-----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, HSxKf75O8O6hwcqqrsVQ5GyHB879zjPDhGZdOKfNefL834Ts2o7uX8iOoeBW+VlZ 1A81wiigSGko0rx5oNn3dg== 0000950115-99-001602.txt : 19991206 0000950115-99-001602.hdr.sgml : 19991206 ACCESSION NUMBER: 0000950115-99-001602 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19991203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNF TECHNOLOGIES INC CENTRAL INDEX KEY: 0001093229 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232997171 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-92087 FILM NUMBER: 99768783 BUSINESS ADDRESS: STREET 1: 7722 EAST GRAY RD CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 4807184065 MAIL ADDRESS: STREET 1: 7722 E GRAY RD CITY: SCOTTSDALE STATE: AZ ZIP: 85260 SB-2 1 INITIAL STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, VIA EDGAR ON DECEMBER 3, 1999 REGISTRATION NO. 333 -_________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- CNF TECHNOLOGIES, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 3577 23-2997171 - ------------------------------- ---------------------------- ----------------------------------- (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) Incorporation or Organization) Classification Code Number)
CNF Technologies, Inc. 7722 East Gray Road Scottsdale, Arizona 85260 (480) 718-4065 ------------------------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive office and principal place of business) Mr. David G. Thompson 7722 East Gray Road Scottsdale, Arizona 85260 (480) 718-4065 ------------------------------------------------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) with a copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll Professional Corporation Eleven Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103 (215) 665-3873 ---------------------------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable following effectiveness of this Registration Statement. ----------------------------------- 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, 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, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement in 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, please check the following box: / / CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Title of Each Class Amount to be Offering Price Per Aggregate Amount of of Securities to be Registered Registered (1) Share (2) Offering Price(2) Registration Fee (2) ------------------------------ ------------------------------------ ------------------ -------------------- Common Stock, $.0001 par value 1,756,624 (3) $5.6875 9,990,792 $3,027.51
(1) Represents shares of the Company's Common Stock which may be offered by certain Selling Security Holders. See "SELLING SECURITY HOLDERS." (2) Estimated pursuant to Rule 457(c) for the purpose of calculating the registration fee. Based on the average of the bid and asked prices per share of the Company's common stock as reported on the OTC Bulletin Board on November 29, 1999. (3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, this registration statement also includes additional shares of Common Stock issuable upon stock splits, stock dividends or similar transactions. 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, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 2 The information in this Prospectus is not complete and may be changed. The Selling Security Holders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is 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. SUBJECT TO COMPLETION, DATED DECEMBER 3, 1999 PRELIMINARY PROSPECTUS CNF TECHNOLOGIES, INC. 1,756,624 Shares of Common Stock The Selling Security Holders identified on page 46 of this Prospectus, may offer and sell, from time to time, up to 1,756,624 shares of Common Stock of CNF Technologies, Inc. The shares were issued by us in private placement transactions. The Selling Security Holders may sell all or a portion of their shares through public or private transactions at prevailing market prices or at privately negotiated prices. We will not receive any part of the proceeds from sales of these shares by the Selling Security Holders. Our Common Stock is traded on the OTC Bulletin Board under the symbol "CNFT". The last reported bid price of our Common Stock on November 29, 1999 on the OTC Bulletin Board was $5.00 per share. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this preliminary prospectus is December 3, 1999 3 TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY................................................................................................1 THE OFFERING......................................................................................................3 SUMMARY CONSOLIDATED FINANCIAL DATA...............................................................................4 RISK FACTORS......................................................................................................5 USE OF PROCEEDS..................................................................................................13 MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS......................................................13 CAPITALIZATION...................................................................................................15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................16 DESCRIPTION OF BUSINESS..........................................................................................25 MANAGEMENT.......................................................................................................35 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................40 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................41 DESCRIPTION OF SECURITIES........................................................................................43 SELLING SECURITY HOLDERS.........................................................................................46 PLAN OF DISTRIBUTION.............................................................................................47 LEGAL MATTERS....................................................................................................48 EXPERTS..........................................................................................................49 WHERE YOU CAN GET MORE INFORMATION...............................................................................49 FINANCIAL STATEMENTS............................................................................................F-1
ABOUT THIS PROSPECTUS This Prospectus is part of a registration statement we filed with the United States Securities and Exchange Commission. You should rely only on the information provided in this Prospectus. We have not authorized anyone to provide you with information different from that contained in this Prospectus. The Selling Security Holders are offering to sell, and seeking offers to buy, shares of Common Stock only in jurisdictions where offers and sales are permitted. The information contained in this Prospectus is accurate only as of the date of this Prospectus, regardless of the time of delivery of this Prospectus or of any sale of Common Stock. This Preliminary Prospectus is subject to completion prior to this offering. i PROSPECTUS SUMMARY The following information is intended to summarize the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. This section is not intended to be a complete description of all aspects of our business or the Common Stock being offered by the Selling Security Holders. Investors should carefully consider the information set forth under the caption "RISK FACTORS" beginning at page 5 of this Prospectus. Unless the context otherwise requires, all references to "CNF," the "Company," "we," "us" or "our" refer to CNF Technologies, Inc. and our subsidiaries. About CNF Technologies, Inc. We design, manufacture and market portable computer peripherals and accessories for laptop computers to notebook PC vendors, wholesale distributors, computer resellers, computer retail stores and corporate end users. Our devices are designed to bring the functionality and power of desktop computers to portable computer users. Our core products o Internal high-capacity removable storage devices for various notebook computers (including Zip and LS/120 Super Disk drives) o Portable DVD-ROM drives o Portable CD-ROM drives o Universal bay replicators branded as deviceDOCK's(TM) o Monitor stands o Numeric keypads o Proprietary and universal auto adapters o Universal port replicators In addition to the core products described above, we plan to introduce a universal docking station to complement our universal port replicator during the next fiscal year. The universal port replicator and the universal docking station are product devices which enable users of almost any make or model of portable computer to transform their laptop into a desktop computer. These products are designed to link a laptop to a network, a full-size monitor, keyboard and mouse, as well as an array of external and internal peripherals. Industry and market information According to International Data Corporation, a market research firm, portable computers are currently the fastest growing segment of the personal computer market. This growth has 1 been fueled by advances in computer technology and the increasing demand for computer mobility. International Data Corporation also predicts that the portable computer market will grow at a compound annual rate of 15%, from 14.1 million units in 1997 to approximately 25 million units by 2001. We market our products through wholesale distributors, original equipment manufacturers ("OEMs"), resellers, and to a lesser extent, directly to corporate end users throughout the United States, Canada, Australia, Japan and Europe. The market for personal computers and computer peripherals is subject to intense competition and characterized by both rapid technological change and shifting consumer demands. In order to effectively compete in this industry, we must continually develop and introduce new products with improved features in a timely and cost-efficient manner. This requires us to maintain superior research and development, comprehensive market research and effective communication channels with manufacturers, distributors and corporate end users. Our Mission We believe that current industry trends will lead to an increased demand for the use of peripherals and accessories designed to maximize the portability and enhance the functionality of laptop computers and create a substantial potential market for our products. Our overriding mission is to design, manufacture and market peripheral products which can integrate any laptop computer into any network or desktop computer at any time. Our products are designed to permit laptop computer users to rely exclusively on their laptop by eliminating the need to rely on a specific stationary office or network. Our primary focus is to anticipate technological advancements and consumer preference as far in advance as possible, develop new products and improved features to meet such market demands and transform ideas from concept to market as quickly as possible. Corporate information We were incorporated under the laws of Florida on September 23, 1996 as JLL Ventures Corp. and on April 1, 1999, reincorporated into the State of Delaware. Thereafter, our wholly owned subsidiary acquired CNF, Inc., a California corporation ("CNF, Inc."), by merger (the "Merger") and assumed the historic operations of CNF, Inc. In connection with the Merger, we changed our name to CNF Technologies, Inc. ("CNF") and changed the name of our wholly owned subsidiary to CNF Mobile Solutions, Inc. Prior to the Merger, we were an inactive company whose shares were listed for quotation on the OTC Bulletin Board. Our principal executive offices are located at 7722 East Gray Road, Scottsdale, Arizona 85260 and our telephone number is (480) 718-4065. 2 THE OFFERING Common Stock offered by the Selling Security Holders: 1,756,624 Shares Common Stock currently outstanding: 11,352,830 Shares(1) Common Stock to be outstanding after the Offering: 11,502,830 Shares(1)(2) Use of Proceeds: We will not receive any of the proceeds from the sale of shares by the Selling Security Holders.
Trading Symbol (OTC Bulletin Board): "CNFT" - -------------------------- (1) The number of outstanding shares includes 2,000,000 shares which are subject to possible cancellation upon the terms set forth in an escrow agreement entered into in connection with the Merger. These shares will be released from escrow based on the proceeds we receive in a private placement of our Common Stock which terminates on February 15, 2000 and the principal amount of outstanding indebtedness, if any, which is converted into shares of our Common Stock on or before February 15, 2000. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - Material Escrow Arrangements." The number of outstanding shares does not include: o 4,163,188 or more shares issuable upon the conversion of 4,163,188 outstanding shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock"); o 792,440 or more shares issuable upon exercise of outstanding options to purchase 792,440 shares of Series A Preferred Stock at exercise prices ranging from $.24 to $1.21 per share which vest over a four (4) year period commencing on the date of grant; o 200,000 shares issuable upon exercise of outstanding warrants; and o up to 200,000 shares issuable upon exercise of warrants issuable upon completion of a private placement transaction. Warrants to purchase 66,667 of such shares have been issued. See "DESCRIPTION OF SECURITIES" and "MANAGEMENT - Outstanding Options; Stock Incentive Plan." (2) Includes 150,000 shares being offered hereunder which are issuable upon conversion of outstanding shares of Series A Preferred Stock. 3 SUMMARY CONSOLIDATED FINANCIAL DATA (1) The following table sets forth our summary financial data. This table does not present all of our financial information. You should read this information together with our financial statements and the notes to those statements beginning on page F-1 of this Prospectus and the information under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Statement of Operations Data:
Year Ended March 31 Six Months Ended September 30 1999 1998 1999 1998 ----------- ----------- ---------- ---------- Revenues $9,425,947 $7,726,484 $6,114,459 $6,593,389 Gross Profit 3,337,398 3,265,540 2,249,198 2,281,809 Loss before income taxes (3,119,725) (58,167) (2,360,679) (443,995) Net Loss (3,074,525) (79,267) (2,360,679) (443,995) Basic and Diluted loss per share: (2) (1.23) (0.03) (0.31) (0.18) Basic and Diluted Weighted average number of shares outstanding: 2,500,250 2,500,000 7,518,457 2,500,000
Balance Sheet Data:
As of March 31, 1999 As of September 30, 1999 -------------- ------------------------ Actual Actual ProForma(3) ----------- ----------- ------------ Working capital (deficiency) $(3,062,743) $(3,460,854) $ (45,854) Total assets 3,538,687 4,789,207 6,529,207 Total liabilities 6,265,324 7,835,082 6,160,082 Stockholders equity (deficit) (2,726,637) (3,045,875) 369,125
- ------------------- (1) The financial data presented above reflect the relevant Statement of Operations Data of CNF, Inc. CNF, Inc. was acquired by us pursuant to the Merger in which CNF, Inc. was merged with and into our wholly owned subsidiary JLL Ventures Acquisition Corp., a Delaware corporation. Upon completion of the Merger, JLL Ventures Acquisition Corp. changed its name to CNF Mobile Solutions, Inc. Because the former stockholders of CNF, Inc. acquired a controlling interest in the Company (the Company was inactive at the time), the Merger has been accounted for as a "reverse acquisition." Accordingly, for financial statement presentation purposes, CNF, Inc. is viewed as the continuing entity and the related business combination is viewed as a recapitalization of CNF, Inc., rather than an acquisition by the Company. (2) Basic income (loss) per common share is based upon the weighted average number of common shares outstanding for each period presented. Diluted income (loss) per common share is based upon the weighted average number of common shares plus the dilutive effect of the existing convertible securities outstanding for each period presented. Convertible securities have not been included as their effect would be anti-dilutive. (3) Gives effect to the following events which occurred after September 30, 1999: o the retirement of 1,000,000 shares of Series A Preferred Stock o the receipt of net proceeds of $1,740,000 from the sale of 666,667 shares of Common Stock in a private placement transaction which closed on November 26, 1999 o the issuance of 1,005,000 shares of Common Stock upon the conversion of $1,675,000 of short-term indebtedness. 4 RISK FACTORS An investment in our Common Stock involves a high degree of risk and should only be made by investors who can afford to lose their entire investment. You should carefully consider the risks and uncertainties described below and other information in this Prospectus before deciding to invest in our Common Stock. If any of the following risks actually occur, our business, results of operations and financial condition could be materially, adversely affected. This could cause the trading price of our Common Stock to decline and a loss of part or all of any investment in our Common Stock. FORWARD LOOKING STATEMENTS The words "may," "will," "expect," "anticipate," "believe," "continue," "estimate," "project," "intend," and similar expressions used in this Prospectus are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statements. WE HAVE A HISTORY OF LOSSES FROM OPERATIONS AND ANTICIPATE FUTURE LOSSES WILL OCCUR During the fiscal year ended March 31, 1998 we sustained a net loss of $79,267. During the fiscal year ended March 31, 1999 we sustained a net loss of $3,074,525. This trend continued during the six months ended September 30, 1999 as we sustained additional net losses of $2,360,679. Our operating losses will likely continue at these levels if operations remain at current levels. Our business plan assumes a significant increase in sales as we expect our new products to achieve commercial acceptance and gain market share. This plan requires us to make significant investments in operations to support technological development as well as marketing and sales activities. This will result in continued and substantial increases in our operating expenses. To execute this plan we need to generate significant additional revenue from new products and raise substantial additional capital. Since we are uncertain that we will be able to secure any financing or generate sufficient cash flow from operations, our operating losses may continue. OUR FINANCIAL CONDITION RAISES SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO SUSTAIN OPERATIONS As of March 31, 1999, our current liabilities exceeded our current assets by $3,062,743 and our total liabilities exceeded our total assets by $2,726,637. As a result, our financial condition raises uncertainty as to our ability to continue as a going concern. Our long-term viability will depend upon our ability to generate sufficient cash flow from operations to meet 5 our current obligations, raise significant additional capital and ultimately attain profitable operations. WE HAVE EXPERIENCED, AND EXPECT TO CONTINUE TO EXPERIENCE, SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS We recently introduced one new product and intend to introduce another new product during the next fiscal year. These new products are designed to provide universal connectivity for almost any make or model of a PC-based portable computer. Since there are no similar products widely available in the market, it is difficult or impossible for us to predict the future revenues which could be generated by these products. In addition, given the intense competition, rapid technological change, substantial swings in consumer demand and short product life cycles, the continued acceptance of and the revenues generated by our existing products are difficult or impossible to predict. The development of superior products by our competitors could also render our existing products obsolete. As a result, our revenues and operating results are likely to fluctuate significantly. OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND OUR PRODUCTS COULD BECOME OBSOLETE The portable computer industry is characterized by rapid technological change, frequent introduction of new products, continuing changes in consumer demand, shall produce life cycles and rapidly evolving industry standards. The introduction of products utilizing new technology or the emergence of new industry standards can render existing products obsolete and unmarketable very quickly. Our future success will depend in large part upon our ability to satisfy changing customer needs by continuing to develop new products and upgrade existing products as quickly and efficiently as possible. Any failure by us to anticipate or respond to such technological developments or shifting consumer requirements or any significant delay in product development or introduction could substantially and adversely impact our competitive position in the market. WE FACE INTENSE COMPETITION IN THE MARKETS IN WHICH WE OPERATE As the markets for portable computers and associated peripherals continue to grow, we expect the markets for our products to become more competitive. The principal competitive factors in the computer peripherals industry are: o product innovation o design o functionality o performance o ease of use o price and availability 6 Our principal competitors are large, nationally recognized OEMs as well as more specialized computer peripheral manufacturers. Many of our competitors have established reputations and significantly greater financial, marketing, personnel and other resources than we do. As a result, these competitors may be in a better position than us to quickly respond to rapid technological change and consumer demand. For example, large OEMs, particularly those manufacturing notebook PCs, not only have advance knowledge of technological improvements to their own products, but also greater resources which may permit them to develop superior peripheral products faster than we can. This could render our products obsolete for portable computers manufactured or marketed by such OEMs. For