intent to be legally bound hereby, the Company has
executed this Note as of the date first written above.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
-----------------------------------------
Name: Wayne I. Danson
Title: President and Chief Financial Officer
5
EXHIBIT "A"
NOTICE OF CONVERSION
(To be executed by the Holder in order to Convert the Note)
TO:
The undersigned hereby irrevocably elects to convert $ of the principal amount
of the above Note into Shares of Common Stock of ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., according to the conditions stated therein, as of the
Conversion Date written below.
Conversion Date:
- ---------------
Applicable Conversion Price:
- ---------------------------
Signature:
- ---------
Name:
Address:
- -------
Amount to be converted: $
- -------------------------
Amount of Note unconverted: $
- -----------------------------
Conversion Price per share: $
- -----------------------------
Number of shares of Common Stock to be
issued:
A-1
THIS SECURED CONVERTIBLE PROMISSORY NOTE, AND THE SECURITIES INTO WHICH IT IS
CONVERTIBLE (COLLECTIVELY, THE "SECURITIES"), HAVE NOT BEEN REGISTERED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE. THE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND REGULATION D THEREUNDER. THE SECURITIES ARE "RESTRICTED" AND MAY NOT
BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND
APPLICABLE STATE LAW OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS THEREOF AND THE COMPANY IS PROVIDED WITH AN OPINION OF COUNSEL OR
OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
EXEMPTIONS ARE AVAILABLE.
SECURED CONVERTIBLE PROMISSORY NOTE
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
6% Secured Convertible Promissory Note
Due December 29, 2005
No. 2 $333,111.00
This Secured Convertible Promissory Note (this "Note") is issued by
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC., a Florida corporation (the
"Company"), to HUI CYNTHIA LEE (together with her permitted successors and
assigns, the "Holder") pursuant to exemptions from registration under the
Securities Act of 1933, as amended. Capitalized terms not otherwise defined
herein shall have the meanings given such terms in that certain Stock Purchase
Agreement of even date herewith by and between the Company, the initial Holder
and the other parties named therein (the "Purchase Agreement").
ARTICLE I.
Section 1.01 Principal and Interest. For value received on December 30, 2004
(the "Issue Date"), the Company hereby promises to pay on December 29, 2005 (the
"Maturity Date") to the order of the Holder in lawful money of the United States
of America and in immediately available funds the principal sum of Three Hundred
Thirty Three Thousand One Hundred Eleven Dollars (US $333,111.00), together with
accrued and unpaid interest on the unpaid principal of this Note at the annual
simple rate of six percent (6%) (computed on the basis of a 365/6-day year and
the actual days elapsed) from the Issue Date until all amounts due and owing
hereunder by the Company to the Holder have been paid in full. Upon the
occurrence and during the continuance of an Event of Default (as defined below)
interest on the unpaid principal amount of this Note shall accrue at the annual
simple rate of ten percent (10%) (computed on the basis of a 365/6-day year and
the actual days elapsed). Section 1.02 Optional Conversion. On or after the
Issue Date, the Holder shall be entitled, at its option, to convert, at any time
and from time to time, until payment in full of all amounts due and owing under
this Note, all or any part of the unpaid principal amount of the Note, into
shares (the "Conversion Shares") of the Company's common stock, no par value per
share, ("Common Stock"), at a price per share (the "Conversion Price") equal to
$0.01, subject to adjustment for stock splits, reverse stock splits and other
recapitalizations effected by the Company. To convert this Note, the Holder
shall deliver written notice thereof, substantially in the form of Exhibit "A"
to this Note, with appropriate insertions (the "Conversion Notice"), to the
Company in accordance with Section 6.01 hereof. The date set forth in the
Conversion Notice shall be deemed to be the date upon which the conversion shall
be effective (the "Conversion Date").
Section 1.03 Right of Repurchase/Redemption. At any time on or prior to the
Maturity Date, the Company shall, at its option, have the right to redeem, upon
three (3) business days prior written notice to the Holder (the "Redemption
Notice"), a portion or all of the outstanding amount due and owing under this
Note (the "Redemption Right"). In the event the Company exercises its Redemption
Right on or prior to July __, 2005, the redemption price shall be one hundred
five percent (105%) of the principal amount redeemed, thereafter the redemption
price shall be one hundred ten percent (110%) of the principal amount redeemed.
Upon redemption, the Company shall also pay all accrued and unpaid interest
thereon. The third business day after the Holder's receipt of the Redemption
Notice shall be referred to herein as the "Redemption Date." Once the Company
has issued to the Holder a Redemption Notice, the Holder may continue to execute
conversions at any time, and from time to time, on or prior to the business day
immediately preceding the Redemption Date. Notwithstanding the foregoing,
payment by the Company on or after the Maturity Date of all amounts due and
owing hereunder shall not be deemed an exercise by the Company of its Redemption
Right.
ARTICLE II.
Section 2.01 Amendments and Waiver of Default. This Note may be amended solely
with the written consent of the Holder and the Company.
ARTICLE III.
Section 3.01 Events of Default. An Event of Default is defined as follows:
the Company shall (i) make a general assignment for the benefit of creditors;
(ii) be adjudicated as bankrupt or insolvent; (iii) file a voluntary petition in
bankruptcy; (iv) have a petition or proceeding filed against it under any
bankruptcy or insolvency law or statute of the United States of America or any
state or jurisdiction thereof, which petition or proceeding is not dismissed
within ninety (90) days from the date of commencement thereof; or (v) have a
receiver, trustee, custodian, conservator or other person appointed by any court
to take charge of the Company's affairs, assets or business and such appointment
is not vacated or discharged within ninety (90) days thereafter.
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Section 3.02 Remedy. Upon the occurrence of an Event of Default, the Holder may
declare the principal amount hereof, and all accrued and unpaid interest, to be
forthwith due and payable whereupon the same shall immediately become due and
payable.
ARTICLE IV.
Section 4.01 Re-issuance of Note. If and whenever the Holder elects to convert a
part of the Note pursuant to Section 1.02 hereof, the Company shall reissue a
new Note in the same form as this Note to reflect the new principal amount.
Section 4.02 Termination of Conversion Rights. The Holder's right to convert all
or any portion of the unpaid principal amount under this Note into Conversion
Shares in accordance with Section 1.02 hereof shall terminate on the date that
all amounts due and owing hereunder are paid in full.
ARTICLE V.
Section 5.01 Security Interest. To secure the Company's payment obligations
hereunder, the Company hereby grants to the Holder a security interest in and to
those Shares delivered by the Holder pursuant to the Purchase Agreement and the
Pledge Agreement. Such security interest will be a first priority lien provided
there are no Encumbrances on the Shares on the Closing Date. ARTICLE VI.
Section 6.01 Notices. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Note must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon confirmation of receipt, when sent by facsimile;
(iii) three (3) business days after being sent by U.S. certified mail, return
receipt requested; or (iv) one (1) business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
if to the Company:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire
Facsimile: 215.851.8383
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if to the Holder:
Hui Cynthia Lee
[Address]
-------
with a copy to:
Quarles & Brady Streich Lang LLP Renaissance One Two N. Central Avenue Phoenix,
Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
Section 6.02 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of choice of law or conflicts of laws that would defer to the substantive law of
another jurisdiction. The Company and the Holder irrevocably consent to the
jurisdiction of the United States federal courts and the state courts located in
the State of New York in any suit or proceeding based on or arising under this
Note and irrevocably agree that any and all claims arising out of this Note or
related to the transactions contemplated by this Note shall be determined
exclusively in such courts. The Company and the Holder irrevocably waive the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The Company and the Holder further agree that service of process mailed by first
class mail shall be deemed in every respect effective service of process in any
such suit or proceeding. Nothing herein shall affect the right of either the
Company or the Holder to serve process in any other manner permitted by law. The
Company and the Holder agree that a final non-appealable judgment in any such
suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
Section 6.03 Severability. The invalidity of any of the provisions of this Note
shall not invalidate or otherwise affect any of the other provisions of this
Note, which shall remain in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, with the intent to be legally bound hereby, the Company has
executed this Note as of the date first written above.
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
-------------------------------------------
Name: Wayne I. Danson
Title: President and Chief Financial Officer
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EXHIBIT "A"
NOTICE OF CONVERSION
(To be executed by the Holder in order to Convert the Note)
TO:
The undersigned hereby irrevocably elects to convert $ of the principal amount
of the above Note into Shares of Common Stock of ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC., according to the conditions stated therein, as of the
Conversion Date written below.
Conversion Date:
- ---------------
Applicable Conversion Price:
- ---------------------------
Signature:
- ---------
Name:
Address:
- -------
Amount to be converted: $
- -------------------------
Amount of Note unconverted: $
- -----------------------------
Conversion Price per share: $
- -----------------------------
Number of shares of Common Stock to be issued:
A-1
CUSTODIAL AND STOCK PLEDGE AGREEMENT
THIS CUSTODIAL AND STOCK PLEDGE AGREEMENT ("Agreement"), dated as of December
30, 2004, is by and among ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. (referred
to as the "Pledgor"), THEODORE S. LI and HUI CYNTHIA LEE (together, the
"Pledgees") and QUARLES & BRADY STREICH LANG LLP ("Custodian").
NOW, THEREFORE, in consideration of the premises and the mutual promises herein
contained, and intending to be legally bound hereby, the parties hereto agree as
follows:
1. Background.
Pledgor and Pledgees are parties to that certain Stock Purchase Agreement, dated
December 10, 2004 (the "Purchase Agreement"), pursuant to which Pledgees agreed
to sell to Pledgor, and Pledgor agreed to purchase from Pledgees, all of the
outstanding shares of common stock of Pacific Magtron International Corp. (the
"Company") owned by Pledgees (the "Pledged Shares"). In exchange for the Pledged
Shares, Pledgor issued to Sellers promissory notes in aggregate principal amount
of $500,000 (each a "Note" and together the "Notes"). To secure the payment
obligations of Pledgor under the Notes (the "Obligations"), Pledgor has agreed
to grant to Pledgees a security interest in and to the Pledged Shares. Pledgor
and Pledgees agree that until such time all amounts due and owing under the
Notes are paid in full or until their earlier release in accordance with the
terms hereof, as the case may be, the certificates representing the Pledged
Shares shall be held in escrow by Custodian in accordance with the terms hereof.
2. Pledge of Pledged Shares.
2.1 As security for the full and prompt payment of the Notes, Pledgor hereby
pledges to Pledgees all of the Pledged Shares and grants to Pledgees a lien upon
and a continuing security interest in the Pledged Shares, subject to the terms
and conditions of this Agreement. Such security interest will be a first
priority lien provided there are no Encumbrances on the Shares on the Closing
Date. Pledgor will execute and file a UCC-1 Financing Statements respecting the
Shares. Upon payment of each Note the applicable Pledgee hereby authorizes the
Pldgor to file a UCC-3 Financing Statement terminating the applicable UCC-1
Financing Statement.
2.2 If Pledgor shall become entitled to receive or shall receive with respect to
the Pledged Shares (i) any additional shares of capital stock of the Company; or
(ii) any stock certificate, including without limitation, any certificate
representing a stock dividend or in connection with any increase or reduction of
capital, reclassification, merger, consolidation, sale of assets, combination of
shares, stock split or other recapitalization; or (iii) any option, warrant or
right, whether as an addition to, in substitution of or in exchange for any of
the Pledged Shares, or otherwise; or (iv) any dividend or other distribution
payable in property, or securities issued by a person other than the Company;
then, in any such event, Pledgor shall receive and accept the same, in trust, as
trustee for Pledgees, and shall deliver them immediately to Custodian, together
with all necessary or appropriate endorsements of Pledgor. Any cash
distributions received by Pledgor in respect of the Pledged Shares may be
applied to reduce such of the Obligations as Pledgor may determine in its sole
discretion. 3. Delivery of Shares to Custodian.
Concurrently with the execution and delivery of this Agreement, Pledgor hereby
authorizes Pledgees to deliver, on behalf of Pledgor, to Custodian for the
account of Sellers, the certificates representing all of the Pledged Shares,
together with duly executed Stock Powers to Pledgees, in the form attached
hereto as Exhibit "A", with signature guaranteed, permitting transfer of the
Pledged Shares to Pledgees or its assignee, receipt of which is hereby
acknowledged by the Custodian, to be held and released in accordance with the
terms of this Agreement. Concurrently with the execution and delivery of this
Agreement, Pledgor is also delivering to Pledgees letters addressed to the
transfer agent of the Company (the "Transfer Agent"), informing the Transfer
Agent of the pledge of the Pledged Shares, instructing the Transfer Agent to
honor the Stock Powers delivered to Pledgees, and informing the Transfer Agent
that Pledgor's address on the records of the transfer agent, during the term of
this Agreement, shall be c/o Quarles & Brady Streich Lang LLP. Pledgor shall
thereafter deliver to Custodian (a) any other certificates for the Pledged
Shares as required by the terms of this Agreement, together with duly executed
stock powers relating to such certificates, with signatures guaranteed; and (b)
any documents or other evidence received of Pledgor's interest in any securities
issued as a dividend, stock split or otherwise because of or with respect to the
Pledged Shares or in exchange for the Pledged Shares, promptly after receiving
such evidence, accompanied by duly executed stock powers or other appropriate
instrument of transfer, with signatures guaranteed covering the same.
