TABLE OF CONTENTS

 

1.	SALE AND TRANSFER OF INTERESTS; CLOSING
	1.1	Interests
	1.2	Purchase Price
	1.3	Adjustment Amount
	1.4	Deferred Payments
2.	REPRESENTATIONS AND WARRANTIES OF SELLERS
	2.1	Organization and Good Standing
	2.2	Power, Authorization and Validity
	2.3	Capitalization
	2.4	Subsidiaries
	2.5	No Violation of Articles of Organization or Existing Agreements
	2.6	Litigation
	2.7	Company Financial Statements
	2.8	Employee and Labor Matters
	2.9	Taxes
	2.10	Title to Properties; Condition of Equipment and Property
	2.11	Absence of Certain Changes
	2.12	Agreements and Commitments
	2.13	Intellectual Property
	2.14	Compliance with Laws
	2.15	Certain Transactions and Agreements
	2.16	Benefit Plans; ERISA.
	2.17	Books and Records
	2.18	Insurance
	2.19	Environmental, Health and Safety Matters
	2.20	Product and Service Warranties
	2.21	Customers; Backlog; Returns and Complaints
	2.22	Suppliers
	2.23	Inventory
	2.24	Accounts Receivable
	2.25	Restrictions on Business Activities
	2.26	Certain Payments
	2.27	Bank Accounts
	2.28	Other Entities’ Liabilities
	2.29	Debt
	2.30	Company Documents
	2.31	No Brokers
	2.32	Disclosure
3.	REPRESENTATIONS AND WARRANTIES OF BUYER
	3.1	Organization and Good Standing
	3.2	Power, Authorization and Validity

 

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	3.3	No Violation of Certificate or Existing Agreements
	3.4	Litigation
	3.5	No Brokers
	3.6	No Restrictions
4.	CLOSING MATTERS
	4.1	The Closing
	4.2	Seller Deliveries
	4.3	Buyer Deliveries
5.	SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES
	5.1	Survival of Representations
	5.2	Agreement to Indemnify
6.	MISCELLANEOUS
	6.1	Governing Law; Dispute Resolution
	6.2	Assignment; Binding Upon Successors and Assigns
	6.3	Severability
	6.4	Counterparts
	6.5	Amendment and Waivers
	6.6	No Waiver
	6.7	Expenses
	6.8	Notices
	6.9	Stamp Duty
	6.10	Construction of Agreement
	6.11	Further Assurances
	6.12	Absence of Third-Party Beneficiary Rights
	6.13	Public Announcement
	6.14	Entire Agreement
	6.15	Sellers Release

 

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Directory of Defined Terms

 

	Section
Accrued Liabilities	1.3
Agreement	Paragraph 1
Balance Sheet Date	2.7(a)
Bookings	1.4(a)(ii)
Buyer	Paragraph 1
Buyer Ancillary Agreements	3.2(a)
Cash Payment	1.2
Claim	2.6
Closing	4.1
Closing Date	4.1
Closing Financial Statements	1.3(a)
Company	Recitals
Company Ancillary Agreements	2.2(a)
Company Disclosure Letter	2
Consulting Agreements	4.1(c)
Contingent Reduction Amount	5.2(l)
Copyrights	2.13(a)(iii)
Damage Cap	5.2(c)
Damages	5.2(a)
Debt	2.29
Disagreement Notice	1.3(a)
Employee Benefit Plan	2.15(a)
Enforceability Exceptions	2.2(c)
Environmental, Health and Safety Requirements	2.19(a)
ERISA	2.15(a)
Escrow Agent	4.1(e)
Escrow Agreement	4.1(e)
Escrow Promissory Note	4.3(c)
Excluded Liabilities	5.2(d)
Financial Statements	2.7(a)
GAAP	1.3
Governmental Body	2.6
Gross Margin	1.4(a)(v)
Incremental Maintenance Fees	1.4(a)(iv)
Indemnified Person or Indemnified Persons	5.2(a)
Intellectual Property	2.13(a)
Interests	Recitals
Knowledge	2.6
L.M. Maxson	Paragraph 1

 

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	Section
Legal Requirements	2.14
Listed Intellectual Property	2.13(c)(i)
Long-Term Bookings	1.4(a)(ii)
Marks	2.13(a)(i)
Material Adverse Change	2.5
Material Adverse Effect	2.5
Material Agreements	2.12
Members Ancillary Agreements	2.2(a)
Net Realizable Receivables	1.3
Noncompetition Agreements	4.1(d)
Notice of Claim	5.2(h)
NPAC Deferred Payments	1.4(b)
P. McGuire	Paragraph 1
Patents	2.13(a)(ii)
PASCO	2.31
Permitted Lien	2.10
Person	2.6
Plan	2.15(a)
Promissory Note	4.3(b)
Purchase Price	1.2
Qualifying Revenue	1.4(a)(iii)
Sales Tax	5.2(i)
Sellers	Paragraph 1
Sellers Indemnified Person	5.2(b)
Significant Customer	2.21
Significant Supplier	2.22
Site	2.19(e)
Source Code	2.21
Tax or Taxes	2.9
Tax Return	2.9
Trade Secrets	2.13(a)(v)
Treasury Regulations	2.9
TSE Deferred Payments	1.4(a)
TSE Deferred Payments Period	1.4(a)(i)
TSE Products	1.4(a)(ii)
Unaffiliated Firm	1.3(a)
Working Capital	1.3

 

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ACQUISITION AGREEMENT

 

THIS ACQUISITION AGREEMENT (“ Agreement ”) is made as of October 15, 2004, by Evolving Systems, Inc., a Delaware corporation (“ Buyer ”), Peter McGuire, an individual resident in the State of Colorado (“ P. McGuire ”), and Lisa Marie Maxson, an individual resident in the State of Colorado (“ L.M. Maxson ” and, collectively with P. McGuire, “ Sellers ”).