these and other reasons, we may not be able to compete effectively in the markets in which we operate. WE COULD BE AFFECTED BY A DECLINE IN INDUSTRY GROWTH RATE Our future success is dependent not only on our own growth rate but also the growth rate of the portable computer notebook industry. Even though notebooks are one of the fastest growing segments of the personal computer market, we are uncertain whether this growth will continue. An overall decrease in the demand for portable computers would result in a material adverse effect on our business. THE SALES OF A PRINCIPAL PRODUCT LINE ARE LIKELY TO DECREASE Our CD-ROM sales constitute a substantial percentage of our sales (5% during the six months ended September 30, 1999, 19% during the six months ended September 30, 1998, 41% during fiscal year ended March 31, 1998 and 38% during the fiscal year ended March 31, 1999.) Two market factors indicate that the product life of external CD-ROM products may be coming to an end. First, most major notebooks come standard with an internal CD-ROM, making the need for an external one unnecessary. In fact, Sherwood Research estimates that only 10% of the notebooks currently being manufactured are shipped without internal drive capabilities. Second, there appears to be a shift from CD-ROMs to DVD. Since these trends reduce the demand for CD-ROMs, our sales of CD-ROMs will continue to decrease. We are currently attempting to respond to these market forces by focusing on DVD technology. Our future success will, to some extent, depend upon our continued development of products that incorporate DVD technology. WE RELY ON THIRD-PARTY SUPPLIERS TO PROVIDE COMPONENTS THAT ARE CRITICAL TO OUR BUSINESS We are currently dependent on two main product lines (CD-ROMs and Zip Drives) which accounted for approximately 80% of our revenue during the six months ended September 30, 1999 and approximately 73% of our revenue during the fiscal year ended March 31, 1999. One supplier provides the main component for CD-ROMs and another provides the main component for Zip Drives. We purchase these components under purchase orders and do not have a long-term contract with either supplier. Any termination or disruption of our relationship with either supplier or any material adverse change to the financial condition of either supplier would prevent us from filling customer orders. Although we believe that our relationships with these suppliers are good, we cannot assure you that these relationships will continue or whether these suppliers will continue to be able to provide our components in a timely and cost efficient 7 manner. Although alternate suppliers are available, there are a limited number of such suppliers and finding and qualifying replacement suppliers could take several months. We are also dependent upon these suppliers to manufacture and deliver components that are free from defect, competitive in functionality and cost and in compliance with our specifications, all of which are beyond our control. WE HAVE LIMITED INTELLECTUAL PROPERTY PROTECTION Our success and ability to compete are dependent, in part, upon proprietary technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets and technical measures to protect our proprietary rights. We have been issued one patent and have five patent applications pending with notification that one of those pending patents will likely be issued within the next 60 days. We cannot be certain that patents pending or future patent applications will issue, or that if issued, we would have the resources to protect any such issued patent from infringement. We also enter into confidentiality, non-compete and/or work for hire invention assignment agreements with our key employees and limit the access to and distribution of our product design documentation and other proprietary information. We cannot assure you that these efforts will deter misappropriation or to prevent an unauthorized third party from obtaining or using information which we deem to be proprietary. Although we believe that our technology does not currently infringe upon patents held by others, we cannot assure you that such infringements do not exist or will not exist in the future, particularly as the number of products and competitors in our industry segment grows. WE ARE DEPENDENT UPON A LIMITED NUMBER OF THIRD-PARTY DISTRIBUTORS, OEMS AND PRINCIPAL CUSTOMERS We derive a substantial portion of our product sales from distributors. We do not maintain an exclusive distributorship with any significant distributor and our distribution agreements can be terminated at any time. Accordingly, our distributors are not obligated to purchase products from us in the future and may represent competing lines of products. As a result, the ultimate distribution of our products to end-users is beyond our control. In addition, four customers directly or indirectly accounted for 89% of our revenues during the six months ended September 30, 1999 and 65% of our revenues during the fiscal year ended March 31, 1999. A loss of any of these customers could substantially reduce our sales. Although we believe our relations with these distributors/customers are good, we cannot assure you that any or all of them will continue to do business with us in the future. WE ARE AT RISK OF PRODUCT DEFECTS AND EXPOSURE TO POTENTIAL PRODUCT LIABILITY CLAIMS Given the complex nature of our products, they may contain undetected errors or performance problems particularly when new products are introduced. Although our products undergo extensive testing prior to introduction to the market, it is typical in the computer industry for such products to contain errors and performance problems which are discovered after commercial introduction. To the extent these defects and errors are discovered after shipment, they could result in a loss of sales revenues, delay in market acceptance, product returns, warranty claims and the loss of a potential market all of which could have a material 8 adverse effect on our business. In addition, components and other products manufactured and distributed by others which are incorporated into our products may also contain such defects and errors which could substantially reduce the performance of our products. We are also at risk of exposure to potential product liability claims from distributors and end users for damages resulting from a defect in products that we distribute. Although we maintain product liability insurance we cannot assure you that this insurance will be adequate to cover any claims brought against us. To the extent these claims are not covered by insurance, they severely and negatively impact our business. THE LOSS OF SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL COULD HARM OUR OPERATIONS A loss of one or more of our current officers or key personnel could severely and negatively impact our operations. Although we have employment contracts with most of our key personnel, these contracts do not prevent them from resigning or otherwise leaving our Company. Effective product development and innovation is dependent upon our ability to attract and retain talented technical and marketing personnel. The market for such persons is extremely competitive. We cannot be certain that we will have the financial or other resources to attract and retain such individuals. OUR COMMON STOCK HAS A LIMITED MARKET AND MAY BE ADVERSELY EFFECTED BY THE INFLUX INTO THE MARKET OF THE SHARES COVERED BY THIS PROSPECTUS The public trading market for our Common Stock recently commenced on the OTC Bulletin Board. There is minimal supply of shares eligible for public resale (100,000 shares) and trading has been extremely limited. Accordingly, we are uncertain that a regular trading market for our Common Stock will develop, and if it develops, whether it can be sustained. By its very nature, trading on the OTC Bulletin Board provides very limited market liquidity. The trading market for our Common Stock may be adversely effected by the influx into the market of the 1,756,624 shares of Common Stock covered by this Prospectus. Although it is impossible to predict market influences and prospective values for securities, it is possible that, in and of itself, the substantial increase in the number of shares available for public sale could have a depressive effect on the market. Until a more seasoned trading market develops, if at all, the market price for our Common Stock is likely to be volatile and factors such as success in developing new products, competition and fluctuations in operating results may all have a significant effect. In addition, the stock markets generally have experienced, and continue to experience, extreme price and volume fluctuations which have affected the market price of many small capitalization companies and which have been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of our Common Stock. THE ABILITY TO TRADE OUR SHARES COULD BE ADVERSELY EFFECTED IF THE TRADING PRICE FALLS BELOW $5.00 PER SHARE The SEC has adopted regulations imposing limitations upon the manner in which certain low priced securities (referred to as a "penny stock") are publicly traded. Under these 9 regulations, a penny stock is defined as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on a national exchange, the Nasdaq National Market System or SmallCap Market and any equity security issued by a Company that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000 for the last three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. The regulations also require certain broker/dealers who recommend such securities to persons other than established customers and certain accredited investors to make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. These requirements make it more difficult to effect transactions in penny stocks as compared to other securities. Since our Common Stock presently trades above $5.00 per share, it is not considered a "penny stock." We are uncertain that trading prices at this level can be sustained. Should trading prices fall below $5.00 per share, our shares could be considered a "penny stock." OUR SHARES MAY NOT BE ELIGIBLE TO TRADE ON THE OTC BULLETIN BOARD AFTER JANUARY 12, 2000 During January 1999, the National Association of Securities Dealers, Inc. ("NASD") adopted a rule to preclude "non-reporting" public companies from trading on the OTC Bulletin Board. Under the new rule in order for securities to be eligible for trading on the OTC Bulletin Board they must be registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Since our shares were eligible for trading prior to the effective date of the new rule, our Common Stock remains eligible for trading on the OTC Bulletin Board even though our shares are not registered under the Exchange Act. In order to maintain such trading, we must secure Exchange Act registration by no later than January 12, 2000. Otherwise, our Common Stock would only be eligible to be traded in the illiquid "pink sheet" system. OUR COMMON STOCK WILL LIKELY BE SUBJECT TO ADDITIONAL DILUTION We are in need of substantial additional financing. This will entail the issuance of additional shares of Common Stock or common stock equivalents which will have the effect of increasing the number of shares outstanding. In connection with other business matters, we will likely undertake the issuance of additional shares of Common Stock. This may be done in order to, among others, acquire assets or stock of another business, compensate employees or consultants or for other valid business reasons at the discretion of our Board of Directors. Under applicable Delaware law, we can issue additional shares without notice to, or approval of, existing stockholders. In addition, in conjunction with the Merger, we issued 5,163,188 shares of Series A Preferred Stock (of which 1,000,000 have been surrendered) and options to purchase 836,790 shares of Series A Preferred Stock (of which 44,350 have been cancelled). Each share of Series A Preferred Stock is initially convertible into one (1) share of Common Stock. Depending on our financial performance during the fiscal year ended March 31, 2000, each share of Series A Preferred Stock is convertible into up to 2.25 shares of Common Stock. Accordingly, no later than June 30, 2000, the Series A Preferred Stock will convert into a minimum of 4,163,188 and a maximum of 9,367,173, shares of Common Stock. In addition, the options could be exercised 10 for up to 671,065 (currently vested) or 1,782,990 (upon full vesting) additional shares of Common Stock. We also intend to adopt a stock option plan pursuant to which we may grant options to purchase shares of Common Stock equal to 10% of our then outstanding shares of Common Stock. WE ARE CONTROLLED BY A LIMITED NUMBER OF STOCKHOLDERS. As of the date of this Prospectus, our officers, directors and a limited number of principal stockholders beneficially own more than approximately 65% of our outstanding voting shares. These stockholders will be in a position to elect all of our directors and control the outcome of other corporate matters without the approval of our other stockholders. WE MAY BE ADVERSELY AFFECTED IF OUR PRODUCTS AND TECHNOLOGY ARE NOT YEAR 2000 COMPLIANT. We are presently attempting to respond to Year 2000 issues. Year 2000 issues are the result of computer programs being written using two digits rather than four to define the applicable year associated with the program or an associated computation. Any such two-digit computer programs may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. To address such "Year 2000" issues, we established a Year 2000 Project Team. We have successfully completed testing of current products and products under development and do not believe there is significant risk of noncompliance. We are uncertain that certain previous releases of our products, which are no longer under support, will prove to be Year 2000 compliant. We have completed initial evaluation, analysis and testing of our core internal systems. We do not currently expect any significant issues to be identified during further review, however, further inquiry and review is expected to continue throughout 1999. Failure on our part to correct any issues with internal systems could result in material disruption to our operations. We have completed our initial assessment of the readiness of third-party business partners, including significant vendors and customers. The assessment of the compliance of third party business partners is on-going and is also expected to continue throughout 1999. Even where assurances are received from third parties there remains a risk that failure of systems and products of other companies on which we rely could have a material adverse effect on us. Our total cost for these Year 2000 compliance issues is not anticipated to be material to our financial position or results of operations in any given year. These costs and the date on which we plan to complete the Year 2000 modification and testing processes are based on our best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, we are uncertain that these estimates will be achieved and actual results could differ from those plans. In addition, because many companies may need to upgrade or replace computer systems and software to comply with Year 2000 requirements, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to upgrade their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such 11 as those offered by us, which could have a material adverse effect on our business, results of operations and cash flows. DELAWARE'S ANTI-TAKEOVER LAW MAY DISCOURAGE CHANGE IN CONTROL TRANSACTIONS. As our shares become more widely held, listed on NASDAQ or on a national exchange, we will become subject to Section 203 of the General Corporation Law of the State of Delaware, an anti-takeover law. In general, the law prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three (3) years after the date of the transaction in which the person became an interested stockholder, unless the "business combination" is approved in a prescribed manner. "Business combinations" include mergers, asset sales and other transactions resulting in a financial benefit to our stockholders. An "interested stockholder" is a person who, together with its affiliates and associates, owns, or within three (3) years, did own fifteen percent (15%) or more of a corporation's voting stock. To the extent this provision of Delaware law becomes applicable to us, it could have the effect of delaying, deferring or preventing a change in control of the Company or the removal of our existing management. This could deter or delay unsolicited changes in control of our Company by discouraging open market purchases of our stock or a non-negotiated tender or exchange offer for such stock. Since takeover transactions frequently afford stockholders the opportunity to sell their shares at a premium over current market prices, these provisions may be disadvantageous to a majority of our stockholders who may otherwise desire to participate in such a transaction and receive a premium for their shares. 12 USE OF PROCEEDS The Company will not receive any proceeds from the sale of Common Stock by the Selling Security Holders. MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information Since October 7, 1998, our Common Stock has been listed for quotation on the OTC Bulletin Board under the symbol "CNFT." The market for our shares is extremely limited. We are uncertain if a significant trading market for our Common Stock will develop or, if developed, will be sustained. In order for our Common Stock to remain eligible for quotation on the OTC Bulletin Board, our Common Stock must be registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act") by no later than January 12, 2000. Upon the effective date of this Prospectus, we will be filing a registration statement for the purpose of registering our Common Stock under the Exchange Act which will be effective upon filing with the SEC. Accordingly, if this Prospectus is not declared effective by the SEC prior to January 12, 2000, our shares will no longer be eligible for quotation on the OTC Bulletin Board. The following table sets forth the range of the high and low closing bid prices per share of our Common Stock during each of the calendar quarters identified below. These bid prices were obtained from the National Quotations Bureau, Inc. and do not necessarily reflect actual transactions, retail markups, mark downs or commissions. The transactions include inter-dealer transactions. Based on the very limited public float and trading in our Common Stock, we believe that such data is anecdotal and may bear no relation to the true value of our Common Stock or the range of prices that would prevail in a liquid market.
1998 High Low ---- ---- --- 4th Quarter * * 1999 High Low ---- ---- --- 1st Quarter * * 2nd Quarter $6.00 $5.50 3rd Quarter $6.4375 $4.00 4th Quarter (through November 29, 1999) $6.00 $5.00
* No bids reported - ------------------------------ The closing bid price of our Common Stock as of November 29, 1999 was $5.00 per share. 13 Holders As of November 29, 1999, we had approximately 110 stockholders of record, although we believe that there are additional beneficial owners of our Common Stock who own their shares in "street name." Dividends We have not paid any cash dividends, to date, and we have no intention of paying any cash dividends on our Common Stock in the foreseeable future. The declaration and payment of dividends is subject to the discretion of the Board of Directors and to certain limitations imposed under the General Corporation Law of the State of Delaware. The timing, amount and form of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. Shares Eligible for Public Sale and Registration Rights As of the date of this Prospectus, there are 11,352,830 outstanding shares of our Common Stock. Of these shares, 100,000 are eligible for public trading. Assuming that we comply with the adequate public information disclosure requirements of SEC Rule 144 promulgated under the Securities Act, a substantial number of additional shares will be eligible for public resale under Rule 144 on the dates and in the amounts set forth below: o March 15, 2000 - 900,000 shares o June 10, 2000 - 8,167,500 shares o August 15, 2000 - 424,081 shares o November 2, 2000 - 600,000 shares o November 26, 2000 - 1,161,249 shares We have agreed to register the public resale of 2,423,291 of the shares identified above; 1,756,624 of which are being registered for public resale hereunder. We have agreed to file a registration statement with the SEC permitting the public resale of 666,667 shares of our Common Stock identified above by no later than on or about August 26, 2000 and up to 400,000 additional shares issuable upon exercise of warrants issued or issuable to our placement agent by no later than November 26, 2000. Shares Issuable Upon Exercise or Conversion of Outstanding Options, Warrants and Preferred Stock We have issued options to purchase an aggregate of 792,440 shares of Series A Preferred Stock of which 298,251 are currently exercisable. The remaining options vest in ratable monthly installments over a three (3) year period. We have also issued warrants to purchase an aggregate of 200,000 shares of Common Stock all of which are currently exercisable. In connection with a 14 private placement transaction, we have agreed to issue warrants to our placement agent to purchase up to an additional 200,000 shares of Common Stock which will be immediately exercisable. As of the date of the Prospectus, we have issued warrants to purchase 66,667 of these shares. Finally, we have issued an aggregate of 4,163,188 shares of Series A Preferred Stock which are initially convertible into one (1) share of our Common Stock. Depending on our financial performance during the fiscal year ending March 31, 2000, each share of Series A Preferred Stock is convertible into up to 2.25 shares of our Common Stock. Accordingly, the shares of Series A Preferred Stock are convertible into a minimum of 4,163,188 shares of Common Stock and a maximum of 9,367,173 shares of Common Stock. CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999 on an actual basis and on a pro forma basis, giving effect to the pro forma adjustments discussed within the Summary Consolidated Financial Data table. This table should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" appearing elsewhere in this Prospectus.