4. Rights of Pledgor in the Pledged Shares.
Unless and until an Event of Default (as that term is defined herein) shall have
occurred, Pledgor shall be entitled to exercise all voting and other corporate
rights in respect of the Pledged Shares (except for the right to receive
dividends and distributions payable in kind, which shall be delivered to the
Custodian), including, without limitation, all rights and privileges of
conversion, exchange and subscription, as though Pledgor were the absolute owner
of the Pledged Shares, subject to the pledge herein contained. Notwithstanding
the foregoing, Pledgor covenants and agrees that it shall not vote any of the
Pledged Shares in any way inconsistent with the provisions or intent of this
Agreement. All rights of Pledgor to vote and give consents, waivers and
ratifications, and to convert, exchange or subscribe (collectively referred to
as the "Corporate Rights"), shall cease if an Event of Default hereunder shall
occur. If an Event of Default shall occur, whether or not the Pledged Shares
shall have been registered in Pledgees' name, Pledgee then shall have the right
to exercise all Corporate Rights with respect to the Pledged Shares.
5. Representations and Warranties.
Pledgor represents and warrants to Pledgees that:
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(a) this Agreement has been duly authorized, executed and delivered by Pledgor;
(b) the execution, delivery and performance by Pledgor of Pledgor's obligations
under this Agreement does not and will not violate any provision of law or any
judgment, order or regulation of any court or of any public or governmental
agency or authority applicable to Pledgor or of the Articles of Incorporation or
Bylaws of the Pledgor;
(c) the execution, delivery and performance by Pledgor of Pledgor's obligations
under this Agreement does not and will not conflict with or constitute a breach
of or a default under any agreement, indenture or instrument to which Pledgor is
a party or by which Pledgor or any of Pledgor's property is bound; and
(d) this Agreement constitutes the legal, valid and binding obligation of
Pledgor enforceable in accordance with its terms.
6. Covenants.
Pledgor covenants that until all of the Obligations have been satisfied in full
it shall not sell, convey or otherwise dispose of any of the Pledged Shares or
any interest in the Pledged Shares, or create, incur or permit to exist any
pledge, mortgage, lien, charge or encumbrance or any security interest
whatsoever in or with respect to any of the Pledged Shares, other than that
created by this Agreement, nor attempt to do any of the foregoing.
7. Release of Pledged Shares.
7.1 Custodian shall disburse the Pledged Shares at any time pursuant to the
joint written instructions of Pledgees and Pledgor (which may be executed and/or
transmitted in counterparts).
7.2 If, within ten (10) business days after a Maturity Date (as defined in the
respective Notes), Custodian shall not have received a notice from the
applicable Pledgee(s) that the Obligations to such Pledgee(s) have not been
satisfied in full and that such Pledgee(s) disputes Pledgor's right to receive
any Pledged Shares, Custodian shall deliver to Pledgor the Pro Rata Shares (as
defined below) of the Pledgee(s) to which the Maturity Date relates. In the
event Custodian receives such notice from the applicable Pledgee(s), Custodian
shall release the Pledged Shares solely in accordance with Section 9.2 below.
7.3 Upon delivery of all Pledged Shares by Custodian in accordance with the
terms hereof, this Agreement shall terminate and be of no further force or
effect.
8. Events of Default.
Any Event of Default under the Note shall be deemed an Event of Default
hereunder.
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9. Pledgees' Remedies Upon Default.
9.1 At any time after the occurrence of an Event of Default, any Pledgee may, at
its option, deliver a certificate to the Custodian and Pledgor specifying the
nature of the Event of Default. If, within ten business days (10) after its
receipt of such certificate, the Custodian shall not have received written
notice from Pledgor that it disputes the occurrence of such Event of Default
then the Custodian shall release to such Pledgee(s) a certificate or
certificates representing a percentage of the Pledged Shares equal to the ratio
of the original principal amount of such Pledgee's Note to the aggregate
original principal amount of all the Notes (with respect to any Pledgee, the
"Pro Rata Shares"). In the event that Pledgor does deliver a timely notice to
the Custodian that it disputes such determination, then Custodian shall release
the Pledged Shares solely in accordance with Section 9.2 below.
9.2 In the event any dispute arises between Pledgor and any Pledgee, Custodian
shall release such Pledgee's Pro Rata Shares solely (i) upon its receipt of the
joint written instructions of the applicable Pledgee(s) and Pledgor (which may
be executed and/or transmitted in counterparts) or (ii) in accordance with a
final judgment or final court order from a court of competent jurisdiction
directing disposition of the applicable Pledged Shares (a "Court Order"). A
judgment or order under any provision of this Agreement shall not be deemed to
be final until the time within which an appeal may be taken therefrom has
expired and no appeal has been taken, or until the entry of a judgment or order
from which no appeal may be taken. Custodian shall be entitled to receive and
may conclusively rely on an opinion of counsel to the presenting party to the
effect that a Court Order as referred to in this Section is final and
nonappealable and from a court of competent jurisdiction.
10. Custodian
10.1 Custodian undertakes to perform only such duties as are expressly set forth
herein.
10.2 Custodian may rely and shall be protected in acting or refraining from
acting upon any notice, instruction or request furnished to it in writing
hereunder and reasonably believed by it to be genuine and to have been signed or
presented by the proper party or parties.
10.3 Custodian shall not be liable for any action taken by it in good faith
without gross negligence, and may consult with counsel of its own choice and
shall have full and complete authorization and protection for any reasonable
action taken or suffered by it hereunder in good faith and in accordance with
the written opinion of such counsel.
10.4 Custodian may resign and be discharged from its duties or obligations
hereunder by giving notice in writing of such resignation specifying a date (not
less than thirty (30) days after the giving of such notice) when such
resignation shall take effect, and by transferring all funds then held by it
pursuant to this Agreement to the successor custodian. Promptly after such
notice, Pledgor and Pledgees shall by mutual agreement appoint a successor
custodian, such custodian to hold the Pledged Shares upon the resignation date
specified in such notice. If a successor custodian is not appointed within
thirty (30) days, Custodian shall have the right to petition any court of
competent jurisdiction for the appointment of a successor custodian. Pledgor and
Pledgees may by mutual agreement at any time substitute a new custodian by
giving fifteen (15) days' notice thereof to the Custodian then acting. Custodian
shall continue to serve until its successor accepts the responsibility of
Custodian and receives delivery of the Pledged Shares.
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10.5 Pledgor and Pledgees agree, jointly and severally, to indemnify Custodian
for, and to hold it harmless against, any loss, liability or expense incurred by
it, arising out of or in connection with its entering into this Agreement and
carrying out its duties hereunder, including the costs and expenses of defending
itself against any claim of liability in the premises, other than as incurred by
reason of its willful or reckless misconduct or bad faith. The provisions of
this section shall survive the resignation or removal of Custodian and the
termination of this Agreement.
10.6 Custodian's duties hereunder may be altered, amended, modified or revoked
only by a writing signed by Pledgor, Pledgees and Custodians.
10.7 Custodian is hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and is hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case Custodian obeys or complies with any such order, judgment or decree,
Custodian shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been entered
without jurisdiction.
10.8 Custodian has acted as legal counsel for Pledgees, and may continue to act
as legal counsel for Pledgees, from time to time, notwithstanding its duties as
Custodian hereunder. Pledgor consents to Custodian acting in such capacity as
legal counsel for Pledgees and waives any claim that such representation
represents a conflict of interest on the part of Custodian. Pledgor understands
that Pledgees and Custodian are relying explicitly on the foregoing provision in
entering into this Agreement. Notwithstanding the foregoing, Custodian shall not
represent Pledgees in any proceeding resulting from Custodian delivery of the
Pledged Securities into court as contemplated in Section 9.2 hereof.
10.9 Pledgees shall pay the fees and costs of the Custodian under this
Agreement.
11. Notices.
Notices, requests, instructions or other documents to be in given under this
Agreement shall be in writing and shall be deemed given and received, (i) when
sent if sent by facsimile, provided that the fax is promptly confirmed by
telephone confirmation thereof, (ii) when delivered, if delivered personally to
the intended recipient, and (iii) one business day later, if sent by overnight
delivery via a national courier service, and in each case, addressed to a party
at the following address for such party:
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if to Pledgor:
Advanced Communications Technologies, Inc.
420 Lexington Avenue, Suite 2739
New York, NY 10170
Attention: Wayne Danson, Chief Executive Officer
Facsimile: 646.227.1666
With a copy to:
Eckert Seamans Cherin & Mellott, LLC 1515 Market Street - 9th Floor
Philadelphia, PA 19102
Attention: Gary A. Miller, Esquire Facsimile: 215.851.8383
if to any Pledgee:
to the address set forth below such Pledgee's
name on the signature pages hereto
with copies to:
Quarles & Brady Streich Lang LLP Renaissance One
Two N. Central Avenue Phoenix, Arizona 85004-2391
Attention: Christian J. Hoffmann, III, Esquire Fax: 602-420-5008
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
12. Miscellaneous.
12.1 No course of dealing between Pledgor and Pledgees, nor any failure or delay
in exercising any right, power or privilege hereunder shall operate as a waiver
of such right, power or privileges.
12.2 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK, AND THE PARTIES AGREE AND CONSENT TO THE
EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE COURTS LOCATED IN NEW YORK
COUNTY, NEW YORK IN ANY ACTION OR PROCEEDING HEREUNDER, AND TO SERVICE OF
PROCESS BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED (WHICH SHALL CONSTITUTE
"PERSONAL SERVICE"). The parties hereto hereby irrevocably waive, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this agreement.
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12.3 This Agreement shall inure to the benefit of the successors and assigns of
each Pledgee. This Agreement shall be binding upon each of the successors and
assigns of Pledgor.
12.4 This Agreement contains or refers to the entire agreement of the parties
with respect to its subject matter, and supersedes any prior arrangements or
understandings between the parties with respect thereto. Any waiver,
modification, discharge or termination of this Agreement must be in writing and
signed by the parties necessary to the enforcement thereof.
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IN WITNESS WHEREOF, and intending to be legally bound by this Agreement, each of
the parties hereto has caused this Agreement to be executed and delivered as of
December 30, 2005. PLEDGOR:
ATTEST: ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
- -------------------------------------------- ------------------------
(Authorized Signature)
Name: Wayne I. Danson
------------------------
(Printed or Typed)
Title: President
------------------------
Date: December 30, 2004
------------------------
State of _____________________ :
ss
County of ___________________ :
On this _____ day of ______________2005, before me the subscriber, a Notary
Public in and for the State and County aforesaid personally appeared
___________________________, known or satisfactory identified to me, who
acknowledged that he/she was the ______________[title of office] of Advanced
Communications Technologies, Inc. and had executed the foregoing instrument in
such capacity in the name of and on behalf of such corporation for/ the purposes
stated therein.
Witness my hand and seal the day and year aforesaid.
[Notarial Seal]
Notary Public
Signatures continue on next page
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PLEDGEES:
ATTEST:
/s/ Theodore S. Li
- -------------------------------------------- ---------------------------
Theodore S. Li
Address:
/s/ Hui Cynthia Lee
---------------------------
Hui Cynthia Lee
Address:
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State of _____________________ :
ss
County of ___________________ :
On this _____ day of ____________2005, before me the subscriber, a Notary Public
in and for the State and County aforesaid personally appeared Theodore S. Li
known or satisfactory identified to me, who acknowledged that he had executed
the foregoing instrument for the purposes stated therein.
Witness my hand and seal the day and year aforesaid.
[Notarial Seal]
Notary Public
10
State of _____________________ :
ss
County of ___________________ :
On this _____ day of ____________2005, before me the subscriber, a Notary Public
in and for the State and County aforesaid personally appeared Hui Cynthia Lee
known or satisfactory identified to me, who acknowledged that she had executed
the foregoing instrument for the purposes stated therein.
Witness my hand and seal the day and year aforesaid.
[Notarial Seal]
Notary Public
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IRREVOCABLE STOCK POWER
FOR VALUE RECEIVED, ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. does hereby sell,
assign and transfer to , shares of the common stock of PACIFIC MAGTRON
INTERNATIONAL CORP., a _____________corporation, represented by Certificate(s)
No(s) _________________ inclusive, standing in the name of ADVANCED
COMMUNICATIONS TECHNOLOGIES, INC. on the books of PACIFIC MAGTRON INTERNATIONAL
CORP. ADVANCED COMMUNICATIONS TECHNOLOGIES, INC. does hereby irrevocably
constitute and appoint _______________________ attorney to transfer the said
stock or bond(s) as the case may be, on the books of PACIFIC MAGTRON
INTERNATIONAL CORP., with full power of substitution in the premises.
ADVANCED COMMUNICATIONS
TECHNOLOGIES, INC.
By: (SEAL)
Dated: , 200__
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of this 30th day of December
2004 ("Effective Date"), by and among Pacific Magtron International Corp., a
Nevada corporation ("PMIC"), Encompass Group Affiliates, Inc., a Delaware
corporation ("Encompass"), Advanced Communication Technologies, Inc., a Florida
corporation ("ACT"), and Theodore S. Li, an individual whose address is
________________________________ ("Executive"). For purposes hereof, the terms
PMIC, Encompass and ACT shall include each of their respective subsidiaries and
PMIC, Encompass and ACT shall be referred to collectively herein as the
"Company."
WITNESSETH
WHEREAS, Executive presently serves as a Director and as President, Chief
Executive Officer, Chief Financial Officer and Treasurer of PMIC;
WHEREAS, ACT, Executive and certain other shareholders of PMIC have entered into
a Stock Purchase Agreement, pursuant to which ACT will purchase all of the
shares of common stock of PMIC owned by Executive and each such other
shareholder (the "Stock Purchase"); and
WHEREAS, it is a condition to the Stock Purchase that Executive enter into this
Agreement with the Company effective as of the Effective Date.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment. PMIC hereby employs Executive, and Executive hereby accepts
employment with PMIC, as Chief Financial Officer and Chief Operating Officer, or
such other senior executive position as may be determined by the Board of
Directors of PMIC (the "Board") from time to time during the Employment Period
(as defined below). For purposes of this Agreement, "senior executive position"
shall mean a position of Vice President or a more senior position. In addition
to his duties set forth in this Section 1 and Section 3 below, Executive shall
at the request of the PMIC CEO (as defined below) or the Board serve as an
officer or director of PMIC or any subsidiary of PMIC, without additional
compensation and subject to any policy of the Compensation Committee of the
Board (the "PMIC Compensation Committee") with regard to directors' fees.