 

RECITALS

 

Sellers desire to sell, and Buyer desires to purchase, all of the issued and outstanding ownership interests and all options, warrants and other rights to acquire ownership interests (the “ Interests ”) of Telecom Software Enterprises, LLC, a Colorado limited liability company (referred to herein as “ Company ” or “ TSE ” ), for the consideration and on the terms set forth in this Agreement.

 

NOW, THEREFORE , in consideration of the mutual agreements, covenants and other promises set forth herein, the mutual benefits to be gained by the performance thereof, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and accepted, the parties hereto agree as follows:

 

1.                                       SALE AND TRANSFER OF INTERESTS; CLOSING

 

1.1           Interests .  Subject to the terms and conditions of this Agreement, Sellers hereby sell and transfer the Interests to Buyer, and Buyer hereby purchases and acquires the Interests from Sellers free and clear of all encumbrances, liens and claims other than restrictions on transfer under federal and state securities laws and as set forth in Part 2.3(a) of the Company Disclosure Letter.

 

1.2           Purchase Price .  The aggregate purchase price (the “ Purchase Price ”) for the Interests, subject to Section 5.2(l), is $1,500,000 in cash (the “ Cash Payment ”) plus (a) the Promissory Note and Escrow Promissory Note in an aggregate amount equal to $888,775, (b) the Adjustment Amount (which may be a negative number resulting in a decrease to the Purchase Price) and (c) the Deferred Payments.  The Purchase Price shall be paid and delivered as follows:

 

(a)           the Cash Payment, Promissory Note and Escrow Promissory Note  shall be delivered and paid in accordance with Section 4.3;

 

(b)           the Adjustment Amount shall be calculated and paid in cash in accordance with Section 1.3; and

 

(c)           the Deferred Payments shall be calculated and paid in cash in accordance with Section 1.4.

 

1.3           Adjustment Amount .  The “ Adjustment Amount ” (which may be a positive or negative number) will be equal to (a) the Working Capital of Company as of the Closing Date, minus (b) $(111,225).  By way of example, (a) if the Working Capital of Company as of the Closing Date is actually $(111,275), the Adjustment Amount would be $(50.00) and the

 

 

Purchase Price would be reduced by $50.00; and (b) if the Working Capital of Company as of the Closing Date is actually $(111,175), the Adjustment Amount would be $50.00 and the Purchase Price would be increased by $50.00.  “ Working Capital ” for this purpose will be calculated as the sum of all cash, cash equivalents, prepaid expenses, realizable deposits and Net Realizable Receivables of Company, less the sum of all accounts payable, Accrued Liabilities, unearned revenue (e.g. income received but not yet earned), flex spending plan payables, payroll tax payables and Deferred Revenue Costs of Company, each calculated in conformity with generally accepted accounting principles applicable in the United States (“ GAAP ”).  “ Accrued Liabilities ” includes all commission expenses payable after Closing for sales with respect to which Company has received total or partial payments prior to Closing, income tax liabilities, royalties, professional and legal fees and other appropriate liabilities of any kind.  By way of clarification and not by way of limitation, the calculation of working capital shall not include any future expenses in connection with Company’s real estate lease or any sales tax.  “ Net Realizable Receivables ” means all accounts receivable (reduced by applicable allowances for doubtful accounts in accordance with GAAP) less (i) royalty expenses accrued in connection with such accounts receivable, and (ii) actual direct costs typically incurred by Company based upon past practice and experience in the packaging, installation and training of and for the applicable products included in such accounts receivable if such packaging, installation and training was not completed prior to the Closing Date.  “ Deferred Revenue Costs ” means, for each currently effective maintenance and compliance service contract of Company (the “ Effective Contracts ”), (i) the actual direct costs typically incurred by Company based upon past practices and experience in providing maintenance and compliance service under contracts such as the Effective Contract during the previous twelve consecutive calendar months (“ Typical Costs ”), multiplied by (ii) a fraction, the numerator of which is the number months remaining on the term under such Effective Contract (the “ Remaining Term ”), and the denominator of which is the number of months in the original term (the “ Original Term ”) of such Effective Contract .  By way of example of the calculation of Deferred Revenue Costs and for illustrative purposes only, assuming the following two Effective Contracts are in place:  (i) a customer (the “ First Customer ”) with a maintenance service contract with Typical Costs of $60,000 with an Original Term of twelve (12) months and a Remaining Term of four (4) months, and (ii) a customer (“ Second Customer ”) with a maintenance service contract with Typical Costs of $30,000 with an Original Term of twelve (12) months and a Remaining Term of six (6) months and a compliance service contract with Typical Costs of $50,000 with an Original Term of twelve (12) months and a Remaining Term of six (6) months, the Deferred Revenue Costs for the Effective Contract of the First Customer would total $20,000 ($60,000 multiplied by (4/12)) and the Deferred Revenue Costs for the Effective Contracts of the Second Customer would total $40,000 (($30,000 multiplied by (6/12)) plus ($50,000 multiplied by (6/12)), for a total Deferred Revenue Costs of $60,000.