Actual Pro Forma ------ --------- Long -term debt $251,881 $251,881 Preferred Stock 516 416 Common Stock 959 1,135 Additional paid in capital 2,048,466 5,463,390 Accumulated deficit (5,095,816) (5,095,816) Total stockholders' equity (deficiency) (3,045,875) 369,125 ---------- ---------- Total capitalization (2,793,994) 621,006 ---------- ----------
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Prospectus contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth in "Risk Factors" and elsewhere in this Prospectus. OVERVIEW We design, manufacture and market computer peripheral devices and accessories. Our product lines include: o internal Zip and SuperDisk Drives o universal bay replicators branded as Device Docks o portable optical storage devices like DVD and CD-ROM drives o external numeric keypads o monitor stands o auto adapters We have in the past derived most of our revenue from the sale of internal Zip and SuperDisk drives and CD-ROMS. We believe that our future growth will be in our universal docking products. These products enable users of almost any make or model of PC based portable computer to essentially turn their portable computer into a desktop computer allowing them to link portable computers to a network, a full-size monitor, keyboard, mouse, an array of external and internal peripherals. Principal among this product line is the universal port replicator and the planned introduction of a universal docking station during the next fiscal year. In fiscal 1999 and the first six months of fiscal 2000, 73% and 80%, respectively, of our revenue was derived from sales of the Inner Bay Notebook Zip Drives and CD-ROMs. We believe that these product lines will decrease as a percentage of our revenue as our recently introduced universal port replicator achieves market acceptance. Current trends indicate that the CD-ROM product life is coming to an end. While we believe that sales of Inner Bay Notebook Zip Drives will continue to account for a significant portion of our revenue and gross profit, our future results of operations will be highly dependent upon the success of the universal docking products. See "RISK FACTORS." We market and sell our products worldwide through multiple indirect channels, primarily distributors and resellers, and a substantial majority of our revenue in fiscal 1999 and the first six 16 months of fiscal 2000 was derived from sales to distributors and resellers. Certain of our products, in particular our Inner Bay Notebook Zip Drives, and Device DOCK products, are sold to OEMs and we intend to increase our sales to OEMs in the future. We support our indirect channels with our own sales and marketing organization. Our key distributors include Ingram Micro and Merisel America. In fiscal 1999, sales to Ingram Micro accounted for 14% of our revenue. In the first six months of fiscal 2000, sales to Ingram Micro accounted for 33% of our revenue and sales to Merisel America accounted for 51% of our revenue. The loss of, or reduction in sales to, any of our key customers could have a material adverse effect on our business and results of operations. We provide price protection rights and limited product return rights for stock rotation to most of our distributors and resellers. See "RISK FACTORS." We recognize revenue when products are shipped to customers. Our cost of revenue consists primarily of costs associated with components, outsourced manufacturing of certain subassemblies and in-house labor associated with assembly, testing, shipping and quality assurance. Our gross margin is affected by a number of factors including: o product mix o competitive product pricing pressures o manufacturing costs and o component costs We anticipate that our gross margin may decline in the future as a result of shifts in our product mix and competitive pricing pressure. In particular, we expect our gross margin on sales of the Innerbay Notebook Zip Drives will decline as a result of a shift in product mix toward lower the priced solutions. We seek to mitigate the effects of declining prices by improving product design and reducing costs, primarily manufacturing and component costs. See "RISK FACTORS." Our operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future on a quarterly and an annual basis. Prior growth rates that we have experienced in revenue should not be considered indicative of future growth rates. Factors that could cause the our future operating results to fluctuate include: o the level of demand for our products o our success in developing new products o the timing of new product introductions and product enhancements by us and our competitors o market acceptance of our new and enhanced products o the emergence of new industry standards o the timing of customer orders 17 o the mix of products sold o competition o the mix of distribution channels through which our products are sold and general economic conditions Many of these factors are beyond our control. The markets for our products are characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our future success will depend to a substantial degree upon our ability to enhance our existing products and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and emerging and evolving industry standards. The introduction of new or enhanced products also requires us to manage the transition from older products in order to minimize disruption in customer ordering patterns, to avoid excessive levels of older product inventories and to ensure that adequate supplies of new products can be delivered to meet customer demand. There can be no assurance that we will successfully develop, introduce or manage the transition to new products. RESULTS OF OPERATIONS Comparison of the Six Month Period Ended September 30, 1999 to the Six Month Period Ended September 30, 1998 Total Revenue Revenue for the six months ended September 30 1999 amounted to $6,114,459 compared to $6,593,389 for the six months ended September 30, 1998, a decrease of 7%. The decrease is attributable to a number of factors including an inability to fulfill orders as a result of working capital deficiencies, as well as a change in product mix towards lower priced products (in recognition of competitive pricing pressure). Sales were also adversely affected by a temporary delay in product shipments caused by weather-related problems suffered by one of our principal suppliers. Anticipated decreases in the sale of CD-ROMs are expected to be offset in part by sales of products that incorporate DVD technology, as well as the introduction of our universal docking products. Gross Profit and Cost of Revenue Gross profit and gross profit percentage during the six months ended September 30, 1999 amounted to $2,249,198 and 37%, respectively, as compared to $2,281,809 and 35%, respectively, during the six months ended September 30, 1998. Our cost of revenue for the six months ended September 30, 1999 was $3,865,261 or 63% of revenue as compared to $4,311,580 or 65% of revenue during the six months ended September 30, 1998. The increase in gross profit and corresponding decrease in cost of revenue during the six months ended September 30, 1999 was principally due to a shift in our product mix to higher gross profit 18 products, primarily monitor stands. The increase was offset, in part, by increased sales of zip drives, which provide a lower gross profit. Research and Development Research and development expenses generally consist of salaries and other personnel costs of our research and development teams, product supplies and tooling costs. Research and development expenses amounted to $631,735 during the six months ended September 30, 1999 as compared to $487,963 during the six months ended September 30, 1998, an increase of 29%. The increase in research and development costs is primarily due to increased staffing, development of the universal docking station, and the release of the universal port replicator during fiscal 2000. We expect research and development expenses to increase in the future, although such expenses may vary as a percentage of revenue. Sales and Marketing Expenses Sales expenses and marketing generally consist of salaries, commissions and other personnel costs of the Company's sales, marketing and support personnel, advertising, promotions and travel. Marketing and sales expenses during the six months ended September 30, 1999 amounted to $550,403 as compared to $506,536 during the six months ended September 30, 1998, an increase of 9%. As a percentage of revenue, such expenses increased from 8% during the six months ended September 30, 1998 to 9% during the six months ended September 30, 1999. The increase was primarily attributable to promotional costs associated with the introduction of the universal port replicator and trade shows. The Company expects marketing and sales expense to increase in the future, although such expenses may vary as a percentage of revenue. General and Administrative Expenses General and administrative expenses primarily consist of salaries, facility costs, depreciation and other general operation costs. General and administrative expenses increased to $2,728,589 during the six months ended September 30, 1999 from $1,683,039 during the six months ended September 30, 1998. As a percentage of revenue, general and administrative expenses increased from 26% to 45%. This increase is primarily attributable to increased salaries and wages, employee recruitment costs, insurance and legal fees. Other Expense, Net Other expense, net in the six months ended September 30, 1999 increased by $650,884 to $699,150 from $48,266 in the six months ended September 30, 1998. The increase in other expenses was attributable to $709,243 of interest expense, which includes $544,439 attributable to equity incentives associated with bridge financing beginning in April 1999. 19 Fiscal Year Ended March 31, 1999 compared to 1998 Total Revenue Revenue for the year ended March 31, 1999 ("Fiscal 1999") amounted to $9,425,947 compared to $7,726,484 for the year ended March 31, 1998 ("Fiscal 1998"), an increase of 22%. The increase in revenue was principally due to increased unit sales of ZIP drives and increased unit sales of monitor stands. As a percentage of revenue, sales of our CD-ROMs amounted to 38% in Fiscal 1999 and 41% in Fiscal 1998, respectively. We believe that unit sales of CD-ROMs will continue to decline as the product life cycle comes to an end. Revenue from this product line is expected to decline as a percentage of our revenue as our other products achieve market acceptance. While we believe that sales of DVD's will replace some of the decrease in revenue attributable to CD-ROM's, our future results of operations will be highly dependent upon the success of our universal docking products. Gross Profit and Cost of Revenue Gross profit and gross profit percentage during Fiscal 1999 amounted to $3,337,398 and 35%, respectively, as compared to $3,265,540 and 42%, respectively, during Fiscal 1998. Our cost of revenue for Fiscal 1999 was $6,088,549 or 65% of revenue as compared to $4,460,944 or 58% of revenue during Fiscal 1998. The decrease in gross profit and corresponding increase in cost of revenue during Fiscal 1999 was principally due to a shift in our product mix to lower gross profit products, primarily ZIP drive products. The decrease was offset, in part, by increased sales of monitor stands, which provide a higher gross profit. Research and Development Research and development expenses amounted to $1,200,939 during Fiscal 1999 as compared to $890,944 during Fiscal 1998. As a percentage of revenue, research and development costs remained relatively constant. The increase in research and development expenses during Fiscal 1999 was principally due to increased personnel costs associated with the development of new products such as the port replicator and device dock as well as the continuing development of ZIP products for new notebooks. We expect research and development expenses to increase in the future, although such expenses may vary as a percentage of revenue. Sales and Marketing Expenses Sales and marketing expenses during Fiscal 1999 amounted to $1,086,265 as compared to $480,170 during Fiscal 1998, an increase of 126%. As a percentage of revenue, such expenses increased from 6% in Fiscal 1998 to 12% in Fiscal 1999. The increase in marketing and sales expenses during Fiscal 1999 was due primarily to the increase in personnel and promotional activities. We expect marketing and revenue expenses to increase in the future, although such expenses may vary as a percentage of revenue. 20 General and Administrative Expenses General and administrative expenses increased to $3,960,673 during Fiscal 1999 from $1,916,877 during Fiscal 1998. As a percentage of revenue, general and administrative expenses increased from 25% to 42%. This increase is primarily attributable to increased personnel costs. Technical personnel, sales representatives, and a management team were hired in order to guide us through our projected growth. We also moved our headquarters from Morgan Hill, CA to Scottsdale, AZ. Our new location contains over 40,000 square feet; 16,000 square feet of office space and 24,000 square feet of manufacturing and inventory stockroom. This location is substantially larger than our prior offices. We expect general and administrative expense to increase in the future, although such expenses may vary as a percentage of revenue. LIQUIDITY AND CAPITAL RESOURCES We have historically funded our operations primarily through cash generated from operations and lending institutions. Net cash used in operating activities amounted to $2,698,440 during the six months ended September 30, 1999. Net cash used in operating activities amounted to $52,726 during the six months ended September 30, 1998. The increase in cash used in operating activities is primarily attributed to an increased net loss. Net cash used in operating activities amounted to $702,828 and $444,212 during Fiscal 1999 and Fiscal 1998, respectively. This 58% increase was primarily the result of an increased net loss and an increase in inventory and other assets. Accounts receivable were $834,383 at March 31, 1999, compared to $1,084,527 at March 31, 1998. Days sales outstanding ("DSO") were 37 days at March 31, 1999 compared to 34 days at March 31, 1998. We expect that accounts receivable will increase as revenue increases and as revenue from international and OEM customers represent a higher percentage of our total revenue. While to date we have not experienced significant losses related to accounts receivable, there can be no assurance that we will not experience losses related to accounts receivable in the future. Net cash used in investing activities amounted to $85,874 and $155,232 during the six months ended September 30, 1999 and 1998, respectively. The decrease is primarily attributable to a reduction in property and equipment purchases. Net cash used in investing activities amounted to $211,044 and $273,929 during Fiscal 1999 and Fiscal 1998, respectively. The increase primarily reflects the net purchase of property and equipment used in operations. Net cash provided by financing activities amounted to $2,766,326 and $47,196 during the six months ended September 30, 1999 and 1998, respectively. The increase was primarily due to an increase in notes payable and the Merger with JLL. Net cash provided by financing activities amounted to $869,116 and $620,195 during Fiscal 1999 and Fiscal 1998, respectively. The increase was primarily from notes payable. As of March 31, 1999, we had two collateralized bank-revolving lines of credit with balances of $83,000 and $599,120 bearing interest at the lender's prime rate plus 2.0% and 3.5%, 21 respectively. As of September 30, 1999, the outstanding amounts due under these lines of credit totaled $229,713. The lines of credit were paid in full on October 6, 1999. Prior to the Merger, we issued Bridge Notes (aggregate principal amount of $1,775,000) and certain additional promissory notes at an interest rate of 10% per annum paid annually in arrears. Bridge Notes in the principal amount of $1,075,000 at an interest rate of 10% are due at the earlier of (i) one year from the date of issuance; or (ii) our completion of an equity financing transaction of at least $3,000,000. The holders of $925,000 principal amount of these Bridge Notes have converted such notes into common stock. Bridge Notes in the principal amount of $700,000 at an interest rate of 10% are due on the earlier of (i) one year from the date of issuance; or (ii) our completing a financing transaction in the amount of $4,000,000. The holder of $550,000 principal amount of these Bridge Notes has converted such notes into common stock. We issued additional promissory notes in the aggregate principal amount of $778,259 at an interest rate of 10% due on the earlier of (i) one year from the date of issuance; and (ii) our completing a financing transaction in the amount of $4,000,000. The holders of these notes have converted $547,253 of outstanding indebtedness due thereunder into an aggregate of 359,081 shares of Common Stock. Finally, during July and August 1999, we issued promissory notes in the aggregate principal amount of $650,000 at an interest rate of 10% which is due on the earlier of (i) two years from the date of issuance; and (ii) our completing a financing transaction in the amount of $5,000,000. The holders of $200,000 principal amount of these Bridge Notes have converted such notes into Common Stock. Upon completion of the Merger, we obtained $1,000,000; representing the proceeds from the sale of Common Stock prior to the Merger. The Merger Agreement provided for the completion of a private placement to yield gross proceeds of $2,000,000 to $6,000,000, (including for this purpose the conversion of certain indebtedness). In this connection, we commenced a private offering (the "Private Offering") of shares of our Common Stock seeking to raise a minimum of $2,000,000 and a maximum of $6,000,000. On November 26, 1999, we conducted the initial closing of the Private Offering pursuant to which we obtained gross proceeds of $2,000,000 from the sale of 666,667 shares of Common Stock. The Private Offering will continue until February 15, 2000. We believe that our existing negative working capital and borrowing capacity, coupled with the funds generated from our operations, will be insufficient to fund our anticipated working capital, capital expenditures and debt payment requirements through March 31, 2000. We will require an additional $5,000,000 in a combination of new capital and the conversion of indebtedness to execute on our operations plan. In the longer term, unless we can generate significantly greater cash flow from operations, we will likely require additional sources of liquidity to fund future growth. Such sources of liquidity may include additional equity offerings or debt financing. In the normal course of business, we evaluate acquisitions of businesses, products and technologies that complement our business. 22 We intend to continue to pursue strategic investment in products, technologies or distribution networks in order to broaden our product lines and to provide a more complete solution to the mobile computer user. We may acquire businesses, products or technologies in the future. There can be no assurance that we will not require additional financing in the future or, if we were required to obtain additional financing in the future, that sources of capital will be available on terms favorable to us, if at all. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field which recognized "00" as 1900 rather than 2000. These date code fields will need to accept four digit year entries to distinguish 21st century dates from 20th century dates. To address such "Year 2000" issues, we established a Year 2000 Project Team which is currently in phase four of its five-phase plan to assess the Company's Year 2000 compliance. In prior phases, we identified the following three key areas critical to successful Year 2000 compliance: products, financial and information systems and third-party relationships. We have successfully completed testing of current products and products under development and do not believe there is significant risk of noncompliance. There can be no assurance that certain previous releases of our products, which are no longer under support, will prove to be Year 2000 compliant. We have completed our initial evaluation, analysis and testing of our core internal systems and we do not currently expect any significant issues to be identified during further review, however, further inquiry and review is expected to continue throughout 1999. Our failure to correct any issues with internal systems could result in material disruption to our operations. We have completed our initial assessment of the readiness of third-party business partners, including significant vendors and customers. The assessment of the compliance of third party business partners is on-going and is also expected to continue throughout 1999. Even where assurances are received from third parties there remains a risk that failure of systems and products of other companies on which we rely could have a material adverse effect on us. Contingency plans will be developed if it appears that we, or our key suppliers, will not be year 2000 compliant, and such noncompliance is expected to have a material adverse impact on our operations. Since no material non-compliance has been detected, no contingency plans have been developed. Based on the work done to date, we have not incurred material costs and do not expect to incur future material costs to address the Year 2000 problem for our systems and products. At this time, we cannot reasonably estimate the potential impact on our financial position, results of operations and cash flows if internal systems are found to be noncompliant or if key suppliers, customers and other business partners do not become Year 2000 compliant on a timely basis. 23 Because many companies may need to upgrade or replace computer systems and software to comply with Year 2000 requirements, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to upgrade their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase products such as those offered by us, which could have a material adverse effect on our business, results of operations and cash flows. The foregoing statements are based upon our best estimates at the present time, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. SEASONALITY We believe the markets for our products are somewhat seasonal, with a higher proportional share of total sales occurring in the fourth fiscal quarter (first calendar quarter) and a sales slowdown commonly occurring during the first fiscal quarter (second calendar quarter). See "DESCRIPTION OF BUSINESS - Seasonality And Other Fluctuations Of Revenue." INFLATION We do not believe that inflation has to date had a material impact on our operations. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources during the period. There were no differences between net loss and comprehensive net loss for the years presented. In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued, which establishes accounting and reporting standards for derivative instruments and hedging activities which are required for fiscal quarters beginning after June 15, 1999. On May 20, 1999, the FASB issued an Exposure Draft, which would have the effect of deferring the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. On July 7, 1999, the FASB adopted the Exposure Draft as SFAS No. 137. This statement requires balance sheet recognition of derivatives as assets or liabilities measured at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. On a preliminary basis, we do not believe that eventual adoption will have a significant impact on our financial statements. 