-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HnkkGYlTlMk1duGmwTGkdDyJk/obS2tj7oRUP+zgbTsdgVvM0yjTTsnDU7f5zrPt NJSGVwT4Hfsy/FV5YZffKw== 0001019687-06-001048.txt : 20060504 0001019687-06-001048.hdr.sgml : 20060504 20060504115712 ACCESSION NUMBER: 0001019687-06-001048 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20060504 DATE AS OF CHANGE: 20060504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IElement CORP CENTRAL INDEX KEY: 0001043105 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 760270295 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-131451 FILM NUMBER: 06806902 BUSINESS ADDRESS: STREET 1: 17194 PRESTON ROAD STREET 2: SUITE 102 PMB 341 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 214-254-3440 MAIL ADDRESS: STREET 1: 17194 PRESTON ROAD STREET 2: SUITE 102 PMB 341 CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: MAILKEY CORP DATE OF NAME CHANGE: 20040607 FORMER COMPANY: FORMER CONFORMED NAME: GLOBAL DIVERSIFIED ACQUISITION CORP DATE OF NAME CHANGE: 20030625 FORMER COMPANY: FORMER CONFORMED NAME: SUTTON TRADING SOLUTIONS INC DATE OF NAME CHANGE: 20020925 SB-2/A 1 ielement_sb2a1-050506.txt Registration No. 333-131451 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- Amendment No. 1 to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- IELEMENT CORPORATION (Name of Small Business Issuer in its Charter) NEVADA 7389 76-0270295 ------ ---- ---------- State or other Jurisdiction Primary Standard I.R.S. Employer of incorporation or Industrial Classification Identification No. Organization Code Number 17194 PRESTON ROAD SUITE 102, PMB 341 DALLAS, TX 75248 (214) 254-3440 (Address and Telephone Number of Registrant's Principal Executive Offices) --------------- IVAN ZWEIG CHIEF EXECUTIVE OFFICER 17194 PRESTON ROAD SUITE 102, PMB 341 DALLAS, TX 75248 (214) 254-3440 (Name, Address and Telephone Number of Agent for Service) --------------- COPY TO: LAURA ANTHONY, ESQ. LEGAL & COMPLIANCE, LLC 330 CLEMATIS STREET WEST PALM BEACH, FLORIDA 33401 (561) 514-0936 --------------- AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT - -------------------------------------------------------------------------------- (Approximate Date of Proposed Sale to the Public) If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 ("Securities Act"), check the following box.[X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - -------------------------------------------------------------------------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE REGISTRATION FEE - -------------------------------------------------------------------------------------------------------- Common Stock,$.001 par value 82,212,048 $ 0.078 $ 8,632,265 $ 686.00 - -------------------------------------------------------------------------------------------------------- Common Stock underlying exercise of stock purchase warrants 30,488,281 $ 0.10 (2) $ 3,080,234 $ 330.00 - -------------------------------------------------------------------------------------------------------- TOTAL: 112,700,329 $ --- $ 11,712,796 $ 1,016.00 - --------------------------------------------------------------------------------------------------------
(1) The proposed maximum offering price is estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and 457(g) of the Securities Act of 1933, as amended. The price per share is based on the price of the common stock on the Over-The-Counter Bulletin Board on May 2, 2006. (2) An aggregate of 29,441,407 of the warrants are exercisable at $0.10 per share and 1,046,874 of the warrants are exercisable at $0.13 per share. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. Subject to completion, dated May 3, 2006 PROSPECTUS I-ELEMENT CORPORATION 17194 PRESTON ROAD SUITE 102, PMB 341 DALLAS, TX 75248 (214) 254-3440 112,700,329 Shares of Common Stock We are registering for resale up to 112,700,329 shares of our common stock, of which 82,212,048 shares are currently outstanding and 30,488,281 shares are issuable upon the exercise of stock purchase warrants by certain selling shareholders identified in this prospectus (the "Warrants"). We will not receive any proceeds from this offering. We may receive proceeds from the exercise price of the Warrants if they are exercised by the selling security holders. We will bear all costs associated with this registration. The shares of common stock being offered in this prospectus may be sold at fixed prices, prevailing market prices determined at the time of sale, varying prices determined at the time of sale or at negotiated prices. The shares of our common stock covered by this prospectus may be sold from time to time pursuant to various agreements between the selling shareholders and us. Our common stock is traded on the OTC Bulletin Board under the symbol "IELM.OB." The average of the high and low trading price of our common stock on May 1, 2006 was $0.075. The information in this prospectus is not complete and may be changed. These securities may not be sold (except pursuant to a transaction exempt from the registration requirements of the Securities Act) until the Registration Statement filed with the Securities and Exchange Commission ("SEC") is declared effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 2 WHICH DESCRIBES CERTAIN MATERIAL RISK FACTORS YOU SHOULD CONSIDER BEFORE INVESTING. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is May 3, 2006 You should rely only on the information contained in this prospectus. We have not, and the Selling Stockholders have not, authorized anyone to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the Selling Stockholders are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. TABLE OF CONTENTS Page PROSPECTUS SUMMARY..................................................... 1 RISK FACTORS........................................................... 3 FORWARD-LOOKING STATEMENTS............................................. 9 USE OF PROCEEDS........................................................ 10 MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS............ 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............. 10 BUSINESS............................................................... 18 MANAGEMENT............................................................. 26 DESCRIPTION OF THE PRIVATE PLACEMENT................................... 31 SELLING STOCKHOLDERS................................................... 31 DESCRIPTION OF SECURITIES.............................................. 34 PLAN OF DISTRIBUTION................................................... 35 SHARES ELIGIBLE FOR FUTURE SALE........................................ 36 WHERE YOU CAN FIND MORE INFORMATION.................................... 36 LEGAL MATTERS.......................................................... 36 EXPERTS................................................................ 37 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES........................................... 37 FINANCIAL STATEMENTS................................................... 38 PROSPECTUS SUMMARY Unless otherwise indicated, all references to "we", "us", "our" and similar terms, as well as references to the "Registrant", the "Company" or "IElement" in this prospectus, refer to IElement Corporation, a Nevada corporation and not to the selling stockholders. THIS PROSPECTUS IS A PART OF A REGISTRATION STATEMENT THAT WE HAVE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION USING A "SHELF REGISTRATION" PROCESS. YOU SHOULD READ THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT, AS WELL AS ANY POST-EFFECTIVE AMENDMENTS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART, TOGETHER WITH THE ADDITIONAL INFORMATION DESCRIBED UNDER "AVAILABLE INFORMATION" BEFORE YOU MAKE ANY INVESTMENT DECISION. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN THESE SECURITIES. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL STATEMENTS. SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS FUTURE EVENTS AND DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO GENERATE REVENUE, INCOME AND CASH FLOW. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN THESE FORWARD-LOOKING STATEMENTS. SEE "FORWARD LOOKING STATEMENTS." Company Overview IElement is a facilities-based nationwide communications service provider that provides telecommunications services to small and medium sized businesses ("SMBs"). As a facilities-based provider we own our own network equipment including telephone switches. In other words, we sell local and long distance telephone service and Internet access primarily via digital T-1 connections and tailor the particular service to the customer's needs by regulating bandwidth, number of telephone lines, and type of service. Our Layer 2 Private Network ("L2PN") service allows businesses with multiple locations to connect all of their locations securely without the use of firewalls or encryption devices and without routing traffic over the internet. We have already developed our Voice over Internet Protocols ("VoIP"s) service and successfully tested it internally. We are in the process of installing VoIP service for our first customer. We have a network presence in 18 major markets in the United States, including facilities in Los Angeles, Dallas, and Chicago and smaller facilities in ten other cities. Historically, we have regularly incurred losses from operations such that, as of December 31, 2005, we have generated an accumulated deficit of $1,845,591. Inasmuch as we will continue to have operating expenses and will be required to make significant up-front expenditures in connection with the proposed development of our business, we may continue to incur losses for at least the next 12 months and until such time, if ever, as we are able to generate sufficient revenues to finance our operations and the costs of continuing expansion. As a result of our operating losses, we have relied upon external financing to fund operations. The report of our independent registered public accountants on our 2005 and 2004 financial statements, as included in this Prospectus, included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to recurring losses and working capital shortages. Our ability to continue as a going concern will be determined by our ability to obtain additional funding. We have relied almost entirely on external financing to fund our operations. Such financing has historically come from a combination of borrowings from, and sale of capital stock to, third parties. We will need to raise additional capital to fund our anticipated operating expenses and future expansion. If we cannot obtain additional funds when needed, we may be forced to curtail or cease our activities, which may result in the loss of all or a substantial portion of your investment. 1 About This Offering This prospectus relates to the resale of up to 112,700,329 shares of our common stock, of which 82,212,048 shares are currently outstanding and 30,488,281 shares are issuable upon the exercise of stock purchase warrants by certain selling shareholders identified in this prospectus. We will not receive any proceeds from this offering. However, upon exercise of the Warrants by the selling shareholders, we will receive the proceeds therefrom. We will bear all costs associated with this registration. Common Stock Offered.............................. 112,700,329 shares Common Stock Outstanding at May 2, 2006(1)........ 158,735,031 shares Use of Proceeds.................................. We will not receive any of the proceeds from the sale of the shares by the selling shareholders, except upon exercise of certain common stock purchase warrants. OTC Bulletin Board Ticker Symbol.................. IELM.OB (1) Does not include (i)30,488,281 shares that are issuable upon the exercise of outstanding warrants. Selected Financial Information The selected financial information presented below is derived from and should be read in conjunction with our consolidated financial statements, including notes thereto, appearing elsewhere in this prospectus. The information provided for fiscal year end March 31, 2005 reflects consolidated numbers of I-Element and MailKey. The summary financial information provided for the years ended March 31, 2004 and 2003 reflect solely I-Element as the reverse merger with MailKey was consummated in January 2005. See "Financial Statements." Summary Operating Information Fiscal Year Ended March 31, --------------------------------------- 2005 2004 2003 ---- ---- ---- Net revenues ......................... $5,652,756 $5,644,343 $438,600 Income (loss) from operations ........ ($605,335) $321,094 $22,625 Net income (loss) .................... ($643,846 ($324,793) ($8,543) Earnings (loss) per common share ..... ($0.02) ($7.60) ($8,543) Weighted average number of common shares outstanding Basic ........................... 25,312,486 42,732 1 Diluted ......................... 25,312,486 42,732 1 Summary Balance Sheet Information March 31 -------------------------- 2005 2004 ---- ---- Working capital deficit .............. ($2,713,235) ($3,642,946) Total assets ......................... $3,890,454 $3,737,047 Total liabilities .................... $3,869,168 $4,075,383 Stockholders' equity deficiency ...... $21,286 $328,336 I-Element had income from operations for each of the fiscal years ended March 31, 2004 and 2003. However, after deductions for interest, depreciation, amortization and loss on the sale of stock, the Company produced a net loss in each of these fiscal years. Revenue, income from operations, net loss and net loss per weighted average common share outstanding for the period ended March 31, 2003 was significantly lower than the subsequent years as the Company only operated for one month during this period from March 1, 2003 through March 31, 2003. In the fiscal year ended March 31, 2004, the Company's total liabilities exceeded its assets due to net losses incurred from inception to the ends of that fiscal year. 2 RISK FACTORS An investment in the Common Stock of the Company is highly speculative, involves a high degree of risk and should be considered only by those persons who are able to afford a loss of their entire investment. In evaluating the Company and its business, prospective investors should carefully consider the following risk factors in addition to the other information included in this Registration Statement. The following risk factors should be considered carefully in addition to the other information contained in this prospectus: RISKS RELATED TO OUR BUSINESS WE HAVE A LIMITED OPERATING HISTORY WHICH RAISES SUBSTANTIAL DOUBT AS TO OUR ABILITY TO SUCCESSFULLY DEVELOP PROFITABLE BUSINESS OPERATIONS We have a limited operating history. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a business in the telecommunications industry. We have yet to generate significant revenues from operations and have been focused on organizational, development, and market analysis and fund raising activities. There is nothing at this time on which to base an assumption that our business operations will prove to be successful or that we will ever be able to operate profitably. Our future operating results will depend on many factors, including: - our ability to raise adequate working capital; - success of our development; - demand for our services; - the level of our competition; - our ability to attract and maintain key management and employees; and - our ability to efficiently produce and establish facilities for treatment in a highly competitive and speculative environment while maintaining quality and controlling costs. To achieve profitable operations, we must, alone or with others, successfully execute on the factors stated above, along with continually developing ways to enhance our production, marketing and treatment efforts, when commenced. Despite our best efforts we may not be successful in our development efforts or obtain required regulatory approvals. WE HAVE HISTORICALLY INCURRED LOSSES AND LOSSES MAY CONTINUE IN THE FUTURE We have generated an accumulated deficit of $1,845,591 at December 31, 2005. Inasmuch as we will continue to have operating expenses and will be required to make significant up-front expenditures in connection with the proposed development of our business, we may continue to incur losses for at least the next 12 months and until such time, if ever, as we are able to generate sufficient revenues to finance our operations and the costs of continuing expansion. There can be no assurance that we will be able to generate significant revenues or achieve profitable operations. It may be necessary to raise capital through issuing equity which could cause dilution and/or negatively affect the price of our common stock. THERE IS DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING. The report of our independent registered public accountants on our 2005 and 2004 financial statements, as included in this Prospectus, included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern due to recurring losses and working capital shortages. Our ability to continue as a going concern will be determined by our ability to obtain additional funding. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS, OUR BUSINESS OPERATIONS WILL BE CURTAILED. Our operations have relied almost entirely on external financing to fund our operations, including the expansion into VoIP. Such financing has historically come from a combination of borrowings from, and sale of capital stock to, third parties. Although our recent private placement has provided us with funds to operate for the next twelve months, we may in the future need to raise additional capital to fund anticipated operating expenses and future expansion. We anticipate receiving funds from the exercise of the Warrants by the Selling Stockholders, however, if for some reason, the Warrants are not exercised, we may need to curtail expansion plans. Among other things, external financing will be required to cover our operating costs. The sale of our capital stock to raise capital may cause dilution to our existing shareholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. There can be no assurance that we will be able to obtain additional funding when needed, or that such funding, if available, will be available on terms we find acceptable. If we cannot obtain additional funds when needed, we may be forced to curtail or cease our activities, which may result in the loss of all or a substantial portion of your investment. 3 WE ARE DEPENDENT ON THE EFFORTS OF OUR EXECUTIVE OFFICERS AND SENIOR MANAGEMENT. Our success depends largely upon the continued services of our executive officers and other key personnel. A small number of key management, operating employees and consultants manage our telecommunications business. In particular, we rely heavily on the services of our CEO, Mr. Ivan Zweig and our Chief Technology Expert, Mr. Alex Ponnath. Mr. Ponnath is a consultant, independent contractor who has been working with I-Element since February, 2000. Our loss of of either gentlemen or their failure to work effectively as a team could materially adversely impact our telecommunications business. Competition for qualified executives in the telecommunications and data communication industries is intense and there are a limited number of persons with applicable experience. In addition, the remaining fourteen employees have worked together for several years and operate well as a team. Accordingly, the loss of any of our employees could effect the overall management of our business. Effective January 18, 2005 we entered into an employment agreement with Ivan Zweig, our chairman and chief executive officer. This agreement provides that Mr. Zweig may discontinue his employment with us after providing us with little notice of his decision (typically one month). As a result, Mr. Zweig could terminate his employment with us at any time without penalty and go to work for one of our competitors. We believe that we have offset this risk to some degree by maintaining a key person life insurance policy on Ivan Zweig. BECAUSE COMPETITION FOR OUR TARGET EMPLOYEES IS INTENSE, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN THE HIGHLY SKILLED EMPLOYEES WE NEED TO SUPPORT OUR PLANNED GROWTH. To execute our growth plan, we must attract and retain highly qualified personnel. We may need to hire additional personnel in virtually all operational areas, including selling and marketing, operations and technical support, programming, technology, engineering, customer service and administration. We may not be successful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Although competition for highly skilled and competent employees is a risk faced by all businesses and by our competitors, many of our competitors have greater resources than we do and therefore can offer more attractive compensation packages. IF WE ACQUIRE ANY COMPANIES OR TECHNOLOGIES IN THE FUTURE, SUCH COMPANIES AND TECHNOLOGIES COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE MANAGEMENT'S TIME AND ATTENTION AND DILUTE STOCKHOLDER VALUE. We intend to acquire or make investments in complementary companies, businesses, assets and/or technologies in the future. We have not made any acquisitions or investments to date, and therefore, our ability to make acquisitions or investments is unproven. Moreover, we have not currently entered into any material definitive agreements for acquisitions, although we have engaged in preliminary and informal discussions. Acquisitions and investments involve numerous risks, including: o inability to generate sufficient revenue or growth in revenue or to offset acquisition or investment costs; o difficulties in integrating operations, technologies, service and personnel; o diversion of financial and management resources from existing operations; o risk of entering new markets; and o potential loss of key employees; o difficulties integrating the operations and personnel of acquired companies; o the additional financial resources required to fund the operations of acquired companies; o the potential disruption of our business; o our ability to maximize our financial and strategic position by the incorporation of acquired technology or businesses with our product and service offerings; o the difficulty of maintaining uniform standards, controls, procedures and policies; o the potential loss of key employees of acquired companies; o the impairment of employee and customer relationships as a result of changes in management; and o significant expenditures to consummate acquisitions. Acquisitions could also require us to record substantial amounts of goodwill and other intangible assets. Any future impairment of such goodwill along with the amortization of other intangible assets, would adversely affect our operating results. In addition, if we finance acquisitions by issuing convertible debt or equity securities our existing stockholders may be diluted, which could affect the market price of our stock. If we finance such acquisitions with bank debt or high yield debt, these arrangements would likely impose substantial operating covenants on us and result in interest expense that could adversely affect our business and operating results. 4 As a part of our acquisition strategy, we may engage in discussions with various businesses respecting the potential acquisition. In connection with these discussions, we and each potential acquired business may exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms and conditions of the potential acquisition. In certain cases, the prospective acquired business may agree not to discuss a potential acquisition with any other party for a specific period of time, may grant us certain rights in the event the acquisition is not completed, and may agree to take other actions designed to enhance the possibility of the acquisition. Potential acquisition discussions may take place over a long period of time, may involve difficult business integration and other issues, and may require solutions for numerous family relationship, management succession and related matters. As a result of these and other factors, potential acquisitions that from time to time appear likely to occur may not result in binding legal agreements and may not be consummated. Our acquisition agreements may contain purchase price adjustments, rights of set-off and other remedies in the event that certain unforeseen liabilities or issues arise in connection with an acquisition. These remedies, however, may not be sufficient to compensate us in the event that any unforeseen liabilities or other issues arise. OUR GROWTH COULD STRAIN OUR PERSONNEL AND INFRASTRUCTURE RESOURCES, AND IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS AND PROCEDURES TO MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN. As we implement our business plan, we may experience a period of rapid growth in our employee roster and operations, which may place a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part upon the ability of our senior management to manage this growth effectively, including attracting additional skilled personnel. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business will likely be harmed. To manage the expected growth of our operations and personnel, we will need to continually improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we are adding will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan. THE MARKET IN WHICH WE PARTICIPATE IS INTENSELY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, OUR OPERATING RESULTS, STOCKHOLDER VALUE AND PLANNED GROWTH WILL SUFFER. The market for telecommunications solutions, including local, long distance, data and Internet products and services, is intensely competitive and rapidly changing. Barriers to entry into this market have increased due to regulatory changes and increased costs of doing business with the Incumbent Local Exchange Carriers (ILECs), but these barriers have been offset by reductions in costs for bandwidth and the subsequent development of Voice over Internet Protocol (VoIP), which has allowed new competition to arise in the telephone services arena. Many of our competitors are larger and have more resources than we do. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, larger research, development and marketing budgets as well as substantially greater financial, technical and other resources. In addition, many of our current and potential competitors have access to larger customer bases and have more extensive marketing and distribution arrangements with resellers, distributors and OEMs than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Furthermore, because of these advantages, even if we develop products that are more effective than the products that our competitors offer, potential customers might accept competitive products in lieu of purchasing our products or services. We face competition from businesses that develop their own VoIP and other Internet based telecommunications services, as well as from ILECs who have achieved regulatory relief from the Telecommunications Act of 1996, and have begun to charge more for wholesale prices and in some cases eliminated the wholesale opportunity based on the size of the market. Our current and potential principal competitors include: o Other Competitive Local Exchange (CLECs) provider who provide many of the same telecommunications products and services that we do. Some examples of CLECs are : XO Communications, Xspedius, Logix Communications and McLeod Telecom; ILECs such as SBC Communications, Verizon, Qwest and Bell South who are the largest provider of local, long distance and Internet services to businesses; 5 o VoIP providers such as Vonage, Covad and mPower who can deliver local and long distance services over an Internet connection. WE MAY BECOME INVOLVED IN LITIGATION, WHICH COULD BE COSTLY AND TIME CONSUMING TO DEFEND. We may become involved in litigation such as securities class actions, intellectual property, employment (unfair hiring or terminations) and/or issues pertaining to delivering E911 services, among others. For example, we may be subject to lawsuits by parties claiming that we did not offer E911 services that are required by law at increasingly higher standards. Parties trying to call 911 from locations that we service may not be able to complete the call based on the fact that a T1 is a digital service and that emergencies such as fires, power outages, or simple equipment failure could disable the ability of a person to dial out over our local lines. Any of these parties could potentially claim that we are interfering with the lawful conduct of their business. Although we believe we have properly informed our customers, given them information on backup E911 procedures, as well as paying for backup lines to be installed, risk of litigation cannot be entirely eliminated. Litigation involves costs in defending the action and the risk of an adverse judgment. On February 14, 2006 we settled the breach of contract litigation against Communications Plus, Inc., a California company d/b/a Global Communications, ("Global") for a total settlement amount of $27,000 payable in periodic payments beginning on February 14, 2006 and ending December 1, 2006. On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a Three 18, Inc. ("KK"), filed a complaint against us and CEO Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to KK. On May 2, 2006 we settled the litigation for a total settlement amount of $26,500 payable in periodic payment beginning on May 2, 2006 and ending on July 2, 2006. THE FAILURE OF OUR CUSTOMERS TO PAY THEIR BILLS ON A TIMELY BASIS COULD ADVERSELY AFFECT OUR CASH FLOW. Our target customers consist of residences and small businesses. We anticipate having to bill and collect numerous relatively small customer accounts. We may experience difficulty in collecting amounts due on a timely basis. Although we will have the ability to discontinue services for untimely payments some customers may have moved or may not desire continued services, in which case collection could be very difficult. Our failure to collect accounts receivable owed to us by our customers on a timely basis could have a material adverse effect on our business, financial condition, results of operations and cash flow. As of May 2, 2006, our gross accounts receivable totaled $452,979. We have set aside an allowance of $12,165 against that balance for uncollectible accounts. The net amount we expect to receive is $440,814. As a telecommunications provider, we bill for our services up front, so therefore we have significant leverage to collect on our Accounts Receivable because, with proper dunning, we can discontinue our customers' telephone and internet services if they do not pay their bill. WE MAY BE UNABLE TO ADAPT TO RAPID TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS. The communications industry is subject to rapid and significant changes due to technology innovation, evolving industry standards, and frequent new service and product introductions. New services and products based on new technologies or new industry standards expose us to risks of technical or product obsolescence. We will need to use technologies effectively, continue to develop our technical expertise and enhance our existing products and services in a timely manner to compete successfully in this industry. We may not be successful in using new technologies effectively, developing new products or enhancing existing products and services in a timely manner in order to compete. In particular, it was and will continue to be a costly process to upgrade our networks to accommodate VoIP traffic. If a more advanced technology is developed and implemented in the telecommunications industry we may not be able to adapt or adapt quickly enough to effectively compete. THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY REGULATED AND AMENDMENTS TO OR REPEALS OF EXISTING REGULATIONS OR THE ADOPTION OF NEW REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. Federal, state and local regulation may affect our telecommunications business. Since regulation of the telecommunications industry in general, and the CLEC industry in particular, is frequently changing, we cannot predict whether, when and to what extent new regulations will affect us. The following factors, among others, may adversely affect our business, financial condition and results of operations: o delays in obtaining required regulatory approvals; o new court decisions; o the enactment of new adverse regulations; and o the establishment of strict regulatory requirements. 6 INDUSTRY CONSOLIDATION COULD MAKE IT MORE DIFFICULT TO COMPETE. Companies offering Internet, data and communications services are, in some circumstances, consolidating. We may not be able to compete successfully with businesses that have combined, or will combine, to produce companies with substantially greater financial, sales and marketing resources, larger client bases, extended networks and infra-structures and more established relationships with vendors, distributors and partners than we have. RISKS RELATED TO OUR STOCK WE HAVE NOT PAID DIVIDENDS TO OUR STOCKHOLDERS. We have never paid, nor do we anticipate paying, any cash dividends on our common stock. Future debt, equity instruments or securities may impose additional restrictions on our ability to pay cash dividends. Individuals who purchase our common stock from the Selling Shareholders will not receive income on such investment from the Company paying dividends. Any potential profit on the investment will be the result of an increased stock price, and the ability of an investor to sell the stock at such an increased price. THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including: o announcements of new products or services by our competitors; o fluctuations in revenue from our indirect sales channels. In addition, the market price of our common stock could be subject to wide fluctuations in response to: o quarterly variations in our revenues and operating expenses; o announcements of technological innovations or new products or services by us; and o our technological capabilities to accommodate the future growth in our operations or those of our customers. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of the stock of many Internet-related companies, and that often have been unrelated or disproportionate to the operating performance of these companies. Market fluctuations such as these may seriously harm the market price of our common stock. Further, securities class action suits have been filed against companies following periods of market volatility in the price of their securities. If such an action is instituted against us, we may incur substantial costs and a diversion of management attention and resources, which would seriously harm our business, financial condition and results of operations. DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO FALL. Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If our quarterly revenue or operating results fall below the expectations of investors or security analysts, the price of our common stock could fall substantially. Our quarterly revenue and operating results may fluctuate as a result of a variety of factors, many of which are outside our control, including: o the amount and timing of expenditures relating to the rollout of our POTS and VoIP service offerings; o our ability to obtain, and the timing of, necessary regulatory approvals; o the rate at which we are able to attract customers within our target markets and our ability to retain these customers at sufficient aggregate revenue levels; o our ability to deploy our network on a timely basis; o the availability of financing to continue our expansion; o technical difficulties or network downtime; and o the introduction of new services or technologies by our competitors and resulting pressures on the pricing of our service. FUTURE SALES BY OUR STOCKHOLDERS MAY HAVE THE AFFECT OF LOWERING OUR STOCK PRICE. Sales of our common stock in the public market following this offering could lower the market price of our common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. We are registering for resale more than 100% of the current public float, and accordingly, the number of shares trading in the open market will increase by over 100%. This large increase in available common stock may have a depressive effect on our stock price. 7 OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE EXTENT TO WHICH A TRADING MARKET MAY DEVELOP. ACCORDINGLY INVESTORS MAY HAVE DIFFICULTY SELLING THEIR SHARES DUE TO THE LACK OF AN ACTIVE AND LIQUID PUBLIC MARKET FOR OUR SHARES. Before this offering, our common stock has traded on the Over-the-Counter Bulletin Board. Thinly traded common stock is typically significantly more volatile than common stock trading in an active public market. The market price of our common stock is likely to be highly volatile as the stock market in general, and the market for small cap and micro cap technology companies in particular, has been highly volatile. Investors may not be able to resell their shares of our common stock following periods of volatility because of the market's adverse reaction to volatility. We cannot assure you that our common stock will trade at the same levels of our stocks in our industry or that our industry stocks in general will sustain their current market prices. Factors that could cause such volatility may include, among other things: o actual or anticipated fluctuations in our quarterly operating results o large purchases or sales or our common stock o announcements of technological innovations o changes in financial estimates by securities analysts o investor perception of our business prospects o conditions or trends in the telecommunications industry o changes in the market valuations of other industry-related companies o the acceptance of market makers and institutional investors of our business model and our common stock; and o worldwide economic or financial conditions. INVESTORS IN OUR SECURITIES MAY SUFFER DILUTION. THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE. The issuance of shares of our common stock, or shares of our common stock underlying warrants, options or preferred stock will dilute the equity interest of existing stockholders who do not have anti-dilution rights and could have a significant adverse effect on the market price of our common stock. The sale of our common stock acquired at a discount could have a negative impact on the market price of our common stock and could increase the volatility in the market price of our common stock. In addition, we may seek additional financing which may result in the issuance of additional shares of our common stock and/or rights to acquire additional shares of our common stock. The issuance of our common stock in connection with such financing may result in substantial dilution to the existing holders of our common stock who do not have anti-dilution rights. Those additional issuances of our common stock would result in a reduction of an existing holder's percentage interest in our company. The Selling Stockholders intend to sell in the public market the shares of common stock being registered in this offering. To the extent the Selling Stockholders acquired their shares or warrants at prices less than the current trading price of our common stock, they may have an incentive to immediately resell such shares in the market which may, in turn, cause the trading price of our common stock to decline. Significant downward pressure on our stock price caused by the sale of stock registered in this offering could encourage short sales by third parties that would place further downward pressure on our stock price. We are registering for resale up to 112,700,329 shares of our common stock, of which 82,212,048 shares are currently outstanding and 30,488,281 shares are issuable upon the exercise of stock purchase warrants by certain selling shareholders identified in this prospectus. As such shares of our common stock are resold in the public market, the supply of our common stock will increase, which could decrease its price. Moreover, the number of shares we are registering for resale constitutes more than 100% of the shares currently outstanding on a fully diluted basis. OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO RESELL 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. Penny stocks are stocks: 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 have a price of not less than $5.00 per share); or o In issuers with net tangible assets 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. 8 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. 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. IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS. AS A RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING, WHICH COULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR COMMON STOCK. We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company's internal controls over financial reporting in its annual report, which contains management's assessment of the effectiveness of the company's internal controls over financial reporting. In addition, an independent registered public accounting firm must attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting. These requirements may first apply to our annual report on Form 10-K for the fiscal year ending March 31, 2008. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may still decline to attest to our management's assessment or may issue a report that is qualified if they are not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We are a young company with limited accounting personnel and other resources with which to address our internal controls and procedures. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting at a reasonable assurance level. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our common stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. To the extent that any statements made in this prospectus contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as "expects", "plans", "will", "may", "anticipates", "believes", "should", "intends", "estimates", and other words of similar meaning. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include the following: o availability and adequacy of our cash flow to meet our requirements; o economic, competitive, demographic, business and other conditions in our markets o competition o changes in our business and growth strategy (including our acquisition strategy) or development plans o availability of additional capital to support acquisitions and development, and o other factors discussed under the section entitled "Risk Factors" or elsewhere in this prospectus 9 All forward-looking statements attributable to us are expressly qualified by these and other factors. Information regarding market and industry statistics contained in this prospectus is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements. USE OF PROCEEDS The selling stockholders will receive all of the proceeds from the sale of the shares offered for sale by them under this prospectus. We will not receive any proceeds from the resale of shares by the selling stockholders covered by this prospectus. We will, however, receive proceeds from the exercise of warrants outstanding. In that case, we could receive a maximum of $3,080,234, which would be used for working capital and general corporate purposes Use of proceeds from the original issuance of the shares of common stock registered herein: - $100,000 acquisition of as of yet unidentified smaller complimentary entity - $200,000 new activities--marketing in Europe, including research reports and telemarketing; telemarketing into new markets such as Fresno, CA and Lubbock, TX - $203,437 monthly operations - $79,000 capital expenditures including equipment related to VoIP - $850,000 pay debt and bring accounts payable current - $150,000 finder's fees Use of proceeds from the original issuance of the stock purchase warrants registered herein: - $500,000 fund new full service office and sales force in Chicago, including hiring necessary personnel and management to operate office - $200,000 software purchase for new equipment - $900,000 acquisitions of as of yet unidentified telecommunications entities - $450,000 monthly operations and reserve for potential negative cash flow - $150,000 consultants & marketing expansion including in Europe, California and Texas MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since April 2004, our common stock has been quoted on the OTC Bulletin Board under the symbol "IELM.OB". Prior to that date, there was no active market for our common stock. We have a March 31 fiscal year. The following table sets forth the high and low sales prices for the periods indicated as reported by the OTC Bulletin Board: Fiscal Year 2005 High Low - ---------------- ---- --- First Quarter(beginning April 14, 2004) $3.80 $3.30 Second Quarter 3.60 0.78 Third Quarter 1.01 0.40 Fourth Quarter 0.09 0.02 Fiscal Year 2006 High Low - ---------------- ---- --- First Quarter $0.09 $0.01 Second Quarter 0.07 0.03 Third Quarter 0.08 0.03 Fourth Quarter 0.22 0.06 The source of these high and low prices was the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. The high and low prices listed have been rounded up to the next highest two decimal places. The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market for the products we distribute, and other factors, over many of which we have little or no control. In addition, board market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance. 10 Holders As of May 2, 2006, there were 392 holders of record of our common stock and approximately 530 beneficial holders. Dividend Policy We have never paid dividends on our common stock and do not expected to do so in the foreseeable future. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION This "Plan of Operation" and other parts of this report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof and, except as required by law we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the caption "Disclosure Regarding Forward-Looking Statements" and elsewhere in this report. The following should be read in conjunction with our unaudited financial statements and the related notes thereto contained elsewhere in this report. The statements contained herein that are not historical facts are forward-looking statements that involve a number of risks and uncertainties. Historical results should not be relied on as indicative of trends in operating results for any future period. The actual results of the future events described in such forward-looking statements in this report could differ materially from those stated in such forward-looking statements. OUR PLAN OF OPERATION In January of 2005, the Company, then known as Mailkey Corporation closed its merger agreement with IElement, Inc., a facilities-based nationwide telecommunications communications service provider to small and medium sized enterprises. IElement, Inc., seeks to provide broadband data, voice and wireless services using integrated T-1 lines with a Layer 2 Private Network/Wide Area Network (WAN) solution to provide dedicated Internet access services, customizable business solutions for voice, data and Internet, and secure communications channels between our customers' offices, partners, vendors, customers and employees without the use of a firewall or encryption devices. In the first quarter 2005 the Company was unable to continue funding the development of its messaging security solutions and the rights to development and commercialization of the messaging security solutions were transferred to Tehshi Inc., in return for 20% of the common stock (2,640,000 shares of common stock) of Tehshi, Inc., issued to IElement, and for the cancellation of $76,107 in total debt that the Company owed to the development team of the messaging security solutions, Charles Ashley and Isaac de la Pena, who hold a combined 80% of the common stock of Tehshi, Inc. In the first quarter 2005, the Company sold its insolvent British Virgin Islands subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting firm, SS Khehar & Company. SS Khehar & Company agreed to deal with the winding up of the former subsidiary, for a fee of $1,800. On July 21, 2005 and August 1, 2005, the Company filed an Information Statement on Schedule 14C in preliminary form and in definitive form, respectively, disclosing that, among other items, it had obtained the requisite shareholder approval to change the Company's name to IElement Corporation. As of August 21, 2005, Mailkey Corporation formally changed its name to IElement Corporation ("IElement"). Subsequently, IElement has undertaken steps to present itself as IElement to its customer base and target market and will continue to take steps to notify, inform and/or promote the name of IElement. We now aim to grow the business of IElement and establish it as a profitable national added-value carrier. On November 10, 2005, the Company announced its intention to enter into the Voice Over Internet Protocol ("VOIP") market. The Company subsequently purchased the equipment necessary to begin providing VOIP services and identified a partner with VOIP expertise to assist in the planning and implementation. We purchased VoIP equipment for $80,000 and have identified Comm Partners as a VoIP partner, an un-related entity. The costs related to further development of our VoIP product are limited to our potential purchase of a new platform that will handle much more capacity than we currently can handle. That platform could cost up to 100,000 for what we would want to do. 11 We estimate the cost to enter the Chicago market to be approximately $500,000 from May 1, 2006 through March 31, 2007 before operations there become profitable. The $500,000 to start the sales force in Chicago covers all costs associated with acquiring a new office, staffing, training and managing a sales force and installation engineers, acquiring additional bandwidth or connections to accommodate new customers there, paying commissions and agent fees. The Company's current offices and equipment will support the Dallas and Los Angeles service. We will however have increased overall costs for additional marketing, including telemarketing services. Our next target markets are smaller cities in the Midwestern region that have yet to be identified. The Company expects that a budgeted amount of approximately $650,000 for monthly operations shall be sufficient for 18 months of operations, including the expansion into the Dallas, Chicago and Los Angeles markets. Upselling added value managed services will not cost a significant amount of money and began on May 1, 2006. The VoIP testing phase has been completed. We began aggressively marketing VoIP on May 1, 2006. IElement's focus is to become a profitable national Communication Service Provider (CSP) from California to Florida. IElement's added value, managed service strategy includes the potential development of additional subscription model services such as Managed Microsoft Exchange(tm), prepaid and postpaid cellular services, email and network security, residential/ business based wireless, and Managed Blackberry(tm) services. The development of these services would allow IElement to offer Small and Medium-sized Enterprises ("SMEs") the access to large enterprise type applications with little or no software purchase, hardware investment, upgrade concerns, or full-time administration of these services. These sell-through services should increase the Average Revenue Per Customer ("ARPC"), as well as help improve customer retention. As an "added-value" provider we intend to provide services that enhance our customers' ability to communicate on top of or along with basic internet access or telephone service. The Company intends to: -- Initially concentrate its resources on adding customers in the Dallas, Los Angeles and Chicago markets, while extending its sales reach smaller as of yet unidentified cities in the Midwest region of the United States. -- Build out the necessary infrastructure to sell IElement broadband services (wireless or wireline), as well as reselling voice services over the same T1 or wireless equivalent. -- Upsell added value managed services to our current and future customer base to raise our ARPC. We believe that existing infrastructure can serve multiple new markets as they are brought online in advance of the need for additional capital expenditures or additional software licenses. The cost associated with this goal is minimal and our efforts are beginning immediately. -- Seek acquisitions of wireless ISPs (WISPs) and other suitable telephony and/or data carriers in secondary and tertiary markets that can be layered onto the Company's current network including equipment and lines already owned or leased. We believe that such acquisitions would enable greater economies of scale and operating efficiencies. The Company is continuously exploring potential acquisitions in this regard. -- Begin aggressively marketing VOIP to the Company's current and potential customers. The Company is currently working diligently to add a small VOIP customer base upon which it can use as a base to aggressively market and expand this base. We have already begun such efforts and will continue to do so in the future. As noted above, we are initially concentrating on adding customers in the Dallas, Los Angeles and Chicago markets. We anticipate that the number of people who we employ may increase substantially over the next 12 months as we continue to execute on our business plan. The costs of implementing our business plan will be derived both from operating revenues and proceeds received from the exercising of warrants by the Selling Stockholders. The building out of I-Element's necessary infrastructure includes purchasing or leasing new telephone switches, the cost of which is expected to be in the range of $200,000 to $600,000 depending on whether we upgrade switches in one market or two and what features the new switches come with. We intend to begin building out infrastructure in May, 2006 and estimate completion by May, 2007. 12 EXECUTIVE OVERVIEW Although we have a solid, consistent, steady revenue base, revenue attrition is a major trend in the telecommunications industry that affects every provider and is an area of financial concern to us. Competition between providers for services that many small and medium sized businesses see as commodities leads customers to change providers based largely on price. The resulting effect is detrimental to our business model in two ways. First, our customers leave us for other providers and second, when we do renew our customers' contracts, we do so at rates up to 20 percent lower than they had been paying. To combat this revenue attrition, we intend to hire a new sales force in the coming months and we have earmarked $500,000 in cash raised through our recent private equity placement for this purpose. This will allow us to pursue new customers that more than replace the revenue lost to attrition. This sales force will be based in Chicago, where the smallest of our three major customer bases is and also where we have the most underutilized network capacity, allowing us to turn a profit quicker than we could elsewhere and maybe within 6 months. Our overall financial condition improved significantly with the recent private equity placement and the increased liquidity it brought. However, we do continue to use cash and at our current pace we would run out of cash this year if we were not able to successfully convert the warrants issued in the private placement, raise additional funds or acquire a cash flow positive company. To combat this, we would be able to reduce or eliminate certain general and administrative expense items, defer salaries or eliminate costly vendors. These spending cuts would return the company to the break even point or result in a net income. Because doing so would halt our growth plans, we do not intend to make these cuts unless we are unable to continue pursuing our growth model. We continue to incur operating losses because we have readied the company for rapid growth "out of the gate" as soon as we convert the private placement warrants. We have the necessary equipment, infrastructure, personnel, experience and processes to handle a much higher volume of customers. If we cut back on these expenses before we have a chance to utilize them we will save money in the short term but seriously hinder our ability to grow. Our main items of concern with our operating results are the declining revenue that results from customer attrition as described above and the corresponding decrease in cash flow, which was negative to begin with. These items in tandem cause concern because the only way to remedy them is to spend more cash on sales and retention. We currently do not have an active sales force and only one employee dedicated to retention, so our revenue and cash flow from operations have recently been decreasing. We believe that the money we expect to receive from investors exercising their warrants to purchase our stock will be sufficient not only to stabilize our current revenue, but to rapidly grow our customer base and increase our revenue, provide a positive cash flow from operations and start earning a net income on a regular basis. If we are able to successfully convert most of the warrants outstanding and set aside $500,000 specifically for a new sales force in Chicago, we believe we will be able to successfully become a profitable company within 6 months of that successful conversion. If we are unable to successfully convert a majority of the warrants, we will be forced to seek other debt or equity funding or to cut expenses by laying off employees or discontinuing certain services provided by our vendors. Our auditors have expressed doubt as to our ability to continue as a going concern. Because of the telecommunications industry's declining revenue trend and the fact that we cannot stabilize or increase our revenue and cash flow without a sales force, we believe that we need to recruit, train and retain an effective sales force. In order to do this, we need to obtain additional funding in the minimum amount of $500,000. Our intent is to raise this cash by calling the warrants issued in our recent private equity placement. If we are not able to do this and cannot raise additional debt or equity financing by other means, we may not be able to continue as a going concern. We believe that we have a very valuable business and have no intention of discontinuing our operations. We will do everything in our power to obtain additional financing and continue to carry out our business model. Market trends in our industry are shifting towards Voice over Internet Protocol (VoIP), and we have also developed our own VoIP product offering. VoIP has been gaining large scale acceptance as companies like Packet-8, Skype and Vonage continue to broadly advertise their services. These pioneering companies have paved the way for smaller, more agile companies like us by spending their time and money developing working VoIP platforms and then exerting significant effort to spread the word about VoIP, thereby leading to the large scale acceptance of which we are now in the midst. 13 We believe that we see an excellent opportunity as a business VoIP provider since none of the major VoIP providers are targeting businesses. Our barrier to entry into VoIP was minimal when you consider the potential return. Since our network consulting company, Obelix, had already done all necessary research and development, we were able to upgrade our network to provide VoIP for a one time cost of $79,000 in equipment, which we funded from the proceeds of our recent private equity placement. Another major trend in our industry is towards managed services like managed or hosted exchange (for email), managed PBX (for call features and routing) and data storage or disaster recovery. These services and others like them will be a great addition to the services we already provide and will allow our customers more freedom and options that could be added on to their existing services. Each of these services will be very inexpensive for us to provide and would bolster our gross margins and cash flow from operations. Theses services will also further entrench our customers with us as they would have more services committed to one provider, making it more likely that they will opt to renew their contracts at the end of their terms. Managed services will be an excellent addition to our product offerings and we are currently researching the order in which we want to roll them out. There are risks associated with providing these new products, and while the monetary costs to provide these new products are not great, the time and effort involved in providing them are substantial, especially considering our need for a regular sales force selling our existing products. The major risks are that we could start providing a service that nobody wants to buy, that we are not good at selling or that other companies will be able to provide the service at lower prices, maybe even below our cost. In any one of these three scenarios, we would again add to our negative cash flow from operations and take a further net loss, something we can ill afford to do. There are very good opportunities available in our industry. Any company with a strong sales force can profit from "traditional" telephone and internet services, VoIP, managed services, secure wide area networks, wireless internet access and other complimentary services. We have the infrastructure in place to compete in the marketplace and to profit from our business model, but we need to start with a sales force and continue to build upon it by layering on additional services for our sales force to sell (like disaster recovery) and allowing our service offerings to evolve with the market (like VoIP). Looking retrospectively at the merger between Mailkey and IElement in January 2005, it becomes apparent that the merged company made the correct decision in jettisoning its old anti-spam product. Even at that time, there were two or three companies that had already deployed a good anti-spam product and were well on their way to achieving a dominant market share. We estimated that the old Mailkey anti-spam product would've required an additional $1 million in research and development costs to completely develop, and there were no assurances that we would have ever been able to sell that product. In fact, it seems likely that we would never have produced a product that could compete with those already on the market. We believe that the direction we've taken IElement with regards to winding down the anti-spam business and concentrating on the business of providing telecommunications service is a great turnaround for the company and one that will benefit our shareholders. We compete with both competitive local exchange carriers (CLECs) like ourselves, who lease certain access lines from incumbent local exchange carriers (ILECs), and the ILECs themselves. Some examples of our ILEC competitors are Verizon Communications and AT&T. Some examples of our CLEC competitors are XO Communications and CBeyond Communications. We also compete with internet service providers (ISPs), but since their product offerings are typically limited in comparison to ours, this competition has little effect on our operations or planning. Most of our competitors are larger than us, both in terms of employment and revenue. A number of telecommunications firms either went out of business during the telecom downturn or have been acquired by larger carriers. Because of our size, we are more agile and can quickly adapt the changes in the marketplace and exploit our larger competitors' inability to react quickly, beating them to market with a new product or working more closely with a particular customer to personalize their service. We provide our own in-house live technical support 24 hours a day, 365 days a year, many of our customers know our employees by our first names and are much more comfortable working with a small, service-oriented company like IElement. RESULTS OF OPERATIONS FISCAL YEAR END MARCH 31, 2005 AS COMPARED TO MARCH 31, 2004 REVENUES Revenues were $5,652,756 for the fiscal year ended March 31, 2005, as compared to $5,644,343 for the period ended March 31, 2004. This decrease in revenue was due to customer attrition. 14 COST OF REVENUES Cost of revenues was $2,957,407 for the fiscal year ended March 31, 2005 and $3,270,930 for the period ended March 31, 2004. OPERATING EXPENSES Operating expenses for the fiscal year ended March 31, 2005 were $2,677,340 compared to $2,052,319 for the period ended March 31, 2004. The increase in operating expenses was primarily related to expanding our market reach, employing a sales team and items related to consummating the merger between I-Element and MailKey. GAIN (LOSS) FROM OPERATIONS Loss from operations for the fiscal year ended March 31, 2005 was ($605,335) compared to a gain from operations of $321,094) for the period ended March 31, 2004. INTEREST EXPENSE Interest expense was $6,992 and $31,354 for the fiscal years ended March 31, 2005 and 2004, respectively. NET INCOME (LOSS) APPLICABLE TO COMMON STOCK Net loss applicable to Common Stock was $643,846 for the fiscal year ended March 31, 2005, compared to a loss of $324,793 for the period ended March 31, 2004. Net loss per common share was $0.02 for the fiscal year ended March 31, 2005 and $7.60 for the period ended March 31, 2004. The losses in both years can be attributed to large interest expenses associated with outstanding promissory notes and large factoring expenses associated with the financing of accounts receivables. In addition, in both periods the Company had losses associated with the sale of investment stock. In addition for the year end March 31, 2005 the Company had a large depreciation expense. THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 2004 The revenue for the three months ended December 31, 2005 has decreased $295,376 from the same period ended December 31, 2004 for two reasons. First, due to financial constraints, we reduced our Dallas sales force in anticipation of redirecting it to the Chicago market. This action has caused our customer base to decrease as customer contracts expire and are not renewed. The recent private placement, however, has provided us with the funds to sustain a long term effort in Chicago where our network is running the furthest below capacity. Secondly, the prior year income statement had $128,334 and $358,001 of non-recurring consulting revenue for the three and nine month periods ended December 31, 2004, respectively. Comparable revenue for telecommunication services would be $1,119,972 and $1,286,814 for the three months ended December 31, 2005 and 2004 respectively and $3,487,000 and $4,066,344 for the nine months ended December 31, 2005 and 2004 respectively. The general and administrative expenses for the three months ended December 31, 2005 have increased $86,265 over the same period ended December 31, 2004. Said expenses for the last three months of 2005 increased, along with total expenses, because we had significant one-time expenses related to marketing our private placement Most of the expenses have decreased with the exception of some one-time consulting fees. The non-recurring consulting revenue for that period was related specifically to a one-time planned acquisition of Reality Wireless The Company incurred $141,750 for consulting fees to be paid out in stock. When these one time consulting fees are excluded, the recurring general and administrative expenses decreased $55,485 for the three months ended December 31, 2005 when compared to the same period ended December 31, 2004. The cost of sales for the last three months of 2005 was actually lower than the cost of sales in any other quarter of calendar 2005, but there was an increase when compared with the last three months of 2004. That increase is due to the fact that we are providing services in more markets than in 2004, so we have a more expansive owned network. Selling expenses have decreased $28,841 for the three months ended December 31, 2005 due to a decrease in sales headcount, as described above, from the same period ended December 31, 2004. Interest expense for the three months ended December 31, 2005 has decreased $37,667 from the same period ended December 31, 2004 reflecting that notes payable have been renegotiated with zero percent interest. PROFIT (LOSS) FROM OPERATIONS Loss from operations for the three months ended December 31, 2005 was ($328,262) compared to a profit of $99,807_for the three months ended December 31, 2004. 15 NET INCOME (LOSS) APPLICABLE TO COMMON STOCK Net loss applicable to Common Stock was ($328,262) for the three months ended December 31, 2005, compared to a profit of $99,807 for the three months ended December 31, 2004. Net loss per common share was $0.00 for the three months ended December 31, 2005 and net income per common share was $0.02 for the three months ended December 31, 2004. The reason for the losses in the three months ended December 31, 2005 are due in main part to one time consulting revenue in the prior period as well as a decrease in customers and therefore revenue. The Company had a decrease of customers due to attrition and the lack of an active sales force. In addition, during the three months ended December 31, 2005, the Company incurred non recurring consulting expenses related to the private placement. NINE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED TO DECEMBER 31, 2004 REVENUES Revenues were $3,487,000 for the nine months ended December 31, 2005, as compared to $4,424,345 for the nine months ended December 31, 2004. This decrease in revenue was due to two reasons. First, due to financial constraints, we reduced our Dallas sales force in anticipation of redirecting it to the Chicago market. This action has caused our customer base to decrease as customer contracts expire and are not renewed. Secondly, the prior year income statement had $128,334 and $358,001 of non-recurring consulting revenue for the three and nine month periods ended December 31, 2004, respectively. COST OF REVENUES Cost of revenues was $2,141,575 for the nine months ended December 31, 2005 and $2,223,222 for the nine months ended December 31, 2004. OPERATING EXPENSES Operating expenses for the nine months ended December 31, 2005 were $2,209,711 compared to $2,389,373 for the nine months ended December 31, 2004. The decrease in operating expenses was primarily related to a decrease in rental expense and associated overhead, a decrease in sales expenses due to a decrease in sales related employees/independent contractors, a decrease in advertising expenses, and a decrease in interest expense. LOSS FROM OPERATIONS Loss from operations for the nine months ended December 31, 2005 was $864,286 compared to $188,250 for the nine months ended December 31, 2004. INTEREST EXPENSE Interest expense was $4,951 and $107,222 for the nine months ended December 31, 2005 and 2004, respectively. The decrease in interest expense is primarily related to the payoff of certain notes payable combined with a re-negotiation of other notes payable to a zero percent interest rate. NET INCOME (LOSS) APPLICABLE TO COMMON STOCK Net loss applicable to Common Stock was $864,286 for the nine months ended December 31, 2005, compared to a loss of $226,761 for the nine months ended December 31, 2004. Net loss per common share was $0.01 for the nine months ended December 31, 2005 and $0.05 for the nine months ended December 31, 2004. The reasons for the losses in the nine months ended December 31, 2005 and December 31, 2004 are due in main part to one time consulting revenue in the prior period as well as a decrease in customers and therefore revenue. The Company had a decrease of customers due to attrition and the lack of an active sales force. In addition, during the three months ended December 31, 2005, the Company incurred non recurring consulting expenses related to the private placement. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have funded our operations primarily through private sales of equity securities and the utilization of short-term convertible debt. As of December 31, 2005 we had a cash balance of $1,205,129. In order to facilitate working cash flow, the Company factors or sells approximately 99% of accounts receivables for its customer billing with an outside agency, thereby receiving 75% of the aggregate net face value of the assigned accounts at the time of placement with the factor. We do not otherwise maintain a line of credit or term loan with any commercial bank or other financial institution. To date, our capital needs have been principally met through the receipt of proceeds from factoring customer receivables and the sale of equity and debt securities. Factoring allows us to receive virtually immediate cash from customer invoices. When each customer pays the third party directly, we receive another 22.75%, so the total cost to us for the third party's advance to us, their payment for processing and collections is 2.25%. Factoring in this manner is a financing alternative to credit card processing. 16 The Company recently closed a private placement offering for an aggregate sale price of $1,579,375, of which up to 10% is subject to deduction for fees in connection with the private placement, and warrants for the purchase of and aggregate total of 22,562,500 at a strike price of $.10 per share. Therefore, we believe that our current cash resources will be sufficient to sustain our current operations and we further expect to be able to fund the expansion of operations over the next twelve (12) months. In the event that the Company develops an opportunity to enter a significant business combination or other agreement with an entity deemed complementary to our business plan, then the Company may at such point need to seek additional funding. Additionally, in the event that the Company's plans change, that its assumptions prove to be inaccurate or its cash flow proves to be insufficient (due to unanticipated expenses, inadequate revenues, difficulties, problems or otherwise), the Company may be required to either seek further additional financing or curtail its activities. As of March 14, 2006, our gross accounts receivable totaled $452,979. We have set aside an allowance of $12,165 against that balance for uncollectible accounts. The net amount we expect to receive is $440,814. As a telecommunications provider, we bill for our services up front, so therefore we have significant leverage to collect on our Accounts Receivable because, with proper dunning, we can discontinue our customers' telephone and internet services if they do not pay their bill. As of March 31, 2006 I-Element has total notes payable and outstanding in the aggregate principal amount of $634,684.45 owed to 14 note holders. As of March 31, 2006 I-Element is current in all obligations except for past due total payments of $7500, which I-Element intends to bring current. None of the notes are interest bearing. The following is a more detailed discussion of the 14 notes. On January 19, 2005, I-Element issued eight (8) promissory notes to, Kramerica, certain members of Mr. Zweig's immediate family and others in the aggregate amount of $376,956.16 (the "Notes") with no interest. Upon issuance, the Notes were payable in 36 monthly installments with the first payment commencing six months after the closing of the merger and were secured by substantially all of the assets of I-Element. I-Element did not make any payments on the Notes. On March 25, 2006 each of the Notes were cancelled and I-Element issued new convertible promissory notes to the same individuals in the same principal amount of $376,956.16, again with no interest thereon. The first payment on each of the new convertible promissory notes is due in September 2006 with a total of 36 monthly installments through August 2009. The Lender has the right to convert all or a portion of the outstanding balance, at any time until the notes are paid in full, into I-Element's common stock at a conversion price of $0.035 per share. Any past due balance on the old Notes was forgiven at the time of cancellation of the old Notes and issuance of the new convertible promissory notes. The new convertible promissory notes are secured by substantially all the assets of I-Element as were the original Notes. On August 8, 2005, I-Element issued four (4) promissory notes in the aggregate principal amount of $183,097 to Timothy Dean Smith ($53,930), Susan Walton ($30,000), Jeremy Dean Smith ($54,603) and Dolphin Capital ($44,564), with no interest. Upon issuance the notes were payable in 36 monthly installments with the first payment due in February, 2006. I-Element did not make the February, 2006 payment. On March 25, 2006 each of the Notes were cancelled and I-Element issued new convertible promissory notes to the same individuals in the same principal amount of $183,097, again with no interest thereon. The first payment on each of the new convertible promissory notes is due in September 2006 with a total of 36 monthly installments through August 2009. The Lender has the right to convert all or a portion of the outstanding balance, at any time until the notes are paid in full, into I-Element's common stock at a conversion price of $0.035 per share. Any past due balance on the old Notes was forgiven at the time of cancellation of the old Notes and issuance of the new convertible promissory notes. The remaining two notes are held by Duane Morris ($39,631.29) and Palladian ($35,000). The Duane Morris note was issued in exchange for a settlement of disputed attorneys fees on August 16, 2005 and is being paid in nine monthly installments beginning on September 30, 2005 and ending May 30, 2006. As of March 31, 2006 I-Element is past due $2500 on the Duane Morris note. The Palladian note was issued on August 29, 2005 and is being paid in fourteen monthly installments beginning September 5, 2005 and ending October 28, 2006. As of March 31, 2006, I-Element is past due $5000 on the Palladian note. On February 14, 2006 we settled the breach of contract litigation against Communications Plus, Inc., a California company d/b/a Global Communications, ("Global") for $27,000 payable to Global Communications in periodic payments beginning February 14, 2006 and ending December 1, 2006. On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a Three 18, Inc. ("KK"), filed a complaint against us and CEO Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to KK. On May 2, 2006 we settled the litigation for a total settlement amount of $26,500 payable in periodic payments beginning on May 2, 2006 and ending on July 2, 2006. 17 As of May 2, 2006, IElement has issued all stock payable due and owing as of December 31, 2005 as reflected in our notes to financial statements except for 300,000 shares of common stock valued at $12,000 to be issued for services rendered. IElement is not aware of any undisclosed actual or contingent liabilities. CRITICAL ACCOUNTING POLICY AND ESTIMATES Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this Annual Report. OFF-BALANCE SHEET ARRANGEMENTS As of December 31, 2005, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships. BUSINESS IElement (f/k/a Global Diversified Acquisitions Corp f/k/a MK Secure Solutions Ltd.) was established as a messaging security and management company. A messaging security and management company is one that seeks to provide its customers with protection from spam, viruses, hackers and thieves that attack electronically and in particular through e-mail. On March 25, 2004, pursuant to an Agreement and Plan of Merger, Global Diversified Acquisition Corp. ("GDAC"), acquired all of the outstanding capital stock of MK Secure Solutions Ltd ("MKSS"), a holding company incorporated on March 11, 2003, under the laws of the British Virgin Islands. The transaction was effectuated by the issuance of shares such that the former MKSS shareholders owned approximately 90% of the outstanding MailKey Corporation stock after the transaction. GDAC then changed its name to MailKey Corporation ("MailKey"). Pursuant to the terms of the Merger Agreement, GDCA issued 26,246,000 shares of its common stock to the MailKey Shareholders, representing approximately ninety-four percent (94%) of GDCA's outstanding Common Stock. Pursuant to the terms of the Merger Agreement, at the Effective Time, MailKey: (i) received a letter of resignation from Andrew J. Kacic as a member of its board of directors, which resignation became effective at 12:00 noon eastern standard time on March 26, 2004, (ii) appointed Graham Norton-Standen and Tim Dean-Smith to serve as directors of the Company, which appointments became effective at the Effective Time, and (iii) received letters of resignation from John W. Shaffer and Raymond J. Bills, constituting all of the remaining members of the Company's board of directors as it existed immediately prior to the Effective Time. Susan Walton subsequently became a director of MailKey. MailKey, had offices in the United States, Europe and Asia, and was a messaging security company that provided a suite of applications and technologies to manage and control messages and limit the dangers posed by the rapid growth of electronic communication. MailKey protected companies from intrusive or dangerous messages, whether they be e-mail, short messaging service (SMS) or multimedia messaging service (MMS) messages, and helps protects businesses from the most important threats inherent in electronic communication - - spam, viruses, identity theft, mail abuse and lapses in enforcing company security policy. MailKey's applications analyzed and applied rules to all incoming and outgoing messages on a company's network. In so doing, MailKey's technology was designed to put control back into the hands of a company's information technology department. A detailed description of the Merger and the Agreement and Plan of Merger and First Amendment thereto are set forth on Form 8-K, and Exhibits 2.1 and 2.2 filed therewith, filed on April 9, 2004. 18 On November 9, 2004, MailKey Corporation agreed to merge with and into IElement, Inc., a Nevada corporation pursuant to which MailKey acquired all of the issued and outstanding shares of capital stock of IElement. On January 19, 2005, Mailkey consummated the acquisition of IElement. Pursuant to the Agreement and Plan of Merger dated November 9, 2004, as amended by the First Amendment and Waiver to Agreement and Plan of Merger dated December 30, 2004, Mailkey issued an aggregate of 47,845,836 shares of its common stock in exchange for all of the issued and outstanding shares of capital stock of I-Element at an exchange ratio of 3.52 shares of Mailkey for each outstanding share of common stock of I-Element. IElement is a facilities-based nationwide communications service provider that provides telecommunications services to small and medium sized enterprises ("SMEs"). IElement utilizes high-speed Internet T-1 lines, integrated T-1 lines for voice and data, wireless Internet/data services, and a Layer 2 Private Network solution to provide SMEs with dedicated Internet access services, customizable business solutions for voice, data and Internet, and secure communications channels between the SMEs' offices, partners, vendors, customers and employees without the use of a firewall or encryption devices. IElement has a network presence in 18 major markets in the United States, including facilities in Los Angeles, Dallas, and Chicago. IElement started business in 2003. A detailed description of the foregoing Merger and the Agreement and Plan of Merger and First Amendment thereto are set forth on Form 8-K, and Exhibits 2.1 and 2.2 filed therewith, filed on January 25, 2005. In connection with the closing of the merger, the Company entered into a letter of intent with Ivan Zweig and Kramerica Capital Corporation ("Kramerica"), a corporation wholly-owned by Mr. Zweig, which contemplates that IElement will enter into a four year employment agreement pursuant to which Mr. Zweig will serve as the Chief Executive Officer of MailKey and IElement. The letter of intent provided that Mr. Zweig will receive an annual base salary of $300,000. In addition to his base salary, Mr. Zweig will be entitled to annual performance bonuses with targets ranging from $1,000,000 to $3,000,000 during the second, third and fourth years provided IElement achieves certain performance goals. If Mr. Zweig is terminated without cause, the Company is obligated to pay the remaining salary owed to Mr. Zweig for the complete term of the employment agreement, to pay off all notes owed to Mr. Zweig or Kramerica, all outstanding options shall become fully vested, the Company shall pay all earned performance bonuses and all accrued vacation. If Mr. Zweig is terminated for any reason other than cause, the Company shall pay in full the Notes owed to either Mr. Zweig or Kramerica Capital Corporation and at least 75% of the earned bonus plan set forth by the directors. On August 1, 2005, we filed with the SEC an Information Statement on Schedule 14C to change our name from MailKey Corporation to IElement Corporation. Concurrent with this name change, we received a new stock trading symbol (IELM.OB) on the NASD Over-the-Counter Electronic Bulletin Board. The Company received consent to amend the Articles of Incorporation to increase the number of shares of common stock authorized to be issued from 100,000,000 shares to 2,000,000,000 shares, and consented to the authorization of 200,000,000 shares of Blank Check Preferred Stock. There are no current plans to designate any Blank Check Preferred Stock. Consistent with the expectations of the parties, on August 3, 2005 Tim Dean Smith and Susan Walton resigned from all positions and as Directors with the Company leaving Ivan Zweig as the sole officer and director. On March 4, 2006 Lance K. Stovall and Ken A Willey joined the Board of Directors. Again, IElement is a facilities-based nationwide communications service provider that provides telecommunications services to small and medium sized enterprises ("SMEs"). IElement utilizes high-speed Internet T-1 lines, integrated T-1 lines for voice and data, wireless Internet/data services, and a Layer 2 Private Network solution to provide SMEs with dedicated Internet access services, customizable business solutions for voice, data and Internet, and secure communications channels between the SMEs' offices, partners, vendors, customers and employees without the use of a firewall or encryption devices. IElement employees its own installation technicians that install the Company's services and equipment in the Dallas/Fort Worth, Texas market as well as the Los Angeles/Orange County, California markets. In most other markets the Company contracts to third parties to perform such installations and to service customers on an as needed basis. The Company competes with both competitive local exchange carriers (CLEC's) who lease access lines from incumbent local exchange carriers (ILEC's), as well as the ILEC's themselves. Some examples of ILEC competitors are Verizon Communications and AT&T. Some examples of CLEC competitors are XO Communications and CBeyond Communications. In addition, IElement competes with internet service providers (ISP's) to some extent. However, most ISP's are limited in their product line and do not offer telephone of VOiP services and thus are not considered major competitors to us. 19 The Company is of course dependent on its customer base for continued revenue, however, its customer base is diversified and consists of many smaller customers as opposed to a few larger customers. The Company can generally quickly replace a lost customer with a new customer without a significant impact on revenue and operations. However, at present, IElement has a drastically reduced sales force and accordingly, the loss of customers would have a greater impact than at other times. IElement intends to use proceeds from the private placement and the exercise of warrants to build its sales force, including in the Chicago area. Other than the IElement logo, the Company has no trademarks. The Company does not own any patents or significant intellectual property rights. In early 2005 we were unable to continue funding the development of our messaging security solutions, and the rights were transferred to the development team in return for the cancellation of most of the liabilities which we owed to them. We retained an interest of 20% in the messaging security solutions; however to date there has been no commercialization of the solutions. In the first quarter 2005 we sold our insolvent British Virgin Islands subsidiary, MK Secure Solutions Limited, for $1.00 to a UK based accounting firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with the winding up of the former subsidiary, for a fee of $1,800. We sold the business to relieve our management and staff of the responsibility of administratively winding up and administratively dissolving MK Secure, which at that time had no revenues, assets or liabilities. In addition, the sale of the business relieved us of the accounting responsibilities and expenses of reporting a net zero entity on a consolidated basis. Effective January 24, 2005, Ivan Zweig was appointed to the Board of Directors of MailKey. He has served as the Chief Executive Officer of IElement since March 2003. Mr. Zweig is also the Chief Executive Officer, director and sole shareholder of Kramerica, an entity utilized by Mr. Zweig for asset ownership and payment of certain compensation. Since December 1998, Mr. Zweig has served as the Chief Executive Officer and director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide voice and data carrier specializing in high speed Internet access and secure data transaction. ICCC provides us with resold telecom services for approximately $100,000 on a monthly basis for such services. On October 1, 2004, ICCC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court, Northern District of Texas, Dallas Division. The cost of services is approximately $100,000 per month and fluctuates with the amount of services being provided in that month. ICCC earns a commercially reasonable margin for their services. ICCC has interconnection agreements and other resources including existing account managers and business relationships already in place. We are not dependant on the services that ICCC is reselling to us in that we would be able to make a transition away from this resale agreement, but ICCC is already providing these services and it would be cost prohibitive (approximately $35,000) to change providers or perform the services in-house. We estimate that it would take 24 months to recover the new installation costs. ICCC had a confirmation hearing to approve its plan of reorganization on April 26, 2006 whereat the Plan was approved. Our arrangement with ICCC allows either party to terminate the relationship at any time upon 30 days notice. Except for the cost of the change, IElement could quickly and easily move its business away from ICCC and to a different provider in the event such a move was necessary or the contract was cancelled for any reason. As of May 2, 2006 IElement consists of IElement Corporation, a Nevada corporation, which is the registrant and parent corporation. IElement, Inc. is a wholly owned subsidiary without separate operations. The Company intends to file a short form merger to merge IElement, Inc. into IElement corporation and terminate it as a separate entity. In addition, we have two operating subsidiaries. IElement Telephone of California was formed on November 14, 2005 to acquire and administer a telecommunications license in the state of California. IElement Telephone of Arizona was formed on March 13, 2006 to acquire and administer a telecommunications license in the state of Arizona. We now aim to grow and establish us as a leading regional added-value carrier. We intend to: o Concentrate our resources on adding customers in the Dallas, Los Angeles and Chicago markets, while extending our sales reach into the next target markets. o Build out the necessary infrastructure to sell IElement broadband services (wireless or wireline), as well as reselling voice services over the same T1 or wireless equivalent. o Upsell added value managed services (Blackberry, secure email, VoIP, prepaid cellular, and storage) to our current and future customer base to raise our ARPC. Existing infrastructure can serve multiple new markets as they are brought online before we would need any capital expenditures or additional software licenses. 