2. Term; Renewal. The term of this Agreement shall commence on the Effective
Date and expire on the third anniversary thereof (the "Employment Period"),
unless earlier terminated in accordance with its terms; provided, however, that
the Employment Period may, by written agreement between the parties hereto, be
extended for an additional one-year period.
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3. Employment and Duties.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment Period shall be
that of Chief Financial Officer and Chief Operating Officer of PMIC. Executive
shall directly report to the Chief Executive Officer of PMIC (the "PMIC CEO"),
or such other senior executive officer of Encompass or ACT, as determined from
time to time by the Company. The services to be rendered by Executive pursuant
to this Agreement shall consist of such services as defined and directed by the
Board or the PMIC CEO.
(b) During the Employment Period, Executive shall serve the Company faithfully
and to the best of his ability; shall devote his entire working time, attention,
energy and skill to his employment and the benefit and business of the Company;
and shall use his best efforts, skills and ability to promote the Company's
interests and to perform such duties as from time to time may be reasonably
assigned to him and are consistent with his titles and positions with the
Company.
(c) During the Employment Period, in addition to any other duties or
responsibilities the Company may give to Executive consistent with Section 1,
Executive shall, subject to Section 3.2 herein, be required to sign, and shall
sign, all certifications and such other documents or instruments requested by
the Board, the Chief Executive Officer of ACT, or the PMIC CEO in connection
with PMIC's and/or ACT's obligations under or to (i) the Securities and Exchange
Commission, (ii) any exchange or association on which the Company's shares of
capital stock are listed, (iii) any federal, state or local authority, and/or
(iv) any other governmental, quasi-governmental or non-governmental entity or
organization (foreign or domestic) that regulates or has authority over PMIC
and/or ACT. In addition, in the event Executive, in his current position or in
any position Executive accepts in the future, becomes obligated to sign
certifications and such other documents or instruments as may be required by the
rules and regulations promulgated by any of (i) through (iv) above, Executive
shall, subject to Section 3.2 herein, sign all such certifications and other
documents or instruments as required thereby.
3.2 Observance of Rules and Regulations. Executive agrees to observe and comply
with all applicable laws and regulations, as well as the rules and regulations
of the Company with respect to the performance of his duties.
4. Compensation; Benefits and Expenses.
4.1 Base Salary. As compensation for the services to be rendered hereunder,
during the Employment Period, the Company shall pay to Executive a minimum
annual base salary (the "Base Salary") of $120,000.00. The Base Salary shall be
payable in accordance with usual payroll practices of the Company. Executive's
Base Salary shall be reviewed annually by the PMIC Compensation Committee during
the Employment Period and may be increased, but not decreased, from time to time
by the PMIC Compensation Committee in its sole discretion.
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4.2 Bonus.
(a) Within thirty (30) days after the Effective Date, Executive shall receive a
signing bonus in the amount of $225,000.
(b) Immediately following each fiscal year, the Company shall set aside for the
payment of PMIC executive bonuses, an amount equal to ten percent (10%) of net
income of PMIC during such fiscal year (the "PMIC Bonus Pool"). For each fiscal
year or portion thereof after the Effective Date and during the Employment
Period, the Company shall pay to Executive an annual performance bonus, in cash,
equal to a portion of the PMIC Bonus Pool, as determined by the PMIC
Compensation Committee, in its sole discretion (the "PMIC Performance Bonus").
For purposes hereof, "net income" shall mean, with respect to PMIC, for any
fiscal year, the net income (loss) of PMIC for such fiscal year, determined in
accordance with generally accepted accounting principles, consistently applied;
provided, however, that there shall be excluded from net income (a) the net
income (loss) of any person in which PMIC has a joint interest with a third
party, except to the extent such net income is actually paid to PMIC by dividend
or other distribution during such fiscal year, (b) the net income (or loss) of
any person accrued prior to the date it becomes a subsidiary of PMIC or is
merged into or becomes consolidated with PMIC or its assets are purchased by
PMIC, and (c) the net income (if positive) of any subsidiary of PMIC to the
extent that the declaration or payment of dividends or similar distributions of
such net income by such subsidiary (i) is not at that time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order statute, rule or governmental regulation or (ii) would be subject
to any taxes payable on such dividends or distributions.
(c) In addition to the PMIC Performance Bonus, Executive may receive, and ACT
may grant to Executive, restricted shares of common stock of ACT, with a vesting
schedule and other terms established by the Compensation Committee of the Board
of Directors of ACT (the "ACT Compensation Committee"), in its sole discretion
(the "Incentive Bonus").
(d) Executive acknowledges that the amount of the PMIC Performance Bonus and the
amount of the Incentive Bonus shall at all times be determined by the PMIC
Compensation Committee and the ACT Compensation Committee, respectively, in
their respective sole discretion. The Company shall pay each of the Performance
Bonus and the Incentive Bonus to Executive within thirty (30) days after the
Company's audited results for the applicable fiscal year are delivered to the
Company.
4.3 Earn-Out.
(a) Earn-Out Shares. In the event Pacific Magtron, Inc. ("PMI"), Pacific Magtron
(GA), Inc. ("PMI-GA"), and LiveWarehouse, Inc. ("LW") achieve the Milestones (as
defined in Section 4.3(b) below) for any year during the three (3) year period
commencing January 1, 2005 and expiring December 31, 2007, Executive shall have
the right to receive on March 31 of the immediately following calendar year, the
applicable ratable portion of 66,666,666 shares of restricted common stock of
ACT (priced at $.01 per share, or $666,666 in the aggregate), to be earned at
the end of each such year at the rate of 25% for each of the first and second
years and 50% for the third year (the "Shares"); provided, that in the event the
Milestones are not achieved in any year, except as provided below, such ratable
portion of Shares shall be forfeited entirely, without any ability to re-earn
such Shares in a future year; provided further, that in the event Executive's
employment with the Company is terminated for "cause" by the Company (as
contemplated by Section 6.1 of this Agreement) prior to the expiration of the
initial Employment Period, all of the Shares earned or
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to be earned by Executive shall be forfeited. In the event that Executive's
employment with the Company is terminated prior to the expiration of the initial
Employment Period for any reason other than "cause," Executive shall be
permitted to receive the Shares earned by him prior to such termination, but
shall in no event be entitled to receive Shares to be earned after the
Termination Date (as defined in Section 6.1 below). Notwithstanding the
foregoing, the number of Shares and the price per Share shall be adjusted
accordingly for stock splits, reverse stock splits and other recapitalizations
effected by ACT, so that Executive retains the right, after accounting for such
adjustment, to receive the same percentage of ACT's outstanding shares of Common
Stock as Executive would have had the right to receive had such adjustment not
been so effected.
Upon earning the Shares at the end of each year, if applicable, the Shares will
be placed in escrow with a mutually agreeable escrow agent to be held and
released in accordance with the terms of an escrow agreement in substantially
the form of Exhibit "A" hereto; provided, however, that in the event that the
employment of Executive is terminated by the Company prior to the expiration of
the initial Employment Period without cause (as contemplated by Section 6.2 of
this Agreement), Executive terminates this Agreement for Good Reason (as
contemplated by Section 6.3 of this Agreement), or this Agreement is terminated
due to Executive's death or Disability (as defined below), Executive shall
receive any Shares earned by him no later than the later of (a) the immediately
following March 31 or (b) thirty (30) days after the Termination Date. Upon
release from escrow, the Shares will include piggyback registration rights,
subject to customary underwriters' cutbacks.
Upon receipt of the Shares, Executive will acquire the Shares for his own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act of 1933, as amended. Executive is an "accredited
investor," as such term is defined in Rule 501(a) promulgated pursuant to the
Securities Act of 1933, as amended. Executive acknowledges that Executive has
had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary in light of such personal knowledge of the Company's affairs,
Executive has asked such questions and received answers to the full satisfaction
of Executive. Executive understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares or the fairness of suitability of
the investment in the Shares nor have such authorities passed upon or endorsed
the merits of the offering of the Shares.
Notwithstanding the foregoing, in the event that the Milestones are not achieved
in a given year, the Board of Directors of ACT shall have the right, in its sole
and absolute discretion, to grant to Executive all or a portion of the Shares
that could have been earned by Executive during such year.
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(b) Milestones. Revenue and EBITDA (earnings before interest, taxes,
depreciation and amortization) herein shall be defined according to generally
accepted accounting principles and no allocation from PMIC, ACT or Encompass
overhead shall be included in the calculation of EBITDA. The Milestones for the
combined Revenues and EBITDA of PMI, PMI-GA and LW are:
Calendar Year End Revenues EBITDA
----------------- -------- ------
December 31, 2005 $70,000,000 $490,000
December 31, 2006 $82,000,000 $738,000
December 31, 2007 $95,000,000 $950,000
Notwithstanding anything contained herein to the contrary, the determination of
the Milestones shall be based on unaudited pro forma financial statements of
PMI, PMI-GA and LW, prepared by the management of PMIC and approved by
Executive, the Chief Executive Officer of ACT and the ACT Compensation
Committee.
4.4 Other Benefits. Executive shall also be eligible to participate in any life
and health insurance programs and any incentive, savings and retirement plans
that the Company makes available to all of its executives of similar seniority.
Executive shall also be eligible to receive discretionary performance based
bonuses as approved and authorized by the ACT Compensation Committee, including
any incentive stock programs approved by ACT's shareholders.
4.5 Business Expenses. Executive will be reimbursed, in accordance with the
Company's expense reimbursement policy, for business expenses that have been
pre-approved by the Board or the PMIC CEO upon presentation of vouchers or other
documents reasonably necessary to verify the expenditures and sufficient, in
form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
4.6 Vacation. Executive shall be entitled to take up to four (4) weeks of
vacation per calendar year, which shall be taken in accordance with the
Company's vacation policy in effect from time to time for executives of
comparable seniority.
5. No Competitive Activities; Confidentiality; Invention
5.1 General Restriction. During the Employment Period and for a period of two
(2) years thereafter (the "Restricted Period"), Executive covenants and agrees
that, except on behalf of the Company, he will not, directly or indirectly:
(a) Competing Business. Own, manage, operate, control, participate in the
ownership, management, operation or control of, be employed by, or provide
services as a consultant to, any individual or business that is involved in
business activities that are the same as, similar to or in competition with,
directly or indirectly, any business activities conducted, or actively being
planned, by Encompass and/or PMIC during the Restricted Period and anywhere in
the United States and Canada (it being acknowledged that Encompass' and/or
PMIC's businesses are international in scope). The ownership of less than one
percent (1%) of the outstanding stock of any public corporation shall not be
deemed a violation of this provision.
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(b) Soliciting Customers. Attempt in any manner to contact or solicit any
individual, firm, corporation or other entity (i) that is or has been, a
customer of Encompass and/or PMIC at any time during the Restricted Period, (ii)
to which a proposal has been made by Encompass and/or PMIC during the Restricted
Period or (iii) appearing Encompass' and/or PMIC's new business target list on
the date of Executive's termination (as such list has been prepared and
maintained in accordance with Encompass' and/or PMIC's past practice), for the
purpose of providing services or products similar to the services and products
provided by Encompass and/or PMIC, or engaging in any activity which could be,
directly or indirectly, competitive with the business of Encompass and/or PMIC.
(c) Interfering with Other Relations. Persuade or attempt to persuade any
supplier, vendor, licensor or other entity or individual doing business with
Encompass and/or PMIC to discontinue or reduce its business with Encompass
and/or PMIC or otherwise interfere in any way with the business relationships
and activities of Encompass and/or PMIC.
(d) Employees. Attempt in any manner to solicit any individual, who is at the
time of such attempted solicitation, or was at any time during the one (1) year
period preceding the termination of Executive's employment, an employee or
consultant of Encompass and/or PMIC, to terminate his or her employment or
relationship with Encompass and/or PMIC, or engage such individual, as an
employee or consultant. Cooperate with any other person in persuading, enticing
or aiding, or attempting to persuade, entice or aid, any employee of or
consultant to Encompass and/or PMIC to terminate his or her employment or
business relationship with Encompass and/or PMIC, or to become employed as an
employee or retained as a consultant by any person other than Encompass and/or
PMIC.
In the event of a voluntary or involuntary filing under Chapter 7 of the United
States Bankruptcy Code by PMIC and Encompass that is not dismissed within ninety
(90) days, Executive shall no longer be bound by the restrictions contained in
this Section 5.1.