24 DESCRIPTION OF BUSINESS General Development of Business and Overview CNF, Inc. was incorporated under the laws of the State of California in 1988 to design, manufacture and market computer peripheral devices and accessories. Over time our business has evolved so that we currently focus our resources exclusively on peripherals and accessories for laptop computers. Our operations are conducted from offices in Scottsdale, Arizona. Prior to our relocation to Scottsdale, Arizona in July 1998, we operated in Morgan Hill, California. From inception in 1988 until the Merger with JLL on June 8, 1999, we operated as a independent privately held corporation. By virtue of the Merger, we became a non-reporting public company whose shares are eligible for quotation on the OTC Bulletin Board. We design, manufacture and market portable computer peripherals and accessories. We provide a broad range of affordable, easy-to-use devices that make the functionality and power of desktop computers available to portable computer users. Our current products include: o internal high-capacity removable storage devices for various notebook computers (including Zip and LS/120 SuperDisk drives) o portable DVD-ROM drives o portable CD-ROM drives o universal bay replicators branded as deviceDOCK's(TM) o monitor stands o numeric keypads o proprietary and universal auto adapters o universal port replicators o universal docking stations (planned introduction during the next fiscal year) Universal Port Replicator and Docking Systems The universal port replicator and universal docking station enable users of almost any make or model of PC based portable computer to essentially turn their portable computer into a desktop computer. These devices link portable computers to a network, a full-size monitor, keyboard, mouse, an array of external and internal peripherals using parallel, serial, USB, SCSI-2, EIDE, etc. connections. The universal docking stations will also include PCI expansion capability. Prior to our introduction of universal docking solutions all existing docking stations were compatible with only one particular PC model. Such "proprietary" docking solutions are more expensive and less flexible than our universal docking products. We believe that our universal docking products will expand the overall size of the estimated docking market for a number of reasons. First, several notebook manufacturers have removed the proprietary docking connector from their notebooks (e.g., IBM ThinkPad 240 and Toshiba Satellite 2500). Accordingly, the only way to "dock" with these notebooks is through a universally compatible product such as ours. Second, since a universal product requires a retailer to only carry one product, we believe that retailers can add incremental revenue by offering docking solutions to their customers without stocking a multitude of different products. Third, we believe 25 that universal solutions open up entirely new applications for docking such as multi-brand notebook environments, guest offices, hotel rooms, conference centers, service bureaus and kiosks. Industry Background According to International Data Corporation, a market research firm ("IDC"), the portable computer market is the fastest growing segment of the personal computer industry. Growth in this market has been fueled by advances in computer technology and the increasing demand for computer mobility. IDC predicts that the portable computer market (excluding handheld devices) will grow at a compounded annual rate of 15% from 14.1 million units in 1997 to approximately 25 million units in the year 2001. In addition, the handheld companion market (as defined by IDC) is expected to grow at a compounded annual rate of over 40% from 3 million units in 1997 to approximately 13 million units by 2001. We believe this translates to an addressable potential market of at least $2 billion per year for portable peripheral products. Coupled with this trend toward portability, there is an increased demand for computers that are smaller and lighter but have functionality and convenience similar to the traditional desktop computer. To meet this demand, there has been an increased use of peripherals and accessories such as high capacity storage devices, DVD drives, CD-ROM drives, keypads, auto adapters, monitor stands, port replicators, docking stations, and Universal Serial Bus (USB) devices which enable users to maximize their computer's portability while enhancing its functionality. To make these smaller computers more convenient to use in the office and home, port replicators and docking stations have been developed to allow users easy connections to networks, full-size monitors, keyboards, and other peripheral devices providing portable computer users with all of the features and functionality of a traditional desktop computer. IDC reported that 74% of all notebook computers sold in 1997 served as the users' primary computer. Sherwood research reported that 19% of all notebook buyers use a Docking Station and 22% of users use a Port Replicator. Port replicators provide users with ports for utilizing peripherals such as a standard-size keyboard, mouse and monitor, as well as connecting to other devices such as an Ethernet network, printer, modem, etc. The main function of a port replicator is to connect peripherals to a notebook in a fast and convenient manner. This allows users to take their notebook home or on the road with maximum convenience. Docking stations include basic port replicator features, as well as more advanced capabilities such as PC card slots, internal drive bays for storage devices, and PCI/ISA slots. Docking stations enable the user to expand the notebook into a virtual desktop computing device. Attaching and releasing the portable computers from the port replicator or docking station is typically a one-step procedure that takes seconds to complete compared to the burdensome task of attaching or releasing each external device separately. When the portable computer is detached from the connectivity product, all external devices connected to the connectivity product stay in place, ready to be reattached. 26 Currently, close to 100% of the docking station market is served internally by the various portable computer OEMs ("Original Equipment Manufacturers"). These OEMs have historically designed port replicators and docking stations for their makes and models of portable computers and subcontracted these products for assembly to various vendors. Because computer OEMs primarily focus on providing the latest technological capabilities with strong price and performance characteristics for portable computers, their development of port replicators and docking stations has often been a secondary focus. The port replicators and docking stations developed by OEMs are generally expensive, lack configuration flexibility and are often available only well after the computer model is launched. Additionally, OEMs generally retool each generation of portable computers and have not created standardized port replicators and docking stations that are independent of model or manufacturer. Because user demand for high performance portable computers has fueled the growth in the port replicator and docking station markets, there is a large opportunity to provide a complete, cost-effective connectivity solution that is independent of manufacturer and model. In this context, we believe that we have a significant opportunity to create a new mobile computing product category with the introduction of our universal port replicators and docking stations, thereby creating a significant additional market opportunity. We believe that the universal aspects of these products will open new market segments for docking, including hotels, kiosks, guest offices and service bureaus. Products We currently offer seven major product lines: (i) internal Zip and SuperDisk drives; (ii) external bay replicators; (iii) portable optical storage devices like DVD and CD-ROM drives; (iv) external numeric keypads; (v) monitor stands; (vi) auto adapters; and (vii) universal port replicators. During the current fiscal year, we plan to introduce a universal docking station. The key features of the our products are summarized in the following table:
- -------------------------------------------------------------------------------- Product Features - ------- -------- InnerBay(TM) Notebook Zip Drives - -------------------------------- Toshiba Tecra 8000 series, Tecra 520-550 and 100 MB storage; 400% faster than an external parallel port Zip Satellite Pro 440-490 drive; 40% faster than an external SCSI Zip drive; designed for HP OmniBook 4100 and 900 series the portable computer with low power consumption and Dell Latitude CP series durability in mind InnerBay(TM) SuperDisk LS-120 Drives - ------------------------------------ Toshiba Tecra 8000, 520-550, Satellite Pro 440- 120 MB storage; 500% faster than a floppy drive. Backwards 490 and Satellite 220-225 compatible with 1.44MB floppy disks. deviceDOCK(TM) - External Bay Replicator - ---------------------------------------- Toshiba Tecra SelectBay1 Allows simultaneous use of multiple internal devices transforms IBM 755, 760, 765 UltraBay1 proprietary devices into universally compatible devices; - --------------------------------------------------------------------------------
27
- -------------------------------------------------------------------------------- Product Features - ------- -------- eliminates need to purchase new peripherals when changing portable computers. Attaches though PC Card interface. Portable DVD & CD-ROM Drives - ---------------------------- cardport 20x, 24x and 32x CD-ROM 20x, 24x and 32x CD-ROM; 2x generation DVD-ROM; draws cardportDVD - with software MPEG-2 power directly from the portable computer via the PCMCIA connection; Plug and Play; compatible with most major portable computers. Universal Docking Products - -------------------------- theBUS Universal Port Replicator - School Bus Works on most portable computers with a Type II Yellow or Transit Black PCMCIA/CardBus slot providing 10Base-T Ethernet, video port, theBUS Universal Port Replicator - with serial port, parallel port, keyboard and mouse ports. Ethernet Universal Docking Station (Yet to be - ------------------------- announced) Universal Keypads - ----------------- PS/2 Numeric Keypad Black 18-key numeric keypad; connects via serial or PS/2 port; PS/2 Numeric Keypad White professional typist tactile feel. PS/2 Numeric Keypad Grey PS/2 Numeric Keypad for IBM ThinkPad Serial Numeric Keypad - Black Serial Numeric Keypad - Ivory Universal Monitor Stands - ------------------------ Monitor Stand Black Creates space for portable computer on the desktop with access to all ports; supports a 150 pound monitor, ergonomically height adjustable. Auto Adapters - ------------- Pocket Power II 100w - Universal Auto Generates AC power from 12V DC cigarette plug; the most Adapter compact, lightweight 100-watt inverter on the market. Panasonic Auto Adapter - ---------------------- Powers select Panasonic notebooks with a simple connection to a Panasonic Auto Adapter- Hard Wire cigarette plug. - --------------------------------------------------------------------------------
28 Product Development We operate in an industry that is subject to rapid technological change and shifting consumer demands. As a result, our future success depends in significant part on our ability to continually develop and introduce, in a timely manner, new products with improved features and to develop and manufacture these products at an affordable cost. Accordingly, in order to maintain our competitive position in the market, we must continually enhance our existing products and develop new products. Two elements drive our product development strategy. First, our ear-to-the-market discipline of proactively exploring which new products are demanded by our customers. Through discussions with an OEM customer, for example, we developed the idea to design and develop an InnerBay(TM) Zip drive for the customer's line of portable computers. The customer had been unable to develop a Zip drive for its line because the Zip drive mechanism was too large to fit into the inner bay of the portable computer. CNF's InnerBay(TM) Zip drives for this customer's line of portable computers began shipping in December 1998. Our development team has also provided novel solutions to similar problems experienced by other OEM customers. The second element of our product development strategy is an emphasis on bringing new products to market quickly. Our development team can take a new product from concept to prototype in several weeks. Similarly, we believe that, on average, we can take new products from prototype to beta version in several months. Our product development is managed by a team that includes electrical, mechanical and software engineers, marketing and sales personnel, project managers and component buyers, as well as manufacturing and operations representatives. The average industry experience of the team members is in excess of 10 years, and certain members are individually named in over 10 patents and 25 patent applications. Our engineers start the design process in-house using computer aided design ("CAD") workstations. Printed circuit boards are laid out, and the files are sent electronically to partner printed circuit board houses in the United States and Taiwan. These partner companies generally return the printed circuit boards within one to five days. Concurrent with the design of custom printed circuit boards and metal components, we design prototypes for any plastic components in the product. For such plastic prototyping, we use stereolithography, a process that produces an exact replica of a design on a CAD workstation in one to four days. The newly formed parts are then painted and have the appearance of a final tooled and molded part. While the hardware components are being designed and manufactured, any software code necessary for the product is developed by our software team, which includes two individuals who have in excess of 17 years experience as software developers. We use product prototypes to begin compatibility testing, regulatory testing, form and fit testing, ergonomic testing, and thermal tests. We also use the prototypes to garner early market/customer feedback before hard tooling takes place. Once any final product changes have been implemented in the design files, the files are sent electronically to a partner company in Taiwan that cuts steel molds using computer aided machining and some hand processing. The 29 molding process utilized generally requires approximately 8 to 10 weeks, which we believe is substantially faster than many of our competitors. After the new product is developed, but before it begins shipping, we test the product in our product assurance lab for various issues, including compatibility, power consumption, drop testing, and software issues. Although we believe we have the human resources to effectively develop new products and respond to market forces, we can give no assurance that we will be successful in developing, manufacturing and marketing new and enhanced products that meet both the performance and price demands of the market. It is uncertain that we will have sufficient capital resources to develop and market new products on a longer-term basis. See "RISK FACTORS." Manufacturing We focus our manufacturing efforts on producing high-quality products while at the same time minimizing costs. Our manufacturing operations are located at our headquarters in Scottsdale, Arizona and consist mainly of materials procurement, final assembly, testing, quality assurance and shipping. Low-cost suppliers in Taiwan perform the vast majority of the manufacturing of our products. Local manufacturing is used to ramp up new products and to satisfy orders requiring the most immediate delivery. Some of our products, including the monitor stands and external numeric keypads, are manufactured in their entirety by third parties. Our current significant supplier or third-party manufacturing relationships include: Goldteck International, Inc.; Ditron Manufacturing; Iomega; Mitsubishi Electronics; Performance Mold & Engineering; and TYI Systems Limited. We oversee the Taiwanese manufacturers through a liaison. We are also able to monitor the manufacturing lines of one of our key suppliers via live Internet transmissions. Finally, our representatives visit suppliers on a regular basis. Certain select components used in our products are currently available from a limited number of suppliers. Disruption in service by any of our manufacturers or our suppliers could lead to supply constraints or delays in the delivery of our products. This could have a material adverse effect on our business. See "RISK FACTORS." Sales And Marketing Prior to 1998, we marketed and sold our products primarily through direct sales to OEMs and corporate users of portable computers. Since 1998, we have marketed and sold our products primarily through indirect channels, including wholesale distributors, OEMs and resellers. Our key distributors include Ingram Micro and Merisel Americas, Incorporated. During the six months ended September 30, 1999, sales to Ingram Micro accounted for 33% of our revenue and sales to Merisel America accounted for 51% of our revenue. In the year ended March 31, 1999, sales to Ingram Micro accounted for 14% and sales to Merisel America accounted for 5% of our revenues. We intend to increase our sales through distributors in the future. 30 In international markets, we have agreements with 22 distributors located in more than 18 foreign countries. During the six months ended September 30, 1999, international sales represented 7% of revenues. During the year ended March 31, 1999, international sales represented 10% of revenues. We expect that international sales will continue to comprise a similar proportion of our revenues in the future. We believe that fostering the distribution of our products through cooperation agreements and alliances with a variety of key companies within the computer and consumer electronic industries, is a critical element of our strategic goal of being "the first name you think of once you buy or sell a notebook computer." We work directly with the major portable computer manufacturers to achieve approval of our products as "Standard" or "Approved" products for use with the manufacturers' portable computers. In many cases, we agree to place the logo of the manufacturer of the portable computer for which a given peripheral has been designed on the approved product. We believe that these approvals result in increased sales of our products to corporations, which account for 60-70% of US portable computer sales. Most corporations only allow their employees and purchasing managers to purchase portable computer peripherals that are approved by the manufacturer of the portable computer in question. A significant portion of our products are sold as approved or standardized products of a given portable computer manufacturer. However, in the year ended March 31, 1999, 15% of our revenues were derived from OEM sales, when such sales are strictly defined as direct sales to portable computer manufacturers. The vast majority of our products, even those that bear the logo of the portable computer manufacturer, are primarily sold through indirect industry channels, including distributors and resellers, with the approval of the portable computer manufacturer. We plan to introduce new OEM products during the second half of calendar 1999. We support our direct and indirect channels with our own sales and marketing organization. We manage our sales and marketing activities primarily from our offices in Scottsdale, Arizona. Our field and in-house sales and marketing staff is largely responsible for generating end user demand for our products by soliciting prospective customers, providing technical advice with respect to our products and working closely with distributors to sell our products. Our sales and marketing staff actively participate with distributors and resellers in the selling process, which provides end users with the level of support needed for the successful integration of solutions in enterprise networks. Additionally, our sales force concentrates on providing "Fortune 1000" companies with solutions for their laptop users. Many of these companies use "standards lists" to test and approve products and only allow their employees to purchase products from such lists. The goal of the sales force is to penetrate these "standards lists." We provide some of our distributors and resellers with limited product return rights for stock rotation. We also provide most of our distributors and resellers with price protection rights. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors or resellers if we lower our prices for such products. 31 We believe that our sales strategy of working closely with OEM's to approve products, working with the distributors to make the product available, and working directly with the corporate end-users to standardize the product provides us with a competitive advantage. Backlog Because our customers typically require prompt delivery of products and a substantial majority of our sales are booked and shipped in the same quarter, the timing and volume of customer orders are difficult to forecast. Accordingly, we typically operate with a relatively small order backlog. Further, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or canceled with little or no penalty. We believe that our backlog at any given time is not a meaningful indicator of future revenue. Seasonality And Other Fluctuations Of Revenue We believe the markets for our products are somewhat seasonal, with a higher proportional share of total sales occurring in the fourth fiscal quarter (first calendar quarter) and a sales slowdown commonly occurring during the first fiscal quarter (second calendar quarter). Sales in a given period may also be influenced by new product introductions, component supply availability, working capital availability, and other factors. Revenues and growth rates for any prior quarter are not necessarily indicative of revenues or growth rates to be expected in any future quarter. Like other firms in the information technology industry, we anticipate that during the second half of calendar 1999, revenues may be adversely affected by the postponement or cancellation of information technology spending due to concerns relative to Year 2000 issues. Service and Support We believe that service and support are critical components of end user satisfaction and the success of our business. Our support includes a toll-free technical support hotline to provide a range of telephone support to our distributors, dealers and end-user customers as well as fax back, e-mail and online Internet support. The service and support group also handles product returns and updates. Competition The market for computer products, in general, is intensely competitive, subject to rapid technological change, and sensitive to new product introductions or enhancements, and marketing efforts by industry participants. The principal competitive factors affecting the markets for our product offerings include price, corporate and product reputation, innovation with frequent product enhancement, breadth of integrated product line, product design, functionality and features, product quality, performance, ease-of-use, and support. We can give no assurance that we can maintain our competitive position against current or potential competitors, especially those with greater financial, marketing, service, support, technical or other competitive resources. We currently compete primarily with the internal design efforts of OEMs. These OEMs, as well as a number of our potential non-OEM competitors, generally have larger technical 32 staffs, more established and larger marketing and sales organizations and significantly greater financial resources than we do. Although we believe that we have a proprietary position with respect to our technologies, which could pose a competitive barrier for companies seeking to develop or sell competing products in our markets, we can give no assurance that such competitors will not be able to respond more quickly to new or emerging technologies and changes than we can, or develop products that are superior to our products or that achieve greater market acceptance. We can give no assurance that we will be able to compete successfully against our competitors or that the competitive pressures that we face will not have a material adverse effect on our business, results of operations and financial condition. Our competitors include notebook manufacturers such as Toshiba, IBM and Compaq, as well as third party suppliers such as Mobility Electronics, EXP, VST Technologies, Port/Targus, and Extended Systems. Our future success will depend, in large part, upon our ability to increase our share of our target market and to sell additional products and product enhancements to existing customers. Future competition may result in price reductions, reduced margins or decreased sales, which, in turn, would have a material adverse effect on our business, results of operations and financial condition. Proprietary Rights We rely on a combination of patent, copyright and trademark laws, trade secrets, nondisclosure agreements and technical measures to protect our technology. While we currently intend to vigorously enforce our intellectual property rights, we can give no assurance that the steps we take to protect our technology and enforce our rights will be successful or that we will have the resources to do so. We have four patents pending in the United States and eight patents pending in over 21 other countries. The categories of patent applications include: universal docking and port replication solutions, data multiplexing, power management, and external and internal device solutions. In August 1999, we were granted a Notice of Allowance from the United States Patent and Trademark Office for the issuance of a patent for our Digitari Universal Docking and Port Replication Technologies. On or about October 28, 1999 the Australian Patent Office issued us a patent for our Digitari Universal Docking and Port Replication Technolgies. In August 1999, we were issued a patent from the United States Patent and Trademark Office for our Universal Device Dock Technologies. The process of seeking patent protection can be expensive and time consuming. We can give no assurance that patents will issue from pending or future applications or that if issued, these patents will not be challenged, invalidated or circumvented, or that the rights granted to us will provide meaningful protection or other commercial advantage. Also, we can give no assurance that any patents that we obtain will provide us with substantial value or protection, that their validity will not be challenged, that affirmative defenses to infringement will not be asserted or that we will have the financial resources to protect such patents. Due to the rapid technological change that characterizes our industry, we believe that the success of our products will also depend on the technical competence and creative skill of our personnel in addition to legal protections afforded our existing drive and disk technology. As is 33 typical in our industry, from time to time, we have been, and may in the future be, notified of claims that may be infringing certain patents, trademarks and other intellectual property rights of third parties. It is not possible to predict the outcome of these claims and we can give no assurance that these claims will be resolved in our favor. If one or more of these claims is resolved unfavorably, we can give no assurance that the outcomes will not have a material adverse effect on our business or financial results. Our industry has been characterized by significant litigation relating to infringement of patents and other intellectual property rights. We can give no assurance that future intellectual property claims will not result in litigation. If infringement were established, we could be required to pay substantial damages or be enjoined from manufacturing and selling the infringing product(s) in one or more countries, or both. In addition, the costs of engaging in intellectual property litigation may be substantial regardless of outcome, and we can give no assurance that we will be able to obtain any necessary licenses on satisfactory terms. Certain technology used in our products is licensed on a royalty-bearing basis from third parties. The termination of a license arrangement could have a material adverse effect on our business and financial results. Facilities Our executive offices and production facilities are located at 7722 East Gray Road, Scottsdale, Arizona. The office space consists of approximately 16,000 square feet of leased space. The production facility consists of approximately 24,000 square feet of leased space and houses two production lines. The warehouse has four overhead truck doors for incoming and outgoing materials as well as an industrial freight lift. Both facilities are leased under an agreement which expires in April, 2001. We believe that our present facilities will provide adequate space for our business activities and production for the foreseeable future. Employees As of December 1, 1999, we had approximately 66 employees (approximately 21 in operations, 14 in engineering, 23 in sales and marketing and 8 in administration). None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good. Legal Proceedings We are not a party to any material legal proceedings, although we are involved from time to time in routine litigation incident to business. 34 MANAGEMENT Directors and Executive Officers The following sets forth certain information regarding each of the directors and executive officers of the Company.