20 o Look for acquisitions of wireless ISPs (WISPs), and other suitable telephony and/or data carriers, in secondary and tertiary markets which can be layered onto the Company's national backbone (or our current network which includes the equipment we own and the lines we lease) which we expect will create economies of scale and operating efficiencies. o Complete VOIP testing phase and begin aggressively marketing VOIP to the Company's current and potential customers. Our focus is to become a profitable national Communication Service Provider (CSP) from California to Florida. Our added value, managed service strategy includes the potential development of additional subscription model services such as Managed Microsoft Exchange, prepaid and postpaid cellular services, email and network security, residential/ business based wireless, and Managed Blackberry(tm) services. The development of these services would allow us to offer SMBs access to Enterprise type applications with little or no software purchase, hardware investment, upgrade worries, or full-time administration of these services. These sell through services should increase the Average Revenue Per Customer, as well as help improve customer retention. We anticipate that the number of people who we employ may increase substantially over the next 12 months as we continue to execute on our business plan. REGULATORY OVERVIEW OVERVIEW We are subject to regulation by federal, state and local government agencies. Historically, the FCC had jurisdiction over interstate long distance services and international services, while state regulatory commissions had jurisdiction over local and intrastate long distance services. The Telecommunications Act of 1996, or the "Telecom Act" fundamentally changed the way telecommunications is regulated in this country. The FCC was given a major role in writing and enforcing the rules under which new competitors could compete in the local marketplace. Those rules, coupled with additional rules and decisions promulgated by the various state regulatory commissions, form the core of the regulatory framework under which we operate in providing our services. With a few limited exceptions, the FCC continues to retain exclusive jurisdiction over the provision of interstate and international long distance service, and the state regulatory commissions regulate our provision of intrastate local and long distance service. Additionally, municipalities and other local government agencies may regulate limited aspects of our business, such as use of government-owned rights-of-way, and may require permits such as zoning approvals and building permits. The Telecom Act and the related rules governing competition issued by the FCC, as well as pro-competitive policies already developed by state regulatory commissions, have enabled new entrants like IElement to capture a portion of the ILECs' market share of local services. However, there have been numerous attempts to limit the pro-competitive policies in the local exchange services market through a combination of proposed federal legislation, adoption of new rules by the FCC, and ILEC challenges to existing and proposed regulations. To date, the ILECs have succeeded in eliminating some of the market-opening regulations adopted by the FCC and the states through numerous court challenges. In particular, the ILECs appealed, and won partial reversals of, a series of FCC orders defining the ILEC facilities -- known as unbundled network elements or "UNEs" -- that ILECs must lease to competitors at cost-based rates. We expect the ILEC's efforts to scale back the benefits of the Telecom Act and local service competition to continue. However, while the FCC has eliminated certain UNEs, the basic framework of local competition, including the UNE regime itself, has remained intact. The successful implementation of our business plan is predicated on the assumption that the basic competitive framework and pro-competitive safeguards will remain in place. The passage of the Telecom Act largely preceded the explosive growth of the Internet and IP communications. Congress is currently considering whether to further amend the Telecom Act to, among other things, directly address IP communications. It is possible that any such amendment to the Telecom Act could eliminate or materially alter the market-opening regulatory framework of the Telecom Act in general, and the UNE regime in particular. Such a result could adversely affect IElement's business. It is not possible to predict if, when, or how the Telecom Act will be amended. FEDERAL REGULATION The FCC exercises jurisdiction over our telecommunications facilities and services. We have authority from the FCC for the installation, acquisition and operation of our wireline network facilities to provide facilities-based domestic interstate and international services. Because IElement is not dominant in any of its markets, unlike ILECs, we are not currently subject to price cap or rate of return regulation. Thus, our pricing policies for interstate end user services are only subject to the federal guidelines that charges for such services be just, reasonable, and non-discriminatory. 21 IMPLEMENTATION OF THE TELECOM ACT THE TELECOM ACT'S LOCAL COMPETITION FRAMEWORK One of the key goals of the Telecom Act is to encourage competition in the provision of local telephone service. To do this, the Telecom Act provides three means by which CLECs such as IElement can enter the local telephone service market. The three modes of entry are as follows: o ACCESS TO UNES. ILECs are required to lease to CLECs various elements in their network that are used individually or in combination with each other to provide local telephone service. As discussed in more detail below, the FCC determines which facilities must be made available by the ILECs as UNEs. The ILECs must make UNEs available at rates that are based on their forward-looking economic costs, a pricing regime known as "TELRIC," short for Total Element Long Run Incremental Cost. For IElement, the most critical UNEs are local loops and transport, which enable us to connect our customers to our network. o CONSTRUCTION OF NEW FACILITIES. CLECs may also enter the local service market by building entirely new facilities. The ILECs are required to allow CLECS to interconnect their facilities with the ILECs' facilities in order to reach all customers. o RESALE. ILECs are required to permit CLECs to purchase their services for resale to the public at a wholesale rate that is less than the rate charged by the ILECs to their retail customers. To facilitate competitors' entry into local telephone markets using one or more of these three methods, the Telecom Act imposes on the ILECs the obligation to open their networks and markets to competition. When requested by competitors, ILECs are required to negotiate, in good faith, agreements that set forth terms governing the interconnection of their network, access to UNEs, and resale. The following is a summary of the interconnection and other rights granted by the Telecom Act that are important for effective local service competition and our belief as to the effect of those requirements, if properly implemented: o interconnection with the networks of incumbents and other carriers, which permits our customers to exchange traffic with customers connected to other networks; o requirements that the ILECs make available access to their facilities for our local loops and transport needs, thereby enabling us to serve customers not directly connected to our networks; o compensation obligations, which mandate reciprocal payment arrangements for local traffic exchange between us and both incumbent and other competitive carriers and compensation for terminating local traffic originating on other carriers' networks; o requirements concerning local number portability, which allows customers to change local carriers without changing telephone numbers, thereby removing a significant barrier for a potential customer to switch to our local voice services; o access to assignment of telephone numbers, which enables us to provide telephone numbers to new customers on the same basis as incumbent carriers; and o collocation rights allowing us to place telecommunications equipment in ILEC central offices, which enables us to have direct access to local loops and other network elements. Although the rights established in the Telecom Act are a necessary prerequisite to the introduction of full local competition, they must be properly implemented and enforced to permit competitive telephone companies like IElement to compete effectively with the incumbent carriers. Discussed below are several FCC and court proceedings relating to the application of certain FCC rules and policies that are significant to and directly impact our operations and costs as well as the nature and scope of industry competition. UNBUNDLING OF INCUMBENT NETWORK ELEMENTS In a series of orders and related court challenges that date back to 1996, the FCC has promulgated rules implementing the market-opening provisions of the Telecom Act, including the requirement that the ILECs lease UNEs to competitors at cost-based rates. At the core of the series of FCC orders is the FCC's evolving effort to define which ILEC network facilities must be made available as UNEs. Initially, the FCC defined a broad list of UNEs, consisting of most of the elements of the ILECs' networks. Under pressure from the ILECs, the FCC has subsequently reduced the list, while preserving access to those network elements critical to the operation of IElement's business. 22 The current list of UNEs was promulgated by the FCC in two orders. The first is the Triennial Review Order, or "TRO", which was released on August 21, 2003. Several carriers and other entities appealed the FCC's TRO decision. On March 2, 2004, the U.S. Court of Appeals for the D.C. Circuit issued its opinion in United States Telecom Association v. FCC, No. 00-1012 ("USTA II Decision"). In the USTA II Decision, the court reversed and overturned many of the conclusions of the TRO. In the aftermath of the USTA II Decision, the FCC released the second of its two currently controlling orders, the TRO Remand Order or "TRRO", on February 4, 2005. It is expected that various parties will appeal the TRRO. It is not possible to predict the outcome of those appeals. It is possible that portions of the order could be overturned and that the FCC will issue new rules in their place that further restrict access to UNEs. As of March 11, 2005, the effective date of the TRRO, the ILECs are obligated to provide as UNEs the following network facilities used by IElement to serve its customers: UNE LOOPS DS0 LOOPS. A DS0 loop is a single, voice-grade channel. Typically, individual business lines are DS0 loops. The ILECs must make DS0 loops available at UNE rates on an unlimited basis. DS1 LOOPS. A DS1 loop is a digital loop with a total speed of 1.544 megabytes per second, which is the equivalent of 24 DS0s. Multiple voice lines and Internet access can be provided to a customer over a single DS1 loop. We serve most of our customers with DS1 loops. The ILECs must provide DS1 loops at UNE rates at the majority of their central offices. Competitors, however, are limited to no more than 10 DS1 loops to any particular building. DS3 LOOPS. A DS3 loop is a digital loop with a total speed of 44.736 megabytes per second. In some cases, I-Element serves its large business customers with DS3 loops. ILECs must provide DS3 loops at UNE rates at the majority of their central offices. Competitors, however, are limited to no more than one DS3 loop to any particular building. As of the TRRO, ILECs are not required to provide optical capacity loops or dark fiber loops as UNEs. Optical capacity loops, referred to as OCn loops, are very high-capacity digital loops ranging in capacity from OC3 loops, which are the equivalent of three DS3s to OC192. This will not impact our costs. The ILECs are also not required to provide certain mass market broadband loop facilities and functionality as UNEs. Under the TRO, the ILECs are not required to make newly-deployed fiber-to-the-home or FTTH loops available as UNEs and are only required to provide the equivalent of DS0 capacity on any FTTH loop built over an existing copper loop. These recent FCC orders should only limit availability for those specific network elements, which are not material to us. It is possible, however, that the ILECs will seek additional broadband regulatory relief in future proceedings. UNE TRANSPORT DS1 TRANSPORT. Whether transport is available as a UNE is determined on a route-by-route basis. ILECs must make transport at UNE rates available at DS1 capacity levels between any two ILEC central offices unless both central offices either (1) serve more than 38,000 business lines or (2) have four or more fiber-based collocators. On routes where DS1 transport must be made available, each individual competitor is limited to no more than 10 DS1 transport circuits per route. DS3 TRANSPORT. Access to DS3 capacity-level transport is more limited than access to DS1 transport. ILECs must make transport at UNE rates available at DS3 capacity levels between any two ILEC central offices unless both central offices either (1) serve more than 24,000 business lines or (2) have three or more fiber-based collocators. On routes where DS3 transport must be made available, each individual competitor is limited to no more than 12 DS1 transport circuits per route. DARK FIBER TRANSPORT. Dark fiber transport is available under the same conditions as DS3 transport. ILECs are not required to provide access to transport at greater-than DS3 capacity levels. ILECs are also not required to provide transport at any capacity level to connect an ILEC central office with a competitor's facilities. TRANSITIONAL AVAILABILITY WHERE ELEMENTS ARE NO LONGER AVAILABLE AS UNES For DS1, DS3, and dark fiber loops and transport that do not meet the criteria for availability set forth above, the FCC established a transitional period during which the ILECs must continue to make the elements available at UNE rates to serve existing customers. For DS1 and DS3 loops and transport, the ILECs must make the elements available at 115% of the TELRIC rate for one year beginning on March 11, 2005. For dark fiber loops and transport, the ILECs must make the elements available at 115% of the TELRIC rate for 18 months beginning on March 11, 2005. 23 Although these rules adopted by the FCC in the TRRO became effective on March 11, 2005, many of the requirements imposed by the FCC in the TRO and TRRO were not self-executing. Accordingly, the FCC made clear that carriers must follow the change of law procedures in their applicable interconnection agreements with ILECs to implement any TRO requirements that are not self-executing and that carriers must follow the procedures set forth in section 252(b) of the Telecom Act to modify interconnection agreements that are silent as to implementation of changes in law. ADDITIONAL FEDERAL REGULATIONS The following discussion summarizes some additional specific areas of federal regulation that directly affect our business. VOIP. Like a growing number of carriers, we utilize IP technology for the transmission of a portion of our network traffic. The regulatory status and treatment of IP-enabled services is unresolved. In particular, there is uncertainty as to the imposition of access charges, Universal Service fund contributions, and other taxes, fees, and surcharges on VoIP services. In a recent order, the FCC held that Vonage's VoIP services and similar offerings by other providers are subject to the FCC's interstate jurisdiction, preempting state efforts to regulate VoIP providers as intrastate telecommunications providers. Four separate state commissions have appealed this ruling and the case is currently pending. The FCC, however, left open the question of whether VoIP providers provide "telecommunications" -- i.e., basic transmission services - -- or enhanced "information services." Under the Communications Act, those are mutually exclusive categories. Generally, telecommunications carriers, including traditional local and long distance telecommunications companies are regulated under the Communications Act; information service providers are generally unregulated. The FCC has initiated a rulemaking proceeding to address the classification of VoIP and other IP-enabled service offerings. It is not possible to predict the outcome of that proceeding or its effect on IElement's operations. AT&T DECLARATORY RULING RE: VOIP. On April 21, 2004, the FCC released an order denying AT&T's request that the FCC find that VoIP services are exempt from switched access charges, the AT&T Order. The FCC held that an interexchange service that uses ordinary customer premises equipment that originates and terminates on the PSTN, that provides no enhanced functionality, and that undergoes no net protocol conversion, is a telecommunications service and subject to switched access charges. The order apparently places interexchange services similar to those VoIP services offered by AT&T in the same regulatory category as traditional telecommunications services and, therefore, potentially subjects such VoIP services to access charges and other regulatory obligations including Universal Service fees. Although the FCC did not rule on the applicability of access charges for services provided prior to April 21, 2004, the ILECs may attempt to assert claims against other telecommunications companies including us for the retroactive payment of access charges. ILEC PROVISION OF BROADBAND TELECOMMUNICATIONS SERVICES AND INFORMATION SERVICES. Currently, the ILECs, as dominant carriers, are subject to a relatively high degree of regulation with respect to their broadband serving offerings. The FCC, however, has initiated a rulemaking proceeding in which it is considering deregulating, or applying a lower degree of regulation to, ILEC broadband offerings. If the ILECs are largely freed from dominant carrier regulation, they will have much greater pricing flexibility and will pose a greater competitive threat to IElement. In a second, related rulemaking, the FCC is considering whether to eliminate certain requirements it imposes on the ILECs with respect to their broadband Internet access services. Currently, where the ILECs offer Internet access or other information services over broadband facilities, they must (1) purchase the underlying broadband transmission facilities from themselves at tariffed rates and (2) make the underlying facilities available to competitors on a non-discriminatory basis. If the FCC were to eliminate these requirements, it could result in an increase to our network costs. To date, these deregulatory trends have been directed towards facilities used primarily by residential customers, and not by business customers. INTERCARRIER COMPENSATION REFORM. Currently, telecommunications carriers are required to pay other carriers for interstate access charges and local reciprocal compensation charges. These two forms of intercarrier compensation have been under review by the FCC since 2001. The FCC continues to consider a broad order reforming the intercarrier compensation system. STATE AND LOCAL REGULATION In general, state regulatory commissions have regulatory jurisdiction over us when our facilities and services are used to provide local and other intrastate services. Under the Telecom Act, state commissions continue to set the requirements for providers of local and intrastate services, including quality of services criteria. State regulatory commissions also can regulate the rates charged by CLECs for intrastate and local services and can set prices for interconnection by new telecommunications service providers with the ILEC networks, in accordance with guidelines set by the FCC. In addition, state regulatory commissions in many instances have authority under state law to adopt additional regulations governing local competition and consumer protection, so long as the state's actions are not inconsistent with federal law or regulation. 24 Most state regulatory commissions require companies that wish to provide intrastate common carrier services to register or be certified to provide these services. These certifications generally require a showing that the carrier has adequate financial, managerial and technical resources to offer the proposed services in a manner consistent with the public interest. We are certified in all of the states in which we conduct business. In most states, we are also required to file tariffs setting forth the terms, conditions and prices for services that are classified as intrastate, and to update or amend our tariffs as rates change or new products are added. We may also be subject to various reporting and record-keeping requirements. Where we choose to deploy our own transmission facilities, we may be required, in some cities, to obtain street opening and construction permits, permission to use rights-of-way, zoning variances and other approvals from municipal authorities. We also may be required to obtain a franchise to place facilities in public rights of way. In some areas, we may be required to pay license or franchise fees for these approvals. We cannot assure you that fees will remain at current levels, or that our competitors will face the same expenses, although the Telecom Act requires that any fees charged by municipalities be reasonable and non-discriminatory among telecommunications carriers. RECENT FEDERAL RULEMAKING. Effective as of March 11, 2005, the Federal Communications Commission's, or FCC's, Triennial Review Remand Order, or TRRO, altered a number of significant federal regulations applicable to the provision of competitive telecommunications services in a manner favorable to incumbent carriers. The TRRO established new standards for when CLECs obtain cost-based rates from ILECs when leasing unbundled network elements, or UNEs, which connect a customer's location with the applicable communications network end office, commonly referred to as "loops". This aspect of the TRRO will result in an increase to our overall costs of service in 2005. The TRRO also curtailed the ability of CLECs to obtain cost-based UNE rates for network elements linking central offices in which they have located their own equipment, but between which they do not own proprietary fiber lines. Fiber lines between central offices is referred to in our industry as "local transport". This aspect of the TRRO will not have a material impact on us as we own or lease under long-term agreements nearly all of the local transport that we use to connect central offices in which we own equipment. This aspect of the TRRO could, however present opportunities for us to sell our own network capacity to telecommunications companies that are negatively impacted by the TRRO ruling on local transport. The TRRO also severely curtailed the ability of CLECs to lease switching capacity from ILECs at cost-based rates, which practice is known in the telecommunications industry as unbundled network element platform, or UNE-P. We are not materially impacted by this aspect of the TRRO as we own all of the switching facilities we use in our business. We anticipate that one of the results of the TRRO will be that many CLECs that are substantially dependent on UNE-P will need to either acquire their own switches, seek a facilities-based partner to switch their customers' traffic, or find other strategic alternatives to their current business models. One possible result of the TRRO on UNE-P dependent carriers is additional consolidation of existing telecommunications carriers. INDUSTRY CONSOLIDATION. On January 31, 2005, SBC Communications, Inc. and AT&T Corp. announced their intention to enter into a business combination. In February 2005, Verizon Communications, Inc. and MCI, Inc. announced an agreement to enter into a business combination, and Qwest Communications International, Inc. announced a bid to compete with Verizon's purchase offer. Such transactions, if consummated, would result in substantial consolidation of U.S. wireline telecommunications resources and revenue. In addition, as reflected by XO's acquisition of the CLEC businesses of Allegiance Telecom, Inc. and the acquisitions of Cable and Wireless USA, Inc. by Savvis Communications, Inc., Focal Communications, Inc. by Broadwing Corporation, and KMC Telecom Corp. by CenturyTel, Inc., substantial consolidation has also taken place among CLECs. While it is not certain what the effects of this industry consolidation will be, we believe that one possible result could be that prices for telecommunications services would stabilize due to reduced competition. RESEARCH AND DEVELOPMENT IElement does not engage in research and development. For more information about us visit our website at www.ielement.com 25 ENGAGE IN STRATEGIC ACQUISITIONS AND JOINT VENTURES We intend to acquire, where appropriate, telecommunication companies, companies with technologies that we believe are complimentary to our existing technologies, as well as to acquire wireless broadband Internet service providers with strategically located networks that will enable the expansion of our national coverage area. In addition, we intend to acquire companies, businesses and assets that we believe are complementary to our business. We may seek to form joint ventures and seek joint venture partners in order to reduce our investment in a particular project and to help promote the development and sale of our products. We intend to finance this acquisition strategy with proceeds from our private placement, the exercise of the warrants issued therein and, depending on the size of the acquisition, our common stock. Any acquisition we consummate should include a cash payment, a stock payment or a combination of the two. We have met preliminarily with some companies to discuss a possible acquisition and each of them are either: (a) similar businesses from which we could realize cost reductions and improve net income or (b) complimentary businesses from which we could expand our current range of services to improve gross margins and net income. No definitive agreements have been signed with any potential acquisition. PRINCIPAL EXECUTIVE OFFICES Our corporate headquarters and principal offices are located at 17194 Preston Road Suite 102, PMB 341, Dallas, TX 75248 where we lease this office space on a month-to-month basis. The monthly payment under the current lease is $3,284. The Company also leased additional office space in Texas and California. The Company ceased leasing this additional space during the year ended December 31, 2004. We believe that this office space is adequate to support our current operations. EMPLOYEES As of May 2, 2006, we had 13 full-time and 3 part-time employees. We enjoy good employee relations. None of our employees are members of any labor union and we are not a party to any collective bargaining agreement. MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The following table sets forth information as of May 2, 2006 regarding the members of our board of directors and our executive officers. All directors hold office until the next annual meeting of shareholders and the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board. Name Age Position Since - ---- --- -------- ----- Ivan Zweig 33 CEO and Chairman January 2005 Interim CFO August 2005 Lance K. Stovall 37 Director March 2006 Ken A. Willey 31 Director March 2006 IVAN ZWEIG (age 33). Mr. Zweig has been our Chairman and Chief Executive Officer since January 2005, and has been interim Chief Financial Officer since August 2005. Mr. Zweig is also the Chief Executive Officer, director and sole shareholder of Kramerica, a personnel services corporation. Since December 1998, Mr. Zweig has served as the Chief Executive Officer and director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide data carrier specializing in high speed Internet access and secure data transaction. From February 1998 until March 1999 Mr. Zweig was the Western Region Dedicated Sales Manager of NET-tel Communications. He was responsible for Internet sales for 52 reps in the Western Region. Previously he employed by MidCom Communications, where he was a Sales Manager after being an Account Executive for a short time. Despite his association with ICCC Mr. Zweig devotes a minimum of forty hours per week to IElement. MidCom was purchased by Winstar whereupon all of the management team migrated over to NET-tel. Before Midcom, Mr. Zweig helped form a joint venture of five individuals who invested over $500,000 to fund a health food and nutrition franchise called Smoothie King. He purchased the rights to build 18 stores in the San Francisco Bay Area and sold his interest after building the first two. Additionally, in 1995 he started a city magazine called Dallas/Ft.Worth Lifestyles. This was Mr. Zweig's first employment venture after college and a brief stint of playing professional baseball. He attended Tulane University and was a member of Team USA in 1991, which played in Cuba for the Pan American Games. He was also a two-time All-American pitcher while at Tulane. Mr. Zweig left Tulane before earning a degree. 26 Resignations. On August 3, 2005 we accepted the resignations of Timothy Dean-Smith and Susan Walton from their positions on the Board of Directors. Mr. Dean-Smith also resigned from his position as Chief Financial Officer of the Company. The resignations of Mr. Dean-Smith and Ms. Walton are consistent with the expectations of the parties pursuant to the consummation of the merger between iElement, Inc. and Mailkey Corporation (the merged entity currently known as IElement Corporation) on January 19, 2005. We have begun searching for individuals to fill the vacant positions on the Board and who will serve until the next elections are held for these positions. Additionally, Ivan Zweig, our current Chairman of the Board and Chief Executive Officer of, has accepted our appointment as the Chief Financial Officer until such time as a new Chief Financial Officer is appointed. On March 4, 2006 (as reported on Form 8-K) Ivan Zweig, our sole board member, appointed two additional members to the Board of Directors to serve until the next annual election of directors by shareholders in accordance with Article III, Section 3 of our By-laws. The new directors are: LANCE K. STOVALL (age 37). Mr. Stovall attended Texas Christian University from 1987 to 1991 where he earned a B.S. in Neuroscience. From September 2005 to the present Mr. Stovall has been the President of Lone Star Valet in Dallas, Texas. From October 2003 through September 2005, Mr. Stovall was Vice President of Business Development of IElement. Mr. Stovall left his employ with IElement for personal reasons and not as a result of any disagreement with the Company. From October 1999 through September 2003, Mr. Stovall worked for and was a co-founder of Zone Communications in Los Angeles, California. In 1998 and 1999 Mr. Stovall was Director of Operations of Lone Star Valet in Dallas, Texas. From 1993 to 1998 Mr. Stovall was founder and Vice President of Operations for Excel Student Services in Arlington, Texas. Mr. Stovall entered into a Directors Agreement with IElement whereby he agreed to maintain the confidentiality of our trade secrets and proprietary information and to refrain from soliciting our employees or customers for a period of two years following the term of the Director's Agreement. We agreed to hold Mr. Stovall harmless and indemnify him in his position as a Director, where he has acted in good faith in the performance of his duties. Finally we agreed to compensate Mr. Stovall with 250,000 stock options exercisable at $.01 per share and vesting 62,500 each on June 4, 2006, September 4, 2006, December 4, 2006 and March 4, 2007. KEN A. WILLEY (age 31). From 2005 through the present, Mr. Willey has been employed with Noble Royalties, Inc. From 2004 through 2005 Mr. Willey was regional director of McLeod USA. From 2000 through 2004 Mr. Willey was District Sales Manager at Logix. From 1997 through 2000 Mr. Willey was District Sales Manager for Verizon and from 1992 through 1997 Mr. Willey worked in various capacities at Circuit City. Mr. Willey entered into a Directors Agreement with IElement whereby he agreed to maintain the confidentiality of our trade secrets and proprietary information and to refrain from soliciting our employees or customers for a period of two years following the term of the Director's Agreement. We agreed to hold Mr. Stovall harmless and indemnify him in his position as a Director, where he has acted in good faith in the performance of his duties. Finally we agreed to compensate Mr. Stovall with 250,000 stock options exercisable at $.01 per share and vesting 62,500 each on June 4, 2006, September 4, 2006, December 4, 2006 and March 4, 2007. BOARD OF DIRECTORS Our Board of Directors serves until the next annual meeting of shareholders or until their respective successor is duly elected and qualified. Directors are elected at the annual meeting of shareholders or by written consent of the shareholders, and each Director holds office until his successor is duly elected and qualified or he resigns, unless sooner removed. Officers are elected annually by our Board of Directors and serve at the discretion of the Board. During the fiscal year ended March 31, 2005, the Board of Directors held one meeting. One action of the Board of Directors was taken by written consent, which action approved the merger between Mailkey and IElement Corporation. SHAREHOLDER COMMUNICATIONS In light of the limited operations we conduct and the limited number of record and beneficial shareholders that we have, we have not implemented any formal procedures for shareholder communication with our Board of Directors. Any matter intended for the Board, or for any individual member or members of the Board, should be directed to our corporate secretary at 17194 Preston Rd., Suite 102 PMB 341, Dallas, TX 75248. In general, all shareholder communication delivered to the corporate secretary for forwarding to the Board or specified Board members will be forwarded in accordance with the shareholder's instructions. However, the corporate secretary reserves the right to not forward to Board members any abusive, threatening or otherwise inappropriate materials. 27 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On July 21, 2005 and August 1, 2005, the Company filed an Information Statement on Schedule 14C in preliminary form and in definitive form, respectively, disclosing that, among other items, it had obtained the requisite shareholder approval to change the Company's name to IElement Corporation. As of August 21, 2005, Mailkey Corporation formally changed its name to IElement Corporation ("IElement"). Subsequently, IElement has undertaken steps to inform present itself as IElement to its customer base and target market and will continue to take steps to notify, inform and/or promote the name of IElement. We now aim to grow the business of IElement and establish it as a leading regional added-value carrier. AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has not created a standing audit committee of the Board. Instead, our full Board of Directors acts as our audit committee. The Board of Directors determined that our internal controls are adequate to insure that financial information is recorded, processed, summarized and reported in a timely and accurate manner in accordance with applicable rules and regulations of the Securities and Exchange Commission. Accordingly, our Board of Directors concluded that the benefits of retaining an individual who qualifies as an "audit committee financial expert," as that term is defined in Item 401(e) of Regulation S-B promulgated under the Securities Act, would be outweighed by the costs of retaining such a person. As a result, no member of our Board of Directors is an "audit committee financial expert." COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own 10% or more of our common stock, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% stockholders are required to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us or written representations from such persons that no other reports were required for such persons, we believe that during the fiscal year ended March 31, 2005, the Section 16(a) filing requirements applicable to our officers, directors and ten percent (10%) stockholders were not satisfied in a timely fashion. In particular, Mr. Zweig did not timely meet the Section 16(a) filing requirements. However, as of the date of this registration statement, the filing requirements of Mr. Zweig have been satisfied. In addition, Mr. Barry Brault received 2,258,013 shares of common stock in the merger with IElement on January 19, 2005, and on the same date received 8,784,669 shares of common stock in exchange for debt for a total of 11,042,682 which at the time represented in excess of 10% of the outstanding common shares. Mr. Brault has not made any filings pursuant to Section 16(a). As of the date of this registration statement Mr. Brault owns less than 10% of the outstanding common shares. CODE OF BUSINESS CONDUCT AND ETHICS We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our Code of Business Conduct and Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in our other public communications; (iii) compliance with applicable governmental laws, rules and regulations; (iv) the prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the Code of Ethics. EXECUTIVE COMPENSATION (a) Compensation. The following table sets forth compensation awarded to, earned by or paid to the Company's Chief Executive Officer and the four other most highly compensated executive officers with compensation in excess of $100,000 for the fiscal years ended March 31, 2005, 2004 and 2003 (collectively, the "Named Executive Officers"). 28 SUMMARY COMPENSATION TABLE -------------------------- Annual Compensation Long Term Compensation Awards ------------------- ----------------------------- Securities Restricted Underlying All other Name and Principal Salary Bonus Stock Options/ compensation Position Year ($) ($) Award(s) Warrants ($) - ------------------------------------------------------------------------------------------------------ Ivan Zweig, CEO* 2005 300,000 45,000 85,000 0 0 2004 75,000 15,000 0 0 0 2003 180,000 0 0 0 0 Timothy Dean-Smith** 2005 137,448 0 0 0 0 2004 136,500 0 0 0 0 2003 14,606 0 0 0 0 Graham Norton-Standen*** 2004 7,182 0 0
* Includes payments made to Kramerica, Inc. ** On August 8, 2005 Timothy Dean-Smith resigned as Chief Financial Officer. Mr. Dean-Smith was a former officer and director of MailKey. *** Former Chief Executive Officer and Secretary of MailKey OPTION GRANTS DURING 2005 ------------------------- PERCENT OF NUMBER OF TOTAL OPTIONS SECURITIES GRANTED TO EXERCISE UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION NAME OFFERING 2005 SHARE DATE ---- -------- ---- ----- ---- Debra Chase 50,000 16.39% $0.01 09/08/15 Albert Marrero 50,000 16.39% $0.01 09/08/15 Brett Jensen 30,000 9.84% $0.01 09/08/15 Eric Mason 5,000 1.64% $0.01 09/08/15 Mark Mooney 20,000 6.56% $0.01 09/08/15 Alex Nelson 40,000 13.11% $0.01 09/08/15 Heather Walther 40,000 13.11% $0.01 09/08/15 Peter Walther 50,000 16.39% $0.01 09/08/15 Jeff Wilson 20,000 6.56% $0.01 09/08/15 TOTALS 305,000 100.00% EMPLOYMENT CONTRACTS On January 18, 2005 we entered into an Employment Agreement with Mr. Zweig in the form of a Binding Letter of Intent. Pursuant to the Agreement Mr. Zweig is the Chief Executive Officer of the Company. The terms of the agreement are as follows. Mr. Zweig's base salary in the amount of $25,000.00 per month is to be paid to Kramerica Capital Corporation, a company for which Mr. Zweig is the sole shareholder, officer and director. Mr. Zweig receives benefits offered to other employees of the Company and is to receive 4 weeks of vacation per year. Mr. Zweig's reasonable expenses are to be reimbursed. Upon termination without cause, all Notes due and owing to Mr. Zweig or his entities are to be paid in full, all outstanding options are to accelerate and fully vest and be paid in full, all earned performance bonuses must be paid in full, and all accrued vacation pay and other outstanding benefits are to be paid in full. If Mr. Zweig is terminated for cause, all Notes and other obligations are to be paid within 60 days. In addition, the Agreement provides for bonus payments following the end of the 12th month as follows: for months 13 through 24, a $1,000,000 bonus calculated on the closing average revenue number and EDITDA for months 22 through 24 which revenue number must be $1,250,000 ($15,000,000 annualized) per month and EBITDA of 15%; for months 25-36 a $2,000,000 bonus if actual revenue during months 25-36 reaches $22,500,000 and EBITDA of 18%; and for months 37-48 a $3,000,000 bonus if actual revenue during months 37-48 reaches $30,000,000 and EBITDA of 21%. Bonuses are payable in promissory notes. The term of the Agreement is 48 months, provided however, that the Agreement may be immediately terminated if the Notes due to Mr. Zweig are declared in default. Although the Notes are 6 months behind, Mr. Zweig has not declared a default or terminated the employment agreement. Clause 10 to the employment contract inadvertently stated "intentionally omitted" rather than "reserved for future use". We do not have an employment contract with any other executive officer. We may in the future create retirement, pension, profit sharing and medical reimbursement plans covering our Executive Officers and Directors. 29 Directors Compensation Our former Director Susan Walton received compensation of $30,000 during the fiscal year end March 31, 2005 and $20,000 during the fiscal year end March, 2006 for serving on the Board of Directors of the Company. No other director received compensation for serving on the Board of Directors during year end March 31, 2005. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of May 2, 2006, the number of outstanding common shares of the Company beneficially owned by (i) each person known to us to beneficially own more than 5% of its outstanding common shares, (ii) each director, (iii) each nominee for director, (iv) each executive officer listed in the Summary Compensation Table, and (iv) all executive officers and directors as a group. - --------------------------------- ------------------------- -------------------- Owner Common Shares(2) Percentage - --------------------------------- ------------------------- -------------------- Ivan Zweig(1) 18,967,576(1) 11.95% - --------------------------------- ------------------------- -------------------- Barry Brault(3) 11,042,682 6.96% - --------------------------------- ------------------------- -------------------- Gerd Weger(4) 15,000,000 9.45% - --------------------------------- ------------------------- -------------------- Officers and directors as a group (1 persons) 23,967,576 28.36% - --------------------------------- ------------------------- -------------------- (1) An officer and director. Comprised of 85,000 shares of common stock owned by Mr. Zweig individually; 18,685,966 shares of common stock owned by Kramerica Corporation, an entity in which Mr. Zweig is the sole shareholder, officer and director; and 196,610 shares of common stock owned by Mr. Zweig's spouse. (2) Includes common shares underlying warrants and vested options and warrants and options which shall become exercisable or vest within 60 days from the date of this prospectus. (3) A beneficial owner of more than 5% of outstanding common shares (4) A beneficial owner of more than 5% of outstanding common shares Barry Brault's address is 7742 Paseo Del Rey #7 in Playa Del Rey, CA 90293. Gerd Weger's address is Alter Henkhauser Weg 50 in Hagen, Germany 58119. There are no family relationships among our directors and executive officers. Except as set forth below, no director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. No director or officer has been found by a court to have violated a federal or state securities or commodities law. Certain Relationships and Related Transactions None of our directors or executive officers or their respective immediate family members or affiliates is indebted to us. As of the date of this prospectus, there is no material proceeding to which any of our directors, executive officers or affiliates is a party or has a material interest adverse to us. Mr. Zweig is also the Chief Executive Officer, director and sole shareholder of Kramerica, a personnel services corporation. Since December 1998, Mr. Zweig has served as the Chief Executive Officer and director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide voice and data carrier specializing in high speed Internet access and secure data transaction. ICCC provides I-Element with resold telecom services and I-Element pays ICCC approximately $100,000 on a monthly basis for such services. On October 1, 2004, ICCC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court, Northern District of Texas, Dallas Division. ICCC's plan of reorganization Was approved by the Bankruptcy Court on April 26, 2006. 30 On January 19, 2005, I-Element issued promissory notes to, Kramerica, certain members of Mr. Zweig's immediate family and others in the aggregate amount of $376,956.16 (the "Notes") with no interest. Upon issuance, the Notes were payable in 36 monthly installments with the first payment commencing six months after the closing of the merger and were secured by substantially all of the assets of I-Element. I-Element did not make any payments on the Notes. On March 25, 2006 each of the Notes were cancelled and I-Element issued new convertible promissory notes to the same individuals in the same principal amount of $376,956.16, again with no interest thereon. The first payment on each of the new convertible promissory notes is due in September 2006 with a total of 36 monthly installments through August 2009. The Lender has the right to convert all or a portion of the outstanding balance, at any time until the notes are paid in full, into I-Element's common stock at a conversion price of $0.035 per share. Any past due balance on the old Notes was forgiven at the time of cancellation of the old Notes and issuance of the new convertible promissory notes. The new convertible promissory notes are secured by substantially all the assets of I-Element as were the original Notes. DESCRIPTION OF THE PRIVATE PLACEMENT In August 2005, the Company has entered into an agreement with Vista Capital, S.A. ("Vista") whereby Vista assisted in raising capital through the sale of units of Company stock and warrants. Each unit contains 500,000 shares of common stock at $0.035 and warrants to purchase an additional 250,000 shares of common stock at $0.10. The warrants can be called by the Company after the Company's closing share price is equal to or exceeds $0.12 for ten consecutive trading days and only if the underlying shares are registered. Each unit was sold for $17,500. As of December 31, 2005, the Company had sold 87.75 units for cash totaling $1,535,625 plus accepted services for 0.50 units totaling $8,750 and had 2 units outstanding on stock subscriptions receivable totaling $35,000. The Company closed the private placement offering on December 30, 2005 raising $1,579,375. As part of the offering, the company paid 10% of the funds raised to Vista for fund raising fees. As part of its compensation Vista Capital received or will receive 1,000,000 shares of common stock, warrants for 1,046,874 shares of common stock at an exercise price of $0.13 per share and warrants for 2,878,907 shares of common stock at an exercise price of $0.10. A list of securities sold in the private placement is available in the Form 8-K filed by the Company on January 5, 2006. The Securities were not registered under applicable securities laws and were sold in reliance on an exemption from such registration. Each of the investors is an "accredited investor" and the Company believes that the issuance and sale of the Convertible Notes qualified for an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933. SELLING STOCKHOLDERS The following table sets forth the shares beneficially owned, as of the date of this prospectus, by the selling stockholders prior to the offering contemplated by this prospectus, the number of shares each selling stockholder is offering by this prospectus and the number of shares which each selling stockholder would own beneficially if all such offered shares are sold. None of the selling stockholders is known to us to be a registered broker-dealer or an affiliate of a registered broker-dealer We and the Selling Stockholder will be subject to applicable provisions of the Exchange Act and the rules and regulations promulgated under it, including without limitation, Regulation M. Regulation M restricts certain activities of the Selling Stockholder and may limit the timing of purchases and sales of any of the shares by the Selling Stockholder or any other person. Also, Regulation M may restrict the ability of any person engaged in the distribution of the shares to engage in market-making activities with respect to the particular shares being distributed for a period of up to five business days prior to the commencement of a distribution. All of these limitations may affect the marketability of our shares and the ability of any person or entity to engage in market-making activities with respect to our shares. Each of the selling stockholders has acquired his, her or its shares solely for investment and not with a view to or for resale or distribution of such securities. Beneficial ownership is determined in accordance with SEC rules and includes voting or investment power with respect to the securities. 31 SELLING STOCKHOLDERS SHARES SHARES PERCENTAGE OF COMMON BENEFICIAL OF COMMON OF COMMON STOCK INCLUDED OWNERSHIP STOCK OWNED STOCK OWNED IN THE BEFORE THE AFTER THE AFTER THE INVESTOR OFFERING(1) OFFERING(2) OFFERING(3) OFFERING; - ------------------------------------- ------------ ------------ ------------ ------------ AK Asset Management 1,500,000 1,500,000 0 0 (through Andre Kossinger) Amaltea SA 750,000 750,000 0 0 (through Vittorio Boeri) Annette Bohmer 750,000 750,000 0 0 Barry Brault 8,784,669 11,042,682 2,258,013 1.42% BDM Holdings, LLC c/o Palladian Advisors, 1,500,000 1,500,000 0 0 (through Carl Glaeser and Jon Gordon) Bellano Family Trust 450,000 450,000 0 0 (through Bob Bellano) Benjamin S. Eichholz, 2,250,000 3,800,000 1,550,000 0.97% Brett Jensen 200,000 200,000 0 0 Calder Capital Inc. 750,000 750,000 0 0 (through Georg Kieber) Chet Zalesky 1,601,930 1,601,930 0 0 Christiane Loeberbauer 375,000 375,000 0 0 Clarence V. Keck Jr 225,000 225,000 0 0 Derrick Stilwell 500,000 500,000 0 0 Dolphin Capital 1,680,000 1,680,000 0 0 (through Jeremy Dean-Smith) Donald Kennedy 20,000 20,000 0 0 Duane Morris, LLP 880,000 880,000 0 0 (through Vince Vietti) Film and Music Entertainment, Inc. 1,500,000 1,500,000 0 0 (through Caspter von Winterfeldt) Frank A. Davis 300,000 300,000 0 0 Fred J. Matulka 750,000 750,000 0 0 Fred Schmitz 7,500,000 7,500,000 0 0 General Research GMBH 750,000 750,000 0 0 (through Georg Hochwimmer) Gerd Weger 15,000,000 15,000,000 0 0 Glenn L. Jensen 4,500,000 4,500,000 0 0 Global Equity Trading & Finance LTD 4,000,000 4,000,000 0 0 (through Tracey Casari) Hendrik Paulus 750,000 750,000 0 0 Holger Pfeiffer 375,000 375,000 0 0 Isaac de la Pena 150,000 150,000 0 0 Jeff Wilson 714,286 714,286 0 0 Jeffery Brault 1,050,000 1,050,000 0 0 Jeremy Dean-Smith 2,900,000 2,900,000 0 0 Jerome Niedfelt 450,000 450,000 0 0 John Fox 100,000 100,000 0 0 John Niedfelt 300,000 300,000 0 0 Jonathan Lowenthal 750,000 750,000 0 0 Jorn Follmer 750,000 750,000 0 0 Jurgen Popp 3,250,000 3,250,000 0 0 Kenneth J. Meyer 1,500,000 1,500,000 0 0 Laurence B. Straus 450,000 450,000 0 0 March Enterprises Defined Benefit Plan 1,601,930 1,601,930 0 0 (through Dennis Zweig) Marianne Issels 375,000 375,000 0 0 Matthias Graeve 375,000 375,000 0 0 Michael Bloch 3,000,200 5,034,200 2,034,200 1.28% Michael D. Melson 750,000 750,000 0 0 Misty Starke 500,000 500,000 0 0 Oscar Greene Jr 750,000 750,000 0 0 Palladian Capital Advisors 2,500,000 2,500,000 0 0 (through Carl Glaeser and Jon Gordon) Quality Sound Communications dba Telcombrokers 1,626,530 1,626,530 0 0 (through Dominic Antonini) Raymond R. Dunwoodie 750,000 750,000 0 0 Red Giant Productions, Inc. 750,000 750,000 0 0 (through John Daley) Richard R. Crose 750,000 750,000 0 0 Robert A. Flaster 300,000 300,000 0 0 Robert A. Smith 450,000 450,000 0 0 32 Robert H. Gillman 750,000 750,000 0 0 Robert R. Rowley 750,000 750,000 0 0 Robert Zweig 275,000 275,000 0 0 Ryan Cornelius 2,250,000 2,250,000 0 0 Rockwell Capital Ventures 4,000,000 4,000,000 0 (through Todd Poindexter) Sat Paul Dewan 450,000 450,000 0 0 Stefan Muller 1,750,000 1,750,000 0 0 Stonegate Ventures 1,000,000 1,000,000 0 0 (through Al Del Favero) Susan Walton 400,000 400,000 0 0 Terrence Byrne 2,712,703 2,712,703 0 0 Thomas Allen Piscula 750,000 750,000 0 0 Thomas W. Barrett 300,000 300,000 0 0 Thomas Weiss Dr. 375,000 375,000 0 0 Tim Dean-Smith 1,800,000 1,800,000 0 0 Timothy M. Broder 750,000 750,000 0 0 Trad Solutions 340,000 340,000 0 0 (through Dart Forst) Trey Investments, LLP 225,000 225,000 0 0 (through William Cail) Ulrich Nusser 375,000 375,000 0 0 Veronica Kristi Prenn 2,250,000 4,636,000 2,386,000 1.50% Vista Capital 4,925,781 4,925,781 0 0 (through Todd Poindexter) Wayne P. Schoenmakers 150,000 150,000 0 0 William G. Cail 37,500 37,500 0 0 William Harner 225,000 225,000 0 0 William M. Goatley Revocable Trust FBO William M Goatley DTD 5/9/89 375,000 375,000 0 0 Yock Investments 1,000,000 1,000,000 0 0 (through Al Del Favero) TOTALS 112,700,329 120,928,542
(1) Includes the shares issuable upon conversion of the warrants. (2) This column represents the actual shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, the additional number of shares of common stock as may be issued or issuable upon conversion of the warrants and any additional shares of common stock owned by the Selling Stockholder which common stock is not offered in this prospectus, and included in the registration statement of which this prospectus is a part. (3) Assumes that all securities registered will be sold MATERIAL RELATIONSHIPS WITH CERTAIN SELLING STOCKHOLDERS TIM DEAN-SMITH was the Chief Financial Officer and director from the closing of the merger in January of 2005. He joined I-Element March 2004 following the merger with MK Secure Solutions Limited, which Mr. Dean-Smith founded. Mr. Dean-Smith resigned from all positions with the Company on August 3, 2005. Dennis Zweig is Ivan Zweig's uncle. Susan Walton was a director of the Company until she resigned her position on August 3, 2005. Vista Capital has acted as a consultant for I-Element and its predecessor MailKey for several years. Most recently Vista Capital assisted in the Private Placement Offering for which I-Element is registering shares in this registration statement. Rockwell Capital Ventures, Global Trading Equity & Finance and Jurgen Popp have acted as consultants for I-Element and its predecessor MailKey. Stefan Muller and Fred Schmitz have recently agreed to act as an informal international advisory board whereby in exchange for 100,000 options each they have agreed to be available for consulting services and input on an as needed basis. The options have not yet vested. Isaac de la Pena, together with another individual, owns a majority of Tehshi, Inc. IElement owns a twenty percent (20%) interest of Tehshi, Inc. which it received in the first quarter 2005 in a transaction whereby IElement transferred the rights to development and commercialization of its messaging security solutions operations and Mr. de la Pena, together with his partner, cancelled a debt owed by IElement in the amount of $76,107. In addition Mr. de la Pena is a former employee of MailKey. 33 DESCRIPTION OF SECURITIES We are authorized to issue 2,000,000,000 shares of common stock, par value $0.001 per share, and 200,000,000 shares of blank check preferred stock. As of May 2, 2006, there were 158,735,031 shares of common stock and -0- shares of preferred stock issued and outstanding. There are no current plans to designate any Blank Check Preferred Stock. COMMON STOCK Subject to any prior rights to receive dividends to which the holders of shares of any series of the preferred stock may be entitled, the holders of shares of common stock shall be entitled to receive dividends, if and when declared payable from time to time by the board of directors, from funds legally available for payment of dividends. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, after there shall have been paid to the holders of shares of preferred stock the full amounts to which they shall be entitled, the holders of the then outstanding shares of common stock shall be entitled to receive, pro rata, any remaining assets of the Company available for distribution to our shareholders. The board of directors may distribute in kind to the holders of the shares of common stock such remaining assets of the Company or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation trust or entity and receive payment in cash, stock or obligations of such other corporation, trust or entity or any combination of such cash, stock, or obligations, and may sell all or any part of the consideration so received, and may distribute the consideration so received or any balance or proceeds of it to holders of the shares of common stock. The voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the Company (unless in connection with that event the dissolution, liquidation or winding up of the Company is specifically approved), or the merger or consolidation of the Company into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the Company of any class, shall not be deemed to be a dissolution, liquidation or winding up of the Company. Except as provided by law or this certificate of incorporation with respect to voting by class or series, each outstanding share of common stock shall entitle the holder of that share to one vote on each matter submitted to a vote at a meeting of shareholders. Such numbers of shares of common stock as may from time to time be required for such purpose shall be reserved for issuance (i) upon conversion of any shares of preferred stock or any obligation of the Company convertible into shares of common stock and (ii) upon exercise of any options or warrants to purchase shares of common stock. PREFERRED STOCK The board of directors is expressly authorized to adopt, from time to time, a resolution or resolutions providing for the issue of preferred stock in one or more series, to fix the number of shares in each such series and to fix the designations and the powers, preferences and relative, participating, optional and other special rights and the qualifications, limitations and restrictions of such shares, of each such series. The authority of the board of directors with respect to each such series shall include a determination of the following, which may vary as between the different series of preferred stock: (a) The number of shares constituting the series and the distinctive designation of the series; (b) The dividend rate on the shares of the series, the conditions and dates upon which dividends on such shares shall be payable the extent, if any, to which dividends on such shares shall be cumulative, and the relative rights of preference, if any, of payment of dividends on such shares; (c) Whether or not the shares of the series are redeemable and, if redeemable, the time or times during which they shall be redeemable and the amount per share payable on redemption of such shares, which amount may, but need not, vary according to the time and circumstances of such redemption; (d) The amount payable in respect of the shares of the series, in the event of any liquidation, dissolution or winding up of this corporation, which amount may, but need not, vary according to the time or circumstances of such action, and the relative rights of preference, if any, of payment of such amount; (e) Any requirement as to a sinking fund for the shares of the series, or any requirement as to the redemption, purchase or other retirement by the Company of the shares of the series; (f) The right, if any, to exchange or convert shares of the series into other securities or property, and the rate or basis, time, manner and condition of exchange or conversion; (g) The voting rights, if any, to which the holders of shares of the series shall be entitled in addition to the voting rights provided by law, and 34 (h) Any other terms, conditions or provisions with respect to the series not inconsistent with the provisions of the articles of incorporation or any resolution adopted by the board of directors pursuant thereto. The number of authorized shares of preferred stock may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Company entitled to vote at a meeting of shareholders. No holder of shares of preferred stock of the Company shall, by reason of such holding have any preemptive right to subscribe to any additional issue of any stock of any class or series nor to any security convertible into such stock. TRADING INFORMATION Our common stock is currently quoted on the OTC Bulletin Board under the trading symbol IELM.OB. The transfer agent for our common stock is Madison Stock Transfer, P.O. Box 145, Brooklyn, NY 11229; (718) 627-4453. PLAN OF DISTRIBUTION We are registering an aggregate of 112,700,329 shares of our common stock covered by this prospectus on behalf of the selling stockholders. The selling stockholders and any of their donees, pledgees, assignees and successors-in-interest may, from time to time, offer and sell any and all of their shares of common stock on any stock exchange, market, or trading facility on which such shares are traded. The selling stockholders will act independently of us and each other in making decisions with respect to the timing, manner and size of each such sale. Sales may be made at fixed or negotiated or market prices. The shares may be sold by way of any legally available means, including in one or more of the following transactions: o a block trade in which a broker-dealer engaged by a selling stockholder attempts to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account pursuant to this prospectus; o ordinary brokerage transactions and transactions in which a broker-dealer solicits purchasers; and o privately negotiated transactions. Transactions under this prospectus may or may not involve brokers or dealers. The selling stockholders may sell shares directly to purchasers or to or through broker-dealers, who may act as agents or principals. Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in selling shares. Broker-dealers or agents may receive compensation in the form of commissions, discounts or concessions from the selling stockholders in amounts to be negotiated in connection with the sale. Broker-dealers or agents also may receive compensation in the form of discounts, concessions, or commissions from the purchasers of shares for whom the broker-dealers may act as agents or to whom they sell as principal, or both. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Selling stockholders and any broker-dealers and any other participating broker-dealers who execute sales for the selling stockholders may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting discounts and commissions under the Securities Act. If the selling stockholders are deemed to be underwriters, they may be subject to certain statutory and regulatory liabilities, including liabilities imposed pursuant to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. To the extent required, the number of shares to be sold, the name of the selling stockholder, the purchase price, the name of any agent or broker and any applicable commissions, discounts or other compensation to such agents or brokers and other material facts with respect to a particular offering will be set forth in a prospectus supplement as required by the Rules and Regulations under the Securities Act. The selling stockholders may also sell shares under Rule 144 under the Securities Act if available, rather than pursuant to this prospectus. In order to comply with the securities laws of certain states, if applicable, the shares will be sold in such jurisdictions, if required, only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and complied with. The anti-manipulative provisions of Regulation M promulgated under the Exchange Act may apply to sales of the shares offered by the selling stockholders. We are required to pay all fees and expenses incident to the registration of the shares. Otherwise, all discounts, commissions or fees incurred in connection with the sale of our common stock offered hereby will be paid by the selling stockholders. 35 SHARES ELIGIBLE FOR FUTURE SALE As of May 2, 2006, we had outstanding an aggregate of 158,735,031 shares of our common stock, assuming no exercises of our outstanding Stock Purchase Warrants. All shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless they are purchased by our "affiliates," as that term is defined in Rule 144 promulgated under the Securities Act. PUBLIC FLOAT As of May 2, 2006, the public float for our common stock consisted of 24,071,140 shares. These shares are freely tradable without restriction or further registration under the Securities Act, unless they are purchased by our "affiliates," as that term is defined in Rule 144 promulgated under the Securities Act. RULE 144 In general, under Rule 144, as currently in effect, a person who has beneficially owned shares of our common stock for at least one year, including the holding period of prior owners other than affiliates, is entitled to sell within any three-month period a number of shares that does not exceed the greater of: o 1% of the number of shares of our common stock then outstanding or o the average weekly trading volume of our common stock on the OTC Bulletin Board during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner-of-sale provisions, notice requirements and the availability of current public information about us. In order to effect a Rule 144 sale of our common stock, our transfer agent will require an opinion from legal counsel. We may charge a fee to persons requesting sales under Rule 144 to obtain the necessary legal opinions. RULE 144(K) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale and who has beneficially owned shares for at least two years, including the holding period of certain prior owners other than affiliates, is entitled to sell those shares without complying with the manner-of-sale, public information, volume limitation or notice provisions of Rule 144. Our transfer agent will require an opinion from legal counsel to effect a Rule 144(k) transaction. We may charge a fee to persons requesting transactions under Rule 144(k) to obtain the necessary legal opinions. No shares of our common stock currently outstanding will be eligible for sale pursuant to Rule 144(k) until June 24, 2007. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, and other information with the SEC. Our filings are available to the public at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's Public Reference Room, 100 F. Street, NE, Washington, D.C. 20549. Further information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. We have filed a registration statement on Form SB-2 with the SEC under the Securities Act for the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement, certain parts of which have been omitted in accordance with the rules and regulations of the SEC. For further information, reference is made to the registration statement and its exhibits. Whenever we make references in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for the copies of the actual contract, agreement or other document. LEGAL MATTERS The validity of the securities being offered by this prospectus have been passed upon for us by Laura Anthony, Esq., Legal & Compliance, LLC, 330 Clematis Street, Suite 217, West Palm Beach, Florida 33401. Telephone (561) 514-0936 On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/ Three 18, Inc. ("KK"), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to KK. On May 2, 2006 we settled the litigation for a total settlement amount of $26,500 payable in periodic payments beginning on May 2, 2006 and ending on July 2, 2006. 36 On April 26, 2005 Communications Plus, Inc., a California company d/b/a Global Communications, ("Global"), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to Global. Global seeks damages in the amount of $50,000, plus interest. On February 14, 2006 the Company settled the matter for $27,000 payable in periodic installments the first of which was on February 14, 2006 and the last of which is due December 1, 2006. EXPERTS The financial statements of the Company as of December 31, 2005 appearing in this prospectus have been so included in reliance on the report of Bagell, Josephs & Levine, CPA's, an independent registered public accounting firm, given on the authority of said firm as experts in accounting and auditing. The financial statements as of March 30, 2005 and 2004 included in this prospectus have been so included in reliance on the report of Bagell, Josephs & Levine, CPA's, an independent certified public accounting firm, given on the authority of said firm as experts in accounting and auditing. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us, we have been advised that it is the SEC's opinion that such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 37 I-ELEMENT CORPORATION FINANCIAL STATEMENTS Index to Financial Statements FISCAL YEAR END 2004, 2005 AND NINE MONTHS ENDED DECEMBER 31, 2005 38 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 39 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 TABLE OF CONTENTS Consolidated Audited Financial Statements: PAGE(S) ------- Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheet as of March 31, 2005 F-2 Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and 2004 and the Years Ended December 31, 2004 and 2003 F-3 Consolidated Statement of Changes in Stockholders' (Deficit) for the Period March 11, 2003 (Inception) to March 31, 2005 F-4 Consolidated Statements of Cash Flow for the Three Months Ended March 31, 2005 and 2004 and the Years Ended December 31, 2004 and 2003 F-5 Notes to Consolidated Financial Statements. F-7 40 BAGELL, JOSEPHS & COMPANY, L.L.C. Certified Public Accountants High Ridge Commons Suites 400-403 200 Haddonfield Berlin Road Gibbsboro, New Jersey 08026 (856) 346-2828 Fax (856) 346-2882 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM MailKey Corporation and Subsidiary Dallas, Texas We have audited the accompanying consolidated balance sheet of MailKey Corporation and Subsidiary (the "Company") as of March 31, 2005 and the related statements of operations and cash flow for the three months ended March 31, 2005 and 2004, the years ended December 31, 2004 and 2003 and the related statement of stockholders' equity (deficit) from March 11, 2003 (inception) to March 31, 2005. 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 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 consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying consolidated financial statements for the three months ended March 31, 2005 and 2004 and for the years ended December 31, 2004 and 2003 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the consolidated financial statements, the Company has sustained operating losses and capital deficits that raise substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters are also described in Note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MailKey Corporation and Subsidiary as of March 31, 2005 and the results of its operations and cash flow for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004 and 2003 and changes in stockholders' equity (deficit) from March 11, 2003 (inception) to March 31, 2005 in conformity with accounting principles generally accepted in the United States of America. MEMBER OF: BAGELL, JOSEPHS & COMPANY, L.L.C. AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS /s/ BAGELL, JOSEPHS & COMPANY, L.L.C. - ------------------------------------- Certified Public Accountants Gibbsboro, New Jersey June 28, 2005 F-1 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET MARCH 31, 2005 AUDITED ASSETS MARCH 31, 2005 ----------- CURRENT ASSETS: Cash and cash equivalents $ 340,321 Accounts receivable, net 520,644 Other current assets 1,780 ----------- TOTAL CURRENT ASSETS 862,745 ----------- Fixed assets, net of depreciation 889,051 ----------- OTHER ASSETS: Goodwill 2,079,665 Deposits 58,993 ----------- TOTAL OTHER ASSETS 2,138,658 ----------- TOTAL ASSETS $ 3,890,454 =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,400,992 Customer deposits 164,112 Receivable financing payable 483,114 Commissions payable 176,136 Liability for stock to be issued 75,000 Deferred revenue 815,036 Current portion - notes payable 461,590 ----------- TOTAL CURRENT LIABILITIES 3,575,980 ----------- LONG-TERM LIABILITIES: Notes payable, net of current portion 293,188 ----------- TOTAL LONG-TERM LIABILITIES 293,188 ----------- TOTAL LIABILITIES 3,869,168 ----------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.001 Par Value, 100,000,000 shares authorized; 91,783,730 shares issued and outstanding at March 31, 2005 91,783 Additional paid-in capital 921,198 Accumulated deficit (991,695) ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 21,286 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,890,454 =========== F-2 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 THREE MONTHS ENDED YEARS ENDED ---------------------------- ---------------------------- MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, 2005 2004 2004 2003 (AUDITED) (UNAUDITED) (AUDITED) (AUDITED) ------------ ------------ ------------ ------------ OPERATING REVENUE: Service income $ 1,228,411 $ 1,530,427 $ 5,954,772 $ 4,552,436 COST OF SALES EXCLUSIVE OF DEPRECIATION AND AMORTIZATION 736,275 819,756 3,042,978 2,716,680 ------------ ------------ ------------ ------------ GROSS PROFIT 492,136 710,671 2,911,794 1,835,756 ------------ ------------ ------------ ------------ OPERATING EXPENSES General and administrative 687,928 458,311 2,033,764 1,116,810 Selling expenses 116,263 109,240 519,600 518,425 Depreciation & amortization 68,164 60,403 260,806 159,070 Interest expense 6,992 31,354 138,576 122,100 Receivable factoring fees 29,874 33,085 129,021 118,504 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 909,221 692,393 3,081,767 2,034,909 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE OTHER (EXPENSE) (417,085) 18,278 (169,973) (199,153) ------------ ------------ ------------ ------------ OTHER (EXPENSE) Loss on sale of investments -- (86,558) (125,068) (65,903) ------------ ------------ ------------ ------------ TOTAL OTHER EXPENSES -- (86,558) (125,068) (65,903) ------------ ------------ ------------ ------------ NET LOSS BEFORE PROVISION FOR INCOME TAXES (417,085) (68,280) (295,041) (265,056) PROVISION FOR INCOME TAXES -- -- -- -- ------------ ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON SHARES $ (417,085) $ (68,280) $ (295,041) $ (265,056) ============ ============ ============ ============ NET LOSS PER BASIC AND DILUTED SHARES $ (0.01) $ (0.40) $ (0.03) $ -- ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 56,697,484 171,863 11,344,053 1 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-3 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - AUDITED FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 AND FOR THE THREE MONTHS ENDED MARCH 31, 2005 RESTATED RESTATED RESTATED RESTATED ---------- ---------- ---------- ---------- ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2002 (Inactive) 1 $ -- $ -- $ -- $ -- Net loss for the year ended December 31, 2003 -- -- -- (265,056) (265,056) ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2003 -- -- -- (265,056) (265,056) ---------- ---------- ---------- ---------- ---------- Issuance of stock in exchange for redemption of shares of Integrated Communications Consultants Corporation ("ICCC") - recapitalization 14,369,368 14,369 -- (14,369) -- Issuance of stock as 1% premium for redemption of shares of ICCC 143,687 144 -- (144) -- Shares of common stock issued in exercise of options 26,400 26 49 -- 75 Accounts payable converted to common stock 35,200 35 4,965 -- 5,000 Issuance of common stock in conversion of notes payable 423,209 423 247,577 -- 248,000 Shares issued for cash 206,391 206 119,094 -- 119,300 Net loss for the year -- -- -- (295,041) (295,041) ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2004 15,204,255 15,203 371,685 (574,610) (187,722) ---------- ---------- ---------- ---------- ---------- Shares of common stock issued in exercise of options 16,115,345 16,115 29,667 -- 45,782 Issuance of common stock in conversion of notes payable 16,526,236 16,527 809,785 -- 826,312 Effects of reverse merger 34,726,355 34,726 (511,014) -- (476,288) Issuance of shares at $0.025 per share for services 7,487,587 7,488 179,701 -- 187,189 Issuance of shares at $0.025 per share in conversion of accounts payable 693,280 693 16,639 -- 17,332 Issuance of shares at $0.025 per share in conversion of debt to equity 1,030,672 1,031 24,735 -- 25,766 Net loss for the three months ended March 31, 2005 -- -- -- (417,085) (417,085) ---------- ---------- ---------- ---------- ---------- Balance March 31, 2005 91,783,730 $ 91,783 $ 921,198 $ (991,695) $ 21,286 ========== ========== ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements. F-4 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 THREE MONTHS ENDED YEARS ENDED -------------------------- -------------------------- MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, 2005 2004 2004 2003 (AUDITED) (UNAUDITED) (AUDITED) (AUDITED) ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $ (417,085) $ (68,280) $ (295,041) $ (265,056) ----------- ----------- ----------- ----------- ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 68,164 60,403 260,806 159,070 Stock issued for services 187,189 -- -- -- Loss on disposal of equipment 1,877 -- 2,296 -- CHANGES IN ASSETS AND LIABILITIES (Increase) decrease in accounts receivable 67,361 239,346 159,934 (747,939) (Increase) decrease in other current assets 2,470 (2,471) (4,077) (173) (Increase) decrease in deposits 10,530 468 (14,517) (40,006) Increase (decrease) in accounts payable 294,777 (19,316) 154,463 (1,259,056) Increase in accrued interest -- 17,289 77,364 56,507 Increase (decrease) in payroll taxes payable (17,230) 27,232 17,230 -- Increase (decrease) in customer deposits (4,878) (14,819) (35,010) 204,000 Increase (decrease) in receivable financing payable (20,807) (342,679) (153,082) 657,003 Increase in commissions payable 18,411 43,786 98,994 58,731 Increase (decrease) in refunds payable (1,079) (1,526) (936) 2,015 Increase (decrease) in deferred revenue (19,940) 93,331 (262,959) 1,097,935 ----------- ----------- ----------- ----------- Total adjustments 586,845 101,044 300,506 188,087 ----------- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 169,760 32,764 5,465 (76,969) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of equipment 2,800 -- 3,451 -- Acquisition of fixed assets (9,485) (163,766) (233,396) (251,023) ----------- ----------- ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (6,685) (163,766) (229,945) (251,023) ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements F-5 MAILKEY CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 THREE MONTHS ENDED YEARS ENDED MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, 2005 2004 2004 2003 (AUDITED) (UNAUDITED) (AUDITED) (AUDITED) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITES Payments of notes payable $ (32,909) $ (32,600) $ (465,344) $ (46,193) Proceeds from notes payable 22,450 100,000 625,331 467,054 Common stock issued for cash -- -- 119,300 -- Proceeds in exercise of stock options 39,954 -- 75 -- ----------- ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 29,495 67,400 279,362 420,861 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 192,570 (63,602) 54,882 92,869 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR / PERIOD 147,751 92,869 92,869 -- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - END OF YEAR / PERIOD $ 340,321 $ 29,267 $ 147,751 $ 92,869 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest expense $ 2,563 $ 3,890 $ 34,983 $ 6,459 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Accounts payable converted to equity $ 17,332 $ 5,000 $ 5,000 $ -- =========== =========== =========== =========== Accounts payable converted to debt $ 70,000 $ -- $ 50,000 $ -- =========== =========== =========== =========== Conversion of notes payable to equity $ 852,078 $ -- $ 248,000 $ -- =========== =========== =========== =========== Issuance of stock for redemption of ICCC shares $ -- $ 4,123 $ 4,123 $ -- =========== =========== =========== =========== Debt converted to accounts payable $ 126,000 $ -- $ -- $ -- =========== =========== =========== =========== Debt converted in exercise of options $ 5,828 $ -- $ -- $ -- =========== =========== =========== =========== Accounts payable and accrued expenses acquired in reverse merger $ 63,343 $ -- $ -- $ -- =========== =========== =========== =========== Debt acquired in reverse merger $ 337,945 $ -- $ -- $ -- =========== =========== =========== =========== Stock issued for services $ 187,189 $ -- $ -- $ -- =========== =========== =========== =========== Goodwill recorded in acquisition $ -- $ -- $ -- $ 2,079,665 =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements F-6
MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION MK Secure Solutions Ltd. was established as a messaging security and Management company. On March 25, 2004, pursuant to an Agreement and Plan of Merger, Global Diversified Acquisition Corp. ("GDAC"), acquired all of the outstanding capital stock of MK Secure Solutions Ltd ("MKSS"), a holding company incorporated on March 11, 2003, under the laws of the British Virgin Islands. The transaction was effected by the issuance of shares such that the former MKSS shareholders owned approximately 90% of the outstanding MailKey stock after the transaction. GDAC then changed its name to MailKey Corporation ("MailKey"). The Company's Chairman and Chief Executive Officer resigned in September 2004 and the Company's Chief Financial Officer and member of the Board resigned in November 2004. Both positions have been filled by the Company's founder and deputy chairman. In the first quarter of 2005 the Company was unable to continue funding the development of its messaging security solutions, and the rights were transferred to the development team in return for the cancellation of most of the liabilities which the Company owed to them. The Company retains an interest of 20% in the messaging security solutions; however to date there has been no commercialization of the solutions. In the first quarter 2005 the Company sold its insolvent British Virgin Islands subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with the winding up of the former subsidiary, for a fee of $1,800. On November 9, 2004, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the MailKey Corporation, MailKey Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary ("Merger Sub"), Inc., a Nevada Corporation, I-Element, Inc. ("I-Element") and Ivan Zweig, pursuant to which the Company agreed to acquire all of the issued and outstanding shares of capital stock of I-Element. This transaction closed in January 2005. At the closing of the Merger, Merger Sub was merged into I-Element, at which time the separate corporate existence of Merger Sub ceased and I-Element now continues as the surviving company. The Share Exchange has been accounted for as a reverse merger under the purchase method of accounting. Accordingly, I-Element will be treated as the continuing entity for accounting purposes and the historical financial statements presented will be those of I-Element. F-10 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Under the terms of the Merger Agreement, MailKey issued its common stock, $.001 par value per share, in exchange for all of the issued and outstanding shares of capital stock of I-Element. The exchange ratio setting forth the number of shares of MailKey common stock issued for each issued and outstanding share of capital stock of I-Element was 3.52 shares of MailKey common stock for each issued and outstanding share of capital stock of I-Element. I-Element, incorporated in Nevada on December 30, 2002, is a facilities-based nationwide communications service provider that provides state-of-the-art telecommunications services to small and medium sized enterprises ("SMEs"). I-Element provides broadband data, voice and wireless services by offering integrated T-1 lines as well as Layer 2 Private Network solutions that provide SMEs with dedicated Internet access services, customizable business solutions for voice, data, wireless and Internet, and secure communications channels between the SME offices, partners, vendors, customers and employees without the use of a firewall or encryption devices. I-Element has a network presence in 18 major markets in the United States, including facilities in Los Angeles, Dallas, and Chicago. The Company started business in 2003. In connection with the closing of the merger, MailKey entered into a letter of intent with Ivan Zweig and Kramerica Capital Corporation ("Kramerica"), a corporation wholly-owned by Mr. Zweig, which contemplates that MailKey and I-Element will enter into a four year employment agreement with Kramerica and Mr. Zweig pursuant to which Mr. Zweig will serve as the Chief Executive Officer of MailKey and I-Element. The letter of intent provides that Mr. Zweig will receive an annual base salary of $300,000. In addition to his base salary, Mr. Zweig will be entitled to annual performance bonuses with targets ranging from $1,000,000 to $3,000,000 during the second, third and fourth years provided I-Element achieves certain performance goals. If Mr. Zweig is terminated without cause, MailKey is obligated to pay the remaining salary owed to Mr. Zweig for the complete term of the employment agreement, to pay off all notes owed to Mr. Zweig or Kramerica, all outstanding options shall become fully vested, MailKey shall pay all earned performance bonuses and all accrued vacation. If Mr. Zweig is terminated for any reason other than cause, MailKey shall pay in full the F-11 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Notes owed to either Mr. Zweig or Kramerica Capital Corporation and at least 75% of the earned bonus plan set forth by the directors. Effective January 24, 2005, Mr. Zweig was also appointed to the Board of Directors of MailKey. Ivan Zweig has served as the Chief Executive Officer of I-Element since March 2003. Mr. Zweig is also the Chief Executive Officer, director and sole shareholder of Kramerica, a personnel services corporation. Since December 1998, Mr. Zweig has served as the Chief Executive Officer and director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide data carrier specializing in high speed Internet access and secure data transaction. ICCC provides I-Element with resold telecom services and I-Element pays ICCC approximately $97,000 on a monthly basis for such services. On October 1, 2004, ICCC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court, Northern District of Texas, Dallas Division. On January 19, 2005, upon the consummation of the acquisition, I-Element issued eight (8) promissory notes to, Kramerica, certain members of Mr. Zweig's immediate family and others in the aggregate amount of $376,956.16 (the "Notes") with no interest. Upon issuance, the Notes were payable in 36 monthly installments with the first payment commencing six months after the closing of the merger and were secured by substantially all of the assets of I-Element. I-Element did not make any payments on the Notes. On March 25, 2006 each of the Notes were cancelled and I-Element issued new convertible promissory notes to the same individuals in the same principal amount of $376,956.16, again with no interest thereon. The first payment on each of the new convertible promissory notes is due in September 2006 with a total of 36 monthly installments through August 2009. The Lender has the right to convert all or a portion of the outstanding balance, at any time until the notes are paid in full, into I-Element's common stock at a conversion price of $0.035 per share. Any past due balance on the old Notes was forgiven at the time of cancellation of the old Notes and issuance of the new convertible promissory notes. The new convertible promissory notes are secured by substantially all the assets of I-Element as were the original Notes. , The aggregate of the Kramerica notes are $120,000 and were issued for services rendered prior to issuance. The $50,000 note was originally issued on June 1, 2004 for services prior to that date and was restated subsequent to the merger on January 19, 2005. The remaining $70,000 note was issued on January 19, 2005 for services rendered prior to that date. The Company's consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, and have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. F-12 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the financial position and results of I-Element. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash or cash equivalents. The Company maintains cash and cash equivalents with a financial institution which is insured by the Federal Deposit Insurance Corporation up to $100,000. At various times throughout the year the Company had amounts on deposit at the financial institution in excess of federally insured limits. REVENUE AND COST RECOGNITION The Company records its transactions under the accrual method of accounting whereby income is recognized when the services are provided rather than when billed or the fees are collected, and costs and expenses are recognized in the period they are incurred rather than paid for. In determining when to recognize revenue the Company relies on Staff Accounting Bulletin Topic 13. The Company uses 4 criteria in determining when revenue is realized or realizable and earned. First, the Company must have persuasive evidence of the existing of an arrangement. The Company utilizes written contracts with its customers to meet this criterion. Second, delivery must have occurred or services must have been rendered. The Company defers revenue from the date invoiced, usually the 28th day of the month 2 months prior to completion of rendering services, to the month services are deemed completely rendered, thereby satisfying this criterion. Third, the price must be fixed and determinable. The Company delivers invoices to every customer stating the exact amount due for services, thereby satisfying this criterion. Fourth, collectibility must be reasonably assured. The Company invoices prior to rendering services and can thereby recognize a problem in payment prior to providing services. The Company immediately writes down bad debt and the Company utilizes an allowance for doubtful receivables, thereby satisfying this criterion. F-13 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) ACCOUNTS RECEIVABLE The Company factors 99% of its billings with an outside agency. The Company invoices its customers on the 28th of the month for services to be rendered two months subsequent to the billing date. The Company receives 75% of the aggregate net face value of the assigned accounts at the time of placement with the factor. DEFERRED REVENUE Deferred revenue consists of customers billed in advance of revenue being earned. PROVISION FOR BAD DEBT Under SOP 01-6 "Accounting for Certain Entities (including Entities with Trade Receivables), the Company has intent and belief that all amounts in accounts receivable are collectible. The Company has determined that based on their collections an allowance for doubtful accounts of $6,673 and $6,098 has been recorded at March 31, 2005 and December 31, 2004. Bad debt expense for the three months ended March 31, 2005 and 2004 was $4,821 and $17,626, respectively and for the years ending December 31, 2004 and 2003 was $63,498 and $52,241, respectively. ADVERTISING COSTS The Company expenses the costs associated with advertising and marketing as incurred. Advertising and marketing expenses, included in the statements of operations for the three months ended March 31, 2005 and 2004 were $660 and $9,216, respectively, and for the years ended December 31, 2004 and 2003 were $24,556 and $5,901, respectively. F-14 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) INCOME TAXES The income tax benefit is computed on the pretax loss based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates. No benefit is reflected for the three months ended March 31, 2005 and 2004 and for the years ended December 31, 2004 and 2003, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates. FIXED ASSETS Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Furniture and equipment 5 Years Telecommunications equipment 5 Years When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments. F-15 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) (LOSS) PER SHARE OF COMMON STOCK Historical net (loss) per common share is computed using the weighted average number of common shares outstanding. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for the periods presented. (LOSS) PER SHARE OF COMMON STOCK (CONTINUED) The following is a reconciliation of the computation for basic and diluted EPS: THREE MONTHS ENDED YEARS ENDED ---------------------------- --------------------------- MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, 2005 2004 2004 2003 (AUDITED) (UNAUDITED) (AUDITED) (AUDITED) ------------ ------------ ------------ ------------ Net loss $ (417,085) $ (68,280) $ (295,041) $ (265,056) ------------ ------------ ------------ ------------ Weighted-average common shares Outstanding (Basic) 38,143,835 48,825 3,222,743 1 Weighted-average common stock Equivalents Stock options -- -- -- -- Warrants -- -- -- -- ------------ ------------ ------------ ------------ Weighted-average common shares Outstanding (Diluted) 38,143,835 48,825 3,222,743 1 ------------ ------------ ------------ ------------
Options and warrants outstanding to purchase stock were not included in the computation of diluted EPS for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2005 and 2004 because inclusion would have been antidilutive. F-16 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued Statement No. 142 "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. STOCK-BASED COMPENSATION Employee stock awards under the Company's compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related interpretations. The Company provides the disclosure requirements of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), and related interpretations. Stock-based awards to non-employees are accounted for under the provisions of SFAS 123 and has adopted the enhanced disclosure provisions of SFAS No. 148 "Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment of SFAS No. 123". The Company measures compensation expense for its employee stock-based compensation using the intrinsic-value method. Under the intrinsic-value method of accounting for stock-based compensation, when the exercise price of options granted to employees is less than the estimated fair value of the underlying stock on the date of grant, deferred compensation is recognized and is amortized to compensation expense over the applicable vesting period. In each of the periods presented, the vesting period was the period in which the options were granted. All options were expensed to compensation in the period granted rather than the exercise date. F-17 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) STOCK-BASED COMPENSATION (CONTINUED) The Company measures compensation expense for its non-employee stock-based compensation under the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR SERVICES". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company's common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. Stock-based compensation for the three months ended March 31, 2005 and 2004 was $187,189 and $0, respectively and for the years ended December 31, 2004 and 2003 was $0 and $0, respectively. RECENT ACCOUNTING PRONOUNCEMENTS On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," and portions of Accounting Principles Board Opinion 30, "Reporting the Results of Operations." This Standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. F-18 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) This Standard also requires expected future operating losses from discontinued operations to be displayed in the period (s) in which the losses are incurred, rather than as of the measurement date as presently required. The adoption of SFAS No. 144 did not have an impact on the Company's results of operations or financial position. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds SFAS No. 4, "REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT," and an amendment of that statement, SFAS No. 44, "ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS," and SFAS No. 64, "EXTINGUISHMENTS OF DEBT MADE TO SATISFY SINKING-FUND REQUIREMENTS". This statement amends SFAS No. 13, "ACCOUNTING FOR LEASES", to eliminate inconsistencies between the required accounting for sales-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions. Also, this statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Provisions of SFAS No. 145 related to the rescissions of SFAS No. 4 were effective for the Company on November 1, 2002 and provisions affecting SFAS No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have a significant impact on the Company's results of operations or financial position. In June 2003, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES". This statement covers restructuring type activities beginning with plans initiated after December 31, 2002. Activities covered by this standard that are entered into after that date will be recorded in accordance with provisions of SFAS No. 146. The adoption of SFAS No. 146 did not have a significant impact on the Company's results of operations or financial position. F-19 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In December 2002, the FASB issued Statement No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends Accounting Principles Board ("APB") Opinion No. 28, "INTERIM FINANCIAL REPORTING", to require disclosure about those effects in interim financial information. SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company will continue to account for stock-based employee compensation using the intrinsic value method of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," but has adopted the enhanced disclosure requirements of SFAS 148. In May 2003, the FASB issued SFAS Statement No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of this statement F-20 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) did not have a significant impact on the Company's results of operations or financial position. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF Others". FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantees and elaborates on existing disclosure requirements related to guarantees and warranties. The recognition requirements are effective for guarantees issued or modified after December 31, 2002 for initial recognition and initial measurement provisions. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial position. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position. On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), "SHARE-BASED PAYMENT" ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. F-21 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) The provisions of SFAS 123R are effective for small business issuers as of the first interim period that begins after December 15, 2005. Accordingly, the Company will implement the revised standard in the first quarter of fiscal year 2006. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company's results of operations in the first quarter of fiscal year 2006 and thereafter. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, "EXCHANGES OF NON-MONETARY ASSETS, AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR NON-MONETARY TRANSACTIONS" (" SFAS 153"). This statement amends APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under SFAS 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flow. ACCOUNTING POLICY AS TO GOODWILL IMPAIRMENT: At December 31, 2005 and March 31, 2005 our balance sheet included goodwill with a total carrying value of $2,079,665, representing 45.7% and 53.4% of total assets, respectively. This goodwill has been recorded in connection with the acquisition of substantially all of the assets of Integrated Communications Consultants Corporation ("ICCC") in March 2003. Generally accepted accounting principles require that we assess the fair value of the acquired entity at least annually in order to identify any impairment in the values. However, on a quarterly basis, we are alert for events or circumstances that would indicate, more likely than not, that the fair value of the acquired entity has been reduced below its carrying amount. If we determine that the fair value of the entity is less than the net assets of the entity, including goodwill, an impairment loss would be identified and recorded at that time. F-22 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 3 - FIXED ASSETS Property and equipment as of March 31, 2005 was as follows: MARCH 31, 2005 --------------- Property and equipment $1,373,268 Less: accumulated depreciation (484,217) --------------- Net book value $ 889,051 =============== There was $68,164 and $60,403 charged to operations for depreciation expense for the three months ended March 31, 2005 and 2004, respectively and $260,806 and $156,691 was charged to operations for depreciation expense for the years ended December 31, 2004 and 2003, respectively. NOTE 4 - NOTES PAYABLE The Company has several notes payable at March 31, 2005. Proceeds from the notes were utilized to finance the general working capital requirements of the Company, purchase equipment and pay certain liabilities assumed by the Company in the purchase of the principal assets of Integrated Communications Consultants Corporation in March of 2003. The notes carry varying interest rates between zero and 5.75%. Prior to the effective merger of I-Element with MailKey, certain of the notes were converted into shares of common stock. F-23 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 4 - NOTES PAYABLE (CONTINUED) Accrued interest on the notes is $4,767 at March 31, 2005. The notes payable balances at March 31, 2005 were as follows: March 31, 2005 ---------------- Total notes payable $ 754,778 Less current maturities (461,590) ---------------- Long-term notes payable $ 293,188 ================ The amount of principal maturities of the notes payable for the next four years ending March 31, and in the aggregate is as follows: 2006 $ 461,590 2007 125,652 2008 125,652 2009 41,884 ---------------- $ 754,778 ================ F-24 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 5 - OPERATING LEASES The Company leases office space under leases commencing in March and June of 2004. The leases are payable on a month-to-month basis. Monthly payments under the current leases are $3,900. The Company also leased additional office space in Texas and California. The Company ceased leasing this additional space during the year ended December 31, 2004. Rental payments charged to expense for the three months ended March 31, 2005 and 2004 were $11,700 and $15,050, respectively and during the years ended December 31, 2004 and 2003 were $82,072 and $68,750, respectively. NOTE 6 - STOCKHOLDERS' EQUITY (DEFICIT) COMMON STOCK As of March 31, 2005, the Company has 100,000,000 shares of common stock authorized at a par value of $0.001, and 91,783,730 shares issued and outstanding. The following details the stock transactions for the three months ended March 31, 2005: The Company issued 4,578,223 shares of common stock due to the exercise of options. The Company issued 4,694,953 shares of common stock for the conversion of debt to equity valued at $826,312. The Company issued 7,487,587 shares of common stock for services valued at $187,189. The Company issued 693,280 shares of common stock in conversion of accounts payable to equity valued at $17,332. The Company issued 1,030,672 shares of common stock for the conversion of debt to equity valued at $25,766. In connection with the recapitalization, there were $337,945 in notes payable and $63,343 in liabilities assumed by the new company. F-25 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 7 - PROVISION FOR INCOME TAXES Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company's tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. At March 31, 2005, deferred tax assets consist of the following: Net deferred tax assets $ 294,392 Less: valuation allowance (294,392) --------- $ -0- ========= At March 31, 2005, the Company had deficits accumulated in the approximate amount of $981,305, available to offset future taxable income through 2023. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods. NOTE 8 - GOING CONCERN As shown in the accompanying consolidated financial statements the Company has sustained net operating losses for the three months ended March 31, 2005 and 2004 and the years ended December 31, 2004 and 2003. There is no guarantee that the Company will be able to raise enough capital or generate revenues to sustain its operations. This raises substantial doubt about the Company's ability to continue as a going concern. The Company's future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. There is no guarantee that the Company will be able to raise enough capital or generate revenues to sustain its operations. Management believes they can raise the appropriate funds needed to support their business plan and acquire an operating, cash flow positive company. F-26 MAILKEY CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2004 AND 2003 NOTE 8 - GOING CONCERN The consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern. F-27 IELEMENT CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 TABLE OF CONTENTS ----------------- Condensed Consolidated Financial Statements: PAGE(S) ------- Condensed Consolidated Balance Sheet as of December 31, 2005 F-29 Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2005 and 2004 and the Nine Months Ended December 31, 2005 and 2004 F-30 Condensed Consolidated Statements of Cash Flow for the Nine Months Ended December 31, 2005 and 2004 F-31 Notes to Condensed Consolidated Financial Statements F-33 F-28 IELEMENT CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2005 ASSETS ------ December 31, 2005 (UNAUDITED) ----------- CURRENT ASSETS: Cash and cash equivalents $ 1,205,129 Accounts receivable, net 474,647 Other current assets 1,159 ----------- TOTAL CURRENT ASSETS 1,680,935 ----------- Fixed assets, net of depreciation 733,433 ----------- OTHER ASSETS: Goodwill 2,079,665 Deposits 56,821 ----------- TOTAL OTHER ASSETS 2,136,486 ----------- TOTAL ASSETS $ 4,550,854 =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,076,982 Customer deposits 139,121 Receivable financing payable 405,338 Commissions payable 167,225 Liability for stock to be issued 2,297,875 Deferred revenue 712,998 Current portion - notes payable 336,257 ----------- TOTAL CURRENT LIABILITIES 5,135,796 ----------- LONG-TERM LIABILITIES: Notes payable, net of current portion 315,928 ----------- TOTAL LONG-TERM LIABILITIES 315,928 ----------- TOTAL LIABILITIES 5,451,724 ----------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.001 Par Value, 2,000,000,000 shares authorized; 96,477,065 shares issued and outstanding 96,477 Preferred stock, $.001 Par Value, 200,000,000 shares authorized; Zero shares issued and outstanding -- Additional paid-in capital 717,687 Additional paid-in capital - Warrants 177,757 Stock subscription receivable (35,000) Unearned compensation expense (12,200) Accumulated deficit (1,845,591) ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (900,870) ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,550,854 =========== The accompanying notes are an integral part of these condensed consolidated financial statements. F-29 IELEMENT CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- --------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2005 2004 2005 2004 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ------------ ------------ ------------ ------------ OPERATING REVENUE $ 1,119,772 $ 1,415,148 $ 3,487,000 $ 4,424,345 COST OF SALES EXCLUSIVE OF DEPRECIATION AND AMORTIZATION 689,185 573,732 2,141,575 2,223,222 ------------ ------------ ------------ ------------ GROSS PROFIT 430,587 841,416 1,345,425 2,201,123 ------------ ------------ ------------ ------------ OPERATING EXPENSES General and administrative 580,397 494,132 1,598,893 1,575,452 Selling expenses 82,307 111,148 314,844 410,360 Depreciation & amortization 69,934 67,976 207,986 200,403 Interest expense -- 37,667 4,951 107,222 Receivable factoring fees 26,211 30,686 83,037 95,936 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 758,849 741,609 2,209,711 2,389,373 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE OTHER (EXPENSE) (328,262) 99,807 (864,286) (188,250) ------------ ------------ ------------ ------------ OTHER (EXPENSE) Loss on sale of investments -- -- -- (38,511) ------------ ------------ ------------ ------------ TOTAL OTHER EXPENSES -- -- -- (38,511) ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (328,262) 99,807 (864,286) (226,761) PROVISION FOR INCOME TAXES -- -- -- -- ------------ ------------ ------------ ------------ NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ (328,262) $ 99,807 $ (864,286) $ (226,761) ============ ============ ============ ============ NET INCOME (LOSS) PER BASIC AND AND DILUTED SHARES $ (0.00) $ 0.02 $ (0.01) $ (0.05) ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 96,477,065 4,319,392 94,817,400 4,272,887 ============ ============ ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements. F-30 IELEMENT CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NINE MONTHS ENDED ---------------------------- DECEMBER 31, DECEMBER 31, 2005 2004 (UNAUDITED) (UNAUDITED) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $ (864,286) $ (226,761) ----------- ----------- ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 207,986 200,403 Stock issued for services 33,498 -- Stock to be issued for services 236,750 -- Gain on sale of equipment -- (894) Fixed asset write off -- 3,190 CHANGES IN ASSETS AND LIABILITIES (Increase) decrease in accounts receivable 45,997 (79,412) (Increase) decrease in other current assets 621 (1,606) (Increase) decrease in deposits 2,172 (14,985) Increase in accounts payable and accrued expenses 190,568 109,368 Increase in accrued interest 4,872 107,069 (Decrease) in customer deposits (24,991) (20,191) Increase (decrease) in receivable financing payable (77,776) 189,597 Increase (decrease) in commissions payable (8,911) 55,208 (Decrease) in deferred revenue (102,038) (356,290) ----------- ----------- Total adjustments 508,748 191,457 ----------- ----------- NET CASH (USED IN) OPERATING ACTIVITIES (355,538) (35,304) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of fixed assets (52,368) (69,632) Proceeds from sale of fixed assets -- 3,453 ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (52,368) (66,179) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of notes payable $ (46,349) $ (134,429) Proceeds from notes payable -- 235,021 Common stock issued for cash -- 119,300 Cash received for common stock to be issued 1,535,625 -- Fund raising fees charged to paid in capital (216,562) -- Proceeds in exercise of stock options -- 75 ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,272,714 219,967 ----------- ----------- The accompanying notes are an integral part of these condensed consolidated financial statements F-31 IELEMENT CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED) THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NINE MONTHS ENDED ------------------------ December 31, DECEMBER 31, 2005 2004 (Unaudited) (UNAUDITED) ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 864,808 118,484 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 340,321 29,267 ---------- ---------- CASH AND CASH EQUIVALENTS - END OF PERIOD $1,205,129 $ 147,751 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest expense $ 114 $ 26,631 ========== ========== SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Accounts payable converted to equity $ 85,194 $ -- ========== ========== Accounts payable converted to debt $ 177,884 $ 59,000 ========== ========== Accounts payable converted to liability for stock to be issued $ 251,500 $ -- ========== ========== Notes payable converted to equity $ -- $ 248,000 ========== ========== Notes payable converted to liability for stock to be issued $ 239,000 $ -- ========== ========== Stock issued for services $ 33,498 $ -- ========== ========== Stock to be issued for services $ 236,750 $ -- ========== ========== Fixed asset write off $ -- $ 3,190 ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements F-32
IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION The unaudited interim condensed consolidated financial statements included herein have been prepared by IElement Corporation and Subsidiary (the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the March 31, 2005 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year. The management of the Company believes that the accompanying unaudited condensed consolidated financial statements contain all adjustments (including normal recurring adjustments) necessary to present fairly the operations and cash flows for the periods presented. IElement Corporation (the "Company" or "IElement") was established as a messaging security and management company. On March 25, 2004, pursuant to an Agreement and Plan of Merger, Global Diversified Acquisition Corp. ("GDAC"), acquired all of the outstanding capital stock of MK Secure Solutions Ltd ("MKSS"), a holding company incorporated on March 11, 2003, under the laws of the British Virgin Islands. The transaction was effected by the issuance of shares such that the former MKSS shareholders owned approximately 90% of the outstanding MailKey Corporation stock after the transaction. GDAC then changed its name to MailKey Corporation ("MailKey"). The Company's Chairman and Chief Executive Officer resigned in September 2004 and the Company's Chief Financial Officer and member of the Board resigned in November 2004. Both positions have been filled by the Company's founder and deputy chairman. F-33 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) In early 2005 the Company was unable to continue funding the development of its messaging security solutions, and the rights were transferred to the development team in return for the cancellation of most of the liabilities which the Company owed to them. The Company retains an interest of 20% in the messaging security solutions; however to date there has been no commercialization of the solutions. In the first quarter 2005 the Company sold its insolvent British Virgin Islands subsidiary, MK Secure Solutions Limited, for $1 to a UK based accounting firm, SS Khehar & Company. SS Khehar & Company has agreed to deal with the winding up of the former subsidiary, for a fee of $1,800. On November 9, 2004, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the MailKey Corporation, MailKey Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary ("Merger Sub"), Inc., a Nevada Corporation, I-Element, Inc. ("I-Element") and Ivan Zweig, pursuant to which the Company agreed to acquire all of the issued and outstanding shares of capital stock of I-Element. This transaction closed in January 2005. At the closing of the Merger, Merger Sub was merged into I-Element, at which time the separate corporate existence of Merger Sub ceased and I-Element now continues as the surviving company. The Share Exchange has been accounted for as a reverse merger under the purchase method of accounting. Accordingly, I-Element will be treated as the continuing entity for accounting purposes and the historical financial statements presented will be those of I-Element. Under the terms of the Merger Agreement, MailKey issued its common stock, $.001 par value per share, in exchange for all of the issued and outstanding shares of capital stock of I-Element. The exchange ratio setting forth the number of shares of MailKey common stock issued for each issued and outstanding share of capital stock of I-Element was 3.52 shares of MailKey common stock for each issued and outstanding share of capital stock of I-Element. I-Element, incorporated in Nevada on December 30, 2002, is a facilities-based nationwide communications service provider that provides state-of-the-art telecommunications services to small and medium sized enterprises ("SMEs"). I-Element provides broadband data, voice and wireless services by offering integrated T-1 lines as well as Layer 2 Private Network solutions that provide SMEs with dedicated Internet access services, customizable business solutions for voice, data, wireless and Internet, and secure communications channels between the SME offices, partners, vendors, customers and employees without the use of a firewall or encryption devices. I-Element has a network presence in 18 major markets in the United States, including facilities in Los Angeles, Dallas, and Chicago. The Company started business in 2003. F-34 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) In connection with the closing of the merger, MailKey entered into a letter of intent with Ivan Zweig and Kramerica Capital Corporation ("Kramerica"), a corporation wholly-owned by Mr. Zweig, which contemplates that MailKey and I-Element will enter into a four year employment agreement with Kramerica and Mr. Zweig pursuant to which Mr. Zweig will serve as the Chief Executive Officer of MailKey and I-Element. The letter of intent provides that Mr. Zweig will receive an annual base salary of $300,000. In addition to his base salary, Mr. Zweig will be entitled to annual performance bonuses with targets ranging from $1,000,000 to $3,000,000 during the second, third and fourth years provided I-Element achieves certain performance goals. If Mr. Zweig is terminated without cause, MailKey is obligated to pay the remaining salary owed to Mr. Zweig for the complete term of the employment agreement, to pay off all notes owed to Mr. Zweig or Kramerica, all outstanding options shall become fully vested, MailKey shall pay all earned performance bonuses and all accrued vacation. If Mr. Zweig is terminated for any reason other than cause, MailKey shall pay in full the Notes owed to either Mr. Zweig or Kramerica Capital Corporation and at least 75% of the earned bonus plan set forth by the directors. Effective January 24, 2005, Mr. Zweig was also appointed to the Board of Directors of MailKey. Ivan Zweig has served as the Chief Executive Officer of I-Element since March 2003. Mr. Zweig is also the Chief Executive Officer, director and sole shareholder of Kramerica, a personnel services corporation. Since December 1998, Mr. Zweig has served as the Chief Executive Officer and director of Integrated Communications Consultants Corp. ("ICCC"), a nationwide data carrier specializing in high speed Internet access and secure data transaction. ICCC provides I-Element with resold telecom services and I-Element pays ICCC approximately $100,000 on a monthly basis for such services. On October 1, 2004, ICCC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court, Northern District of Texas, Dallas Division. Upon the consummation of the acquisition, I-Element has issued outstanding promissory notes to, among others, Kramerica in the aggregate amount of $120,000 (the "Notes"). I-Element has also issued promissory notes to members of Mr. Zweig's immediate family. The promissory notes are payable in 36 monthly installments with the first payment commencing six months after the closing of the merger and will continue to be secured by substantially all of the assets of I-Element. F-35 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) The Company received consent to amend the Articles of Incorporation to increase the number of shares of common stock authorized to be issued from 100,000,000 shares to 2,000,000,000 shares, and consented to the authorization of 200,000,000 shares of Blank Check Preferred Stock. There are no current plans to designate any Blank Check Preferred Stock. On August 1, 2005, the Company filed an Information Statement in definitive form on schedule 14C with the SEC to change its name from MailKey Corporation to IElement Corporation. Concurrent with this name change, the Company received a new stock trading symbol (IELM.OB) on the NASD Over-the-Counter Electronic Bulletin Board. On August 8, 2005 Tim Dean-Smith and Susan Walton resigned their positions on the Board of Directors (the "Board") of the Company. Tim Dean-Smith also resigned from his position as Chief Financial Officer of the Company. The resignations of Mr. Dean-Smith and Ms. Walton were consistent with the expectations of the parties pursuant to the consummation of the merger between I-Element, and the Company on January 19, 2005, and do not arise from any disagreement on any matter relating to the Company's operations, policies or practices, nor regarding the general direction of the Company. Neither Mr. Dean-Smith nor Ms. Walton served on any subcommittees of the Board. Ivan Zweig, the current Chairman of the Board and Chief Executive Officer was appointed as the Chief Financial Officer of the Company until a new Chief Financial Officer is found. The Company's condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, and have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. F-36 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The condensed consolidated financial statements include the financial position and results of I-Element. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash or cash equivalents. The Company maintains cash and cash equivalents with a financial institution which is insured by the Federal Deposit Insurance Corporation up to $100,000. At various times throughout the year the Company had amounts on deposit at the financial institution in excess of federally insured limits. REVENUE AND COST RECOGNITION The Company records its transactions under the accrual method of accounting whereby income is recognized when the services are provided rather than when billed or the fees are collected, and costs and expenses are recognized in the period they are incurred rather than paid for. ACCOUNTS RECEIVABLE The Company factors 99% of its billings with an outside agency. The Company invoices its customers approximately 34 days prior to the month services are to be rendered with invoice amounts due on the first of the month in which services are rendered. The Company receives 75% of the aggregate net face value of the assigned accounts at the time of placement with the factor. F-37 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) DEFERRED REVENUE Deferred revenue consists of customers billed in advance of revenue being earned. PROVISION FOR BAD DEBT Under SOP 01-6 "Accounting for Certain Entities (including Entities with Trade Receivables), the Company has intent and belief that all amounts in accounts receivable are collectible. The Company has determined that based on their collections an allowance for doubtful accounts of $12,165 has been recorded at September 30, 2005. Bad debt expense for the three months ended December 31, 2005 and 2004 was $20,711 and $26,243, respectively and for the nine months ending December 31, 2005 and 2004 was $67,943 and $45,872, respectively. ADVERTISING COSTS The Company expenses the costs associated with advertising and marketing as incurred. Advertising and marketing expenses, included in the statements of operations for the three months ended December 31, 2005 and 2004 were $2,445 and $4,308, respectively and for the nine months ending December 31, 2005 and 2004 was $6,034 and $15,340, respectively. INCOME TAXES The income tax benefit is computed on the pretax loss based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates. No benefit is reflected for the three months ended December 31, 2005 and 2004, respectively and for the nine months ended December 31, 2005 and 2004, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates. F-38 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) FIXED ASSETS Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Furniture and equipment 5 Years Telecommunications equipment 5 Years When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Deduction is made for retirements resulting from renewals or betterments. (LOSS) PER SHARE OF COMMON STOCK Historical net (loss) per common share is computed using the weighted average number of common shares outstanding. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for the periods presented. GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued Statement No. 142 "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. F-39 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) STOCK-BASED COMPENSATION Employee stock awards under the Company's compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", and related interpretations. The Company provides the disclosure requirements of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), and related interpretations. Stock-based awards to non-employees are accounted for under the provisions of SFAS 123 and has adopted the enhanced disclosure provisions of SFAS No. 148 "Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment of SFAS No. 123". The Company measures compensation expense for its employee stock-based compensation using the intrinsic-value method. Under the intrinsic-value method of accounting for stock-based compensation, when the exercise price of options granted to employees is less than the estimated fair value of the underlying stock on the date of grant, deferred compensation is recognized and is amortized to compensation expense over the applicable vesting period. In each of the periods presented, the vesting period was the period in which the options were granted. All options were expensed to compensation in the period granted rather than the exercise date. The Company measures compensation expense for its non-employee stock-based compensation under the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR Services". The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company's common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty's performance is complete. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital. Employee net stock-based compensation for the three months ended December 31, 2005 and 2004 was $17,497 and $0, respectively and for the nine months ended December 31, 2005 and 2004 was $54,497 and $0, respectively. On September 8, 2005, the Company issued 325,000 stock options to its employees. The options have an exercise price of $0.01 and vest over 3 years. F-40 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51". FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position. On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), "SHARE-BASED PAYMENT" ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective for small business issuers as of the first interim period that begins after December 15, 2005. Accordingly, the Company will implement the revised standard in the first quarter of fiscal year 2006. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company's results of operations in the first quarter of fiscal year 2006 and thereafter. F-41 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, "EXCHANGES OF NON-MONETARY ASSETS, AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR NON-MONETARY TRANSACTIONS" (" SFAS 153"). This statement amends APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under SFAS 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flow. NOTE 3 - FIXED ASSETS Property and equipment as of December 31, 2005 was as follows: Property and equipment $1,425,637 Less accumulated depreciation 692,204 ---------- Net book value $ 733,433 ========== There was $69,934 and $67,976 charged to operations for depreciation expense for the three months ended December 31, 2005 and 2004, respectively and $207,986 and $200,403 charged to operations for depreciation expense for the nine months ended December 31, 2005 and 2004, respectively. NOTE 4 - LIABILITY FOR STOCK TO BE ISSUED The Company has signed agreements with vendors and former directors to convert $251,500 of accounts payable and $239,000 of notes payable into equity. During the three months ended December 31, 2005, the Company also agreed to issue stock for $236,750 of services received. As of December 31, 2005, the shares have not been issued. F-42 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 4 - LIABILITY FOR STOCK TO BE ISSUED - (CONTINUED) In August 2005, the Company has entered into an agreement with Vista Capital, S.A. ("Vista") whereby Vista raised capital through the sale of units of Company stock and warrants. Each unit contains 500,000 shares of common stock at $0.035 and warrants to purchase an additional 250,000 shares of common stock at $0.10. The warrants can be called by the Company after the Company's closing share price is equal to or exceeds $0.12 for ten consecutive trading days. Each unit was sold for $17,500. As of December 31, 2005, the Company had sold 87.75 units for cash totaling $1,535,625 plus accepted the services for 0.50 units totaling $8,750 and had 2 units outstanding on stock subscriptions receivable totaling $35,000. The Company closed the private placement offering on December 30, 2005 raising $1,579,375. As part of the offering, the company paid 10% of the funds raised to Vista for fund raising fees. The Company is currently working to register and issue all 59,469,286 of the shares of common stock. NOTE 5 - NOTES PAYABLE The Company has several notes payable at December 31, 2005. Proceeds from the notes were utilized to finance the general working capital requirements of the Company, purchase equipment and pay certain liabilities assumed by the Company in the purchase of the principal assets of Integrated Communications Consultants Corporation in March of 2003. Prior to the effective merger of I-Element with MailKey, certain of the notes were converted into shares of common stock. Several notes have been partially converted into equity with the remaining balances restated at zero percent interest. All outstanding notes at December 31, 2005 have zero percent interest rate. Accrued interest on the notes was $0 at December 31, 2005. The notes payable balances at December 31, 2005 were as follows: Total notes payable $652,185 Less current maturities 336,257 -------- Long term notes payable $315,928 ======== F-43 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 5 - NOTES PAYABLE - (CONTINUED) The amount of principal maturities of the notes payable for the next 3 years ending December 31, and in the aggregate is as follows: 2006 $336,257 2007 186,684 2008 129,244 -------- $652,185 ======== As of December 31, 2005, the Company has not made payments on the notes totaling $85,277 which were due between August and December 2005. NOTE 6 - OPERATING LEASES The Company leases office space on a month-to-month basis. The monthly payment under the current lease is $3,284. The Company also leased additional office space in Texas and California. The Company ceased leasing this additional space during the year ended December 31, 2004. Rental payments charged to expense for the three months ended December 31, 2005 and 2004 was $9,852 and $21,675, respectively and for the nine months ended December 31, 2005 and 2004 was $32,020 and $67,022, respectively. NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) COMMON STOCK As of December 31, 2005, the Company has 2,000,000,000 shares of common stock authorized at a par value of $0.001, and 96,477,065 shares issued and outstanding. The company also has 200,000,000 shares of Blank Check Preferred Stock authorized. There are no current plans to designate any Blank Check Preferred Stock. The following details the stock transactions for the nine months ended December 31, 2005: The Company received 1,498,195 shares of common stock valued at $37,455 which were issued in the previous quarter for services. Upon receipt, the common shares were canceled. F-43 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED) COMMON STOCK (CONTINUED) The Company issued 1,500,000 shares of common stock valued at $75,000 against the Liability for stock to be issued. The Company issued 340,000 shares of common stock valued at $8,500 to a sales agent as payment on the outstanding balance owed. The Company issued 175,000 shares of common stock valued at $3,500 to a consultant as payment on the outstanding balance owed. The Company issued 300,000 shares of common stock valued at $6,000 to a consultant for services received. The Company issued 250,000 shares of common stock valued at $5,500 to a consultant for services received. The Company issued 1,000,000 shares of common stock valued at $40,000 to an employee as a bonus. The Company issued 1,000,000 shares of common stock valued at $40,000 to a consultant for services received. The Company issued 1,626,530 shares of common stock valued at $73,194 to a sales agent as payment on the outstanding balance owed and as payment for current services. The Company is currently working to register and issue 59,469,286 shares of common stock to meet the $2,297,875 Liability for stock to be issued balance. F-44 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 8 - PROVISION FOR INCOME TAXES Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company's tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. At December 31, 2005, deferred tax assets consist of the following: Net deferred tax assets $553,677 Less: valuation allowance (553,677) -------- $ -0- At December 31, 2005, the Company had deficits accumulated in the approximate amount of $1,845,591, available to offset future taxable income through 2023. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods. NOTE 9 - GOING CONCERN As shown in the accompanying condensed consolidated financial statements, the Company has sustained net operating losses for the three months ended December 30, 2005 and for the nine months ended December 31, 2005 and 2004. Although the Company recently raised funds, there is no guarantee that the Company will be able to generate enough revenues or raise enough additional capital to sustain its operations in the long term. This raises substantial doubt about the Company's ability to continue as a going concern. The Company's future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management believes they have raised sufficient funds to support their business plan and acquire an operating cash flow positive company. The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern. F-45 IELEMENT CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 AND THE NINE MONTHS ENDED DECEMBER 31, 2005 AND 2004 NOTE 10 - CONTINGENCIES On April 19, 2005 KK Solutions, Inc., a California corporation d/b/a/ Three 18, Inc. ("KK"), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to KK. KK seeks damages in the amount of $78,000, plus interest. The Company is vigorously defending against this action, which is currently in the discovery phase of the proceeding. On April 26, 2005 Communications Plus, Inc., a California company d/b/a Global Communications, ("Global"), filed a complaint against the Company and its CEO, Ivan Zweig, individually, in the Superior Court of the State of California, County of Los Angeles, alleging breach of contract pursuant to a dispute regarding sales commissions due to Global. Global seeks damages in the amount of $50,000, plus interest. The Company is vigorously defending against this action, which is currently in the discovery phase of the proceeding. F-46 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Nevada corporation law provides that: o a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; o a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper; and o to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense. Our Certificate of Incorporation provide that no director or officer shall be personally liable to our company or any of its stockholders for damages for breach of fiduciary duty as a director or officer involving any act or omission of such director or officer unless a final adjudication establishes that such acts or omissions involve: (i) intentional misconduct , (ii) fraud, or (iii) a knowing violation of the law that was material to the cause of action. Our Bylaws provide we have the power to indemnify, to the greatest allowable extent permitted under the General Corporate Laws of Nevada, directors or officers of our company for any duties or obligations arising out of any acts or conduct of the officer or director performed for or on behalf of our company. We will reimburse each such person for all legal and other expenses reasonably incurred by him in connection with any such claim or liability, including power to defend such persons from all suits or claims as provided for under the provisions of the General Corporate Law of Nevada. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under Nevada law or otherwise, we have been advised the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by us for expenses incurred or paid by a director, officer or controlling person of our company in successful defense of any action, suit, or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION We will pay all expenses in connection with the registration and sale of our common stock. All amounts shown are estimates except for the registration fee. EXPENSES AMOUNT Registration Fee $ 1,375.00 Costs of Printing and Engraving $ 3,900.00 Legal Fees $ 15,000.00 Accounting Fees $ 2,000.00 Miscellaneous $ 650.00 --------------- TOTAL $ 22,925.00 ============== ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES As of December 31, 2005, the Company has 2,000,000,000 shares of common stock authorized at a par value of $0.001, and as of May 2, 2006 158,735,031 shares issued and outstanding. The company also has 200,000,000 shares of Blank Check Preferred Stock authorized. There are no current plans to designate any Blank Check Preferred Stock. On February 1, 2006, I Element issued 168,680 shares of common stock to Quality Sound Communications in exchange for the cancellation of a debt owed to Quality by IElement in the amount of $18,554.85 for sales commissions owed. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On February 1, 2006, I-Element issued 250,000 shares of common stock to Stefan Muller in exchange for consulting services rendered in the amount of $8.750. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. The Board of Directors approved the delivery of the shares to each of the following recipients on January 23, 2006, except for the shares issued to John Fox, Donald Kennedy and Stefan Muller which were approved for issuance on December 27, 2005. The shares were issued in exchange for services rendered and as compensation. The securities were issued in reliance on Section 4(2) of the Securities Act. All shares are restricted pursuant to Rule 144. SHARES ISSUED TO: PER SHARE NUMBER OF AGGREGATE VALUE OF VALUE SHARES ISSUED SHARES ISSUED - ---------------------------------- --------- ------------- ------------------ Duane Morris, LLP $.050 880,000 $44,000.00 Palladian Capital Partners,LLC $.040 2,200,000 $88,000.00 Palladian Capital Partners,LLC $.040 300,000 $12,000.00 Tim Dean-Smith $.050 1,600,000 $84,000.00 Susan Walton $.050 400,000 $20,000.00 Jeremy Dean-Smith $.050 1,800,000 $90,000.00 Dolphin Capital $.050 2,900,000 $145,000.00 Isaac de la Pena $.050 150,000 $7,500.00 Misty Starke $.040 500,000 $20,000.00 Brett Jensen $.035 200,000 $7,000.00 Jeff Wilson $.035 714,286 $25,000.01 Vista Capital $.070 1,000,000 $70,000.00 Stonegate Ventures $.060 1,000,000 $60,000.00 Yock Investments $.060 1,000,000 $60,000.00 Jurgen Popp $.060 1,000,000 $60,000.00 Global Equity Trading & Finance, Ltd. $.040 250,000 $10,000.00 John Fox $.050 100,000 $5,000.00 Donald Kennedy $.050 20,000 $1,000.00 Stefan Muller $.060 1,000,000 $60,000.00 --------------- -------------- TOTAL 17,014,286 $868,500.01 =============== ==============
On December 30, 2005, the Company confirmed the sale of unregistered securities sold in units consisting of, in the aggregate, 45,125,000 shares of common stock at a purchase price of $0.035 per share, for an aggregate purchase price of $1,579,375 and warrants for the purchase of and aggregate total of 22,562,500 at a strike price of $0.10 per share (the "Warrants"). The securities were sold to accredited investors in reliance on an exemption provided in Regulation D, Rule 506 and 4(2) under the Securities Act. The Company may call the Warrants at any time after both the (1) closing bid price for the common stock of the Company has been equal to or greater than $0.12 per share for ten (10) consecutive trading days, and (2) the shares underlying the warrants have been included on an SB-2 Registration Statement, or other substantially equivalent registration statement, that has been filed by the Company and then active or declared effective by the SEC and shall expire upon the earlier of forty-five (45) days from the date the Warrant is called or on December 31,2007. The following is a complete list of share recipients: II-2 PURCHASER AGGREGATE SHARES OF COMMON NUMBER OF SHARES PURCHASE PRICE STOCK PURCHASED ISSUABLE UPON CONVERSION OF WARRANT - ------------------------------- -------------- ---------------- ---------------- Michael Bloch $70,000 2,000,000 1,000,000 Jonathan Lowenthal $17,500 500,000 250,000 Wayne Schoenmakers $3,500 100,000 50,000 Thomas Barrett $7,000 200,000 100,000 Wm Goatley Revocable Trust $8,750 250,000 125,000 Richard Crose $17,500 500,000 250,000 Robert Gillman $17,500 500,000 250,000 Timothy Broder $17,500 500,000 250,000 Thomas Allen Piscula $17,500 500,000 250,000 Raymond Dunwoodle $17,500 500,000 250,000 Fred Matulka $17,500 500,000 250,000 Michael Melson $17,500 500,000 250,000 Oscar Greene Jr $17,500 500,000 250,000 Robert Rowley $17,500 500,000 250,000 Trey Investments, LLP $5,250 150,000 75,000 William Cail $875 25,000 12,500 Kenneth Meyer $35,000 1,000,000 500,000 Frank Davis $7,000 200,000 100,000 Holger Pfeiffer $8,750 250,000 125,000 Bellano Family Trust $10,500 300,000 150,000 Calder Capital, Inc. $17,500 500,000 250,000 Ulrich Nusser $8,750 250,000 125,000 Sat Paul Dewan $10,500 300,000 150,000 Thomas Weiss $8,750 250,000 125,000 Marianne Issels $8,750 250,000 125,000 Stefan Muller $17,500 500,000 250,000 Annette Bohmer $17,500 500,000 250,000 Hendrik Paulus $17,500 500,000 250,000 Robert Flaster $7,000 200,000 100,000 William Harner $5,250 150,000 75,000 Veronica Kristi Prenn $52,500 1,500,000 750,000 Ryan Cornelius $52,500 1,500,000 750,000 Jurgen Popp $52,500 1,500,000 750,000 Robert Smith $10,500 300,000 150,000 Gerd Weger $350,000 10,000,000 5,000,000 Christiane Loberbauer $8,750 250,000 125,000 Fred Schmitz $175,000 5,000,000 2,500,000 Glenn Jensen $105,000 3,000,000 1,500,000 Laurence Straus $10,500 300,000 150,000 General Research GMBH $17,500 500,000 250,000 AK Asset Management $35,000 1,000,000 500,000 Benjamin Eichholz $52,500 1,500,000 750,000 Amaltea SA $17,500 500,000 250,000 Clarence Keck Jr $5,250 150,000 75,000 Jorn Follmer $17,500 500,000 250,000 Mattias Graeve $8,750 250,000 125,000 Jerome Niedfelt $10,500 300,000 150,000 John Niedfelt $7,000 200,000 100,000 Global Equity Trading & Finance, Ltd. $17,500 500,000 250,000 Global Equity Trading & Finance, Ltd. $70,000 2,000,000 1,000,000 Film & Music Entertainment, Inc. $35,000 1,000,000 500,000 Red Giant Productions, Inc. $17,500 500,000 250,000 -------------- -------------- -------------- TOTAL $1,579,375 45,125,000 22,562,500 ============== ============== ==============
On March 8, 2005 the Company issued 1,693,334 shares of common stock to Lance K. Stovall in exchange for services rendered as a sales agent, which services were valued at $42,333. On June 6, 2005 Mr. Stovall returned 1,498,195 shares of common stock valued at $37,455. Upon receipt, the common shares were canceled. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On April 8, 2005 the Company issued 1,500,000 shares of common stock to BDM Holdings, LLC against the $75,000 liability for Stock to be issued. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On May 19, 2005, the Company issued 340,000 shares of common stock to Trad Solutions valued at $8,500 as a sales agent as payment on the outstanding balance owed. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On June 7, 2005 the Company issued 175,000 shares of common stock to Rick Wright valued at $3,500 to a consultant as payment on the outstanding balance owed. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. II-3 On March 10, 2005, the Company issued 200,000 shares of common stock valued at $5,000 to Blake Martensen, a consultant, for services received. On June 7, 2005 the Company issued 300,000 shares of common stock to Blake Martensen valued at $6,000 as a consultant for services received. On June 29, 2005 the Company issued 1,000,000 shares of common stock valued at $40,000 to Blake Martensen, a consultant for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On June 20, 2005, the Company issued 250,000 shares of common stock to Burton Goldi valued at $5,500 as a consultant for services received. On March 8, 2005 the Company issued 1,030,672 shares of common stock valued at $25,767 to Mr. Goldi for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On June 29, 2005 the Company issued 1,000,000 shares of common stock valued at $40,000 to Heather Walther as a bonus. On March 8, 2005 the Company issued 1,220,637 shares of common stock valued at $30,516 to Ms. Walther for employee compensation. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On July 28, 2005 and August 8, 2005 the Company issued 1,596,311 and 30,219 respectively shares of common stock valued at $73,194 to Quality Sound Communications, a sales agent as payment on the outstanding balance owed and as payment for current services. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 14, 2005, the Company issued 2,229,374 shares of common stock valued at $111,469 to Obelix for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 14, 2005 the Company issued 2,018,000 shares of common stock valued at $50,450 to Claudette Milan for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 10, 2005 and December 8, 2004 the Company issued 150,000 and 150,000 respectively shares of common stock valued at $3,750 and $9,000 to Jon A Gordon for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 10, 2005 and December 31, 2005 the Company issued 150,000 and 150,000 respectively shares of common stock valued at $3,750 and_$9,000 to Carl D. Glaeser for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 8, 2005 and March 28, 2005, the Company issued 192,308 and 192,308 respectively shares of common stock valued at $4,808 and $4,808 to Brian Lebrecht for legal services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 8, 2005, the Company issued 1,000,000 shares of common stock valued at $25,000 to David Otto for legal services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 8, 2005 the Company issued 693,280 shares of common stock valued at $17,332 to Rick Wright for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 8, 2005 the Company issued 2,018,000 shares of common stock valued at $50,450 to Alex Ponnath for technology services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 8, 2005 the Company issued 1,680,000 shares of common stock valued at $42,000 to Jeff Wilson for employee compensation. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On January 19, 2005, Mailkey Corporation, consummated the acquisition of I-Element, Inc. Under the terms of the Merger Agreement dated November 9, 2004, the Company issued an aggregate of 47,845,836 shares of its common stock, $.001 par vale per share, in exchange for all of the issued and outstanding shares of capital stock of I-Element and in exchange for the cancellation of certain debt outstanding on the date of closing. A detailed description of the Merger and the Agreement and Plan of Merger and First Amendment thereto are set forth on Form 8-K, and Exhibits 2.1 and 2.2 filed therewith, filed on January 25, 2005. II-4 On December 8, 2004, the Company issued 400,000 shares of common stock valued at $68,000 to Brad Van Siclen for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On December 8, 2004, the Company issued 95,000 shares of common stock valued at $16,150 to Eric A Farrow for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On December 8, 2004, the Company issued 8,333 shares of common stock valued at $1,417 to Brad B Schwall, Jr for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On December 8, 2004, the Company issued 100,000 shares of common stock valued at $17,000 to Charles Ashley for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On December 8, 2004, the Company issued 60,500 shares of common stock valued at $10,285 to Donald B Schwall, Jr. for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On November 11, 2004, the Company issued 1,000,000 shares of common stock valued at $262,000 to Terrence Byrne for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On November 11, 2004, the Company issued 315,000 shares of common stock valued at $126,000 to Brad Van Siclen for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On November 11, 2004, the Company issued 400,000 shares of common stock valued at $160,000 to Willian Grimes for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On November 5, 2004, the Company issued 37,500 shares of common stock valued at $26,250 to Donald B. Schwall, Jr. for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On November 5, 2004, the Company issued 385,000 shares of common stock valued at $154,000 to Ivan Zweig for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On October 5, 2004, the Company issued 500,000 shares of common stock valued at $350,000 to Roger B. Ponting for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On October 5, 2004, the Company issued 28,750 shares of common stock valued at $20,125 to Susan Walton for services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On September 7, 2004 the Company issued an aggregate of 1,388,072 shares of its common stock to its existing shareholders upon the exercise of outstanding warrants. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On July 20, 2004, the Company issued an aggregate of 291,944 shares of its common stock to its existing shareholders upon the exercise of outstanding warrants. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On June 13, 2004, the Company issued 60,005 shares of common stock valued at $210,018 to Scott Peters upon the exercise of an outstanding warrant. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. On March 25, 2004 MailKey Corporation consummated the reverse merger transaction with Global Diversified Acquisition Corp. In accordance with the terms of the Merger Agreement dated February 20, 2004 as amended March 24, 2004, the Company issued an aggregate of 26,246,000 shares of its common stock to the holders of MailKey capital stock in exchange for all the issued and outstanding capital stock of MailKey. A detailed description of the Merger Agreement and Plan of Merger, as amended, are set forth on Form 8-K, and Exhibits filed therewith, filed on April 9, 2004. Also on March 25, 2004 the Company issued an additional 2,590,013 shares of common stock to certain service providers in association with the consummation of the reverse merger transaction with Global Diversified Acquisition Corp. II-5 On March 18, 2004 the Company issued 200,000 shares of common stock valued at $606,000 to Corporate Communications Network, Inc. for consulting services received. The shares were issued in reliance on Section 4(2) of the Securities Act and contain a restrictive legend in accordance with Rule 144. ITEM 27. EXHIBITS. Exhibit Number Description - ------ ----------- 5.1 Legal Opinion 2.1 Agreement and Plan of Merger, dated February 20, 2004, by and among Global Diversified Acquisition Corp., G.D. Acquisition Corp., MK Secure Solutions Limited and Westvale Consulting Limited. 2.2 First Amendment to Agreement and Plan of Merger, dated March 23, 2004, by and among Global Diversified Acquisition Corp., G.D. Acquisition Corp., MK Secure Solutions Limited and Westvale Consulting Limited. 2.3 Agreement and Plan of Merger, dated November 9, 2004, by and among Mailkey Corporation, Mailkey Acquisition Corp., I-Element, Inc. and Ivan Zweig. 2.4 First Amendment and Waiver to Agreement and Plan of Merger, dated December 30, 2004, by and among Mailkey Corporation, Mailkey Acquisition Corp., I-Element, Inc. and Ivan Zweig. 3(i).1 Articles of Incorporation. 3(i).2 Amendment to Articles of Incorporation 3(i).3 Amendment to Articles of Incorporation 3(i).4 Amendment to Articles of Incorporation 3(i).5 Certificate of Correction 3(i).6 Amended Articles of Incorporation of Mailey Corporation dated August 1, 2005. 3(ii) Restated By-Laws of I-Element 10.1 Employment Agreement with Ivan Zweig in the form of Binding Letter of Intent dated January 18, 2005 10.2 Form of Warrant 10.3 Form of Amended and Restated Convertible Secured Promissory Notes dated March 25, 2006 10.4 Integrated Communications Consultants Corporation Master Services Agreement by and between Integrated Communications Consultants Corporation and IElement, Inc. dated April 30, 2003. 10.5 Lease Agreement between IElement, Inc. and 13714 Gamma, Ltd dated June 9, 2005. 10.6 Form of Vista Capital warrant 21.0 List of Subsidiaries 23.1 Consent of Auditor 23.2 Consent of Attorney (within Exhibit 5.1) II-6 ITEM 28. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii) Reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) Include any additional or changed information on the plan of distribution. (2) For determining liability under the Securities Act, the Registrant will treat each such post-effective amendment as a new registration statement of the securities offered, and the offering of such securities at that time to be the initial bona fide offering. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) For determining liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned small business issuer undertakes that in a primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: i. Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424; ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer; iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and iv. Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 24 above, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. II-8 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas on May 3, 2006. IELEMENT CORPORATION: By: /s/ Ivan Zweig ------------------------------ Name: Ivan Zweig Title: Chief Executive Officer, Chairman and Chief Financial Officer (Interim) IVAN ZWEIG /s/ Ivan Zweig - ------------------------------ Name: Ivan Zweig Title: Chief Executive Officer, Chairman and Chief Financial Officer (Interim) Director II-9 EX-2.1 2 ielement_ex0201.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER BY AND AMONG GLOBAL DIVERSIFIED ACQUISITION CORP. GD ACQUISITION CORP. WESTVALE CONSULTANTS, LTD. AND MK SECURE SOLUTIONS, LTD. DATED: FEBRUARY 20, 2004
TABLE OF CONTENTS ----------------- ARTICLE I THE MERGER..............................................................................................1 1.1 The Merger......................................................................................1 1.2 Conversion of Stock; Conversion of Outstanding Warrants.........................................2 1.3 Merger Consideration............................................................................4 1.4 Additional Rights; Taking of Necessary Action; Further Action...................................4 1.5 No Further Rights or Transfers..................................................................5 ARTICLE II THE CLOSING............................................................................................5 2.1 Closing Date....................................................................................5 2.2 Closing Transactions............................................................................5 ARTICLE III CERTAIN CORPORATE ACTION..............................................................................7 3.1 MailKey Corporate Action; MailKey Shareholder Consent...........................................7 3.2 Acquiror and Sub Corporate Action...............................................................8 ARTICLE IV REPRESENTATIONS AND WARRANTIES.........................................................................8 4.1 Representations and Warranties of MailKey.......................................................8 4.2 Representations and Warranties of Acquiror and Sub.............................................17 ARTICLE V AGREEMENTS OF THE PARTIES..............................................................................22 5.1 Access to Information..........................................................................22 5.2 Confidentiality; No Solicitation...............................................................22 5.3 Interim Operations.............................................................................25 5.4 Intentionally Omitted..........................................................................27 5.5 All Reasonable Efforts.........................................................................27 5.6 Public Announcements...........................................................................28 5.7 Notification of Certain Matters................................................................28 5.8 Expenses.......................................................................................28 5.9 Intentionally Omitted..........................................................................28 5.10 Intentionally Omitted..........................................................................28 5.11 Issuance of Common Stock.......................................................................28 5.12 Prohibition on Trading in Acquiror Securities..................................................28 5.13 Board of Directors.............................................................................29 5.14 Acknowledgment of Approvals....................................................................29 5.15 MailKey Financial Statements...................................................................29 5.16 Certain Post-Closing Corporate Actions.........................................................30 5.17 Production of Schedules and Exhibits...........................................................30 ARTICLE VI CONDITIONS TO CONSUMMATION OF THE MERGER..............................................................30 6.1 Conditions to Obligations of MailKey...........................................................30
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6.2 Conditions to Acquiror's Obligations...........................................................31 ARTICLE VII INDEMNIFICATION......................................................................................33 7.1 Indemnification by the Shareholder.............................................................33 7.2 Indemnification Procedures for Third-Party Claim...............................................33 7.3 Indemnification Procedures for Non-Third Party Claims..........................................34 7.4 Limitations on Indemnification.................................................................35 7.5 Exclusive Remedy...............................................................................35 ARTICLE VIII TERMINATION.........................................................................................35 8.1 Termination....................................................................................35 8.2 Notice and Effect of Termination...............................................................36 8.3 Extension; Waiver..............................................................................36 8.4 Amendment and Modification.....................................................................36 ARTICLE IX MISCELLANEOUS.........................................................................................36 9.1 Survival of Representations and Warranties; Remedies...........................................36 9.2 Limitations on Liability.......................................................................37 9.3 Notices........................................................................................37 9.4 Agreement; Assignment..........................................................................38 9.5 Binding Effect; Benefit........................................................................38 9.6 Headings.......................................................................................38 9.7 Counterparts...................................................................................38 9.8 Governing Law..................................................................................38 9.9 Arbitration....................................................................................38 9.10 Severability...................................................................................39 9.11 Certain Definitions............................................................................39
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EXHIBITS - -------- Exhibit 1.2(c) Form of Warrant Exhibit 1.2(d) Form of Option Exhibit 1.2(e) Form of Loan Unit Exhibit 2.2(a)(ii)(x) Form of U.S. Investment Letter Exhibit 2.2(a)(ii)(y) Form of Non-U.S. Investment Letter Exhibit 4.2(d)(i) Form of Acquiror Warrant SCHEDULES - --------- 1.3(b) MailKey Shareholders and Allocation of Merger Consideration 2.2(a)(ii)(x) U.S. MailKey Security Holders 2.2(a)(ii)(y) Non-U.S. MailKey Security Holders 4.1(a) Articles of Association and Bylaws of MailKey and each Subsidiary 4.1(c) Consents 4.1(e) MailKey GAAP Financial Statements 4.1(f)(i) Location of Leased Property 4.1(f)(ii) Written Notice of Governmental Entity 4.1(f)(iv) MailKey as Landlord 4.1(g) No Contingent Liabilities 4.1(h) Litigation 4.1(i) Taxes 4.1(j) Insurance Coverage 4.1(n)(i) Intellectual Property 4.1(n)(vii) Licenses and Rights 4.1(o) Accounts Receivable 4.1(p) MailKey Material Contracts 4.1(q) Labor Relations 4.1(r) Suppliers and Customers 4.1(u) Absence of Certain Changes or Events 4.2(a)(ii) Articles of Incorporation and Bylaws of Sub 4.2(l) Issuances of Securities 5.11 Issuance of S-8 Shares
iii AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT"), is made and entered into as of February 20, 2004, by and among GLOBAL DIVERSIFIED ACQUISITION CORP., a Nevada corporation ("ACQUIROR"), GD ACQUISITION CORP., a Delaware corporation and wholly-owned subsidiary of Acquiror ("SUB"), MK SECURE SOLUTIONS LTD., a British Virgin Islands private limited company ("MAILKEY"), and WESTVALE CONSULTANTS, LTD, a principal shareholder of MailKey (the "SHAREHOLDER"). RECITALS WHEREAS, Acquiror and Sub have determined that it is in the best interests of their shareholders for Sub to merge with MailKey upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, the respective Boards of Directors of Acquiror, Sub and MailKey have each approved this Agreement and the consummation of the transactions contemplated hereby and approved the execution and delivery of this Agreement; and WHEREAS, for federal income tax purposes, it is intended that the merger shall qualify as a reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"); NOW, THEREFORE, in consideration of the foregoing premises and representations, warranties and agreements contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. (a) Upon the terms and conditions of this Agreement, at the Effective Time (as defined herein), Sub shall be merged with and into MailKey (the "MERGER") in accordance with the provisions of the General Corporation Law of the State of Delaware (the "DGCL") and the corporate laws of the British Virgin Islands ("BVI"), the separate corporate existence of Sub shall cease and MailKey shall continue as the surviving corporation (the "SURVIVING CORPORATION") under the laws of the BVI. (b) The Merger shall become effective upon the later of (i) the filing and acceptance of a certificate of merger with the Secretary of State of the State of Delaware (the "CERTIFICATE OF MERGER") in accordance with the provisions of Section 252 of the DGCL; and (ii) the filing and acceptance of a certificate of merger with the Registrar of International Companies of BVI (the "BVI CERTIFICATE OF MERGER"). The date and time when the Merger shall become effective is referred to herein as the "EFFECTIVE TIME." (c) At the Effective Time: (i) MailKey shall continue its existence under the laws of the BVI as the Surviving Corporation; (ii) the separate corporate existence of Sub shall cease; (iii) all rights, title and interests to all assets, whether tangible or intangible and any property or property rights owned by Sub shall be allocated to and vested in the Surviving Corporation without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing liens or other Encumbrances thereon, and all liabilities and obligations of Sub shall be allocated to the Surviving Corporation, which shall be the primary obligor therefor and, except as otherwise provided by law or contract, no other party to the Merger, other than the Surviving Corporation, shall be liable therefor; and (iv) Each of Sub and MailKey shall execute and deliver, and file or cause to be filed with the Secretary of State of the State of Delaware the Certificate of Merger, and with the Registrar of International Companies of the BVI the BVI Certificate of Merger with such amendments thereto as the parties hereto shall deem mutually acceptable. (d) MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION. (i) The Memorandum of Association of MailKey, as in effect immediately prior to the Effective Time, shall be the Memorandum of Association of the Surviving Company until thereafter amended as provided therein or by applicable law. (ii) The Articles of Association of MailKey, as in effect immediately prior to the Effective Time, shall be the Articles of Association of the Surviving Company until thereafter amended as provided therein or by applicable law. (e) OFFICERS AND DIRECTORS. The officers and directors of MailKey immediately prior to the Effective Time shall be the officers and directors of the Surviving Company, and shall hold office in accordance with the Memorandum of Association and Articles of Association of the Surviving Company until the earlier of his resignation or removal or until his respective successor is duly elected and qualified, as the case may be. 1.2 CONVERSION OF STOCK; CONVERSION OF OUTSTANDING WARRANTS. (a) CONVERSION OF STOCK. At the Effective Time: (i) the shares representing 100% of the issued and outstanding ordinary shares of MailKey ("MAILKEY ORDINARY SHARES") as of the Closing (as that is defined in Section 2.1 hereof) shall, by virtue of the Merger and without any action on the part of the 2 holders of such shares, be converted into and represent the right to receive, and shall be exchangeable for the merger consideration set forth in Section 1.3 hereafter (the "MERGER CONSIDERATIOn"); (ii) the shares representing 100% of the issued and outstanding Preferred A Shares of MailKey ("MAILKEY PREFERRED A SHARES") as of the Closing shall, by virtue of the Merger and without any action on the part of the holders of such shares, be converted into and represent the right to receive, and shall be exchangeable for the Merger Consideration as set forth in Section 1.3 hereafter; (iii) the shares representing 100% of the issued and outstanding Preferred B Shares of MailKey ("MAILKEY PREFERRED B SHARES", and together with MailKey Ordinary Shares and MailKey Preferred A Shares, the "MAILKEY CAPITAL STOCK") as of the Closing shall, by virtue of the Merger and without any action on the part of the holders of such shares, be converted into and represent the right to receive, and shall be exchangeable for the Merger Consideration as set forth in Section 1.3 hereafter; (iv) each issued and outstanding share of common stock, $.001 par value per share, of Sub shall, by virtue of the merger, be converted into and become one (1) validly issued, fully paid and nonassessable ordinary share of the Surviving Corporation. (v) each share of capital stock of MailKey held in treasury as of the Effective Time shall, by virtue of the Merger, be canceled without payment of any consideration therefor and without any conversion thereof; (vi) each share of MailKey Capital Stock outstanding as of the Effective Time, by virtue of the Merger, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist. (b) TRANSFER; DELIVERY OF CERTIFICATES AFTER EFFECTIVE TIME. From and after the Effective Time, there shall be no transfers on the stock transfer books of MailKey of shares of its capital stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, certificates for shares of MailKey Capital Stock that were outstanding immediately prior to the Effective Time, shall be delivered to MailKey, they shall be canceled and exchanged for the consideration to be received therefore in connection with the Merger as provided in this Agreement. (c) CONVERSION OF OUTSTANDING WARRANTS. As of the date of this Agreement, as set forth on SCHEDULE 1.3(B), there are currently outstanding warrants to purchase an aggregate of 26,130 MailKey Ordinary Shares (collectively, the "MAILKEY WARRANTS"). At the Effective Time, holders of the MailKey Warrants (the "MAILKEY WARRANT HOLDERS") shall be entitled to receive, in exchange therefore, warrants (the "ACQUIROR WARRANTS") to purchase shares of common stock, $.001 par value per share, of Acquiror ("ACQUIROR COMMON STOCK"), substantially on the terms of the Form of Warrant attached hereto as EXHIBIT 1.2(C). Immediately prior to the Effective Time, each MailKey Warrant Holder shall surrender to Acquiror for cancellation all certificates or 3 agreements evidencing a MailKey Warrant and receive in exchange therefore the Acquiror Warrants. (d) CONVERSION OF OUTSTANDING OPTIONS. As of the date of this Agreement, as set forth on SCHEDULE 1.3(B), there are currently outstanding options to purchase an aggregate of 18,511 MailKey Ordinary Shares (collectively, the "MAILKEY OPTIONS"). At the Effective Time, holders of the MailKey Options (the "MAILKEY OPTION HOLDERS") shall be entitled to receive, in exchange therefore, options (the "ACQUIROR OPTIONS") to purchase shares of Acquiror Common Stock, substantially on the terms of the Form of Option attached hereto as EXHIBIT 1.2(D). Immediately prior to the Effective Time, each MailKey Option Holder shall surrender to Acquiror for cancellation all certificates or agreements evidencing a MailKey Option and receive in exchange therefore the Acquiror Options. (e) CONVERSION OF LOAN UNITS. As of the date of this Agreement, as set forth on SCHEDULE 1.3(B), there are currently outstanding loan units convertible into an aggregate of 4,500 MailKey Ordinary Shares (collectively, the "MAILKEY LOAN UNITS"). At the Effective Time, holders of the MailKey Loan Units (the "MAILKEY LOAN UNIT HOLDERS") shall be entitled to receive, in exchange therefore, loan units (the "ACQUIROR LOAN UNITS"; together with the Acquiror Capital Stock, Acquiror Warrants, and Acquiror Options, the "ACQUIROR SECURITIES") convertible into shares of Acquiror Common Stock, substantially on the terms of the Form of Loan Unit attached hereto as EXHIBIT 1.2(E). Immediately prior to the Effective Time, each MailKey Loan Unit Holder shall surrender to Acquiror for cancellation all certificates or agreements evidencing a MailKey Loan Unit and receive in exchange therefore the Acquiror Loan Units. 1.3 MERGER CONSIDERATION. (a) Subject to the provisions of Section 1.4 hereafter, the Merger Consideration, consisting of the total purchase price payable to the holders of one hundred percent (100%) of the outstanding MailKey Capital Stock (collectively, the "MAILKEY SHAREHOLDERS") in connection with the acquisition of MailKey by the Merger, shall consist of 25,000,000 newly issued shares of Acquiror Common Stock. (b) The Merger Consideration shall be allocated at Closing among the MailKey Shareholders in the proportion of their share ownership of the outstanding shares of MailKey Capital Stock at the Effective Time as set forth on SCHEDULE 1.3(B). It is intended that the delivery of the Merger Consideration shall qualify as a tax-free exchange under the Code. (c) The Acquiror Common Stock to be delivered at the Closing shall be fully paid and non-assessable and shall be free and clear of all liens, levies and Encumbrances except that such shares shall be "restricted securities" as this term is defined in the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations promulgated thereunder. 1.4 ADDITIONAL RIGHTS; TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of Acquiror, MailKey, Shareholder and Sub shall use their best efforts to take all such action as may be necessary and appropriate to effectuate the Merger under the laws 4 of the BVI and the DGCL as promptly as possible, including, without limitation, the filing of certificates of merger in Delaware and the BVI consistent with the terms of this Agreement. If at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement, the officers of such corporations are fully authorized in the name of their corporations or otherwise, and notwithstanding the Merger, to take, and shall take, all lawful and necessary action. 1.5 NO FURTHER RIGHTS OR TRANSFERS. At and after the Effective Time, the MailKey Capital Stock outstanding immediately prior to the Effective Time shall cease to provide the holder thereof any rights as a shareholder of MailKey, except for the right to surrender the certificate or certificates representing such shares and to receive the Merger Consideration to be received in the Merger as provided in this Agreement. ARTICLE II THE CLOSING 2.1 CLOSING DATE. Subject to satisfaction or waiver of all conditions precedent set forth in Section 6 of this Agreement, the closing of the Merger (the "CLOSING") shall take place at the offices of Spector Gadon & Rosen, P.C. at 10:00 a.m., local time on the day upon which all appropriate Acquiror, Sub and MailKey corporate action has been taken in accordance with Article III of this Agreement, the closing transactions under Section 2.2 have been completed and the last of the conditions precedent set forth in Article VI of this Agreement is fulfilled or waived or at such other time, date and place as the parties may agree. 