 

(a)           Buyer will prepare (or cause to be prepared) financial statements (“ Closing Financial Statements ”) of Company as of the Closing Date, including a computation of the Working Capital as of the Closing Date.  Buyer will deliver the Closing Financial Statements to Sellers within sixty (60) days after the Closing Date.  The Working Capital calculation shall be deemed accepted and conclusive and binding, unless Sellers shall give written notice to Buyer of the items with which Sellers disagree (“ Disagreement Notice ”) within twenty (20) days of the actual receipt by Sellers of the Closing Financial Statements (“ Disagreement Notice Date ”).  The Disagreement Notice shall specify each item disagreed with

 

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by Sellers (or Sellers’ calculation thereof) and the dollar amount of the disagreement and specify in reasonable detail the basis for each disagreement.  Buyer and Sellers shall, during the twenty (20) days after receipt by Buyer of the Disagreement Notice, negotiate in good faith to resolve any such disagreements with respect to the Closing Financial Statements and Working Capital calculation.  If at the end of such twenty (20) days, the parties have been unable to resolve their disagreements, such disagreements shall be resolved by Grant Thornton LLP (the “ Unaffiliated Firm ”).  The Unaffiliated Firm shall (i) resolve the disagreement as to the Closing Financial Statements as promptly as possible after its engagement by the parties, (ii) consider and resolve only those items in the Disagreement Notice which remain unresolved between Buyer and Sellers, and (iii) otherwise employ such procedures as it, in it sole discretion, deems necessary or appropriate under the circumstances.  The Unaffiliated Firm shall submit to the parties a report (the “ Unaffiliated Firm Report ”) of its review of the items in the Disagreement Notice as promptly as practicable and shall include in the Unaffiliated Firm Report its calculation of the Working Capital, which adjustments shall be no more favorable to Buyer than reflected in the Closing Financial Statements, and no more favorable to Sellers than reflected in the Disagreement Notice.  The date Buyer and Sellers receive the Unaffiliated Firm Report shall be the “ Unaffiliated Firm Report Date ”.  The calculations so made by the Unaffiliated Firm in the Unaffiliated Firm Report shall be conclusive and binding on, and non-appealable by, the parties hereto.  The fees and disbursements of the Unaffiliated Firm in connection with preparation and delivery of the Unaffiliated Firm Report shall be borne one half by Sellers and one half by Buyer.  Each of Buyer and Sellers shall promptly cooperate in good faith with the Unaffiliated Firm to assist in the Unaffiliated Firm’s preparation of the Unaffiliated Firm Report.

 

(b)           On the third (3 ^rd ) business day following the final determination of the Adjustment Amount (such date to be the Disagreement Notice Date or the Unaffiliated Firm Report Date, as applicable), if the Adjustment Amount is positive, Buyer will pay such positive amount to Sellers (in accordance with their payment instructions), and if the Adjustment Amount is negative, Buyer may reduce the principle amount of the Escrow Promissory Note by such amount and if the Escrow Promissory Note principle amount is not sufficient, then such amount shall be satisfied in accordance with Section 5.2(j).

 

1.4           Deferred Payments .  The total “ Deferred Payments ” amount payable (or deemed paid in accordance with Section 5.2(j)) to Sellers in accordance with the terms of this Agreement shall equal the sum of (I) the TSE Deferred Payments; provided, however, in no event shall the TSE Deferred Payments, in the aggregate, exceed $2,500,000; plus (II) the NPAC Deferred Payments; provided, however, in no event shall the NPAC Deferred Payments, in the aggregate, exceed $1,000,000.

 

(a)           The “ TSE Deferred Payments ” shall be calculated and paid as follows:

 

(i)            The TSE Deferred Payments will be paid over a twenty four (24) month period following the Closing (or such lesser time that it takes for Sellers to earn the $2,500,000 maximum TSE Deferred Payments, such period of time, the “ TSE Deferred Payments Period ”) based upon Bookings.  Payments will be made based upon Gross Margin from Qualifying Revenue as set forth below.

 

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(ii)           “ Bookings ” shall mean orders which do not contain a clause explicitly allowing cancellation by the customer and which are expected to be recognized as revenue in the subsequent twelve (12) months for orders, licenses or use of, or services rendered in connection with, TSE Products and Incremental Service Fees, signed by a customer and received by Buyer during the TSE Deferred Payments Period.

 

(iii)          “ Long-Term Bookings ” shall mean orders which do not contain a clause explicitly allowing cancellation by the customer and which are for orders, licenses or use of, or services rendered in connection with, TSE Products and Incremental Service Fees, signed by a customer and received by Buyer during the TSE Deferred Payments Period, but not expected to be recognized as revenue in the subsequent twelve (12) months thereafter.

 

(iv)          “ Qualifying Revenue ” means revenue recognized by Buyer in accordance with GAAP from:

 

(I)            Bookings (even if payment is received after the TSE Deferred Payments Period), including without limitation, (i) license fees; (ii) professional or other types of services fees (iii) product or other types of use fees or royalties; and (iv) Incremental Service Fees; and

 

(ii)           Long Term Bookings (even if payment is received after the TSE Deferred Payments Period) including without limitation, (i) license fees; (ii) professional or other types of services fees (iii) product or other types of use fees or royalties; and (iv) Incremental Service Fees.

 

(v)           “ Incremental Service Fees ” means fees paid for maintenance or compliance services in excess of $846,548 per calendar year (2005 and 2006); provided, however, that such amount shall be reduced by the Contingent Reduction Amount in the event that the Purchase Price is reduced by the Contingent Reduction Amount in accordance with Section 5.2(l).

 

(vi)          “ Gross Margin ” means gross revenue from TSE Products less (i) actual direct costs reasonably incurred in connection with the generation of such gross revenue from installation, the providing of professional and maintenance services and customization of the TSE Products required for customer acceptance of such products, (ii) royalties paid in connection with the generation of such gross revenue, (iii) third-party software costs associated with TSE Products paid in connection the with the generation of such gross revenue, and (iv) actual direct costs which may be classified as research and development expenses (“R&D Expenses”) paid in connection with the generation of such gross revenue.  Gross Margin calculations shall not include deductions for sales commissions or overhead allocations or any integration costs with Buyer’s products and services.  For purposes of calculating the Gross Margin for the TSE Deferred Payments only, R&D Expenses shall only be included up to a maximum amount that would result in a Gross Margin of 50% on applicable TSE Product sales until all such applicable R&D Expenses have been applied.  Additionally, Buyer agrees not to incur more than $100,000 in R&D Expenses on any TSE Product without Sellers’ consent; provided, however, in the event Sellers do not consent, Buyer may still incur in excess of $100,000 in R&D Expenses but only charge up to $100,000 in calculating Gross Margin as

 

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described above.  By way of example of the allocation of R&D Expenses and for illustrative purposes only, assuming $110,000 ($10,000 of which Sellers did not consent to) of R&D Expenses are incurred to enhance the TSE Product Verify for a specific application (“ Specific Verify Product ”) and the Specific Verify Product is then sold to customer one for $80,000.  Assuming there are $20,000 of non-R&D Expenses incurred in connection with such customer, Buyer would then apply $20,000 of R&D Expenses to such customer resulting in a Gross Margin of $40,000 (or 50%).  Assuming there is then a second customer for such Specific Verify Product (or a similar product derived from the Specific Verify Product R&D Expenses) and Buyer sells such product for $200,000 (with only $10,000 of non-R&D Expenses, Buyer would then apply the remaining $80,000 of R&D Expenses to such customer resulting in a Gross Margin of $110,000 (or 55%).