Name Age Position ---- --- -------- Paul Charles 38 Chairman of the Board of Directors David Thompson 44 Interim Chief Executive Officer, Chief Financial Officer and Secretary R. Daniel Rudich 29 Vice President of Marketing Frank Layland 42 Vice President of Operations
The following is a brief summary of the business experience of each of the above-named individuals: Paul Charles founded CNF, Inc. in 1988 and currently serves as Chairman of the Company's Board of Directors. Mr. Charles had served as President and Chief Executive Officer of the Company until November 15, 1999. Mr. Charles has been primarily responsible for product design, development and innovation and has been instrumental in the development of each of the Company's principal products. Between 1985 and 1988 Mr. Charles worked for International Business Machines in cost accounting and inventory control management, where he distinguished himself by instituting various cost savings initiatives. Mr. Charles earned a Bachelor's degree in Finance and Accounting from Brigham Young University in 1985. David Thompson was appointed the Interim Chief Executive Officer of the Company on November 15, 1999. He has served as the Chief Financial Officer and Secretary since January 1998. Prior to joining the Company, he was the Chief Financial Officer and Vice President of Information for International Computer Graphics, Inc. ("ICG"), a leading wholesale distributor of computer monitors and video cards. Prior to joining ICG, Mr. Thompson operated his own accounting practice where he specialized in working with closely held corporations involved in mergers, acquisitions, private placements and other financing transactions. Mr. Thompson graduated from Eastern Washington University with a Bachelor's degree in Business Administration with an emphasis in professional accounting. R. Daniel Rudich has served as the Company's Vice President of Marketing since December 1997. Prior to joining the Company, he was the worldwide Product Manager for notebook Zip products at Iomega Corporation where he was responsible for the development and marketing of the notebook Zip drive. Prior to his position with Iomega, Mr. Rudich held various marketing positions at Compaq Computer Corporation and Matrox Electronics. He graduated 35 from McGill University in Montreal, Canada with a Bachelor of Commerce degree in Marketing and International Business and earned an MBA from Yale University. Frank Layland has served as the Company's Director of Operations since August 1998. Between 1985 and 1998, Mr. Layland served as a Project Operations Manager for Lockheed Martin Corporation where he was principally involved with governmental contracts. Mr. Layland has experience managing subcontractors, monitoring costs, production schedules and quality control. He graduated from Brigham Young University with a Bachelor of Science in Business Management. Board of Directors All directors hold office until the next annual meeting of stockholders 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. Mr. Charles is currently the sole director of the Company. In conjunction with the Merger, the Company agreed to maintain a Board of Directors in which Mr. Charles would have one (1) designee, provided the Board consists of less than five (5) members, and two (2) designees if the Board consists of five (5) or more members. It is anticipated that additional persons will be appointed to the Board of Directors. Directors Compensation Directors who are also officers of the Company receive no additional compensation for serving on the Board of Directors, other than reimbursement of reasonable expenses incurred in attending meetings. The Company has not yet formulated a policy regarding the compensation, if any, of non-employee directors. 36 Executive Compensation The following table provides certain summary information concerning compensation paid to or accrued by CNF's Chief Executive Officer, and all other executive officers who earned more than $100,000 (salary and bonus) (the "Named Executive Officers") for all services rendered in all capacities to CNF (and its predecessors) during the fiscal years ended March 31, 1997, 1998 and 1999: Summary Compensation Table
Long-Term Compensation Annual Compensation Awards ---------------------------------- ---------------------- Restricted Name and Principal Fiscal Other Annual Stock Options/ Position Year Salary Bonus Compensation(1) Awards SARs (#) - --------- ---- ------ ----- ------------ ------ -------- Paul Charles(2) 1999 $150,000 -- -- -- -- President and Chief 1998 $117,243 -- -- -- -- Executive Officer 1997 $110,993 $288,871 -- -- -- David Thompson(3) 1999 $150,000 -- -- -- 339,277(4) Interim Chief Executive 1998 $18,367 -- -- -- -- Officer, Chief Financial Officer and Secretary R. Daniel Rudich(5) 1999 $100,000 -- -- -- 203,565(4) Vice President of Marketing 1998 $28,353 -- -- --
- -------------------------- (1) With respect to each of the executive officers named in the table, if not separately reported, the aggregate amount of perquisites and other personal benefits, securities or property received was less than either $50,000 or 10% of the total annual salary and bonus reported for such executive officer. (2) Mr. Charles resigned his position as President and Chief Executive Officer of the Company effective November 15, 1999. (3) Mr. Thompson commenced his employment with CNF on January 1, 1998. Effective November 15, 1999, Mr. Thompson was appointed as the interim Chief Executive Officer of the Company. (4) Consists of options to purchase shares of Series A Preferred Stock which were issued in exchange for options to purchase shares of CNF common stock in connection with the Merger. (5) Mr. Rudich commenced his employment with CNF on December 1, 1997. 37 OPTION/SAR GRANTS TABLE
Option/SAR Grants in the Last Fiscal Year ====================================================================================================================== Individual Grants - ---------------------------------------------------------------------------------------------------------------------- % of Total Options/SARs Granted to Exercise or Options/SARs Employees in Base Price Expiration Name Granted (#)(1) Fiscal Year ($/Sh) Date - ---------------------------------------------------------------------------------------------------------------------- Paul Charles __ __ __ __ Chairman of the Board of Directors - ---------------------------------------------------------------------------------------------------------------------- David Thompson 339,277 41% $.24 April 15, 2008 Interim Chief Executive Officer, Chief Financial Officer and Secretary - ---------------------------------------------------------------------------------------------------------------------- R. Daniel Rudich 203,565 25% $.24 April 15, 2008 Vice President of Marketing ======================================================================================================================
(1) Consists of options to purchase shares of Series A Preferred Stock which were issued in exchange for outstanding options to purchase shares of CNF, Inc. common stock in connection with the merger. Employment Arrangements The Company has entered into employment agreements with Messrs. Charles, Thompson, Rudich and Layland. The employment agreements are for a term of three (3) years commencing May 19, 1999, provide for annual base salaries of, $125,000, $208,000, $85,000 and $85,000, respectively, and an annual merit based discretionary bonus to be determined by the Board of Directors or Compensation Committee. Mr. Rudich's salary will be increased to $120,000, upon the Company reporting two consecutive profitable quarters. Mr. Thompson's agreement provides for a mandatory bonus for the fiscal year ending March 31, 2000 equal to $21,000 in the event that the Company achieves the first of the financial performance targets set forth within the Certificate of Designation for the Company's Series A Convertible Preferred Stock and an additional $10,500 for each additional financial performance target the Company's achieves. See "DESCRIPTION OF SECURITIES - Preferred Stock." Mr. Rudich's agreement provides for the payment of a commission equal to $0.35 for each unit of CNF InnerBay ZIP(TM), CNF Digitari and all products developed by the Company subsequent to January 1, 1998 which are sold and paid for subject to a maximum commission of $200,000 per year. All executives are entitled to participate in the Company's fringe benefit programs, any incentive plan adopted by the Company and to reimbursement for certain company-related travel expenses. Each of the agreements provide for termination "for cause" which includes failure to achieve individual or corporate performance goals as determined by the Board of Directors of the Company or executive management. Commencing on or about May 19, 2000, any executive may be terminated without cause at the discretion of the Board of Directors of the Company. In 38 the event of a termination without cause, certain of the executives are entitled to receive severance pay in the form of salary continuation for an additional period of one year. The agreements contain standard clauses regarding confidentiality, non-compete and non-solicitation of customers, suppliers and employees. The agreements also provide for the executive to disclose all works and inventions to the Company, assign any and all patents to the Company and for all copyrightable material created by any executive during the term of his employment to be the property of the Company. Outstanding Options; Stock Incentive Plan In connection with the Merger, the Company assumed CNF, Inc.'s 1997 Equity Incentive Plan (the "CNF Plan"). The CNF Plan provided for the grant of options to purchase up to 602,026 shares of CNF common stock to employees, officers, directors and consultants of CNF, Inc. The CNF Plan provided for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and the grant of non-qualified stock options at exercise prices not less than the fair market value at the date of grant in the case of incentive stock options and not less than ninety (90%) of the fair market value at the date of grant for non-qualified options. The CNF Plan also provided for the issuance of restricted stock awards. As of the closing of the Merger, CNF, Inc. had granted options (the "CNF Options") to purchase an aggregate of 405,658 shares of CNF, Inc.'s common stock to certain officers and employees of CNF, Inc. The CNF Options were granted during the fiscal year ended March 31, 1999, expire ten (10) years from the date of grant and vest twenty-five percent (25%) after the first year and in ratable installments each subsequent month over the following three (3) years. The CNF Options were issued at exercise prices ranging from $.50 to $2.50 per share. In connection with the Merger, the Company assumed the CNF Options which now represent the right to purchase an aggregate of up to 836,790 shares of Series A Preferred Stock of the Company (of which 44,350 have been cancelled) at exercise prices ranging from $.24 to $1.21 per share. At this time, the Company's Board of Directors does not intend to issue any additional options under the CNF Option Plan. The Board of Directors does, however, intend to adopt a stock incentive plan and have such plan approved by the Company's stockholders. It is anticipated that any such plan will cover the grant of incentive and non-qualified options as well as the issuance of restricted stock awards and stock appreciation rights to officers, directors, key employees and consultants of the Company. The proposed plan will likely cover the issuance of options to purchase ten percent (10%) of the total number of then outstanding shares of the Common Stock of the Company and will be administered by the Board of Directors or a committee thereof. 39 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Loans to Officers In February 1997, the Company loaned Paul Charles $195,000 under a promissory note payable in full on February 14, 2002 at an interest rate of 8% per annum. This note was paid in full on August 14, 1998. Agreements with Officers and Directors The Company has entered into employment and option agreements with Messrs. Charles, Thompson, Rudich and Layland. See "MANAGEMENT - Employment Arrangements," - "Outstanding Options; Stock Incentive Plan" and "Executive Compensation." Amendment to Merger Agreement Effective November 15, 1999, the Company entered into an agreement with Paul Charles and Synergy Group International, Inc., a principal stockholder of the Company ("Synergy"), which amended certain provisions of the Merger Agreement. Specifically, Mr. Charles agreed to resign his position as Chief Executive Officer and to surrender 1,000,000 of the shares of Series A Preferred Stock issued to him in the Merger. The agreement also amended the provisions of the Merger Agreement relating to the private financing obligations. These consisted of reducing the minimum required proceeds from $3,000,000 to $2,000,000, including the conversion of indebtedness as proceeds and amending the escrow provisions relating to the 4,000,000 shares of Common Stock owned by Synergy and others to secure the funding obligations. As amended, 2,000,000 of these shares were released upon the Company realizing gross proceeds of $2,000,000, an additional 1,000,000 shares will be released upon the Company realizing $4,000,000 of gross proceeds and the remaining 1,000,000 shares will be released upon the Company realizing $6,000,000 of gross proceeds. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -- Material Escrow Arrangements." 40 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 29, 1999 information with respect to the securities holdings of all persons which the Company, pursuant to filings with the Securities and Exchange Commission, has reason to believe may be deemed the beneficial owners of more than 5% of the Company outstanding Common Stock. Also set forth in the table is the beneficial ownership of all shares of the Company's outstanding stock, as of such date, of all officers and directors, individually and as a group.