5.2 Confidentiality Agreement. Executive shall not, either during the Employment
Period or at any time thereafter, use or disclose to any third person any
Confidential Information (as defined below) of the Company, other than at the
direction of the Company, or pursuant to a court order or subpoena, provided
that Executive will give notice of such court order or subpoena to the Company
prior to such disclosure. Upon the termination of Executive's employment with
the Company for any reason, Executive shall return any notes, records, charts,
formulae or other materials (whether in hard copy or computer readable form)
containing Confidential Information (as defined below), and will not make or
retain any copies of such materials. Without limiting the generality of the
foregoing, the parties acknowledge that the Company from time to time may be
subject to agreements with its customers, suppliers or licensors to maintain the
confidence of such other persons' confidential information. The terms of such
agreements may require that the Company's employees, including Executive, be
bound by such agreements, and Executive shall be deemed so bound upon notice to
6
him of the terms of such agreements. The term "Confidential Information" as used
herein shall mean any confidential or proprietary information of the Company
whether of a technical, engineering, operational, financial or economic nature,
including, without limitation, all prices, discounts, terms and conditions of
sale, trade secrets, know-how, customers, inventions, business affairs or
practices, systems, products, product specifications, designs, plans,
manufacturing and other processes, data, ideas, details and other information of
the Company. Confidential Information shall not include information which can be
proven by Executive to have been developed by his own work as of the Effective
Date completely independent of its disclosure by the Company or which is in the
public domain, provided such information did not become available to the general
public as a result of Executive's breach of this Section 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full written
disclosure to the Company and solely the Company of all writings, inventions,
processes, methods, plans, developments, improvements, procedures, techniques
and other innovations of any kind that Executive may make, develop or reduce to
practice, alone or jointly with others, at any time during the Employment
Period, whether during working hours or at any other time and whether at the
request or upon the suggestion of the Company or otherwise, and whether or not
they are eligible for patent, copyright, trademark, trade secret or other legal
protection (collectively, "Innovations"). Examples of Innovations shall include,
but are not limited to, discoveries, research, formulas, tools, know-how,
marketing plans, new product plans, production processes, advertising, packaging
and marketing techniques and improvements to computer hardware or software. The
written disclosures provided for herein shall be made to the PMIC CEO or the
Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be the sole
and exclusive property of the Company. Executive hereby assigns all rights,
title or interest in and to the Innovations to the Company. At the Company's
request and expense, during the Employment Period and at any time thereafter,
Executive will assist and cooperate with the Company in all respects and will
execute documents and give testimony to obtain, maintain, perfect and enforce
for the Company any and all patent, copyright, trademark, trade secret and other
legal protections for the Innovations.
5.5 Remedies. Executive acknowledges that the restrictions contained in the
foregoing Sections 5.1 through 5.4, in view of the nature of the business in
which the Company is engaged, are reasonable and necessary in order to protect
the legitimate interests of the Company, and that the legal remedies for a
breach of any of the provisions of this Section 5 will be inadequate and that
such provisions may be enforced by restraining order, injunction, specific
performance or other equitable relief. Such equitable remedies shall be
cumulative and in addition to any other remedies which the injured party or
parties may have under applicable law, equity, this Agreement or otherwise.
Executive shall not, in any action or proceeding to enforce any of the
provisions of this Section 5, assert the claim or defense that an adequate
remedy at law exists. The prevailing party shall be entitled to recover its
legal fees and expenses in any action or proceeding for breach of this Section
5.
5.6 Company Property. All Confidential Information; all Innovations; and all
correspondence, files, documents, advertising, sales, manufacturers' and other
materials or articles or other information of any kind, in any media, form or
format furnished to Executive by the Company, which may not deemed confidential,
shall be and remain the sole property of the Company ("Company Property"). Upon
termination of Executive's employment or at the Company's request, whichever is
earlier, Executive shall immediately deliver to the Company all such Company
Property.
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5.7 Public Policy/Severability. The parties do not wish to impose any undue or
unnecessary hardship upon Executive following his departure from employment with
PMIC and/or Encompass, as the case may be. The parties have attempted to limit
the provisions of this Section 5 to achieve such a result, and the parties
expressly intend that all provisions of this Section 5 be construed to achieve
such result. If, contrary to the effort and intent of the parties, any covenant
or other obligation contained in this Section 5 shall be found not to be
reasonably necessary for the protection of the Company, to be unreasonable as to
duration, scope or nature of restrictions, or to impose an undue hardship on
Executive, then it is the desire of the parties that such covenant or obligation
not be rendered invalid thereby, but rather that the duration, scope or nature
of the restrictions be deemed reduced or modified, with retroactive effect, to
render such covenant or obligation reasonable, valid and enforceable. The
parties further agree that in the event a court, despite the efforts and intent
of the parties, declares any portion of the covenants or obligations in this
Section 5 invalid, the remaining provisions of this Section 5 shall nonetheless
remain valid and enforceable.
6. Termination.
6.1 Termination For Cause. Notwithstanding anything to the contrary contained
herein, this Agreement may be terminated immediately for "cause," at which time
the Company shall have no further obligations or liabilities to Executive
whether under this Agreement or otherwise and Executive's right to further
compensation and benefits hereunder (including, but not limited to, unearned
Shares) shall immediately cease, other than payment to Executive of Base Salary
accrued, and reimbursement of expenses incurred in accordance with Section 4.5,
prior to the effective date of termination of this Agreement (the "Termination
Date"). As used herein and throughout this Agreement, the term "cause" shall
mean (i) any act or omission by Executive that constitutes malfeasance or
misfeasance in the course of Executive's duties hereunder, or in the objectively
reasonable judgment of the Chief Executive Officer of ACT, the Board of
Directors of ACT, the Board or the PMIC CEO, Executive has been grossly
negligent (including habitual neglect of duties), or insubordinate in carrying
out his duties hereunder, (ii) a material breach of this Agreement by Executive
that is not cured within twenty (20) days of receipt of written notice thereof,
(iii) Executive's breach of a fiduciary duty owed to the Company or its
affiliates, or (iv) Executive's conviction of, or pleading nolo contendere to, a
criminal offense or crime constituting a misdemeanor or felony, or conviction in
respect to any act involving fraud, dishonesty or moral turpitude (other than
minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by the Company without cause
and for any reason or no reason prior to the expiration of the Employment Period
upon thirty (30) days' prior written notice from the Company to the Executive.
8
(b) Severance. In the event that the Company terminates Executive's employment
without cause, the Company shall pay to Executive (i) Base Salary accrued,
Shares earned in accordance with Section 4.3, and expenses incurred in
accordance with Section 4.5, prior to the Termination Date, (ii) any unpaid
bonus owed to Executive for a prior fiscal year, (iii) other benefits earned by
Executive in accordance with Section 4.4 ((i), (ii) and (iii), collectively, the
"Accrued Payments"), which Accrued Payments shall be paid to Executive in
accordance with Section 4.1, Section 4.2, Section 4.3 and Section 4.5, as
applicable, (iv) any accrued vacation under Section 4.6, and (v) an additional
amount of Base Salary which would have been payable to Executive during the six
(6) month period immediately following the Termination Date (the "Severance
Payment"), which Severance Payment shall be payable in cash to Executive in
equal monthly installments on the first business day of each calendar month
during the six (6) month period immediately following the Termination Date.
Except as provided in the preceding sentence, the Company shall have no further
obligations or liabilities to Executive whether under this Agreement or
otherwise and Executive's right to further compensation and benefits hereunder
(including, but not limited to, unearned Shares) shall immediately cease.
6.3 Termination for Good Reason.
(a) Good Reason. Executive may terminate this Agreement for Good Reason at any
time within ninety (90) days after the Executive first has actual knowledge of
the occurrence of such Good Reason. For purposes of this Agreement, the term
"Good Reason" shall mean any of the following: (i) the assignment to Executive
of any duties that are not consistent with the duties set forth in Sections 1
and 3 of this Agreement or any other action by the Company that results in a
material diminution in any of the Executive's positions with the Company or in
the Executive's authority, duties or responsibilities and to which Executive has
not consented (excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
within ten (10) days after receipt of notice thereof given by Executive); (ii)
any failure by the Company to comply with any of the provisions of Section 4 of
this Agreement provided such failure is for an amount in excess of $10,000 and
not cured within five (5) days after receipt of notice thereof given by
Executive or is an isolated, insubstantial and inadvertent failure which is not
remedied by the Company within ten (10) days after receipt of notice thereof
given by the Executive; (iii) the Company's requiring Executive, without
Executive's consent and full agreement, to be based at any office other than at
PMIC's headquarters located in Milpitas, California; and (iv) any failure by the
Company to require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of Encompass, ACT or PMIC to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
(b) Severance. In the event that Executive terminates this Agreement for Good
Reason, the Company shall pay to Executive the Severance Payment in accordance
with Section 6.2(b) of this Agreement. Except as provided in the preceding
sentence, the Company shall have no further obligations or liabilities to
Executive whether under this Agreement or otherwise and Executive's right to
further compensation and benefits hereunder (including, but not limited to,
unearned Shares) shall immediately cease.
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6.4 Termination of Other Positions. Upon the Termination Date, Executive hereby
resigns as Chief Financial Officer and Chief Operating Officer of PMIC and from
any and all other positions as officer and/or director Executive may then hold
with the Company, and as fiduciary of any benefit plan of the Company. Executive
shall promptly execute any further reasonable documentation as requested by the
Company and, if Executive is to receive any payments from the Company, execution
of such further documentation shall be a condition thereof.
7. Disability or Death.
7.1 Disability. If, during the Employment Period, Executive becomes disabled or
incapacitated as determined under the Company's Long Term Disability Policy
("Permanently Disabled"), the Company shall have the right at any time
thereafter (but in no event less than 120 days after the event causing such
disability or incapacity), so long as Executive is then still Permanently
Disabled, to terminate this Agreement upon thirty (30) days' prior written
notice to Executive. In the event the Company does not have a Long Term
Disability Policy at the time of the event causing the Executive to become
Permanently Disabled, "Permanently Disabled" shall mean Executive's inability to
fully perform his duties and responsibilities hereunder to the full extent
required by the Company by reason of illness, injury or incapacity for 120
consecutive days or for more than six (6) months during any twelve (12) month
period. If the Company elects to terminate this Agreement in the event that
Executive becomes Permanently Disabled, the Company shall have no further
obligations or liabilities to Executive, whether under this Agreement or
otherwise (including, but not limited to, unearned Shares), other than payment
to Executive of the Accrued Payments, which Accrued Payments shall be paid to
Executive in accordance with Section 4.1, Section 4.2, Section 4.4 and Section
4.5, as applicable.
7.2 Death. If Executive dies during the Employment Period, this Agreement shall
automatically terminate as of the date of Executive's death, and the Company
shall have no further obligations or liabilities to Executive, whether under
this Agreement or otherwise (including, but not limited to, unearned Shares),
other than payment to Executive's estate of the Accrued Payments, which Accrued
Payments shall be paid to Executive in accordance with Section 4.1, Section 4.2,
Section 4.3 and Section 4.5, as applicable.
8. Dispute Resolution. If there shall be any dispute between the Company and
Executive (i) in the event of any termination of Executive's employment by the
Company, or (ii) otherwise arising out of this Agreement, such dispute shall be
resolved in accordance with the dispute resolution procedures set forth in
Exhibit B attached to this Agreement, the provisions of which are incorporated
as a part of this Agreement, and the parties of this Agreement agree that such
dispute resolution procedures will be the exclusive method for resolution of
disputes under this Agreement; provided, however, that (a) the Company or
Executive may seek preliminary judicial relief if, in such party's judgment,
such action is necessary to avoid irreparable injury during the pendency of such
procedures, and (b) nothing in Exhibit B will prevent either party from
exercising the rights of termination set forth in this Agreement. IT IS
EXPRESSLY UNDERSTOOD THAT BY SIGNING THIS AGREEMENT, WHICH INCORPORATES BINDING
ARBITRATION, THE COMPANY AND EXECUTIVE AGREE TO WAIVE COURT OR JURY TRIAL
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9. Indemnification. Each of the Company and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their respective obligations contained in this
Agreement.
10. Governing Law. This Agreement shall be governed by the internal laws of the
State of Delaware, without regard to its or any other jurisdiction's conflict of
laws principles. Any action to enforce any term hereof shall be brought
exclusively within the state or federal courts of Delaware to which jurisdiction
and venue all parties hereby submit themselves.
11. Binding Effect. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
12. Assignment. Any assignee of the Company shall have the right to enforce the
restrictive covenants set forth in this Agreement, and the Company shall have
the right to assign this Agreement, including the right to enforce such
covenants to any successor or assign of the Company. Executive shall not assign
this Agreement or his rights and obligations hereunder.
13. Notices. All notices, designations, consents, offers, acceptances, waivers
or any other communication provided for herein, or required hereunder, shall be
sufficient if in writing and if sent by registered or certified mail, return
receipt requested, overnight courier, or delivered by hand or confirmed
facsimile transmission to (i) Executive at his last known address on the books
of the Company or (ii) the Company at its principal place of business.
14. Additional Documents. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
15. Counterparts. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
16. Entire Agreement. This Agreement contains the sole and entire agreement and
understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof, including, without limitation,
that certain expired Letter of Intent, dated May 18, 2004, by and among
Executive, the Company and the other parties named therein. There are no
representations, agreements, arrangements or understandings, oral or written,
between or among the parties concerning the subject matter hereto, which are not
fully expressed herein or in any supplemental written agreements of even or
subsequent date hereof.
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17. Severability. If any provision of this Agreement, or the application thereof
to any person or circumstances, shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected thereby,
but rather shall be enforced to the greatest extent permitted by law.
18. Modification. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
19. Contract Headings. All headings of the Sections of this Agreement have been
inserted for convenience of reference only, are not to be considered a part of
this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
20. Waiver. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
21. Representation of Executive. Executive, with the full knowledge that the
Company is relying thereon, represents and warrants that he has not made any
commitment inconsistent with the provisions hereof and that he is not under any
disability which would prevent him from entering into this Agreement and
performing all of his obligations hereunder.
22. Joint Participation in Drafting. Each party to this Agreement participated
in the drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party to
this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By: /s/ Martin Nielson
--------------------------------------
Name: Martin Nielson
Title: Chief Executive Officer
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
--------------------------------------
Name: Wayne I. Danson
Title: President
ENCOMPASS GROUP AFFILIATES, INC., a
Delaware corporation
By: /s/ Martin Nielson
--------------------------------------
Name: Martin Nielson
Title: Chief Executive Officer
EXECUTIVE:
/s/ Theodore S. Li
------------------------------------------
THEODORE S. LI
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EXHIBIT A
DISPUTE RESOLUTION PROCEDURES
1. If a controversy arises that is covered by Section 8 of the Agreement, then
not later than twelve (12) months from the date of the event that is the subject
of dispute Executive or the Company may serve on the other a written notice
specifying the existence of such controversy and setting forth in reasonably
specific detail the grounds of the notice ("Notice of Controversy"); provided
that, in any event, the other party will have at least thirty (30) days from and
after the date of the Notice of Controversy to serve a written notice of any
counterclaim ("Notice of Counterclaim"). The Notice of Counterclaim will specify
the claim or claims in reasonably specific detail. If the Notice of Controversy
or the Notice of Counterclaim, as the case may be, is not served within the
applicable period, the claim set forth therein will be deemed to have been
waived, abandoned and rendered unenforceable.