 

(vii)         “ TSE Products ” means those products of Company set forth on Schedule 1.4(a) to this Agreement and any derivative products, modifications, or enhancements therefrom.  Sellers have provided Buyer with a schedule of TSE Products, with “ List Prices ” and “ Deal Prices ” as described and defined on Schedule 1.4(a).  Buyer and Sellers agree to meet on a quarterly basis during the TSE Deferred Payments Period to make mutually agreeable adjustments to Schedule 1.4(a), as needed based on recent sales activities and market conditions.  Buyer shall have the right to price the TSE Products as required to meet a customer’s needs; provided, however, that if Buyer believes that the price for a TSE Product should be less than 75% of the amount listed as the Deal Price, Buyer will consult with Sellers to review the proposal and if Sellers do not agree with the proposed pricing, for purposes of calculating Gross Margin, the price allocated to the TSE Products shall be not less than 75% of the Deal Price.  If Sellers agree with such proposed pricing, such revised pricing shall be used for purposes of calculating Gross Margin.  Buyer shall diligently use its reasonable efforts at all times to market and sell the TSE Products to its customers at or above the prices set forth on Schedule 1.4(a).

 

(viii)        Sellers will be paid, in the aggregate, in accordance with their payment instructions, (I) 70% of the Gross Margin on Qualifying Revenue through March 31, 2005; (II) 50% of the Gross Margin on Qualifying Revenue through May 15, 2006; and (III) 30% of the Gross Margin on Qualifying Revenue thereafter, payable quarterly as follows:  (A) for payments due following the close of the first, second and third calendar quarters, within three (3) business days after the date on which Buyer is required to file its Form 10-Q for such quarter with the Securities and Exchange Commission (the “ SEC ”), or the date on which Buyer actually files such Form 10-Q with the SEC, whichever is earlier; or (B) for payment due following the close of the fourth quarter of 2004 or 2005, payment will be made no later than February 15, 2005 or February 15, 2006, respectively, based upon estimated Gross Margin on Qualifying Revenue (the “ Estimate ”).  If, upon the filing of Buyer’s Form 10-K with the SEC for the year ended December 31, 2004 or December 31, 2005, respectively, (Y) the actual Gross Margin on Qualifying Revenue for the fourth quarter of 2004 or the fourth quarter of 2005, respectively (the “ Fourth Quarter Amount ”), is greater than the respective Estimate, within three (3) business days after the date on which Buyer files such Form 10-K, Buyer shall pay the difference between the respective Fourth Quarter Amount and Estimate to Sellers, or (Z) the Fourth Quarter Amount is less than the respective Estimate, the difference between the respective Estimate and Fourth Quarter Amount shall be deducted from the TSE Deferred Payments for the respective first calendar quarter of 2005 or 2006.  With respect to Bookings which occur in the final quarter of the TSE Deferred Payments Period, Buyer will pay Sellers the appropriate payment no later than

 

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February 15, 2007, provided, however, that if Buyer has not yet received payment from a customer for such Bookings, Buyer will pay Sellers the appropriate amount for such customer within three (3) business days of receiving payment from the customer.  With respect to Long Term Bookings for which revenue is recognized after the TSE Deferred Payments Period, Buyer will pay Sellers the appropriate payment within three (3) business days of receiving payment from the customer.  If for any reason Buyer is not required by the SEC to file a Form 10-Q or Form 10-K for a relevant period referenced in this subparagraph (viii), the payment dates set forth in this subparagraph (viii) shall be determined as if Buyer was required by the SEC to make such filings.

 

(ix)           All TSE Deferred Payments shall be accompanied by a report, certified as being true, complete and correct by the Chief Financial Officer of Buyer, delivered to Sellers setting forth in detail the calculation of the respective TSE Deferred Payments, including without limitation the customers to which licenses and services are sold and the date of sale, along with a listing of the dollar amount sold and the identity and quantity of TSE Products and services sold (an “ Deferred Payments Report ”).  The Deferred Payments Report shall be deemed accepted and conclusive and binding, unless Sellers shall give written notice to Buyer of the items with which Sellers disagree (“ Deferred Payments Disagreement Notice ”) within forty five (45) days of the actual receipt by Sellers of the Deferred Payments Report.  The Deferred Payments Disagreement Notice shall specify each item disagreed with by Sellers (or Sellers’ calculation thereof) and the dollar amount of the disagreement and specify in reasonable detail the basis for each disagreement.  Buyer and Sellers shall, during the twenty (20) days after receipt by Buyer of the Deferred Payments Disagreement Notice, negotiate in good faith to resolve any such disagreements with respect to the respective Deferred Payments Report.  If at the end of such twenty (20) days, the parties have been unable to resolve their disagreements, such disagreements shall be resolved by the Unaffiliated Firm.  The Unaffiliated Firm shall (i) resolve the disagreement as to the Deferred Payments Report as promptly as possible after its engagement by the parties, (ii) consider and resolve only those items in the Deferred Payments Disagreement Notice which remain unresolved between Buyer and Sellers, and (iii) otherwise employ such procedures as it, in it sole discretion, deems necessary or appropriate under the circumstances.  The Unaffiliated Firm shall submit to the parties a report of its review of the items in the Deferred Payments Disagreement Notice as promptly as practicable and shall include in such report its calculation of the Booking, Qualifying Revenue and Gross Margin, which adjustments shall be no more favorable to Buyer than reflected in the Deferred Payments Report, and no more favorable to Sellers than reflected in the Deferred Payments Disagreement Notice.  The calculations so made by the Unaffiliated Firm shall be conclusive and binding on, and non-appealable by, the parties hereto.  The fees and disbursements of the Unaffiliated Firm shall be borne one half by Sellers and one half by Buyer.  Each of Buyer and Sellers shall promptly cooperate in good faith with the Unaffiliated Firm to assist in the Unaffiliated Firm’s calculation of Bookings, Qualifying Revenue and Gross Margin.  If the Unaffiliated Firm’s calculation of Bookings, Qualifying Revenue and Gross Margin results in an amount owed to Sellers under the TSE Deferred Payments, Buyer shall pay such amount to Sellers within three (3) business days of the delivery to Buyer and Sellers of such calculation by the Unaffiliated Firm.