Shares Owned Beneficially Percentage of Name and Address and of Record (1) Outstanding Shares ---------------- ----------------- ------------------ Paul Charles 4,157,000(2) 26.8% 7722 East Gray Road Scottsdale, AZ 85260 David Thompson 134,299(3) 1.2% 7722 East Gray Road Scottsdale, AZ 85260 R. Daniel Rudich 80,579(4) * 7722 East Gray Road Scottsdale, AZ 85260 Frank Layland 12,033(5) * 7722 East Gray Road Scottsdale, AZ 85260 Vincent J. Marold 1,477,500(6) 12.8% c/o Synergy Group International, Inc. 3725 East Sunrise Drive Tucson, AZ 85718 Fincord Holding Corp. 725,000 6.4% P.O. Box 4608 Great Neck, NY 11203 Geneco Investment Corp. 578,000 5.1% 220 E. 42nd Street, 12th Floor New York, NY 10017 Godwin Finance Limited 700,000(7) 6.2% Whitehill House Newby Road Hazel, Cheshire England SK7 50A William J. Meris 765,000 6.7% 8652 East Carrie Drive Scottsdale, AZ 85200 All Directors 4,383,911 27.8% And Executive Officers as a Group (4 persons)
- --------------- *Represents less than 1% of the outstanding shares of Common Stock. 41 (1) The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the rules and regulations promulgated under the Exchange Act, and accordingly, may include securities owned by and for, among others, the spouse and/or minor children of an individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which such person has the right to acquire within 60 days after the date of this Prospectus pursuant to the exercise of options, or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on 11,352,830 shares of Common Stock outstanding as of November 29, 1999. (2) Consists of 4,157,000 shares issuable upon conversion of Series A Preferred Stock. The number of shares issuable upon conversion is subject to adjustment up to a maximum of 9,353,250 shares. See "DESCRIPTION OF SECURITIES." (3) Consists of shares issuable upon exercise of options to purchase 134,299 shares of Series A Preferred Stock which shares are convertible into a like number of shares of Common Stock. The number of shares issuable upon such conversion is subject to adjustment to a maximum of 302,173. See "DESCRIPTION OF SECURITIES." Does not include 204,978 shares issuable upon exercise of options to purchase 204,978 shares of Series A Preferred Stock which are subject to vesting. (4) Consists of shares issuable upon exercise of options to purchase 80,579 shares of Series A Preferred Stock which shares are convertible into a like number of shares of Common Stock. The number of shares issuable upon such conversion is subject to adjustment to a maximum of 181,303. See "DESCRIPTION OF SECURITIES." Does not include 122,986 shares issuable upon exercise of options to purchase 122,986 shares of Series A Preferred Stock which are subject to vesting. (5) Consists of shares issuable upon exercise of options to purchase 12,033 shares of Series A Preferred Stock which shares are convertible into a like number of shares of Common Stock. The number of shares issuable upon such conversion is subject to adjustment to a maximum of 27,074. See "DESCRIPTION OF SECURITIES." Does not include 29,223 shares issuable upon exercise of options to purchase 29,223 shares of Series A Preferred Stock which are subject to vesting. (6) Includes 477,500 shares owned of record by Synergy Group International, Inc. of which Mr. Marold is the sole shareholder. (7) Includes 750,000 shares owned of record by Meris Capital Partners, L.P. which Mr. Meris is deemed to beneficially own. Material Escrow Arrangements 2,000,000 shares of the Company's outstanding Common Stock have been deposited into escrow and remain subject to cancellation upon the terms set forth in a certain escrow agreement entered into in connection with the Merger. Specifically, certain historic shareholders of the Company, including Vincent J. Marold, have deposited these shares into escrow to secure an obligation under the Merger Agreement to complete a private placement which provides the Company with proceeds of between $2,000,000 and $6,000,000 (inclusive of the conversion of certain indebtedness) by no later than on or about February 15, 2000. These shares will be 42 released based on the gross proceeds realized by the Company completion of the private placement and conversion of indebtedness and the conversion of certain indebtedness. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Amendment To Merger Agreement." 2,000,000 of the shares of Series A Preferred Stock issued to Mr. Charles under the Merger Agreement were subject to cancellation upon the terms set forth in a separate escrow agreement by and between the Company and Mr. Charles. These shares were deposited into escrow to secure Mr. Charles' indemnification obligations under the Merger Agreement with respect to certain representations, warranties and covenants thereunder. Provided that there were no claims for indemnification under the Merger Agreement pending against Mr. Charles, 1,000,000 of these shares were subject to release on or about December 8, 1999 and the remainder were subject to release on or about December 8, 2000. Pursuant to an amendment to the Merger Agreement, Mr. Charles agreed to surrender for cancellation the 1,000,000 shares which were subject to release from escrow on or about December 8, 2000. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Amendment To Merger Agreement." DESCRIPTION OF SECURITIES Common Stock The Company is authorized to issue 50,000,000 shares of Common Stock, $.0001 par value per share, of which 11,352,830 are outstanding as of the date of this Prospectus. Holders of Common Stock have equal rights to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Holders of Common Stock have one vote for each share held of record and do not have cumulative voting rights. Holders of Common Stock are entitled, upon liquidation of the Company, to share ratably in the net assets available for distribution, subject to the rights, if any, of holders of any preferred stock then outstanding. Shares of Common Stock are not redeemable and have no preemptive or similar rights. All outstanding shares of Common Stock are fully paid and nonassessable. Preferred Stock Within the limits and restrictions provided in the Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 15,000,000 shares of preferred stock, $.0001 par value per share (the "Preferred Stock"), in one or more series, and to fix, as to any such series, any dividend rate, redemption price, preference on liquidation or dissolution, sinking fund terms, conversion rights, voting rights, and any other preference or special rights and qualifications. Series A Convertible Preferred Stock. The Board of Directors of the Company has authorized the designation of 6,000,000 shares of Preferred Stock as "Series A Convertible Preferred Stock" of which 4,163,188 are outstanding. The Company has also issued options to purchase an additional 792,440 shares of Series A Preferred Stock. The following describes the 43 material features of the Series A Preferred Stock which are more fully set forth in the Company's Certificate of Designation on file with the Delaware Secretary of State. The Series A Preferred Stock is essentially a common stock equivalent. The Series A Preferred Stock does not have a liquidation preference, does not provide for a preferred dividend other than those declared by the Company's Board of Directors out of funds legally available therefor and votes on an as converted into common stock basis. Commencing on the date of issuance, each share of Series A Preferred Stock is convertible into one (1) share of common stock. Thereafter, the conversion ratio is subject to upward adjustment based on the Company achieving certain financial performance targets as reflected in the Company's audited results of operation for the fiscal year ending March 31, 2000 (the "Audited Financial Statements") as follows:
Shares of common stock to be issued upon conversion of each Financial Performance Target Share of Series A Preferred Stock ---------------------------- --------------------------------- Gross Revenues of $22.5 million and Net Income of $900,000 1.5 Gross Revenues of $38.25 million and Net Income of $1.53 million 1.75 Gross Revenues of $51 million and Net Income of $2.04 million 2.00 Gross Revenues of $64 million and Net Income of $2.56 million 2.25
The Financial Performance Targets with respect to Gross Revenues and Net Income shall be considered to have been achieved if actual Gross Revenues or Net Income, as applicable, as reported in the Audited Financial Statements are within 10% of the targeted amount. All shares of Series A Preferred Stock which have not been converted shall automatically convert into common stock upon the earlier of (i) the completion of the Audited Financial Statements; and (ii) June 30, 2000. Dividend Policy The Company has never paid cash dividends on its Common Stock. The Board of Directors does not anticipate paying cash dividends in the foreseeable future as it intends to retain future earnings, if any, to finance the growth of the business. The payment of future cash dividends will depend on such factors as earnings levels, anticipated capital requirements, the operating and financial condition of the Company and other factors deemed relevant by the Board of Directors. 44 Delaware Anti-Takeover Law and Provisions of Company's Certificate of Incorporation As the Company's shares become more widely held, listed on NASDAQ or on a national exchange, to which there can be no assurance, the Company will be governed by Section 203 of the General Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In general, the law prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. "Business combinations" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with its affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. The provisions regarding certain business combinations under the GCL could have the effect of delaying, deferring or preventing a change in control of the Company or the removal of existing management. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. As described above, the Company's Board of Directors is authorized without further stockholder action, to designate any number of series of Preferred Stock with such rights, preferences and designations as determined by the Board. Shares of Preferred Stock issued by the Board of Directors could be utilized, under certain circumstances, to make an attempt to gain control of the Company more difficult or time consuming. For example, shares of Preferred Stock could be issued with certain rights that might have the effect of diluting the percentage of common stock owned by a significant stockholder or issued to purchasers who might side with management in opposing a takeover bid that the Board of Directors determines is not in the best interest of the Company and its stockholders. The existence of the Preferred Stock may, therefore, be viewed as having possible anti-takeover effects. A takeover transaction frequently affords stockholders the opportunity to sell their shares at a premium over current market prices. Transfer Agent The transfer agent for the Company's securities is StockTrans, Inc., 7 East Lancaster Avenue, Ardmore, Pennsylvania 19003, (610) 649-7300. 45 SELLING SECURITY HOLDERS The Selling Security Holders identified in the following table are offering for sale 1,756,624 shares of Common Stock. These shares include: o 1,606,624 shares of Common Stock o 150,000 shares of Common Stock which may be issued upon the conversion of Series A Preferred Stock We previously issued these shares of Common Stock and Series A Preferred Stock in private placement transactions. 850,000 of these shares are being offered by directors, officers or principal stockholders of the Company. Of the 1,756,624 share of Common Stock being offered by the Selling Security Holders, 852,082 shares are subject to lock-up agreements with the Company. The lock-up agreements prohibit the offer or sale of these shares until nine (9) months after the date of this Prospectus. The Selling Security Holders may offer their shares of Common Stock for sale from time to time at market prices prevailing at the time of sale or at negotiated prices, and without payment of any underwriting discounts or commissions except for usual and customary selling commissions paid to brokers or dealers. See "PLAN OF DISTRIBUTION." The following table sets forth as of November 29, 1999 the number of shares being held of record or beneficially by the Selling Security Holders and provides by footnote reference any material relationship between the Company and the Selling Security Holder, all of which is based upon information currently available to the Company.
Beneficial Ownership of Selling Security Holder Beneficial Ownership of Prior to Offering (1) Shares After Offering (2) ----------------------------- Number of Shares ---------------------------- Name of Selling Security Holder Number Percent Offered Hereby (2) Number Percent - ------------------------------- ------ ------- ------------------ ------ ------- Paul Charles (3) 4,157,000 26.8% 150,000 4,007,000 26.1% Enrico E. DiVito, DDS 35,918 * 35,918 0 - Michael G. Glynn 97,500 * 87,500 10,000 * Keith and Carol Henrichsen 11,507 * 5,754 5,753 * Imperium Capital Corporation 250,000 2.2% 250,000 0 - Lawrence Kaplan 347,574 3.1% 173,787 173,787 1.53 Allen and Jane Kelsey 35,890 * 35,890 0 - Lindzon Capital Partners (4) 186,562 1.6% 126,562 60,000 * Meris Capital Partners, L.P. (5) 750,000 5.97% 700,000 50,000 * Blair Portigal 71,822 * 71,822 0 - Harold Rubenstein 113,151 1.01% 83,151 30,000 * Rochelle and Shelden Terman 36,240 * 36,240 0 - TOTAL 1,756,624 =========
- ------------- * Represents less than 1% of the outstanding shares of Common Stock (1) Applicable percentage of ownership is based on 11,352,830 shares of Common Stock outstanding as of November 29, 1999, plus any common stock equivalents held by such holder. (2) Assumes that all shares are sold pursuant to this offering and that no other shares of Common Stock are acquired or disposed of by the Selling Security Holders prior to the termination of this offering. 46 Because the Selling Security Holders may sell all, some or none of their shares or may acquire or dispose of other shares of Common Stock, we cannot estimate the aggregate number of shares which will be sold in this offering or the number or percentage of shares of Common Stock that each Selling Security Holder will own upon completion of this offering. (3) Mr. Charles is the Chairman of the Board of Directors and a principal stockholder of the Company. See "MANAGEMENT" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." (4) Lindzon Capital Partners is an investment fund managed by Howard Lindzon who beneficially owns an additional 332,500 shares of Common Stock and 6,188 shares of Series A Preferred Stock. (5) Under applicable SEC Rules, these shares are deemed to be beneficially owned by William J. Meris, a principal stockholder of the Company. SEE "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Under agreements with the Selling Security Holders, the Company will pay all offering expenses except the fees and expenses of any counsel and other advisors that the Selling Security Holders may employ to represent them in connection with the offering and all brokerage or underwriting discounts or commissions paid to broker-dealers in connection with the sale of the shares. PLAN OF DISTRIBUTION The Selling Security Holders have not advised us of any specific plan for distribution of the shares offered hereby, but it is anticipated that the shares will be sold from time to time by the Selling Security Holders or by pledgees, donees, transferees or other successors in interest. Such sales may be made on the OTC Bulletin Board, any exchange upon which our shares may trade in the future, over-the-counter, or otherwise, at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The shares may be sold by one or more of the following: o a block trade in which the broker or dealer so engaged will attempt 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 or dealer for its account pursuant to this Prospectus; o ordinary brokerage transactions and transactions in which the broker solicits purchases; o through options, swaps or derivatives; o in privately negotiated transactions; o in transactions to cover short sales; o through a combination of any such methods of sale; or o in accordance with Rule 144 under the Securities Act, rather than pursuant to this Prospectus. 47 The Selling Security Holders may sell their shares directly to purchasers or may use brokers, dealers, underwriters or agents to sell their shares. Brokers or dealers engaged by the Selling Security Holders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions, discounts or concessions from the Selling Security Holders, or, if any such broker-dealer acts as agent for the purchaser of shares, from the purchaser in amounts to be negotiated immediately prior to the sale. The compensation received by brokers or dealers may, but is not expected to, exceed that which is customary for the types of transactions involved. Broker-dealers may agree with a Selling Security Holder to sell a specified number of shares at a stipulated price per share, and, to the extent the broker-dealer is unable to do so acting as agent for a Selling Security Holder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment to the Selling Security Holder. Broker-dealers who acquire shares as principal may thereafter resell the shares from time to time in transactions, which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above, in the over-the counter market or otherwise at prices and on terms then prevailing at the time of sale, at prices then related to the then-current market price or in negotiated transactions. In connection with resales of the shares, broker-dealers may pay to or receive from the purchasers of shares commissions as described above. The Selling Security Holders and any broker-dealers or agents that participate with the Selling Security Holders in the sale of the shares may be deemed to be "underwriters" within the meaning of the Securities Act. In that event, any commissions received by broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. From time to time the Selling Security Holders may engage in short sales, short sales against the box, puts and calls and other hedging transactions in our securities, and may sell and deliver the shares in connection with such transactions or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions. In addition, from time to time, a Selling Security Holder may pledge its shares pursuant to the margin provisions of its customer agreements with its broker-dealer. Upon delivery of the shares or a default by a Selling Security Holder, the broker-dealer or financial institution may offer and sell the pledged shares from time to time. Of the 1,756,624 shares of Common Stock being offered by the Selling Security Holders, 852,082 shares are subject to lock-up agreements with the Company. The lock-up agreements prohibit the offer or sale of these shares until nine (9) months after the date of this Prospectus. We will not receive any proceeds from the sale of the shares. We will pay the expenses of preparing this Prospectus and the related registration statement. The Selling Security Holders have been advised that they are subject to the applicable provisions of the Exchange Act, including without limitation, Rules 10b-5 and Regulation M there under. LEGAL MATTERS Certain legal matters, including the validity of the Shares being issued, will be passed upon for the Company by Buchanan Ingersoll Professional Corporation, Eleven Penn Center, 1835 Market Street, 14th Floor, Philadelphia, PA 19103. 48 EXPERTS The financial statements as of March 31, 1999 and 1998 and for each of the two years in the period ended March 31, 1999 included in this Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company's ability to continue as a going concern), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. WHERE YOU CAN GET MORE INFORMATION We have filed a Registration Statement on Form SB-2 with the SEC. This Prospectus, which forms a part of that Registration Statement, does not contain all of the information included in the Registration Statement and the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made. You may review a copy of the Registration Statement at the SEC's public reference room in Washington, D.C., and at the SEC's regional offices in Chicago, Illinois and New York, New York. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The Registration Statement can also be reviewed by accessing the SEC's Internet site at http://www.sec.gov. As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. 49 CNF TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS OF THE COMPANY CNF TECHNOLOGIES, INC. Independent Auditor's Report.................................................F-2 Financial Statements Balance Sheets......................................................F-3 Statements of Operations............................................F-4 Statements of Shareholder's (Capital Deficiency) Equity.............F-5 Statements of Cash Flows............................................F-6 Notes to Financial Statements.......................................F-7 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors CNF Technologies, Inc. Scottsdale, Arizona We have audited the accompanying balance sheets of CNF Technologies, Inc. (formerly CNF, Inc.) (the "Company") as of March 31, 1999 and 1998, and the related statements of operations, shareholder's (capital deficiency) equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at March 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company's recurring losses from operations, negative working capital, and shareholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Phoenix, Arizona May 25, 1999 (June 11, 1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4, and paragraphs 4, 5 and 7 of Note 13) F-2 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) BALANCE SHEETS SEPTEMBER 30, 1999 AND MARCH 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------ March 31, September 30, ----------------------- ASSETS 1999 1999 1998 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 166,675 $ 184,663 $ 229,419 Accounts receivable - trade (net of allowance of $390,000, $390,000 and $330,000 at September 30, 1999, March 31, 1999 and 1998, respectively) 2,043,536 834,383 1,084,527 Accounts receivable - employees and other 4,326 31,736 118,128 Inventories (Note 2) 1,647,513 1,656,001 1,505,140 Prepaid expenses and other current assets 164,580 112,782 314,729 Income tax receivable 95,717 95,717 30,732 ----------- ----------- ----------- Total current assets 4,122,347 2,915,282 3,282,675 PROPERTY AND EQUIPMENT - Net (Note 3) 628,581 582,233 338,261 NOTE RECEIVABLE FROM RELATED PARTY (Note 9) 7,609 9,906 95,000 OTHER ASSETS 30,670 31,266 14,054 ----------- ----------- ----------- TOTAL $ 4,789,207 $ 3,538,687 $ 3,729,990 =========== =========== =========== LIABILITIES AND SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 3,764,547 $ 3,642,535 $ 2,101,691 Accounts payable - related party 345 10,000 Lines of credit (Note 4) 229,713 682,120 672,135 Short-term obligations (Note 5) 503,259 Short-term obligations - related parties (Note 5) 2,675,000 397,551 Accrued compensation 311,483 225,716 144,626 Accrued expenses 515,923 437,050 139,113 Current portion of capital leases (Note 7) 32,379 17,826 Current portion of notes payable (Note 5) 54,156 71,623 62,279 ----------- ----------- ----------- Total current liabilities 7,583,201 5,978,025 3,129,844 CAPITAL LEASES (Note 7) 84,416 67,136 NOTES PAYABLE (Note 5) 167,465 220,163 259,758 ----------- ----------- ----------- Total liabilities 7,835,082 6,265,324 3,389,602 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 1, 7, 10, 12 and 13) SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY (Note 6): Preferred stock, par value of $.0001: 15,000,000 shares authorized; 5,163,188 shares issued and outstanding at September 30, 1999 516 Common stock, par value of $.0001: 50,000,000 shares authorized; 9,591,981 shares issued and outstanding at September 30, 1999 959 Common stock, no par value: 25,000,000 shares authorized; 2,503,000 and 2,500,000 shares issued and outstanding as of March 31, 1999 and 1998, respectively 1,000 1,000 Additional paid-in capital 2,048,466 7,500 (Deficit) retained earnings (5,095,816) (2,735,137) 339,388 ----------- ----------- ----------- Total shareholder's (capital deficiency) equity (3,045,875) (2,726,637) 340,388 ----------- ----------- ----------- TOTAL $ 4,789,207 $ 3,538,687 $ 3,729,990 =========== =========== ===========
See notes to financial statements. F-3 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------- Six Months Ended September 30, Years Ended March 31, --------------------------- --------------------------- 1999 1998 1999 1998 (Unaudited) REVENUES (Note 11) $ 6,114,459 $6,593,389 $ 9,425,947 $7,726,484 COST OF REVENUES 3,865,261 4,311,580 6,088,549 4,460,944 ----------- ---------- ----------- ---------- Gross profit 2,249,198 2,281,809 3,337,398 3,265,540 ----------- ---------- ----------- ---------- OPERATING EXPENSES: General and administrative 2,728,589 1,683,039 3,960,673 1,916,877 Research and development 631,735 487,963 1,200,939 890,944 Sales and marketing 550,403 506,536 1,086,265 480,170 ----------- ---------- ----------- ---------- Total operating expenses 3,910,727 2,677,538 6,247,877 3,287,991 ----------- ---------- ----------- ---------- LOSS FROM OPERATIONS (1,661,529) (395,729) (2,910,479) (22,451) ----------- ---------- ----------- ---------- OTHER INCOME (EXPENSE): Interest income 1,863 177 20,528 1,070 Interest expense (709,243) (60,149) (248,342) (68,552) Other income 8,230 11,706 18,568 31,766 ----------- ---------- ----------- ---------- Other expense - net (699,150) (48,266) (209,246) (35,716) ----------- ---------- ----------- ---------- LOSS BEFORE INCOME TAX (BENEFIT) PROVISION (2,360,679) (443,995) (3,119,725) (58,167) (BENEFIT) PROVISION FOR INCOME TAXES (Note 8) (45,200) 21,100 ----------- ---------- ----------- ---------- NET LOSS $(2,360,679) $ (443,995) $(3,074,525) $ (79,267) =========== ========== =========== ========== BASIC AND DILUTED LOSS PER SHARE - Applicable to common shareholders $ (0.31) $ (0.18) $ (1.23) $ (0.03) =========== ========== =========== ========== BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING - Basic and diluted 7,518,417 2,500,000 2,500,250 2,500,000 =========== ========== =========== ==========
See notes to financial statements. F-4 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) STATEMENTS OF SHAREHOLDER'S (CAPITAL DEFICIENCY) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------ Total Preferred Stock Common Stock Additional Retained Shareholder's ------------------- -------------------- Paid-in Earnings Equity (Capital Shares Amount Shares Amount Capital (Deficit) Deficiency) BALANCE, APRIL 1, 1997 2,500,000 $1,000 $ 418,655 $ 419,655 Net loss (79,267) (79,267) ---------- ------ ----------- ----------- BALANCE, MARCH 31, 1998 2,500,000 1,000 339,388 340,388 Common stock issued (Note 5) 3,000 $ 7,500 7,500 Net loss (3,074,525) (3,074,525) ---------- ------ ---------- ----------- ----------- BALANCE, MARCH 31, 1999 2,503,000 1,000 7,500 (2,735,137) (2,726,637) Net loss (unaudited) (2,360,679) (2,360,679) Retirement of CNF, Inc. stock (unaudited) (Note 13) (2,503,000) (1,000) (1,000) Issuance of new stock (Notes 6 and 13): Preferred stock (unaudited) 5,163,188 $ 516 516 Common stock (unaudited) 9,591,981 959 2,040,966 2,041,925 --------- ----- ---------- ------ ---------- ----------- ----------- BALANCE, SEPTEMBER 30, 1999 (unaudited) 5,163,188 $ 516 9,591,981 $ 959 $2,048,466 $(5,095,816) $(3,045,875) ========= ===== ========== ====== ========== =========== ===========
See notes to financial statements. F-5 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.)
STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------- Six Months Ended September 30, Years Ended March 31, -------------------------- ------------------------- 1999 1998 1999 1998 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,360,679) $(443,995) $(3,074,525) $ (79,267) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 84,085 60,838 140,323 60,797 Amortization of discount on note payable subject to 50% conversion (Note 5) 503,259 Loss (gain) on sales of assets 3,122 (1,409) 8,233 Deferred income taxes - net (12,557) Expenses satisfied with issuance of common stock 60,174 7,500 Expenses associated with merger (50,250) Changes in assets and liabilities: Accounts receivable - trade (1,209,153) (67,253) 250,144 (802,276) Accounts receivable - other 27,409 27,159 86,392 (102,926) Inventories 8,488 641,561 (150,861) (931,665) Prepaid expenses and other assets (51,202) (173,126) 184,735 (248,997) Accounts payable - trade 122,012 (143,584) 1,540,844 1,654,744 Accounts payable - related party (345) (9,510) (9,655) Income tax receivable (64,985) (24,806) Accrued compensation 85,767 24,520 81,090 25,310 Accrued expenses 78,873 32,073 297,937 17,431 ----------- --------- ----------- ---------- Net cash used in operating activities (2,698,440) (52,726) (702,828) (444,212) ----------- --------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (88,171) (250,232) (296,138) (273,929) Loan to officer (9,906) Collection of note receivable 2,297 95,000 95,000 ----------- --------- ----------- ---------- Net cash used in investing activities (85,874) (155,232) (211,044) (273,929) ----------- --------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) on lines of credit, net (452,407) 8,668 9,985 672,135 Loan and note payable 36,892 540,151 Notes payable - related party 2,302,449 39,000 397,551 Equity transaction (Note 13) 1,000,000 Principal payments on capital leases (4,178) (4,032) (11,429) Principal payments on notes payable (79,538) (33,332) (67,142) (51,940) ----------- --------- ----------- ---------- Net cash provided by financing activities 2,766,326 47,196 869,116 620,195 ----------- --------- ----------- ---------- NET DECREASE IN CASH (17,988) (160,762) (44,756) (97,946) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 184,663 229,419 229,419 327,365 ----------- --------- ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 166,675 $ 68,657 $ 184,663 $ 229,419 =========== ========= =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 45,185 $ 60,149 $ 146,289 $ 68,552 =========== ========= =========== ========== Cash paid for income taxes $ -- $ 19,000 $ 20,635 $ 59,429 =========== ========= =========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock in connection with the conversion of notes payable $ 528,259 $ -- $ -- $ -- =========== ========= =========== ========== Capital expenditures financed through obligations under capital leases $ 45,384 $ 69,641 $ 96,391 $ -- =========== ========= =========== ==========
See notes to financial statements. F-6 CNF TECHNOLOGIES, INC. (Formerly CNF, Inc.) NOTES TO FINANCIAL STATEMENTS SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) AND YEARS ENDED MARCH 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. BUSINESS AND BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - CNF Technologies, Inc. (formerly CNF, Inc.) (the "Company") was incorporated in California in June 1988. In July 1998, the Company relocated its corporate headquarters to Scottsdale, Arizona. The Company designs, manufactures and markets portable peripherals to notebook PC vendors, wholesale distributors, computer resellers, computer retail stores and corporate end users. As described in Note 13, on June 8, 1999, the Company completed a merger with JLL Ventures (Delaware) Corp., a Delaware Corporation, (JLL) and JLL ACQUISITIONS CORP., a Delaware corporation and wholly-owned subsidiary of JLL (JLL ACQUISITIONS). JLL subsequently changed its name to CNF Technologies, Inc. and JLL ACQUISITIONS changed its name to CNF Mobile Solutions, Inc. Interim Period Presentation - The unaudited financial statements for the six months ended September 30, 1999 and 1998 have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the results of operations and cash flows. The results of operations for the six months ended September 30, 1999 are not necessarily indicative of results that may be expected for the year ending March 31, 2000 or any future period. Basis of Presentation - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the six months ended September 30, 1999 and the years ended March 31, 1999 and 1998, the Company incurred net losses of $2,360,679 (unaudited), $3,074,525 and $79,267, respectively, and, as of September 30, 1999 and March 31, 1999, the Company's current liabilities exceeded its current assets by $3,460,854 (unaudited) and $3,062,743, respectively, and its total liabilities exceeded its total assets by $3,045,875 (unaudited) and $2,726,637, respectively. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations from sources that are described in Note 13 to the financial statements. F-7 Summary of Significant Accounting Policies a. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. b. Cash and cash equivalents consist of cash held in bank demand deposits and highly liquid investments purchased with initial maturities of three months or less. c. Inventories are stated at the lower of cost (first-in, first-out method) or market. d. Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets of five to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. The Company evaluates the recoverability of long-lived assets on an on-going basis. e. Income Taxes - The Company accounts for income taxes using the asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards measured by applying current enacted tax laws. f. Revenue Recognition - Revenues, less reserves for returns, are generally recognized upon shipment to the customer. Title to the product transfers upon shipment to the customer. Revenues from sales to distributors and authorized resellers are subject to terms allowing certain rights of return and price protection rights. Accordingly, accruals for estimated future returns are provided for upon recognition of revenue. Such amounts are estimated based on historical rates of return, distributor inventory levels and other factors. At September 30, 1999, reserves of $390,000 (unaudited) were recorded by the Company for estimated future returns and bad debts. At March 31, 1999 and 1998, reserves of $390,000 and $330,000, respectively, were recorded by the Company for estimated future returns and bad debts. g. Certain Significant Risks and Uncertainties - The Company participates in a dynamic high technology industry and believes that changes in any of the following areas, among others, could have a material adverse effect on the Company's future financial position or results of operations: advances and trends in new technologies and industry standards; competitive pressures in the form of new products; changes in certain strategic partnerships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; risk associated with changes in domestic and international economic and/or political conditions or regulations; availability of necessary components; risks associated with year 2000 compliance; and the Company's ability to attract and retain employees necessary to support its growth. h. Recently Issued Accounting Standards - In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources during the period. There were no differences between net loss and comprehensive net loss for the years presented. F-8 In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued, which establishes accounting and reporting standards for derivative instruments and hedging activities which are required for fiscal quarters beginning after June 15, 1999. On May 20, 1999, the FASB issued an Exposure Draft, which would have the effect of deferring the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. On July 7, 1999, the FASB adopted the Exposure Draft as SFAS No. 137. This statement requires balance sheet recognition of derivatives as assets or liabilities measured at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The Company has not yet determined the effect the adoption of SFAS No. 133 will have on its financial statements. 2. INVENTORIES Inventories consist of the following: March 31, September 30, ------------------------- 1999 1999 1998 ------------- ---------- ---------- (Unaudited) Raw materials $ 962,876 $1,011,970 $ 575,675 Work in process 91,494 47,169 Finished goods 593,143 596,862 929,465 ---------- ---------- ---------- Inventories $1,647,513 $1,656,001 $1,505,140 ========== ========== ========== 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following: March 31, September 30, ----------------------- 1999 1999 1998 ------------- --------- --------- (Unaudited) Equipment $ 849,825 $ 737,195 $ 414,872 Furniture and fixtures 48,557 30,754 23,818 Leasehold improvements 7,806 Vehicles 38,025 38,025 1,624 ---------- --------- ---------- Total 936,407 805,974 448,120 Accumulated depreciation and amortization (307,826) (223,741) (109,859) ---------- --------- ---------- Property and equipment - net $ 628,581 $ 582,233 $ 338,261 ========== ========= ========= Assets recorded under capital leases consist of the following: September 30, March 31, 1999 1999 ------------- --------- (Unaudited) Equipment $141,774 $ 96,391 Accumulated amortization (24,156) (12,932) -------- -------- Total $117,618 $ 83,459 ======== ======== Depreciation and amortization expense was $84,085 and $60,838 for the six months ended September 30, 1999 and 1998 (unaudited), respectively. Depreciation and amortization expense was $140,323 and $60,797 for the years ended March 31, 1999 and 1998, respectively. F-9 4. LINES OF CREDIT In August 1997, the Company borrowed $100,000 and $600,000 under two bank lines of credit, which bear interest at prime (7.75% at March 31, 1999 and 8.5% at March 31, 1998) plus 2 percent and 3.5 percent per annum, respectively. The Company had outstanding borrowings of $682,120 and $672,135 under the lines of credit as of March 31, 1999 and 1998, respectively. As described in Note 13, subsequent to March 31, 1999, the Company's lines of credit maturity dates were extended under a loan modification agreement. Per the loan modification agreement, on June 7, 1999 and on June 30, 1999, a $100,000 principal-only installment shall be due and payable. In addition, a $100,000 principal-only payment shall be due and payable upon execution of the loan modification agreement. Interest-only installments will be due and payable on the tenth day of each month. The remaining balance on the lines of credit was due and payable on July 31, 1999. In accordance with the loan modification agreement, the Company made a $100,000 principal-only payment, as well as a $100,000 payment for execution of the loan modification agreement, on June 4, 1999. The Company made an additional principal only payment in August 1999 in the amount of approximately $152,000 and negotiated a second loan modification agreement extending the maturity date to September 30, 1999 (unaudited). On October 6, 1999, the Company paid the final installment on its lines of credit (unaudited). F-10 5. DEBT Short-term obligations at consist of the following:
September 30, March 31, 1999 1999 ------------- --------- (Unaudited) Note payable to a shareholder, unsecured, with interest at 10%, payable upon the earlier of the completion of a $3,000,000 financing transaction by the Company or March 19, 2000. 3,000 shares of common stock were issued to the investor as additional consideration. $ 100,000 $100,000 Notes payable to related-parties, unsecured, with interest at 10%, payable upon the earlier of the completion of a $4,000,000 financing transaction by the Company or February 22, 2000 ($250,000) and March 9, 2000 ($25,000). Holder of the note has the right to convert the note to shares of the Company's stock at a price equal to a 25% discount from the offering price in a subsequent offering of the Company's stock, should one occur. On July 15, 1999, one party exercised its option to convert its $25,000 note, plus accrued interest of $892, to 11,507 shares of the Company's common stock. 250,000 275,000 Note payable to the president of the Company, unsecured, with interest at 10%. 22,551 at 10%. Notes payable to four shareholders, unsecured, with interest at 10%, payable upon the earlier of the completion of a $3,000,000 financing transaction by the Company or one year from the date of the note (maturities range from April 7, 2000 to May 6, 2000). 97,500 shares of common stock were issued to the four shareholders as additional consideration. Holders of the notes have the right to convert the notes to shares of the Company's stock at a price equal to a 25% discount from the offering price in a subsequent offering of the Company's stock, should one occur. 975,000 Notes payable to four shareholders, unsecured, with interest at 10%, payable upon the earlier of the completion of a $4,000,000 financing transaction by the Company or one year from the date of the note (maturities range from May 26, 2000 to June 4, 2000). 70,000 shares of common stock were issued to the investors as additional consideration. Holders of the notes have the right to convert the notes to shares of the Company's stock at a price equal to a 25% discount from the offering price in a subsequent offering of the Company's stock, should one occur. 700,000 Notes payable to eight shareholders, unsecured, with interest at 10%, payable upon the earlier of the completion of a $5,000,000 financing transaction by the Company or one year from the date of the note (maturities range from July 8, 2000 to August 18, 2000). 65,000 shares of common stock were issued to the investors as additional consideration. 650,000 ---------- -------- Total related-party short-term obligations 2,675,000 397,551 Note payable, unsecured, with interest at 10%, payable upon the earlier of the completion of a $4,000,000 financing transaction by the Company or January 8, 2000. Holder of the note had the right to convert the note to shares of the Company's stock at a price equal to a 50% discount from the offering price in a subsequent offering of the Company's stock, should one occur. On July 15, 1999, the holder of the note exercised the option to convert the $503,259 note, plus accrued interest of $18,102, to 347,574 shares of the Company's common stock. 503,259 -------- Total short-term obligations $2,675,000 $900,810 ========== ========
F-11 Long-term debt obligations consist of the following:
September 30, March 31, ------------------------- 1999 1999 1998 --------- -------- -------- (Unaudited) Note payable to bank, unsecured, with interest at prime plus 2% (9.75% at March 31, 1999) payable in monthly installments of $1,068 through May 2001 $ 45,000 $ 65,000 Note payable to bank, unsecured, with interest at prime plus 2.25% (10% at March 31, 1999) payable in variable monthly installments through September 2003 $ 200,914 220,871 257,037 Other notes payable 20,707 25,915 --------- -------- -------- Total long-term obligations 221,621 291,786 322,037 Less current portion (54,156) (71,623) (62,279) --------- -------- -------- Total long-term obligations $ 167,465 $220,163 $259,758 ========= ======== ========
Future annual maturities of the Company's long-term notes payable for the years subsequent to March 31, 1999 are as follows: 2000 $ 71,623 2001 77,177 2002 58,134 2003 55,149 2004 29,703 -------- Total $291,786 ======== 6. SHAREHOLDER'S EQUITY Common Stock In November 1997, the Board of Directors approved a 250-for-1 split of the outstanding shares of common stock. All share amounts in these financial statements have been adjusted to give retroactive effect to the stock split. Stock Option Plan In November 1997, the Board of Directors adopted the 1997 Equity Incentive Plan (the "Plan"). Under the Plan, the Company may grant options to purchase up to 602,026 shares of the Company's common stock to employees, officers, directors, and consultants at prices not less than the fair market value (as determined by the Board of Directors) at the date of grant for incentive stock options and not less than 90 percent of the fair market value at the date of grant for nonqualified stock options. During fiscal 1999, the Company granted options of 405,658 shares of common stock to certain employees of the Company. These options expire ten years from the date of grant and vest over a four-year period, 25 percent after the first year and ratably each subsequent month for the balance of the four years. Vested options must be exercised within 45 days of termination of employment. F-12
Options Outstanding ------------------------- Options Exercise Available Price for Grant Shares Per Share ---------- -------- -------------- Balance, April 1, 1997 -- Authorized 602,026 Balance, March 31, 1998 602,026 Granted (405,658) 405,658 $0.50 to $2.50 ---------- -------- -------------- Balance, March 31, 1999 196,368 405,658 $0.50 to $2.50 ======== ======== ==============
In June 1999 (unaudited), the Company issued (i) 5,163,188 shares of Series A Preferred Stock to the holders of all outstanding shares of common stock of CNF; and (ii) options to purchase 836,790 shares of Series A Preferred Stock to the holders of all outstanding options to purchase shares of common stock of CNF in connection with the merger with JLL and JLL ACQUISITIONS. The options to purchase shares of preferred stock have a variable conversion rate to shares of CNF Technologies, Inc. common stock based on financial performance for the year ending March 31, 2000 (Note 13). Subsequent to March 31, 1999, the Company issued 9,591,981 shares of common stock (unaudited). These shares were sold to accredited investors in private placement transactions. The following summarizes certain weighted average information on options outstanding at March 31, 1999:
Options Outstanding Options Exercisable ------------------------------ ----------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price -------- ----------- ------------ -------- ----------- -------- $0.50 376,658 9.07 $0.50 0 $0.50 $2.50 29,000 9.83 $2.50 0 $2.50