2. For a three (3) week period following receipt of the Notice of Controversy or
the Notice of Counterclaim, as the case may be, the parties will make a good
faith effort to resolve the dispute through negotiation ("Period of
Negotiation"). Neither party will take any action during the Period of
Negotiation to initiate arbitration proceedings.
3. If the parties agree during the Period of Negotiation to mediate the dispute,
then the Period of Negotiation will be extended by an amount of time to be
agreed upon by the parties to permit such mediation. In no event, however, may
the Period of Negotiation be extended by more than five weeks or, stated
differently, in no event may the Period of Negotiation be extended to encompass
more than a total of eight weeks.
4. If the parties agree to mediate the dispute but are thereafter unable to
agree within a week on the format and procedures for the mediation, then the
effort to mediate will cease, and the period of Negotiation will terminate four
weeks from the Notice of Controversy or the Notice of Counterclaim, as the case
may be.
5. Following the termination of the Period of Negotiation, the dispute,
including the main claim and counterclaim, if any, will be settled by
arbitration, governed by the Federal Arbitration Act, 9 U.S.C. ss.1 et seq.
("FAA"), and judgment upon the award may be entered in any court having
jurisdiction. The format and procedures of the arbitration are set forth below
(referred to below as the "Arbitration Agreement").
6. A notice of intention to arbitrate ("Notice of Arbitration") will be served
within forty-five (45) days of the termination of the Period of Negotiation. If
the Notice of Arbitration is not served within this period, the claim set forth
in the Notice of Controversy or the Notice of Counterclaim, as the case may be,
will be deemed to have been waived, abandoned and rendered unenforceable.
7. The arbitration, including the Notice of Arbitration, will be governed by the
Commercial Rules of the American Arbitration Association ("AAA") in effect on
the date of the Notice of Arbitration, except that the terms of this Arbitration
Agreement will control in the event of any difference or conflict between such
Rules and the terms of this Arbitration Agreement. 8. The arbitrator will reach
a decision on the merits on the basis of applicable legal principles as embodied
in the law of the State of Delaware. The arbitration hearing will take place in
Delaware.
9. There will be one arbitrator, regardless of the amount in controversy. The
arbitrator selected, in order to be eligible to serve, will be a lawyer in
Delaware with at least fifteen (15) years experience specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA will appoint the arbitrator who will
meet the foregoing criteria.
10. At the time of appointment and as a condition of the appointment, the
arbitrator will be apprised of the time limitations and other provisions of this
Arbitration Agreement and will indicate such dispute resolver's agreement to the
Tribunal Administrator to comply with such provisions and time limitations.
11. During the thirty (30) day period following appointment of the arbitrator,
either party may serve on the other a request for limited numbers of documents
directly related to the dispute. Such documents will be produced within seven
(7) days of the request.
12. Following the thirty-day period of document production, there will be a
forty-five (45) day period during which limited depositions will be permissible.
Neither party will take more than five (5) depositions, and no deposition will
exceed three (3) hours of direct testimony.
13. Disputes as to discovery or prehearing matters of a procedural nature will
be promptly submitted to the arbitrator pursuant to telephone conference call or
otherwise. The arbitrator will make every effort to render a ruling on such
interim matters at the time of the hearing (or conference call) or within five
(5) business days thereafter.
14. Following the period of depositions, the arbitration hearing will promptly
commence. The arbitrator will make every effort to commence the hearing within
thirty (30) days of the conclusion of the deposition period and, in addition,
will make every effort to conduct the hearing on consecutive business days to
conclusion.
15. An award will be rendered, at the latest, within nine (9) months of the date
of the Notice of Arbitration and within thirty (30) days of the close of the
arbitration hearing. The award will set forth the grounds for the decision
(findings of fact and conclusions of law) in reasonably specific detail. The
award will be final and nonappealable except as provided in the FAA and except
that a court of competent jurisdiction will have the power to review whether, as
a matter of law, based upon the findings of fact by the arbitrator, the award
should be confirmed or should be modified or vacated in order to correct any
errors of law made by the arbitrator. Such judicial review will be limited to
issues of law, and the parties agree that the findings of fact made by the
arbitrator will be final and binding on the parties and will serve as the facts
to be relied upon by the court in determining the extent to which the award
should be confirmed, modified or vacated. Except for consequential damages
arising from Executive's breach of Section 5 of the Agreement, which shall not
be limited, the award may only be made for compensatory damages, and if any
other damages (whether exemplary, punitive, consequential, statutory or other)
are included, the award will be vacated and remanded, or modified or corrected,
as appropriate to promote this damage limitation.
Notwithstanding the foregoing, nothing contained herein shall limit the
Company's ability to seek a permanent injunction for Executive's breach of
Section 5 of the Agreement.
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of this 30th day of December
2004 ("Effective Date"), by and among Pacific Magtron International Corp., a
Nevada corporation ("PMIC"), Encompass Group Affiliates, Inc., a Delaware
corporation ("Encompass"), and Advanced Communications Technologies, Inc., a
Florida corporation ("ACT"), and Hui Cynthia Lee, an individual whose address is
_______________________________ ("Executive"). For purposes hereof, the terms
PMIC, Encompass and ACT shall include each of their respective subsidiaries and
PMIC, Encompass and ACT shall be referred to collectively herein as the
("Company").
WITNESSETH
WHEREAS, Executive presently serves as a Director and as Secretary of PMIC and
is a shareholder of PMIC;
WHEREAS, ACT, Executive and certain other shareholders of PMIC have entered into
a Stock Purchase Agreement, pursuant to which ACT will purchase all of the
shares of common stock of PMIC owned by Executive and each such other
shareholder (the "Stock Purchase"); and
WHEREAS, it is a condition to the Stock Purchase that Executive enter into this
Agreement with the Company effective as of the Effective Date.
NOW, THEREFORE, in consideration of the mutual covenants and promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment. PMIC hereby employs Executive, and Executive hereby accepts
employment with PMIC, as Senior Vice President, or such other senior executive
position as may be determined by the Board of Directors of PMIC (the "Board")
from time to time during the Employment Period (as defined below). For purposes
of this Agreement, "senior executive position" shall mean a position of Vice
President or a more senior position.
2. Term; Renewal. The term of this Agreement shall commence on the Effective
Date and expire on the second anniversary thereof (the "Employment Period"),
unless earlier terminated in accordance with its terms; provided, however, that
the Employment Period may, by written agreement between the parties hereto, be
extended for an additional one-year period.
3. Employment and Duties.
3.1 Duties and Responsibilities.
(a) Executive's area of responsibility during the Employment Period shall be
that of Senior Vice President of PMIC. Executive shall directly report to the
Chief Executive Officer of PMIC (the "PMIC CEO"), or such other senior executive
officer of ACT or Encompass, as determined from time to time by the Board or the
PMIC CEO. The services to be rendered by Executive pursuant to this Agreement
shall consist of such services as defined and directed by the Board or the PMIC
CEO.
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(b) During the Employment Period, Executive shall serve the Company faithfully
and to the best of her ability; shall devote her entire working time, attention,
energy and skill to her employment and the benefit and business of the Company;
and shall use her best efforts, skills and ability to promote the Company's
interests and to perform such duties as from time to time may be reasonably
assigned to her and are consistent with her titles and positions with the
Company.
(c) During the Employment Period, in addition to any other duties or
responsibilities the Company may give to Executive consistent with Section 1,
Executive shall subject to Section 3.2 below be required to sign, and shall
sign, all certifications and such other documents or instruments requested by
the Board, the Chief Executive Officer of ACT, the Chief Executive Officer of
Encompass, or the PMIC CEO in connection with PMIC's and/or ACT's obligations
under or to (i) the Securities and Exchange Commission, (ii) any exchange or
association on which the Company's shares of capital stock are listed, (iii) any
federal, state or local authority, and/or (iv) any other governmental,
quasi-governmental or non-governmental entity or organization (foreign or
domestic) that regulates or has authority over PMIC and/or ACT. In addition, in
the event Executive, in her current position or in any position Executive
accepts in the future, becomes obligated to sign certifications and such other
documents or instruments as may be required by the rules and regulations
promulgated by any of (i) through (iv) above, Executive shall, subject to
Section 3.2 below, sign all such certifications and other documents or
instruments as required thereby.
3.2 Observance of Rules and Regulations. Executive agrees to observe and comply
with all applicable laws and regulations, as well as the rules and regulations
of the Company with respect to the performance of her duties.
4. Compensation; Benefits and Expenses.
4.1 Base Salary. As compensation for the services to be rendered hereunder,
during the Employment Period, the Company shall pay to Executive a minimum
annual base salary (the "Base Salary") of $120,000.00. The Base Salary shall be
payable in accordance with usual payroll practices of the Company. Executive's
Base Salary shall be reviewed annually by the Compensation Committee of the
Board (the "PMIC Compensation Committee") during the Employment Period and may
be increased, but not decreased, from time to time by the PMIC Compensation
Committee in its sole discretion.
4.2 Bonus.
(a) Within thirty (30) days after the Effective Date, Executive shall receive a
signing bonus in the amount of $225,000.
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(b) Immediately following each fiscal year, PMIC shall set aside for the payment
of PMIC executive bonuses, an amount equal to ten percent (10%) of net income of
PMIC during such fiscal year (the "PMIC Bonus Pool"). For each fiscal year or
portion thereof after the Effective Date and during the Employment Period, PMIC
shall pay to Executive an annual performance bonus, in cash, equal to a portion
of the PMIC Bonus Pool, as determined by the PMIC Compensation Committee, in its
sole discretion (the "PMIC Performance Bonus").
For purposes hereof, "net income" shall mean, with respect to PMIC, for any
fiscal year, the net income (loss) of PMIC for such fiscal year, determined in
accordance with generally accepted accounting principles, consistently applied;
provided, however, that there shall be excluded from net income (a) the net
income (loss) of any person in which PMIC has a joint interest with a third
party, except to the extent such net income is actually paid to PMIC by dividend
or other distribution during such fiscal year, (b) the net income (or loss) of
any person accrued prior to the date it becomes a subsidiary of PMIC or is
merged into or becomes consolidated with PMIC or its assets are purchased by
PMIC, and (c) the net income (if positive) of any subsidiary of PMIC to the
extent that the declaration or payment of dividends or similar distributions of
such net income by such subsidiary (i) is not at that time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order statute, rule or governmental regulation or (ii) would be subject
to any taxes payable on such dividends or distributions.
(c) In addition to the PMIC Performance Bonus, Executive may receive, and ACT
may grant to Executive, restricted shares of common stock of ACT, with a vesting
schedule and other terms established by the Compensation Committee of the Board
of Directors of ACT (the "ACT Compensation Committee"), in its sole discretion
(the "Incentive Bonus").
(d) Executive acknowledges that the amount of the PMIC Performance Bonus and the
amount of the Incentive Bonus shall at all times be determined by the PMIC
Compensation Committee and the ACT Compensation Committee, respectively, in
their respective sole discretion. PMIC shall pay each of the Performance Bonus
and the Incentive Bonus to Executive within thirty (30) days after the Company's
audited results for the applicable fiscal year are delivered to the Company.
4.3 Earn-Out.
(a) Earn-Out Shares. In the event Pacific Magtron, Inc.
("PMI"), Pacific Magtron (GA), Inc. ("PMI-GA"), and LiveWarehouse, Inc. ("LW")
achieve the Milestones (as defined in Section 4.3 below) for any year during the
two (2) year period commencing January 1, 2005 and expiring December 31, 2006,
Executive shall have the right to receive on March 31 of the immediately
following calendar year, the applicable ratable portion of 33,333,333 shares of
restricted common stock of ACT (priced at $.01 per share, or $333,333 in the
aggregate), to be earned at the end of each such year at the rate of 50% for
3
each year (the "Shares"); provided, that in the event the Milestones are not
achieved in any year, except as provided below, such ratable portion of Shares
shall be forfeited entirely, without any ability to re-earn such Shares in a
future year; provided further, that in the event Executive's employment with
PMIC is terminated for "cause" by PMIC (as contemplated by Section 6.1 of this
Agreement) prior to the expiration of the initial Employment Period, all of the
Shares earned or to be earned by Executive shall be forfeited. In the event that
Executive's employment with PMIC is terminated prior to the expiration of the
initial Employment Period for any reason other than "cause," Executive shall be
permitted to receive the Shares earned by her prior to such termination, but
shall in no event be entitled to receive Shares to be earned after the
Termination Date (as defined in Section 6.1 below). Notwithstanding the
foregoing, the number of Shares and the price per Share shall be adjusted
accordingly for stock splits, reverse stock splits and other recapitalizations
effected by ACT, so that Executive retains the right to receive, after
accounting for such adjustment, the same percentage of ACT's outstanding shares
of Common Stock as Executive would have had the right to receive had such
adjustment not been so effected.
Upon earning the Shares at the end of each year, if applicable, the Shares will
be placed in escrow with a mutually agreeable escrow agent to be held and
released in accordance with the terms of an escrow agreement in substantially
the form of Exhibit "A" hereto; provided, however, that in the event that the
employment of Executive is terminated by PMIC prior to the expiration of the
initial Employment Period without cause (as contemplated by Section 6.2 of this
Agreement), Executive terminates this Agreement for Good Reason (as contemplated
by Section 6.3 of this Agreement), or this Agreement is terminated due to
Executive's death or Disability (as defined below), Executive shall receive any
Shares earned by her no later than the later of (a) the immediately following
March 31 or (b) thirty (30) days after the Termination Date. Upon release from
escrow, the Shares will include piggyback registration rights, subject to
customary underwriters' cutbacks.