 

(x)            Buyer shall maintain separate records regarding Bookings, Qualifying Revenue and Gross Margin.  At any time during business hours and with reasonable

 

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notice to Buyer, Sellers and their representatives and agents shall have the right to inspect the records of Buyer and to discuss such records with Buyer’s employees, each at Buyer’s place of business, as reasonably necessary to calculate, verify and determine Bookings, Qualifying Revenue and Gross Margin.  Buyer shall diligently cooperate in good faith with such inspection by Sellers.

 

(xi)           Buyer shall diligently use its commercially reasonable efforts at all times to market and sell the TSE Products to its customers, such efforts to be evidenced by regular contact and discussions of TSE Products with potential customers as reasonably appropriate for such potential customers.  In addition, Buyer shall diligently use its commercially reasonable efforts to maximize Qualifying Revenue.  If there is no Qualifying Revenue for a period of nine (9) consecutive months, Buyer will have the option to terminate active selling of the TSE Products.  During the TSE Deferred Payments Period, Buyer shall provide to Sellers all internal sales reports related to the TSE Products.  In addition, Sellers shall have the right to attend and participate in all internal sales meetings and sales strategy sessions of Buyer relating to the TSE Products, to communicate directly with management of Buyer responsible for sales of the TSE Products and to communicate with potential and existing customers with the prior written approval of Buyer’s Vice President of Sales, which approval shall not be unreasonably withheld.

 

(xii)          Buyer agrees not to sell or otherwise transfer any or all of the ownership interest in or to the TSE Products during the TSE Deferred Payments Period without Sellers’ prior written approval, which approval shall not be unreasonably withheld.  For purposes of this provision, the merger of Buyer with or into another entity or the sale or transfer of the stock of Buyer (or other change of control event) shall not require Sellers’ consent if the resulting or acquiring entity has agreed to assume all obligations of Buyer under this Agreement.

 

(b)           Buyer intends to license, sell the asset, or provide services related to the Company’s Number Portability Administration Center Service Management System ( “ NPAC SMS ” ) Simulator (the “ NPAC SMS Simulator ” ) as a separate transaction from the sale of TSE Products.  This transaction would include the sale of the software used to simulate the NPAC SMS that will be used as-is or modified for providing production NPAC SMS services, or a transaction that would restrict the further use and sale of this software for that purpose.  The parties envision that the transaction may be completed as a single transaction with revenues recognized at the time of the transaction or revenues may be recognized over time as with a revenue sharing agreement or a “right-to-use” sale.  Accordingly, the NPAC Deferred Payments shall be calculated and paid as follows:

 

(xiii)         Buyer shall pay to Sellers, up to one millions dollars ($1,000,000) in the aggregate, the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins (collectively, the “ NPAC Deferred Payments ”) as set forth herein for  any sale, license, royalty or use of, or other commercialization of, the NPAC SMS Simulator or any professional and other types services rendered in connection therewith, if such transaction is entered into by Buyer at any time before the end of the calendar year 2011 (the “ NPAC Deferred Payments Period ”) or if Buyer enters into any letter of intent, agreement or negotiations for such a transaction prior to December 31, 2011 and the closing or effectiveness of such contemplated transaction occurs within six (6) calendar months after the end of the NPAC Deferred Payments

 

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Period. Such payments of the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins shall be made pursuant to the terms hereof even if the date of the actual payment is after the NPAC Deferred Payments Period.

 

(xiv)        In the event Buyer (i) sells any or all of the ownership interest in or to the NPAC SMS Simulator or (ii) receives a single, lump sum payment for any sale, use license or royalty, or other types of commercialization of the NPAC SMS Simulator (collectively, an “ NPAC Product Disposition ”), on an “as is” basis (for example, no modifications or additions have been made to the NPAC SMS Simulator), Buyer shall immediately pay to Sellers $1,000,000 in the aggregate in cash, less any amounts previously paid  pursuant to Section 1.4(b)(iii) and Section 1.4(b)(iv) of this Agreement (the “ NPAC Disposition Payment ”).

 

(xv)         In the event Buyer sells, allows the use of, licenses, receives royalties on or commercializes the NPAC SMS Simulator in any way on an “as is” basis and where the payments to be received by Buyer for such transaction is to be paid in two or more payments, Sellers will be paid, in the aggregate, eighty percent (80%) of the NPAC Gross Revenues, payable quarterly as set forth below.  “ NPAC Gross Revenues ” means any and all gross revenue recognized in accordance with GAAP, resulting from, arising out of or associated with any sale, use, license or royalty, or other types of commercialization, of the NPAC SMS Simulator (other than professional or other types of services provided in connection with the NPAC SMS Simulator which shall be treated as described in (iv) below) where the payments to be received by Buyer in connection therewith is to be paid in two or more payments.