2.2 CLOSING TRANSACTIONS. At the Closing, the following transactions shall occur, all of such transactions being deemed to occur simultaneously: (a) MailKey shall deliver, or cause to be delivered, to Acquiror and Sub, the following documents and shall take the following actions: (i) Certificates, if any, representing all of the issued and outstanding shares of MailKey Capital Stock; (ii) Investment letters (x) in the form attached to this Agreement as Exhibit 2.2(a)(ii)(x) (the "U.S. INVESTMENT LETTER") executed by the U.S. resident MailKey Shareholders, MailKey Warrant Holders, the MailKey Option Holders and the MailKey Loan Unit Holders listed on SCHEDULE 2.2(A)(II)(X) ("U.S. MAILKEY SECURITY HOLDERS") and (y) in the form attached to this Agreement as Exhibit 2.2(a)(ii)(y) (the "NON U.S. INVESTMENT LETTER") executed by the non-U.S. resident MailKey Shareholders, MailKey Warrant Holders, the 5 MailKey Option Holders and the MailKey Loan Unit Holders listed on SCHEDULE 2.2(A)(II)(Y) ("NON-U.S. MAILKEY SECURITY HOLDERS"); (iii) The MailKey Warrants and any certificates or agreements evidencing the MailKey Warrants for cancellation in accordance with Section 1.2(c) hereof; (iv) The MailKey Options and any certificates or agreements evidencing the MailKey Options for cancellation in accordance with Section 1.2(d) hereof; (v) The MailKey Loan Units and any certificates or agreements evidencing the MailKey Loan Units for cancellation in accordance with Section 1.2(e) hereof; (vi) A certificate executed by an authorized officer of MailKey to the effect that all representations and warranties made by MailKey in this Agreement are true and correct on and as of the Closing, as though originally given to Acquiror and Sub on said date; (vii) An incumbency certificate signed by all of the officers of MailKey dated at or about the Closing; (viii) Copy of Articles of Association of MailKey certified by the Secretary of MailKey at or about the Closing shall be delivered by MailKey; similar Articles, Regulations or other governing instruments will be delivered by each of the Subsidiaries; and (ix) Board resolution dated at or about the Closing authorizing the transactions contemplated by this Agreement and Written Notice (as defined in Section 3.1(a) certified by the Secretary of MailKey. (b) Acquiror will deliver, or shall cause to be delivered, to MailKey, the MailKey Warrant Holders and the MailKey Shareholders, as applicable, the following documents and shall take the following actions: (i) Acquiror shall deliver or shall cause to be delivered to the MailKey Shareholders certificates evidencing 25,000,000 shares of Acquiror Common Stock in payment of the Merger Consideration in accordance with Section 1.3(b); (ii) Acquiror shall deliver or cause to be delivered to the MailKey Warrant Holders, the Acquiror Warrants in accordance with Section 1.2(c); (iii) Acquiror shall deliver or cause to be delivered to the MailKey Option Holders, the Acquiror Options in accordance with Section 1.2(d); (iv) Acquiror shall deliver or cause to be delivered to the MailKey Loan Unit Holders, the Acquiror Loan Units in accordance with Section 1.2(e); (v) A certificate executed by an authorized officer of Acquiror to the effect that all representations and warranties of Acquiror under this Agreement are true and correct as of the Closing, as though originally given to MailKey on said date; 6 (vi) A certificate executed by an authorized officer of Sub to the effect that all representations and warranties of Sub under this Agreement are true and correct as of the Closing, as though originally given to MailKey and the MailKey Shareholders on said date; (vii) A certificate of good standing from the Secretary of State of the State of Nevada dated at or about the Closing that Acquiror is in good standing under the laws of said state; (viii) A certificate of good standing from the Secretary of State of the State of Delaware dated at or about the Closing that Sub is in good standing under the laws of said state; (ix) An incumbency certificate signed by all of the officers of Acquiror dated at or about the Closing; (x) An incumbency certificate signed by all of the officers of Sub dated at or about the Closing; (xi) Certificate of Incorporation of Acquiror certified by the Secretary of State of the State of Nevada at or about the Closing Date and a copy of the Bylaws of Acquiror certified by the Secretary of Acquiror dated at or about the Closing; (xii) Certificate of Incorporation of Sub certified by the Secretary of State of the State of Delaware at or about the Closing Date and a copy of the Bylaws of Sub certified by the Secretary of Sub dated at or about the Closing; (xiii) Board resolution of Acquiror dated at or about the Closing authorizing the transactions contemplated by this Agreement certified by the Secretary of Acquiror; and (xiv) Board and shareholder resolutions of Sub dated at or about the Closing authorizing the transactions contemplated by this Agreement certified by the Secretary of Sub. (c) Each of the parties to this Agreement shall have otherwise executed whatever documents and agreements, provided whatever consents or approvals and shall have taken all such actions as are required under this Agreement. ARTICLE III CERTAIN CORPORATE ACTION 3.1 MAILKEY CORPORATE ACTION; MAILKEY SHAREHOLDER CONSENT. (a) On or before the Closing, Shareholder, the holder of more than 50% of the votes of the MailKey Shareholders, having accepted Acquiror's offer to acquire all of the MailKey Capital Stock by way of merger as contemplated in this Agreement (the "QUALIFYING 7 OFFER"), pursuant to Regulation 105 of the Articles of Association of MailKey, will have notified the "Other Shareholders" (as defined in Regulation 107 of the Articles of Association) of their intention to accept such Qualifying Offer (the "WRITTEN NOTICE"), and such Written Notice shall be effective. The MailKey Shareholders will therefore be bound to accept such Qualifying Offer. (b) MailKey shall cause to occur all other corporate action necessary to effect the Merger and to consummate the other transactions contemplated hereby. 3.2 ACQUIROR AND SUB CORPORATE ACTION. Acquiror and Sub shall cause to occur all corporate action necessary to effect the Merger and to consummate the other transactions contemplated hereby. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 REPRESENTATIONS AND WARRANTIES OF MAILKEY. As a material inducement to Acquiror and Sub to execute this Agreement and consummate the Merger and other transactions contemplated hereby, MailKey and Shareholder, jointly and severally, hereby make the following representations and warranties to Acquiror and Sub. The representations and warranties are true and correct in all material respects at this date, and will be true and correct in all material respects on the Closing as though made on and as of such date. (a) CORPORATE EXISTENCE AND POWER. (i) MailKey is a corporation duly incorporated, validly existing and in good standing under the laws of the BVI, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to have any of the foregoing would not have a Material Adverse Effect. MailKey and each of its respective Subsidiaries, is duly qualified to do business as a foreign corporation and is in good standing in the UK and Singapore and in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. True, correct and complete copies of the Articles of Association of MailKey and its subsidiaries, as amended to date, are attached hereto as SCHEDULE 4.1(A) and are made a part hereof. (ii) MailKey owns no interest in any other entity other than MK Secure Solutions Limited (UK) and MailKey Asia PTE Ltd. (collectively the "Subsidiaries" and individually a "Subsidiary"). Each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the country of its incorporation, and has all corporate powers and all government licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to have any of the foregoing would not have a Material Adverse Effect. Each Subsidiary is duly qualified to do business as a foreign 8 corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities make such qualification necessary, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. (b) DUE AUTHORIZATION AND REQUISITE APPROVALS. (i) This Agreement has been duly authorized, executed and delivered by MailKey and constitutes a valid and binding agreement of MailKey enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, and other similar laws relating to, limiting or affecting the enforcement of creditors rights generally or by the application of equitable principles. As of the Closing all corporate action on the part of MailKey required under applicable law, its Articles of Association in order to consummate the Merger will have occurred. (ii) The Board of Directors of MailKey has approved the execution of this Agreement and the consummation of the Merger and all other transactions contemplated hereby. The MailKey Shareholders have consented by operation of the Written Notice (as defined in Section 3.1(a)) to the execution of this Agreement and the consummation of the Merger and all other transactions contemplated hereby. (c) NO CONTRAVENTION. The execution and delivery of the Agreement does not, and the consummation of the transactions contemplated hereby will not: (i) conflict with or result in any violation of any provision of the Articles of Association of MailKey or any of the Subsidiaries; or (ii) conflict with or result in any violation or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of a right or obligation or loss under, any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to MailKey or any of the Subsidiaries, or any of their respective properties or assets, or result in the creation or imposition of any mortgage, lien, pledge, charge or security interest of any kind ("ENCUMBRANCE") of MailKey or the Subsidiaries, except such as is not reasonably likely to have a Material Adverse Effect or prevent MailKey from consummating the transactions contemplated by this Agreement. Except as set forth on Schedule 4.1(c), no consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, is required by or with respect to MailKey or any Subsidiary in connection with the execution and delivery of this Agreement by MailKey or the consummation by MailKey of the transactions contemplated hereby, except the filing of the BVI Certificate of Merger. (d) CAPITALIZATION AND SHARE OWNERSHIP. The authorized capital stock of MailKey consists solely of 4,700,000 Ordinary Shares, 150,000 Preferred A Shares and 150,000 Preferred B Shares. The MailKey Preferred A 9 Shares, MailKey Preferred B Shares and MailKey Ordinary Shares have the rights and preferences set forth in the Articles of Association. There are currently 87,365.85 MailKey Ordinary Shares outstanding, 94,387 MailKey Preferred A Shares outstanding, and 68,247.15 MailKey Preferred B Shares outstanding, all of which are owned by the shareholders identified on SCHEDULE 1.3(B). The outstanding shares of capital stock of MailKey have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive rights. Except as set forth in this Section 4.1(d) or on SCHEDULE 1.3(B), there are outstanding (A) no shares of capital stock or other voting securities of MailKey, (B) no securities of MailKey convertible into or exchangeable for shares of capital stock or voting securities of MailKey and (C) no options, warrants or other rights to acquire from MailKey, the MailKey Shareholders, or any other Person, and no obligation of MailKey to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of MailKey, and there are no agreements or commitments to do any of the foregoing. There are no voting trusts or voting agreements applicable to any shares of capital stock of MailKey. The MailKey Capital Stock to be surrendered in the Merger will be owned of record and beneficially by the shareholders identified on SCHEDULE 1.3(B), free and clear of any Encumbrances or Rights. There are no agreements (other than this Agreement) to sell, pledge, assign or otherwise transfer such securities. All of the issued and outstanding shares of capital stock of the Subsidiaries are owned by MailKey, and there are no agreements (other than this Agreement) to sell, pledge assign or otherwise transfer such securities. (e) GAAP FINANCIAL STATEMENTS. Attached hereto as Schedule 4.1(e) are copies of consolidated financial statements of MailKey and the Subsidiaries for the period commencing March 11, 2003 (inception) through December 31, 2003 (the "GAAP Financial Statements"). The GAAP Financial Statements have been prepared from, and are in accordance with, the books and records of MailKey, comply in all material respects with applicable accounting requirements, have been prepared in accordance with United States generally accepted accounting principles consistently applied ("GAAP") throughout the periods reported upon and fairly present in all material respects the financial position of MailKey and its Subsidiaries as of the dates thereof and the results of operations and cash flows of MailKey and its Subsidiaries for the periods then ended. (f) REAL PROPERTIES. (i) MailKey and the Subsidiaries have good and marketable title to, and valid leasehold interests in, all of the properties and leasehold interests identified on SCHEDULE 4.1(F)(I) hereto pursuant to the true, correct and complete copies of the lease agreements attached to SCHEDULE 4.1(F)(I). MailKey and the Subsidiaries own or lease no other real estate. None of the leasehold interests held by MailKey or the Subsidiaries is subject to any Encumbrance, except (a) liens for ad valorem taxes not yet due or being contested in good faith; and (b) contractual or statutory mechanics or materialmen's liens or other statutory or common law Encumbrances relating to obligations of MailKey that are not delinquent or are being contested in good faith. There are no Encumbrances which materially interfere with the present use of such leasehold interests. 10 (ii) Except as described on SCHEDULE 4.1(F)(II) hereto neither MailKey nor any Subsidiary has received any written notice from any governmental entity having jurisdiction over MailKey or the Subsidiaries or over any of the real property leased by MailKey or the Subsidiaries of any violation by MailKey or the Subsidiaries of any law, regulation or ordinance relating to zoning, environmental matters, local building or fire codes or similar matters relating to any of the real property leased by MailKey or the Subsidiaries or of any condemnation or eminent domain proceeding. (iii) Except such as has not had and is not reasonably likely to have a Material Adverse Effect, all of the buildings leased by MailKey or the Subsidiaries and all plumbing, HVAC, electrical, mechanical and similar systems are in good repair and adequate for their current use, ordinary wear and tear excepted. (iv) Except as described on SCHEDULE 4.1(F)(IV), neither MailKey nor any Subsidiary is a party to any lease, sublease, lease assignment or other agreement for the use or occupancy of any of the leasehold premises wherein MailKey or the Subsidiary is the landlord, sub-landlord or assignor, whether by name, as successor-in-interest or otherwise. There are no outstanding agreements with any party to acquire the leasehold premises or any portion thereof or any interest therein. (v) All certificates of occupancy and all other licenses, permits, authorizations, consents, certificates and approvals required by all governmental authorities having jurisdiction over the leasehold premises occupied by MailKey or the Subsidiaries have been issued, are fully paid for and are in full force and effect, will survive the Closing and will not be invalidated, violated or otherwise adversely affected by the Merger or the other transactions contemplated by this Agreement. (g) NO UNDISCLOSED LIABILITIES. Except contained within the Financial Statements (as defined in Section 5.15) or otherwise as described on SCHEDULE 4.1(G), at the Closing, MailKey and the Subsidiaries shall have no material liabilities or indebtedness, whether related to tax or non-tax matters, known or unknown, due or not yet due, liquidated or unliquidated, fixed or contingent, determined or determinable in amount or otherwise, and to the Knowledge of MailKey, there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, except as and to the extent reflected on this Agreement or any Schedule or Exhibit hereto or which has been incurred in the ordinary course of business since December 31, 2003, and as accurately reflected on the books and records of MailKey or the Subsidiaries. (h) LITIGATION. Except as described on SCHEDULE 4.1(H) hereto there is no action, suit, investigation or proceeding (or, to the Knowledge of MailKey, any basis therefor) pending against, or to the Knowledge of MailKey, threatened against or affecting MailKey or the Subsidiaries or any of their properties before any court or arbitrator or any governmental body, agency or official that (i) if adversely determined against MailKey or the Subsidiaries, would 11 have a Material Adverse Effect or (ii) in any manner challenges or seeks to prevent, enjoin, alter or materially delay the Merger or any of the other transactions contemplated by the Agreement. (i) TAXES. Attached hereto on SCHEDULE 4.1(I) are true and correct copies of tax returns of MailKey and the Subsidiaries for the period of its existence. Except as disclosed on SCHEDULE 4.1(I), MailKey and the Subsidiaries have timely filed all tax returns required to be filed by them, or will timely file when due all tax returns required to be filed by them between the date hereof and the Closing. MailKey and the Subsidiaries have paid in a timely fashion or will pay when due in a timely fashion, all taxes required to be paid in respect of the periods covered by such returns, and the books and the GAAP Financial Statements of MailKey reflect adequate reserves for all taxes payable by MailKey and the Subsidiaries which have been, or will be, accrued but are not yet due. Neither MailKey nor any of the Subsidiaries is delinquent in the payment of any material tax, assessment or governmental charge. No deficiencies for any taxes have been proposed, asserted or assessed against MailKey or any Subsidiary. MailKey is not aware of any facts which would constitute the basis for the proposal or assertion of any such deficiency and there is no action, suit, proceeding, audit or claim now pending or threatened against MailKey or the Subsidiaries, asserting any deficiency in the payment of taxes. All taxes which MailKey or the Subsidiaries are required by law to withhold and collect have been duly withheld and collected, and have been timely paid over to the proper authorities to the extent due and payable. For the purposes of this Agreement, the term "TAX" shall include all federal, state, local and foreign income, property, sales, excise and other taxes of any nature whatsoever. Neither MailKey nor the Subsidiaries nor any member of any affiliated or combined group of which MailKey is or has been a member has granted any extension or waiver of the limitation period applicable to any tax returns. There are no Encumbrances for taxes upon the assets of MailKey or the Subsidiaries, except Encumbrances for current taxes not yet due Subsidiaries. There are no tax sharing or tax allocation agreements to which MailKey is now or ever has been a party. MailKey will not be required under Section 481(c) of the Code, to include any material adjustment in taxable income for any period subsequent to the Merger. MailKey (i) has not been a member of an affiliated group filing a consolidated federal income tax return (other than a group the common parent of which was MailKey) and (ii) has no liability for the taxes of any Person (other than MailKey) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise. (j) INSURANCE COVERAGE. SCHEDULE 4.1(J) sets forth a list of all MailKey key-man life insurance policies and other insurance policies material to the current and proposed business of MailKey and the Subsidiaries. MailKey and the Subsidiaries maintain insurance covering their assets, business, equipment, properties, operations, employees, officers and directors with such coverage, in such amounts, and with such deductibles and premiums as are consistent with insurance coverage provided for other companies of comparable size and in comparable industries. All of such policies are in full force and effect and all premiums payable have been paid in full and MailKey and the Subsidiaries are in full compliance with the terms and conditions of such policies. Neither MailKey nor any Subsidiary has received any notice from any issuer of such policies of 12 its intention to cancel or refusal to renew any policy issued by it or of its intention to renew any such policy based on a material increase in premium rates other than in the ordinary course of business. None of such policies are subject to cancellation by virtue of the Merger or the consummation of the other transactions contemplated by this Agreement. There is no claim by MailKey pending under any of such policies as to which coverage has been questioned or denied. (k) COMPLIANCE WITH LAWS. Neither MailKey nor any Subsidiary is in violation of, nor has any such entity violated, any applicable provisions of any laws, statues, ordinances or regulations, other than as would not be reasonably likely to have a Material Adverse Effect or constitute a felony. Without limiting the generality of the foregoing, MailKey and the Subsidiaries have all licenses, permits, certificates and authorizations needed or required for the conduct of business of MailKey and the Subsidiaries as presently conducted and for the use of its properties and premises occupied by it, except where the failure to obtain a licenses, permit, certificate or authorization would not have a Material Adverse Effect. (l) PERSONAL PROPERTY. MailKey and the Subsidiaries have good and valid title to all of their personal property, tangible and intangible, reflected on the Financial Statements and to all other personal property owned by them, free and clear of any Encumbrance. MailKey and the Subsidiaries are the owner of all of its personal property now located in or upon their leased premises and of all personal property which is used in the operation of their business. All such equipment, furniture and fixtures and other tangible personal property are in good operating condition and repair and do not require any repairs other than normal routine maintenance to maintain such property in good operating condition and repair. (m) ADVISORY FEES. There is no investment banker, broker, finder or other advisor which has been retained by, or is authorized by MailKey to act on its or their behalf, who might be entitled to any fee or commission from MailKey, Acquiror, Sub or any of their respective Affiliates upon consummation of this Merger. (n) INTELLECTUAL PROPERTY. (i) SCHEDULE 4.1(N)(I) sets forth a true and complete list of (A) all Patents, Trademarks, Copyrights and Software included in the Owned Intellectual Property, (B) all MailKey IP Agreements, and (C) all other Owned Intellectual Property material to the business of MailKey or the Subsidiaries. (ii) The operation of MailKey and the Subsidiaries as currently conducted or as contemplated to be conducted and the use of the Owned Intellectual Property and Licensed Intellectual Property in connection therewith do not conflict with, infringe, misappropriate or otherwise violate the intellectual property or other proprietary rights, including rights of privacy, publicity and endorsement, of any third party, and no actions, suits, 13 proceedings, investigations or claims are pending or, to the Knowledge of MailKey, threatened against MailKey alleging any of the foregoing. (iii) MailKey is the exclusive owner of the entire and unencumbered right, title and interest in and to the Owned Intellectual Property and the MailKey IP Agreements, and MailKey and the Subsidiaries have a valid right to use the Owned Intellectual Property and Licensed Intellectual Property in the ordinary course of its business as presently conducted or as contemplated to be conducted. (iv) No Owned Intellectual Property, or to the Knowledge of MailKey, any Licensed Intellectual Property, is subject to any outstanding decree, order, injunction, judgment or ruling restricting the use of such Intellectual Property or that would impair the validity or enforceability of such Intellectual Property. (v) The Owned Intellectual Property and the Licensed Intellectual Property include all of the Intellectual Property used in the ordinary day-to-day conduct of the business of MailKey and its Subsidiaries, and there are no other items of Intellectual Property that are material to the ordinary day-to-day conduct of such business. The Owned Intellectual Property and, to the Knowledge of MailKey, the Licensed Intellectual Property, are subsisting, valid and enforceable, and have not been adjudged invalid or unenforceable in whole or part. (vi) No actions or claims have been asserted or are pending or, to the Knowledge of MailKey, threatened against MailKey or any Subsidiary (A) based upon or challenging or seeking to deny or restrict the use by MailKey or any Subsidiary of any of the Owned Intellectual Property or Licensed Intellectual Property, (B) alleging that any services provided by, processes used by, or products manufactured or sold by MailKey or any Subsidiary infringe or misappropriate any Intellectual Property right of any third party or (C) alleging that the Licensed Intellectual Property is being licensed or sublicensed in conflict with the terms of any license or other agreement. (vii) Except as set forth in SCHEDULE 4.1(N)(VII), MailKey has not granted any license or other right to any third party with respect to the Owned Intellectual Property or Licensed Intellectual Property. The consummation of the transactions contemplated by this Agreement will not result in the termination or impairment of any of the Owned Intellectual Property. (o) ACCOUNTS RECEIVABLE. The accounts receivable of MailKey and its Subsidiaries referred to within the Financial Statements constitute valid claims in the full amount thereof against the debtors charged therewith on the books of MailKey and its Subsidiaries to which each such account is payable and has been acquired in the ordinary course of business. Except as set forth in Schedule 4.1(O), the accounts receivable are fully collectible to the extent of the face value thereof (less the amount of the allowance for the doubtful accounts reflected on the Financial Statements) in the due course of normal commercial dealings. 14 (p) MAILKEY MATERIAL CONTRACTS. Neither MailKey nor any Subsidiary is a party to or bound by any oral, written or implied contracts, agreements, leases, powers of attorney, guaranties, surety arrangements or other commitments, excluding contracts entered into in the ordinary course of business, the liabilities or commitments under which exceed $10,000 individually or $100,000 in the aggregate (the "MAILKEY MATERIAL CONTRACTS"), except for the leases and agreements described on Schedules 4.1(f)(i), (ii) and (iv), 4.1(j), 4.1(n)(vii) and 4.1(p). (q) LABOR RELATIONS Except as described on SCHEDULE 4.1(Q), as of the date of this Agreement (i) there are no activities or proceedings of any labor union to organize any non-unionized employees of MailKey or any of its Subsidiaries; (ii) there are no unfair labor practice charges and/or complaints pending against MailKey or any of its Subsidiaries before the National Labor Regulations Board, or any similar foreign labor relations governmental bodies, or any current union representation questions involving employees of MailKey or any of its Subsidiaries; and (iii) there is no strike, slowdown, work stoppage or lockout, or threat thereof, by or with respect to any employees of MailKey or any of its Subsidiaries. As of the date of this Agreement, neither MailKey nor any of its Subsidiaries is a party to any collective bargaining agreements. There are no controversies pending or threatened between MailKey and its Subsidiaries and any of their respective employees, except for such controversies that would not be reasonably likely to have a Material Adverse Effect. (r) SUPPLIERS AND CUSTOMERS. Set forth on SCHEDULE 4.1(R) is a list of the ten largest customers of MailKey and its Subsidiaries based on the percentage of revenue represented by those customers for the period ending September 30, 2003. The relationship of MailKey and its Subsidiaries with their suppliers and customers are good commercial working relationships and no material supplier or customer of MailKey and its Subsidiaries has canceled, curtailed or otherwise terminated or threatened to cancel or otherwise terminate, his or its relationship with MailKey or any of its Subsidiaries. MailKey has no Knowledge, or reason to believe, that the Merger or any other transaction contemplated hereby would adversely affect any such material supplier or customer relationship. (s) INTENTIONALLY OMITTED. (t) INTENTIONALLY OMITTED. (u) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as and to the extent set forth on the Financial Statements, to the extent contained in this Agreement, or as set forth on SCHEDULE 4.1(U), between December 31, 2003 (the date of the most recent Financial Statements) and the Closing, there will not be (i) any material adverse change in the business, assets, properties, results of operations, financial condition or prospects of MailKey or any of its Subsidiaries, (ii) any entry by MailKey or any of its 15 Subsidiaries into any material commitment or transaction which is not in the ordinary course of business; (iii) any change by MailKey or any of its Subsidiaries in accounting principles or methods except insofar as may be required by a change in generally accepted accounting principles; (iv) any declaration, payment or setting aside for payment of any dividends or other distributions (whether in cash, stock or property) in respect of capital stock of MailKey or any Subsidiary, or any direct or indirect redemption, purchase or any other type of acquisition by MailKey, or any direct or indirect redemption, purchase or any other type of acquisition by MailKey of any shares of its capital stock or any other securities for an aggregate sum not in excess of $10,000, (v) any agreement by MailKey, whether in writing or otherwise, to take any action which, if taken prior to the date of this Agreement, would have made any representation or warranty in this Section 4.1 untrue or incorrect; (vi) any acquisition of the assets of MailKey, other than in the ordinary course of business and consistent with past practice and not in excess of $25,000 in the aggregate; or (vii) any execution of any agreement with any executive officer of MailKey providing for his or her employment, or any increase in the compensation or in severance or termination benefits payable or to become payable by MailKey to its officers or key employees, or any material increase in benefits under any collective bargaining agreement or in benefits under any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, insurance or other plan or arrangement or understanding (whether or not legally binding) providing benefits to any present or former employee of MailKey. Since the date of the Financial Statements, there has not been and there is not threatened, any material adverse change in financial condition, business, results of operations or prospects of the business or any material physical damage or loss to any of the properties or assets of the business or to the premises occupied in connection with the business, whether or not such loss is covered by insurance. (v) INVESTMENT INTENT. The Acquiror Securities issued to the U.S. MailKey Security Holders are not being registered under the Securities Act on the basis of the statutory exemption provided by Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder, relating to transactions not involving a public offering. The Acquiror Securities issued to the Non-U.S. MailKey Security Holders are not being registered under the Securities Act on the basis of the statutory exemption provided by Regulation S promulgated thereunder, relating to offers and sales of Securities that occur outside of the United States. The Acquiror's reliance on these exemptions is based in part on the representations contained in the U.S. Investment Letters and the non-U.S. Investment Letters. (w) INVESTMENT BANKING FEES. There is no investment banker, broker, finder or other similar intermediary which has been retained by, or is authorized by MailKey to act on its or their behalf, who might be entitled to any fee or commission from MailKey, Acquiror, Sub or any of their respective affiliates upon consummation of this Merger. 16 (x) STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. Neither this Agreement, including all exhibits and schedules and other closing documents, nor any other financial statement, document or other instrument heretofore or hereafter furnished by MailKey to Acquiror or Sub in connection with the Merger or the other transactions contemplated hereby, contains or will contain any untrue statement of any material fact or omit or will omit to state any material fact required to be stated in order to make such statement, information, document or other instruments, in light of the circumstances in which they are made, not misleading. There is no fact known to MailKey which may have a Material Adverse Effect on the business, prospects, financial condition or results of operations of MailKey or of any of its properties or assets which has not been set forth in this Agreement as an exhibit or schedule hereto or disclosed by MailKey to the Acquiror prior to the execution of this Agreement. 4.2 REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB. As a material inducement to MailKey to execute this Agreement and to consummate the Merger and the other transactions contemplated hereby, Acquiror and Sub, hereby jointly and severally, make the following representations and warranties: (a) CORPORATE EXISTENCE AND POWER. (i) Acquiror is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with the corporate power and authority to own and operate its respective business as presently conducted, except where the failure to be or have any of the foregoing would not have a Material Adverse Effect. Acquiror is duly qualified as a foreign corporation or other entity to do business and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except for such failures to be so qualified or in good standing as would not have a Material Adverse Effect. (ii) Sub is the only subsidiary of Acquiror. Sub is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, with the corporate power and authority to own and operate its businesses as presently conducted, except where the failure to be or have any of the foregoing would not have a Material Adverse Effect. Sub is duly qualified as a foreign company or other entity to do business and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except for such failures to be so qualified or in good standing as would not, individually or in the aggregate, have a Material Adverse Effect. True, correct and complete copies of the Certificate of Incorporation and Bylaws, or similar organizational documents, of Sub, as amended to date, are attached hereto as SCHEDULE 4.2(A)(II) and are made a part hereof. 17 (b) DUE AUTHORIZATION. This Agreement, and as of the Closing the other agreements described herein to which Acquiror or Sub is a party, has been, or as of the Closing will be, duly authorized, executed and delivered by Acquiror or Sub, as applicable, and constitutes, or as of the Closing will constitute, a valid and binding agreement of Acquiror or Sub, as applicable, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, and other similar laws relating to, limiting or affecting the enforcement of creditors rights generally or by the application of equitable principles. As of the Closing all corporate action on the part of Acquiror and Sub required under applicable law in order to consummate the Merger will have occurred. (c) NO CONTRAVENTION. The execution and delivery of the Agreement does not, and the consummation of the transactions contemplated thereby will not (i) conflict with or result in any violation of any provision of the Certificate of Incorporation or Bylaws of Acquiror or Sub or (ii) conflict with or result in any violation or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any right or obligation or to a loss or a benefit under, any provision of the Certificate of Incorporation or Bylaws of Acquiror or Sub or any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Acquiror or Sub or their properties or assets or result in the creation or imposition of any Encumbrance on any asset of Acquiror or Sub, except, only as to clause (ii) above, such as is not reasonably likely to have a Material Adverse Effect or prevent Acquiror or Sub from consummating the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any Person, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, is required by or with respect to Acquiror or Sub in connection with the execution and delivery of this Agreement or the consummation by them of the transactions contemplated hereby, except the filing of the Certificate of Merger. (d) CAPITALIZATION. (i) The authorized capital stock of Acquiror consists of 100,000,000 shares of common stock, $.001 par value per share. The outstanding capital stock of the Acquiror consists solely of 318,018 shares of common stock. All shares of capital stock of Acquiror outstanding have been duly authorized and validly issued, are fully paid and nonassessable and are free of preemptive rights. There are currently: (A) 5,010,000 shares of Acquiror Common Stock approved for issuance under Acquiror's 2001 Employee Stock Compensation Plan, which shares were registered under the Securities Act pursuant to a Registration Statement on Form S-8, registration no. 333-109067, filed with the SEC on September 24, 2003 (the "Form S-8 Registration Statement"), of which 5,000,000 shares of Acquiror Common Stock are currently available for issuance (the "S-8 Shares"), and (B) warrants outstanding to acquire 200,000 shares of Acquiror Common Stock (the "Acquiror Warrants") in the Form of Acquiror Warrant attached hereto as EXHIBIT 4.2(d)(i). Upon the 18 issuance of the Acquiror Common Stock and the S-8 Shares contemplated hereby, such shares shall be duly authorized, validly issued, fully paid and nonassessable shares of capital stock of Acquiror. Acquiror's 2001 Employee Stock Compensation Plan has been duly authorized and approved by all necessary corporate action. The persons set forth on SCHEDULE 5.11 are the only persons to whom S-8 Shares will be issued, and each of such persons is an officer, director or employee of, or consultant to, Acquiror, or is such other person permitted under the Securities Act to receive the S-8 Shares. The S-8 Shares shall be issued solely for compensatory purposes, and not for the purpose of raising capital for Acquiror or Sub. Except as provided in this Section 4.2(d)(i), there are currently outstanding (A) no shares of capital stock or other voting securities of Acquiror, (B) no securities of Acquiror convertible into or exchangeable for shares of capital stock or voting securities of Acquiror and (C) no options, warrants or other rights to acquire shares of capital stock from Acquiror or any other Person, and no obligation of Acquiror to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of Acquiror, and there are no agreements or commitments to do any of the foregoing. There are no voting trusts or voting agreements applicable to any shares of capital stock of Acquiror. There are no agreements (other than this Agreement) to sell, pledge, assign or otherwise transfer such securities. (ii) The authorized capital stock of Sub consists solely of 1,000 shares of common stock, $.001 par value per share, of which 100 shares are issued and outstanding and owned of record and beneficially by Acquiror. The outstanding shares of Sub have been duly authorized and validly issued, and are fully paid and nonassessable and free of preemptive rights. (e) SEC REPORTS AND FINANCIAL STATEMENTS. Acquiror has filed with the SEC, and has heretofore made available to MailKey true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it under the Exchange Act or the Securities Act since April 1, 2001, including the Form S-8 Registration Statement (as such documents have been amended since the time of their filing, collectively, the "Acquiror SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the Acquiror SEC Documents, including any financial statements or schedules included therein (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, and (b) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. The S-8 Registration Statement was filed with the SEC on September 24, 2003, and is currently effective and has been effective at all times since such date. Each of the financial statements included in the Acquiror SEC Documents have been prepared from, and are in accordance with, the books and records of Acquiror, comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the financial positions and the results of operations and cash flows of Acquiror as of the dates thereof or for the periods presented therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount). 19 (f) ASSETS. Acquiror does not own or have any leasehold interest in any real property. Acquiror has good and marketable title to or the legal right to use, and holds free and clear of all Encumbrances, all of the assets reflected in the most recent financial statements contained in the Acquiror SEC Documents, except for those sold or otherwise disposed of since the date of such financial statements in the ordinary course of business consistent with past practice and not in violation of this Agreement. All assets of Acquiror that are used in the operations of its business are in good operating condition and repair, subject to normal wear and tear. None of the equipment and other assets owned or used by Acquiror is subject to any commitment or other arrangement for their sale or use by any Affiliate of Acquiror, or by third parties. (g) LITIGATION. There is no action, suit, investigation or proceeding (or, to the Knowledge of Acquiror or Sub any basis therefor) pending against, or to the Knowledge of Acquiror or Sub threatened, against or affecting Acquiror, Sub or any of their respective properties before any court or arbitrator or any governmental body, agency or official that (i) if adversely determined against Acquiror or Sub, would have a Material Adverse Effect or (ii) in any manner challenges or seeks to prevent, enjoin, alter or materially delay the Merger or any of the other transactions contemplated by the Agreement. (h) TAXES. Acquiror and Sub have timely filed (or has had timely filed on its behalf) with the appropriate tax authorities all tax returns required to be filed by them or on behalf of them, and each such tax return was complete and accurate in all material respects, and Acquiror and Sub have timely paid (or have had paid on their behalf) all material Taxes due and owing by it, regardless of whether required to be shown or reported on a tax return, including Taxes required to be withheld by it. No deficiency for a material Tax has been asserted in writing or otherwise, to Acquiror's Knowledge, against Acquiror or any Subsidiary or with respect to any Assets, except for asserted deficiencies that either (i) have been resolved and paid in full or (ii) are being contested in good faith. There are no material Liens for Taxes upon the Assets. (i) COMPLIANCE WITH LAWS. To the Knowledge of Acquiror and Sub, neither Acquiror nor Sub is in violation of, nor has either Acquiror or Sub violated, any applicable provisions of any laws, statues, ordinances or regulations, other than as would not be reasonably likely to have a Material Adverse Effect or constitute a felony. (j) ENVIRONMENTAL MATTERS. Except for such matters that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, Acquiror (i) has obtained all applicable permits, licenses and other authorizations that are required to be obtained under all applicable Environmental Laws by Acquiror in connection with its business; (ii) is in compliance with all 20 terms and conditions of such required permits, licenses and authorizations, and with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in or arising from applicable Environmental Laws in connection with its business; (iii) has not received notice of any part or present violations of Environmental Laws in connection with its business, or of any spill, release, event, incident, condition or action or failure to act in connection with its business that is reasonably likely to prevent continued compliance with such Environmental Laws, or which would give rise to any common law environmental liability or liability under Environmental Laws, or which would otherwise form the basis of any action against Acquiror based on or resulting from the manufacture, processing, use, treatment, storage, disposal, transport, or handling, or the emission, discharge or release into the environment, of any hazardous material by any Person in connection with Acquiror's business; and (iv) has taken all actions required under applicable Environmental Laws to register any products or materials required to be registered by Acquiror thereunder in connection with its business. (k) INSURANCE. Acquiror does not maintain any insurance covering its assets, business, equipment, properties, operations, employees, officers, directors and managers. (l) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on SCHEDULE 4.2(L) or as otherwise contemplated by this Agreement, since the date of the most recent financial statements contained in the Acquiror SEC Documents (i) there has been no change or development in, or effect on, Acquiror that has or could reasonably be expected to have a Material Adverse Effect, (ii) Acquiror has not sold, transferred, disposed of, or agreed to sell, transfer or dispose of, any material amount of its assets other than in the ordinary course of business, (iii) Acquiror has not paid any dividends or distributed any of its assets to any of its shareholders, (iv) Acquiror has not acquired any material amount of assets except in the ordinary course of business, nor acquired or merged with any other business, (v) Acquiror has not waived or amended any of its respective material contractual rights except in the ordinary course of business, and (vi) Acquiror has not entered into any agreement to take any action described in clauses (i) through (v) above. (m) ADVISORY FEES. There is no investment banker, broker, finder or other advisor which has been retained by, or is authorized by Acquiror or Sub to act on its or their behalf, who might be entitled to any fee or commission from MailKey, Acquiror, Sub or any of their respective Affiliates upon consummation of this Merger. (n) STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. Neither this Agreement, including all exhibits and schedules and other closing documents, nor any document filed with the SEC pursuant to Acquiror's reporting obligations under the Exchange Act, nor any other financial statement, document or other instrument 21 heretofore or hereafter furnished by Acquiror or Sub to MailKey in connection with the Merger or the other transactions contemplated hereby, or any information furnished by Acquiror or Sub taken as a whole contains or will contain any untrue statement of any material fact or omit or will omit to state any material fact required to be stated in order to make such statement, information, document or other instruments, in light of the circumstances in which they are made, not misleading. There is no fact known to Acquiror or Sub taken as a whole which may have a Material Adverse Effect on the business, prospects, financial condition or results of operations of Acquiror or Sub taken as a whole or of any of its properties or assets which has not been set forth in this Agreement as an exhibit or schedule hereto. ARTICLE V AGREEMENTS OF THE PARTIES 5.1 ACCESS TO INFORMATION. At all times prior to the Closing or the earlier termination of this Agreement in accordance with the provisions of Section 8, and in each case subject to Section 5.2 below, each of the parties hereto shall provide to the other parties (and the other parties' authorized representatives) full access during normal business hours and upon reasonable prior notice to the premises, properties, books, records, assets, liabilities, operations, contracts, personnel, financial information and other data and information of or relating to such party (including without limitation all written proprietary and trade secret information and documents, and other written information and documents relating to intellectual property rights and matters), and will cooperate with the other party in conducting its due diligence investigation of such party. 5.2 CONFIDENTIALITY; NO SOLICITATION. (a) CONFIDENTIALITY OF MAILKEY-RELATED INFORMATION. With respect to information concerning MailKey that is made available to Acquiror pursuant to the terms of this Agreement, Acquiror and Sub agree that they shall hold such information in strict confidence, shall not use such information except for the sole purpose of evaluating the Merger and related transactions contemplated in this Agreement and shall not disseminate or disclose any of such information other than to their directors, officers, employees, shareholders, Affiliates, agents and representatives who need to know such information for the sole purpose of evaluating the Merger and the related transactions (each of whom shall be informed in writing by Acquiror or Sub of the confidential nature of such information and directed by Acquiror or Sub in writing to treat such information confidentially). If this Agreement is terminated pursuant to the provisions of Section 8, Acquiror or Sub shall immediately return all such information, all copies thereof and all information prepared by Acquiror or Sub based upon the same. The above limitations on use, dissemination and disclosure shall not apply to information that (i) is learned by Acquiror or Sub from a third party entitled to disclose it; (ii) becomes known publicly other than through Acquiror, Sub or any party who received the same through Acquiror or Sub, provided that Acquiror or Sub has no Knowledge that the disclosing party was subject to an obligation of confidentiality; (iii) is 22 required by law or court order to be disclosed by Acquiror or Sub ; or (iv) is disclosed with the express prior written consent thereto of MailKey. Acquiror and Sub shall undertake all necessary steps to ensure that the secrecy and confidentiality of such information will be maintained in accordance with the provisions of this paragraph (a). Notwithstanding anything contained herein to the contrary, in the event a party is required by court order or subpoena to disclose information which is otherwise deemed to be confidential or subject to the confidentiality obligations hereunder, prior to such disclosure, the disclosing party shall: (A) promptly notify the non-disclosing party and, if having received a court order or subpoena, deliver a copy of the same to the non-disclosing party; (B) cooperate with the non-disclosing party, at the expense of the non-disclosing party in, obtaining a protective or similar order with respect to such information; and (C) provide only such of the confidential information as the disclosing party is advised by its counsel is necessary to strictly comply with such court order or subpoena. (b) CONFIDENTIALITY OF ACQUIROR-RELATED INFORMATION. With respect to information concerning Acquiror that is made available to MailKey pursuant to the provisions of this Agreement, MailKey agrees that they shall hold such information in strict confidence, shall not use such information except for the sole purpose of evaluating the Merger and the related transactions, and shall not disseminate or disclose any of such information other than to their directors, officers, employees, shareholders, Affiliates, agents and representatives who need to know such information for the sole purpose of evaluating the Merger and the related transactions (each of whom shall be informed in writing by MailKey of the confidential nature of such information and directed by such party in writing to treat such information confidentially). If this Agreement is terminated pursuant to the provisions of Section 8, MailKey agrees to return immediately all such information, all copies thereof and all information prepared by either of them based upon the same. The above limitations on use, dissemination and disclosure shall not apply to information that (i) is learned by MailKey from a third party entitled to disclose it; (ii) becomes known publicly other than through MailKey or any party who received the same through MailKey, provided that MailKey has no knowledge that the disclosing party was subject to an obligation of confidentiality; (iii) is required by law or court order to be disclosed by MailKey; or (iv) is disclosed with the express prior written consent thereto of Acquiror. MailKey agrees to undertake all necessary steps to ensure that the secrecy and confidentiality of such information will be maintained in accordance with the provisions of this paragraph (b). Notwithstanding anything contained herein to the contrary, in the event a party is required by court order or subpoena to disclose information which is otherwise deemed to be confidential or subject to the confidentiality obligations hereunder, prior to such disclosure, the disclosing party shall: (i) promptly notify the non-disclosing party and, if having received a court order or subpoena, deliver a copy of the same to the non-disclosing party; (ii) cooperate with the non-disclosing party at the expense of the non-disclosing party in obtaining a protective or similar order with respect to such information; and (iii) provide only such of the confidential information as the disclosing party is advised by its counsel is necessary to strictly comply with such court order or subpoena. 23 (c) NONDISCLOSURE. Neither MailKey, nor Acquiror or Sub shall disclose to the public or to any third party the existence of this Agreement or the transactions contemplated hereby or any other material non-public information concerning or relating to any other party hereto, other than with the express prior written consent of the other parties hereto, except as may be required by law or court order or to enforce the rights of such disclosing party under this Agreement, in which event the contents of any proposed disclosure shall be discussed with the other party before release; provided, however, that notwithstanding anything to the contrary contained in this Agreement, any party hereto may disclose this Agreement to any of its directors, officers, employees, shareholders, Affiliates, agents and representative who need to know such information for the sole purpose of evaluating the Merger, and to any Person whose consent is required in connection with the Merger or this Agreement. The parties anticipate issuing a mutually acceptable, joint press release announcing the execution of this Agreement and the consummation of the Merger. (d) NO SOLICITATION. In consideration of the substantial expenditure of time, effort and money to be undertaken by Acquiror and MailKey in connection with the transactions contemplated by this Agreement, neither MailKey or any of their respective Affiliates on the one hand nor Acquiror, Sub or Acquiror Shareholder on the other hand, will, prior to the Closing directly or indirectly, through any officer, director, agent or otherwise: (i) solicit, initiate or encourage the submission of inquiries, proposals or offers from any Person or entity relating to any acquisition or purchase of assets of or any equity interest in the other party or any Affiliate thereof or any tender offer (including a self-tender offer), exchange offer, merger, consolidation, business combination, sale of a substantial amount of assets or sale of securities, liquidation, dissolution or similar transaction involving the other party or its Affiliates (a "Transaction Proposal"); (b) enter into or participate in any discussions or negotiations regarding a Transaction Proposal, or furnish to any other Person or entity any information with respect to the business, properties or assets of the other party or its Affiliates in connection with a Transaction Proposal; or (c) otherwise cooperate in any way with, or assist or participate in, facilitate or encourage any effort or attempt by any other Person to do or seek a Transaction Proposal; provided, however, that the foregoing shall not prohibit Acquiror from (x) furnishing information concerning Acquiror and its businesses, properties or assets pursuant to an appropriate confidentiality agreement to a third party who has made an unsolicited Transaction Proposal and/or (y) engaging in discussions or negotiations with a third party who has made an unsolicited Transaction Proposal, but, in each case referred to in the foregoing clauses (x) and (y), only to the extent that the board of directors of Acquiror shall have concluded in good faith, after consulting with and considering the advise of outside counsel, that such action is required by the board of directors of Acquiror in the exercise of its fiduciary duties to the stockholders of Acquiror. Each party shall promptly notify the other party if any such proposal or offer, or any inquiry or contact with any Person or entity with respect thereto is made. Notwithstanding the foregoing, if either party terminates this Agreement, upon the other party's satisfaction of any obligation owing to the terminating party, the foregoing provision shall be of no force or effect. 24 5.3 INTERIM OPERATIONS. During the period from the date of this Agreement and continuing until the Closing: (a) INTERIM OPERATIONS OF MAILKEY. MailKey agrees (except as expressly contemplated by this Agreement, including any Exhibits and Schedules hereto, or to the extent that Acquiror shall otherwise consent in writing) that: (i) ORDINARY COURSE. MailKey and its Subsidiaries shall carry on their business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent with such business, use all reasonable efforts to preserve intact their present business organizations, keep available the services of their present officers and employees and preserve their relationships with customers, suppliers and others having business dealings with them; (ii) DIVIDENDS; CHANGES IN STOCK. MailKey and its Subsidiaries shall not and shall not propose to (a) declare, set aside or pay any dividend, on, or make other distributions in respect of, any of their capital stock, (b) split, combine or reclassify any of their capital stock or issue, authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of their capital stock (c) redeem, repurchase or otherwise acquire any shares of their capital stock or (d) otherwise change their capitalization. (iii) GOVERNING DOCUMENTS. MailKey shall not amend its Articles of Association. None of the Subsidiaries shall amend their respective corporate charters or governing documents. (iv) NO DISPOSITIONS. MailKey and its Subsidiaries shall not sell, lease, pledge, encumber or otherwise dispose of or agree to sell, lease, pledge, encumber or otherwise dispose of, any of their material assets except in the ordinary course of business consistent with prior practice and in no event amounting in the aggregate to more than $25,000 in value of such assets. (v) INDEBTEDNESS. MailKey and its Subsidiaries shall not incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others other than in the ordinary course of business consistent with prior practice or as otherwise set forth in SCHEDULE 1.3(B). (vi) BENEFIT PLANS; ETC. MailKey and its Subsidiaries shall not adopt or amend in any material respect any collective bargaining agreement or Employee Benefit Plan (as defined herein) which will have the result of increasing the cost of any such agreement or Employee Benefit Plan to Acquiror. 25 (vii) EXECUTIVE COMPENSATION. MailKey and its Subsidiaries shall not grant to any executive officer any increase in compensation or in severance or termination pay, or enter into any employment agreement with any executive officer. (viii) ACQUISITIONS. MailKey and its Subsidiaries shall not acquire (by merger, consolidation or acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or subdivision thereof, or make any investment by either purchase of stock or securities, contributions to capital, property transfer or, except in the ordinary course of business, purchase of any property or assets, of any other individual or entity. (ix) TAX ELECTIONS. MailKey and its Subsidiaries shall not make any material tax election or settle or compromise any material federal, state, local or foreign tax liability. (x) WAIVERS AND RELEASES. MailKey and its Subsidiaries shall not waive, release, grant or transfer any rights of material value or modify or change in any material respect any Material Agreement other than in the ordinary course of business and consistent with past practice. (xi) OTHER ACTIONS. MailKey and its Subsidiaries shall not enter into any agreement or arrangement to do any of the foregoing. MailKey and its Subsidiaries shall not take any action, or fail to take any action, that is reasonably likely to result in any of the representations and warranties of them set forth in this Agreement becoming untrue in any material respect. (b) INTERIM OPERATIONS OF ACQUIROR AND SUB. Acquiror and Sub agree (except as expressly contemplated by this Agreement, including any Exhibits and Schedules hereto, or to the extent that MailKey shall otherwise consent) that: (i) ORDINARY COURSE. Acquiror and Sub shall conduct no business activity other than in connection with the transactions contemplated by this Agreement. (ii) DIVIDENDS; CHANGES IN STOCK. Except as contemplated hereby or disclosed herein, neither Acquiror nor Sub shall (and neither shall propose to) (a) declare or pay any dividend, on, or make other distributions in respect of, any of its capital stock, (b) split, combine or reclassify any of its capital stock or issue, authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (c) repurchase or otherwise acquire any shares of its capital stock or (d) otherwise change its capitalization. (iii) ISSUANCE OF SECURITIES. Except as contemplated by this Agreement, Acquiror shall not sell, issue, pledge, authorize or propose the sale or issuance of, pledge or purchase or propose the purchase of, any shares of its capital stock of any class or securities convertible into, or rights, warrants or options to acquire, any such shares or other convertible securities. 26 (iv) GOVERNING DOCUMENTS. Acquiror and Sub shall not amend their charter documents. None of the Subsidiaries shall amend their respective corporate charters or governing documents. (v) NO DISPOSITIONS. Acquiror shall not sell, lease, pledge, encumber or otherwise dispose of or agree to sell, lease, pledge, encumber or otherwise dispose of, any of its material assets except in the ordinary course of business consistent with prior practice and in no event amounting in the aggregate to more than $5,000 in value of such assets. (vi) INDEBTEDNESS. Except as contemplated by this Agreement, Acquiror shall not incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others other than in the ordinary course of business consistent with prior practice and in no event amounting in the aggregate to more than $5,000. (vii) EXECUTIVE COMPENSATION. Acquiror shall not grant to any executive officer any increase in compensation or in severance or termination pay, or enter into any employment agreement with any executive officer. (viii) ACQUISITIONS. Acquiror shall not acquire (by merger, consolidation or acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or subdivision thereof, or make any investment by either purchase of stock or securities, contributions to capital, property transfer or, except in the ordinary course of business, purchase of any property or assets, of any other individual or entity. (ix) TAX ELECTIONS. Acquiror shall not make any material tax election or settle or compromise any material federal, state, local or foreign tax liability. (x) WAIVERS AND RELEASES. Acquiror shall not waive, release, grant or transfer any rights of material value or modify or change in any material respect any Material Agreement other than in the ordinary course of business and consistent with past practice. (xi) OTHER ACTIONS. Acquiror shall not enter into any agreement or arrangement to do any of the foregoing. Acquiror shall not take any action, or fail to take any action, that is reasonably likely to result in any of its representations and warranties set forth in this Agreement becoming untrue in any material respect. 5.4 INTENTIONALLY OMITTED. 5.5 ALL REASONABLE EFFORTS. Subject to the terms and conditions of this Agreement and to the fiduciary duties and obligations of the boards of directors of the parties hereto to their respective shareholders, as advised by their counsel, each of the parties to this Agreement shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, or to remove any injunctions or other 27 impediments or delays, legal or otherwise, as soon as reasonable practicable, to consummate the Merger and the other transactions contemplated by this Agreement. 5.6 PUBLIC ANNOUNCEMENTS. Acquiror, Sub and MailKey shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger, this Agreement or the other transactions contemplated by this Agreement and shall not issue any other press release or make any other public statement without prior consent of the other parties, except as may be required by law or, with respect to Acquiror, by obligations pursuant to rule or regulation of the Exchange Act, the Securities Act, any rule or regulation promulgated thereunder or any rule or regulation of the National Association of Securities Dealers. 5.7 NOTIFICATION OF CERTAIN MATTERS. MailKey shall give prompt notice to Acquiror, and Acquiror shall give prompt notice to MailKey, of (a) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which would cause any of its representations or warranties in this Agreement to be untrue or inaccurate in any material respect, as to MailKey, at or prior to the Closing, and, as to Acquiror or Sub, as of the Closing and (b) any material failure of MailKey, on the one hand, or Acquiror and Sub, on the other hand, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by them under this Agreement; provided, however, the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available to the party receiving such notice under this Agreement as expressly provided in this Agreement. 5.8 EXPENSES. All costs and expenses incurred in connection with the Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses whether or not the Merger is consummated. 5.9 INTENTIONALLY OMITTED. 5.10 INTENTIONALLY OMITTED. 5.11 ISSUANCE OF COMMON STOCK. On or before the Closing, Acquiror shall take all necessary action to authorize the issuance of 975,000 S-8 Shares to the persons set forth on SCHEDULE 5.11, and shall issue such S-8 Shares to such persons immediately after Closing. Such S-8 Shares shall be allocated among such persons as set forth on SCHEDULE 5.11. 5.12 PROHIBITION ON TRADING IN ACQUIROR SECURITIES. MailKey acknowledges that the United States securities laws prohibit any Person who has received material non-public information concerning the matters which are the subject 28 matter of this Agreement from purchasing or selling the securities of the Acquiror, or from communicating such information to any Person under circumstances in which it is reasonably foreseeable that such Person is likely to purchase or sell securities of the Acquiror. Accordingly, until such time as any such non-public information has been adequately disseminated to the public, MailKey shall not purchase or sell any securities of the Acquiror, or communicate such information to any other Person. 5.13 BOARD OF DIRECTORS. On or before the Closing, Acquiror shall obtain letters of resignation from Andrew J. Kacic, John W. Shaffer and Raymond J. Bills, constituting all of the members of its board of directors, and take all necessary corporation action, including amending Acquiror's bylaws if necessary, to appoint Tim Dean-Smith and Susan Walton (the "MAILKEY DESIGNEES") to serve as the directors of Acquiror, all to be effective at 12:00 noon eastern standard time on the first Business Day after the Closing. Acquiror shall comply with and immediately take all actions, if any, required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under this Section 5.13, including mailing to its shareholders the information required by such Section 14(f) and Rule 14f-1 as is necessary to enable the MailKey Designees to be appointed to the Acquiror's Board of Directors (the "Information Statement"). MailKey will supply the Acquiror with all information with respect to, and be solely responsible for all information with respect to, MailKey, the MailKey Designees and its officers, directors and Affiliates required by such Section 14(f) and Rule 14f-1. MailKey shall assume and be responsible for paying all reasonable costs associated with the preparation of the Information Statement, the filing of the Information Statement with the SEC, the distribution of the Information Statement to the shareholders of Acquiror, and any and all other reasonable costs associated with the fulfillment of Acquiror's obligations under Section 14(f) and Rule 14f-1 as they relate to the actions described in this Section 5.13. 5.14 ACKNOWLEDGMENT OF APPROVALS. By virtue of their respective signatures to this Agreement, Acquiror, Sub and MailKey acknowledge their approval of this Agreement and their consent to the consummation of the transactions identified herein. 5.15 MAILKEY FINANCIAL STATEMENTS. Prior to Closing, MailKey shall prepare and deliver to Acquiror copies of audited consolidated financial statements of MailKey and the Subsidiaries for the fiscal year ended March 31, 2003, together with a report containing an unqualified opinion thereon by an independent accountant authorized to practice before the SEC (which report may include one or more qualifications relating to MailKey's ability to continue as a going concern), and unaudited consolidated financial statements of MailKey and the Subsidiaries for the interim period ending December 31, 2003, which will have been reviewed by an independent accountant authorized to practice before the SEC (collectively, the "FINANCIAL STATEMENTS") which shall be attached hereto as SCHEDULE 4.1(E)(II). Such Financial Statements will have been prepared from, and will be in accordance with, the books and records of MailKey, will comply in all material respects with 29 applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, will have been prepared in accordance with GAAP applied on a consistent basis throughout the periods reported upon and will fairly present in all material respects the financial position of MailKey and its Subsidiaries as of the dates thereof and the results of operations and cash flows of MailKey and its Subsidiaries for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount). 5.16 CERTAIN POST-CLOSING CORPORATE ACTIONS. Commencing upon the Effective Time and continuing for a period of six (6) months thereafter, MailKey shall not (i) decrease the number of issued and outstanding shares of common stock of Acquiror held by each shareholder of record; (ii) issue for cash additional shares of common stock of Acquiror for a price per share that is less than the greater of (x) eighty percent (80%) of the closing price of the shares of common stock on the exchange or electronic trading system on which such shares are traded, as determined at the close of trading on the immediately preceding business day, or (y) $1.50 per share; nor (iv) issue more than 350,000 S-8 Shares, except that subsections (i), (ii), (iii), and (iv) shall not prevent MailKey from obtaining any vote of Acquiror's directors and shareholders during such six (6) month period necessary to effect any of the actions described in such subsections after the expiration of such six (6) month period. Commencing upon the Effective Time and continuing for a period of ninety (90) days thereafter, MailKey shall not cause Acquiror to file a registration statement with the SEC relating to the registration of any Acquiror Securities, except that MailKey shall not be prevented from obtaining any vote of Acquiror's directors and shareholders during such ninety (90) day period necessary to effect any of such actions after the expiration of such ninety (90) day period. 5.17 PRODUCTION OF SCHEDULES AND EXHIBITS. Each of the parties hereto shall utilize its reasonable best efforts to produce all Schedules and Exhibits required to be produced by it under this Agreement prior to the execution hereof. In the event that any party has not produced all Schedules and Exhibits required to be produced by it hereunder prior to the execution of this Agreement, unless otherwise provided herein, all such Schedules and Exhibits shall be produced by such party not later than three (3) Business Days prior to the Closing. The Schedules and Exhibits produced subsequent to the execution of this Agreement, shall be given such force and effect as though such Schedules and Exhibits which were produced upon execution of this Agreement. ARTICLE VI CONDITIONS TO CONSUMMATION OF THE MERGER 6.1 CONDITIONS TO OBLIGATIONS OF MAILKEY. The obligations of MailKey to consummate the Merger and the other transactions contemplated to be consummated by them at the Closing are subject to the satisfaction (or waiver by MailKey) at or prior to the Closing (or at such other time prior thereto as may be expressly provided in this Agreement) of each of the following conditions: 30 (a) The representations and warranties of Acquiror and Sub set out in this Agreement shall be true and correct in all material respects at and as of the time of the Closing as though such representations and warranties were made at and as of such time; (b) Acquiror shall have complied in a timely manner and in all material respects with the respective covenants and agreements set out in this Agreement; (c) The Merger shall have been approved by Sub in accordance with the provisions of the DGCL. The Board of Directors of Sub and Acquiror shall have approved the execution of this Agreement and the Merger thereby; (d) There shall be delivered to MailKey an officer's certificate of Acquiror to the effect that all of the representations and warranties of Acquiror set forth herein are true and correct in all material respects as of the Closing, and the Acquiror has complied in all material respects with the covenants and agreements set forth herein that are required to be complied with by the Closing; (e) There shall be delivered to MailKey an officer's certificate of Sub to the effect that all of the representations and warranties of Sub set forth herein are true and complete in all material respects as of the Closing, and Sub has complied in all material respects with the covenants and agreements set forth herein that are required to be complied with by the Closing; (f) All director, shareholder, lender, lessor and other parties' consents and approvals, as well as all filings with, and all necessary consents or approvals of, all federal, state and local governmental authorities and agencies, as are required under this Agreement, applicable law or any applicable contract or agreement (other than as contemplated by this Agreement) to complete the Merger shall have been secured; and (g) No statute, rule, regulation, executive order, decree, injunction or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or governmental authority that prohibits or restricts the consummation of the Merger or the related transactions. 6.2 CONDITIONS TO ACQUIROR'S OBLIGATIONS. The obligations of Acquiror and Sub to consummate the Merger and the other transactions contemplated to be consummated by them at the Closing are subject to the satisfaction (or waiver by Acquiror and Sub) at or prior to the Closing (or at such other time prior thereto as may be expressly provided in this Agreement) of each of the following conditions: (a) The representations and warranties of MailKey set out in this Agreement shall be true and correct in all material respects at and as of the time of the Closing as though such representations and warranties were made at and as of such time; (b) MailKey shall have complied in a timely manner and in all material respects with its covenants and agreements set out in this Agreement; 31 (c) There shall be delivered to Acquiror an officer's certificate of MailKey to the effect that all of the representations and warranties of MailKey set forth herein are true and correct in all material respects as of the Closing, and that MailKey has complied in all material respects with covenants and agreements set forth herein required to be complied with by the Closing; (d) There shall be delivered to Acquiror a certificate signed by the Shareholder to the effect that the representations and warranties of MailKey and the Shareholder set forth herein and true and correct in all material respects and that MailKey and the Shareholder have complied in all material respects with their covenants and agreements required to be complied with by the Closing; (e) MailKey shall have secured the written consent of the holders of 100% of the MailKey Capital Stock by way of Written Notice as described in Section 3.1(a) hereof; (f) All U.S. MailKey Security Holders shall have executed and delivered U.S. Investment Letters and Non-U.S. MailKey Security Holders shall have executed and delivered Non-U.S. Investment Letters; (g) Intentionally Omitted. (h) All director, shareholder, lender, lessor and other parties' consents and approvals, as well as all filings with, and all necessary consents or approvals of, all federal, state and local governmental authorities and agencies, as are required under this Agreement, applicable law or any applicable contract or agreement (other than as contemplated by this Agreement) to complete the Merger shall have been secured; (i) A comparison of the GAAP Financial Statements and the Financial Statements shall not reveal any changes in the financial position and the results of operations and cash flows of MailKey and its Subsidiaries that, if evaluated collectively as a single change resulting from a single event occurring subsequent to the date of delivery of the GAAP Financial Statements to Acquiror and the date of delivery of the Financial Statements to Acquiror, would constitute and event having a Material Adverse Effect on MailKey and the Subsidiaries collectively. (j) The Board of Directors of MailKey and the MailKey Shareholders by way of Written Notice as provided in Section 3.1 shall have approved the Merger in accordance with the BVI laws; and (k) No statute, rule, regulation, executive order, decree, injunction or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or governmental authority that prohibits or restricts the consummation of the Merger or the related transactions. 32 ARTICLE VII INDEMNIFICATION 7.1 INDEMNIFICATION BY THE SHAREHOLDER. From and after the Closing Date, the Shareholder shall indemnify and hold harmless Acquiror and Sub and their respective officers, directors and shareholders (each an "Indemnified Party"), from and against any and all demands, claims, actions or causes of action, judgments, assessments, losses, liabilities, damages or penalties and reasonable attorneys' fees and related disbursements (collectively, "Claims") suffered by such Indemnified Party resulting from or arising out of (i) any inaccuracy in or breach of any of the representations or warranties made by MailKey or the Shareholder at the time they were made, and, except for representations and warranties that speak as of a specific date or time (which need only be true and correct as of such date or time), on and as of the Closing Date, (ii) any breach or nonfulfillment of any covenants or agreements made by MailKey or the Shareholder, and (iii) any misrepresentation made by MailKey or the Shareholder, in each case as made herein or in the Schedules or Exhibits annexed hereto or in any closing certificate, schedule or any ancillary certificates or other documents or instruments furnished by MailKey or the Shareholder pursuant hereto or in connection with the Merger. 7.2 INDEMNIFICATION PROCEDURES FOR THIRD-PARTY CLAIM. (a) Upon obtaining knowledge of any Claim by a third party which has given rise to, or is expected to give rise to, a claim for indemnification hereunder, Acquiror shall give written notice ("Notice of Claim") of such claim or demand to the Shareholder, specifying in reasonable detail such information as the Indemnified Party may have with respect to such indemnification claim (including copies of any summons, complaint or other pleading which may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). Subject to the limitations set forth in Section 7.2(b) hereof, no failure or delay by Acquiror in the performance of the foregoing shall reduce or otherwise affect the obligation of the Shareholder to indemnify and hold the Indemnified Party harmless, except to the extent that such failure or delay shall have actually adversely affected the Shareholder's ability to defend against, settle or satisfy any Claims for which the Indemnified Party is entitled to indemnification hereunder. (b) If the claim or demand set forth in the Notice of Claim given by Acquiror pursuant to Section 7.2(a) hereof is a claim or demand asserted by a third party, the Shareholder shall have fifteen (15) days after the date on which Notice of Claim is given to notify Acquiror in writing of its election to defend such third party claim or demand on behalf of the Indemnified Party. If the Shareholder elects to defend such third party claim or demand, Acquiror shall make available to the Shareholder and its agents and representatives all records and other materials that are reasonably required in the defense of such third party claim or demand and shall otherwise cooperate with, and assist the Shareholder in the defense of, such third party claim or demand, and so long as the Shareholder is defending such third party claim in good faith, the Indemnified Party shall not pay, settle or compromise such third party claim or demand. If the Shareholder 33 elects to defend such third party claim or demand, the Indemnified Party shall have the right to participate in the defense of such third party claim or demand, at such Indemnified Party's own expense. In the event, however, that such Indemnified Party reasonably determines that representation by counsel to the Shareholder of both the Shareholder and such Indemnified Party could reasonably be expected to present counsel with a conflict of interest, then the Indemnified Party may employ separate counsel to represent or defend it in any such action or proceeding and the Shareholder will pay the fees and expenses of such counsel. If the Shareholder does not elect to defend such third party claim or demand or does not defend such third party claim or demand in good faith, the Indemnified Party shall have the right, in addition to any other right or remedy it may have hereunder, at the Shareholder's expense, to defend such third party claim or demand; provided, however, that (i) such Indemnified Party shall not have any obligation to participate in the defense of, or defend, any such third party claim or demand; (ii) such Indemnified Party's defense of or its participation in the defense of any such third party claim or demand shall not in any way diminish or lessen the obligations of the Shareholder under the agreements of indemnification set forth in this Article VII; and (iii) such Indemnified Party may not settle any claim without the consent of the Shareholder, which consent shall not be unreasonably withheld or delayed. (c) MailKey and the Shareholder, and Acquiror, Sub and the other Indemnified Parties, if any, shall cooperate fully in all aspects of any investigation, defense, pre-trial activities, trial, compromise, settlement or discharge of any claim in respect of which indemnity is sought pursuant to this Article VII, including, but not limited to, by providing the other party with reasonable access to employees and officers (including as witnesses) and other information. (d) Except for third party claims being defended in good faith, the Shareholder shall satisfy its obligations under this Article VII in respect of a valid claim for indemnification hereunder that is not contested by MailKey in good faith in cash within thirty (30) days after the date on which Notice of Claim is given. 7.3 INDEMNIFICATION PROCEDURES FOR NON-THIRD PARTY CLAIMS. In the event any Indemnified Party should have an indemnification claim against the Shareholder under this Agreement that does not involve a claim by a third party, the Indemnified Party shall promptly deliver notice of such claim to the Shareholder in writing and in reasonable detail. The failure by any Indemnified Party to so notify the Shareholder shall not relieve the Shareholder from any liability that it may have to such Indemnified Party, except to the extent that the Shareholder has been actually prejudiced by such failure. If the Shareholder does not notify the Indemnified Party within fifteen (15) Business Days following its receipt of such notice that the Shareholder disputes such claim, such claim specified by the Shareholder in such notice shall be conclusively deemed a liability of the Shareholder under this Article VII and the Shareholder shall pay the amount of such liability to the Indemnified Party on demand, or in the case of any notice in which the amount of the claim is estimated, on such later date when the amount of such claim is finally determined. If the Shareholder disputes its liability with respect to such claim in a timely manner, Shareholder and the Indemnified Party shall proceed in good 34 faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be submitted to arbitration pursuant to Section 9.9. 7.4 LIMITATIONS ON INDEMNIFICATION. No claim for indemnification under this Article VII shall be asserted by, and no liability for such indemnify shall be enforced against, the Shareholder to the extent the Indemnified Party has theretofore received indemnification or otherwise been compensated for such Claim. In the event that an Indemnified Party shall later collect any such amounts recovered under insurance policies with respect to any Claim for which it has previously received payments under this Article VII from the Shareholder, such Indemnified Party shall promptly repay to the Shareholder such amount recovered. 7.5 EXCLUSIVE REMEDY. The indemnification provisions of this Article VII shall be the exclusive remedy following the Closing with respect to breaches thereof and shall be limited as provided in Section 9.2. The obligations of the parties set forth in this Article VII shall be conditioned upon the Closing having occurred. ARTICLE VIII TERMINATION 8.1 TERMINATION. This Agreement may be terminated and the Merger may be abandoned at any time prior to or at the Closing: (a) by mutual written consent of Acquiror, Sub and MailKey; (b) by any of Acquiror, Sub or MailKey: (i) if the Closing shall not have occurred on or before March 31, 2004, unless otherwise extended in writing by all of the parties hereto; provided, however, that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before that date; or (ii) if any court of competent jurisdiction, or any governmental body, regulatory or administrative agency or commission having appropriate jurisdiction shall have issued an order, decree or filing or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable; (c) by MailKey if any of the conditions specified in Section 6.1 have not been met or if satisfaction of such a condition is or becomes impossible (other than through the failure 35 of MailKey to comply with their respective obligations under this Agreement) and MailKey has not waived such conditions on or before the Closing; or (d) by Acquiror if any of the conditions specified in Section 6.2 have not been met or if satisfaction of such a condition is or becomes impossible (other than through the failure of Acquiror or Sub to comply with their respective obligations under this Agreement) and Acquiror or Sub has not waived such condition on or before the Closing. 8.2 NOTICE AND EFFECT OF TERMINATION. In the event of the termination and abandonment of this Agreement pursuant to Section 8.1, written notice thereof shall forthwith be given to the other party or parties specifying the provision pursuant to which such termination is made. Upon termination, this Agreement shall forthwith become void and all obligations of the parties under this Agreement will terminate without any liability on the part of any party or its directors, officers or shareholders and none of the parties shall have any claim or action against any other party, except that the provisions of this Section 8.2 and Sections 5.2, 5.6 and 5.8, shall survive any termination of this Agreement. Nothing contained in this Section 8.2 shall relieve any party from any liability for any breach of this Agreement other than in the event of a termination pursuant to Section 8.1. 8.3 EXTENSION; WAIVER. Any time prior to the Closing, the parties may (a) extend the time for the performance of any of the obligations or other acts of any other party under or relating to this Agreement; (b) waive any inaccuracies in the representations or warranties by any other party or (c) waive compliance with any of the agreements of any other party or with any conditions to its own obligations. Any agreement on the part of any other party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. 8.4 AMENDMENT AND MODIFICATION. This Agreement may be amended by written agreement of Acquiror, Sub and MailKey. ARTICLE IX MISCELLANEOUS 9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; REMEDIES. All representations and warranties contained in or made pursuant to this Agreement or in any agreement, certificate, document or statement delivered pursuant hereto shall survive the Closing for a period of twelve (12) months from the Closing Date, unless otherwise specified in such agreement, certificate or document; provided, however, that notwithstanding the foregoing, the representations and warranties set forth in Sections 4.1(a), (b), (d), (e), (g), (i) and (u) and Sections 4.2(a), (b), (d), (e), (g), (i) and (j) and all covenants and agreements of the parties relating to the subject matter(s) thereof shall survive the Closing 36 without such applicable limitation. The right to indemnification, payment of damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages, or other remedy based on such representations, warranties, covenants, and obligations. The rights and remedies of the parties to this Agreement are cumulative, not alternative. In addition to their respective rights to damages or other remedies they may have, and without limitation thereof, Acquiror shall have the right to obtain injunctive relief to restrain any breach or otherwise to specifically enforce the provisions of this Agreement, it being agreed by the parties that money damages alone would be inadequate to compensate Acquiror for such breach or other failure to perform the obligations of MailKey under this Agreement. 9.2 LIMITATIONS ON LIABILITY No party to this agreement shall be liable to any other party for breach of its respective representations and warranties in Article 4, unless and until the aggregate amount of all claims exceeds $25,000 (the "Deductible"), and then only to the extent of amounts in excess of the Deductible. Further, in no event shall any party's liability for breach of its respective representations and warranties in Article 4 exceed $300,000. 9.3 NOTICES. All notices requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given on the date if delivered personally, or upon the second Business Day after it shall have been deposited by certified or registered mail with postage prepaid, or sent by telex, telegram or telecopier, as follows (or at such other address or facsimile number for a party as shall be specified by like notice):
IF TO MAILKEY OR SHAREHOLDER: WITH A COPY TO: ---------------------------- -------------- MailKey Secure Solutions, Ltd. Spector Gadon & Rosen, P.C. P.O. Box 3321 Seven Penn Center Road Town, Tortola 1635 Market Street British Virgin Islands 7th Floor Attention: Tim Dean-Smith Philadelphia, PA 19103 Attention: Vincent A. Vietti, Esq.