Upon receipt of the Shares, Executive will acquire the Shares for her own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act of 1933, as amended. Executive is an "accredited
investor," as such term is defined in Rule 501(a) promulgated pursuant to the
Securities Act of 1933, as amended. Executive acknowledges that Executive has
had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary in light of such personal knowledge of the Company's affairs,
Executive has asked such questions and received answers to the full satisfaction
of Executive. Executive understands that no United States federal or state
agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Shares or the fairness of suitability of
the investment in the Shares nor have such authorities passed upon or endorsed
the merits of the offering of the Shares.
Notwithstanding the foregoing, in the event that the Milestones are not achieved
in a given year, the Board of Directors of ACT shall have the right, in its sole
and absolute discretion, to grant to Executive all or a portion of the Shares
that could have been earned by Executive during such year.
(b) Milestones. Revenue and EBITDA (earnings before interest, depreciation,
taxes and amortization) herein shall be defined according to generally accepted
accounting principles and no allocation from PMIC, ACT or Encompass overhead
shall be included in the calculation of EBITDA. The Milestones for the combined
Revenues and EBITDA of PMI, PMI-GA and LW are:
4
Calendar Year End Revenues EBITDA
----------------- -------- ------
December 31, 2005 $70,000,000 $490,000
December 31, 2006 $82,000,000 $738,000
Notwithstanding anything contained herein to the contrary, the determination of
the Milestones shall be based on unaudited pro forma financial statements of
PMI, PMI-GA and LW, prepared by the management of PMIC and approved by
Executive, the Chief Executive Officer of ACT and the ACT Compensation
Committee.
4.4 Other Benefits. Executive shall also be eligible to participate in any life
and health insurance programs and any incentive, savings and retirement plans
that the Company makes available to all of its executives of similar seniority.
Executive shall also be eligible to receive discretionary performance based
bonuses as approved and authorized by the ACT Compensation Committee, including
any incentive stock programs approved by ACT's shareholders.
4.5 Business Expenses. Executive will be reimbursed, in accordance with the
Company's expense reimbursement policy, for business expenses that have been
pre-approved by the Board or the PMIC CEO upon presentation of vouchers or other
documents reasonably necessary to verify the expenditures and sufficient, in
form and substance, to satisfy Internal Revenue Service requirements for such
expenses.
4.6 Vacation. Executive shall be entitled to take up to four (4) weeks of
vacation per calendar year, which shall be taken in accordance with the
Company's vacation policy in effect from time to time for executives of
comparable seniority.
5. No Competitive Activities; Confidentiality; Invention
5.1 General Restriction. During the Employment Period and for a period of two
(2) years thereafter (the "Restricted Period"), Executive covenants and agrees
that, except on behalf of the Company, she will not, directly or indirectly:
(a) Competing Business. Own, manage, operate, control, participate in the
ownership, management, operation or control of, be employed by, or provide
services as a consultant to, any individual or business that is involved in
business activities that are the same as, similar to or in competition with,
directly or indirectly, any business activities conducted, or actively being
planned, by Encompass and/or PMIC during the Restricted Period anywhere in the
United States and Canada (it being acknowledged that Encompass' and/or PMIC's
businesses are international in scope). The ownership of less than one percent
(1%) of the outstanding stock of any public corporation shall not be deemed a
violation of this provision.
(b) Soliciting Customers. Attempt in any manner to contact or solicit any
individual, firm, corporation or other entity (i) that is or has been, a
customer of Encompass and/or PMIC at any time during the Restricted Period, (ii)
to which a proposal has been made by Encompass and/or PMIC during the Restricted
Period or (iii) appearing on Encompass' and/or PMIC's new business target list
on the date of Executive's termination (as such list has been prepared and
maintained in accordance with Encompass' and/or PMIC's past practice), for the
purpose of providing services or products similar to the services and products
provided by Encompass and/or PMIC, or engaging in any activity which could be,
directly or indirectly, competitive with the business of Encompass and/or PMIC.
5
(c) Interfering with Other Relations. Persuade or attempt to persuade any
supplier, vendor, licensor or other entity or individual doing business with
Encompass and/or PMIC to discontinue or reduce its business with Encompass
and/or PMIC or otherwise interfere in any way with the business relationships
and activities of Encompass and/or PMIC.
(d) Employees. Attempt in any manner to solicit any individual, who is at the
time of such attempted solicitation, or was at any time during the one (1) year
period preceding the termination of Executive's employment, an employee or
consultant of Encompass and/or PMIC, to terminate his or her employment or
relationship with Encompass and/or PMIC, or engage such individual, as an
employee or consultant. Cooperate with any other person in persuading, enticing
or aiding, or attempting to persuade, entice or aid, any employee of or
consultant to Encompass and/or PMIC to terminate his or her employment or
business relationship with Encompass and/or PMIC, or to become employed as an
employee or retained as a consultant by any person other than Encompass and/or
PMIC.
In the event of a voluntary or involuntary filing under Chapter 7 of the United
States Bankruptcy Code by PMIC and Encompass that is not dismissed within ninety
(90) days, Executive shall no longer be bound by the restrictions contained in
this Section 5.1.
5.2 Confidentiality Agreement. Executive shall not, either during the Employment
Period or at any time thereafter, use or disclose to any third person any
Confidential Information (as defined below) of the Company, other than at the
direction of the Company, or pursuant to a court order or subpoena, provided
that Executive will give notice of such court order or subpoena to the Company
prior to such disclosure. Upon the termination of Executive's employment with
the Company for any reason, Executive shall return any notes, records, charts,
formulae or other materials (whether in hard copy or computer readable form)
containing Confidential Information (as defined below), and will not make or
retain any copies of such materials. Without limiting the generality of the
foregoing, the parties acknowledge that the Company from time to time may be
subject to agreements with its customers, suppliers or licensors to maintain the
confidence of such other persons' confidential information. The terms of such
agreements may require that the Company's employees, including Executive, be
bound by such agreements, and Executive shall be deemed so bound upon notice to
her of the terms of such agreements. The term "Confidential Information" as used
herein shall mean any confidential or proprietary information of the Company
whether of a technical, engineering, operational, financial or economic nature,
including, without limitation, all prices, discounts, terms and conditions of
sale, trade secrets, know-how, customers, inventions, business affairs or
practices, systems, products, product specifications, designs, plans,
manufacturing and other processes, data, ideas, details and other information of
6
the Company. Confidential Information shall not include information which can be
proven by Executive to have been developed by her own work as of the Effective
Date completely independent of its disclosure by the Company or which is in the
public domain, provided such information did not become available to the general
public as a result of Executive's breach of this Section 5.2.
5.3 Disclosure of Innovations. Executive shall make prompt and full written
disclosure to the Company and solely the Company of all writings, inventions,
processes, methods, plans, developments, improvements, procedures, techniques
and other innovations of any kind that Executive may make, develop or reduce to
practice, alone or jointly with others, at any time during the Employment
Period, whether during working hours or at any other time and whether at the
request or upon the suggestion of the Company or otherwise, and whether or not
they are eligible for patent, copyright, trademark, trade secret or other legal
protection (collectively, "Innovations"). Examples of Innovations shall include,
but are not limited to, discoveries, research, formulas, tools, know-how,
marketing plans, new product plans, production processes, advertising, packaging
and marketing techniques and improvements to computer hardware or software. The
written disclosures provided for herein shall be made to the PMIC CEO or the
Board.
5.4 Assignment of Ownership of Innovations. All Innovations shall be the sole
and exclusive property of the Company. Executive hereby assigns all rights,
title or interest in and to the Innovations to the Company. At the Company's
request and expense, during the Employment Period and at any time thereafter,
Executive will assist and cooperate with the Company in all respects and will
execute documents and give testimony to obtain, maintain, perfect and enforce
for the Company any and all patent, copyright, trademark, trade secret and other
legal protections for the Innovations.
5.5 Remedies. Executive acknowledges that the restrictions contained in the
foregoing Sections 5.1 through 5.4, in view of the nature of the business in
which the Company is engaged, are reasonable and necessary in order to protect
the legitimate interests of the Company, and that the legal remedies for a
breach of any of the provisions of this Section 5 will be inadequate and that
such provisions may be enforced by restraining order, injunction, specific
performance or other equitable relief. Such equitable remedies shall be
cumulative and in addition to any other remedies which the injured party or
parties may have under applicable law, equity, this Agreement or otherwise.
Executive shall not, in any action or proceeding to enforce any of the
provisions of this Section 5, assert the claim or defense that an adequate
remedy at law exists. The prevailing party shall be entitled to recover its
legal fees and expenses in any action or proceeding for breach of this Section
5.
5.6 Company Property. All Confidential Information; all Innovations; and all
correspondence, files, documents, advertising, sales, manufacturers' and other
materials or articles or other information of any kind, in any media, form or
format furnished to Executive by the Company, which may not deemed confidential,
shall be and remain the sole property of the Company ("Company Property"). Upon
termination of Executive's employment or at the Company's request, whichever is
earlier, Executive shall immediately deliver to the Company all such Company
Property.
5.7 Public Policy/Severability. The parties do not wish to impose any undue or
unnecessary hardship upon Executive following her departure from employment with
PMIC and/or Encompass, as the case may be. The parties have
7
attempted to limit the provisions of this Section 5 to achieve such a result,
and the parties expressly intend that all provisions of this Section 5 be
construed to achieve such result. If, contrary to the effort and intent of the
parties, any covenant or other obligation contained in this Section 5 shall be
found not to be reasonably necessary for the protection of the Company, to be
unreasonable as to duration, scope or nature of restrictions, or to impose an
undue hardship on Executive, then it is the desire of the parties that such
covenant or obligation not be rendered invalid thereby, but rather that the
duration, scope or nature of the restrictions be deemed reduced or modified,
with retroactive effect, to render such covenant or obligation reasonable, valid
and enforceable. The parties further agree that in the event a court, despite
the efforts and intent of the parties, declares any portion of the covenants or
obligations in this Section 5 invalid, the remaining provisions of this Section
5 shall nonetheless remain valid and enforceable.
6. Termination.
6.1 Termination For Cause. Notwithstanding anything to the contrary contained
herein, this Agreement may be terminated immediately for "cause," at which time
the Company shall have no further obligations or liabilities to Executive
whether under this Agreement or otherwise and Executive's right to further
compensation and benefits hereunder (including, but not limited to, unearned
Shares) shall immediately cease, other than payment to Executive of Base Salary
accrued, and reimbursement of expenses incurred in accordance with Section 4.5,
prior to the effective date of termination of this Agreement (the "Termination
Date"). As used herein and throughout this Agreement, the term "cause" shall
mean (i) any act or omission by Executive that constitutes malfeasance or
misfeasance in the course of Executive's duties hereunder, or in the objectively
reasonable judgment of the Chief Executive Officer of ACT, the Board of
Directors of ACT, the Board or the PMIC CEO, Executive has been grossly
negligent (including habitual neglect of duties), incompetent or insubordinate
in carrying out her duties hereunder, (ii) a material breach of this Agreement
by Executive that is not cured within twenty (20) days of receipt of written
notice thereof, (iii) Executive's breach of a fiduciary duty owed to PMIC or its
affiliates, or (iv) Executive's conviction of, or pleading nolo contendere to, a
criminal offense or crime constituting a misdemeanor or felony, or conviction in
respect to any act involving fraud, dishonesty or moral turpitude (other than
minor traffic infractions or similar minor offenses).
6.2 Termination without Cause.
(a) Without Cause. This Agreement may be terminated by PMIC without cause and
for any reason or no reason prior to the expiration of the Employment Period
upon thirty (30) days' prior written notice from PMIC to the Executive.
(b) Severance. In the event that PMIC terminates Executive's employment without
cause, PMIC shall pay to Executive (i) Base Salary accrued, Shares earned in
accordance with Section 4.3, and expenses incurred in accordance with Section
4.5, prior to the Termination Date, (ii) any unpaid bonus owed to Executive for
a prior fiscal year, (iii) other benefits earned by Executive in accordance with
Section 4.4 ((i), (ii) and (iii), collectively, the
8
"Accrued Payments"), which Accrued Payments shall be paid to Executive in
accordance with Section 4.1, Section 4.2, Section 4.3 and Section 4.5, as
applicable, (iv) any accrued vacation under Section 4.6, and (v) an additional
amount of Base Salary which would have been payable to Executive during the six
(6) month period immediately following the Termination Date (the "Severance
Payment"), which Severance Payment shall be payable in cash to Executive in
equal monthly installments on the first business day of each calendar month
during the six (6) month period immediately following the Termination Date.
Except as provided in the preceding sentence, the Company shall have no further
obligations or liabilities to Executive whether under this Agreement or
otherwise and Executive's right to further compensation and benefits hereunder
(including, but not limited to, unearned Shares) shall immediately cease.