 

(xvi)        In the event Buyer provides professional services or other types of services in connection with the license of the NPAC SMS Simulator and/or sells, allows the use of, licenses, receives royalties on or otherwise commercializes the NPAC SMS Simulator in any way and the NPAC SMS Simulator has been modified by Buyer, or will be modified in connection with such transaction, Sellers will be paid, in the aggregate, eighty percent (80%) of the NPAC Gross Margins, payable quarterly as set forth below.  “ NPAC Gross Margins ” means any and all gross revenue recognized in accordance with GAAP, from the NPAC SMS Simulator less (i) actual direct costs reasonably incurred in connection with the generation of such gross revenue from installation, the providing of professional and maintenance services and customization of the NPAC SMS Simulator required for customer acceptance, (ii) royalties paid in connection with the generation of such gross revenue, (iii) third party software costs associated with the NPAC SMS Simulator paid in connection with the generation of such gross revenue, and (iv) the actual direct costs which may be classified as R&D Expenses paid in connection with the generation of such gross revenue.  The NPAC Gross Margin calculation shall not include deductions for sales commissions or overhead allocations.

 

(xvii)       The NPAC Gross Revenue and the NPAC Gross Margins that  are recognized as revenue in any given fiscal quarter shall be payable as follows: (A) for payments due following the close of the first, second and third calendar quarters, within three (3) business days after the date on which Buyer is required to file its Form 10-Q for such quarter with the SEC, or the date on which Buyer actually files such Form 10-Q with the SEC, whichever is earlier; or (B) for payment due following the close of the fourth quarter of any calendar year, payment will be made no later than February 15 of the following calendar year, based upon estimated NPAC Gross Revenues and NPAC Gross Margins (the “ NPAC Estimate ”).  If, upon

 

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the filing of Buyer’s Form 10-K with the SEC for any relevant fiscal year, (Y) the actual NPAC Gross Revenues and NPAC Gross Margins for the fourth quarter of such relevant fiscal year (the “ NPAC Fourth Quarter Amount ”) is greater than the NPAC Estimate for such relevant fiscal year, within three (3) business days after the date on which Buyer files such Form 10-K, Buyer shall pay the difference between the NPAC Fourth Quarter Amount and the NPAC Estimate to Sellers, or (Z) the NPAC Fourth Quarter Amount is less than the NPAC Estimate, the difference between the NPAC Estimate and the NPAC Fourth Quarter Amount shall be deducted from the NPAC Deferred Payments for the first calendar quarter of the following calendar year.  If for any reason Buyer is not required by the SEC to file a Form 10-Q or Form 10-K for a relevant period referenced in this subparagraph (v), the payment dates set forth in this subparagraph (v) shall be determined as if Buyer was required by the SEC to make such filings.

 

(xviii)      All NPAC Deferred Payments shall be accompanied by a report, certified as being true, complete and correct by the Chief Financial Officer of Buyer, delivered to Sellers setting forth in detail the calculation of the respective NPAC Deferred Payment, including without limitation the customers to which licenses and services are sold and the date of sale, along with a listing of the dollar amount sold and the identity and quantity of NPAC SMS Simulator and services sold (an “ NPAC Deferred Payments Report ”).  The NPAC Deferred Payments Report shall be deemed accepted and conclusive and binding, unless Sellers shall give written notice to Buyer of the items with which Sellers disagree (“ NPAC Deferred Payments Disagreement Notice ”) within forty five (45) days of the actual receipt by Sellers of the NPAC Deferred Payments Report.  The NPAC Deferred Payments Disagreement Notice shall specify each item disagreed with by Sellers (or Sellers’ calculation thereof) and the dollar amount of the disagreement and specify in reasonable detail the basis for each disagreement.  Buyer and Sellers shall, during the twenty (20) days after receipt by Buyer of the NPAC Deferred Payments Disagreement Notice, negotiate in good faith to resolve any such disagreements with respect to the respective NPAC Deferred Payments Report.  If at the end of such twenty (20) days, the parties have been unable to resolve their disagreements, such disagreements shall be resolved by the Unaffiliated Firm.  The Unaffiliated Firm shall (i) resolve the disagreement as to the NPAC Deferred Payments Report as promptly as possible after its engagement by the parties, (ii) consider and resolve only those items in the NPAC Deferred Payments Disagreement Notice which remain unresolved between Buyer and Sellers, and (iii) otherwise employ such procedures as it, in it sole discretion, deems necessary or appropriate under the circumstances.  The Unaffiliated Firm shall submit to the parties a report of its review of the items in the NPAC Deferred Payments Disagreement Notice as promptly as practicable and shall include in such report its calculation of the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins, which adjustments shall be no more favorable to Buyer than reflected in the NPAC Deferred Payments Report, and no more favorable to Sellers than reflected in the NPAC Deferred Payments Disagreement Notice.  The calculations so made by the Unaffiliated Firm shall be conclusive and binding on, and non-appealable by, the parties hereto.  The fees and disbursements of the Unaffiliated Firm shall be borne one half by Sellers and one half by Buyer.  Each of Buyer and Sellers shall promptly cooperate in good faith with the Unaffiliated Firm to assist in the Unaffiliated Firm’s calculation of the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins.  If the Unaffiliated Firm’s calculation of the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins results in an amount owed to Sellers under the NPAC Deferred Payments, Buyer shall pay such amount to Sellers

 

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within three (3) business days of the delivery to Buyer and Sellers of such calculation by the Unaffiliated Firm.

 

(xix)         Buyer shall maintain separate records regarding the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins.  At any time during business hours and with reasonable notice to Buyer, Sellers and their representatives and agents shall have the right to inspect the records of Buyer and to discuss such records with Buyer’s employees, each at Buyer’s place of business, as reasonably necessary to calculate, verify and determine the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins.  Buyer shall diligently cooperate in good faith with such inspection by Sellers.