37
IF TO ACQUIROR OR SUB: WITH A COPY TO: --------------------- -------------- Global Diversified Acquisition Corp. Brown Rudnick Berlack Israels 7025 E. First Avenue 120 West 45th Street Suite 5 New York, New York 10036 Scotsdale, Arizona 85251 Attention: Steven Saide, Esq. Attention: Andrew J. Kacic
9.4 AGREEMENT; ASSIGNMENT. This Agreement, including all Exhibits and Schedules hereto, constitutes the entire Agreement among the parties with respect to its subject matter and supersedes all prior agreements and understandings, both written and oral, among the parties or any of them with respect to such subject matter and shall not be assigned by operation of law or otherwise. 9.5 BINDING EFFECT; BENEFIT. This Agreement shall inure to the benefit of and be binding upon the parties and their respective successors and assigns. Nothing in this Agreement is intended to confer on any Person other than the parties to this Agreement or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.6 HEADINGS. The descriptive headings of the sections of this Agreement are inserted for convenience only, do not constitute a part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. 9.7 COUNTERPARTS. This Agreement may be executed in two or more counterparts and delivered via facsimile, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. 9.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, except to the extent that the Nevada General Corporation Law shall apply to the internal corporate governance of the Acquiror or the BVI law shall apply to the internal corporate governance of MailKey, without regard to the laws that might otherwise govern under principles of conflicts of laws applicable thereto. 9.9 ARBITRATION. If a dispute arises as to the interpretation of this Agreement, it shall be decided finally in an arbitration proceeding conforming to the Rules of the American Arbitration 38 Association applicable to commercial arbitration then in effect at the time of the dispute. The arbitration shall take place in Philadelphia, Pennsylvania. The decision of the Arbitrators shall be conclusively binding upon the parties and final, and such decision shall be enforceable as a judgment in any court of competent jurisdiction. The parties shall share equally the costs of the arbitration. 9.10 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 9.11 CERTAIN DEFINITIONS. As used herein: (a) "AFFILIATE" shall have the meanings ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act; (b) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which federally chartered financial institutions are not open for business in the City of Philadelphia, Pennsylvania; (c) "COPYRIGHTS" means mask works, rights of publicity and privacy, and copyrights in works of authorship of any type, including Software, registrations and applications for registration thereof throughout the world, all rights therein provided by international treaties and conventions, all moral and common law rights thereto, and all other rights associated therewith; (d) "ENCUMBRANCES" shall mean any security or other property interest or right, claim, lien, pledge, option, charge, security interest, contingent or conditional sale, or other title claim or retention agreement, interest or other right or claim of third parties, whether perfected or not perfected, voluntarily incurred or arising by operation of law, and including any agreement to grant or submit to any of the foregoing in the future; (e) "ENVIRONMENTAL LAW" shall mean any applicable statute, rule, regulation, law, bylaw, ordinance or directive of any nation or government, any state, municipality or other political subdivision thereof and any entity, body, agency, commission or court, whether domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any executive official thereof, dealing with the pollution or protection of natural resources or the indoor or ambient environment or with the protection of human health or safety; (f) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended; 39 (g) "INTELLECTUAL PROPERTY" means (a) Patents, (b) Trademarks, (c) Copyrights, (d) Trade Secrets and (e) Software; (h) "KNOWLEDGE" means an individual will 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 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 existence of such fact or other matter. (ii) A Person (other than an individual) will 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, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter; (i) "LICENSED INTELLECTUAL PROPERTY" means Intellectual Property licensed to MailKey or its Subsidiaries pursuant to the MailKey IP Agreements; (j) "MAILKEY IP AGREEMENTS" means (a) licenses of Intellectual Property by MailKey or its Subsidiaries to any third party, (b) licenses of Intellectual Property by any third party to MailKey or its Subsidiaries, (c) agreements between MailKey or its Subsidiaries and any third party relating to the development or use of Intellectual Property, the development or transmission of data, or the use, modification, framing, linking, advertisement, or other practices with respect to Internet web sites, and (d) consents, settlements, decrees, orders, injunctions, judgments or rulings governing the use, validity or enforceability of MailKey Intellectual Property; (k) "MAILKEY SOFTWARE" means all Software (a) material to the operation of the business of MailKey or its Subsidiaries or (b) manufactured, distributed, sold, licensed or marketed by MailKey or its Subsidiaries; (l) "MATERIAL ADVERSE EFFECT" shall mean any adverse effect on the business, condition (financial or otherwise) or results of operation of the relevant party and its subsidiaries, if any, which is material to such party and its subsidiaries, if any, taken as a whole; (m) "OWNED INTELLECTUAL PROPERTY" means Intellectual Property owned by MailKey or its Subsidiaries; (n) "PATENTS" means United States, foreign and international patents, patent applications and statutory invention registrations, including reissues, divisions, continuations, continuations-in-part, extensions and reexaminations thereof, and all rights therein provided by international treaties and conventions; (o) "PERSON" means any individual, corporation, partnership, association, trust or other entity or organization, including a governmental or political subdivision or any agency or institution thereof; 40 (p) "RIGHTS" shall mean any and all outstanding subscriptions, warrants, options, voting agreements, voting trusts, proxies, or other arrangements or commitments obligating or which may obligate a Person to dispose of or vote any shares; (q) "SOFTWARE" means computer software, programs and databases in any form, including Internet web sites, web content and links, source code, object code, operating systems and specifications, data, databases, database management code, utilities, graphical user interfaces, menus, images, icons, forms, methods of processing, software engines, platforms, and data formats, all versions, updates, corrections, enhancements and modifications thereof, and all related documentation, developer notes, comments and annotations; (r) "TAXES" shall mean all taxes (whether U.S. federal, state, local or non-U.S.) based upon or measured by income and any other tax whatsoever, including, without limitation, gross receipts, profits, sales, levies, imposts, deductions, charges, rates, duties, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll and social security, employment, excise, stamp duty or property taxes, together with any interest, penalties, charges or fees imposed with respect thereto. (s) "TRADE SECRETS" means trade secrets, know-how and other confidential or proprietary technical, business and other information, including manufacturing and production processes and techniques, research and development information, technology, drawings, specifications, designs, plans, proposals, technical data, financial, marketing and business data, pricing and cost information, business and marketing plans, customer and supplier lists and information, and all rights in any jurisdiction to limit the use or disclosure thereof; and (t) "TRADEMARKS" means trademarks, service marks, trade dress, logos, trade names, corporate names, URL addresses, domain names and symbols, slogans and other indicia of source or origin, including the goodwill of the business symbolized thereby or associated therewith, common law rights thereto, registrations and applications for registration thereof throughout the world, all rights therein provided by international treaties and conventions, and all other rights associated therewith. [Remainder of page intentionally left blank] 41 IN WITNESS WHEREOF, Acquiror, Sub, MailKey and Shareholder have caused this Agreement to be signed by their respective officers hereunto duly authorized, all as of the date first written above. GLOBAL DIVERSIFIED ACQUISITION CORP. By: /s/ John W. Shaffer -------------------------------------- John W. Shaffer Chief Financial Officer GD ACQUISITION CORP. By: /s/ John W. Shaffer -------------------------------------- John W. Shaffer President MK SECURE SOLUTIONS, LTD. By: /s/ Tim Dean-Smith -------------------------------------- Tim Dean-Smith Chief Executive Officer WESTVALE CONSULTANTS, LTD. By: /s/ Tim Dean-Smith -------------------------------------- Tim Dean-Smith Director 42 Omitted Exhibits and Schedules ------------------------------ The following exhibits and schedules to the Agreement and Plan of Merger have been omitted:
Exhibit Exhibit Description ------- ------------------- A Form of Warrant B Form of Option C Form of Loan Unit D Form of U.S. Investment Letter E Form of Non-U.S. Investment Letter F Form of Acquiror Warrant Schedule Schedule Description -------- -------------------- 1 MailKey Shareholders and Allocation of Merger Consideration 2 U.S. MailKey Security Holders 3 Non-U.S. MailKey Security Holders 4 Articles of Association and Bylaws of MailKey and each Subsidiary 5 Consents 6 MailKey GAAP Financial Statements 7 Location of Leased Property 8 Written Notice of Governmental Entity 9 MailKey as Landlord 10 No Contingent Liabilities 11 Litigation 12 Taxes 13 Insurance Coverage 14 Intellectual Property 15 Licenses and Rights 16 Accounts Receivable 17 MailKey Material Contracts 18 Labor Relations 19 Suppliers and Customers 20 Absence of Certain Changes or Events 21 Articles of Incorporation and Bylaws of Sub 22 Issuances of Securities 23 Issuance of S-8 Shares
The Company agrees to furnish supplementally a copy of the foregoing omitted exhibits and schedules to the Securities and Exchange Commission upon request. EX-2.2 3 ielement_ex0202.txt FIRST AMENDMENT EXHIBIT 2.2 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is made and entered into this 23rd day of March, 2004, by and among GLOBAL DIVERSIFIED ACQUISITION CORP., a Nevada corporation ("ACQUIROR"), GD ACQUISITION CORP., a Delaware corporation and wholly-owned subsidiary of Acquiror ("SUB"), MK SECURE SOLUTIONS LTD., a British Virgin Islands private limited company ("MAILKEY"), and WESTVALE CONSULTANTS, LTD, a principal shareholder of MailKey (the "SHAREHOLDER") for the purpose of amending the Agreement and Plan of Merger (the "MERGER AGREEMENT") dated February 20, 2004, by and among Acquiror, Sub, MailKey, and the Shareholder. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Merger Agreement. RECITALS WHEREAS, the parties hereto desire to amend certain provisions of the Merger Agreement. NOW, THEREFORE, in consideration of the foregoing premises and representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. The first sentence of Section 1.2(c) is hereby deleted in its entirety and replaced with the following sentence: As of the date of this Agreement, as set forth on SCHEDULE 1.3(B), there are currently outstanding warrants to purchase an aggregate of 39,070.6 MailKey Ordinary Shares (collectively, the "MAILKEY WARRANTS"). 2. The first sentence of Section 1.2(d) is hereby deleted in its entirety and replaced with the following sentence: As of the date of this Agreement, as set forth on SCHEDULE 1.3(B), there are currently outstanding options to purchase an aggregate of 34,650 MailKey Ordinary Shares (collectively, the "MAILKEY OPTIONS"). 3. The first sentence of Section 1.2(e) is hereby deleted in its entirety and replaced with the following sentence: As of the date of this Agreement, as set forth on SCHEDULE 1.3(B), there are currently outstanding loan units convertible into an aggregate of 6,500 MailKey Ordinary Shares (collectively, the "MAILKEY LOAN UNITS"). 4. Section 1.3(a) is hereby deleted in its entirety and replaced with the following provision: (a) Subject to the provisions of Section 1.4 hereafter, the Merger Consideration, consisting of the total purchase price payable to the holders of one hundred percent (100%) of the outstanding MailKey Capital Stock (collectively, the "MAILKEY SHAREHOLDERS") in connection with the acquisition of MailKey by the Merger, shall consist of 26,246,000 newly issued shares of Acquiror Common Stock. 5. Section 2.2(b)(i) is hereby deleted in its entirety and replaced with the following provision: (i) Acquiror shall deliver or shall cause to be delivered to the MailKey Shareholders certificates evidencing 26,246,000 shares of Acquiror Common Stock in payment of the Merger Consideration in accordance with Section 1.3(b). 6. The third sentence of Section 4.1(d) is hereby deleted in its entirety and replaced with the following sentence: There are currently 99,825.85 MailKey Ordinary Shares outstanding, 94,387 MailKey Preferred A Shares outstanding, and 68,247.15 MailKey Preferred B Shares outstanding, all of which are owned by the shareholders identified on SCHEDULE 1.3(B). 7. The second, third and forth sentences of Section 4.2(d) are hereby deleted in their entirety and replaced with the following sentences: The outstanding capital stock of the Acquiror consists solely of 518,018 shares of common stock. All shares of capital stock of Acquiror outstanding have been duly authorized and validly issued, are fully paid and nonassessable and are free of preemptive rights. There are currently 5,010,000 shares of Acquiror Common Stock approved for issuance under Acquiror's 2001 Employee Stock Compensation Plan, which shares were registered under the Securities Act pursuant to a Registration Statement on Form S-8, registration no. 333-109067, filed with the SEC on September 24, 2003 (the "Form S-8 Registration Statement"), of which 5,000,000 shares of Acquiror Common Stock are currently available for issuance (the "S-8 Shares"). 8. Section 4.2(m) is hereby deleted in its entirety and replaced with the following provision: (m) ADVISORY FEES. There is no investment banker, broker, finder or other advisor which has been retained by, or is authorized by Acquiror or Sub to act on its or their behalf, 2 who might be entitled to any fee or commission from MailKey, Acquiror, Sub or any of their respective Affiliates upon consummation of this Merger, except that Legend Advisory Corporation shall be entitled to a finder's fee in connection with the Merger as provided in SCHEDULE 4.2(M). 9. Section 5.11 is hereby deleted in its entirety and replaced with the following provision: 5.11 ISSUANCE OF COMMON STOCK. On or before the Closing, Acquiror shall take all necessary action to authorize the issuance of 1,325,000 S-8 Shares and 300,000 shares of Acquiror Common Stock to the persons set forth on SCHEDULE 5.11, and shall issue such S-8 Shares and shares of Acquiror Common Stock to such persons immediately after Closing. Such S-8 Shares and shares of Acquiror Common Stock shall be allocated among such persons as set forth on SCHEDULE 5.11. 10. Section 5.13 is hereby deleted in its entirety and replaced with the following provision: 5.13 BOARD OF DIRECTORS. On or before the Closing: (i) Acquiror shall obtain a letter of resignation from Andrew J. Kacic as a member of its board of directors, such resignation to be effective at 12:00 noon eastern standard time on the first Business Day after the Closing, (ii) Acquiror shall obtain letters of resignation from John W. Shaffer and Raymond J. Bills, constituting all of the remaining members of Acquiror's board of directors on the date hereof, such resignations to be effective on such date and at such time as Tim Dean-Smith and Graham Norton-Standen shall decide in their sole discretion, and (iii) Acquiror shall take all necessary corporate action, including amending Acquiror's bylaws if necessary, to appoint Tim Dean-Smith and Graham Norton-Standen to serve as directors of Acquiror, such appointments to be effective immediately upon Closing. Acquiror shall supply MailKey with all information, and be solely responsible for such information, with respect to the officers and directors of Acquiror as they exist immediately prior to Closing to the extent MailKey may be wish to provide such information to Acquiror's shareholders pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in connection with any decision by MailKey to appoint new directors to the Board of Directors of Acquiror subsequent to Closing. Commencing upon Closing and continuing until the date and time Andrew J. Kacic's resignation from Acquiror's board of directors becomes effective as provided in this Section 5.13, Acquiror shall not take any action, or fail to take any action, that would be reasonably likely to result in any of its representations and warranties set forth in this Agreement to become untrue in any material respect if such representations and warrants were made at the time any such action is taken. 3 11. Section 5.15 is hereby deleted in its entirety and replaced with the following provision: 5.15. MAILKEY FINANCIAL STATEMENTS. Prior to Closing, MailKey shall provide to Acquiror a letter prepared by L J Soldinger Associates ("L J Soldinger") stating that: (i) providing L J Soldinger receives full cooperation from the management of MailKey in the assistance of the audit of the MailKey financial statements, and (ii) barring any unforeseen and extraordinary problems, in Soldinger's judgment, an audit of the MailKey financial statements can be completed within sixty (60) days after the Closing in accordance with applicable SEC rules and regulations. 12. The last sentence of Section 5.16 is hereby deleted in its entirety. 13. Section 6.2(i) is hereby deleted in its entirety. 14. EXHIBIT 4.2(D)(I) is hereby deleted in its entirety. 15. SCHEDULE 1.3(B) is hereby deleted in its entirety and replaced with the schedule attached hereto as EXHIBIT A. 16. SCHEDULE 2.2(A)(II)(X) is hereby deleted in its entirety and replaced with the schedule attached hereto as EXHIBIT B. 17. SCHEDULE 2.2(A)(II)(Y) is hereby deleted in its entirety and replaced with the schedule attached hereto as EXHIBIT C. 18. SCHEDULE 4.2(M) is hereby made a part of the Merger Agreement as attached hereto as EXHIBIT D. 19. SCHEDULE 5.11 is hereby deleted in its entirety and replaced with the schedule attached hereto as EXHIBIT E. 20. Except as expressly provided herein, the Merger Agreement shall remain in full force and effect. 21. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 22. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 4 IN WITNESS WHEREOF, Parent, Sub, the Company and the Shareholder have caused this Amendment to be signed by their respective officers hereunto duly authorized, all as of the date first written above. GLOBAL DIVERSIFIED ACQUISITION CORP. By: /s/ John W. Shaffer ----------------------------------- John W. Shaffer Chief Financial Officer GD ACQUISITION CORP. By: /s/ John W. Shaffer ----------------------------------- John W. Shaffer President MK SECURE SOLUTIONS, LTD. By: /s/ Tim Dean-Smith ----------------------------------- Tim Dean-Smith Chief Executive Officer WESTVALE CONSULTANTS, LTD. By: /s/ Tim Dean-Smith ----------------------------------- Tim Dean-Smith Director 5 Omitted Exhibits ---------------- The following exhibits to the Agreement and Plan of Merger have been omitted: Exhibit Exhibit Description ------- ------------------- A MailKey Shareholders and Allocation of Merger Consideration B U.S. MailKey Security Holders C Non-U.S. MailKey Security Holders D Advisory Fees E Issuances of S-8 Shares The Company agrees to furnish supplementally a copy of the foregoing omitted exhibits and schedules to the Securities and Exchange Commission upon request. EX-2.3 4 ielement_ex0203.txt PLAN OF MERGER EXHIBIT 2.3 AGREEMENT AND PLAN OF MERGER BY AND AMONG MAILKEY CORPORATION MAILKEY ACQUISITION CORP. IELEMENT, INC. AND IVAN ZWEIG DATED NOVEMBER 9, 2004 TABLE OF CONTENTS ARTICLE I: THE MERGER..........................................................1 1.1......THE MERGER.......................................................1 1.2......CONVERSION OF TARGET SHARES......................................2 1.3......DISSENTERS' RIGHTS...............................................4 1.4......SUBSEQUENT ACTIONS...............................................5 ARTICLE II: THE CLOSING........................................................5 2.1......CLOSING DATE.....................................................5 2.2......CLOSING MERGER...................................................5 ARTICLE III: REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDER.............................................7 3.1......ORGANIZATION AND QUALIFICATION...................................7 3.2......AUTHORIZATION; VALIDITY AND EFFECT OF AGREEMENT..................7 3.3......COMPANY SUBSIDIARIES.............................................8 3.4......NO CONFLICT; REQUIRED FILINGS AND CONSENTS.......................8 3.5......CAPITALIZATION...................................................8 3.6......FINANCIAL STATEMENTS.............................................9 3.7......PROPERTIES AND ASSETS............................................9 3.8......INTELLECTUAL PROPERTY...........................................10 3.9......NO UNDISCLOSED LIABILITIES......................................11 3.10.....RELATED PARTY TRANSACTIONS......................................11 3.11.....LITIGATION......................................................11 3.12.....TAXES...........................................................12 3.13.....INSURANCE.......................................................12 3.14.....COMPLIANCE......................................................12 3.15.....MATERIAL CONTRACTS..............................................13 3.16.....LABOR RELATIONS.................................................13 3.17.....ENVIRONMENTAL MATTERS...........................................13 3.18.....ABSENCE OF CERTAIN CHANGES OR EVENTS............................14 3.19.....INVESTMENT INTENT...............................................14 3.20.....EMPLOYEE BENEFIT MATTERS........................................15 3.21.....BROKERS AND FINDERS FEES........................................15 ARTICLE IV: REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...........15 4.1......ORGANIZATION AND QUALIFICATION..................................15 4.2......AUTHORIZATION; VALIDITY AND EFFECT OF AGREEMENT.................16 4.3......NO CONFLICT; REQUIRED FILINGS AND CONSENTS......................16 4.4......CAPITALIZATION..................................................16 4.5......SEC REPORTS AND FINANCIAL STATEMENTS............................17 4.6......BROKERS AND FINDERS.............................................17 ARTICLE V: CERTAIN COVENANTS..................................................18 5.1......CONDUCT OF BUSINESS BY THE COMPANY AND THE SUBSIDIARIES.........18 5.2......ACCESS TO INFORMATION...........................................19 5.3......CONFIDENTIALITY; NO SOLICITATION................................19 5.4......BEST EFFORTS; CONSENTS..........................................20 5.5......FURTHER ASSURANCES..............................................21 5.6......PUBLIC ANNOUNCEMENTS............................................21 5.7......NOTIFICATION OF CERTAIN MATTERS.................................21 5.8......EMPLOYMENT AGREEMENT............................................21 5.9......PROHIBITION ON TRADING IN COMPANY SECURITIES....................21 5.10.....ADVISORY FEE....................................................22 5.11.....INVESTMENT LETTERS..............................................22 5.12.....AUDITED FINANCIAL STATEMENTS....................................22 5.13.....WORKING CAPITAL.................................................22 5.14.....TARGET OPTIONS AND WARRANTS.....................................23 5.15.....PARENT AND TARGET CAPITALIZATION................................23 5.16.....SCHEDULES AND EXHIBITS..........................................24 ARTICLE VI: CONDITIONS TO CONSUMMATION OF THE MERGER..........................24 6.1......CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDER...........................................24 6.2......CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB..............24 6.3......OTHER CONDITIONS TO OBLIGATIONS OF THE COMPANY, THE PRINCIPAL SHAREHOLDER, PARENT AND MERGER SUB....................25 ARTICLE VII: INDEMNIFICATION..................................................26 7.1......INDEMNIFICATION BY THE PRINCIPAL SHAREHOLDER....................26 7.2......INDEMNIFICATION PROCEDURES FOR THIRD-PARTY CLAIM................26 7.3......INDEMNIFICATION PROCEDURES FOR NON-THIRD PARTY CLAIMS...........27 7.4......LIMITATIONS ON INDEMNIFICATION..................................28 7.5......EXCLUSIVE REMEDY................................................28 ARTICLE VIII: TERMINATION.....................................................28 8.1......TERMINATION.....................................................28 8.2......PROCEDURE AND EFFECT OF TERMINATION.............................29 ARTICLE IX: MISCELLANEOUS.....................................................30 9.1......ENTIRE AGREEMENT................................................30 9.2......AMENDMENT AND MODIFICATIONS.....................................30 9.3......EXTENSIONS AND WAIVERS..........................................30 9.4......SUCCESSORS AND ASSIGNS..........................................30 9.5......SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS...........30 9.6......HEADINGS; DEFINITIONS...........................................31 9.7......SEVERABILITY....................................................31 9.8......SPECIFIC PERFORMANCE............................................31 9.9......EXPENSES........................................................31 ii 9.10.....NOTICES.........................................................31 9.11.....GOVERNING LAW...................................................32 9.12.....ARBITRATION.....................................................32 9.13.....COUNTERPARTS....................................................32 9.14.....CERTAIN DEFINITIONS.............................................32 iii EXHIBITS Exhibit 3.1 Articles of Incorporation and Bylaws of Company Exhibit 3.3 Articles of Incorporation and Bylaws of Subsidiaries Exhibit 3.6 GAAP Financial Statements Exhibit 5.11 Form of Investment Letter Exhibit 5.13(a) Form of Promissory Note iv SCHEDULES Schedule 3.3 Subsidiaries of the Company Schedule 3.5(a) Target Shareholders and Capitalization of Company Schedule 3.5(b) Subsidiaries and Capitalization of Subsidiaries Schedule 3.7 Real Property Schedule 3.8 Exceptions to Ownership of Intellectual Property Schedule 3.9 Undisclosed Liabilities Schedule 3.10 Related Party Transactions Schedule 3.11 Litigation Schedule 3.13 Insurance Schedule 3.14 Exceptions to Compliance With Governmental Authorities Schedule 3.15 Material Contracts Schedule 3.16 Labor Relations Schedule 3.18 Certain Changes or Events Schedule 5.1 Exceptions to Conduct of Business in Ordinary Course v AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is made and entered into this 9th day of November, 2004, by and among MAILKEY CORPORATION, a Nevada corporation ("Parent"), MAILKEY ACQUISITION CORP., a Delaware corporation ("Merger Sub"), IELEMENT, INC., a Nevada corporation ("Company"), and IVAN ZWEIG, the principal shareholder of the Company (the "Principal Shareholder"). RECITALS WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have approved, and deem it advisable and in the best interests of their respective companies and stockholders to consummate a merger of Merger Sub with and into the Company (the "Merger"), with the Company as the surviving company in the Merger upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, pursuant to the terms of this Agreement, upon consummation of the Merger, each issued and outstanding share (individually, a "Target Share"; and collectively, the "Target Shares") of common stock, $.001 par value per share ("Target Common Stock"), of the Company shall represent the right to receive three and forty-four one-hundredths (3.44) shares (individually, a "Parent Share," and collectively, the "Parent Shares") of common stock, $.001 par value per share ("Parent Common Stock"), of Parent; and WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, in consideration of the foregoing premises and representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. (a) THE MERGER. At the Effective Time (as defined in Section 1.1(b)), the Merger shall be effected and Merger Sub shall be merged with and into the Company, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the Nevada General Corporation Law ("NGCL") and the Delaware General Corporation Law ("DGCL"), whereupon the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving company in the Merger (the "Surviving Company"). (b) EFFECTIVE TIME. On the Closing Date (as defined in Section 2.1), the parties shall file articles of merger ("Articles of Merger") with the Secretary of State of the State of Nevada and a certificate of merger ("Certificate of Merger") with the Secretary of State of the State of Delaware and make all other filings or recordings required by the NGCL and DGCL in connection with the Merger. The Merger shall become effective at such time as the Articles of Merger and Certificate of Merger are duly filed and accepted with the Secretary of State of the State of Nevada and the Secretary of State of the State of Delaware, respectively, or at such later time as Parent, Merger Sub and the Company shall agree and specify in the Articles of Merger and Certificate of Merger (the time the Merger becomes effective being the "Effective Time"). (c) EFFECTS OF THE MERGER. At the Effective Time, the Merger shall have the effects set forth in this Agreement, the NGCL and the DGCL. Without limiting the foregoing, and subject thereto, at the Effective Time, all of the property, rights, powers, privileges and franchises shall be vested in the Surviving Company, and all of the debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Company. (d) ARTICLES OF INCORPORATION AND BYLAWS. (i) The articles of incorporation of the Company as in effect immediately prior to the Effective Time shall be the articles of incorporation of the Surviving Company until thereafter amended as provided therein or by applicable law. (ii) The bylaws of the Company as in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Company until thereafter amended as provided therein or by applicable law. (e) OFFICERS AND DIRECTORS. The officers and directors of the Company immediately prior to the Effective Time shall be the officers and directors of the Surviving Company, and shall hold office in accordance with the articles of incorporation and bylaws of the Surviving Company until the earlier of the applicable officer's or director's resignation or removal or until his or her respective successor is duly elected and qualified, as the case may be. 1.2 CONVERSION OF TARGET SHARES. (a) CONVERSION OF TARGET SHARES. At the Effective Time, by virtue of the Merger and without any action on the part of the shareholders of Target ("Target Shareholders"): (i) PURCHASER COMMON STOCK. Each issued and outstanding share of common stock, $.001 par value per share, of Merger Sub shall be converted into and become one (1) validly issued, fully paid and non-assessable share of common stock, $.001 par value per share, in the Surviving Company; (ii) CANCELLATION OF TREASURY SECURITIES AND PARENT-OWNED SECURITIES. All Target Shares that are owned by the Company as treasury securities, all Target Shares owned by any subsidiary of the Company, and any Target Shares owned by Parent, Merger Sub or any other wholly-owned subsidiary of Parent, shall be canceled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor; and 2 (iii) CONVERSION OF TARGET SHARES. Each of the Target Shares shall be converted into the right to receive three and forty-four one-hundredths (3.44) newly issued Parent Shares (the "Exchange Ratio"). All such Target Shares, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Target Share shall cease to have any rights with respect thereto, except the right to receive the Parent Shares therefor upon the surrender of such certificate in accordance with Section 1.2(b) hereof, without interest or dividends. (b) EXCHANGE OF CERTIFICATES. Each Target Shareholder shall deliver to Merger Sub any certificate evidencing a Target Share and receive in exchange therefore the Parent Shares to be received in connection with the Merger as provided in Section 1.2(a)(iii). If, after the Effective Time, certificates for the Target Shares that were outstanding immediately prior to the Effective Time shall be delivered to the Company, such Target Shares shall be exchanged for the Parent Shares to be received in connection with the Merger as provided in Section 1.2(a)(iii). (c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No interest or dividends or other distributions with respect to Parent Shares with a record date after the Effective Time shall be paid to the holder of any unsurrendered certificate with respect to the Target Shares represented thereby, and no cash payment in lieu of fractional Target Shares shall be paid to any such holder. (d) NO FURTHER OWNERSHIP RIGHTS IN TARGET SHARES. From and after the Effective Time, the holders of certificates evidencing ownership of Target Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Target Shares, except as otherwise provided for herein or by applicable law. (e) NO FRACTIONAL SHARES. No certificates or scrip representing fractional Parent Shares shall be issued upon the surrender for exchange of certificates representing Target Shares, no dividend or distribution of Parent shall relate to such fractional interests and such fractional interests will not entitle the owner thereof to vote or to any rights of a shareholder of Parent. Each Target Shareholder who would otherwise have been entitled to receive a fraction of a Parent Share (after taking into account all certificates delivered by such Target Shareholder) shall receive that number of Parent Shares that such holder would have received if such fractional Parent Share was rounded up to the nearest whole number. (f) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such Person of a bond in such reasonable amount as the Parent may direct as indemnity against any claim that may be made against it with respect to such certificate, the Parent will issue in exchange for such lost, stolen or destroyed certificate the Parent Shares to which such Person is entitled pursuant to this Agreement. (g) TRANSFER BOOKS. The Target Share transfer books of the Company shall be closed immediately at the Effective Time and thereafter there shall be no further registration of transfers of Target Shares on the records of the Company. If, after the Effective Time, 3 certificates are presented to the Surviving Company for any reason, they shall be cancelled and exchanged as provided in this Section 1.2. (h) ADJUSTMENTS. If at any time during the period between the date of this Agreement and the Effective Time, any change in the number of issued and outstanding shares of Parent Common Stock or Target Common Stock shall occur, including, without limitation, by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares, or any stock dividend thereon with a record date during such period, the Exchange Ratio shall be adjusted appropriately. The parties agree that that any shares of Parent Common Stock issued by Parent in connection with the satisfaction of its obligations under Section 5.13(b) or in connection with any capital-raising transaction by Parent shall be excluded from the determination of the Exchange Ratio and any adjustment of the Exchange Ratio. The parties further agree that the Exchange Ratio gives full effect to the Company's satisfaction of its obligations under section 5.14, and that any shares of Target Common Stock issued by the Company in connection with the satisfaction of its obligations under Section 5.14 shall be excluded from the determination of the Exchange Ratio. 1.3 DISSENTERS' RIGHTS. Notwithstanding any provision of this Agreement to the contrary, any Target Shares that are issued and outstanding immediately prior to the Effective Time and that are held by an Target Shareholder that has not voted in favor of the Merger or consented thereto in writing and who has properly delivered a written notice of demand for appraisal of such Target Shares in accordance with Section 92A.420 of the NGCL, if Section 92A.380 of the NGCL provides for appraisal rights for such Target Shares in the Merger (the "Dissenting Target Shares"), shall not be converted into the right to receive Parent Shares unless and until such Target Shareholder fails to perfect or effectively withdraws or loses its right to appraisal and payment under Section 92A.380 of the NGCL. If, after the Effective Time, any such Target Shareholder fails to perfect or effectively withdraws or loses its right to appraisal, such Dissenting Target Shares shall thereupon be treated as if they had been converted as of the Effective Time into the right to receive the Parent Shares to which such Target Shareholder is entitled, without interest or dividends thereon. The Company shall give Parent: (i) prompt notice of any notice or demands for appraisal or payment for Target Shares received by the Company, and (ii) the opportunity to participate in an direct all negotiations and proceedings with respect to any such demands or notices. The Company shall not, without the prior written consent of Parent, make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. Any amounts paid to holders of Dissenting Target Shares in an appraisal proceeding shall be paid by the Surviving Company out of its own funds and will not be paid, directly or indirectly, by Parent or Merger Sub. Each Dissenting Target Share, if any, shall be canceled after payment in respect thereof has been made to the holder thereof pursuant to Section 92A.380 of the NGCL. At the Effective Time, any holder of Dissenting Target Shares shall cease to have any rights with respect thereto except the rights provided by Section 92A.380 of the NGCL or as otherwise provided in this Section 1.3. 4 1.4 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, the Surviving Company shall determine, in its sole discretion, or shall be advised, that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Company its right, title or interest in, to or under any of the property, rights, powers, privileges, franchises or other assets of either of the Company or Merger Sub acquired or to be acquired by the Surviving Company as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, then the officers of the Surviving Company shall be authorized to execute and deliver, and shall execute and deliver, in the name and on behalf of either the Company or Merger Sub, all such deeds, bills of sale, assignments, assurances, and to take and do, in the name and on behalf of each such corporation or otherwise, all such other actions and things as may be necessary or desirable, to vest, perfect or confirm any and all right, title or interest in, to and under such property, rights, powers, privileges, franchises or other assets in the Surviving Company or otherwise to carry out the transactions contemplated by this Agreement. ARTICLE II THE CLOSING 2.1 CLOSING DATE. Subject to satisfaction or waiver of all conditions precedent set forth in Article VI of this Agreement, the closing of the Merger (the "Closing") shall take place at the offices of Duane Morris LLP at 10:00 a.m., local time on (a) the later of: (i) the first Business Day following the day upon which all appropriate Parent and Merger Sub corporate action and Company action has been taken in accordance with Articles III and IV, respectively, of this Agreement; or (ii) the day on which the last of the conditions precedent set forth in Article V of this Agreement is fulfilled or waived; or (b) at such other time, date and place as the parties may agree, but in no event shall such date be later than February 15, 2005 (the "Outside Date"), unless such date is extended by the requirements of law or the mutual agreement of the parties. 2.2 CLOSING MERGER. At the Closing, the following transactions shall occur, all of such transactions being deemed to occur simultaneously: (a) The Company shall deliver or cause to be delivered to Parent and Merger Sub the following documents and/or shall take the following actions: (i) Certificates evidencing all of the Target Shares; (ii) Any agreements between the Target Shareholders and the Company relating to the Target Shares; (iii) The officer's certificate described in Section 6.2(c); 5 (iv) An incumbency certificate signed by all of the executive officers of the Company dated at or about the Closing Date; (v) A certificate of good standing from the Secretary of State of the State of Nevada, dated at or about the Closing Date, to the effect that the Company is in good standing under the laws of the State of Nevada; (vi) Articles of incorporation of the Company certified by the Secretary of State of the State of Nevada at or about the Closing Date and bylaws of the Company certified by the Secretary of the Company at or about the Closing Date; (vii) Resolutions of the board of directors and shareholders of the Company dated at or about the Closing Date authorizing the Merger, certified by the Secretary of the Company; and (viii) The investment letters described in Section 5.11. (b) Parent and Merger Sub shall deliver or cause to be delivered to the Company the following documents and shall take the following actions: (i) Certificates evidencing all of the Parent Shares; (ii) The officer's certificates described in Section 6.1(c); (iii) An incumbency certificate signed by all of the executive officers of Parent dated at or about the Closing Date; (iv) An incumbency certificate signed by all of the executive officers of Merger Sub dated at or about the Closing Date; (v) A certificate of good standing from the Secretary of State of the State of Delaware, dated at or about the Closing Date, to the effect that Merger Sub is in good standing under the laws of said state; (vi) Articles of incorporation of Parent certified by the Secretary of State of the State of Nevada at or about the Closing Date and the bylaws of Parent certified by the Secretary of Parent at or about the Closing Date; (vii) Articles of incorporation of Merger Sub certified by the Secretary of State of the State of Delaware at or about the Closing Date and bylaws of Merger Sub certified by the Secretary of Merger Sub at or about the Closing Date; (viii) Resolutions of the board of directors of Parent dated at or about the Closing Date authorizing the Merger, certified by the Secretary of Parent; (ix) Resolutions of the board of directors and shareholders of Merger Sub dated at or about the Closing Date authorizing the Merger, certified by the Secretary of Merger Sub; and 6 (x) Working capital in accordance with the provisions of Section 5.13(b). (c) Each of the parties to this Agreement shall have otherwise executed whatever documents and agreements, provided whatever consents or approvals and shall have taken all such other actions as are required under this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDER The Company and the Principal Shareholder hereby make the following representations and warranties to Parent and Merger Sub. 3.1 ORGANIZATION AND QUALIFICATION. The Company is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, with the corporate power and authority to own and operate its businesses as presently conducted, except where the failure to be or have any of the foregoing would not have a Material Adverse Effect. The Company is duly qualified as a foreign company or other entity to do business and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except for such failures to be so qualified or in good standing as would not, individually or in the aggregate, have a Material Adverse Effect. True, correct and complete copies of the articles of incorporation and bylaws of the Company, as amended the date, are attached hereto as Exhibit 3.1. 3.2 AUTHORIZATION; VALIDITY AND EFFECT OF AGREEMENT. The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and to consummate the Merger. The execution and delivery of this Agreement by the Company and the performance by the Company of its obligations hereunder and the consummation of the Merger have been duly authorized by its board of directors and shareholders and all other necessary company action on the part of the Company and no other company proceedings on the part of the Company are necessary to authorize this Agreement and the Merger. This Agreement has been duly and validly executed and delivered by the Company and, assuming that it has been duly authorized, executed and delivered by the other parties hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 7 3.3 COMPANY SUBSIDIARIES. Attached hereto as Schedule 3.3 is a complete and accurate list of the Company's subsidiaries (the "Subsidiaries"). The Subsidiaries are duly organized, validly existing and in good standing under the laws of their respective jurisdictions of organization, with the requisite corporate power and authority to own and operate their respective businesses as presently conducted, except where the failure to be or have any of the foregoing would not have a Material Adverse Effect. The Subsidiaries are duly qualified as foreign companies or other entities to do business and are in good standing in each jurisdiction where the character of their respective properties owned or held under lease or the nature of their respective activities makes such qualification necessary, except for such failures to be so qualified or in good standing as would not, individually or in the aggregate, have a Material Adverse Effect. True, correct and complete copies of the articles of incorporation and bylaws of each of the Subsidiaries, as amended to date, are attached hereto as Exhibit 3.3. 3.4 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. Neither the execution and delivery of this Agreement by the Company nor the performance by the Company of its obligations hereunder, nor the consummation of the Merger, shall: (i) conflict with the Company's articles of incorporation or bylaws; (ii) conflict with any Subsidiary's articles of incorporation or bylaws; (iii) violate any statute, law, ordinance, rule or regulation applicable to the Company, any of its Subsidiaries or any of their respective assets or properties; or (iv) violate, breach, be in conflict with or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of any provision of, or result in the termination of, the acceleration of the maturity of, or the acceleration of the performance of any obligation of the Company or its Subsidiaries under, or result in the creation or imposition of any Liens upon any properties, assets or business of the Company or its Subsidiaries under, any Material Contract or any order, judgment or decree to which the Company or any of its Subsidiaries is a party or by which the Company, any of its Subsidiaries or any of their respective assets or properties is bound or encumbered except, in the case of clauses (ii), (iii) & (iv), for such violations, breaches, conflicts, defaults or other occurrences which, individually or in the aggregate, would not have a Material Adverse Effect. 3.5 CAPITALIZATION. (a) Attached hereto as Schedule 3.5(a) is a complete and accurate list of (i) the Target Shareholders and each holder of options and warrants ("Target Options and Warrants") of the Company, (ii) the number and class of issued and outstanding Target Shares and Target Options and Warrants owned by such Target Shareholders and holders on the date of this Agreement, and (iii) the exercise price, date of grant, vesting schedules and number of shares of Target Common Stock issuable upon the exercise of the Target Options and Warrants. The authorized capital stock of the Company consists of 30,000,000 shares of Target Common Stock. There are currently issued and outstanding 3,854,943 shares of Target Common Stock, and Target Options and Warrants to acquire 4,777,537 shares of Target Common Stock. The Target Shares and Target Options and Warrants represent all of the outstanding equity interests in the Company. All of the Target Shares have been validly authorized and issued and are fully paid and non-assessable, and the Company has reserved on its books and records, for future issuance, 8 the shares of Common Stock issuable under the exercise of the Target Options and Warrants. Except for this Agreement or as set forth on Schedule 3.5(a), there are no outstanding options, warrants, agreements, conversion rights, preemptive rights, or other rights to subscribe for, purchase or otherwise acquire any Target Common Stock. There are no voting trusts or other agreements or understandings to which the Company is a party with respect to the voting of Target Common Stock, and there is no indebtedness of the Company having general voting rights issued and outstanding. Except for this Agreement or as set forth on Schedule 3.5(a), there are no outstanding obligations of any Person to repurchase, redeem or otherwise acquire outstanding Target Common Stock. Except as set forth in this Agreement or as set forth on Schedule 3.5(a), the Company has no Target Common Stock reserved for issuance. (b) Attached hereto as Schedule 3.5(b) is a complete and accurate list authorized and outstanding equity interests of the Subsidiaries. All equity interests of the Subsidiaries outstanding as of the date of this Agreement have been duly authorized and validly issued, are fully paid and non-assessable, and are free of preemptive rights. 3.6 FINANCIAL STATEMENTS. True and complete copies of the Company's consolidated balance sheets at December 31, 2003 and 2002 and the last day of each subsequent interim period, and consolidated income statements and statements of cash flows for the fiscal years ended December 31, 2003 and 2002 and for each subsequent interim period, are attached hereto as Exhibit 3.6 (collectively, the "GAAP Financial Statements"). The GAAP Financial Statements (including the notes thereto) present fairly in all material respects the financial position and results of operations and cash flows of the Company and its Subsidiaries at the dates or for the periods set forth therein, in each case in accordance with GAAP applied on a consistent basis throughout the periods involved (except as otherwise indicated therein). The GAAP Financial Statements were prepared from and in accordance with the books and records of the Company and its Subsidiaries, as applicable. 3.7 PROPERTIES AND ASSETS. The Company and its Subsidiaries have good and marketable title to, valid leasehold interests in, or the legal right to use, and hold free and clear of all Liens and Encumbrances, all of the assets, properties and leasehold interests reflected in the Financial Statements (the "Assets"), except for those sold or otherwise disposed of since the date of the Financial Statements in the ordinary course of business consistent with past practice and not in violation of this Agreement. All Assets of the Company and its Subsidiaries that are used in the operations of their respective businesses are in good operating condition and repair, subject to normal wear and tear. The Company and its Subsidiaries have delivered to Parent or otherwise made available, correct and complete copies of all leases, subleases and other material agreements or other material instruments relating to all real property used in conducting the businesses of the Company and the Subsidiaries to which the Company or the Subsidiaries is a party (collectively, the "Real Property"), all of which are identified on Schedule 3.7. There are no pending or, to the Company's or any of the Subsidiaries' knowledge, threatened condemnation proceedings relating to any of the Real Property. Except as set forth on Schedule 3.7, none of the real property improvements (including leasehold improvements), equipment and 9 other Assets owned or used by the Company or its Subsidiaries is subject to any commitment or other arrangement for their sale or use by any Affiliate of the Company or its Subsidiaries, or by third parties. 3.8 INTELLECTUAL PROPERTY. (a) Except as disclosed in Schedule 3.8, (i) the Company or its Subsidiaries are the owners of all of the Intellectual Property free and clear of any royalty or other payment obligation, lien or charge, or have sufficient rights to use such Intellectual Property under a valid and enforceable license agreement, (ii) there are no agreements that restrict or limit the use of the Intellectual Property by the Company or its Subsidiaries, and (iii) to the extent that the Intellectual Property owned or held by the Company or its Subsidiaries are registered with the applicable authorities, record title to such Intellectual Property is registered or applied for in the name of the Company or of its Subsidiaries. (b) The Company's and Subsidiaries' rights to the Intellectual Property are valid and enforceable, and the Intellectual Property and the products and services of the Company and its Subsidiaries do not infringe upon intellectual property rights of any person or entity in any country. Except where reasonable business decisions to allow rights to lapse have been made, all maintenance taxes, annuities and renewal fees have been paid and all other necessary actions to maintain the Intellectual Property rights have been taken through the date hereof. There exists no impediment that would impair the Company's rights to conduct its business or the business of its Subsidiaries after the Effective Time as it relates to the Intellectual Property. (c) The Company and its Subsidiaries have taken all reasonable and appropriate steps to protect the Intellectual Property and, were applicable, to preserve the confidentiality of the Intellectual Property. (d) Neither the Company nor any of its Subsidiaries has received any notice of claim that any of such Intellectual Property has expired, is not valid or enforceable in any country or that it infringes upon or conflicts with the intellectual property rights of any third party, and no such claim or infringement or conflict, whenever filed or threatened, currently exists. (e) Neither the Company nor any of the Subsidiaries has given any notice of infringement to any third party with respect to any of the Intellectual Property or has become aware of facts or circumstances evidencing the infringement by any third party of any of the Intellectual Property, and no claim or controversy with respect to any such alleged infringement currently exists. (f) The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the Merger will not: (i) constitute a breach by the Company or the Subsidiaries of any instrument or agreement governing any Intellectual Property owned by or licensed to the Company or any of the Subsidiaries, (ii) pursuant to the terms of any license or agreement relating to any Intellectual Property, cause the modification of any terms of any such license or agreement, including but not limited to the modification of the 10 effective rate of any royalties or other payments provided for in any such license or agreement, (iii) cause the forfeiture or termination of any Intellectual Property under the terms thereof, (iv) give rise to a right of forfeiture or termination of any Intellectual Property under the terms thereof, or (v) impair the right of the Company, the Subsidiaries, the Surviving Company or Parent to make, have made, offer for sale, use, sell, export or license any Intellectual Property or portion thereof pursuant to the terms thereof. 3.9 NO UNDISCLOSED LIABILITIES. Except as disclosed in the Financial Statements or Schedule 3.9, the Company has no material liabilities, indebtedness or obligations, except those that have been incurred in the ordinary course of business, whether known or unknown, absolute, accrued, contingent or otherwise, and whether due or to become due, and to the Knowledge of the Company, there is no existing condition, situation or set of circumstances that could reasonably be expected to result in such a liability, indebtedness or obligation. 3.10 RELATED PARTY TRANSACTIONS. Except as provided on Schedule 3.10: (a) There is no indebtedness between the Company or any of its Subsidiaries, on the one hand, and any officer, director or Affiliate (other than the Company or any of its Subsidiaries) of the Company or the Subsidiaries, on the other hand, other than usual and customary advances made in the ordinary course of business; (b) No officer, director or Affiliate of the Company or any of its Subsidiaries provides or causes to be provided any assets, services (other than services as an, officer, manager, director or employee) or facilities to the Company or any of its Subsidiaries; (c) Neither the Company nor any of its Subsidiaries provides or causes to be provided any assets, services or facilities to any officer, director or Affiliate of the Company or any of its Subsidiaries (other than as reasonably necessary for them to perform their duties as officers, directors or employees); (d) Neither the Company nor any of its Subsidiaries beneficially owns, directly or indirectly, any investment in or issued by any such officer, director or Affiliate of the Company or any of its Subsidiaries; and (e) No officer, director or Affiliate of the Company or any of its Subsidiaries has any direct or indirect ownership interest in any Person with which the Company or any of its Subsidiaries competes or has a business relationship other than an ownership interest that represents less than five percent (5%) of the outstanding equity interests in a publicly traded company. 3.11 LITIGATION. Except for the matters set forth in Schedule 3.11, there is no action, claim, suit, litigation, proceeding, or governmental investigation ("Action") instituted, pending or threatened 11 against the Company or any of its Subsidiaries that, individually or in the aggregate, directly or indirectly, would be reasonably likely to have a Material Adverse Effect, nor is there any outstanding judgment, decree or injunction, in each case against the Company or its Subsidiaries, that, individually or in the aggregate, has or would be reasonably likely to have a Material Adverse Effect. 3.12 TAXES. The Company and its Subsidiaries have timely filed (or have had timely filed on their behalf) with the appropriate tax authorities all tax returns required to be filed by them or on behalf of them, and each such tax return was complete and accurate in all material respects, and the Company and its Subsidiaries have timely paid (or have had paid on their behalf) all material Taxes due and owing by it, regardless of whether required to be shown or reported on a tax return, including Taxes required to be withheld by it. No deficiency for a material Tax has been asserted in writing or otherwise, to the Company's Knowledge, against the Company or any Subsidiary or with respect to any Assets, except for asserted deficiencies that either (i) have been resolved and paid in full or (ii) are being contested in good faith. There are no material Liens for Taxes upon the Assets. 3.13 INSURANCE. Schedule 3.13 sets forth a list of all of the Company's key-man life insurance policies and other insurance policies material to the current and proposed business of the Company. The Company maintains insurance covering its assets, business, equipment, properties, operations, employees, officers, directors and managers with such coverage, in such amounts, and with such deductibles and premiums as are consistent with insurance coverage provided for other companies of comparable size and in comparable industries. All of such policies are in full force and effect and all premiums payable have been paid in full and the Company is in full compliance with the terms and conditions of such policies. The Company has not received any notice from any issuer of such policies of its intention to cancel or refusal to renew any policy issued by it or of its intention to renew any such policy based on a material increase in premium rates other than in the ordinary course of business. None of such policies are subject to cancellation by virtue of the consummation of the Merger. There is no claim by the Company pending under any of such policies as to which coverage has been questioned or denied. 3.14 COMPLIANCE. Except as disclosed on Schedule 3.14, the Company and its Subsidiaries are in compliance with all foreign, federal, state and local laws and regulations of any Governmental Authority applicable to its operations or with respect to which compliance is a condition of engaging in the business thereof, except to the extent that failure to comply would not, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries have received any notice asserting a failure, or possible failure, to comply with any such law or regulation, the subject of which notice has not been resolved as required thereby or otherwise to the satisfaction of the party sending the notice, except for such failure as would not, individually or in the aggregate, have a Material Adverse Effect. The Company and its 12 Subsidiaries hold all permits, licenses and franchises from Governmental Authorities required to conduct its business as it is now being conducted, except for such failures to have such permits, licenses and franchises that would not, individually or in the aggregate, have a Material Adverse Effect. 3.15 MATERIAL CONTRACTS. Except as set forth in Schedule 3.15, neither the Company nor any of its Subsidiaries is a party to or bound by any Material Contract. The Material Contracts constitute all of the material agreements and instruments that are necessary and desirable to operate the business as currently conducted by the Company and its Subsidiaries and as contemplated to be conducted. True, correct and complete copies of each Material Contract described and listed on Schedule 3.15 will be made available to Parent within ten (10) Business Days prior to the Closing. All of the Material Contracts are valid, binding and enforceable against the respective parties thereto in accordance with their respective terms. All parties to all of the Material Contracts have performed all obligations required to be performed to date under such Material Contracts, and neither the Company or its Subsidiaries, nor, to the best of its Knowledge, any other party, is in default or in arrears under the terms thereof, and no condition exists or event has occurred which, with the giving of notice or lapse of time or both, would constitute a default thereunder. The consummation of this Agreement and the Merger will not result in an impairment or termination of any of the rights of the Company or any of its Subsidiaries under any Material Contract. None of the terms or provisions of any Material Contract materially and adversely affects the business, prospects, financial condition or results of operations of the Company. 3.16 LABOR RELATIONS. Except as described on Schedule 3.16, as of the date of this Agreement (i) there are no activities or proceedings of any labor union to organize any non-unionized employees of the Company or any of its Subsidiaries; (ii) there are no unfair labor practice charges and/or complaints pending against the Company or any of its Subsidiaries before the National Labor Regulations Board, or any similar foreign labor relations governmental bodies, or any current union representation questions involving employees of the Company or any of its Subsidiaries; and (iii) there is no strike, slowdown, work stoppage or lockout, or threat thereof, by or with respect to any employees of the Company or any of its Subsidiaries. As of the date of this Agreement, neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreements. There are no controversies pending or threatened between the Company and its Subsidiaries and any of their respective employees, except for such controversies that would not be reasonably likely to have a Material Adverse Effect. 3.17 ENVIRONMENTAL MATTERS. Except for such matters that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, the Company and its Subsidiaries (i) have obtained all applicable permits, licenses and other authorizations that are required to be obtained under all applicable Environmental Laws by the Company and its Subsidiaries in connection with their respective businesses; (ii) are in compliance with all terms and conditions of such required 13 permits, licenses and authorizations, and with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in or arising from applicable Environmental Laws in connection with their respective businesses; (iii) have not received notice of any part or present violations of Environmental Laws in connection with their respective businesses, or of any spill, release, event, incident, condition or action or failure to act in connection with their respective businesses that is reasonably likely to prevent continued compliance with such Environmental Laws, or which would give rise to any common law environmental liability or liability under Environmental Laws, or which would otherwise form the basis of any Action against the Company or its Subsidiaries based on or resulting from the manufacture, processing, use, treatment, storage, disposal, transport, or handling, or the emission, discharge or release into the environment, of any hazardous material by any Person in connection with the Company's or its Subsidiaries' respective businesses; and (iv) have taken all actions required under applicable Environmental Laws to register any products or materials required to be registered by the Company or its Subsidiaries thereunder in connection with their respective businesses. 3.18 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on Schedule 3.18 or as otherwise contemplated by this Agreement, since December 31, 2003, (i) there has been no change or development in, or effect on, the Company or any of its Subsidiaries that has or could reasonably be expected to have a Material Adverse Effect, (ii) neither the Company nor any of its Subsidiaries has sold, transferred, disposed of, or agreed to sell, transfer or dispose of, any material amount of Assets other than in the ordinary course of business, (iii) neither the Company nor any of its Subsidiaries any has paid any dividends or distributed any Assets to any officer, director or shareholder of the Company, (iv) neither the Company nor any of its Subsidiaries has acquired any material amount of Assets except in the ordinary course of business, nor acquired or merged with any other business, (v) neither the Company nor any of its Subsidiaries has waived or amended any of their respective material contractual rights except in the ordinary course of business, and (vi) neither the Company nor any of its Subsidiaries has entered into any agreement to take any action described in clauses (i) through (v) above. 3.19 INVESTMENT INTENT. The Parent Shares being acquired by the Principal Shareholder in connection with the Merger are being acquired for the respective Principal Shareholder's own account for investment purposes only and not with a view to, or with any present intention of, distributing or reselling any of such Parent Shares. The Principal Shareholder acknowledges and agrees that the Parent Shares have not been registered under the Securities Act or under any state securities laws, and that the Parent Shares may not be, directly or indirectly, sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act and applicable state securities laws, except pursuant to an available exemption from such registration. The Principal Shareholder also acknowledges and agrees that neither the SEC nor any securities commission or other Governmental Authority has (a) approved the transfer of the Parent Shares or passed upon or endorsed the merits of the transfer of the Parent Shares, this Agreement or the Merger; or (b) confirmed the accuracy of, determined the adequacy of, or reviewed this Agreement. The Principal Shareholder has such Knowledge, sophistication and 14 experience in financial, tax and business matters in general, and investments in securities in particular, that it is capable of evaluating the merits and risks of this investment in the Parent Shares, and the Principal Shareholder has made such investigations in connection herewith as it deemed necessary or desirable so as to make an informed investment decision without relying upon Parent for legal or tax advice related to this investment. 3.20 EMPLOYEE BENEFIT MATTERS. Neither the Company nor any Subsidiaries are a party to, or since their respective inceptions have been a party to, any Employee Benefit Plans, programs, arrangements or agreements, whether formal or informal, whether in writing or otherwise, with respect to which the Company or a Subsidiary has or may have any obligation or that are maintained, contributed to or sponsored by the Company or the Subsidiary for the benefit of any current or former director, officer or employee of the Company or the Subsidiary . Neither the Company nor any Subsidiary has a current or projected liability in respect of post-employment or post-retirement health, medical or life insurance benefits for any of its retired, former or current employees. There is no contract, plan or arrangement, written or otherwise, covering any employee or former employee of the Company or any Subsidiary that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code and, except as contemplated by this Agreement, no employee or former employee of the Company or any Subsidiary will become entitled to any bonus, retirement, severance, job security or similar benefit or enhancement of such benefit (including acceleration of vesting or exercise of an incentive award) as a result of the Merger. Neither the Company nor any Subsidiary has any express or implied commitment to: (i) create, incur liability with respect to or cause to exist any Employee Benefit Plan, program, arrangement or agreement; or (ii) enter into any contract or agreement to provide compensation or benefits to any individual. 3.21 BROKERS AND FINDERS FEES. Neither the Company or any of its Subsidiaries nor any of their respective officers, directors, employees or managers has employed any broker or finder or incurred any liability for any investment banking fees, brokerage fees, commissions or finders fees in connection with the Merger for which the Company or any of its Subsidiaries has or could have any liability. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub hereby make the following representations and warranties to the Company and the Principal Shareholder: 4.1 ORGANIZATION AND QUALIFICATION. Parent and Merger Sub are duly organized, validly existing and in good standing under the laws of their respective jurisdiction of organization, with the corporate power and authority to own and operate their respective business as presently conducted, except where the 15 failure to be or have any of the foregoing would not have a Material Adverse Effect. Parent and Merger Sub are duly qualified as foreign corporations or other entities to do business and are in good standing in each jurisdiction where the character of their properties owned or held under lease or the nature of their activities makes such qualification necessary, except for such failures to be so qualified or in good standing as would not have a Material Adverse Effect. 4.2 AUTHORIZATION; VALIDITY AND EFFECT OF AGREEMENT. Parent and Merger Sub have the requisite corporate power and authority to execute, deliver and perform their respective obligations under this Agreement and to consummate the Merger. The execution and delivery of this Agreement by the Company and Merger Sub and the performance by Parent and Merger Sub of their respective obligations hereunder and the consummation of the Merger have been duly authorized by their respective boards of directors and all other necessary corporate action on the part of the Company and Merger Sub and no other corporate proceedings on the part of Parent or Merger Sub are necessary to authorize this Agreement and the Merger. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and, assuming that it has been duly authorized, executed and delivered by the other parties hereto, constitutes a legal, valid and binding obligation of Parent and Merger Sub, in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 4.3 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. Neither the execution and delivery of this Agreement by Parent or Merger Sub nor the performance by Parent or Merger Sub of their respective obligations hereunder, nor the consummation of the Merger, will: (i) conflict with Parent's articles of incorporation or bylaws; (ii) conflict with Merger Sub's articles of incorporation or bylaws; (iii) violate any statute, law, ordinance, rule or regulation, applicable to Parent or any of the properties or assets of Parent; or (iv) violate, breach, be in conflict with or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or permit the termination of any provision of, or result in the termination of, the acceleration of the maturity of, or the acceleration of the performance of any obligation of Parent or Merger Sub, or result in the creation or imposition of any Lien upon any properties, assets or business of Parent or Merger Sub under, any Material Contract or any order, judgment or decree to which Parent is a party or by which it or any of its assets or properties is bound or encumbered except, in the case of clauses (ii), (iii) and (iv), for such violations, breaches, conflicts, defaults or other occurrences which, individually or in the aggregate, would not have a material adverse effect on its obligation to perform its covenants under this Agreement. 4.4 CAPITALIZATION. (a) The authorized capital stock of Parent consists of 100,000,000 shares of Parent Common Stock. At June 30, 2004, there were issued and outstanding 29,355,251 shares of Parent Common Stock, options to acquire 3,214,167 shares of Parent Common Stock, and 16 warrants to acquire 2,298,295 shares of Parent Common Stock. All shares of capital stock of Parent outstanding as of the date of this Agreement have been duly authorized and validly issued, are fully paid and non-assessable, and are free of preemptive rights. (b) The authorized capital stock of Merger Sub consists solely of 1,000 shares of common stock, $.001 par value per share, of which 100 shares are issued and outstanding and owned of record and beneficially by Parent. All shares of capital stock of Merger Sub outstanding as of the date of this Agreement have been duly authorized and validly issued, are fully paid and non-assessable, and are free of preemptive rights. 4.5 SEC REPORTS AND FINANCIAL STATEMENTS. Parent has filed with the SEC, and has heretofore made available to the Company true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it under the Exchange Act or the Securities Act (as such documents have been amended since the time of their filing, collectively, the "Parent SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the Parent SEC Documents, including any financial statements or schedules included therein: (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, and (b) complied in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Each of the financial statements included in the Parent SEC Documents have been prepared from, and are in accordance with, the books and records of Parent, comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the financial positions and the results of operations and cash flows of Parent as of the dates thereof or for the periods presented therein (subject, in the case of unaudited statements, to normal year-end audit adjustments not material in amount). 4.6 BROKERS AND FINDERS. Except as described in Section 5.10, neither Parent or Merger Sub, nor any of their respective officers, directors, employees or managers, has employed any broker, finder, advisor or consultant, or incurred any liability for any investment banking fees, brokerage fees, commissions or finders' fees, advisory fees or consulting fees in connection with the Merger for which Parent or Merger Sub has or could have any liability. 17 ARTICLE V CERTAIN COVENANTS 5.1 CONDUCT OF BUSINESS BY THE COMPANY AND THE SUBSIDIARIES. (a) Except (i) as expressly permitted by this Agreement, (ii) as required by applicable law or any Material Contract to which the Company or any of its Subsidiaries is a party or by which any Asset is bound, (iii) with the consent of Parent or (iv) as set forth on Schedule 5.1, during the period commencing with the date of this Agreement and continuing until the Closing Date, the Company and its Subsidiaries shall conduct their business in all material respects in the ordinary and usual course consistent with past practice and use their commercially reasonable efforts to preserve intact their respective business organizations and relationships with third parties and keep available the services of their respective present officers and employees. (b) Without limiting the generality of Section 5.1(a), during the period commencing with the date of this Agreement and continuing until the Closing Date, neither the Company nor any of its Subsidiaries shall: (i) adopt or propose any change in their respective articles of incorporation, bylaws or other constitutional documents, except for changes which would not have Material Adverse Effect; (ii) (A) issue, authorize or sell any equity or debt securities, (B) issue, authorize or sell any securities convertible into, or options with respect to, or warrants to purchase or rights to subscribe for, any equity or debt securities, (C) split, combine, reclassify or make any other change in their respective issued and outstanding equity or debt securities, (D) redeem, purchase or otherwise acquire any of their respective equity or debt securities, or (E) declare any dividend or make any distribution with respect to their equity or debt securities; (iii) (A) increase in any manner the compensation of, or enter into any new bonus or incentive agreement or arrangement with, any of their respective directors, officers, employees or managers other than increases in compensation in the ordinary course of business and consistent with past practice and that are not material in the aggregate, (B) pay or agree to pay any pension, retirement allowance or other employee benefit to any director, officer, employee or manager, whether past or present, other than as required by applicable law, contracts or plan documents in effect on the date of this Agreement, (C) enter into any new employment, severance, consulting, or other compensation agreement with any director, officer, employee or manager or other person other than in connection with any new hires or promotions in the ordinary course and consistent with past practice, or (D) commit themselves to any additional pension, profit-sharing, deferred compensation, group insurance, severance pay, retirement or other employee benefit plan, fund or similar arrangement, or adopt or amend or commit themselves to adopt or amend any of such plans, funds or similar arrangements in existence on the date hereof; 18 (iv) (A) enter into, extend, renew or terminate any Material Contract, or make any change in any Material Contracts, (B) reclassify any assets or liabilities, or (C) do any other act that (x) would cause any representation or warranty of the Company in this Agreement to be or become untrue in any material respect, or (y) could reasonably be expected to have a Material Adverse Effect; (v) (A) sell, transfer, lease or otherwise dispose of any Assets other than in the ordinary course of business consistent with prior practice, (B) create or permit to exist any new Lien or Encumbrance on any Assets (iii) assume, incur or guarantee any obligation for borrowed money other than in the ordinary course of business consistent with past practices, (iv) enter into any joint venture, partnership or other similar arrangement, (v) make any investment in or purchase any securities of any Person, (vi) incur any indebtedness, issue or sell any new debt securities, enter into any new credit facility or make any capital expenditures, or (vii) merge or consolidate with any other Person or acquire any other Person or a business, division or product line of any other Person (except as provided for in this Agreement); (vi) make any change in any method of accounting or accounting practice except as required (a) by reason of a concurrent change in law, SEC guidelines or GAAP, or (b) by reason of a change in the Company's or any of its Subsidiaries' method of accounting practices that, due to law, SEC guidelines or requirements, or GAAP, requires a change in any method of accounting or accounting practice; or (vii) settle or compromise any material Tax liability, make or change any material Tax election, or file any tax return other than a tax return filed in the ordinary course of business and prepared in a manner consistent with past practice; 5.2 ACCESS TO INFORMATION. At all times prior to the Closing or the earlier termination of this Agreement in accordance with the provisions of Article VIII, and in each case subject to Section 5.3 below, each party hereto shall provide to the other party (and the other party's authorized representatives) reasonable access during normal business hours and upon reasonable prior notice to the premises, properties, books, records, assets, liabilities, operations, contracts, personnel, financial information and other data and information of or relating to such party (including without limitation all written proprietary and trade secret information and documents, and other written information and documents relating to intellectual property rights and matters), and will cooperate with the other party in conducting its due diligence investigation of such party, provided that the party granted such access shall not interfere unreasonably with the operation of the business conducted by the party granting access, and provided that no such access need be granted to privileged information or any agreements or documents subject to confidentiality agreements. 