6.3 Termination for Good Reason.
(a) Good Reason. Executive may terminate this Agreement for Good Reason at any
time within ninety (90) days after the Executive first has actual knowledge of
the occurrence of such Good Reason. For purposes of this Agreement, the term
"Good Reason" shall mean any of the following: (i) the assignment to Executive
of any duties that are not consistent with the duties set forth in Sections 1
and 3 of this Agreement or any other action by the Company that results in a
material diminution in any of the Executive's positions with the Company or in
the Executive's authority, duties or responsibilities and to which Executive has
not consented (excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
within ten (10) days after receipt of notice thereof given by Executive); (ii)
any failure by the Company to comply with any of the provisions of Section 4 of
this Agreement provided such failure is for an amount in excess of $10,000 and
not cured within five (5) days after receipt of notice thereof given by
Executive or is an isolated, insubstantial and inadvertent failure which is not
remedied by the Company within ten (10) days after receipt of notice thereof
given by the Executive; (iii) the Company's requiring Executive, without
Executive's consent and full agreement, to be based at any office other than at
PMIC's headquarters located in Milpitas, California; and (iv) any failure by the
Company to require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of Encompass, ACT or PMIC to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
(b) Severance. In the event that Executive terminates this Agreement for Good
Reason, the Company shall pay to Executive the Severance Payment in accordance
with Section 6.2(b) of this Agreement. Except as provided in the preceding
sentence, the Company shall have no further obligations or liabilities to
Executive whether under this Agreement or otherwise and Executive's right to
further compensation and benefits hereunder (including, but not limited to,
unearned Shares) shall immediately cease.
6.4 Termination of Other Positions. Upon the Termination Date, Executive hereby
resigns as Senior Vice President of PMIC and from any and all other positions as
officer and/or director Executive may then hold with the Company, and as
fiduciary of any benefit plan of the Company. Executive shall promptly execute
any further documentation as requested by PMIC and, if Executive is to receive
any payments from PMIC, execution of such further documentation shall be a
condition thereof.
9
7. Disability or Death.
7.1 Disability. If, during the Employment Period, Executive becomes disabled or
incapacitated as determined under PMIC's Long Term Disability Policy
("Permanently Disabled"), the Company shall have the right at any time
thereafter (but in no event less than 120 days after the event causing such
disability or incapacity), so long as Executive is then still Permanently
Disabled, to terminate this Agreement upon thirty (30) days' prior written
notice to Executive. In the event PMIC does not have a Long Term Disability
Policy at the time of the event causing the Executive to become Permanently
Disabled, "Permanently Disabled" shall mean Executive's inability to fully
perform her duties and responsibilities hereunder to the full extent required by
PMIC by reason of illness, injury or incapacity for 120 consecutive days or for
more than six (6) months during any twelve (12) month period. If PMIC elects to
terminate this Agreement in the event that Executive becomes Permanently
Disabled, the Company shall have no further obligations or liabilities to
Executive, whether under this Agreement or otherwise (including, but not limited
to, unearned Shares), other than payment to Executive of the Accrued Payments,
which Accrued Payments shall be paid to Executive in accordance with Section
4.1, Section 4.2, Section 4.4 and Section 4.5, as applicable.
7.2 Death. If Executive dies during the Employment Period, this Agreement shall
automatically terminate as of the date of Executive's death, and the Company
shall have no further obligations or liabilities to Executive, whether under
this Agreement or otherwise (including, but not limited to, unearned Shares),
other than payment by PMIC to Executive's estate of the Accrued Payments, which
Accrued Payments shall be paid to Executive in accordance with Section 4.1,
Section 4.2, Section 4.3 and Section 4.5, as applicable.
8. Dispute Resolution. If there shall be any dispute between the Company and
Executive (i) in the event of any termination of Executive's employment by the
Company, or (ii) otherwise arising out of this Agreement, such dispute shall be
resolved in accordance with the dispute resolution procedures set forth in
Exhibit B attached to this Agreement, the provisions of which are incorporated
as a part of this Agreement, and the parties of this Agreement agree that such
dispute resolution procedures will be the exclusive method for resolution of
disputes under this Agreement; provided, however, that (a) the Company or
Executive may seek preliminary judicial relief if, in such party's judgment,
such action is necessary to avoid irreparable injury during the pendency of such
procedures, and (b) nothing in Exhibit B will prevent either party from
exercising the rights of termination set forth in this Agreement. IT IS
EXPRESSLY UNDERSTOOD THAT BY SIGNING THIS AGREEMENT, WHICH INCORPORATES BINDING
ARBITRATION, THE COMPANY AND EXECUTIVE AGREE TO WAIVE COURT OR JURY TRIAL.
9. Indemnification. Each of the Company and Executive shall indemnify the other
for any losses, damages, liabilities, judgments, claims, costs, penalties and
expenses incurred by such other party (including, without limitation, costs and
reasonable attorneys' fees and costs), resulting from the indemnifying party's
failure to perform any of their respective obligations contained in this
Agreement.
10
10. Governing Law. This Agreement shall be governed by the internal laws of the
State of Delaware, without regard to its or any other jurisdiction's conflict of
laws principles. Any action to enforce any term hereof shall be brought
exclusively within the state or federal courts of Delaware to which jurisdiction
and venue all parties hereby submit themselves.
11. Binding Effect. Except as otherwise herein expressly provided, this
Agreement shall be binding upon, and shall inure to the benefit of the parties
hereto, their respective heirs, legal representatives, successors and assigns.
12. Assignment. Any assignee of the Company shall have the right to enforce the
restrictive covenants set forth in this Agreement, and the Company shall have
the right to assign this Agreement, including the right to enforce such
covenants to any successor or assign of the Company. Executive shall not assign
this Agreement or her rights and respective obligations hereunder.
13. Notices. All notices, designations, consents, offers, acceptances, waivers
or any other communication provided for herein, or required hereunder, shall be
sufficient if in writing and if sent by registered or certified mail, return
receipt requested, overnight courier, or delivered by hand or confirmed
facsimile transmission to (i) Executive at her last known address on the books
of PMIC or (ii) PMIC at its principal place of business.
14. Additional Documents. Each of the parties hereto agrees to execute and
deliver, without cost or expense to any other party, any and all such further
instruments or documents and to take any and all such further action reasonably
requested by such other of the parties hereto as may be necessary or convenient
in order to effectuate this Agreement and the intents and purposes thereof.
15. Counterparts. This Agreement may be executed simultaneously in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and such counterparts may
be delivered by facsimile transmission, which facsimile copies shall be deemed
originals.
16. Entire Agreement. This Agreement contains the sole and entire agreement and
understanding of the parties and supersedes any and all prior agreements,
discussions, negotiations, commitments and understandings among the parties
hereto with respect to the subject matter hereof, including, without limitation,
that certain expired Letter of Intent, dated May 18, 2004, by and among
Executive, the Company and the other parties named therein. There are no
representations, agreements, arrangements or understandings, oral or written,
between or among the parties concerning the subject matter hereto, which are not
fully expressed herein or in any supplemental written agreements of even or
subsequent date hereof.
17. Severability. If any provision of this Agreement, or the application thereof
to any person or circumstances, shall, for any reason and to any extent, be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall not be affected thereby,
but rather shall be enforced to the greatest extent permitted by law.
11
18. Modification. This Agreement cannot be changed, modified or discharged
orally, but only if consented to in writing by both parties.
19. Contract Headings. All headings of the Sections of this Agreement have been
inserted for convenience of reference only, are not to be considered a part of
this Agreement, and shall in no way affect the interpretation of any of the
provisions of this Agreement.
20. Waiver. Failure to insist upon strict compliance with any of the terms,
covenants, or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition, nor shall any waiver or relinquishment of any right or
power hereunder at any one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
21. Representation of Executive. Executive, with the full knowledge that the
Company is relying thereon, represents and warrants that she has not made any
commitment inconsistent with the provisions hereof and that she is not under any
disability which would prevent him from entering into this Agreement and
performing all of her obligations hereunder.
22. Joint Participation in Drafting. Each party to this Agreement participated
in the drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party to
this Agreement.
[SIGNATURE PAGE FOLLOWS]
12
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written.
PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation
By: /s/ Martin Nielson
------------------------------------------
Name: Martin Nielson
Title: Chief Executive Officer
ADVANCED COMMUNICATIONS TECHNOLOGIES, INC.
By: /s/ Wayne I. Danson
------------------------------------------
Name: Wayne I. Danson
Title: President
ENCOMPASS GROUP AFFILIATES, INC., a
Delaware corporation
By: /s/ Martin Nielson
------------------------------------------
Name: Martin Nielson
Title: Chief Executive Officer
EXECUTIVE:
/s/ Hui Cynthia Lee
----------------------------------------------
HUI CYNTHIA LEE
13
EXHIBIT A
DISPUTE RESOLUTION PROCEDURES
1. If a controversy arises that is covered by Section 8 of the Agreement, then
not later than twelve (12) months from the date of the event that is the subject
of dispute Executive or the Company may serve on the other a written notice
specifying the existence of such controversy and setting forth in reasonably
specific detail the grounds of the notice ("Notice of Controversy"); provided
that, in any event, the other party will have at least thirty (30) days from and
after the date of the Notice of Controversy to serve a written notice of any
counterclaim ("Notice of Counterclaim"). The Notice of Counterclaim will specify
the claim or claims in reasonably specific detail. If the Notice of Controversy
or the Notice of Counterclaim, as the case may be, is not served within the
applicable period, the claim set forth therein will be deemed to have been
waived, abandoned and rendered unenforceable.
2. For a three (3) week period following receipt of the Notice of Controversy or
the Notice of Counterclaim, as the case may be, the parties will make a good
faith effort to resolve the dispute through negotiation ("Period of
Negotiation"). Neither party will take any action during the Period of
Negotiation to initiate arbitration proceedings.
3. If the parties agree during the Period of Negotiation to mediate the dispute,
then the Period of Negotiation will be extended by an amount of time to be
agreed upon by the parties to permit such mediation. In no event, however, may
the Period of Negotiation be extended by more than five weeks or, stated
differently, in no event may the Period of Negotiation be extended to encompass
more than a total of eight weeks.
4. If the parties agree to mediate the dispute but are thereafter unable to
agree within a week on the format and procedures for the mediation, then the
effort to mediate will cease, and the period of Negotiation will terminate four
weeks from the Notice of Controversy or the Notice of Counterclaim, as the case
may be.
5. Following the termination of the Period of Negotiation, the dispute,
including the main claim and counterclaim, if any, will be settled by
arbitration, governed by the Federal Arbitration Act, 9 U.S.C. ss.1 et seq.
("FAA"), and judgment upon the award may be entered in any court having
jurisdiction. The format and procedures of the arbitration are set forth below
(referred to below as the "Arbitration Agreement").
6. A notice of intention to arbitrate ("Notice of Arbitration") will be served
within forty-five (45) days of the termination of the Period of Negotiation. If
the Notice of Arbitration is not served within this period, the claim set forth
in the Notice of Controversy or the Notice of Counterclaim, as the case may be,
will be deemed to have been waived, abandoned and rendered unenforceable.
7. The arbitration, including the Notice of Arbitration, will be governed by the
Commercial Rules of the American Arbitration Association ("AAA") in effect on
the date of the Notice of Arbitration, except that the terms of this Arbitration
Agreement will control in the event of any difference or conflict between such
Rules and the terms of this Arbitration Agreement. 8. The arbitrator will reach
a decision on the merits on the basis of applicable legal principles as embodied
in the law of the State of Delaware. The arbitration hearing will take place in
Delaware.
9. There will be one arbitrator, regardless of the amount in controversy. The
arbitrator selected, in order to be eligible to serve, will be a lawyer in
Delaware with at least fifteen (15) years experience specializing in either
general commercial litigation or general corporate and commercial matters. In
the event the parties cannot agree on a mutually acceptable single arbitrator
from the list submitted by the AAA, the AAA will appoint the arbitrator who will
meet the foregoing criteria.
10. At the time of appointment and as a condition of the appointment, the
arbitrator will be apprised of the time limitations and other provisions of this
Arbitration Agreement and will indicate such dispute resolver's agreement to the
Tribunal Administrator to comply with such provisions and time limitations.
11. During the thirty (30) day period following appointment of the arbitrator,
either party may serve on the other a request for limited numbers of documents
directly related to the dispute. Such documents will be produced within seven
(7) days of the request.
12. Following the thirty-day period of document production, there will be a
forty-five (45) day period during which limited depositions will be permissible.
Neither party will take more than five (5) depositions, and no deposition will
exceed three (3) hours of direct testimony.
13. Disputes as to discovery or prehearing matters of a procedural nature will
be promptly submitted to the arbitrator pursuant to telephone conference call or
otherwise. The arbitrator will make every effort to render a ruling on such
interim matters at the time of the hearing (or conference call) or within five
(5) business days thereafter.
14. Following the period of depositions, the arbitration hearing will promptly
commence. The arbitrator will make every effort to commence the hearing within
thirty (30) days of the conclusion of the deposition period and, in addition,
will make every effort to conduct the hearing on consecutive business days to
conclusion.
15. An award will be rendered, at the latest, within nine (9) months of the date
of the Notice of Arbitration and within thirty (30) days of the close of the
arbitration hearing. The award will set forth the grounds for the decision
(findings of fact and conclusions of law) in reasonably specific detail. The
award will be final and nonappealable except as provided in the FAA and except
that a court of competent jurisdiction will have the power to review whether, as
a matter of law, based upon the findings of fact by the arbitrator, the award
should be confirmed or should be modified or vacated in order to correct any
errors of law made by the arbitrator. Such judicial review will be limited to
issues of law, and the parties agree that the findings of fact made by the
arbitrator will be final and binding on the parties and will serve as the facts
to be relied upon by the court in determining the extent to which the award
should be confirmed, modified or vacated.
2
Except for consequential damages arising from Executive's breach of
Section 5 of the Agreement, which shall not be limited, the award may only be
made for compensatory damages, and if any other damages (whether exemplary,
punitive, consequential, statutory or other) are included, the award will be
vacated and remanded, or modified or corrected, as appropriate to promote this
damage limitation.
Notwithstanding the foregoing, nothing contained herein shall limit the
Company's ability to seek a permanent injunction for Executive's breach of
Section 5 of the Agreement.