 

(xx)          Buyer shall diligently use its commercially reasonable efforts at all times to market and sell the NPAC SMS Simulator to potential customers and buyers, such commercially reasonable efforts to be evidenced by regular contact and discussions of the NPAC SMS Simulator with potential customers and buyers in the same manner as Buyer conducts such sales practices for its other products, taking into account when the market will be ready for these activities.  In addition, Buyer shall diligently use its commercially reasonable efforts to maximize the NPAC Disposition Payment, NPAC Gross Revenues and NPAC Gross Margins.  In addition, during the NPAC Deferred Payments Period Sellers shall have the right to attend and participate in all internal sales meetings and sales strategy sessions of Buyer, and to communicate directly with management of Buyer responsible for sales and to communicate with potential customers with the prior written approval of Buyer’s Vice President of Sales, which approval shall not be unreasonably withheld.

 

(c)           Set-off of Deferred Payments .  The Deferred Payments are subject to Buyer’s right of set-off set forth in Section 5.2(j).  Any amounts so set-off shall be deemed timely paid to Sellers in calculating the amount of the Deferred Payments made to Sellers.  Subject to Section 5.2(j), in the event that any Deferred Payment becomes due to Sellers in accordance with this Section 1.4 and Buyer has delivered a Notice of Claim in accordance with Section 5.2 prior to such due date, Buyer may withhold such amount so due until such claim is finally determined in accordance with Section 5.  Buyer’s failure to exercise its right of set-off shall not relieve any Seller of such Seller’s indemnification obligations set forth in Section 5.

 

(d)           Inter-Company Use and Licensing .  Notwithstanding anything contained herein to the contrary any use by, or license to, Buyer or any of its wholly-owned subsidiaries of the TSE Products, NPAC SMS Simulator or any other Company products (the “ Company Products ”) for internal use and testing purposes (and not for resale or other commercialization purposes or with any rights to sublicense, distribute or make available for use on a service provider basis) shall not be included in the calculations of the Deferred Payments.  Notwithstanding anything contained herein to the contrary, the parties agree that upon payment in full of the Promissory Note and Escrow Promissory Note (or with the prior written consent of Sellers), Buyer shall be authorized to cause Company to transfer, sell and assign the Company Products to Buyer or any of its wholly-owned subsidiaries; provided that any such wholly-owned subsidiary shall have agreed in writing to assume the obligations relating to the Deferred Payments under this Agreement.  No such transfer, sale or assignment from Company to Buyer or any of its wholly-owned subsidiaries shall be included in the calculation of the Deferred Payments (it being understood, however, that the obligations regarding Deferred Payments shall

 

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in all other respects remain fully in effect regardless of whether such Company Products are owned by Company, Buyer or any of its wholly-owned subsidiaries).

 

2.                                       REPRESENTATIONS AND WARRANTIES OF SELLERS

 

Each Seller jointly and severally represents and warrants to Buyer that, except as set forth in the letter addressed to Buyer from Sellers and dated as of the date hereof, including all schedules thereto, which has been delivered by Sellers to Buyer concurrently with the parties’ execution of this Agreement (the “Company Disclosure Letter” ), each of the representations, warranties and statements contained in the following sections of this Section 2 is true and correct as of the date of this Agreement.  For all purposes of this Agreement, the statements contained in the Company Disclosure Letter shall also be deemed to be representations and warranties made and given by each Seller under Section 2 of this Agreement.

 

2.1           Organization and Good Standing .  Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Colorado.  Company has the limited liability company power and authority to own, operate and lease its properties and to carry on its business as now conducted and as currently proposed to be conducted.  Except as set forth in Part 2.1 of the Company Disclosure Letter, Company is qualified to do business as a foreign limited liability company in each jurisdiction where it is required by law to be so qualified, except where such failure to qualify would not reasonably be expected to have a Material Adverse Effect on Company.  The operations now being conducted by Company are not now, and have never been, conducted by Company under any other name, excepting certain activities conducted under the name “Obsydian Technologies, LLC”.  Company has terminated all activities relating to Obsydian Technologies, LLC and Obsydian Technologies, LLC has assigned all rights, title and interest relating to the TSE Products to Company.  Company has no, and shall incur no, liabilities relating to Obsydian Technologies, LLC.

 

2.2           Power, Authorization and Validity .  Company has the limited liability company power and authority to enter into and perform its obligations under this Agreement and all agreements and documents that Company is required to execute pursuant to this Agreement (collectively, the “ Company Ancillary Agreements ”). The execution and delivery of this Agreement and the Company Ancillary Agreements provided for herein have been duly and validly approved and authorized by all necessary limited liability company action by Company.  Each Seller has the right and legal capacity to enter into and perform such Seller’s respective obligations under this Agreement and all agreements and documents that such Seller is required to execute pursuant to this Agreement (the “ Members Ancillary Agreements ”).

 

(a)           No material authorization, consent or approval from a Governmental Body or material filing with any Governmental Body is necessary to enable Company or Sellers to enter into or perform their respective obligations under this Agreement, the Company Ancillary Agreements or the Members Ancillary Agreements.

 

(b)           This Agreement has been duly executed and delivered by Company and Sellers.  This Agreement is, and the Company Ancillary Agreements when executed and delivered by Company will be, valid and binding obligations of Company enforceable against

 

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Company in accordance with their respective terms, subject only to the effect, if any, of (i) applicable bankruptcy and other similar laws affecting the rights of creditors generally, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies (the “ Enforceability Exceptions ”).  This Agreement is, and the Members Ancillary Agreements when executed and delivered by Sellers will be, valid and binding obligations of Sellers enforceable against Sellers in accordance with their respective terms, subject only to the Enforceability Exceptions.