5.3 CONFIDENTIALITY; NO SOLICITATION. (a) CONFIDENTIALITY. Each party shall hold, and shall cause its respective Affiliates and representatives to hold, all Confidential Information made available to it in connection with the Merger in strict confidence, shall not use such information except for the 19 sole purpose of evaluating the Merger and shall not disseminate or disclose any of such information other than to its directors, officers, managers, employees, shareholders, interest holders, Affiliates, agents and representatives, as applicable, who need to know such information for the sole purpose of evaluating the Merger (each of whom shall be informed in writing by the disclosing party of the confidential nature of such information and directed by such party in writing to treat such information confidentially). If this Agreement is terminated pursuant to the provisions of Article VIII, each party shall immediately return to the other party all such information, all copies thereof and all information prepared by the receiving party based upon the same. The above limitations on use, dissemination and disclosure shall not apply to Confidential Information that (i) is learned by the disclosing party from a third party entitled to disclose it; (ii) becomes known publicly other than through the disclosing party or any third party who received the same from the disclosing party, provided that the disclosing party had no Knowledge that the disclosing party was subject to an obligation of confidentiality; (iii) is required by law or court order to be disclosed by the parties; or (iv) is disclosed with the express prior written consent thereto of the other party. The parties shall undertake all necessary steps to ensure that the secrecy and confidentiality of such information will be maintained in accordance with the provisions of this subsection (a). Notwithstanding anything contained herein to the contrary, in the event a party is required by court order or subpoena to disclose information which is otherwise deemed to be confidential or subject to the confidentiality obligations hereunder, prior to such disclosure, the disclosing party shall: (i) promptly notify the non-disclosing party and, if having received a court order or subpoena, deliver a copy of the same to the non-disclosing party; (ii) cooperate with the non-disclosing party, at the expense of the non-disclosing party, in obtaining a protective or similar order with respect to such information; and (iii) provide only that amount of information as the disclosing party is advised by its counsel is necessary to strictly comply with such court order or subpoena. (b) NO SOLICITATION. Except as otherwise contemplated in this Agreement, neither the Company nor any Subsidiary shall, directly or indirectly, solicit any inquiries or proposals for, or enter into or continue or resume any discussions with respect to or enter into any negotiations or agreements relating to, the sale or exchange of all or a substantial part of the Assets. The Company shall promptly notify Parent if any such proposal or offer, or any inquiry or contact with any Person or entity with respect thereto, is made. 5.4 BEST EFFORTS; CONSENTS. Subject to the terms and conditions herein provided, each of Parent, Merger Sub and the Company agrees to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the Merger and to cooperate with the others in connection with the foregoing, including using its reasonable efforts to (i) obtain all waivers, consents and approvals from other parties to loan agreements, leases, mortgages and other contracts necessary for the consummation of the Merger, (ii) make all filings with, and obtain all consents, approvals and authorizations that are required to be obtained from, Governmental Authorities, (iii) lift or rescind any injunction, restraining order, decree or other order adversely affecting the ability of the parties hereto to consummate the Merger, (iv) effect all necessary registrations and filings and submissions of information requested by Governmental Authorities, and (v) fulfill all conditions to this Agreement. Each of Parent, Merger Sub and the Company shall use all 20 reasonable efforts to prevent the entry, enactment or promulgation of any threatened or pending preliminary or permanent injunction or other order, decree or ruling or statute, rule, regulation or executive order that would adversely affect the ability of the parties hereto to consummate the Merger. 5.5 FURTHER ASSURANCES. Subject to Section 5.4, each of the parties hereto agrees to use its reasonable best efforts before and after the Closing Date to take or cause to be taken all action, to do or cause to be done, and to assist and cooperate with the other party hereto in doing, all things necessary, proper or advisable under applicable laws to consummate and make effective, in the most expeditious manner practicable, the Merger, including, but not limited to: (i) the satisfaction of the conditions precedent to the obligations of any of the parties hereto; (ii) to the extent consistent with the obligations of the parties set forth in Section 5.4, the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the performance of the obligations hereunder; and (iii) the execution and delivery of such instruments, and the taking of such other actions, as the other party hereto may reasonably require in order to carry out the intent of this Agreement. 5.6 PUBLIC ANNOUNCEMENTS. Parent, Merger Sub and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger or this Agreement, and shall not issue any other press release or make any other public statement without the prior written consent of the other parties, except as may be required by law or, with respect to Parent, by obligations pursuant to rule or regulation of the Exchange Act, the Securities Act, any rule or regulation promulgated thereunder or any rule or regulation of the National Association of Securities Dealers. 5.7 NOTIFICATION OF CERTAIN MATTERS. Each party hereto shall promptly notify the other party in writing of any events, facts or occurrences that would result in any breach of any representation or warranty or breach of any covenant by such party contained in this Agreement. 5.8 EMPLOYMENT AGREEMENT. At or prior to Closing, Parent and the Principal Shareholder shall enter into an Employment Agreement on terms to be mutually agreed upon by Parent and the Principal Shareholder. 5.9 PROHIBITION ON TRADING IN COMPANY SECURITIES. The Company acknowledges that information concerning the matters that are the subject matter of this Agreement may constitute material non-public information under United States federal securities laws, and that United States federal securities laws prohibit any Person 21 who has received material non-public information relating to Parent from purchasing or selling securities of Parent, or from communicating such information to any Person under circumstances in which it is reasonably foreseeable that such Person is likely to purchase or sell securities of Parent. Accordingly, until such time as any such non-public information has been adequately disseminated to the public, the Company shall not purchase or sell any securities of Parent, or communicate such information to any other Person. 5.10 ADVISORY FEE. Upon the Closing of the Merger, Parent may pay an advisory fee to such parties, in such amounts and in such manner as shall be mutually agreed upon by Parent and the Company. 5.11 INVESTMENT LETTERS. At or prior to Closing, the Company shall deliver to Parent investment letters in the form attached hereto as Exhibit 5.11 executed by each Target Shareholder listed on Schedule 3.5(a). 5.12 AUDITED FINANCIAL STATEMENTS. Within forty-five (45) days after the Closing, the Company shall deliver to Parent consolidated balance sheets at December 31, 2003 and 2002 and consolidated income statements and statements of cash flows for the fiscal years ended December 31, 2003 and 2002 audited by an SEC-registered independent accountant, and shall have its consolidated balance sheets, income statements and statements of cash flows for each interim period subsequent to December 31, 2003, reviewed by an SEC-registered independent accountant (collectively, the "Audited Financial Statements"). The Audited Financial Statements (including the notes thereto) shall present fairly in all material respects the financial position and results of operations and cash flows of the Company at the dates or for the periods set forth therein, in each case in accordance with GAAP applied on a consistent basis throughout the periods involved and in accordance with all applicable SEC rules and regulations (except as otherwise indicated therein). The Audited Financial Statements shall be prepared from and in accordance with the books and records of the Company. The Company shall use its best efforts to have its independent accountant consent to Parent's use of and reliance on the Audited Financial Statements as may be required in connection with any filings made by Parent under the United States federal securities laws. 5.13 WORKING CAPITAL. (a) Parent shall provide $100,000 of working capital to the Company in the following manner and in accordance with the following schedule: (i) $50,000 within three (3) business days of the date of this Agreement; and (ii) $50,000 within 30 days of the date of this Agreement. The working capital set forth in subsections (i) and (ii) shall be provided to the Company under promissory notes substantially in the form attached hereto as Exhibit 5.13(a) (the "Promissory Notes"). In the event that Parent fails to satisfy any of its obligations under this Section 5.13(a) by the date specified, Parent shall have five (5) Business Days to satisfy such obligations. If Parent fails to satisfy such obligations with in such five (5) Business Days, 22 Parent's failure to satisfy such obligations shall then constitute a breach of this Section 5.13(a). If Parent fails to make the payment set forth in subsection (ii) above within 40 days of the date of this Agreement, Parent shall release the Company from any and all obligations of the Company under the Promissory Note evidencing the payment set forth in subsection (i) above. In the event that this Agreement is terminated by Parent or Merger Sub under Section 8.1(e), (x) the Promissory Notes shall become due and payable within 180 days of the termination of this Agreement; and (y) Parent shall be released from any and all obligations under this Section 5.13(a). If the Merger is consummated, Parent shall release the Company from any and all obligations of the Company under any and all Promissory Notes then outstanding. (b) At or prior to Closing, Parent shall procure funds in the following amount: (i) $1.5 million, less (ii) the amount of working capital provided to the Company under Section 5.13(a). Such funds shall be reserved on Parent's books for use exclusively by the Company. 5.14 TARGET OPTIONS AND WARRANTS. The Company covenants and agrees that: (a) Prior to the Closing, all Target Options and Warrants shall be exercised into shares of Target Common Stock or terminated in accordance with the terms and conditions specified in the instruments pursuant to which they were issued, and, immediately prior to the Closing, no Target Options and Warrants shall remain outstanding; (b) All shares of Target Common Stock subject to issuance under the Target Options and Warrants, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized and validly issued, fully paid and non-assessable, and free of preemptive rights; (c) At and immediately prior to the Closing, with the exception of this Agreement, there shall be no outstanding (i) options, warrants, agreements, conversion rights, preemptive rights, or other rights to purchase or otherwise acquire any Target Common Stock, or (ii) obligations of any Person to repurchase, redeem or otherwise acquire any Target Common Stock; and (d) At and immediately prior to the Closing, there shall be no (i) voting trusts or other agreements or understandings to which any Target Shareholder shall be a party with respect to the voting of the Target Common Stock, or (ii) issued and outstanding indebtedness of the Company having general voting rights. 5.15 PARENT AND TARGET CAPITALIZATION. (a) Immediately prior to the Closing, the Company shall provide Parent with a revised capitalization table substantially in the form of Schedule 3.5(a) and shall update Section 3.5(a) to reflect the changes in the capitalization of the Company contemplated by Section 5.14 and any other changes in the capitalization of the Company occurring after the date hereof and prior to the Closing. 23 (b) Immediately prior to the Closing, Parent shall update Section 4.4 to reflect any changes in the capitalization of the Company occurring after the date hereof and prior to the Closing. 5.16 SCHEDULES AND EXHIBITS. Each of the parties hereto shall utilize its reasonable best efforts to produce all schedules and exhibits required of it under this Agreement prior to the execution hereof. In the event that any party has not produced all schedules and exhibits required to be produced by it hereunder prior to the execution of this Agreement, all such schedules and exhibits shall be produced by such party within ten (10) Business Days thereafter. The schedules and exhibits produced subsequent to the execution of this Agreement shall be given such force and effect as though such schedules and exhibits were produced on the date of execution of this Agreement. ARTICLE VI CONDITIONS TO CONSUMMATION OF THE MERGER 6.1 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDER. The obligations of the Company and the Principal Shareholder to consummate the Merger shall be subject to the fulfillment, or written waiver by the Company or the Principal Shareholder, at or prior to the Closing, of each of the following conditions: (a) The representations and warranties of Parent and Merger Sub set out in this Agreement shall be true and correct in all material respects at and as of the time of the Closing as though such representations and warranties were made at and as of such time, except that the representations and warranties set forth in Section 4.4 shall be updated as provided in Section 5.15(b); (b) Parent and Merger Sub shall have performed and complied in all material respects with all covenants, conditions, obligations and agreements required by this Agreement to be performed or complied with by Parent and Merger Sub, respectively, on or prior to the Closing Date, including those set forth in Sections 5.8 and 5.13; (c) Parent shall have delivered to the Company an officer's certificate of each of Parent and Merger Sub to the effect that the conditions set forth in Section 6.1(a) and (b) have been satisfied; and (d) Parent shall have delivered to the Company any certificates evidencing the Parent Shares in accordance with Section 2.2(b)(i). 6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to consummate the Merger shall be subject to the fulfillment or written waiver by Parent or Merger Sub, at or prior to the Closing, of each of the following conditions: 24 (a) The representations and warranties of the Company set out in this Agreement shall be true and correct in all material respects at and as of the time of the Closing as though such representations and warranties were made at and as of such time, except that the representations and warranties set forth in Section 3.5 shall be updated as provided in Section 5.15(a); (b) The Company and the Principal Shareholder shall have performed and complied in all material respects with all covenants, conditions, obligations and agreements required by this Agreement to be performed or complied with by the Company or the Principal Shareholder on or prior to the Closing Date; (c) The company shall have delivered to Parent and Merger Sub a certificate of the Secretary of the Company and the Principal Shareholder to the effect that the conditions set forth in Section 6.2(a) and (b) hereof have been satisfied; (d) The Company shall have delivered to Parent and Merger Sub any certificates evidencing the Target Shares and any agreement relating to the Target Shares in accordance with 2.2(a)(i) & (ii); (e) The GAAP Financial Statements and records of the Company shall be of such quality that, in the judgment of Parent in its sole and absolute discretion, an audit of the Financial Statements can be completed within forty-five (45) days after the Closing in accordance with applicable SEC rules and regulations; (f) Parent and Merger Sub shall have completed a due diligence review of the business, operations, financial condition and prospects of the Company and shall have been satisfied with the results of their due diligence review in their sole and absolute discretion; (g) The Target Shareholders shall have approved the Merger in accordance with the NGCL; and (h) Immediately prior to Closing, the aggregate number of Dissenting Target Shares shall not exceed five percent (5%) of the aggregate number of outstanding Target Shares. 6.3 OTHER CONDITIONS TO OBLIGATIONS OF THE COMPANY, THE PRINCIPAL SHAREHOLDER, PARENT AND MERGER SUB. The obligations of Parent, Merger Sub and the Company to consummate the Merger shall be subject to the fulfillment, or written waiver by each of Parent, Merger Sub and the Company, at or prior to the Closing, of each of the following conditions: (a) All director, shareholder, lender, lessor and other parties' consents and approvals, as well as all filings with, and all necessary consents or approvals of, all federal, state and local governmental authorities and agencies, as are required under this Agreement, applicable law or any applicable contract or agreement (other than as contemplated by this Agreement) to complete the Merger shall have been secured; and 25 (b) No statute, rule, regulation, executive order, decree, preliminary or permanent injunction, or restraining order shall have been enacted, entered, promulgated or enforced by any Governmental Authority that prohibits or restricts the consummation of the Merger. ARTICLE VII INDEMNIFICATION 7.1 INDEMNIFICATION BY THE PRINCIPAL SHAREHOLDER. During the period commencing on the Closing Date and ending on the date that is 12 months after the Closing Date, the Principal Shareholder shall indemnify and hold harmless Parent and Merger Sub and their respective officers, directors and shareholders (each an "Indemnified Party"), from and against any and all demands, claims, actions or causes of action, judgments, assessments, losses, liabilities, damages or penalties and reasonable attorneys' fees and related disbursements (collectively, "Claims") suffered by such Indemnified Party resulting from or arising out of any knowing (i) inaccuracy in or breach of any of the representations or warranties made by the Company or the Principal Shareholder at the time they were made, and, except for representations and warranties that speak as of a specific date or time (which need only be true and correct as of such date or time), on and as of the Closing Date, (ii) breach or nonfulfillment of any covenants or agreements made by the Company or the Principal Shareholder, and (iii) misrepresentation made by the Company or the Principal Shareholder, in each case as made herein or in the Schedules or Exhibits annexed hereto or in any closing certificate, schedule or any ancillary certificates or other documents or instruments furnished by the Company or the Principal Shareholder pursuant hereto or in connection with the Merger. 7.2 INDEMNIFICATION PROCEDURES FOR THIRD-PARTY CLAIM. (a) Upon obtaining knowledge of any Claim by a third party that has given rise to, or is expected to give rise to, a claim for indemnification hereunder, Parent shall give written notice ("Notice of Claim") of such claim or demand to the Principal Shareholder, specifying in reasonable detail such information as the Indemnified Party may have with respect to such indemnification claim (including copies of any summons, complaint or other pleading that may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). Subject to the limitations set forth in Section 7.2(b) hereof, no failure or delay by Parent in the performance of the foregoing shall reduce or otherwise affect the obligation of the Principal Shareholder to indemnify and hold the Indemnified Party harmless, except to the extent that such failure or delay shall have actually adversely affected the Principal Shareholder' ability to defend against, settle or satisfy any Claims for which the Indemnified Party is entitled to indemnification hereunder. (b) If the claim or demand set forth in the Notice of Claim given by Parent pursuant to Section 7.2(a) hereof is a claim or demand asserted by a third party, the Principal Shareholder shall have fifteen (15) days after the date on which the Notice of Claim is delivered to notify Parent in writing of its election to defend such third party claim or demand on behalf of the Indemnified Party. If the Principal Shareholder elect to defend such third party 26 claim or demand, Parent shall make available to the Principal Shareholder and its agents and representatives all records and other materials that are reasonably required in the defense of such third party claim or demand and shall otherwise cooperate with, and assist the Principal Shareholder in the defense of, such third party claim or demand, and so long as the Principal Shareholder is defending such third party claim in good faith, the Indemnified Party shall not pay, settle or compromise such third party claim or demand. If the Principal Shareholder elect to defend such third party claim or demand, the Indemnified Party shall have the right to participate in the defense of such third party claim or demand at the Principal Shareholder's expense. In the event, however, that such Indemnified Party reasonably determines that representation by counsel to the Principal Shareholder of both the Principal Shareholder and such Indemnified Party could reasonably be expected to present counsel with a conflict of interest, then the Indemnified Party may employ separate counsel to represent or defend it in any such action or proceeding and the Principal Shareholder will pay the fees and expenses of such counsel. If the Principal Shareholder does not elect to defend such third party claim or demand or does not defend such third party claim or demand in good faith, the Indemnified Party shall have the right, in addition to any other right or remedy it may have hereunder, at the Principal Shareholder's expense, to defend such third party claim or demand; provided, however, that (i) such Indemnified Party shall not have any obligation to participate in the defense of or defend any such third party claim or demand; (ii) such Indemnified Party's defense of or its participation in the defense of any such third party claim or demand shall not in any way diminish or lessen the obligations of the Principal Shareholder under the agreements of indemnification set forth in this Article VII; and (iii) such Indemnified Party may not settle any claim without the consent of the Principal Shareholder, which consent shall not be unreasonably withheld or delayed. (c) The Company and the Principal Shareholder, and Parent, Merger Sub and the other Indemnified Parties, if any, shall cooperate fully in all aspects of any investigation, defense, pre-trial activities, trial, compromise, settlement or discharge of any claim in respect of which indemnity is sought pursuant to this Article VII, including, but not limited to, by providing the other party with reasonable access to employees and officers (including as witnesses) and other information. (d) Except for third party claims being defended in good faith, the Principal Shareholder shall satisfy its obligations under this Article VII in respect of a valid claim for indemnification hereunder that is not contested by the Company in good faith in cash within thirty (30) days after the date on which Notice of Claim is delivered. 7.3 INDEMNIFICATION PROCEDURES FOR NON-THIRD PARTY CLAIMS. In the event any Indemnified Party should have an indemnification claim against the Principal Shareholder under this Agreement that does not involve a claim by a third party, the Indemnified Party shall promptly deliver notice of such claim to the Principal Shareholder in writing and in reasonable detail. The failure by any Indemnified Party to so notify the Principal Shareholder shall not relieve the Principal Shareholder from any liability that it may have to such Indemnified Party, except to the extent that the Company has been actually prejudiced by such failure. If the Principal Shareholder does not notify the Indemnified Party within fifteen (15) Business Days following its receipt of such notice that the Principal Shareholder disputes such claim, such claim specified by the Principal Shareholder in such notice shall be conclusively 27 deemed a liability of the Principal Shareholder under this Article VII and the Principal Shareholder shall pay the amount of such liability to the Indemnified Party on demand, or in the case of any notice in which the amount of the claim is estimated, on such later date when the amount of such claim is finally determined. If the Principal Shareholder dispute their liability with respect to such claim in a timely manner, the Principal Shareholder and the Indemnified Party shall proceed in good faith to negotiate a resolution of such dispute and, if not resolved through negotiations, such dispute shall be submitted to arbitration pursuant to Section 9.12. 7.4 LIMITATIONS ON INDEMNIFICATION. (a) No claim for indemnification under this Article VII shall be asserted by an Indemnified Party, and no liability for such indemnify shall be enforced against the Principal Shareholder, to the extent the Indemnified Party has theretofore received indemnification or otherwise been compensated for such Claim. In the event that an Indemnified Party shall later collect any such amounts recovered under insurance policies with respect to any Claim for which it has previously received payments under this Article VII from the Principal Shareholder, such Indemnified Party shall promptly repay to the Principal Shareholder such amount recovered; provided, however, that in no event shall the amount repaid to the Principal Shareholder exceed the amount paid by the Principal Shareholder under this Article VII. (b) The Principal Shareholder shall not be liable for any indemnification under this Article VII until the aggregate value of all Claims exceeds $50,000. In the event the aggregate value of all Claims exceeds $50,000, the Principal Shareholder shall be liable only for the amount by which the aggregate value of such Claims exceeds $50,000. 7.5 EXCLUSIVE REMEDY. The indemnification provisions of this Article VII (i) shall, in the case of the representatives and warranties, be the exclusive remedy following the Closing with respect to breaches thereof, (ii) shall apply without regard to, and shall not be subject to, any limitation by reason of set-off, limitation or otherwise, and (iii) are intended to be comprehensive and not to be limited by any requirements of law concerning prominence of language or waiver of any legal right under any law (including, without limitation, rights under any workers compensation statute or similar statute conferring immunity from suit). The obligations of the parties set forth in this Article VII shall be conditioned upon the Closing having occurred. ARTICLE VIII TERMINATION 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) by mutual consent of Parent, Merger Sub, the Company and the Principal Shareholder; 28 (b) by any of Parent, Merger Sub, the Company or the Principal Shareholder if the Closing shall not have occurred on or before the Outside Date; (c) by Parent, Merger Sub, the Company or the Principal Shareholder if any Governmental Authority shall have issued an injunction, order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting any material portion of the Merger and such injunction, order, decree, ruling or other action shall have become final and nonappealable; (d) by Parent, Merger Sub, the Company or the Principal Shareholder upon written notice to the other party if any of the conditions to the Closing set forth in Section 6.3 shall have become incapable of fulfillment by the Outside Date and shall not have been waived in writing by Parent, Merger Sub, the Company, or the Principal Shareholder, respectively. (e) by Parent or Merger Sub upon written notice to the Company if any of the conditions to the Closing set forth in Section 6.2 shall have become incapable of fulfillment by the Outside Date and shall not have been waived in writing by Parent; or (f) by the Company or the Principal Shareholder upon written notice to Parent if any of the conditions to the Closing set forth in Section 6.1 shall have become incapable of fulfillment by the Outside Date and shall not have been waived in writing by the Company or the Principal Shareholder. 8.2 PROCEDURE AND EFFECT OF TERMINATION. In the event of termination of this Agreement pursuant to Section 8.1 hereof, written notice thereof shall forthwith be given by the terminating party to the other party, and, except as set forth below, this Agreement shall terminate and be void and have no effect and the Merger shall be abandoned without any further action by the parties hereto; provided, however, that if such termination shall result from the failure of a party to perform a covenant, obligation or agreement in this Agreement or from the breach by Parent, Merger Sub, the Company or the Principal Shareholder of any representation or warranty contained herein, such party shall be fully liable for any and all damages incurred or suffered by the other party as a result of such failure or breach. If this Agreement is terminated as provided herein: (a) each party hereto shall redeliver, and shall cause its agents (including, without limitation, attorneys and accountants) to redeliver, all documents, work papers and other material of each party hereto relating to the Merger, whether obtained before or after the date hereof; and (b) each party agrees that all Confidential Information received by Parent and Merger Sub, on the one hand, or the Company and the Principal Shareholder, on the other hand, with respect to the other party, this Agreement or the Merger shall be kept confidential notwithstanding the termination of this Agreement. 29 ARTICLE IX MISCELLANEOUS 9.1 ENTIRE AGREEMENT. This Agreement and the Schedules and Exhibits hereto contain the entire agreement between the parties and supercede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 9.2 AMENDMENT AND MODIFICATIONS. This Agreement may not be amended, modified or supplemented except by an instrument or instruments in writing signed by the party against whom enforcement of any such amendment, modification or supplement is sought. 9.3 EXTENSIONS AND WAIVERS. At any time prior to the Closing, the parties hereto entitled to the benefits of a term or provision may (a) extend the time for the performance of any of the obligations or other acts of the parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto, or (c) waive compliance with any obligation, covenant, agreement or condition contained herein. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument or instruments in writing signed by the party against whom enforcement of any such extension or waiver is sought. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement. 9.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that no party hereto may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other party hereto. Except as provided in Article VII, nothing in this Agreement is intended to confer upon any person not a party hereto (and their successors and assigns) any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.5 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and warranties contained herein shall survive the Closing and shall thereupon terminate twelve (12) months after the Closing, except that (i) the representations contained in Sections 3.1, 3.2, 3.3, 3.5, 3.6, 3.9, 3.12, 3.17, 4.1, 4.2, 4.4 and 4.5 shall survive indefinitely. All covenants and agreements contained herein which by their terms contemplate actions following the Closing shall survive the Closing and remain in full force and effect in accordance with their terms. All other covenants and agreements contained herein shall not survive the Closing and shall thereupon terminate. 30 9.6 HEADINGS; DEFINITIONS. The section and article headings contained in this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement. All references to sections or articles contained herein mean sections or articles of this Agreement unless otherwise stated. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms. 9.7 SEVERABILITY. If any provision of this Agreement or the application thereof to any Person or circumstance is held to be invalid or unenforceable to any extent, the remainder of this Agreement shall remain in full force and effect and shall be reformed to render the Agreement valid and enforceable while reflecting to the greatest extent permissible the intent of the parties. 9.8 SPECIFIC PERFORMANCE. The parties hereto agree that in the event the Company fails to consummate the Merger in accordance with the terms of this Agreement, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine. It is accordingly agreed that Parent and Merger Sub shall be entitled to specific performance in such event, without the necessity of proving the inadequacy of money damages as a remedy, in addition to any other remedy at law or in equity. 9.9 EXPENSES. Whether or not the Merger is consummated, and except as otherwise expressly set forth herein, all legal and other costs and expenses incurred in connection with the Merger, including any legal and other costs and expenses incurred in compliance with the terms of this Agreement, shall be paid by the party incurring such expenses. 9.10 NOTICES. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, telecopy, telefax or other electronic transmission service to the appropriate address or number as set forth below. IF TO THE COMPANY OR MERGER SUB: WITH A COPY TO: MailKey Corporation Duane Morris LLP 130 Shaftesbury Avenue 240 Princeton Avenue, Suite 150 London, England W1D 5EU Hamilton, NJ 08619-2304 Attention: Chief Executive Officer Attention: Vincent A. Vietti, Esquire 31 IF TO THE COMPANY OR THE PRINCIPAL WITH A COPY TO: TARGET SHAREHOLDERS: iElement, Inc. Technology Sector Law 333 Washington Boulevard, Suite 15 11845 Olympic Avenue Marina Del Rey, CA 90292 East Tower, Suite 550 Attention: Chief Financial Officer Los Angeles, CA 90064 Attention: Jebb Dykstra, Esquire 9.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the laws that might otherwise govern under applicable principles of conflicts of laws thereof, except to the extent that the NGCL shall apply to the internal corporate governance of Parent or the Company and to the extent that the DGCL shall apply to the internal corporate governance of Merger Sub. 9.12 ARBITRATION. If a dispute arises as to the interpretation of this Agreement, it shall be decided in an arbitration proceeding conforming to the Rules of the American Arbitration Association applicable to commercial arbitration then in effect at the time of the dispute. The arbitration shall take place in the State of New York. The decision of the Arbitrators shall be conclusively binding upon the parties and final, and such decision shall be enforceable as a judgment in any court of competent jurisdiction. The parties shall share equally the costs of the arbitration. 9.13 COUNTERPARTS. This Agreement may be executed in two or more counterparts and delivered via facsimile, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 9.14 CERTAIN DEFINITIONS. As used herein: (a) "AFFILIATE" shall have the meanings ascribed to such term in Rule 12b-2 of the Exchange Act; (b) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a day on which federally chartered financial institutions are not open for business in New York City; (c) "CONFIDENTIAL INFORMATION" shall mean the existence and contents of this Agreement and the schedules and exhibits hereto, and all proprietary technical, economic, environmental, operational, financial and/or business information or material of one party that, prior to or following the Closing Date, has been disclosed by the Company or any Subsidiary, on 32 the one hand, or Parent or Merger Sub, on the other hand, in written, oral (including by recording), electronic, or visual form to, or otherwise has come into the possession of, the other; (d) "EMPLOYEE BENEFIT PLAN" shall mean: (i) each bonus, stock option, stock purchase, incentive compensation, deferred compensation and other equity compensation plan, program, agreement or arrangement; (ii) each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program within the meaning of Section 3(1) of ERISA (whether or not subject to ERISA); (iii) each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); (iv) each "employee benefit plan" within the meaning of Section 3(3) of ERISA (whether or not subject to ERISA); (v) each employment, retention, termination, severance, change of control or compensation agreement; and (vi) each other employee benefit plan, fund, program, agreement or arrangement that is, in each case, sponsored, maintained or contributed to or required to be contributed to by the Company, any Subsidiary or any third party, or to which the Company, any Subsidiary or any third party is party, whether written or otherwise, for the benefit of any director, employee or former employee of the Company or any Subsidiary; (e) "ENCUMBRANCES" shall mean any security or other property interest or right, claim, lien, pledge, option, charge, security interest, contingent or conditional sale, or other title claim or retention agreement, interest or other right or claim of third parties, whether perfected or not perfected, voluntarily incurred or arising by operation of law, and including any agreement (other than this Agreement) to grant or submit to any of the foregoing in the future; (f) "ENVIRONMENTAL LAW" shall mean any applicable statute, rule, regulation, law, bylaw, ordinance or directive of any Governmental Authority dealing with the pollution or protection of natural resources, the indoor or ambient environment, or the protection of human health or safety; (g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (h) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder; (i) "GAAP" shall mean United States generally accepted accounting principles as in effect on the date or for the period with respect to which such principles are applied; (j) "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state, municipality or other political subdivision thereof and any entity, body, agency, commission or court, whether domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any executive official thereof; (k) "INTELLECTUAL PROPERTY" shall mean all of the Company's and Subsidiaries': (i) inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto and all patents, patent applications and patent disclosures, together with all 33 reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, (ii) trademarks, service marks, trade dress, domain names, maskworks, logos, trade names and corporate names, including all goodwill associated therewith and all applications, registrations and renewals in connection therewith, (iii) copyrightable works, copyrights and all applications, registrations and renewals in connection therewith, (iv) trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (v) computer software, together with all translations, adaptations, derivations and combinations thereof (including data and related documentation), (vi) all other proprietary rights, and (vii) all copies and tangible embodiments thereof (in whatever form or medium); (l) "KNOWLEDGE" shall mean (i) with respect to an individual, knowledge of a particular fact or other matter, if such individual is aware of such fact or other matter, and (ii) with respect to a Person that is not an individual, 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, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, knowledge of such fact or other matter; (m) "LIENS" shall mean liens, pledges, charges, claims, security interests, purchase agreements, options, title defects, restrictions on transfer or other encumbrances, or any agreements (other than this Agreement) to do any of the foregoing, of any nature whatsoever, whether consensual, statutory or otherwise; (n) "MATERIAL ADVERSE EFFECT" shall mean any adverse effect on the business, condition (financial or otherwise) or results of operation of the applicable entity and its subsidiaries, if any, which is material to the applicable entity and its subsidiaries, if any, taken as a whole; (o) "MATERIAL CONTRACT" shall mean any oral, written or implied contracts, agreements, leases, powers of attorney, guaranties, surety arrangements or other commitments, excluding equipment and furniture leases entered into in the ordinary course of business, the liabilities or commitments associated therewith exceed, in the case of the Company and its Subsidiaries collectively, $10,000 individually or $25,000 in the aggregate; (p) "PERSON" shall mean any individual, corporation, partnership, association, trust or other entity or organization, including a governmental or political subdivision or any agency or institution thereof; (q) "SEC" shall mean the Securities and Exchange Commission; (r) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder; and (s) "TAXES" shall mean all taxes (whether U.S. federal, state, local or non-U.S.) based upon or measured by income and any other tax whatsoever, including, without 34 limitation, gross receipts, profits, sales, levies, imposts, deductions, charges, rates, duties, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll and social security, employment, excise, stamp duty or property taxes, together with any interest, penalties, charges or fees imposed with respect thereto. [Remainder of page intentionally left blank] 35 IN WITNESS WHEREOF, Parent, Merger Sub, the Company and the Principal Shareholder have caused this Agreement to be signed by their respective officers hereunto duly authorized, all as of the date first written above. MAILKEY CORPORATION By: /s/ Tim Dean-Smith ------------------------------------- Tim Dean-Smith President and Chief Executive Officer MAILKEY ACQUISITION CORP. By: /s/ Tim Dean-Smith ------------------------------------- Tim Dean-Smith President and Chief Executive Officer IELEMENT, INC. By: /s/ Ivan Zweig ------------------------------------- Ivan Zweig President and Chief Executive Officer /s/ Ivan Zweig ---------------------------------------- Ivan Zweig 36 EXHIBITS AND SCHEDULES Pursuant to Item 601(b)(2) of Regulation S-K, the exhibits and schedules to this Agreement and Plan of Merger have been omitted. The Company agrees to furnish supplementally a copy of all omitted exhibits and schedules to the Securities and Exchange Commission upon request. 37 EX-2.4 5 ielement_ex0204.txt FIRST AMENDMENT EXHIBIT 2.4 FIRST AMENDMENT AND WAIVER TO AGREEMENT AND PLAN OF MERGER THIS FIRST AMENDMENT AND WAIVER TO AGREEMENT AND PLAN OF MERGER (this "Amendment and Waiver") is made and entered into this 31st day of December, 2004, by and among MAILKEY CORPORATION, a Nevada corporation ("Parent"), MAILKEY ACQUISITION CORP., a Delaware corporation and wholly-owned subsidiary of Parent ("MERGER Sub"), IELEMENT, INC., a Nevada corporation (the "COMPANY"), and IVAN ZWEIG, the principal shareholder of iElement (the "PRINCIPAL SHAREHOLDER"), for the purpose of amending the Agreement and Plan of Merger (the "MERGER Agreement") dated November 9, 2004, by and among Parent, Merger Sub, iElement and the Principal Shareholder. Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Merger Agreement. RECITALS WHEREAS, the parties hereto desire to amend certain provisions of the Merger Agreement. NOW, THEREFORE, in consideration of the foregoing premises and representations, warranties, covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. The Second WHEREAS clause is hereby deleted in its entirety and replaced with the following: WHEREAS, pursuant to the terms of this Agreement, upon consummation of the Merger, each issued and outstanding share (individually, a "Target Share"; and collectively, the "Target Shares") of common stock, $.001 par value per share ("Target Common Stock"), of the Company shall represent the right to receive between 2.5913 and 3.9835 newly issued shares (individually, a "Parent Share," and collectively, the "Parent Shares") of common stock, $.001 par value per share ("Parent Common Stock"), of Parent; and 2. The first sentence of Section 1.2(a)(iii) is hereby deleted in its entirety and replaced with the following sentences: Each of the Target Shares shall be converted into the right to receive between 2.5913 and 3.9835 newly issued Parent Shares (the "Exchange Ratio"). The Exchange Ratio shall be adjusted based on the number of Parent Shares issued to holders of those certain secured notes of the Company in the aggregate principal amount of $1,238,739 (the "Target Secured Notes") as follows: In the event that zero (0) Parent Shares are issued to the holders of the Target Secured Notes, the Exchange Ratio shall be 3.9835 and in the event that 24,774,785 Parent Shares are issued to the holders of the Target Secured Notes, the Exchange Ratio shall be 2.5913. In the event that the Number of Parent Shares issued to the holders of the Target Secured Notes is between zero (0) and 24,774,785, the Exchange Ratio shall equal 2.5913 plus the product of 1.3922 and a fraction the numerator of which is the number of Parent Shares issued to the holders of the Target Secured Notes and the denominator of which is 24,774,785. 3. The second and third sentences of Section 1.2(h) are hereby deleted in their entirety and replaced with the following sentences: In addition, the parties agree that that any shares of Parent Common Stock issued by Parent in connection with any capital-raising transaction by Parent shall be excluded from the determination of the Exchange Ratio and any adjustment of the Exchange Ratio. 4. The following provisions are hereby added as Sections 1.5 and 1.6: 1.5 OPTIONS AND WARRANTS. (a) Immediately prior to the Closing, each outstanding option ("Target Options") exercisable into shares of Target Common Stock and each warrant ("Target Warrants") exercisable into shares of Target Common Stock whether vested or not vested, shall immediately become vested in full and either exercised by the holder thereof prior to Closing or be deemed assumed by Parent. In the event that any Target Options and Target Warrants are exercised by the holder thereof prior to or simultaneous with the Closing, all shares of Target Common Stock issued upon exercise thereof shall be converted into Parent Shares in accordance with Section 1.2(a)(iii) of the Merger Agreement. (b) At and after the Effective Time: (i) each Target Option and Target Warrant then outstanding shall entitle the holder thereof to acquire the number (rounded down to the nearest whole number) of shares of Parent Common Stock determined by multiplying (x) the number of shares of Target Common Stock subject to such Target Option or Target Warrant immediately prior to the Effective Time, by (y) the Exchange Ratio; and (ii) the exercise price per share of Parent Common Stock subject to any Target Option or Target Warrant at and after the Effective Time shall be an amount (rounded down to the nearest one-hundredth of a cent) equal to (x) the exercise price per share of Target Common Stock subject to such Target Option or Target Warrant prior to the Effective Time, divided by (y) the Exchange Ratio. (c) Other than as provided in subsections (a) and (b) above, as of and after the Effective Time, each Target Option and Target Warrant then outstanding shall be subject to the same terms and conditions as in effect immediately prior to the Effective Time (including, but not limited to, the acceleration of exercisability or conversion, as applicable, as of the date of approval of the Merger by the shareholders of the Company), but giving effect to the Merger (it being understood that any performance criteria to which such Target Option, and or Target Warrant remains subject may be equitably adjusted by Parent to reflect the consummation of the Merger). 2 (d) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of Target Options and Target Warrants Notes after the Effective Time. 1.6 TARGET SECURED NOTES. Prior to the Effective Time, all Target Secured Notes shall either be (i) surrendered and cancelled in exchange for shares of Target Common Stock pursuant to the terms of a Securities Purchase Agreement in substantially the form attached hereto as EXHIBIT A; or (ii) exchanged for a newly issued Secured Notes in substantially the form attached hereto as EXHIBIT B. Any shares of Target Common Stock issued in exchange for Target Secured Notes shall be converted into Parent Shares in accordance with Section 1.2(a)(iii) of the Merger Agreement. Prior to the approval of the Merger by the shareholders of the Company, the Company shall use its best efforts to cause all such Target secured Notes to be exchanged for shares of Target Common Stock. 5. Sections 2.2(a)(ii), 2.2(a)(viii) and 5.11 are hereby deleted in their entirety. 6. The first, second, third, fourth and fifth sentences of Section 3.5(a) are hereby deleted in their entirety and replaced with the following sentences: Attached hereto as Schedule 3.5(a) is a complete and accurate list of (i) the Target Shareholders and each holder of Target Options, Target Warrants and Target Secured Notes, (ii) the number and class of issued and outstanding Target Shares, Target Options, Target Warrants and Target Secured Notes (collectively, the "Target Securities") owned by such Target Shareholders and holders on the date of this Agreement, (iii) the exercise price, date of grant, vesting schedules and number of shares of Target Common Stock issuable upon the exercise of the Target Options and Target Warrants, and (iv) the date of issuance and outstanding principal amount of all outstanding Target Secured Notes. The authorized capital stock of the Company consists of 30,000,000 shares of Target Common Stock. There are currently issued and outstanding (i) 4,319,392 shares of Target Common Stock, (ii) Target Options exercisable into 4,578,223 shares of Target Common Stock, (iii) Target Warrants exercisable into zero shares of Target Common Stock, and (iv) Target Secured Notes which may be exchanged for up to 9,560,755 shares of Target Common Stock. The Target Securities represent all of the outstanding equity interests in the Company. All of the Target Shares have been validly authorized and issued and are fully paid and non-assessable, and the Company has reserved on its books and records, for future issuance, the shares of Target Common Stock issuable upon the exercise of the Target Options or Target Warrants or upon exchange of the Target Notes. 7. Sections 2.2(b)(x) and 5.13(b) are hereby deleted in their entirety. The last sentence of 5.13(a) is deleted in its entirety and is replaced with the following sentence: If the Merger is consummated, the Parent will exchange any and all Promissory Notes outstanding from the Company at the time of closing for a newly issued Secured Note in substantially the form attached hereto as Exhibit B. 8. Section 5.14 is hereby deleted in its entirety. 3 9. Section 6.2(d) is hereby deleted in its entirety and replaced with the following provision: The Company shall have delivered to Parent and Merger Sub any certificates evidencing the Target Shares in accordance with Section 2.2(a)(i). 10. Section 5.16 is hereby amended to delete the words ""Business Days thereafter" and replace them with the word " days prior to Closing". 11. MailKey and Merger Sub do hereby waive any breach of any representations and warranties or breach of any covenants or agreements by any party to the Merger Agreement that may exist or arise under the Merger Agreement or this Amendment and Waiver as a result of the issuance by iElement of the Target Notes. 12. The waiver set forth in Section 9 hereof is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Merger Agreement, nor shall it constitute an obligation to execute similar waivers or amendments under the same or similar circumstances in the future. 13. Schedule 3.5(a) is hereby deleted in its entirety and replaced with the schedule attached hereto as EXHIBIT C. 14. Section 9.11 is hereby amended to provide for copies of notice to the Company or Principal Target Shareholders to be sent to the following person: The Lebrecht Group, APLC 22342 Avenida Empresa, Suite 220 Rancho Santa Margarita, CA 92688 Facsimile (949) 635-1244 Attention: Brian A. Lebrecht, Esq. 15. Except as expressly provided herein, the Merger Agreement shall remain in full force and effect. 16. This Amendment and Waiver may be executed in two or more counterparts and delivered via facsimile, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 17. This Amendment and Waiver shall be governed by and construed in accordance with the laws of the State of New York, without regard to the laws that might otherwise govern under applicable principles of conflicts of laws thereof, except to the extent that the NGCL shall apply to the internal corporate governance of Parent or the Company and to the extent that the DGCL shall apply to the internal corporate governance of Merger Sub. 4 IN WITNESS WHEREOF, Parent, Merger Sub, the Company and the Principal Shareholder have caused this Amendment and Waiver to be signed by their respective officers hereunto duly authorized, all as of the date first written above. MAILKEY CORPORATION By: /s/ Tim Dean-Smith ------------------------------------- Tim Dean-Smith President and Chief Executive Officer MAILKEY ACQUISITION CORP. By: /s/ Tim Dean-Smith ------------------------------------- Tim Dean-Smith President and Chief Executive Officer IELEMENT, INC. By: /s/ Ivan Zweig ------------------------------------- Ivan Zweig President and Chief Executive Officer /s/ Ivan Zweig ---------------------------------------- Ivan Zweig 5 EXHIBITS AND SCHEDULES Pursuant to Item 601(b)(2) of Regulation S-K, the exhibits and schedules to this Agreement and Plan of Merger have been omitted. The Company agrees to furnish supplementally a copy of all omitted exhibits and schedules to the Securities and Exchange Commission upon request. EX-3.I.1 6 ielement_ex03001i.txt ARTICLES OF INCORPORATION EXHIBIT 3(i).1 ARTICLES OF INCORPORATION OF Air Epicurean, Inc. Article I. The name of the Corporation is Air Epicurean, Inc. Article II. Its principal and registered office in the State of Nevada is 774-180 Mays Boulevard, Incline Village NV 89451. The initial registered agent for services of process at that address is N & R Group, Ltd. a Nevada Corporation. Article III. The purposes for which the corporation is organized are to engage in any activity or business not in conflict with the laws of the State of Nevada or of the United States of America. The period of existence of the corporation shall be perpetual. Article IV. The Corporation shall have authority to issue an aggregate of One Hundred Million (100,000,000) shares of common voting equity stock of par value one mil ($0.001) per share, and no other class or classes of stock, for a total capitalization of $100,000. The Corporation's capital stock may be sold from time to time for such consideration as may be fixed by the Board of Directors, provided that no consideration so fixed shall be less than par value. Article V. No shareholder shall be entitled to any preemptive or preferential rights to subscribe to any unissued stock or any other securities which the corporation may now or hereafter be authorized to issue, nor shall any shareholder possess cumulative voting rights at any shareholders meeting for the purpose of electing Directors. Article VI. The affairs of the corporation shall be governed by a Board of Directors of one (1) person. The Initial Director of the Corporation, whose name and address is J. Dan Sifford, Jr., 3131 Southwest Freeway, Suite 46, Houston, TX 77098, to serve until the next regular meeting of shareholders or until their successors are elected. Article VII. The Capital Stock after the amount of the subscription price or par value shall not be subject to assessment to pay the debts of the corporation, and no stock issued as paid up shall ever be assessable or assessed. Article VIII. The initial By-laws of the corporation shall be adopted by its Board of Directors. The power to alter, amend or repeal the By-laws, or adopt new By-laws, shall be vested in the Board of Directors, except as otherwise may be specifically provided in the By-laws. Article IX. The name and address of the Incorporator of the corporation is J. Dan Sifford, Jr., 3131 Southwest Freeway, Suite 46, Houston, TX 77098 I THE UNDERSIGNED, being the Incorporator hereinbefore named for the purpose of forming a Corporation pursuant the General Corporation Law of the State of Nevada, do make and file these Articles of Incorporation, hereby declaring and certifying that the facts herein stated are true, and accordingly have set my hand hereunto this Day, July 12, 1996. /S/ J. Dan Sifford, Jr. J. Dan Sifford, Jr. INCORPORATOR EX-3.I.2 7 ielement_ex03002i.txt AMENDMENT TO ARTICLES EXHIBIT 3(i).2 AMENDMENT TO ARTICLES OF INCORPORATION OF Air Epicurean, Inc. (after payment of capital and issuance of stock) We the Undersigned, Officers of Air Epicurean, Inc. ("the Corporation") hereby certify: The Board of Directors of the Corporation at a meeting of duly convened and held on April 24, 1997 adopted a resolution to amend the Articles of Incorporation as Originally filed and/or amended. Article One is superseded and replaced as follows: Article I. The name of the Corporation shall be Ikon Ventures, Inc. The number of shares of the Corporation outstanding and entitled to vote on an amendment to the Articles of Incorporation is 25,550,000; and the foregoing changes and amendment have been consented to and approved by affirmative vote of 23,720,000 shares, a majority vote of 92% of each class of stock outstanding and entitled to vote thereon, at a Meeting of Shareholders duly called upon notice; immediately following which approval, this amendment was adopted by the Board of Directors. Matthew R. Bauer J. Dan Sifford PRESIDENT SECRETARY EX-3.I.3 8 ielement_ex03003.txt AMENDMENT TO ARTICLES EXHIBIT 3(i).3 AMENDMENT TO ARTICLES OF INCORPORATION OF IKON VENTURES, INC. (a Nevada corporation) FIRST: The name of the corporation is IKON VENUTRES, INC. (the "Corporation"). SECOND: The Corporation wishes to amend Article I of the Corporation's articles of incorporation to change the Corporation's name to Sutton Trading Solutions, Inc. Accordingly, as amended said Article shall read in its entirety as follows: "Article I. The name of the Corporation is SUTTON TRADING SOLUTIONS, INC." THIRD: That the stockholders holding a majority of the outstanding shares of stock entitled to vote on the amendment approved said amendment by written consent dated September 10, 2001 in accordance with the provisions of Section 78.320 of the General Corporation Law of the State of Nevada and Article II.8 of the By-laws of the Corporation. IN WITNESS WHEREOF, the undersigned, being the Chief Executive Officer of the Corporation, for the purpose of amending the Articles of Incorporation pursuant to the General Corporation Law of Nevada, does hereby make and file these Articles of Amendment. Dated: As of September 10, 2001 ATTEST: /s/ LEIGH BICKELL /s/ JONATHAN D. SIEGEL - -------------------------------- -------------------------------- Leigh Bickell Jonathan D. Siegel Secretary Chief Executive Officer EX-3.I.4 9 ielement_ex0304.txt AMENDMENT TO ARTICLES EXHIBIT 3(i).4 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION (AFTER ISSUANCE OF STOCK) SUTTON TRADING SOLUTIONS, INC. We, the undersigned, Andrew J. Kacic, Chairman, and John W. Shaffer, Secretary of Sutton Trading Solutions, Inc. do hereby certify: That the Board of Directors of said corporation by Unanimous Written Consent of the Board of Directors dated as of February 27, 2003 adopted resolutions to amend the original articles as follows: Article I is hereby amended to read in its entirety as follows: Article I. The name of the corporation is Global diversified Acquisition Corp. (hereinafter called the "Corporation"). Article IV is hereby amended to read in its entirety as follows: Article IV. The Corporation shall have authority to issue an aggregate of One Hundred Million (100,000,000) shares of common voting equity stock of par value one mil ($0.001) per share, and no other class or classes of stock, for a total capitalization of $100,000. The Corporation's capital stock may be sold from time to time for such consideration as may be fixed by the Board of Directors, provided that no consideration so fixed shall be less than par value. Each 100 shares of Common Stock outstanding at 9:00 a.m. on February 13, 2001 shall be deemed to be one share of Common Stock of the Corporation, par value one mil ($0.001) per share. Each 400 shares of Common Stock outstanding at 9:00 a.m. on April __, 2003 [i.e., the filing date of the Certificate of Amendment] shall be deemed to be one share of Common Stock of the Corporation, par value one mil ($0.001) per share." The number of shares of the Corporation outstanding and entitled to vote on an amendment to the Articles of Incorporation is 47,579,520; that the said change and amendment have been consented to and approved by a majority vote of the stockholders holding at least a majority of each class of stock outstanding and entitled to vote thereon. ---------------------------------------- Andrew J. Kacic, Chief Executive Officer ---------------------------------------- John W. Shaffer, Secretary STATE OF ARIZONA ) ) SS. COUNTY OF ) On April ___, 2003, personally appeared before me, a Notary Public, Andrew J. Kacic and John W. Shaffer, who acknowledged that they executed the above instrument. ---------------------------------------- Signature of Notary (Notary Stamp or Seal) EX-3.I.5 10 ielement_ex0305i.txt CERTIFICATE OF CORRECTION EXHIBIT 3(i).5 CERTIFICATE OF CORRECTION (Pursuant to NRS 78.0295 and 80.007) 1. The name of the corporation for which correction is being made: Global Diversified Acquisition Corp. 2. Description of the original document for which correction is being made: Certificate of Amendment of Articles of Incorporation (After Issuance of Stock) 3. Filing date of the original document: 04/23/03 4. Description of the incorrect statement and the reason it is incorrect or the manner in which the execution or other formal authentication was defective: Article IV. The penultimate sentence of Article IV was incorrect in that the date stated therein, April 23, 2003 should have been February 13, 2001, as stated in prior filings with the Secretary of State. 5. Correction of the incorrect statement or defective execution or authentication: As corrected, Article IV should read in its entirety as follows: The Corporation shall have authority to issue an aggregate of One Hundred Million (100,000,000) shares of common voting equity stock of par value one mil ($0.001) per share, and no other class or classes of stock, for a total capitalization of $100,000. The Corporation's capital stock may be sold from time to time for such consideration as may be fixed by the Board of Directors, provided that no consideration so fixed shall be less than par value. Each 100 shares of Common Stock outstanding at 9:00 a.m. on February 13, 2001 shall be deemed to be one share of Common Stock of the Corporation, par value one mil ($0.001) per share. Each 400 shares of Common Stock outstanding at 9:00 a.m. on April 24, 2003 shall be deemed to be one share of Common Stock of the Corporation, par value one mil ($0.001) per share." 6. Signature: /s/ JOHN W. SHAFFER ---------------------------------------- John W. Shaffer, Secretary July 2, 2003 EX-3.I.6 11 ielement_ex0306.txt AMENDED ARTICLES EXHIBIT 3(i).6 CERTIFICATE OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF MAILKEY CORPORATION The undersigned President of Mailkey Corporation, a Nevada Corporation (the "Corporation"), pursuant to the provisions of Sections 78.385 and 78.390 of the Nevada Revised Statutes, for the purposes of amending the Articles of Incorporation of the Corporation, does hereby certify as follows: That (i) the Board of Directors of the Corporation in a Unanimous Consent to Action in lieu of Special Meeting of the Board of Directors, and (ii) a majority of the shareholders of the Corporation in a Consent to Action in lieu of Special Meeting of the Stockholders, on MARCH 3, 2005 adopted resolutions to amend the Articles of Incorporation of the Corporation as follows: Article I of the Articles of Incorporation is deleted in its entirety and hereby amended to read as follows: "ARTICLE I NAME - ---- The name of the Corporation is "IELEMENT CORPORATION." Article IV of the Articles of Incorporation is deleted in its entirety and hereby amended to read as follows: "ARTICLE IV STOCK - ----- The number of shares the Corporation is authorized to issue is Two Billion Two Hundred Million (2,200,000,000) shares consisting of: (a) 2,000,000,000 shares of common stock, $0.001 par value per share ("Common Stock"); and (b) 200,000,000 shares of blank check preferred stock, $0.001 par value per share ("Blank Check Preferred Stock"); 1. COMMON STOCK (a) Voting. Except as otherwise expressly provided by law, and subject to the voting rights provided to the holders of the Blank Check Preferred Stock by the Board of Directors, the Common Stock shall have exclusive voting rights on all matters requiring a vote of shareholders, voting together as one class. (b) Other Rights. Each share of Common Stock issued and outstanding shall be identical in all respects one with the other, and no dividends shall be paid on any shares of Common Stock unless the same is paid on all shares of Common Stock outstanding at the time of such payment. Except for and subject to the terms expressly provided to the holders of the Blank Check Preferred Stock, or except as may be provided by the laws of the State of Nevada, the holders of Common Stock shall have exclusively all other rights of shareholders. (c) Pursuant to NRS 78.2055(3), if the Corporation proposes to decrease the number of issued and outstanding shares of a particular class or series of shares and such decrease would adversely affect the relative preference or rights of another class or series, the Corporation shall not be required to seek the approval of such other affected class or series. (d) Pursuant to NRS 78.207(3), if the Corporation proposes to decrease or increase the authorized shares of a particular class or series of shares and correspondingly increase or decrease the amount of issued and outstanding shares of the same class or series, and such decrease or increase would adversely affect the relative preference or rights of another class or series, the Corporation shall not be required to seek the approval of such other affected class or series. 2. BLANK CHECK PREFERRED STOCK (a) Issuance. The Blank Check Preferred Stock may be issued from time to time in one or more series. Subject to the limitations set forth herein and any limitations prescribed by law, the Board of Directors is expressly authorized, prior to issuance of any series of Blank Check Preferred Stock, to fix by resolution or resolutions providing for the issue of any series the number of shares included in such series and the designations, relative powers, preferences and rights, and the qualifications, limitations or restrictions of such series. Pursuant to the foregoing authority vested in the Board of Directors, subject to the laws of the State of Nevada, the Board of Directors is expressly authorized to determine with respect to each series of Blank Check Preferred Stock: (i) The designation or designations of such series and the number of shares (which number from time to time may be decreased by the Board of Directors, but not below the number of such shares then outstanding, or may be increased by the Board of Directors unless otherwise provided in creating such series) constituting such series; (ii) The rate or amount and times at which, and the preferences and conditions under which, dividends shall be payable on shares of such series, the status of such dividends as cumulative or noncumulative, the date or dates from which dividends, if cumulative, shall accumulate, and the status of such shares as participating or nonparticipating after the payment of dividends as to which such shares are entitled to any preference; (iii) The rights and preferences, if any, of the shareholders of such series upon the liquidation, dissolution or winding up of the affairs of, or upon any distribution of the assets of, the Corporation, which amount may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates, and the status of the shares of such series as participating or nonparticipating after the satisfaction of any such rights and preferences; (iv) The full, limited or special voting rights, if any, to be provided for shares of such series, in addition to the voting rights provided by law; (v) The times, terms and conditions, if any, upon which shares of such series shall be subject to redemption, including the amount the shareholders of such series shall be entitled to receive upon redemption (which amount may vary under different conditions or at different redemption dates) and the amount, terms, conditions and manner of operation of any purchase, retirement or sinking fund to be provided for the shares of such series; (vi) The rights, if any, of shareholders of such series to convert such shares into, or to exchange such shares for, shares of any other class or classes or of any other series of the same class, the prices or rates of conversion or exchange, and adjustments thereto, and any other terms and conditions applicable to such conversion or exchange; (vii) The limitations, if any, applicable while such series is outstanding on the payment of dividends or making of distributions on, or the acquisition or redemption of, Common Stock or restrictions, if any, upon the issue of any additional shares (including additional shares of such series or any other series or of any other class) ranking on a parity with or prior to the shares of such series either as to dividends or upon liquidation; (viii) The conditions or restrictions, if any, upon the issue of any of any other class) ranking on a parity with or prior to the shares of such series either as to dividends or upon liquidation; and (ix) Any other relative powers, preferences and participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of shares of such series; in each case, so far as not inconsistent with the provisions of this Article of Incorporation or the laws of Nevada as then in effect. 3. ISSUANCE OF CERTIFICATES The Board of Directors shall have the authority to issue shares of the capital stock of this Corporation and the certificates therefore subject to such transfer restrictions and other limitations as it may deem necessary to promote compliance with applicable federal and state securities laws, and to regulate the transfer thereof in such manner as may be calculated to promote such compliance or to further any other reasonable purpose. 4. DISTRIBUTION OF SHARES AS DIVIDEND The Board of Directors shall have the authority, in its sole discretion, to issue shares in one class or series of the Corporation's stock as a share dividend in respect of shares of another class irrespective of the existence of outstanding shares of the class or series to be issued." Article VI of the Articles of Incorporation is deleted in its entirety and hereby amended to read as follows: "ARTICLE VI DIRECTORS - --------- The affairs of the corporations shall be governed by a Board of Directors in accordance with the Corporation's Bylaws and pursuant to the laws of the State of Nevada." Article VIII of the Articles of Incorporation is deleted in its entirety and hereby amended to read as follows: "ARTICLE VIII BYLAWS - ------ The initial Bylaws of the Corporation shall be adopted by its Board of Directors. The power to alter, amend or repeal the Bylaws, or adopt new Bylaws, shall be vested exclusively in the Board of Directors, except as otherwise may be specifically provided in the Bylaws." The Articles of Incorporation are hereby amended to add the following language as Article XI: "ARTICLE XI INDEMNIFICATION - --------------- 11.1 INDEMNIFICATION. The Corporation shall indemnify its directors to the full extent permitted by applicable corporate law now or hereafter in force. However, such indemnity shall not apply if the director did not (a) act in good faith and in a manner the director reasonably believed to be in or not opposed to the best interests of the Corporation, and (b) with respect to any criminal action or proceeding, have reasonable cause to believe the director's conduct was unlawful. The Corporation shall advance expenses for such persons pursuant to the terms set forth in the Bylaws, or in a separate Board resolution or contract. 11.2 AUTHORIZATION. The Board of Directors may take such action as is necessary to carry out these indemnification and expense advancement provisions. It is expressly empowered to adopt, approve, and amend from time to time such Bylaws, resolutions, contracts, or further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions. Such Bylaws, resolutions, contracts or further arrangements shall include but not be limited to implementing the manner in which determinations as to any indemnity or advancement of expenses shall be made. 11.3 EFFECT OF AMENDMENT. No amendment or repeal of this Article shall apply to or have any effect on any right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal." EX-10.1 12 ielementsb2a-ex1001.txt EMPLOYMENT AGR EXHIBIT 10.1 MailKey Corporation 26 Bradmore Park Road London W6 ODT January 18,2005 To:Ivan Zweig iElement Inc. Dear Ivan, Re: Ivan Zweig Employment Agreement - Binding Letter of Intent The goal of this letter is to set forth the essential terms and conditions of your Employment Agreement following the Mailkey and I-Element, Inc. merger agreement to be consummated on January 17,2005. The terms and conditions set forth here shall be considered binding to both parties and will survive until the Parties reach a definitive agreement on an Employment Agreement. Both Parties to this Binding Letter of Intent agree to work in good faith to complctc thc dcfinitive Employment Agreement within 60 days of the closing of the merger between Mailkey Corporation ("Parent") and I-Element, Inc. ("Sub")."). This Letter of Intent replaces any earlier letter of intent. The Parties agree to the following terms and conditions: 1. Ivan Zweig's base salary will be paid to Krarnerica Capital Corporation and will equal $25,000 per month. 2. Title shall be Chief Executive Officer of both Parent and Sub. 3. Duties shall be all the usual duties of CEO. 4. Mr. Zwcig primary office shall bc in the Dallas, TX metropolitan area. 5. He shall receive standard benefits as provided by Sub, but in no event shall he receive less than four weeks of vacation per year, and as revised or amended from time to time. 6. Mr. Zweig shall have all reasonable business expenses reimbursed by Sub. 7. Termination / Cessation of Services by Mr. Zweig: a. If Mr. Zweig is terminated without cause by the Parent, Parent shall immediately pay off all Notes owed to Mr. Zweig or his entities, shall fully vest and accelerate all outstanding unvested options, and shall pay off in full his earned performance bonuses, shall pay all accrued vacation and other benefits. b. If Parent terminates Ivan Zweig prior to expiration of the 48 month period for any reason other than "cause," then parent is obligated to: Page 2 January 18,2005 Re: Ivan Zweig Employment Agreement - Binding Letter of Intent i. Pay Mr. Zweig in full all Notes owed to either Ivan Zweig or Kramerica Capital Corporation, ii. Pay Mr. Zweig within five busincss days at least 75% of thc earned bonus plan set forth by the Company Board of Directors. c. If Mr. Zweig is terminated for cause, Company shall pay off all of Notes and other obligations due and payable to Mr. Zweig within 60 days. 8. The term of this Employment Agreement will be 48 months; unless an event of default pursuant to section 3.1A of the Company loan notes issued in pursuance of the merger with iElement is declared, in which event, the employment agreement under this letter and any subsequent binding employment agreement(s) shall be immediately terminated with no further payment due except any base salary and expenses due up until the date of the declaration of the event of default. 9. Mr Zweig will receive bonuses according to the following - - Months 1-12 no bonus - - Months 13 -24 $1M target bonus. This bonus will be calculated on the closing average revenue number and EBITDA for months 22-24. The target is $15M in annualized revenue ($1,250,000 per month) with an EBITDA target of 15%. - - Months 25-36 $2M target bonus. The target is $22.5M in actual revenue during months 25-36. with an EBITDA of 18%. - - Months 37-48 $3M target bonus. The target is $30M in actual revenue during months 37-48, with an EBITDA of 21%. There will be a sliding scale agreed by the company for providing partial bonuses if the performance is less than the target, but still good. Bonus will be paid in promissory notes. Any cash payment to Mr Zweig against the promissory notes cannot exceed 25% of EBITDA cash flow in one month. 