3
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is entered into effective as of
December 30, 2004 (the "Effective Date") by and among Advanced Communication
Technologies, Inc., a Florida corporation ("ACT"); THEODORE S. LI ("Li"), and
CATHERINE HWA ("Hwa" and together with Li, referred to as "Li") husband and wife
residing in California; HUI CYNTHIA LEE ("C. Lee") and JEY HSIN YAO ("Yao" and
together with C. Lee, referred to as "Lee"), husband and wife residing in
California. Li and Lee will be collectively referred to hereinafter as
"Indemnitees" or individually as an "Indemnitee."
RECITALS
WHEREAS, Indemnitees collectively own 6,454,300 shares (the "Shares") of the
common stock, par value $0.001 per share, of Pacific Magtron International
Corp., a Nevada corporation ("PMIC");
WHEREAS, ACT and Indemnitees have entered into a Stock Purchase Agreement,
pursuant to which ACT will purchase all of the shares of common stock of PMIC
owned by Indemnitees (the "Stock Purchase");
WHEREAS, Theodore S. Li has entered into an Individual Guaranty (the "Li
Guaranty") relating to the Company's $3,500,000 inventory financing facility
provided by Textron Financial Corporation (the "Textron Facility"), a true and
correct copy of which is attached hereto as Exhibit A;
WHEREAS, Hui Cynthia Lee has entered into an Individual Guaranty (the "Lee
Guaranty") relating to the Textron Facility, a true and correct copy of which is
attached hereto as Exhibit B; and
WHEREAS, it is a condition to the Stock Purchase that the Company and
Indemnitees enter into this Agreement effective as of the Effective Date.
AGREEMENTS
The parties hereto, intending to be legally bound by this Agreement, hereby
agree as follows:
1. Capitalized Terms. All capitalized terms used but not otherwise defined in
this Agreement will have the meaning ascribed to such terms in the Stock
Purchase Agreement entered into by and between ACT and Indemnitees (the
"Purchase Agreement").
2. Indemnification of Indemnitees.
(a) General. From and after the Effective Date, the ACT will indemnify
Indemnitees as provided in this Section 2. The term "Damages" will mean all
liabilities, demands, claims, actions or causes of action, regulatory,
legislative, or judicial proceedings or investigations, assessments, levies,
losses, fines, penalties, damages, costs and expenses, including, without
limitation, reasonable attorneys', accountants', investigators', and experts'
fees and expenses, arising out of, in connection with, or in any manner relating
to any such claims. (b) Indemnification of Li. ACT hereby agrees to defend,
indemnify, save, and keep harmless Li, and their successors and permitted
assigns, against and from all Damages sustained or incurred by any of them
resulting from or arising out of or by virtue of their respective obligations
under the Li Guaranty, including, but not limited to, any Damages arising from
or relating to: (i) any breach by the Company or PMIC of, or failure by the
Company or PMIC to comply with, any of its covenants or obligations under the
Textron Facility; (ii) the failure to discharge when due any obligation or
liability of the Company or PMIC under the Textron Facility, or any claim
against Li with respect to any such liability or obligation or alleged liability
or obligation; and (iii) any claims by parties other than the Company or PMIC
relating to the Textron Facility to the extent caused by acts or omissions of
the Company or PMIC occurring after the Effective Date, including, without
limitation, Damages which arise out of the ACT's closing of the Stock Purchase
or subsequent operation of PMIC's business.
(c) Indemnification of Lee. ACT hereby agrees to defend, indemnify, save, and
keep harmless Lee, and their successors and permitted assigns, against and from
all Damages sustained or incurred by any of them resulting from or arising out
of or by virtue of their respective obligations under the Lee Guaranty,
including, but not limited to, any Damages arising from or relating to: (i) any
breach by the Company or PMIC of, or failure by the Company or PMIC to comply
with, any of its covenants or obligations under the Textron Facility; (ii) the
failure to discharge when due any obligation or liability of the Company or PMIC
under the Textron Facility, or any claim against Lee with respect to any such
liability or obligation or alleged liability or obligation; or (iii) any claims
by parties other than the Company or PMIC relating to the Textron Facility to
the extent caused by acts or omissions of the Company or PMIC occurring after
the Effective Date, including, without limitation, Damages which arise out of
the ACT's closing of the Stock Purchase or subsequent operation of PMIC's
business.
3. Selection of Counsel. ACT assumes the defense of any claims for Damages with
legal counsel reasonably acceptable to Indemnitees.
4. Settlement. ACT will not settle any claim in any manner which would impose
any obligation on any Indemnitee, without such Indemnitee's prior written
consent.
5. Enforcement.
(a) In any action for indemnification, the burden of proving that
indemnification is not required under this Agreement will be on the Company.
(b) In the event that any action is instituted under this Agreement, or to
enforce or interpret any of the terms or conditions of this Agreement, the
prevailing party will be entitled to recover from, and have paid by, the other
party all court and arbitrator's costs and expenses, including reasonable
counsel fees, incurred by the prevailing party with respect to such action.
2
6. Severability. In the event that any provision of this Agreement is determined
by a court of competent jurisdiction to require the Company to do or to fail to
do any act which is in violation of applicable law, such provision will be
limited or modified in its application to the minimum extent necessary to avoid
a violation of law, and, as so limited or modified, such provision and the
balance of this Agreement will be enforceable in accordance with their terms.
7. Choice of Law. This Agreement will be governed by and construed and enforced
in accordance with the laws of the State of California.
8. Continuation of Indemnification. All agreements and obligations of the
Company contained herein will continue during the period that the Li Guaranty
and the Lee Guaranty are effective, as the case may be, and will continue
thereafter so long as Indemnitees will be subject to any possible claims for
Damages under such agreements.
9. Subrogation. In the event of payment by the Company under this Agreement, the
Company will be subrogated to the extent of such payment to all of the rights of
recovery of each Indemnitee, who will execute all documents and take all actions
reasonably requested by the Company to implement such right of subrogation.
10. Successors and Assigns. This Agreement will be (i) binding upon all
successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law), and (ii) will be binding on and inure to the benefit of the
heirs, personal representatives and estate of each Indemnitee. In the event that
the Company or any of its assets is sold or in the event that Company is merged
with any other entity, the Company will insure that a term and condition of the
sale or merger will be that all of Company's obligations under this Agreement
will be assumed by the buyer or successor.
11. Amendment. No amendment, modification, termination or cancellation of this
Agreement will be effective unless made in writing signed by each of the parties
hereto.
12. Authorization and Approval. The Company confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it under this
Agreement to induce Indemnitees to agree to the Stock Purchase, and acknowledges
that Indemnitees are relying upon the full enforcement and binding nature of
this Agreement in continuing in finalizing such transaction.
3
IN WITNESS WHEREOF, the Company and Indemnitees have executed this Agreement as
of the Effective Date.
INDEMNITEES:
/s/ Hui Cynthia Lee
-------------------------------------------
HUI CYNTHIA LEE, an individual
/s/ Jey Hsin Yao
-------------------------------------------
JEY HSIN YAO, an individual
/s/ Theodore S. Li
-------------------------------------------
THEODORE S. LI, an individual
/s/ Catherine Hwa
-------------------------------------------
CATHERINE HWA, an individual
THE COMPANY:
Advanced Communication Technologies, Inc.,
a Florida corporation
By: /s/ Wayne I. Danson
---------------------------------------
Wayne I. Danson, President
4
EXHIBIT A
Li Guaranty
(Attached)
EXHIBIT B
Lee Guaranty
(Attached)
Contact Information Hawk Associates, Inc. Frank N. Hawkins, Jr. or
Julie Marshall Phone: 305-852-2383 E-mail: info@hawkassociates.com
FOR IMMEDIATE RELEASE:
Advanced Communications Acquires 62% Controlling Interest in Pacific Magtron
NEW YORK, January 3, 2005 -- Advanced Communications Technologies, Inc. (OTC
Bulletin Board: ADVC), a holding company with subsidiaries specializing in the
repair of computers, peripherals and consumer electronics, announced that it has
completed the acquisition of 62% of the outstanding stock of Pacific Magtron
International Corp. (OTC Bulletin Board: PMIC), a California-based distributor
and reseller of computer systems, components, peripherals and software.
Under the terms of the agreement, Advanced Communications purchased 6,454,300
shares of Pacific Magtron's common stock from Ted Li and Hui Cynthia Lee at
$0.077 per share, for a total purchase price of $500,000 payable by Advanced
Communications' issuance of one-year promissory notes convertible into shares of
Advanced Communications. Pacific Magtron will continue to operate as a separate
company and its common stock will continue to trade on the Over-the-Counter
Bulletin Board under the PMIC symbol.
Wayne Danson, Advanced Communications' president and chief financial officer,
said, "During its 14 years of operation in the distribution and reselling
industry, Pacific Magtron has accumulated a customer base of thousands of
leading retailers, technology-based system integrators and other resellers. With
the acquisition of a controlling interest in the company, Advanced
Communications integrates Pacific Magtron's customers with those of our
technology repair business, Cyber-Test, in order to strengthen both companies'
bases. Pacific Magtron also brings annual revenues in excess of $70 million.
With this partnership, our assets have grown to $22 million with an annual
top-line run rate of approximately $80 million."
Ted Li, who co-founded Pacific Magtron in 1990 and has been its CEO since 1995,
has over 25 years of experience in the computer software and hardware arena and
is responsible for Pacific Magtron's operations, financial activities and
technical functions. Li will remain with Pacific Magtron as chief financial
officer and chief operating officer under a three-year employment agreement.
Li said, "The expanded resources that Advanced Communications brings to the
table will benefit Pacific Magtron significantly. The execution of their
acquisitions strategy in related industries should expand our customer base for
the distribution and sales of computer systems, components, peripherals and
software. The structure is a perfect fit for our company."
Hui Lee, who co-founded Pacific Magtron with Li, has over 20 years of experience
in the computer manufacturer and reseller's marketplace and is responsible for
Pacific Magtron's sales and purchasing operations. Lee remains with Pacific
Magtron as executive vice president under a two-year employment contract,
primarily focusing on product procurement and business development in the Asian
market and the Pacific Rim.
Lee added, "This cooperative relationship is a giant step forward for Pacfic
Magtron in terms of our ability to source and market not only our existing
offerings, but significantly increase the breath of offerings to an expanded
customer base. It will also result in a stronger team of professionals in the
computer and office equipment-related industry."
Martin Nielson, president and CEO of Encompass Group Affiliates, Advanced
Communications' operating subsidiary, has assumed the title of president and CEO
of Pacific Magtron. Nielson said, "We are delighted to have acquired control of
a company that puts us on track toward achieving our goal of becoming the go-to
source for office-related technology and services. Pacific Magtron has provided
over 1,800 microcomputer products to over 8,000 system integrators and resellers
in the United States and abroad. The company has established a reputation of
excellence as a major multimedia peripheral distributor in Silicon Valley since
its inception in 1990.
"We are in the process of implementing commercial programs that take advantage
of the synergies provided by owning both Cyber-Test and our controlling interest
in Pacific Magtron. These new programs will incorporate the benefits of
improving our sales while reducing our costs of products and services. This
acquisition should benefit all parties involved, from shareholders to customers.
When combined with the assets we acquired earlier in the year plus the
enhancements realized recently in our balance sheet, it's a win-win
transaction."
In connection with the transaction, Pacific Magtron also announced that it has
hired Rick Martin as executive vice president in charge of strategic business
development and marketing. Martin has over 25 years of experience in product
management, marketing, and distribution channel development with such companies
as Compaq Computer, Businessland and Gap Stores. Most recently, Martin served as
chairman and CEO of Positive Communications, a privately held national wireless
services provider.
About Pacific Magtron International Corp.
Pacific Magtron International Corp., based in Milpitas, Calif., is a publicly
traded distributor, e-commerce reseller and system/solution provider of a wide
range of systems, hardware components and software products with online sales.
Its customer base includes a wide spectrum of technology-based suppliers to the
consumer, corporate, educational and government markets. Pacific Magtron offers
over 1,800 different computer products from more than 50 vendors including a
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line of peripherals sold under its trademarked "EZ-Media" brand name. It has
long-standing relationships with many of the industry's most recognizable and
innovative computer peripheral manufacturers, including Microsoft, Sony,
Plextor, Creative Labs, Adaptec, ATI, Kingston and Logitech, among others.
Pacific Magtron also maintains and operates a system integration facility
located in Norcross, Georgia. For more information, visit Pacific Magtron's
website at http://www.pacificmagtron.com.
About Advanced Communications Technologies, Inc. Advanced Communications
Technologies, Inc. is a New York City-based public holding company that, through
its wholly owned subsidiary and principal operating unit Encompass Group
Affiliates, Inc., owns Cyber-Test, Inc., an established electronic equipment
repair company based in Longwood, Fla. Through its wholly owned investment
subsidiary Hudson Street Investments, Inc., Advanced Communications also owns a
minority interest in Yorkville Advisors Management, LLC, an investment
management partnership. For more information, visit Advanced Communications'
website at http://www.advancedcomtech.net.
A profile for investors on Advanced Communications may be found at the website
http://www.hawkassociates.com/advancedcommunications/profile.htm.
An online investor kit containing Advanced Communications' press releases, SEC
filings, current price Level II quotes, interactive Java stock charts and other
useful information for investors can be found at http://www.hawkassociates.com
and http://www.hawkmicrocaps.com.
This release and oral statements made from time to time by the company's
representatives concerning the same subject matter may contain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements can be identified by introductory words such as
"expects," "plans," "intends," "shoulds," "believes," "will," "estimates,"
"forecasts," "projects" or words of similar meaning, and by the fact that they
do not relate strictly to historical or current facts. Many factors may cause
actual results to differ from forward-looking statements, including inaccurate
assumptions and a broad variety of risks and uncertainties, some of which are
known and others of which are not. Known risks and uncertainties include those
identified from time to time in the reports filed by the company with the
Securities and Exchange Commission, which should be considered together with any
forward looking statement. No forward looking statement is a guarantee of future
results or events, and one should avoid placing undue reliance on such
statements.
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