 

2.3           Capitalization .

 

(a)           The authorized membership interests of Company are now owned fifty percent (50%) by P. McGuire and fifty percent (50%) by L.M. Maxson.  Sellers have been the only owners of any Interests since Company’s formation.  Except as set forth in Part 2.3(a) of the Company Disclosure Letter, each Seller has good and marketable title to such Seller’s Company Interests free and clear of all encumbrances, liens and claims, other than restrictions on transfer under federal and state securities laws.  Except as set forth in Part 2.3(a) of the Company Disclosure Letter, all issued and outstanding Company Interests have been duly authorized and validly issued, are fully paid and nonassessable, are not subject to any right of rescission, right of first refusal or preemptive right and have been offered, issued, sold and delivered by Company in compliance with all requirements of applicable laws and all requirements sets forth in applicable agreements or instruments.  As of the Closing, the Company’s capital account for each Seller is greater than $1.00.  There is no liability for distributions accrued and unpaid by Company.

 

(b)           Except as set forth in Part 2.3(b) of the Company Disclosure Letter, there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which Company is a party or by which it is bound obligating Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any Company Interests or other equity securities or membership interests or obligating Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement.  There are no outstanding or authorized equity appreciation, phantom interests, profit participation or other similar rights with respect to Company.  Except as set forth in Part 2.3(b) of the Company Disclosure Letter, there are no voting trusts, proxies, or other agreements or understandings with respect to the Company Interests.  As a result of the transactions contemplated herein, Buyer will be the sole owner of all Interests.

 

2.4           Subsidiaries .  Company does not have, and has never had, any subsidiaries or any equity interest, direct or indirect, in, or loans to, any corporation, partnership, joint venture, limited liability company or other business entity.  Company is not obligated to make, nor bound by any agreement or obligation to make, any investment in or capital contribution in or on behalf of any other entity.

 

2.5           No Violation of Articles of Organization or Existing Agreements .  Except as set forth in Part 2.5 of the Company Disclosure Letter, Company is not in violation of its articles of organization or operating agreement.  Except as set forth in Part 2.5 of the Company Disclosure Letter, neither the execution and delivery of this Agreement or the Company Ancillary Agreements, nor the consummation of any of the transactions provided for herein, will

 

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(a) conflict with or violate any provision of the articles of organization or operating agreement of Company (b) conflict with or violate or constitute a default under, result in a termination, acceleration or breach of, or provide any party with any right of termination or acceleration or any other material rights or remedies under (in each case with or without notice or lapse of time, or both) (i) any material instrument, contract, agreement, permit, mortgage, license, letter of intent or commitment (whether verbal or in writing) to which Company is a party or by which Company or any of its assets is bound, or (ii) any judgment, writ, decree, order, statute, rule or regulation applicable to Company or (c) have any Material Adverse Effect upon any rights of Company pursuant to the terms of any such material instruments, contracts, agreements, permits, mortgages, licenses, letters of intent or commitments.  “Material Adverse Change” or “Material Adverse Effect , ” when used with reference to any Person or group of related Persons, means any event, change, violation, inaccuracy, circumstance or effect that is or is reasonably likely to be, individually or in the aggregate, materially adverse to the condition (financial or otherwise), properties, employees, assets (including intangible assets), business, operations or results of operations of such entity and its subsidiaries, taken as a whole.

 

2.6           Litigation .  There is no action, suit, proceeding, hearing, investigation, litigation, charge, complaint, claim or demand (collectively, a “ Claim ”) pending or, to any Seller’s Knowledge, threatened against Company (or against any officer, manager, member, employee or agent of Company in their capacity as such or relating to their employment, services or relationship with Company) before any Governmental Body (nor, to the Knowledge of any Seller, are there any facts which could lead to such a Claim).  There is no judgment, decree, injunction, rule or order of any Governmental Body outstanding or pending against Company.  There is no basis for any Person to assert a Claim against Company (or Buyer as parent of Company following the Closing) based upon:  (a) ownership or rights to ownership of any Company Interests, (b) any rights as a securities holder of Company, including, without limitation, any option or other right to acquire any Company Interests, any preemptive rights or any rights to notice or to vote, or (c) any rights under any agreement between Company and any securities holder or former securities holder in such holder’s capacity as such. “ Governmental Body ” shall mean any: (a) nation, principality, state, commonwealth, county, municipality, district or other jurisdiction; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any division, department, agency, bureau, branch, office, commission, council, board, instrumentality, and any court, tribunal or other entity exercising governmental or quasi-governmental powers); (d) governmental or quasi-governmental multi-national organization or body; (e) body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police or taxing authority or power; or (f) official of any of the foregoing.  “Knowledge , ” when used with reference to (a) an individual, means the actual knowledge of such individual, or (b) a party to this Agreement that is not an individual, means the collective actual knowledge of the officers, managers and directors of such party.  An individual, officer, manager, member or director shall be deemed for purposes of the preceding sentence to have actual knowledge of any fact, circumstance, event or other matter that (i) is reflected in one or more documents (whether written or electronic, including email) that is or was in the possession of such individual, officer, manager or director, or (ii) in the case of knowledge of such party’s officers, managers and directors, is either (A) reflected in the books and records of such party, or (B) could be obtained from reasonable inquiry of the individuals employed by such party that are charged with administrative or operational responsibility for such matters. “ Person ” shall mean any

 

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individual, partnership, corporation, business trust, limited liability company, limited liability partnership, joint stock company, trust, unincorporated association, joint venture or other entity or a Governmental Body.

 

2.7           Company Financial Statements .

 

(a)           Company has delivered to Buyer (i) its unaudited balance sheet as of December 31, 2003 and its unaudited income statement and profit and loss statement for the year then ended and (ii) its unaudited balance sheet as of September 30, 2004 (the “ Balance Sheet Date ”) and its unaudited income statement and profit and loss statement for the nine-month period then ended (collectively, the “ Financial Statements ”), a copy of each of which is included in Part  2.7(a) of the Company Disclosure Letter.  The Financial Statements (and the interim balance sheet as of Septe