10. During the term of this Agreement, Mailkey shall nominate Ivan Zweig for a seat on the Parent's Board of Directors; and // // Intentionally Left Blank // Page 3 January 18,2005 Re: Ivan Zweig Employment Agreement - Binding Letter of Intent 11. Mailkey shall use its best efforts to cause I-Element to enter into an Employment Agreement with Ivan Zweig pursuant to the essential terms and conditions of this Letter of Intent. IN WITNESS WHEREOF, the parties have executed this Binding Letter of Intent as to the above essential terms and conditions for an Emp1oyment Agreement between Company and Mr. Ivan Zweig as of the date first hereinabove written. COMPANY - MAILKEY CORPORATION /s/ Tim Dean-Smith - --------------------------------------- By: Tim Dean-Smith ---------------------------------- Its: CEO ---------------------------------- I-ELEMENT, INC. /s/ Ivan Zweig - --------------------------------------- By: Ivan Zweig ---------------------------------- Its: CEO ---------------------------------- KRAMERICA CAPITAL CORPORATION, a Nevada corporation /s/ Ivan Zweig - --------------------------------------- By: Ivan Zweig ---------------------------------- Its: CEO ---------------------------------- IVAN ZWEIG, as an individual /s/ Ivan Zweig - --------------------------------------- By: Ivan Zweig ---------------------------------- Its: CEO ---------------------------------- EX-10.2 13 ielementsb2a-ex1002.txt FORM OF WARRANT EXHIBIT 10.2 WARRANT THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. Warrant To Purchase 250,000 Shares of Common Stock IELEMENT CORPORATION SUCCESSOR TO MAILKEY CORPORATION Date of Issuance: ____________________, 200 No. _______ THIS CERTIFIES that, for value received, ___________________________________, or its assigns (in either case, the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from IElement Corporation, a Nevada corporation (the "Company"), at the price per share set forth in Section 9 hereof, that number of shares of the Company's common stock (the "Common Stock") set forth in Section 8 hereof. This Warrant is referred to herein as the "Warrant" and the shares of Common Stock issuable pursuant to the terms hereof are sometimes referred to herein as "Warrant Shares." 1. HOLDER EXERCISE OF WARRANT. This Warrant shall only be exercisable in whole. To exercise this Warrant in whole, the Holder shall deliver to the Company at its principal office, (a) a written notice, in substantially the form of the exercise notice attached hereto as EXHIBIT A (the "Exercise Notice"), of the Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (b) a check (or wire transfer of funds) in the amount of the aggregate exercise price for the Warrant Shares being purchased, and (c) this Warrant. The Company shall as promptly as practicable, and in any event within twenty (20) days after delivery to the Company of (i) the Exercise Notice, (ii) the check (or wire transfer of funds) mentioned above, and (iii) this Warrant, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates representing the aggregate number of shares of Common Stock specified in such notice, provided this Warrant has vested on or prior to 1 the date such notice is delivered. Each certificate representing Warrant Shares shall bear the legend or legends required by applicable securities laws as well as such other legend(s) the Company requires to be included on certificates for its Common Stock. The Company shall pay all expenses and other charges payable in connection with the preparation, issuance and delivery of such stock certificates except that, in case such stock certificates shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all stock transfer taxes that are payable upon the issuance of such stock certificate or certificates shall be paid by the Holder at the time of delivering the Exercise Notice. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid, and nonassessable. The Warrant shall expire on December 31, 2007 (the "Expiration Date"). The Investor may exercise the warrant at any time prior to the Expiration Date. The Company has no restriction on the sale or transfer of the Warrant or Warrant Shares; HOWEVER, the Investor is required to comply with all state and U. S. laws and regulations relating to security sales and transfers. 2. REGISTRATION RIGHTS. The Company agrees not to file a registration statement with the SEC, other than on Form 10, Form S-4 (except for a public reoffering or resale) or Form S-8 without first having registered (or simultaneous registering) the Common Stock or Warrant Shares. 3. RESERVATION OF SHARES. The Company hereby covenants that at all times during the term of this Warrant there shall be reserved for issuance such number of shares of its Common Stock as shall be required to be issued upon exercise of this Warrant. 4. FRACTIONAL SHARES. This Warrant may be exercised only for a whole number of shares of Common Stock, and no fractional shares or scrip representing fractional shares shall be issuable upon the exercise of this Warrant. 5. TRANSFER OF WARRANT AND WARRANT SHARES. The Holder may sell, pledge, hypothecate, or otherwise transfer this Warrant, in whole, in accordance with and subject to the terms and conditions set forth in the Subscription Agreement and then only if such sale, pledge, hypothecation, or transfer is made in compliance with the act or pursuant to an available exemption from registration under the act relating to the disposition of securities, and is made in accordance with applicable state securities laws. 6. LOSS OF WARRANT. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, or destruction of this Warrant, and of indemnification satisfactory to it, or upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new warrant of like tenor. 7. RIGHTS OF THE HOLDER. No provision of this Warrant shall be construed as conferring upon the Holder the right to vote, consent, receive dividends or receive notice other than as expressly provided herein. Prior to exercise, no provision hereof, in the absence of affirmative action by the Holder to exercise this Warrant, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the holder for the purchase price of any warrant shares or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 2 8. NUMBER OF WARRANT SHARES. This Warrant shall be exercisable for two hundred fifty thousand (250,000) shares of the Company's Common Stock, as adjusted in accordance with this Agreement. 9. EXERCISE PRICE; ADJUSTMENT OF WARRANTS. a. DETERMINATION OF EXERCISE PRICE. The per share purchase price (the "Exercise Price") for each of the Warrant Shares purchasable under this Warrant shall be equal to Ten Cents ($0.10). b. ADJUSTMENT FOR MERGERS OR REORGANIZATION, ETC. In case of any consolidation or merger of the Company with or into another corporation or the conveyance of all or substantially all of the assets of the Company to another corporation, this Warrant shall be exercisable into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon exercise of this Warrant would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holder of this Warrant, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as reasonable may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of this Warrant. c. NO IMPAIRMENT. THE COMPANY WILL NOT, THROUGH ANY REORGANIZATION, TRANSFER OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ISSUE OR SALE OF SECURITIES OR ANY OTHER VOLUNTARY ACTION, AVOID OR SEEK TO AVOID THE OBSERVANCE OR PERFORMANCE OF ANY OF THE TERMS TO BE OBSERVED OR PERFORMED HEREUNDER BY THE COMPANY, BUT WILL AT ALL TIMES IN GOOD FAITH ASSIST IN THE CARRYING OUT OF ALL THE PROVISIONS OF THIS SECTION AND IN THE TAKING OF ALL SUCH ACTION AS MAY BE NECESSARY OR APPROPRIATE IN ORDER TO PROTECT THE EXERCISE RIGHTS OF THE HOLDER OF THIS WARRANT AGAINST IMPAIRMENT. d. ISSUE TAXES. The Company shall pay issue taxes that may be payable in respect of any issue or delivery of shares of Common Stock on exercise of this Warrant, in whole; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such exercise. e. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of common stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of common stock as shall from time to time be sufficient to effect the exercise of this Warrant; and if at any time the number of authorized but unissued shares of common stock shall not be sufficient to effect the exercise of this Warrant, the Company will take all appropriate corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of common stock to such number of shares as shall be sufficient for such purpose. 3 10. CERTAIN DISTRIBUTIONS. In case the Company shall, at any time, prior to the Expiration Date, declare any distribution of its assets to holders of its common stock as a partial liquidation, distribution or by way of return of capital, other than as a dividend payable out of earnings or any surplus legally available for dividends, then the Holder shall be entitled, upon the proper exercise of this Warrant in whole prior to the effecting of such declaration, to receive, in addition to the shares of common stock issuable on such exercise, the amount of such assets (or at the option of the Company a sum equal to the value thereof at the time of such distribution to holders of common stock as such value is determined by the Board of Directors of the Company in good faith), which would have been payable to the Holder had it been a holder of record of such shares of common stock on the record date for the determination of those holders of Common Stock entitled to such distribution. 11. DISSOLUTION OR LIQUIDATION. In case the Company shall, at any time prior to the Expiration Date, dissolve, liquidate or wind up its affairs, the Holder shall be entitled, upon the proper exercise of this Warrant in whole and prior to any distribution associated with such dissolution, liquidation, or winding up, to receive on such exercise, in lieu of the shares of Common Stock to which the Holder would have been entitled, the same kind and amount of assets as would have been distributed or paid to the Holder upon any such dissolution, liquidation or winding up, with respect to such shares of Common Stock had the Holder been a holder of record of such share of Common Stock on the record date for the determination of those holders of Common Stock entitled to receive any such dissolution, liquidation, or winding up distribution. 12. RECLASSIFICATION OR REORGANIZATION. In case of any reclassification, capital reorganization or other change of outstanding shares of common stock of the Company (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of an issuance of common stock by way of dividend or other distribution or of a subdivision or combination), the Company shall cause effective provision to be made so that the Holder shall have the right thereafter by exercising this Warrant, IN ACCORDANCE WITH THE Unit Subscription Agreement, to purchase the kind and amount of shares of stock and other securities and PROPERTY RECEIVABLE UPON SUCH RECLASSIFICATION, CAPITAL REORGANIZATION OR OTHER CHANGE, BY A HOLDER OF THE PROPORTIONAL EQUITY OWNERSHIP IN COMMON STOCK WHICH MIGHT HAVE BEEN PURCHASED UPON EXERCISE OF THIS WARRANT IMMEDIATELY PRIOR TO SUCH RECLASSIFICATION OR CHANGE. ANY SUCH PROVISION SHALL INCLUDE PROVISION FOR ADJUSTMENTS WHICH SHALL BE AS NEARLY EQUIVALENT AS MAY BE PRACTICABLE TO THE ADJUSTMENTS PROVIDED FOR IN THIS WARRANT. THE FOREGOING PROVISIONS OF THIS SECTION 12 SHALL SIMILARLY APPLY TO SUCCESSIVE RECLASSIFICATIONS, CAPITAL REORGANIZATIONS AND CHANGES OF SHARES OF COMMON STOCK. IN THE EVENT THAT IN ANY SUCH CAPITAL REORGANIZATION, RECLASSIFICATION, OR OTHER CHANGE, ADDITIONAL SHARES OF COMMON STOCK SHALL BE ISSUED IN EXCHANGE, CONVERSION, SUBSTITUTION OR PAYMENT, IN WHOLE, FOR OR OF A SECURITY OF THE COMPANY OTHER THAN COMMON STOCK, ANY AMOUNT OF THE CONSIDERATION RECEIVED UPON THE ISSUE THEREOF BEING DETERMINED BY THE BOARD OF DIRECTORS OF THE COMPANY SHALL BE FINAL AND BINDING ON THE HOLDER. 4 13. MISCELLANEOUS. a. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors and assigns of the parties, except to the extent otherwise provided herein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. b. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to the principles of conflict of laws thereof. c. COUNTERPARTS; DELIVERY BY FACSIMILE. This 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. Delivery of this Agreement may be effected by facsimile. d. TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. e. NOTICES. Unless otherwise provided, any notice required or permitted hereunder shall be given by personal service upon the party to be notified, by nationwide overnight delivery service or upon deposit with the United States Post Office, by certified mail, return receipt requested and: (i) if to the Company, addressed to IElement Corporation., 17194 Preston Road, Suite 102 PMB 341, Dallas, TX 75248, or at such other address as the Company may designate by notice to each of the Investors in accordance with the provisions of this Section; and (ii) if to the Warrant holder, at the address indicated on the signature page hereof, or at such other addresses as such Holder may designate by notice to the Company in accordance with the provisions of this Section. f. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either prospectively or retroactively), only with the written consent of the Company and a majority in interest of the Holders. g. ENTIRE AGREEMENT. This Agreement, the Memorandum (including the exhibits and schedules thereto) by and between the Company and the Holder, constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties hereto. 5 IN WITNESS WHEREOF, the undersigned hereby sets is hand and seal this: ___________ day of _________________, 200 . IElement Corporation. By: ____________________________________ Name: Ivan Zweig Title: Chief Executive Officer Investor Name: _____________________________________ Investor Address: __________________________________ _____________________________________________________ _____________________________________________________ 6 WARRANT EXHIBIT A NOTICE OF EXERCISE (To be signed only upon exercise of the Warrant) TO: I Element Corporation, successor to Mailkey Corporation. The undersigned hereby irrevocably elects to exercise the purchase rights represented by the Warrant granted to the undersigned on ______________________, 200 and to purchase thereunder ______________* shares of Common Stock of IElement Corporation. (the "Company") and herewith encloses either payment of $__________________________________ or instructions regarding the manner of exercise permitted under Section 1 of the Warrant, in full payment of the purchase price of such shares being purchased. Dated: ______________________________ ____________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ____________________________________________________ (Please Print Name) ____________________________________________________ (Address) * Insert here the number of shares being exercised, without making any adjustment for additional Common Stock of the Company nor accounting for recapitalization or reorganization of the Company following the original date of the Unit Subscription Agreement, other securities or property which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 7 WARRANT EXHIBIT B (To be used by IElement Corporation. to give notice to Warrant Holders of CALL to exercise the Warrant) NOTICE OF CALL To: The Holder of IElement Corporation Warrant. Name: _______________________________________________ (name of Warrant Holder) Address:____________________________________________ ____________________________________________ ____________________________________________ Notice is hereby given to you that IElement Corporation. (the "Company") hereby elects to exercise its "call" option to sell shares of common stock ("Common Stock") of the Company to you, the Investor, as of the Warrant Call Date, at the Exercise Price and for the number of shares written below, all pursuant to that certain Subscription Agreement and Warrant by and between the Company and you. You are required to exercise your right to purchase common shares of the Company within the time and for the price per share as stated in the said Warrant or you will lose your right to purchase Company common shares on the terms and conditions as stated in said Warrant. Call Date:__________________________________________ Intended Number of Shares:__________________________ Share Dollar Amount:________________________________ Price Per Share: $0.10 IElement Corporation. By:__________________________________ Dated this __ day of _________ 200__. Name:_____________________________ Title:____________________________ 8 EX-10.3 14 ielementsb2a-ex1003.txt FORM OF NOTE EXHIBIT 10.3 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND HAS BEEN TAKEN FOR INVESTMENT PURPOSES ONLY. IT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO SUCH SECURITIES UNDER THE ACT AND QUALIFICATION UNDER APPLICABLE STATE LAW WITHOUT AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED. $_______ ______ 2006 AMENDED AND RESTATED CONVERTIBLE SECURED PROMISSORY NOTE THIS AMENDED AND RESTATED CONVERTIBLE SECURED PROMISSORY NOTE ("Note") is hereby issued by IElement Corporation, a Nevada corporation ("Borrower") to _________________ ("Lender"). This Note amends and restates in its entirety that certain Secured Promissory Note dated ___________, 2005 in the principal amount of $___________ (the "Original Note") FOR VALUE RECEIVED, Borrower hereby unconditionally promises to pay on demand to the order of Lender in lawful money of the United States of America and in immediately available funds, the aggregate principal sum of up to $__________ or, if less, the aggregate principal amount of the borrowing outstanding (the "Principal Amount") together with accrued and unpaid interest thereon, in the manner set forth herein. Borrower further agrees to pay interest on the Principal Amount at the rate per annum equal to ____ %. The parties hereto acknowledge and agree that neither party has defaulted on the terms of the Original Note and that they have exchanged new consideration in connection with the issuance of this Note. Interest shall be calculated from and including the date of this Note to but not including the date such Principal Amount has been repaid in full. Interest shall be calculated on the basis of a 365-day or 366-day year, as the case may be, for the actual number of days elapsed and shall be paid together with the outstanding Principal Amount, as provided in Section 1 of this Note. 1. Repayment. (a) The outstanding Principal Amount and all interest accrued thereon shall be payable by Borrower to Lender in thirty-six (36) equal monthly installments of $__________, with the first payment due and payable on _________ 2006 and the remaining thirty-five (35) installments due on the same day of each consecutive month thereafter until paid in full. (b) Borrower may at any time and from time to time prepay the Principal Amount, in whole or in part, without premium or penalty. 2. Security Agreement. This Note is entitled to the benefit of that certain Security Agreement, dated as of __________, 200__, between Lender and Borrower (the "Security Agreement"), pursuant to which Lender is granted a first priority security interest in the Collateral (as such term is defined in the Security Agreement). This Note shall be subject to the terms and conditions set forth in such Security Agreement. 3. Place of Payment; Application of Payments. All amounts payable hereunder shall be payable to Lender in United States dollars at such bank account as shall be designated by Lender in the Demand Notice in immediately available funds. Payment on this Note shall be applied first to any expenses of collection, then to accrued interest, and thereafter to the outstanding principal balance hereof. 4. Default. The occurrence of any of the following events is an Event of Default ("Event of Default"): (a) Failure To Pay Principal, Interest Or Other Fees. The Borrower fails to pay any installment of principal, interest or other fees hereon PROVIDED, HOWEVER, the Borrower shall have ten (10) days to cure any such failure. (b) Breach Of Covenant. The Borrower breaches any covenant or other term or condition of this Note in any material respect and such breach, if subject to cure, continues for a period of thirty (30) days after the occurrence thereof. 2 (c) Breach Of Representations And Warranties. Any material representation or warranty of the Borrower made herein, or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith shall be false or misleading; provided, however, the Borrower shall have thirty (30) business days to cure such failure. (d) Receiver Or Trustee. The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. (e) Judgments. Any money judgment, writ or similar final process shall be entered or filed against the Borrower or any of its property or other assets for more than $250,000, and shall remain unvacated, unbonded or unstayed for a period of ninety (90) days. (f) Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower; provided, however, that where such action is instituted against the Borrower but is dismissed within thirty (30) days after the filing of such petition, this provision shall not apply to such action. (g) Stop Trade. An SEC stop trade order or trading suspension of the Common Stock for five (5) consecutive trading days or five (5) days during a period of 10 consecutive trading days, excluding in all cases a suspension of all trading on an exchange. (h) Default Under Related Agreement. The occurrence of an Event of Default under and as defined in the Security Agreement. 5. Default Payment. (a) Payment. If an Event of Default occurs, the Lender, at its option, may elect, in addition to all rights and remedies of Lender under the Security Agreement and all obligations of Borrower under the Security Agreement, to require the Borrower to make a Default Payment ("Default Payment"). The Default Payment shall be 105% of the outstanding principal amount of the Note, plus accrued but unpaid interest, all other fees then remaining unpaid, and all other amounts payable hereunder. The Default Payment shall be applied first to any fees due and payable 3 to the Lender, then to accrued and unpaid interest due on the Note and then to the principal balance of the Note. (b) Payment Date and Default Notice. The Default Payment shall be due and payable on the fifteenth (15th) calendar day after the date written notice is sent from the Lender to the Borrower of an Event of Default as defined in Section 4 ("Default Payment Date"). The period between the date of the written notice from the Lender to the Borrower of an Event of Default and the Default Payment Date shall be the "Default Notice Period." If during the Default Notice Period, the Borrower cures the Event of Default, the Event of Default will no longer exist and any rights the Lender had pertaining to the Event of Default will no longer exist. If the Event of Default is not cured during the Default Notice Period, all amounts payable hereunder shall be due and payable on the Default Payment Date, all without further demand, presentment or notice, or grace period, all of which hereby are expressly waived. (c) Cumulative Remedies. The remedies under this Note shall be cumulative. 6. Conversion. (a) Mechanics of Conversion. At any time from the date hereof, Lender may at its option elect to convert all (but not less than all) of the outstanding Principal Amount and unpaid accrued interest thereon as of such date into shares of the Borrower's Common Stock, $0.001 par value per share in accordance with this Section 6. The Lender shall give at least 15 days prior notice to Borrower of the date on which such conversion is to be effectuated (such date, the "Conversion Date"). The number of shares of Common Stock to which Lender shall be entitled upon such conversion shall be determined by dividing (x) the outstanding Principal Amount and unpaid accrued interest thereon as of the Conversion Date by $0.035 (the "Conversion Price") On the Conversion Date, the outstanding Principal Amount and unpaid accrued interest thereon shall be converted automatically into the Common Stock without further action by the Lender and whether or not this Note has been surrendered to Borrower or its transfer agent, and Lender shall be deemed to be the shareholder of record as of the Conversion Date with respect to the Common Stock. Within fourteen (14) days subsequent to the Conversion Date Lender shall surrender this Note to Borrower or its transfer agent, duly marked cancelled and, in exchange therefor, Lender shall receive from Borrower share certificates evidencing 4 the Common Stock in the name or names in which Lender wishes such certificate or certificates to be issued. If within fourteen (14) days of the Conversion Date, Lender is unable to deliver this Note, Lender shall notify Borrower or its transfer agent that such Note has been lost, stolen or destroyed and shall deliver to Borrower an acknowledgement that the obligations evidenced by this Note, shall have been upon the Conversion Date be deemed fully satisfied, and, if requested by Borrower, Lender shall execute an agreement reasonably satisfactory to Borrower to indemnify Borrower from any loss incurred by it in connection with inability of Lender to deliver such Note. (b) Issue Taxes. Borrower shall pay any and all stamp, issue and other taxes that may be payable in respect of the issuance or delivery of the Common Stock. (c) Reservation of Stock Issuable Upon Conversion. Upon any automatic conversion pursuant to Section 6(a) above, Borrower will take all corporate action as may be necessary to increase its authorized but unissued shares of Common Stock Common Stock, as the case may be, to such number of shares as shall be sufficient to effect the conversion of this Note under Section 6(a) above, including, without limitation, obtaining the requisite stockholder approval of any necessary amendment to Borrower's certificate of incorporation. (d) Fractional Shares. No fractional shares shall be issued upon the conversion of this Note into Common Stock. If the conversion would result in the issuance of a fraction of a share of Common Stock, Borrower shall, in lieu of issuing any fractional share, pay Lender who is otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the Conversion Date, with respect to the Common Stock (in each case as determined in good faith by the Board of Directors of Borrower and agreed to by Lender). (e) Adjustment Provisions. The Conversion Price and number and kind of shares or other securities to be issued upon conversion determined herein, shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows: (i) Reclassification, Etc. If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed to evidence 5 the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change. (ii) Stock Splits, Combinations And Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. (iii) Share Issuances. Subject to the provisions of this Section 6, if the Borrower shall at any time prior to the conversion or repayment in full of the Principal Amount issue any shares of Common Stock to a person other than the Lender (otherwise than (1) pursuant to Subsections i or ii above or this subsection e; (2) pursuant to options, warrants, or other obligations to issue shares outstanding on the date hereof as disclosed to Lender in writing; (3) pursuant to options that may be issued under any employee incentive stock option and/or any qualified stock option plan adopted by the Borrower for a consideration per share (the "Offer Price") less than the Conversion Price in effect at the time of such issuance, then the Conversion Price shall be immediately reset to such lower Offer Price; or (4) pursuant to any agreement entered into by the Borrower or any of its subsidiaries for the acquisition of another business (whether by stock purchase or asset purchase, merger or otherwise; or (5) for services rendered by consultants; ((1), (2), (3) (4) and (5) above, are hereinafter referred to as the "Excluded Issuances")). For purposes hereof, the issuance of any security of the Borrower convertible into or exercisable or exchangeable for Common Stock shall result in an adjustment to the Conversion Price only upon the conversion, exercise or exchange of such securities. (iv) Computation Of Consideration. For purposes of any computation respecting consideration received pursuant to Subsection iii above, the following shall apply: (a) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made 6 for any commissions, discounts or other expenses incurred by the Borrower for any underwriting of the issue or otherwise in connection therewith; (b) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Borrower (irrespective of the accounting treatment thereof); and (c) in the case of the issuance of securities convertible into or exchangeable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Borrower for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Borrower upon the conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (a) and (b) of this Subsection iv). 7. Waiver. Except as otherwise provided herein, Borrower waives presentment and written demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys' fees, costs and other expenses. BORROWER WAIVES ITS RIGHTS TO A JURY TRIAL IN CONNECTION WITH ANY CLAIMS ARISING UNDER THIS NOTE TO THE FULLEST EXTENT PERMITTED BY LAW. The right to plead any and all statutes of limitations as a defense to any demands hereunder is hereby waived to the fullest extent permitted by law. 8. Expenses; Attorney's Fees; Collection Costs. Borrower agrees that it will pay the reasonable costs and expenses of the parties (including legal and accounting fees) in connection with this Note. Without limiting the foregoing, if there has been an Event of Default by Borrower hereunder, Lender shall be entitled to receive and Borrower agrees to pay all costs of enforcement and collection incurred by Lender, including, without limitation, reasonable attorney's fees relating thereto. 7 9. Successors and Assigns; Assignment. The provisions of this Note shall inure to the benefit of and be binding on any successor to Borrower and shall extend to any holder hereof. Borrower may assign this Note to any of its affiliates. 10. Further Assurances. Borrower shall, at any time and from time to time, upon the written request of Lender, execute and deliver to Lender such further documents and instruments (including, without limitation, financing statements in connection with Lender's security interest granted hereby) and do such other acts and things as Lender may reasonably request in order to effectuate fully the purpose and intent of this Note. BORROWER IELEMENT CORPORATION By:_______________________ Name:_____________________ Title:____________________ 8 EX-10.4 15 ielementsb2a-ex1004.txt MASTER SERVICES AGR EXHIBIT 10.4 INTEGRATED COMMUNICATIONS CONSULTANTS CORPORATION MASTER SERVICES AGREEMENT THIS MASTER SERVICES AGREEMENT is made and entered into effective as of 3/1/2003 (the "Effective Date") between Integrated Communications Consultants Corporation, a Delaware limited liability company ("Supplier"), and IElement, Inc., a Nevada corporation ("Customer"). WHEREAS, Supplier operates telecommunications network facilities; and WHEREAS, Customer desires to have Supplier provide telecommunications Services to Customer on Supplier's network facilities; and WHEREAS, Supplier desires to provide such Services to Customer on the terms and subject to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, Supplier and Customer agree as follows: 1. DEFINITIONS AND ATTACHMENTS. --------------------------- A. ATTACHMENTS AND EXHIBITS. The following documents are incorporated into and made a part of this Agreement: 1) the document entitled "ACCESS TRANSPORT SERVICES - SERVICE DESCRIPTIONS" which is attached hereto and identified as Attachment 1; 2) the document entitled "ORDERING AND BILLING PROCEDURES" which is attached hereto and identified as Attachment 2; 3) the document entitled "TECHNICAL SPECIFICATIONS" which is attached hereto and identified as Attachment 3; 4) the document entitled "TROUBLE REPORTING/MAINTENANCE AND REPAIR" which is attached hereto and identified as Attachment 4; 5) the document entitled "GENERAL PROVISIONS" which is attached hereto and identified as Attachment 5; 6) the document entitled "ADDITIONAL TERMS AND CONDITIONS" which is attached hereto and identified as Attachment 6; and 7) the Exhibits which are attached hereto and referred to herein. 2 B. DEFINITIONS. Terms used in this Agreement shall have normal or common meanings ascribed to them in the telecommunications industry, unless specifically defined otherwise herein. Certain terms are defined in Attachment 1. For purpose of this Agreement, the following terms shall have the following meanings (terms defined in the singular shall have the same meanings in the plural and vice versa): ACCESS TRANSPORT SERVICES. "Access Transport Services" shall mean dedicated, Point to Point access transport services, as described in Attachment 1, provided by Supplier to Customer pursuant to Firm Order Confirmations under this Agreement. ADDITIONAL SERVICES. "Additional Services" shall mean telecommunications capacity services and/or related services which may be provided by Supplier to Customer but are outside the Access Transport Service offerings described in Attachment 1, subject to mutually agreed upon terms and conditions. AGREEMENT. "Agreement' shall mean this Master Services Agreement, together with the Attachments and Exhibits hereto and all Market Service Orders accepted by Supplier pursuant to Firm Order Confirmations; the words "herein", "hereof", "hereunder" and other words of similar import when used in this Agreement shall refer to this Agreement as a whole, and not to any particular section or other portion of this Agreement. CHRONIC TROUBLE OUTAGE. "Chronic Trouble Outage" shall have the meaning set forth in Section 11.B. EFFECTIVE DATE. "Effective Date" shall have the meaning set forth in the introductory paragraph of this Agreement. END USER. "End User" shall mean one of Customer's subscribers or customers to whom Customer will provide telecommunications services utilizing, in part, Services provided by Supplier to Customer. FCC. "FCC" shall mean the Federal Communications Commission of the United States of America or any other federal agency that succeeds to the responsibilities and authority of the Federal Communications Commission. FIRM ORDER CONFIRMATION. "Firm Order Confirmation" shall have the meaning set forth under the caption "Ordering Procedures" on Attachment 2. FORCE MAJEURE EVENT. "Force Majeure Event" shall have the meaning set forth in paragraph 6 of Attachment 5. MARKET SERVICE ORDER. "Market Service Order" shall have the meaning set forth under the caption "Ordering Procedures" on Attachment 2. NON-RECURRING CHARGE. "Non-Recurring Charge" shall mean, with respect to any Service, the amount that is due and payable by Customer to Supplier as a single charge upon the commencement of Supplier providing such Service to Customer. 3 PLANNED SERVICE OUTAGE. "Planned Service Outage" shall mean a complete loss of transmit or receive capability occurring on Supplier's network, caused by scheduled maintenance or planned enhancements or upgrades to either party's network. POINT OF DEMARCATION. "Point of Demarcation" shall mean the interface (Customer provided DSX jack or other mutually acceptable equipment) between Supplier's Equipment and Customer's equipment located at the point at which common carriers terminate communications cabling in a building or local exchange carrier central office (LEC CO). POINT OF PRESENCE OR POP. "Point of Presence" or "POP" shall mean a specific location where Customer originates and/or terminates its telecommunications service. RECURRING CHARGE. "Recurring Charge" shall mean, with respect to any Service, the amount that is due and payable by Customer to Supplier for each month (or portion thereof) that such Service is provided to Customer. SERVICE DATE. "Service Date" shall mean, with respect to any Service provided by Supplier to Customer, the later of (i) the date Supplier notifies Customer that the Service has been installed, tested, and is available for Customer's use, and (ii) the date specified in or accepted by the Firm Order Confirmation for such Service, as modified pursuant to Section 3.B and the provisions set forth under the caption "Billing and Payment" on Attachment 2. SERVICE OUTAGE. "Service Outage" shall mean a complete loss of transmit or receive capability occurring on Supplier's network relating to Service being provided to Customer, excluding: (i) Planned Service Outages; and (ii) periods of loss due to any FORCE MAJEURE Events. SERVICE TERM. "Service Term" shall have the meaning set forth in Section 3.C. SERVICES. "Services" shall mean Access Transport Services and Additional Services, collectively. Supplier's Equipment. "Supplier's Equipment" shall mean the telecommunications equipment, cabling or facilities installed, tested, operated and controlled by Supplier that are necessary or appropriate for the Services, up to the Point of Demarcation. SUPPLIER'S PROVIDERS. "Supplier's Providers" shall have the meaning set forth in paragraph 8 of Attachment 5. 2. SERVICES; CREDIT REQUIREMENTS; AUTHORIZATION. A. ACCESS TRANSPORT SERVICES.Supplier shall provide to Customer the Services identified in each Market Service Order that is accepted by Supplier pursuant to a Firm Order Confirmation subject to the terms and conditions of such Firm Order Confirmation and this Agreement, all as more fully set forth in Attachment 2. Access Transport Services shall include normal installation, maintenance, inspection, repair and testing associated therewith as provided for herein. 3 B. ADDITIONAL SERVICES. In addition to Access Transport Services, Customer may request Additional Services from Supplier. Any such request shall be subject to availability and Supplier's capability to provide such services as determined by Supplier in Supplier's sole discretion. Within thirty (30) days after receiving such written request, Supplier shall notify Customer whether the Additional Services are available and, if they are, Supplier's recurring and non-recurring charges for such Additional Services and any necessary terms and conditions pertaining to such Additional Services. C. CREDIT SUPPORT. In evaluating requests for Services and at such other times during the term of this Agreement as Supplier may determine in its sole discretion, Supplier may perform a credit review of Customer. Such credit review may be based on Customer's overall financial condition and such other credit or financial considerations as Supplier may determine in its sole discretion. In order to perform such a credit review, Customer shall provide to Supplier Customer's most recent audited financial statements (to include a balance sheet, income statement, statement of cash flow, and their accompanying notes) and any other credit or financial materials or information requested by Supplier in its sole discretion. Based on this credit review, Supplier may agree to proceed with any Service without any further credit support, or may require Customer to provide additional credit support in one or more of the following forms: 1) an irrevocable standby letter of credit in a format, from a financial institution and in an amount acceptable to Supplier in its sole discretion; 2) a cash deposit in an amount Supplier may determine in its sole discretion which Supplier may utilize at any time in its sole discretion as payment of any amount that is due and payable by Customer pursuant to this Agreement (and if all or any portion of such deposit is so used by Supplier, Customer shall promptly pay to Supplier the amount so used which Supplier will hold as a part of the deposit provided pursuant to this paragraph); 3) a guaranty of Customer's obligations under this Agreement in a format, in an amount and from a guarantor acceptable to Supplier in its sole discretion (in order for Supplier to analyze whether such guarantor is acceptable, Supplier may request from Customer, and Customer shall provide or cause to be provided, the same types of credit and financial information relating to such guarantor as Supplier may request of Customer pursuant to this Section); or 4) an alternative form of security acceptable to Supplier in its sole discretion. Any failure of Customer to provide the materials, information or credit support required pursuant to this Section 2.C within thirty (90) days after Supplier makes a request or demand for the same shall constitute a material breach of this Agreement. Supplier may require the credit support described in clauses (1) 4 through (4) above without requesting or performing a credit review of Customer if (i) Customer fails to make any payment due hereunder by the due date specified herein, (ii) Customer defaults under any other provision of this Agreement, or (iii) Customer becomes subject to any of the events or conditions described in clause (1) of Section 12.A. D. AUTHORIZATION. Customer represents and warrants to Supplier, as of the Effective Date and on each date that Customer delivers to Supplier a Market Service Order, that (i) Customer is duly organized, validly existing and in good standing under the laws of its state of formation or organization and in each state where the Services are or will be obtained and has all necessary power and authority to enter into and perform this Agreement and acquire such Services, and (ii) the execution, delivery and performance of this Agreement, including without limitation, each Market Service Order or Firm Order Confirmation to be delivered or executed by Customer, have been or will be duly authorized by all necessary action on the part of Customer. Customer agrees that Supplier may, at any time and from time to time in connection with any request by Customer for Services, require that Customer provide to Supplier certification, in a form satisfactory to Supplier and from a duly authorized officer or agent of Customer acceptable to Supplier, that (i) the person or persons signing or delivering this Agreement or any Market Service Order or Firm Order Confirmation on behalf of Customer are duly authorized to take such actions, and (ii) the signatures of such duly authorized persons on any part of this Agreement are their true and correct signatures. Supplier shall not be required to commence any actions with respect to the provision of any Services unless and until any request for such certification is received by Supplier. Supplier may rely on any such certification until notified by Customer to the contrary. Notwithstanding the foregoing, Supplier shall not be required to make any inquiry into the authority of or validity of any actions taken by any person executing or delivering this Agreement or any Market Service Order or Firm Order Confirmation on behalf of Customer if Supplier reasonably believes that such person has the authority to take such actions. 3. INSTALLATION; SERVICE DATE; TERM AND TERMINATION OF SERVICE. A. TESTING. Upon completion of installation or connection of facilities and/or equipment necessary for the provision of each Service to be provided to Customer, Supplier shall conduct appropriate tests to demonstrate that the Service meets the applicable specifications set forth in Attachment 3. Upon successful completion of such tests, Supplier shall notify Customer that such Service is available for use. B. SERVICE DATE. Supplier shall use commercially reasonable efforts to provide each Service ordered and accepted pursuant to a Firm Order Confirmation by no later than the date specified in or accepted by such Firm Order Confirmation. Supplier's standard provisioning intervals for Services are listed in the applicable Service schedule, and the scheduled Service Date specified in a Firm Order Confirmation shall in no event be prior to expiration of the applicable interval. Customer may request that such Service be made available prior to such specified date, in which event Supplier shall use reasonable efforts to make such Service available by the date requested, but Supplier shall not be responsible or in any way penalized or liable for its failure to do so. Customer may request that such Service be delayed by up to thirty (30) days after such specified date, as set forth in Attachment 2 under the caption "Billing and Payment." If Supplier fails to provide the Service by the date specified pursuant to the applicable Firm Order Confirmation and such failure is not due to (i) any FORCE MAJEURE Event, (ii) any failure of Customer to comply 5 with the terms of this Agreement, or (iii) any fault or negligent act or omission of Customer, any End User or any other party, then Customer shall not be required to pay the Non-Recurring Charge with respect to such Service. Customer's relief from paying such Non-Recurring Charge shall be the sole and exclusive remedy of Customer in the event of such failure by Supplier to provide such Service by such date, and under no circumstances shall such failure be deemed a default under this Agreement. C. SERVICE TERM. Each Service accepted by Supplier pursuant to a Firm Order Confirmation shall remain in effect from the Service Date for such Service until the end of the term established for such Service pursuant to such Firm Order Confirmation (the "Service Term"). The Service Term with respect to any Service from ICCC to IElement is to be established as "Month to Month," and such Service shall continue in effect until the end of the month during which this Agreement is terminated unless (i) Customer notifies Supplier that Customer desires to terminate such Service prior to such time, which notice must be delivered to Supplier at least one month prior to the effective date of such termination, or (ii) such Service is otherwise terminated pursuant to the terms of this Agreement. D. EARLY TERMINATION. If Customer desires to terminate any Service after the Service Date for such Service and prior to the expiration of the Service Term, Customer may do so by providing notification thereof to Supplier at least thirty (30) calendar days in advance of such termination. In the event of any such termination of a Service, Customer shall pay to Supplier, prior to the effective date of such termination, all current and past due balances owed to Supplier for services provided through the effective date of such termination, less any deposits held by Supplier. Notwithstanding the foregoing, Customer shall have no liability to Supplier for early termination of any Service if (i) Customer and Supplier mutually agree upon the terms of new Service to be provided by Supplier to Customer pursuant to this Agreement in replacement of or substitution for such terminated Service, (ii) Customer terminates this Agreement upon a material default by Supplier as set forth in Section 12 or (iii) Supplier terminates such Service as a result to a change to this Agreement objected to by Customer as contemplated in paragraph 16 of Attachment 5. In addition to the foregoing, either party, upon thirty (30) days prior notice to the other party, shall have the right to terminate any Service (and upon such termination, neither party shall have any further liability or obligation to the other party for such Service) if (i) Supplier or Customer is prohibited by law or governmental authority from furnishing or using such Service, (ii) any material rate or other term contained in this Agreement applicable to such Service is changed by order of the highest court of competent jurisdiction to adjudicate the matter, the FCC, or any other local, state or federal governmental authority, (iii) either party cannot obtain, retain or maintain any approval or authorization necessary for such Service as contemplated in Section 10 or (iv) Customer terminates such Service (or a portion thereof) as a result of a Chronic Trouble Outage of all or a portion of such Service as contemplated in Section 11.B, a Force Majeure Event as contemplated in paragraph 6 of Attachment 5, or an Infringement Claim as contemplated in paragraph 10 of Attachment 5. For any Service that is disconnected after the Service commenced and prior to the expiration of the Service Term (the "Terminated Service"), Customer will not be assessed a termination charge, only to the extent that (1) Customer replaces the Terminated Service with a new Service having a term equal to the Terminated Service, (2) the Recurring Charge for the New Service is equal to or greater than the Recurring Charge for the Terminated Service and (3) Customer pays the Non-Recurring Charge associated with the connection of the New Service. Normal termination charges will apply to all other Services disconnected or terminated prior to the expiration of the applicable Service Term. 6 4. ORDERING PROCEDURES. Customer and Supplier shall follow the Service ordering terms, conditions and procedures set forth in Attachment 2 under the caption "Ordering Procedures." 5. PRICING; BILLING AND PAYMENT. A. Supplier has provided to Customer, and Customer acknowledges receipt of, Supplier's pricing schedules setting forth the Recurring Charges and Non-Recurring Charges for the Services that may be provided to Customer by Supplier pursuant to this Agreement. Customer agrees to pay such charges in connection with the Services provided to Customer pursuant to this Agreement. As contemplated in paragraph 16 of Attachment 5, Supplier may change the pricing terms set forth on such pricing schedules, but unless otherwise agreed upon between Customer and Supplier, such changed pricing terms will not apply to any Services then being provided to Customer by Supplier pursuant to Firm Order Confirmations then in effect. Pricing for Additional Services shall be established by Supplier and provided to Customer if the Additional Services will or can be provided by Supplier within a reasonable time after Customer's request for Additional Services under Section 3.B. B. Customer and Supplier shall follow the billing and payment terms, conditions and procedures set forth in Attachment 2 under the caption "Billing and Payment." 6. CONNECTION. A. With respect to each circuit included as part of any Service provided to Customer, Supplier will be responsible for installing the circuit to the Point of Demarcation. If Customer's or the relevant End User's Point of Presence differs from the Point of Demarcation, Customer shall be responsible for connecting to the Point of Demarcation. Actual connection of Supplier's circuit and Customer's equipment necessary for such Service will be the responsibility and expense of Customer. B. If Customer's or an End User's equipment is not compatible with a Service provided to Customer, any special interface equipment or facilities necessary to achieve compatibility shall be the sole responsibility and expense of Customer. 7. EQUIPMENT AND INSTALLATION. A. Unless specifically provided for otherwise herein, Supplier or its agents, shall, at Supplier's sole cost and expense, provide, install, maintain, repair, operate and control (and whenever Supplier determines it to be appropriate, remove) all of Supplier's Equipment required for the provision of Services. Supplier reserves the right to substitute, change or rearrange any of Supplier's Equipment provided that the quality, cost or type of Services are not materially and adversely affected. 7 B. With respect to each Service provided to Customer, equipment and service beyond the Point of Demarcation shall be the sole responsibility and expense of Customer. C. With respect to each Service provided to Customer, Customer and the End User shall provide Supplier and its agents and contractors, at no cost to Supplier or its agents or contractors, all necessary or appropriate access to (including, without limitation access for purposes of removing any of Supplier's Equipment whenever Supplier determines it to be appropriate), and all necessary or appropriate space, power and environmental conditions at, the Point of Demarcation, including, but not limited to (i) roof, window, equipment, battery and conduit space, (ii) heating, ventilation and air conditioning, and (iii) protection from fire and other casualties, as applicable for the particular installation (or removal). Where the granting of access or right-of-way to Supplier and its agents and contractors requires the consent or approval of third parties, Customer shall use (and shall cause End Users to use) its (or their) best efforts to obtain such consent or approval on behalf of Supplier and its agents and contractors. D. Whenever possible, Supplier shall provide at least twenty-four (24) hours notice to Customer prior to entering Customer's POP to install, maintain, repair, replace or remove any of the Supplier's Equipment. If it is not possible to provide such notice, Supplier shall provide notice to Customer as soon as practicable. All of the foregoing is subject to the terms of Section 8 and Attachment 4. E. Except as set forth in Section 6.A, Supplier shall have no obligation to install, maintain or repair any equipment owned or provided by Customer, any End User or any other party. F. Neither party shall adjust, align, attempt to repair, relocate or remove the other party's equipment, except as expressly authorized by the other party. G. Customer shall be liable for any loss or damage, including theft, to Supplier's Equipment to the extent that such loss or damage is the result of Customer's or an End User's or their respective employees', agents' or contractors' negligent acts or omissions, willful misconduct, or breach of the terms of this Agreement. In the event of any such loss or damage to Supplier's Equipment, Customer shall reimburse Supplier for the reasonable cost of repair of Supplier's Equipment, or the replacement thereof, within thirty (30) days after receipt by Customer of a written request for reimbursement and substantiation of actual repair or replacement costs incurred. H. Supplier shall be liable for any loss or damage, including theft, to Customer's or an End User's equipment to the extent that such loss or damage is the result of Supplier's or its employees', agents' or contractors' negligent acts or omissions, willful misconduct, or breach of the terms of this Agreement. In the event of any such loss or damage to any such equipment, Supplier shall reimburse Customer or the End User, as the case may be, for the reasonable cost of repair of the equipment, or the replacement thereof, within thirty (30) days after receipt by Supplier of a written request for reimbursement and substantiation of actual repair or replacement costs incurred. 8 I. Supplier's Equipment shall remain the sole and exclusive property of Supplier, and nothing contained herein shall give or convey to Customer, any End User or any other person, any right, title or interest whatsoever in Supplier's Equipment. Supplier's Equipment shall at all times be and remain personal property, notwithstanding that it may be or become attached to or embedded in real property. Customer shall not, and will cause each End User to not, tamper with, remove or conceal any identifying plates, tags or labels affixed to Supplier's Equipment. Customer will not, and will cause End Users to not, cause or permit Supplier's Equipment to be or become encumbered by any liens, security interests or other encumbrances. Customer will do or cause to be done all acts and things that Supplier may reasonably request to assure that the terms of this Section are satisfied. J. Customer's equipment shall remain the sole and exclusive property of Customer, and nothing contained herein shall give or convey to Supplier, or any other person, any right, title or interest whatsoever in Customer's equipment. Customer's equipment shall at all times be and remain personal property, notwithstanding that it may be or become attached to or embedded in real property. Supplier shall not tamper with, remove or conceal any identifying plates, tags or labels affixed to Customer's equipment. Supplier will not cause or permit Customer's equipment to be or become encumbered by any liens, security interests or other encumbrances. Supplier will do or cause to be done all acts and things that Customer may reasonably request to assure that the terms of this Section are satisfied. 8. TROUBLE REPORTING; MAINTENANCE. Customer and Supplier shall follow the trouble reporting and maintenance terms, conditions and procedures described in Attachment 4. 9. TERM. This Agreement shall be in effect as of the Effective Date and shall remain in effect until either party terminates this Agreement by delivering notice of such termination to the other party at least thirty (30) days prior to the effective date of such termination. Upon termination of this Agreement, all rights of Customer to order new Services shall cease and Supplier shall have no further obligations to consider furnishing new Services to Customer. Upon termination of this Agreement, any Service not previously terminated by Customer that has a term that extends beyond the date this Agreement is terminated shall remain in effect for the term specified in or accepted by the applicable Firm Order Confirmation. 10. GOVERNMENTAL AUTHORIZATION; COMPLIANCE WITH LAW. A. GOVERNMENTAL AUTHORIZATION. This Agreement is subject to all applicable federal, state and local laws, rules and regulations, and all rulings, orders and other actions of governmental agencies and authorities with jurisdiction over any of the subject matter of this Agreement (collectively, "Rules"), including, but not limited to, the Communications Act of 1934, as amended, the rules and regulations of the FCC, and the obtaining and continuance by the parties of any required approval or authorization of the FCC or any other governmental authority. Each of Supplier and Customer shall use its good faith reasonable efforts to obtain, retain, and maintain such approvals and authorizations. If, notwithstanding the foregoing, either party cannot obtain, retain or maintain any such approval or authorization, or if any such Rules adversely affects the Services or any portion thereof or requires Supplier to 9 provide such affected Services other than in accordance with the terms of this Agreement, either party may, without liability to the other party, terminate the affected Service upon at least thirty (30) days prior written notice to the other party. Customer represents that it is a telecommunications carrier under the Communications Act of 1934, as amended, or under the laws of the jurisdiction where it operates. Customer represents that it has taken all actions required by the FCC to operate as a telecommunications carrier under the Communications Act of 1934, as amended. B. COMPLIANCE WITH LAW. Customer agrees that its use of the Services shall be in accordance, and shall comply, with all applicable laws, regulations, and rules. Supplier reserves the right, exercisable in its sole discretion, to disconnect or restrict any transmission initiated by Customer, if such actions are reasonably appropriate to assure that Supplier is not in violation of any civil or criminal law, regulation or rule. 11. SERVICE CREDITS. A. OUT-OF-SERVICE CREDITS. 1) A credit allowance will be given for Service Outages as specified below. Credit allowances will be expressly indicated on and deducted from the next invoice received by Customer after the Service Outage. A Service Outage begins when (i) Customer reports the Service malfunction to Supplier pursuant to the procedures described in Attachment 4 and (ii) the location of the cause of the Service Outage is determined. A Service Outage ends when the affected circuit is fully operational. A credit allowance will be given from the time the Service Outage begins until it ends. For each Service Outage of more than five (5) consecutive minutes, Customer will receive twenty-four (24) "Service Credits," as hereinafter defined, with respect to the Service that is affected by such Service Outage. A "Service Credit" with respect to any Service provided to Customer that is affected by a Service Outage shall mean a credit applied to Customer's account equal to 1/720 (i.e., approximately one (1) hour) of the monthly Recurring Charge for the affected Service. No more than twenty-four (24) Service Credits will be applied to any affected Service during any particular day regardless of the quantity of Service Outages during that day. The Service Credits described in this paragraph shall be the sole and exclusive remedy of Customer in the event of any Service Outage, and under no circumstances shall a Service Outage be deemed a default under this Agreement. 2) Out-of-service credits do not apply to Service Outages (i) caused by Customer or an End User or a supplier of service to Supplier, (e.g., the incumbent local exchange carrier); (ii) due to failure of power or equipment provided by (or the responsibility of) Customer, any End User or any other third parties; (iii) during any period in which Supplier is not given access to the premises of Customer, any End User or other third party; (iv) which constitute Planned Service Outages; or (v) due to any FORCE MAJEURE Event. 10 B. CHRONIC TROUBLE OUTAGE. A "Chronic Trouble Outage" with respect to any circuit included as part of any Service being provided to Customer exists when two or more Service Outages have been reported by Customer to Supplier in connection with such circuit within a 30-day period and the cause of each such Service Outage is determined to be in Supplier's network. Whenever Customer reports to Supplier that a circuit is experiencing a Chronic Trouble Outage, Supplier shall, as promptly as practicable, perform a detailed investigation and report the findings to Customer. If another Service Outage occurs in connection with such circuit within a thirty (30) day period after correcting the most-recent Service Outage, Customer may terminate the Service with respect to such specific circuit without incurring liability to Supplier. Supplier has no obligation to provide alternative routing for any circuit so terminated. 12. DEFAULT. A. DEFAULT GENERALLY. A party shall be in default under this Agreement upon the occurrence of any one or more of the following events or conditions: 1) such party (i) files a petition or otherwise commences, authorizes or acquiesces in the commencement of a proceeding or cause of action under any bankruptcy, insolvency, reorganization, debt restructuring, liquidation or similar law, or has any such petition filed or commenced against it, (ii) makes an assignment or any general arrangement for the benefit of creditors, (iii) otherwise becomes bankrupt or insolvent (however evidenced), (iv) has a liquidator, administrator, receiver, trustee, conservator or similar official appointed with respect to it or any substantial portion of its property or assets, or (v) is generally unable to pay its debts as they fall due; or 2) such party fails to perform any material obligation required of it under this Agreement and such nonperformance is not remedied within ninety (90) days after notice thereof (or if such party has promptly commenced to remedy such nonperformance within such ninety (90) day period and is proceeding diligently to remedy such nonperformance but such nonperformance cannot be cured within such ninety (90) day period, then within such longer period of time as may reasonably be necessary to remedy such nonperformance), except for any failure of such party to pay when due any amount owing pursuant to this Agreement, for which no cure period shall be available. In addition to all remedies available at law or in equity (subject, however to the limitations set forth in paragraph 12 of Attachment 5), the non-defaulting party hereunder may terminate this Agreement (and all Services extending beyond the termination date of this Agreement) upon the occurrence of a default by the other party. Upon any such termination by Supplier, Customer shall be liable to Supplier for the amounts determined pursuant to Section 3.D for each Service then in effect as if such Service was terminated by Customer prior to the end of the term established for such Service. B. SUSPENSION OF SERVICE. 1) In addition to the remedies set forth in Section 12.A, if payment in full is not received by Supplier from Customer on or before the applicable due date for such payment, Supplier shall have the right (i) upon providing written notice ("Suspension Notice"), to suspend or block, 11 at any time after such Suspension Notice is issued, all or any portion of all of the Services then being provided to Customer; and (ii) to immediately place any pending Market Service Orders on hold, and to decline to accept any new Market Service Orders or other requests from Customer to provide Service commencing on the day that Supplier issues the Suspension Notice to Customer. If Supplier receives the entire past due amount prior to any termination of this Agreement under Section 12.A, then the Services shall not be further suspended. Supplier may continue such suspension until such time as Customer has paid in full all charges then due, including any reinstallation charges and/or late fees as specified herein, and at all times may exercise its other remedies under this Agreement in addition to or in substitution of the suspension rights described in this paragraph. 2) Suspension of Services as set forth in this Section shall not affect Customer's obligation to pay for the Services. C. TERMINATION FOR VIOLATION OF LAW. In addition to its other termination rights hereunder, and with respect to all Services, Supplier may immediately disconnect any Services in whole or in part if Supplier determines that such Services violate any law, statute, or ordinance, including the Communications Act of 1934 (as amended), or that the imposition of any statute, or promulgation of any rule, regulation, or order of the Federal Communications Commission or other governing body makes Supplier's performance under this Agreement commercially impracticable. 13. MISCELLANEOUS. This Agreement constitutes the entire agreement between Supplier and Customer with respect to the Services and all other matters provided for herein; all prior and contemporaneous agreements, representations, statements, negotiations, and undertakings with respect to the subject matter herein are superseded by this Agreement. SUPPLIER MAKES NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO ANY AND ALL SERVICES PROVIDED UNDER THIS AGREEMENT OR ITS PERFORMANCE UNDER THIS AGREEMENT, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR OTHERWISE, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, EXCEPT THOSE EXPRESSLY SET FORTH HEREIN. Except as otherwise provided in paragraph 16 of Attachment 5, neither this Agreement nor any of the provisions hereof may be amended, altered or added to in any manner except by a document in writing and signed by an authorized representative of each party. 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives to be effective as of the Effective Date. "SUPPLIER" "CUSTOMER" INTEGRATED COMMUNICATIONS CONSULTANTS IELEMENT, INC. CORPORATION By: By: ---------------------------------- ---------------------------------- Name: Name: -------------------------------- -------------------------------- Title: Title: ------------------------------- ------------------------------- Address:333 Washington Blvd. #15 Address: 17194 Preston Road Marina del Rey, Ca 90292 Suite 102, PMB 341 Dallas, Tx. 75248-1221 Attn: Ivan Zweig Attn: Billing 213-232-3421 888-832-9422 Facsimile No.: 213-232-3521 Facsimile No.: 214-254-3500 13
Attachment 1 ACCESS TRANSPORT SERVICES SERVICE DESCRIPTIONS "REMOTE ACCESS TRANSPORT" refers to those Services that can be provided from any site to any site or central office: DESCRIPTION AVAILABLE CAPACITY LEVELS ----------- ------------------------- Tail Circuit DS1 Central Office Colo-to-Central Office Colo DS1, DS3, OC3, OC12, OC48 Central Office Colo-to Central Office Colo with DS3/1 Mux DS3 Point-to-Central Office Colo DS1, DS3, OC3, OC12, OC48 Point-to-Central Office Colo with DS3/1 Mux DS3 Point to Point DS1, DS3, OC3, OC12, OC48 "COMBINED ACCESS TRANSPORT" refers to a configuration where Customer obtains a high capacity Service from Customer's site to Supplier's hub and lower DESCRIPTION AVAILABLE CAPACITY LEVELS ----------- ------------------------- COMBINED ACCESS MULTIPLEXER Access Multiplexer DS3, OC3, OC12, OC48 DS3/1 Multiplexer option Redundant OC3 Card (4 OC3 interfaces) SERVICES TO SUPPLIER'S HUB FACILITY Point-to-Hub DS3, OC3, OC12, OC48 Central Office Colo-to-Hub DS3, OC3, OC12, OC48 SERVICES FROM SUPPLIER'S HUB FACILITY Hub-to Central Office Colo DS1, DS3, OC3, OC12, OC48 Hub-to-Central Office Colo with DS3/1 Mux DS3 Hub-to-Central Office Colo with OC12/DS3 Mux OC12, OC48 DS1 Tail Circuit DS1 Hub-to-Point DS1, DS3, OC3, OC12, OC48 14
DEFINITIONS: TAIL CIRCUIT. "Tail Circuit" shall mean Service from the local serving central office that would normally serve a remote location to that remote location at the rate specified. POINT-TO-POINT. "Point-to-Point" shall mean Service from customer's premise to any location at the rate specified. CENTRAL OFFICE COLO-TO-CENTRAL OFFICE COLO. "Central Office Colo-to-Central Office Colo" shall mean service between two central offices that have Supplier's networking equipment in place at the rate specified. POINT-TO-CENTRAL OFFICE COLO. "Point-to-Central Office Colo" shall mean Service from any location to a central office with Supplier's networking equipment in place at the rate specified. DS3 ACCESS MULTIPLEXER. "DS3 Access Multiplexer" shall mean a multiplexer with a DS3 electrical interface for the network and 28 DS1 interfaces on the Customer side. OC3 ACCESS MULTIPLEXER. "OC3 Access Multiplexer" shall mean a multiplexer with an OC3 optical interface for the network and 3 DS3 interfaces on the Customer side. OC12 ACCESS MULTIPLEXER. "OC12 Access Multiplexer" shall mean a multiplexer with an OC3 optical interface for the network and 12 DS3 interfaces on the Customer side. CENTRAL OFFICE COLO-TO-HUB. "Central Office Colo-to-Hub" shall mean Service from a central office with Supplier's networking equipment in place to the Supplier's central networking site at the rate specified. POINT-TO-HUB. "Point-to-Hub" shall mean Service from any location to the Supplier's central networking site at the rate specified. HUB-TO-CENTRAL OFFICE COLO. "Hub-to-Central Office Colo" shall mean Service from Supplier's central networking site to a central office with Supplier's networking equipment in place at the rate specified. HUB-TO-POINT. "Hub-to-Point" shall mean Service from Supplier's central networking site to any location at the rate specified. DS3/1 MUX. "DS3/1 Mux" shall mean a central office based multiplexer with a DS3 electrical interface for the network and 28 DS1 interfaces on the Customer side. OC12/DS3 MUX. "OC12/DS3 Mux" shall mean a central office based multiplexer with an OC12 optical interface for the network and 12 DS3 interfaces on the Customer side. ACCESS MULTIPLEXER. "Access Multiplexer" shall mean a multiplexer placed on Customer's premises by Supplier for purposes of aggregating low speed interfaces on the Customer side into a network interface. 15 Attachment 2 ORDERING AND BILLING PROCEDURES ORDERING PROCEDURES. Customer shall request a Service by forwarding to Supplier, by facsimile or such other means as Supplier may designate, a written request for such Service (a "Market Service Order") in substantially the form attached to this Agreement as Exhibit A with all of the information requested by such form completed in full. If upon receipt of such Market Service Order, Supplier agrees to provide such Service (which agreement may not be unreasonably withheld or delayed except with respect to Additional Services requested by Customer which shall be subject to the terms of Section 2.B of the Master Services Agreement), Supplier shall forward to Customer, by facsimile or such other means as Supplier may designate, a response accepting such request (a "Firm Order Confirmation") in substantially the form attached to this Agreement as Exhibit B with all of the information required by such form completed in full. Supplier may, but shall not be obligated to, require that Customer sign and forward to Supplier, by facsimile or such other means as Supplier may designate, the Firm Order Confirmation prior to Supplier agreeing to provide such Service. If Supplier does not request such signed Firm Order Confirmation from Customer, then the agreement of Supplier to provide such Service, and of Customer to obtain such Service, shall be effective when Supplier has forwarded the Firm Order Confirmation to Customer. If, in the Firm Order Confirmation, Supplier has made any change to the terms of such Service as requested in the Market Service Order, such change shall apply to such Service unless Customer objects to it by notice to Supplier within three (3) days after Supplier delivers the Firm Order Confirmation. If such an objection is made by Customer, then Supplier shall not be obligated to provide such Service to Customer. BILLING AND PAYMENT. Supplier shall be entitled to commence billing Customer the Recurring Charge for a Service as of the Service Date for such Service. The Non-Recurring Charge for a Service shall be billed to Customer on the first invoice provided to Customer after the Service Date with respect to such Service. Customer may delay the Service Date for a Service by up to thirty (30) days after the date designated in or accepted by the applicable Firm Order Confirmation by notifying Supplier of such delay prior to such originally designated date. Supplier will accept such delay provided that Customer pays Supplier for all charges, costs and expenses incurred by Supplier as a result of such delay. If Customer requests a delay that is longer than thirty (30) days, Supplier may designate the thirty-first (31st) day after such originally designated date as the Service Date, and commence billing Customer from such date for the Service. Supplier may bill on a current basis all charges, costs or expenses other than Recurring Charges incurred by, and credits due to, Customer. Supplier may bill in advance the Recurring Charges for all Services to be provided during the ensuing billing period. Supplier will, upon request and if available, furnish such detailed information as may reasonably be required for verification of all amounts billed to Customer. All amounts for Services provided to Customer by Supplier and other amounts owing by Customer to Supplier are due and payable within sixty (60) days after the date of the invoice setting forth such amounts, and are payable in immediately available funds to the account designated by Supplier to Customer from time to time. If such payment due date would cause payment to be due on a Saturday, Sunday or legal holiday, payment for such invoiced amounts will be due on the last business day preceding such Saturday, Sunday, or legal holiday. 16 If any portion of the payment is received by Supplier after the payment due date, or if any portion of the payment is received by Supplier in funds that are not immediately available to Supplier, then interest on the overdue amounts shall accrue and be payable by Customer at a rate of 1.5% per month (.000494 per day) or 18% annually or, if less, the maximum rate permitted by applicable law. The interest will be applied for the number of days from the payment due date to and including the date that Supplier actually receives the payment in immediately available funds. CLAIMS AND DISPUTES. If a billing dispute occurs concerning any amounts billed or credited to Customer by Supplier, Customer must submit to Supplier a documented claim for the disputed amount. Customer will submit to Supplier all documentation as may reasonably be required by Supplier to support the claim. All claims must be submitted to Supplier within sixty (60) days after the date of the invoice setting forth the amounts in dispute. If Customer does not submit a claim as stated above, Customer waives all rights to file a claim thereafter. Customer shall not be required to pay amounts disputed in accordance with this paragraph during such period provided that Customer pays all undisputed charges on or before the due date and negotiates in good faith with Supplier for the purpose of resolving such dispute within such 60-day period. If the dispute is resolved in favor of Customer and Customer has withheld the disputed amount, no interest credits or penalties will apply. If the dispute is resolved in favor of Customer and Customer has paid the disputed amount, or if Customer is owed a disputed credit, Customer will be credited by Supplier with interest on such amount or credit at the rate of 1.5% per month (.000494 per day) or 18% annually or, if less, the maximum rate permitted by law, from the date Supplier received payment or was due the credit up to and including the date of refund or credit. If the dispute is resolved in favor of Supplier and Customer has paid the disputed amount on or before the payment due date, no interest credit or penalties will apply. If the dispute is resolved in favor of Supplier and Customer has withheld the disputed amount, any payments withheld pending settlement of the disputed amount shall bear interest at the rate of 1.5% per month (.000494 per day) or 18% annually or, if less, the maximum rate permitted by law, from the payment due date up to and including the date of payment. If Supplier has responded to Customer's dispute in writing and the parties fail to mutually resolve or settle the dispute within the above 60-day period (unless Supplier has agreed in writing to extend such period), all disputed amounts together with the late fees shall become due and payable on the sixty-first (61st) day following the applicable due date, and this provision shall not be construed to prevent Customer from pursuing any legal remedies available to Customer consistent with the terms of this Agreement. The right to dispute hereunder applies only to Services provided to Customer by Supplier and not to any dispute Customer may have with its End User. 17 Attachment 6 ADDITIONAL TERMS AND CONDITIONS 1. ASSUMPTION OF LIABILITIES. This Agreement constitutes an additional agreement to IElement's asset and liability purchase from ICCC on 3/1/2003. IElement agrees to assume various assets and liabilities from ICCC in exchange for ICCC selling the circuits mentioned in the Service Pricing Attachment at cost for the first two years of this agreement. After the two year time period has been satisfied, then ICCC will add on additional maintenance, billing and network costs (not to exceed 20%) to the Recurring Charge agreed upon in the Service Pricing Attachment for the remaining year of the arrangement. 18 SERVICE PRICING 1. PRICING. Supplier shall provide to Customer the Services, as per Attachment 1, identified in each Market Service Order that is accepted by Supplier pursuant to a Firm Order Confirmation subject to the terms and conditions of such Firm Order Confirmation and this Agreement, all as more fully set forth in Attachment 2. Access Transport Services shall include normal installation, maintenance, inspection, repair and testing associated therewith as provided for herein. Pricing for any Access Transport Services will be based upon the published Interconnection Agreement (ICAs) with the underlying providers, plus markup for additional maintenance, billing and network costs. This 20% (maximum) markup will be waived for 24 months according to the Additional Terms and Conditions of this contract. 2. ICAS. Signed ICAs between Supplier and Verizon as well as SBC will be required In Texas, California and Illinois to substantiate the invoice charges from Supplier to Customer as per this Agreement. 19 EX-10.5 16 ielement_ex10-5.txt LEASE AGREEMENT EXHIBIT 10.5 THIS IS AN ORIGINAL DOCUMENT - PLEASE DO NOT ALTER IN ANY WAY. COPY THIS INSTRUMENT TO A NEW FILE FOR EACH AND EVERY TENANT. THANK YOU. LEASE AGREEMENT GAMMA OFFICE BUILDING THE STATE OF TEXAS } COUNTY OF DALLAS } THIS LEASE AGREEMENT (the "Lease"), made and entered into on this ___ day of _____ , 2005, between 13714 Gamma, Ltd. ("Lessor"), and I Element Inc., a Nevada Corporation ("Lessee"), W I T N E S S E T H: -------------------- Section 1. Premises. - ---------- --------- Subject to and upon the terms and conditions herein-after set forth, and each in consideration of the covenants and obligations of the other hereunder, Lessor does hereby lease and demise to Lessee, and Lessee does hereby lease from Lessor, those certain premises (the "Premises") in the building known as 13714 Gamma Road Office Building situated in the City of Farmers Branch, Dallas County, Texas (the "Property"). The Premises shall mean that certain space located in Suite 120 and comprising approximately 3,284 square feet of Rentable Area, as more specifically identified in "Exhibit A" attached hereto. Usable area shall be computed by measuring to the inside finish of permanent outer building walls, or the glass line if at least 50% of the outer building wall is glass, to the outer side of corridors and/or other permanent partitions, and to the center of partitions that separate the Premises from adjoining usable areas. No deduction shall be made for columns and projections necessary to the Building. Section 2. Term. - ---------- ----- (a) Subject to and upon the terms and conditions set forth herein, or in any Rider or exhibit hereto, this Lease shall continue in force on a month-to-month basis beginning on the 1st day of August, 2005. Either party may terminate the month-to-month lease with a 30-day advance written notice to the other. Lessee accepts the Premises in its "as is" condition. (b) If for any reason the Premises are not ready for occupancy by Lessee on the commencement date specified in Paragraph 2(a) above, Lessor shall not be liable or responsible for any claims, damages, or liabilities in connection therewith or by reason thereof, and this Lease and the obligations of Lessee shall nonetheless commence and continue in full force and effect; provided, however, if the Premises are not ready for occupancy for any reason other than omission, delay, or default on the part of Lessee or anyone acting under or for Lessee, the rent herein provided shall not commence until the Premises are ready for occupancy by Lessee. Such abatement of rent shall constitute full settlement of all claims that Lessee might otherwise have against Lessor by reason of the Premises not being ready for occupancy by Lessee on the date of the commencement of the term hereof. Should the term of this Lease commence on a date other than that specified in Paragraph 2(a) above, Lessee will, at the request of Lessor, execute an amendment to this Lease on a form provided by Lessor specifying the beginning date of the term of this Lease. In such event, rental under this Lease shall not commence until such revised commencement date, and the stated term of this Lease shall thereupon commence, and the expiration date shall be extended so as to give effect to the full stated term. The Premises shall be deemed to be ready for occupancy on the first to occur of (i) the date that there is delivered to Lessee a certificate of substantial completion from Lessor's architect, which certificate shall be binding and conclusive upon Lessee in the absence of bad faith and collusion on the part of or between Lessor and Lessor's architect, or (ii) upon the date on which Lessee begins occupancy of the Premises. Tenant Initials ___________ Landlord Initials___________ -1- Section 3. Base Rental. - ---------- ------------ (a) Lessee hereby agrees to pay to Lessor, without setoff or deduction whatsoever, a monthly installment of $3,284.00. Lessee shall also pay, as additional rent, all such other sums of money as shall become due from and payable by Lessee to Lessor under this Lease (Base Rental, any adjustment thereto pursuant to Section 4 hereof, and all such other sums of money due from and payable by Lessee pursuant to this Lease are sometimes hereinafter collectively called "rent"), for the nonpayment of which Lessor shall be entitled to exercise all such rights and remedies as are herein provided in the case of the nonpayment of Base Rental. The Base Rental, together with any adjustment or increase thereto then in effect, shall be due and payable in advance in twelve (12) equal installments on the first (lst) day of each calendar month during the term of this Lease, and Lessee hereby agrees so to pay such Base Rental and any adjustment or increase thereto to Lessor at Lessor's address provided herein (or such other address as may be designated by Lessor in writing from time to time) monthly, in advance, and without demand. If the term of this Lease commences on a day other than the first (lst) day of a month or terminates on a day other than the last day of a month, then the installments of Base Rental and any adjustments thereto for such month or months shall be prorated, and the installment or installments so prorated shall be paid in advance. (b) If any installment of basic rental or other payment specified herein is not made within five (5) days after the due date, a "late charge" in an amount equal to ten percent (10%) of the overdue installment shall be exercised. Section 4. Adjustment of Base Rental. DELETED - ---------- -------------------------- Section 5. Lessee's Occupancy. - ---------- ------------------- Lessee shall occupy the Premises and conduct its normal business operations therefrom and the Premises shall be used by Lessee solely for office purposes and for no other purpose or use. Section 6. Services to be Furnished by Lessor. - ---------- ----------------------------------- Lessor shall furnish to Lessee while occupying the Premises the following services: (a) hot and cold water at those points of supply provided for general use of the tenants in the Building; (b) heated and refrigerated air conditioning in season, during normal business hours for the Building which shall be at such times as are considered normal for other buildings similar to the Building within reasonable proximity thereto and at such temperatures and in such amounts as are considered by Lessor to be standard. Such service at times other than normal business hours shall be optional on the part of Lessor; provided that upon reasonable prior notice such service will be provided to Lessee at Lessee's expense; (c) elevator service in common with other tenants for ingress and egress to and from the Premises if applicable; (d) janitorial service as may in the judgment of the Lessor be reasonably required; (e) electric current for normal office usage in the Premises and electric lighting service for all public areas and special service areas of the Building in the manner and to the extent considered by Lessor to be standard; and (f) access to the Premises at all times through keys, or any other device used in lieu of keys, to the front and rear doors of the Building for Lessee or, if Lessee is a corporation, a reasonable and limited number of designated officers of Lessee. Failure by Lessor to any extent to furnish, or any stoppage of, these defined services, and resulting from causes beyond the control of Lessor or from any other cause, shall not render Lessor liable in any respect for damages to either person or property, nor be construed as an eviction of Lessee, nor work an abatement of rent, nor relieve Lessee from fulfillment of any covenant or agreement hereof. Should any equipment or machinery break down, or for any cause cease to function properly, Lessor shall use reasonable diligence to repair the same promptly. Lessee shall have no claim for rebate of rent or damages on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant Initials ___________ Landlord Initials___________ -2- Section 7. Keys and Locks. - ---------- --------------- Lessor shall furnish Lessee two (2) keys for each corridor door entering the Premises. Additional keys will be furnished at a charge by Lessor on receipt of an order signed by Lessee or Lessee's authorized representative. All such keys shall remain the property of Lessor. No additional locks shall be allowed on any door of the Premises without Lessor's written permission, and Lessee shall not make or permit to be made any duplicate keys, except those furnished by Lessor. Upon termination of this Lease, Lessee shall surrender to Lessor all keys to the Premises. Section 8. Signage. - ---------- -------- (a) Lessor shall provide and install, at Lessee's cost, all letters or numerals on doors in the Premises as may from time to time be requested by Lessee; all such letters and numerals shall be in the standard graphics for the Building and no others shall be used or permitted on the Premises. Lessee shall obtain Lessor written approval for all signage (both directory, sign ban and window lettering prior to installing any signage. (b) Lessee shall not place signs or any other item on the Premises which may be visible from outside the Building, without first obtaining the written consent of Lessor in each such instance. Tenant has Landlords permission to hang a sign on the outside of the building that is the same size as the other outside signs. Tenant may hang a light above the sign that gives the sign visibility at night. Section 9. Relocation of Lessee. - ---------- --------------------- Lessor reserves the right, at its option, to transfer and remove Lessee from the Premises to any other available space in the Property of substantially equal size, and area and equivalent Base Rental per square foot. Lessor shall bear the expense of said removal as well as the expense of any renovations or alterations necessary to make the new space substantially conform in layout and appointment with the original Premises. Section 10. Maintenance and Repairs by Lessor. - ----------- ---------------------------------- Unless otherwise stipulated herein, Lessor shall be required to maintain and repair only the structural portions of the Building, both exterior and interior, including the heating, ventilating, and air conditioning systems and equipment, the plumbing and electrical systems and equipment, the public foyers and lobbies, the corridors, parking areas, elevators, stairwells and restrooms and all other areas serving more than one tenant of the Building; provided, however, that interior partitioning walls, carpeting and other portions of the Premises which might otherwise be considered building standard items shall not be the obligation of Lessor. Such building standard items and any other leasehold improvements of Lessee will, at Lessee's written request, and upon Lessor's written approval, be maintained by Lessor at Lessee's expense, at a cost or charge equal to all costs incurred in such maintenance plus an additional 15% charge to cover overhead, which costs and charges shall be payable by Lessee to Lessor promptly upon being billed therefor. Section 11. Repairs by Lessee. - ----------- ------------------ Lessee covenants and agrees with Lessor, at Lessee's own cost and expense, to repair or replace any damage or injury done to the Premises, Building, or any part thereof, or to the Complex, caused by Lessee or Lessee's agents, employees, invitees, or visitors, and such repairs shall restore the Premises, Building or Complex, as the case may be, to the same or as good a condition as it was prior to such injury or damage, and shall be effected in compliance with all building and fire codes and other applicable laws and regulations; provided, however, if Lessee fails to make such repairs or replacements promptly, Lessor may, at its option, make such repairs or replacements, and Lessee shall repay the cost thereof, plus an additional 15% charge to cover overhead, to Lessor on demand. Tenant Initials ___________ Landlord Initials___________ -3- Section 12. Care of the Premises. - ----------- --------------------- Lessee covenants and agrees with Lessor to take good care of the Premises and the fixtures and appurtenances therein and, at Lessee's expense, to make all nonstructural repairs thereto as and when needed to preserve them in good order and condition except for ordinary wear and tear. Lessee shall not commit or allow any waste or damage to be committed on any portion of the Premises, and at the termination of this Lease, by lapse of time or otherwise, shall deliver up the Premises to Lessor in as good a condition as at the date of the commencement of the term of this Lease, ordinary wear and tear excepted, and upon any termination of this Lease, Lessor shall have the right to re-enter and resume possession of the Premises. Section 13. Parking. During the term of this Lease, Lessee shall have the non-exclusive use in common with Lessor and other tenants of the Building and their guests and invitees, of the uncovered automobile parking areas, driveways, and footways serving the Building, subject to rules and regulations for the use thereof as prescribed from time to time by Lessor. Lessor shall not be liable or responsible for any loss of or to any car or vehicle or equipment or other property therein or damage to property or injuries (fatal or non-fatal), unless such loss, damage, or injury be proximately caused by the negligence of Lessor or its employees. Lessor may make, modify, and enforce rules and regulations relating to the parking of automobiles including without limitation, rules respecting parking charges or fees applicable to all tenants of the Building, and Lessee will abide by such rules and regulations. Section 14. Peaceful Enjoyment. - ----------- ------------------- Lessee shall, and may peacefully have, hold, and enjoy the Premises, subject to the other terms hereof, provided that Lessee pays the rent and other sums herein recited to be paid by Lessee and performs all of Lessee's covenants and agreements herein contained. It is understood and agreed that this covenant and any and all other covenants of Lessor contained in the Lease shall be binding upon Lessor and its successors only with respect to breaches occurring during its or their respective periods of ownership of Lessor's interest hereunder. Section 15. Holding Over. - ----------- ------------- In the event of holding over by Lessee without the written consent of Lessor, after the expiration or other termination of this Lease, Lessee shall, throughout the entire holdover period, pay rent equal to twice the Base Rental, as adjusted herein, and additional rent which would have been applicable had the term of this Lease continued through the period of such holding over by Lessee. No holding over by Lessee after the expiration of the term of this Lease shall be construed to extend the term of this Lease; and in the event of any unauthorized holding over, Lessee shall indemnify Lessor against all claims for damages by any other lessee or prospective lessee to whom Lessor may have leased all or any part of the Premises effective before or after the expiration of the term of this Lease, resulting from delay by Lessee in delivering possession of all or any part of the Premises. Any holding over with the written consent of Lessor shall thereafter constitute a lease from month-to-month, under the terms and provisions of this Lease to the extent applicable to a tenancy from month-to-month. Section 16. Alterations, Additions, and Improvements. - ----------- ----------------------------------------- Lessee covenants and agrees with Lessor not to permit the Premises to be used for any purpose other than that stated in Section 5 hereof or make or allow to be made any alterations or physical additions in or to the Premises without first obtaining the written consent of Lessor in each such instance. Lessor's consent shall not be required for nonstructural alterations made by Lessee from time to time as necessary to adapt the Premises for the uses and business purposes permitted hereby, provided that such alterations do not affect any part of the Building other than the Premises, are not visible from outside the Building and do not adversely affect any service required to be furnished by Lessor to Lessee or to any other tenant or occupant of the Building. Lessee shall be responsible for any lien filed against the Premises or any portion of the Building for work claimed to have been done for, or materials claimed to have been furnished to Lessee. Any and all such alterations, physical additions, or improvements, when made to the Premises by Lessee, shall be at Lessee's expense and shall at once become the property of Lessor and shall be surrendered to Lessor upon termination of this Lease by lapse of time or otherwise; provided, however, this clause shall not apply to the movable fixtures, office equipment, and other personal property owned by Lessee. Tenant Initials ___________ Landlord Initials___________ -4- Section 17. Legal Use and Violations of Insurance Coverage. - ----------- ----------------------------------------------- Lessee covenants and agrees with Lessor not to occupy or use, or permit any portion of the Premises to be occupied or used, for any business or purpose which is unlawful, disreputable, or deemed to be extra-hazardous on account of fire, or permit anything to be done which would in any way increase the rate of fire, liability, or any other insurance coverage on the Building and/or its contents. Section 18. Laws and Regulations; Building Rules. - ----------- ------------------------------------- Lessee covenants and agrees with Lessor to comply with all laws, ordinances, rules, and regulations of any state, federal, municipal, or other government or governmental agency having jurisdiction of the Premises that relate to the use, condition, or occupancy of the Premises. Lessee will comply with the rules of the Building adopted and altered by Lessor from time to time for the safety, care, and cleanliness of the Premises and Building and for the preservation of good order therein, all changes to which will be sent by Lessor to Lessee in writing and shall be thereafter carried out and observed by Lessee. Lessor agrees not to enforce any such rules against Lessee which Lessor is not enforcing against all other tenants of the Building. In the event of a conflict or inconsistency between the provisions of this Lease and any such rules, the provisions of this Lease shall control. See Exhibit "B". Section 19. Nuisance. - ----------- --------- Lessee covenants and agrees with Lessor to conduct its business and control its agents, employees, invitees, and visitors in such manner as not to create any nuisance, or interfere with, annoy, or disturb any other tenant or Lessor in its operation of the Building. Section 20. Entry by Lessor. - ----------- ---------------- Lessee covenants and agrees with Lessor to permit Lessor or its agents or representatives to enter into and upon any part of the Premises at all reasonable hours (and in emergencies at all times) to inspect the same, or to show the Premises to prospective purchasers, mortgagees, or insurers, to clean or make repairs, alterations, or additions thereto, as Lessor may deem necessary or desirable, and Lessee shall not be entitled to any abatement or reduction of rent by reason thereof. Section 21. Assignment and Subletting. - ----------- -------------------------- (a) Lessee shall not, without the prior written consent of Lessor (i) assign or in any manner transfer Lessee's interest in this Lease or any estate or interest therein, or (ii) permit any assignment or transfer of this Lease or any estate or interest therein by operation of law, merger or consolidation, or (iii) sublet the Premises or any part thereof, or (iv) grant any license, concession, or other right of occupancy of any portion of the Premises. Consent by Lessor to one or more assignments or sublettings shall not operate as a waiver of Lessor's rights as to any subsequent assignments and sublettings. Notwithstanding any approved assignment or subletting, Lessee shall at all times remain fully responsible and liable for the payment of the rent herein specified and for compliance with all of Lessee's other obligations under this Lease and in the event of any assignment, by operation of law, merger, consolidation or otherwise, any assignee shall assume and agree to perform all obligations of Lessee hereunder while an event of default, as hereinafter defined, should occur the Premises or any part thereof are then assigned or sublet, Lessor, in addition to any other remedies herein provided or provided by law, may at its option, collect directly from such assignee or sublessee all rents becoming due to Lessee under such assignment or sublease, and apply such rent against any sums due to Lessor by Lessee hereunder, and Lessee hereby authorizes and directs any such assignee or sublessee to make such payments of rent directly to Lessor upon receipt of notice from Lessor. No direct collection by Lessor from any such assignee or sublessee shall be construed to constitute a novation or a release of Lessee from the further performance of its obligations hereunder. Receipt by Lessor of rent from any assignee, sublessee, or occupant of the Premises shall not be deemed a waiver of the covenant contained in this Lease against assignment and subletting or a release of Lessee under this Lease. Lessee shall not mortgage, pledge, or otherwise encumber its interest in this Lease or in the Premises. Any attempted assignment or sublease by Lessee in violation of the terms and covenants of this paragraph shall be void. Tenant Initials ___________ Landlord Initials___________ -5- (b) ln the event Lessee desires Lessor's consent to an assignment of the Lease or subletting of all or a part of the Premises and as a condition to the granting of such consent, Lessee shall submit to Lessor in writing the name of the proposed assignee or subtenant, the proposed commencement date of such assignment or subletting, the nature and character of the business of the proposed assignee or subtenant and such financial information as shall be reasonably necessary for Lessor to determine the credit-worthiness of such proposed assignee or subtenant. Lessor shall have the option (to be exercised within thirty (30) days from submission of Lessee's written request), (i) to refuse to consent to Lessee's assignment or subleasing of such space and to continue this Lease in full force and effect as to the entire Premises; or (ii) to permit Lessee to assign or sublet such space; subject, however, to provision satisfactory to Lessor for payment to Lessor of any consideration to be paid by such proposed assignee or sublessee in connection with such assignment or subletting in excess of Base Rental otherwise payable by Lessee and for payment to Lessor of any lump sum payment in connection with such assignment or subletting. If Lessor should fail to notify Lessee in writing of its election as described above within such thirty (30) day period, Lessor shall be deemed to have elected option (i) above. Section 22. Transfers of Lessor. - ----------- -------------------- Lessor shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Building and property referred to herein, and provided Lessor's transferee assumes the duties and obligations of Lessor arising from and after the date of any such transfer or assignment, upon such transfer or assignment Lessor shall be released from any further obligations hereunder, and Lessee agrees to look solely to such successor in interest of Lessor for the performance of such obligations. Section 23. Subordination to Mortgage. - ----------- -------------------------- This Lease shall be subject and subordinate to any mortgage or deed of trust which may hereafter encumber the Building, and to all renewals, modifications, consolidations, replacements, and extensions thereof, which contain (or which are included in a separate agreement) provisions to the effect that if there should be a foreclosure or sale under power under such mortgage or deed of trust, Lessee shall not be made a party defendant thereto, nor shall such foreclosure or sale under power disturb Lessee's possession under this Lease, provided always Lessee shall not be in default under this Lease. This clause shall be self-operative and no further instrument of subordination need be required by any mortgagee. In confirmation of such subordination, however, Lessee shall, at Lessor's request, execute promptly any certificate or instrument evidencing such subordination that Lessor may request. Lessee hereby constitutes and appoints Lessor the Lessee's attorney-in-fact to execute any such certificate or instrument for and on behalf of Lessee. In the event of the enforcement by the trustee or the beneficiary under any such mortgage or deed of trust of the remedies provided for by law or by such mortgage or deed of trust, Lessee will, upon request of any person or party succeeding to the interest of Lessor as a result of such enforcement, automatically become the Lessee of such successor in interest without change in the terms or other provisions of this Lease; provided, however, that such successor in interest shall not be bound by (a) any payment of rent or additional rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by Lessee of its obligations under this Lease, or (b) any amendment or modification of this Lease made without the written consent of such trustee or such beneficiary or such successor in interest. Upon request by such successor in interest, Lessee shall execute and deliver an instrument or instruments confirming the attornment provided for herein. Section 24. Mechanic's Liens. - ----------- ----------------- Lessee will not permit any mechanic's lien or liens to be placed upon the Premises or improvements thereon or the Building during the term hereof caused by or resulting from any work performed, materials furnished, or obligation incurred by or at the request of Lessee, and nothing in this Lease contained shall be deemed or construed in any way as constituting the consent or request of Lessor, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration, or repair of or to the Premises, or any part thereof, nor as giving Lessee any right, power, or authority to contract for or permit the rendering of Tenant Initials ___________ Landlord Initials___________ -6- any services or the furnishing of any materials that would give rise to the filing of any mechanic's or other liens against the interest of Lessor in the Premises. In the case of the filing of any lien on the interest of Lessor or Lessee in the Premises, Lessee shall cause the same to be discharged of record within ten (10) days after the filing of same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit in court or bonding. If Lessee shall fail to discharge such mechanic's lien within such period, then, in addition to any other right or remedy of Lessor, Lessor may, but shall not be obligated to, discharge the same, either by paying the amount claimed to be due, or by procuring the discharge of such lien by deposit in court or bonding. Any amount paid by Lessor for any of the aforesaid purposes, or for the satisfaction of any other lien, not caused or claimed to be caused by Lessor, with interest thereon at the rate of eighteen percent (18%) per annum or the highest lawful rate, whichever is the lesser, from the date of payment, shall be paid by Lessee to Lessor on demand. Section 25. Estoppel Certificate. - ----------- --------------------- Lessee will, at any time and from time to time, upon not less than ten (10) days' prior request by Lessor, execute, acknowledge, and deliver to Lessor a statement in writing executed by Lessee certifying that Lessee is in possession of the Premises under the terms of this Lease, that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications), and the dates to which the rent has been paid, and either stating that to the knowledge of Lessee no default exists hereunder, or specifying each such default of which Lessee may have knowledge, and such other matters as may be reasonably requested by Lessor; it being intended that any such statement by Lessee may be relied upon by any prospective purchaser or mortgagee of the Building. Section 26. Events of Default. - ----------- ------------------ (a) The following events shall be deemed to be events of default by Lessee under this Lease: (i) Lessee shall fail to pay any installment of the rent hereby reserved or other sum of money payable hereunder when due and the continuance of such failure for ten (10) days. (ii) Lessee shall fail to comply with any term, provision, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days after written notice thereof to Lessee, or, if such failure cannot reasonably be cured within such thirty (30) day period, Lessee commence such actions as are necessary to effect such cure within such thirty (30) day period and thereafter prosecute such cure regularly and diligently to conclusion. (iii) Lessee shall become insolvent, or shall make a transfer in fraud of creditors, or shall commit any act of bankruptcy, or shall make an assignment for the benefit of creditors, or Lessee shall admit in writing its inability to pay its debts as they become due. (iv) Lessee shall file a petition with any bankruptcy court under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any State thereof, or Lessee shall be the subject of an order for relief issued under the National Bankruptcy Act, as amended, or under any similar law or statute, or Lessee shall have filed any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal or state act or law relating to bankruptcy, insolvency or other relief of debtors, or Lessee shall be the subject of any order, judgment or decree entered into by a court of competent jurisdiction approving a petition filed against Lessee for any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal or state act relating to bankruptcy, insolvency or other relief for debtors; Tenant Initials ___________ Landlord Initials___________ -7- (v) A receiver, conservator or trustee shall be appointed for all or substantially all of the assets of Lessee or of the Premises or any of Lessee's property located thereon in any proceeding brought by Lessee, or any such receiver or trustee shall be appointed in any proceeding brought against Lessee and shall not be discharged within sixty (60) days after such appointment, or Lessee shall consent to or acquiesce in such appointment. (vi) The leasehold hereunder shall be taken on execution or other process of law in any action against Lessee. (vii) Lessee shall abandon any portion of the Premises. (viii) Lessee shall fail to vacate the space by the expiration of this lease. (b) If an event of default shall have occurred, Lessor shall have the right at its election, then or at any time thereafter (and upon the expiration of any applicable grace period, Lessee shall not be entitled to cure same and be reinstated as "Lessee" in good standing hereunder), to pursue any one or more of the following remedies in addition to all other rights or remedies provided herein or at law or in equity: (i) Lessor may terminate this Lease and forthwith repossess the Premises and be entitled to recover forthwith as damages a sum of money equal to the total of (A) the cost of recovering the Premises, (B) the unpaid rent earned at the time of termination, plus interest thereon at the rate of eighteen percent (18%) per annum or the maximum legal rate, whichever is lesser from the due date, (C) the balance of the rent for the remainder of the term less the fair market value of the Premises for such period, and (D) any other sum of money and damages owed by Lessee to Lessor. (ii) Lessor may terminate Lessee's right of possession (but not the Lease) and may repossess the Premises by forcible entry or detainer suit or otherwise, without demand or notice of any kind to Lessee and without terminating this Lease, in which event Lessor may, but shall be under no obligation to do so, relet the same for the account of Lessee for such rent and upon such terms as shall be satisfactory to Lessor. For the purpose of such reletting, Lessor is authorized to decorate or to make any repairs, changes, alterations, or additions in or to the Premises and to incur leasing commissions that may be necessary or convenient, and (A) if Lessor shall fail or refuse to relet the Premises, or (B) if the same are relet and a sufficient sum shall not be realized from such reletting after paying the unpaid base and additional rent due hereunder earned, but unpaid at the time of reletting, plus eighteen percent (18%) interest thereon or the highest lawful rate, whichever is lesser, the cost of recovering possession, and all of the costs and expenses of such decorations, repairs, changes, alterations, and additions, and leasing commissions and the expense of such reletting and of the collection of the rent accruing therefrom to satisfy the rent provided for in this Lease to be paid, then Lessee shall pay to Lessor as damages a sum equal to the amount of the rent reserved in this Lease for such period or periods, or if the Premises have been relet, Lessee shall satisfy and pay any such deficiency upon demand therefor from time to time, and Lessee agrees that Lessor may file suit to recover any sums falling due under the terms of this Section 26 from time to time; and that no delivery or recovery of any portion due Lessor hereunder shall be any defense in any action to recover any amount not theretofore reduced to judgment in favor of Lessor, nor shall such reletting be construed as an election on the part of Lessor to terminate this Lease unless a written notice of such intention be given to Lessee by Lessor. Notwithstanding any such reletting without termination, Lessor may at any time thereafter elect to terminate this Lease for such previous breach. Section 27. Lessor's Right to Relet. - ----------- ------------------------ In the event of default by Lessee in any of the terms or covenants of this Lease or in the event the Premises are abandoned by Lessee, Lessor shall have the right, but not the obligation, to relet same for the remainder of the term provided for herein, and if the rent received through reletting does not at least equal the rent provided for herein, Lessee shall pay and satisfy the deficiency between the amount of the rent so provided for and that received through reletting, including, but not limited to, the cost of renovating, altering, and decorating for a new occupant as well as any leasing commissions incurred in connection therewith. Nothing herein shall be construed as in any way denying Lessor the right, in the event of abandonment of the Premises or other breach of this Lease by Lessee, to treat the same as an entire breach, and at Lessor's option to terminate this Lease and/or immediately seek recovery for the entire breach of this Lease and any and all damages which Lessor suffers thereby. Tenant Initials ___________ Landlord Initials___________ -8- Section 28. Lien for Rent. - ----------- -------------- In consideration of the mutual benefits arising under this Lease, Lessee hereby grants to Lessor a lien and security interest on Lessee's furniture, equipment, machinery and furnishings now or hereafter placed in or upon the Premises and such property shall be and remain subject to such lien and security interest of Lessor for payment of all rent and other sums agreed to be paid by Lessee herein. The provisions of this paragraph relating to such lien and security interest shall constitute a security agreement under the Uniform Commercial Code so that Lessor shall have and may enforce a security interest on such property of Lessee. Lessee agrees to execute as debtor such financing statement or statements as Lessor may now or hereafter reasonably request in order that such security interest or interests may be perfected pursuant to the Uniform Commercial Code. Lessor may at its election at any time file a copy of this Lease as a financing statement. Lessor, as secured party, shall be entitled to all of the rights and remedies afforded a secured party under the Uniform Commercial Code in addition to and cumulative of the landlord's liens and rights provided by law or by the other terms and provisions of this Lease. Section 29. Attorneys' Fees. - ----------- ---------------- In the event either party hereto institutes any legal or equitable proceeding against the other party hereto, the prevailing party shall be entitled to recover its reasonable attorneys fees. Section 30. No Implied Waiver. - ----------- ------------------ The failure of Lessor to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power, or remedy contained in this Lease shall not be construed as a waiver or a relinquishment thereof for the future. The waiver of or redress for any violation of any term, covenant, agreement, or condition contained in this Lease shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. No express waiver shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. A receipt by Lessor of any rent with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Lessor of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Lessor. No payment by Lessee or receipt by Lessor of a lesser amount than the monthly installment of rent due under this Lease shall be deemed to be other than on account of the earliest rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such rent or pursue any other remedy in this Lease provided. Section 31. Casualty Insurance. - ----------- ------------------- Lessor shall maintain fire and extended coverage insurance on the Building. Such insurance shall be maintained with an insurance company authorized to do business in Texas, in amounts desired by Lessor and at the expense of Lessor (as a part of the Basic Costs), and payments for losses thereunder shall be made solely to Lessor. Lessee shall maintain at its expense fire and extended coverage insurance on all of its personal property, including removable trade fixtures, located in the Premises and on all additions and improvements made by Lessee and not required to be insured by Lessor above. If the annual premiums to be paid by Lessor shall exceed the standard rates because Lessee's operations, contents of the Premises, or improvements with respect to the Premises beyond Building standard, result in extra-hazardous exposure, Lessee shall pay the excess amount of the premium upon request therefor by Lessor. Tenant Initials ___________ Landlord Initials___________ -9- Section 32. Liability Insurance. - ----------- -------------------- Lessor shall, at its expense (as a part of the Basic Costs), maintain a policy or policies of comprehensive general liability insurance with the premiums thereon fully paid on or before the due date, issued by and binding upon some solvent insurance company. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance insuring Lessee and Lessor against any liability arising out of the use, occupancy or maintenance of the Premises and the Property. Such insurance shall be in an amount not less than $500,000.00 per occurrence. The policy shall insure performance by Lessee of the indemnity provisions of Section 33 of this Lease. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. Section 33. Indemnity. - ----------- ---------- Neither Lessor, nor Lessor's agents, servants, or employees shall be liable to Lessee, or to Lessee's agents, servants, employees, customers, or invitees, for any damage to person or property caused by any act, omission, or neglect of Lessee, its agents, servants or employees, and Lessee agrees to indemnify and hold Lessor and Lessor's agents, servants, and employees harmless from all liability and claims for any such damage. Lessee shall not be liable to Lessor, or to Lessor's agents, servants, employees, customers, or invitees, for any damage to person or property caused by any act, omission, or neglect of Lessor, its agents, servants, or employees, and Lessor agrees to indemnify and hold Lessee harmless from all claims for such damage. Section 34. Waiver of Subrogation Rights. - ----------- ----------------------------- Anything in this Lease to the contrary notwithstanding, Lessor and Lessee each hereby waives any and all rights of recovery, claim, action, or cause of action, against the other, its agents, officers, or employees, for any loss or damage that may occur to the Premises, or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause or origin, including negligence of the other party hereto, its agents, officers, or employees, and covenants that no insurer shall hold any right of subrogation against such other party. Section 35. Casualty Damage. - ----------- ---------------- If the Premises or any part thereof shall be damaged by fire or other casualty, Lessee shall give prompt written notice thereof to Lessor. In case the Building shall be damaged by fire or other casualty, but shall not be rendered untenantable in whole or in part, Lessor shall, at its sole expense, cause such damage to be repaired with reasonable diligence to substantially the same condition in which it was immediately prior to the happening of the casualty, and the Base Rental hereunder shall not be abated; however, in case the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Lessor's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), or in the event any mortgagee under a mortgage or deed of trust covering the Building should require that the insurance proceeds payable as a result of said fire or other casualty be used to retire the mortgage debt, Lessor may, at its option, terminate this Lease and the term and estate hereby granted by notifying Lessee in writing of such termination within sixty (60) days after the date of such damage. If Lessor does not thus elect to terminate this Lease, Lessor shall within seventy-five (75) days after the date of such damage commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building (except that Lessor shall not be responsible for delays outside its control) to substantially the same condition in which it Was immediately prior to the happening of the casualty, except that Lessor shall not be required to rebuild, repair, or replace any part of Lessee's fixtures, equipment or other personal property removable by Lessee under the provisions of this Lease, and Lessor shall not in any event be required to spend for such work an amount in excess of the insurance proceeds actually received by Lessor as a result of the fire or other casualty. Lessor shall not be liable for any inconvenience or annoyance to Lessee or injury to the business of Lessee resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Lessor shall allow Lessee a fair diminution of rent during the time and to the extent the Premises, or any portion thereof, are unfit for occupancy. If the Premises or any other portion of the Building be damaged by fire or other casualty resulting from the fault or Tenant Initials ___________ Landlord Initials___________ -10- negligence of Lessee or any of Lessee's agents, employees, or invitees, the rent hereunder shall not be diminished during the repair of such damage, and Lessee shall be liable to Lessor for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. Any insurance which may be carried by Lessor or Lessee against loss or damage to the Building or to the Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. Section 36. Condemnation. - ----------- ------------- If the whole or substantially the whole of the Premises should be taken for any public or quasi-public use under any governmental law, ordinance, or regulation, or by right of eminent domain, or should be sold to the condemning authority in lieu of condemnation, then this Lease shall terminate as of the date when physical possession of the Premises is taken by the condemning authority. If less than the whole or substantially the whole of the Complex, Building or the Premises is thus taken or sold, Lessor (whether or not the Premises are affected thereby) may terminate this Lease by giving written notice thereof to Lessee within sixty (60) days after the right of election accrues, in which event this Lease shall terminate as of the date when physical possession of such portion of the Complex or Building or Premises is taken by the condemning authority. If upon any such taking or sale of less than the whole or substantially the whole of the Complex or Building or the Premises this Lease shall not be thus terminated, the Base Rental payable thereunder shall be diminished by an amount representing that part of the Base Rental as shall properly, in Lessor's reasonable judgment, be allocable to the portion of the Premises which was so taken or sold or affected, if any, and Lessor shall, at Lessor's sole expense, restore and reconstruct the Complex, Building or the Premises, as the case may be, to substantially their former condition to the extent that the same, in Lessor's judgment, may be feasible; Lessor shall not in any event be required to spend for such work an amount in excess of the amount received by Lessor as compensation awarded upon a taking of any part or all of the Complex, Building or the Premises, and Lessee shall not be entitled to and expressly waives all claim to any such compensation. Section 37. Notices and Cure. - ----------- ----------------- In the event of any act or omission by Lessor which would give Lessee the right to damages from Lessor or the right to terminate this Lease by reason of the constructive or actual eviction from all or part of the Premises or otherwise, Lessee shall not sue for such damages or exercise any such right to terminate until it shall have given written notice of such act or omission to Lessor and to the holder(s) of any indebtedness or other obligations secured by any mortgage or deed of trust affecting the Premises (to the extent Lessor provides Lessee with appropriate notice addresses for any such persons), and a reasonable period of time for remedying such act or omission shall have elapsed following the giving of such notice, during which time Lessor and such holder(s) or either of them, their agents or employees, shall be entitled to enter upon the Premises and do therein whatever may be necessary to remedy such act or omission. During the period after the giving of such notice and during the remedying of such act or omission, the Base Rental payable by Lessee for such period as provided in this Lease shall be abated and apportioned only to the extent that any part of the Premises shall be untenantable. Section 38. Personal Liability. - ----------- ------------------- The liability of Lessor to Lessee for any default by Lessor under the terms of this Lease shall be limited to the interest of Lessor in the Building and the land on which the Building is situated, and Lessee agrees to look solely to Lessor's interest in the Building and the land on which the Building is situated for the recovery of any judgment from Lessor, it being intended that Lessor shall not be personally liable for any judgment or deficiency. This clause shall not be deemed to limit or deny any remedies which Lessee may have in the event of a default by Lessor hereunder which do not involve the personal liability of Lessor. Tenant Initials ___________ Landlord Initials___________ -11- Section 39. Notice. - ----------- ------- Any notice, communication, request, reply, or advice (hereinafter severally and collectively called "notice") in this Lease provided for or permitted to be given, made, or accepted by either party to the other must be in writing, and may, unless otherwise in this Lease expressly provided, be given or be served by depositing the same in the United States mail, postpaid and certified and addressed to the party to be notified, with return receipt requested, or by delivering the same in person to and officer of such party, or by prepaid telegram, when appropriate, addressed to the party to be notified. Notice deposited in the mail in the manner hereinabove described shall be effective, unless otherwise stated in this Lease, from and after the expiration of three {3} days after it is so deposited. Notice given in any other manner shall be effective only if and when received by the party to be notified. For purposes of notice, the addresses of the parties shall, until changed as herein provided, be as follows: For Lessor: 13714 Gamma, Ltd. c/o Harkinson Investment Corporation 4560 Beltline Road, Suite 201 Addison, TX 75001 For Lessee: I Element, Inc. 13714 Gamma Road, Suite 120 Farmers Branch, TX 75244 The parties hereto and their respective heirs, successors, legal representatives, and assigns shall have the right from time to time and at any time to change their respective addresses and each shall have the right to specify as its address any other address by at least fifteen (15) days' written notice to the other party delivered in compliance with this Paragraph 39. Section 40. Surrender. - ----------- ---------- On the last day of the term of this Lease, or upon the earlier termination of this Lease, Lessee shall peaceably surrender the Premises to Lessor in good order, repair, and condition at least equal to the condition when delivered to Lessee, excepting only reasonable wear and tear resulting from normal use, and damage by fire or other casualty covered by the insurance carried by Lessor. All movable fixtures, office equipment, and other personal property of Lessee shall remain the property of Lessee, and upon the expiration date or earlier termination of this Lease may be removed from the Premises by Lessee, subject, however, to Lessor's lien for rent; provided, however, that Lessee shall repair and restore in a good and workmanlike manner (reasonable wear and tear excepted), any damage to the Premises or the Building caused by such removal. Any of such movable fixtures, office equipment and other personal property not so removed by Lessee at or prior to the expiration date or earlier termination of this Lease shall become the property of Lessor. All other property as a part of the Premises attached or affixed to the floor, wall, or ceiling of the Premises (including wall-to-wall carpeting, paneling, or other wall covering) are the property of Lessor and shall remain upon and be surrendered with the Premises as a part thereof at the termination of this Lease by lapse of time or otherwise, Lessee hereby waiving all rights to any payment or compensation therefor. Notwithstanding anything herein to the contrary, Lessee's surrender of the Premises shall in no way affect Lessee's obligation to pay rent to the date of expiration of this Lease, whether or not the amount of such obligation has been ascertained either as of the date Lessee surrenders the Premises or as of the date of expiration of this Lease. Section 41. Captions. - ----------- --------- The captions of each Section of this Lease are inserted and included solely for convenience and shall never be considered or given any effect in construing this Lease, or any provisions hereof, or in connection with the duties, obligations, or liabilities of the respective parties hereto, or in ascertaining intent, if any question of intent exists. -12- Section 42. Entirety and Amendments. - ----------- ------------------------ This Lease embodies the entire contract between the parties hereto relative to the subject matter hereof. No variations, modifications, changes, or amendments herein or hereof shall be binding upon any party hereto unless in writing, executed by a duly authorized officer or a duly authorized agent of the particular party. All exhibits referred to in this Lease and attached hereto are incorporated herein for all purposes. Section 43. Severability. - ----------- ------------- If any term or provision of this Lease, or the application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. Section 44. Binding Effect. - ----------- --------------- Subject to Section 21, all covenants and obligations as contained within this Lease shall bind, extend, and inure to the benefit of Lessor, its successors and assigns, and shall be binding upon Lessee, its permitted successors and assigns. Section 45. Number and Gender of Words. - ----------- --------------------------- All personal pronouns used in this Lease shall include the other gender, whether used in the masculine, feminine, or neuter gender, and the singular shall include the plural whenever and as often as may be appropriate. Section 46. Recordation. - ----------- ------------ Lessee agrees not to record this Lease, but Lessee agrees, on request of Lessor, to execute a short form lease in form recordable and complying with applicable Texas laws. In no event shall such document set forth the rental or other charges payable by Lessee under this Lease; and any such document shall expressly state that it is executed pursuant to the provisions contained in this Lease and is not intended to vary the terms and conditions of this Lease. Section 47. Governing Law. - ----------- -------------- This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the State of Texas. Section 48. Force Majeure. - ----------- -------------- Whenever a period of time is herein prescribed for the taking of any action by Lessor, Lessor shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any act, omission, delay, or neglect of Lessee or any of Lessee's employees or agents, or any other cause whatsoever beyond the control of Lessor. Furthermore, the foregoing shall in no manner release, relieve or affect the independent obligation of Lessee to pay rent hereunder. Section 49. Environmental Requirements. - ----------- --------------------------- Except for Hazardous Material contained in products used by Tenant in legal, non reportable de minimis quantities for ordinary cleaning and office purposes, Tenant shall not permit or cause any party to bring any Hazardous Material upon the Premises or transport, store, use, generate, manufacture or release, any Hazardous Material in or about the Premises without Landlord's prior written consent. Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and shall remediate in a manner satisfactory to Landlord any Hazardous Materials released on or from the Project by Tenant, its agents, employees, contractors, subtenants or invitees. Tenant shall complete and Tenant Initials ___________ Landlord Initials___________ -13- certify to disclosure statements as requested by Landlord from time to time relating to Tenant's transportation, storage, use, generation, manufacture or release of Hazardous Materials on the Premises. The term "Environmental Requirements" means all applicable present and future statutes, regulations, ordinances, rules, codes, judgments, orders or other similar enactments of any governmental authority or agency regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the environment, including without limitation, the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conversation and Recovery Act; and all state and local counterparts thereto, and any regulations or policies promulgated or issued thereunder. The term "Hazardous Materials" means and includes any substance, material, waste, pollutant, or containment listed or defined as hazardous or toxic, under any Environmental Requirements, asbestos and petroleum, including crude oil or any fraction thereof, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). As defined in Environmental Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's "facility" and the "owner" of all Hazardous Materials brought on the Premises by Tenant, its agents, employees, contractors or invitees, and the wastes, by-products, or residues generated, resulting, or produced therefrom. Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including, without limitation, diminution in value of the Premises or the Project and loss of rental income from the Project), claims, demands, actions, suits, damages (including, without limitation, punitive damages), expenses (including, without limitation, remediation, removal, repair, corrective action, or cleanup expenses), and costs (including, without limitation, actual attorneys' fees, consultant fees or expert fees and including, without limitation, removal or management of any asbestos brought into the property in breach of the requirements of this Paragraph 49, regardless of whether such removal or management is required by law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials for which Tenant is obligated to remediate as provided above or any other breach of the requirements under this Paragraph 49 by Tenant, its agents, employees, contractors, subtenants, assignees or invitees, regardless of whether Tenant had knowledge of such noncompliance. The obligations of Tenant under this Paragraph 49 shall survive any termination of this Lease. Section 50. Relationship of Parties. - ----------- ------------------------ Nothing contained herein shall create any relationship between the parties hereto other than that of landlord and tenant, and it is acknowledged and agreed that Lessor does not in any way or for any purpose intend, nor shall this Lease be construed, to create as between Lessor and Lessee the relation of partner, joint venturer or member of a joint or common enterprise with Lessee. Section 51. Security Deposit and Prepaid Rent. DELETED - ----------- --------------------------------- Section 52. Time of Essence. - ----------- ---------------- Time is of the essence of this Lease. Section 53. Riders. - ----------- ------- The following numbered Riders are attached hereto and incorporated herein and made a part of this Lease for all purposes: Exhibit A and Exhibit B. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease in multiple original counterparts as of the date and year first above written. LESSOR: 13714 Gamma, Ltd. By:/S/ William J. Harkinson ------------------------------------ William J. Harkinson, President Harkinson Investment Corporation, General Partner LESSEE: I Element, Inc., a Nevada Corp. By:/S/ Ivan Zweig ------------------------------------ Ivan Zweig CEO Tenant Initials ___________ Landlord Initials___________ -14- EXHIBIT A FLOORPLAN Tenant Initials ___________ Landlord Initials___________ -15- "EXHIBIT B" RULES AND REGULATIONS --------------------- 1. The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from the Premises. 2. Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped areas or other areas outside of its Premises, or on the roof of the Project. 3. Except for seeing-eye dogs, no animals shall he allowed in the offices, halls, or corridors in the Project. 4. Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical instrument or by the making of loud or improper noises. 5. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced: and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant's expense. 6. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project. 7. Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the overnight parking of operative vehicles, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord. 8. Tenant shall maintain the Premises free from rodents, insects and other pests. 9. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the Project. 10. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person. 11. Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, hearing apparatus, or any other service equipment affecting the Premises. 12. Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises. 13. All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose. 14. No auction, public or private, will be permitted on the Premises or the Project. Tenant Initials ___________ Landlord Initials___________ -16- 15. No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord. 16. The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall be operated in the Premises. 17. Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord's consent to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity. 18. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. 19. Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises. 20. Tenant shall not dump waste or refuse or permit any harmful materials (including paper towels, sanitary napkins, etc.) to be placed in any drainage system or sanitary system in or about the Premises. 21. The Landlord reserves the right to rescind any of these rules and make such other and further rules and regulations as in the judgment of the Landlord shall from time to time be needed for safety, protection, care and cleanliness of the Project, the operation thereof, the preservation of good order therein, and the protection and comfort of its tenants, their agents, employees and invitees, including but not limited to rules and regulations regarding hours of access to the Project, which rules when made and notice thereof given to a tenant shall be binding upon him in like manner as if originally herein prescribed. In the event of any conflict, inconsistency, or other differences between the terms and provision of these rules and regulations and any lease now or hereafter in effect between Landlord and any tenant in the Building, Landlord shall have the right to rely on the term or provision in either such lease or such Rules and Regulations which is most restrictive on such tenant and most favorable to Landlord. Tenant Initials ___________ Landlord Initials___________ -17- EX-10.6 17 ielementsb2a_ex1006.txt FORM OF WARRANT EXHIBIT 10.6 WARRANT THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. Warrant To Purchase 2,617,188 Shares of Common Stock IELEMENT CORPORATION Date of Issuance: December 30, 2006 No. Vista 1 THIS CERTIFIES that, for value received, Vista Capital, S.A., an entity duly formed and organized under the laws of Switzerland, or its assigns (in either case, the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from IElement Corporation, a Nevada corporation (the "Company"), at the price per share set forth in Section 9 hereof, that number of shares of the Company's common stock (the "Common Stock") set forth in Section 8 hereof. This Warrant is referred to herein as the "Warrant" and the shares of Common Stock issuable pursuant to the terms hereof are sometimes referred to herein as "Warrant Shares." 1. HOLDER EXERCISE OF WARRANT. This Warrant shall be exercisable in whole or in part at any time prior to the Expiration Date. To exercise this Warrant in whole, the Holder shall deliver to the Company at its principal office, (a) a written notice, in substantially the form of the exercise notice attached hereto as EXHIBIT A (the "Exercise Notice"), of the Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (b) a check (or wire transfer of funds) in the amount of the aggregate exercise price for the Warrant Shares being purchased, and (c) this Warrant. The Company shall as promptly as practicable, and in any event within twenty (20) days after delivery to the Company of (i) the Exercise Notice, (ii) the check (or wire transfer of funds) mentioned above, and (iii) this Warrant, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates representing the aggregate number of 1 shares of Common Stock specified in such notice, provided this Warrant has vested on or prior to the date such notice is delivered. Each certificate representing Warrant Shares shall bear the legend or legends required by applicable securities laws as well as such other legend(s) the Company requires to be included on certificates for its Common Stock. The Company shall pay all expenses and other charges payable in connection with the preparation, issuance and delivery of such stock certificates except that, in case such stock certificates shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all stock transfer taxes that are payable upon the issuance of such stock certificate or certificates shall be paid by the Holder at the time of delivering the Exercise Notice. All shares of Common Stock issued upon the exercise of this Warrant shall be validly issued, fully paid, and nonassessable. The Warrant shall expire on DECEMBER 31, 2007 (the "Expiration Date"). The Investor may exercise the warrant at any time prior to the Expiration Date. The Company has no restriction on the sale or transfer of the Warrant or Warrant Shares; however, the Investor is required to comply with all state and U. S. laws and regulations relating to security sales and transfers. 2. REGISTRATION RIGHTS. The Company agrees not to file a registration statement with the SEC, other than on Form 10, Form S-4 (except for a public reoffering or resale) or Form S-8 without first having registered (or simultaneous registering) the Common Stock or Warrant Shares. 3. RESERVATION OF SHARES. The Company hereby covenants that at all times during the term of this Warrant there shall be reserved for issuance such number of shares of its Common Stock as shall be required to be issued upon exercise of this Warrant. 4. FRACTIONAL SHARES. This Warrant may be exercised only for a whole number of shares of Common Stock, and no fractional shares or scrip representing fractional shares shall be issuable upon the exercise of this Warrant. 5. TRANSFER OF WARRANT AND WARRANT SHARES. The Holder may sell, pledge, hypothecate, or otherwise transfer this Warrant, in whole, in accordance with and subject to the terms and conditions set forth in the Subscription Agreement and then only if such sale, pledge, hypothecation, or transfer is made in compliance with the act or pursuant to an available exemption from registration under the act relating to the disposition of securities, and is made in accordance with applicable state securities laws. 6. LOSS OF WARRANT. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, or destruction of this Warrant, and of indemnification satisfactory to it, or upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new warrant of like tenor. 7. RIGHTS OF THE HOLDER. No provision of this Warrant shall be construed as conferring upon the Holder the right to vote, consent, receive dividends or receive notice other than as expressly provided herein. Prior to exercise, no provision hereof, in the absence of affirmative action by the Holder to exercise this Warrant, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the holder for the purchase price of any warrant shares or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 2 8. NUMBER OF WARRANT SHARES. This Warrant shall be exercisable for two million six hundred seventeen thousand one hundred eighty-eight (2,617,188) shares of the Company's Common Stock, as adjusted in accordance with this Agreement. 9. EXERCISE PRICE; ADJUSTMENT OF WARRANTS. a. DETERMINATION OF EXERCISE PRICE. The per share purchase price (the "Exercise Price") for each of the Warrant Shares purchasable under this Warrant shall be equal to Ten Cents ($0.10). b. ADJUSTMENT FOR MERGERS OR REORGANIZATION, ETC. In case of any consolidation or merger of the Company with or into another corporation or the conveyance of all or substantially all of the assets of the Company to another corporation, this Warrant shall be exercisable into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon exercise of this Warrant would have been entitled upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holder of this Warrant, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as reasonable may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of this Warrant. c. NO IMPAIRMENT. THE COMPANY WILL NOT, THROUGH ANY REORGANIZATION, TRANSFER OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ISSUE OR SALE OF SECURITIES OR ANY OTHER VOLUNTARY ACTION, AVOID OR SEEK TO AVOID THE OBSERVANCE OR PERFORMANCE OF ANY OF THE TERMS TO BE OBSERVED OR PERFORMED HEREUNDER BY THE COMPANY, BUT WILL AT ALL TIMES IN GOOD FAITH ASSIST IN THE CARRYING OUT OF ALL THE PROVISIONS OF THIS SECTION AND IN THE TAKING OF ALL SUCH ACTION AS MAY BE NECESSARY OR APPROPRIATE IN ORDER TO PROTECT THE EXERCISE RIGHTS OF THE HOLDER OF THIS WARRANT AGAINST IMPAIRMENT. d. ISSUE TAXES. The Company shall pay issue taxes that may be payable in respect of any issue or delivery of shares of Common Stock on exercise of this Warrant, in whole; provided, however, that the Company shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such exercise. e. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of common stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of common stock as shall from time to time be sufficient to effect the exercise of this Warrant; and if at any time the number of authorized but unissued shares of common stock shall not be sufficient to effect the exercise of this Warrant, the Company will take all appropriate corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of common stock to such number of shares as shall be sufficient for such purpose. 3 10. CERTAIN DISTRIBUTIONS. In case the Company shall, at any time, prior to the Expiration Date, declare any distribution of its assets to holders of its common stock as a partial liquidation, distribution or by way of return of capital, other than as a dividend payable out of earnings or any surplus legally available for dividends, then the Holder shall be entitled, upon the proper exercise of this Warrant in whole prior to the effecting of such declaration, to receive, in addition to the shares of common stock issuable on such exercise, the amount of such assets (or at the option of the Company a sum equal to the value thereof at the time of such distribution to holders of common stock as such value is determined by the Board of Directors of the Company in good faith), which would have been payable to the Holder had it been a holder of record of such shares of common stock on the record date for the determination of those holders of Common Stock entitled to such distribution. 11. DISSOLUTION OR LIQUIDATION. In case the Company shall, at any time prior to the Expiration Date, dissolve, liquidate or wind up its affairs, the Holder shall be entitled, upon the proper exercise of this Warrant in whole and prior to any distribution associated with such dissolution, liquidation, or winding up, to receive on such exercise, in lieu of the shares of Common Stock to which the Holder would have been entitled, the same kind and amount of assets as would have been distributed or paid to the Holder upon any such dissolution, liquidation or winding up, with respect to such shares of Common Stock had the Holder been a holder of record of such share of Common Stock on the record date for the determination of those holders of Common Stock entitled to receive any such dissolution, liquidation, or winding up distribution. 12. RECLASSIFICATION OR REORGANIZATION. In case of any reclassification, capital reorganization or other change of outstanding shares of common stock of the Company (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of an issuance of common stock by way of dividend or other distribution or of a subdivision or combination), the Company shall cause effective provision to be made so that the Holder shall have the right thereafter by exercising this Warrant, IN ACCORDANCE WITH THE Unit Subscription Agreement, to purchase the kind and amount of shares of stock and other securities and PROPERTY RECEIVABLE UPON SUCH RECLASSIFICATION, CAPITAL REORGANIZATION OR OTHER CHANGE, BY A HOLDER OF THE PROPORTIONAL EQUITY OWNERSHIP IN COMMON STOCK WHICH MIGHT HAVE BEEN PURCHASED UPON EXERCISE OF THIS WARRANT IMMEDIATELY PRIOR TO SUCH RECLASSIFICATION OR CHANGE. ANY SUCH PROVISION SHALL INCLUDE PROVISION FOR ADJUSTMENTS WHICH SHALL BE AS NEARLY EQUIVALENT AS MAY BE PRACTICABLE TO THE ADJUSTMENTS PROVIDED FOR IN THIS WARRANT. THE FOREGOING PROVISIONS OF THIS SECTION 12 SHALL SIMILARLY APPLY TO SUCCESSIVE RECLASSIFICATIONS, CAPITAL REORGANIZATIONS AND CHANGES OF SHARES OF COMMON STOCK. IN THE EVENT THAT IN ANY SUCH CAPITAL REORGANIZATION, RECLASSIFICATION, OR OTHER CHANGE, ADDITIONAL SHARES OF COMMON STOCK SHALL BE ISSUED IN EXCHANGE, CONVERSION, SUBSTITUTION OR PAYMENT, IN WHOLE, FOR OR OF A SECURITY OF THE COMPANY OTHER THAN COMMON STOCK, ANY AMOUNT OF THE CONSIDERATION RECEIVED UPON THE ISSUE THEREOF BEING DETERMINED BY THE BOARD OF DIRECTORS OF THE COMPANY SHALL BE FINAL AND BINDING ON THE HOLDER. 4 13. MISCELLANEOUS. a. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors and assigns of the parties, except to the extent otherwise provided herein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. b. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to the principles of conflict of laws thereof. c. COUNTERPARTS; DELIVERY BY FACSIMILE. This 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. Delivery of this Agreement may be effected by facsimile. d. TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. e. NOTICES. Unless otherwise provided, any notice required or permitted hereunder shall be given by personal service upon the party to be notified, by nationwide overnight delivery service or upon deposit with the United States Post Office, by certified mail, return receipt requested and: (i) if to the Company, addressed to IElement Corporation. 17194 Preston Road, Suite 102 PMB 341, Dallas, TX 75248, or at such other address as the Company may designate by notice to each of the Investors in accordance with the provisions of this Section; and (ii) if to the Warrant holder, at the address indicated on the signature page hereof, or at such other addresses as such Holder may designate by notice to the Company in accordance with the provisions of this Section. f. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either prospectively or retroactively), only with the written consent of the Company and a majority in interest of the Holders. g. ENTIRE AGREEMENT. This Agreement, the Memorandum (including the exhibits and schedules thereto) by and between the Company and the Holder, constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties hereto. 5 IN WITNESS WHEREOF, the undersigned hereby sets is hand and seal this: 30th day of December 2005. IElement Corporation. By: /s/ Ivan Zweig ----------------------------------------- Name: Ivan Zweig Title: Chief Executive Officer Consultant Name: Vista Capital, SA 6 WARRANT EXHIBIT A NOTICE OF EXERCISE (To be signed only upon exercise of the Warrant) TO: I Element Corporation. The undersigned hereby irrevocably elects to exercise the purchase rights represented by the Warrant granted to the undersigned on ______________________, 2005 and to purchase thereunder ______________* shares of Common Stock of IElement Corporation. (the "Company") and herewith encloses either payment of $__________________________________ or instructions regarding the manner of exercise permitted under Section 1 of the Warrant, in full payment of the purchase price of such shares being purchased. Dated: ______________________________ - -------------------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) __________________________________________________ (Please Print Name) __________________________________________________ (Address) * Insert here the number of shares being exercised, without making any adjustment for additional Common Stock of the Company nor accounting for recapitalization or reorganization of the Company following the original date of the Unit Subscription Agreement, other securities or property which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. 7 WARRANT EXHIBIT B (To be used by IElement Corporation. to give notice to Warrant Holders of CALL to exercise the Warrant) NOTICE OF CALL To: The Holder of IElement Corporation Warrant. Name: ____________________________________________ (name of Warrant Holder) Address: _________________________________________ _________________________________________ _________________________________________ Notice is hereby given to you that IElement Corporation. (the "Company") hereby elects to exercise its "call" option to sell shares of common stock ("Common Stock") of the Company to you, the Investor, as of the Warrant Call Date, at the Exercise Price and for the number of shares written below, all pursuant to that certain Subscription Agreement and Warrant by and between the Company and you. You are required to exercise your right to purchase common shares of the Company within the time and for the price per share as stated in the said Warrant or you will lose your right to purchase Company common shares on the terms and conditions as stated in said Warrant. Call Date: _______________________________________ Intended Number of Shares: _______________________ Share Dollar Amount: _____________________________ Price Per Share: $0.10 IElement Corporation. By: _________________________________ Dated this ____ day of ________ 200__. Name: _________________________ Title: ________________________ 8 EX-21 18 ielement_ex2100.txt SUBSIDIARIES EXHIBIT 21 EXHIBIT 21.0 LIST OF SUBSIDIARIES I-Element, Inc., a Nevada corporation formed December 30, 2002. I-Element Telephone of California, Inc., a Nevada corporation formed on October 11, 2005. I-Element Telephone of Arizona, Inc., a Nevada corporation formed on March 13, 2006. EX-23.1 19 ielement_ex2301.txt CONSENT EXHIBIT 23.1 BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C. - ----------------------------------------- CERTIFIED PUBLIC ACCOUNTANTS High Ridge Commons Suites 400 - 403 200 Haddonfield Berlin Road Gibbsboro, NJ 08026 Securities and Exchange Commission Washington, DC 20549 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ladies and Gentlemen: We hereby consent to the use in this Registration Statement on Form SB-2 of our report dated June 28, 2005, relating to the consolidated financial statements of MailKey Corporation and Subsidiary, which appears in such Registration Statement. Additionally, we consent to the use of our quarterly reviewed IElement Corporation and Subsidiary condensed consolidated financial statements for the three and nine months ended December 31, 2005. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ Bagell, Josephs, Levine & Company, L.L.C. Bagell, Josephs, Levine & Company, L.L.C. Gibbsboro, New Jersey January 30, 2006 EX-23.2 20 iec_sb2-ex2302.txt CONSENT EXHIBIT 23.2 LEGAL & COMPLIANCE, LLC LAURA ANTHONY, ESQUIRE STUART REED, ESQUIRE WWW.LEGALANDCOMPLIANCE.COM DIRECT E-MAIL: LAURAANTHONYPA@AOL.COM May 2, 2006 Board of Directors I-Element Corporation 17194 Preston Road Suite 102 PMB 341 Dallas, TX 75248 Re: Registration Statement on Form SB-2 Dear Board Members: We have acted as counsel to I-Element Corporation, a Nevada corporation (the "Company"), in connection with the registration under the Securities Act of 1933 (the "Securities Act"), of 112,700,329 shares of the Company's common stock, $0.001 par value per share (the "Common Stock"), as described below. A registration statement on Form SB-2 has been filed with the Securities and Exchange Commission (file no. 333-131451) on or about January 31, 2006 (the "Registration Statement"). The Registration Statement seeks the registration of 112,700,329 shares of the Common Stock (the "Registered Shares"). The Registered Shares are to be offered to the public by the Selling Stockholders without the use of any underwriters. The Registered Shares include 82,212,048 shares of common stock which are issued and outstanding and an additional 30,488,281 shares of common stock issuable upon the exercise of warrants. In connection with rendering this opinion we have examined executed copies of the Registration Statement and all exhibits thereto. We have also examined and relied upon the original, or copies certified to my satisfaction, of (i) the Articles of Incorporation, Amendments thereto and the By-laws of the Company, (ii) minutes and records of the corporate proceedings of the Company with respect to the issuance of the Registered Shares and related matters, and (iii) such other agreements and instruments relating to the Company as we deemed necessary or appropriate for purposes of the opinion expressed herein. In rendering such opinion, we have made such further investigation and inquiries relevant to the transactions contemplated by the Registration Statement as we have deemed necessary for the opinion expressed herein, and we have relied, to 330 CLEMATIS STREET, #217 o WEST PALM BEACH, FLORIDA o 33401 PHONE: 561-514-0936 o FAX 561-514-0832 OFFICES IN WEST PALM BEACH AND MIAMI BEACH Board of Directors I-Element Corporation May 2, 2006 the extent we deemed reasonable, on certificates and certain other information provided to me by officers of the Company and public officials as to matters of fact of which the maker of such certificate or the person providing such other information had knowledge. Furthermore, in rendering my opinion, we have assumed that the signatures on all documents examined by me are genuine, that all documents and corporate record books submitted to me as originals are accurate and complete, and that all documents submitted to me are true, correct and complete copies of the originals thereof. Based upon the foregoing, we are of the opinion that the Registered Shares have each been duly authorized for issuance and sale, and when sold and issued against payment therefor as contemplated by the Registration Statement, will be validly issued, fully paid and non-assessable under the laws of the State of Nevada, including statutory provisions, all applicable provisions of the Nevada Constitution and reporting judicial decisions interpreting those laws. We hereby consent to the reference to my name in the Registration Statement and the filing of this opinion as an exhibit to the Registration Statement. Sincerely, Legal & Compliance, LLC By: /s/ Laura Anthony ------------------------------ Laura Anthony, President 330 CLEMATIS STREET, #217 o WEST PALM BEACH, FLORIDA o 33401 PHONE: 561-514-0936 o FAX 561-514-0832 OFFICES IN WEST PALM BEACH AND MIAMI BEACH -----END PRIVACY-ENHANCED MESSAGE-----