The Company applies APB Opinion No. 25 and related interpretations in accounting for its Plan. There was no compensation cost charged against income for its Plan for 1999. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123, the Company's net loss and net loss per share for the year ended March 31, 1999 would have been adjusted to the pro forma amounts indicated below: Net loss - as reported $ (3,074,525) ============ Net loss - pro forma $ (3,093,583) ============ Basic and diluted loss per share - as reported $ (1.23) ============ Basic and diluted loss per share - pro forma $ (1.24) ============ F-13 The following summarizes certain weighted average information on options outstanding at September 30, 1999 (unaudited):
Options Outstanding Options Exercisable ------------------------------------ ---------------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price -------- ----------- ------------ -------- ----------- -------- $0.24 771,812 8.57 $0.24 268,112 $0.24 $1.21 20,628 9.42 $1.21 0 $1.21
Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123, the Company's net loss and net loss per share for the six months ended September 30, 1999 would have been adjusted to the pro forma amounts indicated below: Net loss - as reported $ (2,360,679) ============ Net loss - pro forma $ (2,372,958) ============ Basic and diluted loss per share - as reported $ (0.31) ============ Basic and diluted loss per share - pro forma $ (0.32) ============ The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants: no dividend yield; expected volatility of 35 percent; risk-free interest rate of 5 percent; and an expected life of seven years. Concurrent with the merger discussed in Note 13, the Plan was frozen subsequent to March 31, 1999 and no additional options will be issued. On July 14, 1999 (unaudited), the Company issued a Private Placement Memorandum (the "Private Placement") offering 1,000,000 shares of the Company's common stock at a price of $3.00 per share, subject to an increase of up to an additional 1,000,000 shares to cover over-allotments. The offering period expires on September 14, 1999. However, this date was extended through December 6, 1999 at the election of the Company (Note 13). F-14 7. LEASES The Company's operations utilize leased equipment and facilities. Future minimum lease payments under noncancellable operating leases and capital lease payments as of March 31, 1999 consist of the following: Capital Operating Leases Leases -------- --------- 2000 $23,366 $319,020 2001 23,689 319,020 2002 20,971 2003 17,807 2004 13,162 Thereafter 323 ------- -------- Total 99,318 $638,040 ======== Less - interest (14,356) ------- Present value of minimum capital lease obligation 84,962 Less current portion of capital lease obligation (17,826) ------- Long-term portion of capital lease obligation $67,136 ======= Rent expense was $197,413 and $192,634 for the six months ended September 30, 1999 and 1998 (unaudited), respectively. Rent expense was $412,567 and $54,371 for the years ended March 31, 1999 and 1998, respectively. 8. INCOME TAXES The (benefit) provision for income taxes for the years ended March 31 consists of the following: 1999 1998 -------- -------- Current: Federal $(45,200) $ 32,122 State 1,535 -------- -------- Total current (45,200) 33,657 Deferred: Federal (9,769) State (2,788) Total deferred (12,557) -------- -------- Total (benefit) provision from income taxes $(45,200) $ 21,100 ======== ======== F-15 A reconciliation of the (benefit) provision for income taxes and the amounts that would be computed using federal statutory tax rates are as follows:
September 30, March 31, ---------------------------- 1999 1999 1998 --------- ----------- -------- (Unaudited) Computed expected tax benefit $(759,854) $(1,060,707) $(19,777) State income taxes - net of federal benefit (827) Nondeductible expenses and other credits 37,982 (94,618) Change in valuation allowance 759,854 977,525 136,322 --------- ----------- -------- Total $ -- $ (45,200) $ 21,100 ========= =========== ========
The following summarizes the effect of deferred income tax items and the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
September 30, March 31, --------------------------- 1999 1999 1998 ---------- ----------- --------- (unaudited) Net operating loss $1,773,635 $ 1,013,781 Credit carryforwards 127,746 127,746 $ 106,873 Temporary differences: Sales returns 65,000 65,000 42,000 Depreciation (92,680) (92,680) (12,551) ---------- --------- --------- Total 1,873,701 1,113,847 136,322 Valuation allowance (1,873,701) (1,113,847) (136,322) ---------- ----------- --------- Total $ -- $ -- $ -- ========== =========== =========
The valuation allowance is maintained against deferred tax assets as a result of uncertainties concerning the Company's future ability to realize the benefits of such deferred tax assets. 9. RELATED PARTY TRANSACTIONS In February 1997, the Company's President borrowed $195,000 from the Company under a note payable due in full with interest on February 14, 2002. This notes interest rate was 8 percent per annum. At March 31, 1999, the balance was paid in full. The Company's President loaned the Company $39,000 at an interest rate of 10 percent on August 19, 1998. The balance of this note was $22,551 as of March 31, 1999. At September 30, 1999, the balance was paid in full. The Company's Chief Financial Officer borrowed funds during the fiscal year ended March 31, 1999 totaling $9,700. The note bears interest at an interest rate of 8.5 percent per annum. Payments are due monthly with the balance to be paid in full as of November 5, 2000. The balance of the note as of March 31, 1999 and September 30, 1999, including interest, was $9,906 and $7,609, respectively. The Company leased its California facility from its President. For the years ended March 31, 1999 and 1998, rent expense for such lease was $34,000 and $42,800, respectively. F-16 10. EMPLOYEE BENEFIT PLAN In January 1999, the Company adopted a defined contribution plan under Section 401(k) of the Internal Revenue Service Code covering all eligible employees (the "401(k) Plan"). Eligible participants may contribute up to 15 percent of their total compensation. Participants will be immediately vested in their personal contributions and over a six-year period for amounts contributed by the Company. The Company did not make any matching contributions to the 401(k) Plan for the fiscal year ended March 31, 1999 or the six months ended September 30, 1999. 11. BUSINESS SEGMENTS The Company's only business activity is the manufacture and sale of peripheral devices for laptop computers. Therefore, the Company currently operates within one business segment. Two customers accounted for 84 percent of revenues for the six months ended September 30, 1999 (Customer E accounted for 51 percent and Customer C for 33 percent). Three customers accounted for 72 percent of revenues for the six months ended September 30, 1998 (Customer A accounted for 32 percent, Customer B for 21 percent and Customer D for 19 percent). Two customers accounted for 99 percent of accounts receivable (Customer E accounted for 68 percent and Customer C for 31 percent) at September 30, 1999 (unaudited). Four customers accounted for 65 percent of revenues for the year ended March 31, 1999 (Customer A accounted for 22 percent, Customer B for 16 percent, Customer C for 14 percent, and Customer D for 13 percent of revenue). One customer accounted for 13 percent of revenues for the year ended March 31, 1998. Export sales accounted for 10 percent and 17 percent of revenues for the years ended March 31, 1999 and 1998, respectively. Two customers accounted for 81 percent (Customer C accounted for 48 percent and Customer E for 33 percent) and three customers accounted for 45 percent of accounts receivable (Customer F accounted for 27 percent, Customer G for 18 percent, and Customer H for 13 percent) at March 31, 1999 and 1998, respectively. 12. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal matters that management considers to be in the normal course of business. In management's opinion, all matters will be settled without material effect on the Company's financial position or results of operations. 13. SUBSEQUENT EVENTS On April 16, 1999, the Company entered into a definitive agreement to merge with JLL Ventures (Delaware) Corp., a Delaware corporation, ("JLL") and JLL ACQUISITIONS CORP., a Delaware corporation and wholly-owned subsidiary of JLL ("JLL ACQUISITIONS") (the "Merger"). JLL was an inactive public company. In connection with the Merger, all shares of the Company are to be exchanged for shares of JLL. JLL held $1,000,000 in cash at the time of the Merger. The Company will assume no additional liabilities as a result of its merger with JLL. Furthermore, JLL is required by the merger agreement to assist the Company in obtaining additional financing in the form of bridge loans from unrelated parties within 30 days after the Merger closing date. As a result of the Merger, the shareholders of the Company will maintain a controlling interest in the Company and the Merger will be accounted for as a "reverse acquisition." Accordingly, for financial statement presentation purposes, the Company is viewed as the continuing entity and the related business combination is viewed as a recapitalization of the Company, rather than an acquisition by JLL. F-17 Each of the Company's shareholders will exchange each share of Company's common stock for 2.06 shares of JLL's preferred stock. The preferred stock has voting rights and has a variable conversion rate to common stock of CNF Technologies, Inc. based on financial performance for the year ending March 31, 2000: Financial Performance Targets with Preferred Stock Conversion Rates - ------------------------------------------------------------------------------- Conversion Target Rate - ------ ---------- Gross revenues of $20.25 million and net income of $810,000 1.50 Gross revenues of $34.43 million and net income of $1.38 million 1.75 Gross revenues of $45.9 million and net income of $1.84 million 2.00 Gross revenues of $57.6 million and net income of $2.30 million 2.25 The Financial Performance Targets are to be derived from the results of operations reflected within the Company's audited financial statements for the fiscal year ending March 31, 2000. Prior to that time, preferred stock can be converted by the holder to common stock on a one-to-one basis. Should the Company not meet the financial performance targets, the preferred stock will automatically convert to common stock on a one-to-one basis. In any event, all shares of preferred stock shall be converted to shares of common stock no later than June 30, 2000. Subsequent to March 31, 1999 and prior to the closing of the Merger, in accordance with the merger agreement, the Company received $975,000 in bridge loans from four unrelated parties, unsecured, with interest at 10 percent, payable upon the earlier of (i) completion of an unsecured $3,000,000 financing transaction by the Company or (ii) one year from the date of the note (maturities range from April 7, 2000 to May 12, 2000). Also, prior to the closing of the Merger, in accordance with the merger agreement, the Company received $700,000 in bridge loans from four unrelated parties, unsecured, with interest at 10 percent, payable upon the earlier of (i) completion of an unsecured $4,000,000 financing transaction by the Company or (ii) one year from the date of the note (maturities range from May 26, 2000 to June 4, 2000). Holders of the notes have the right to convert the notes to shares of the Company's stock at a price equal to a 25 percent discount from the offering price in a subsequent offering of the Company's stock, should one occur. On June 8, 1999, the Merger was completed and JLL ACQUISITIONS changed its name to CNF Mobile Solutions Inc. On June 11, 1999, JLL changed its name to CNF Technologies, Inc. In connection with the anticipated completion of the Merger, the lines of credit maturity dates were extended under a loan modification agreement. Per the loan modification agreement, on June 7, 1999 and on June 30, 1999, a $100,000 principal-only installment shall be due and payable. In addition, a $100,000 principal-only payment shall be due and payable upon execution of the loan modification agreement. Interest-only installments will be due and payable on the tenth day of each month. The remaining balance on the lines of credit will be due and payable on July 31, 1999. On June 4, 1999, in accordance with the loan modification agreement, the Company made the required $100,000 principal-only payment, as well as the $100,000 principal payment due on execution of the loan modification agreement. The Company made an additional principal only payment in August 1999 in the amount of approximately $152,000, and negotiated a second loan modification agreement extending the maturity date to September 30, 1999 (unaudited). F-18 Event Subsequent to the Interim Period Ended September 30, 1999 (unaudited) On October 6, 1999, the Company paid the final installment on its lines of credit. During October and November 1999, the Company converted $1,704,164 of bridge loans ($1,675,000 principal amount and $29,164 of interest) for 1,019,582 shares of common stock. On November 15, 1999, the Company entered into an agreement with Paul Charles and Synergy Group International, Inc. a principal stockholder of the Company. The agreement amended certain provisions of the Merger. Specifically, Mr. Charles agreed to resign his position as the Chief Executive Officer and President of the Company and to surrender 1,000,000 of the shares of Series A Preferred Stock issued to him in the Merger, all of which were being held in escrow to secure Mr. Charles' indemnification obligation under the Merger. On November 26, 1999, the Company conducted an initial closing of the Private Placement pursuant to which the Company obtained gross proceeds of $2,000,000 from the sale of 666,667 shares of common stock. In connection with the Private Placement, the Company issued warrants to purchase 200,000 shares of common stock, all of which are currently exercisable. In addition, the Company agreed to issue warrants to the Company's placement agent to purchase up to an additional 200,000 shares of common stock, which will be immediately exercisable. On November 26, 1999, the Company issued 66,667 of these warrants. All warrants have an exercise price of $3.00 and expire in November 2004. * * * * * F-19 Until _________ (ninety (90) days after the date of this Prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 1,756,624 Shares [LOGO] CNF TECHNOLOGIES, INC. Common Stock ------------------- P R O S P E C T U S ------------------- December __, 1999 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Certificate of Incorporation and Bylaws reflect the adoption of the provisions of Section 102(b)(7) of the Delaware General Corporation Law (the "GCL"), which eliminate or limit the personal liability of a director to the Company or its stockholders for monetary damages for breach of fiduciary duty under certain circumstances. If the GCL is amended to authorize corporate action further eliminating or limiting personal liability of directors, the Certificate of Incorporation provides that the liability of the director of the Company shall be eliminated or limited to the fullest extent permitted by the GCL. The Company's Certificate of Incorporation and Bylaws also provide that the Company shall indemnify any person, who was or is a party to a proceeding by reason of the fact that he is or was a director, officer, employer or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees) actually and reasonably incurred by him in connection with such proceeding if he acted in good faith and in a manner he reasonably believed to be or not opposed to the best interests of the Company, in accordance with, and to the full extent permitted by, the GCL. The determination of whether indemnification is proper under the circumstances, unless made by the Court, shall be determined by the Board of Directors. Reference is made to Item 28 for the undertakings of the Registrant with respect to indemnification of liabilities arising under the Securities Act of 1933, as amended (the "Act"). ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is a list of the estimated expenses to be incurred by the Registrant in connection with the preparation and filing of this Registration Statement. SEC Registration Fee.......................................... $ 3,027 Printing and Engraving........................................ $20,000 Accountants' Fees and Expenses................................ $15,000 Legal Fees and Expenses....................................... $30,000 Other Offering Expenses....................................... $ 5,000 ------- Total.................................................... $73,027 ======= II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Recent Sales of Unregistered Securities 1. On November 26, 1999, the Company issued 666,667 shares of Common Stock at $3.00 per share raising gross proceeds of $2,000,000. The Company paid brokerage commissions and non accountable expense equal to $260,000 together with warrants to purchase 66,667 shares of Common Stock at an exercise price of $3.00 per share to a registered broker-dealer. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Regulation D promulgated thereunder to the following accredited investors: Name Number of Shares ---- ---------------- Donald Parvin & Philip Parvin JTROS 8,333 Pueblo Properties L.L.C. 8,333 Daljit S. Buttar 108,333 Michael K. Havrilesko 83,333 Myron H. Reinhart 83,333 Steve Katz & Becky Katz JTROS 16,667 David Henry Sutton 8,333 Neil Druks 16,667 Allen Jacobson 16,667 Jacob Roth & Yentil Roth JTROS 16,667 Amro International S.A. 100,000 Balmore Funds 83,334 Austost Anstalt Schaan 83,334 Frederick G. Heumann 33,333 ------- TOTAL 666,667 2. Effective November 26, 1999, the Company issued 419,583 shares of Common Stock in consideration of the cancellation of $675,000 of outstanding indebtedness, $29,164 of accrued interest and additional equity incentives. These securities were sold to accredited investors in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions to the following accredited investors: Name Number of Shares ---- ---------------- Enrico E. DiVito, DDS 30,918 Michael G. Glynn 75,000 Allen and Jane Kelsey 30,890 Lindzon Capital Partners 126,562 Blair Portigal 61,822 Harold Rubenstein 63,151 Rochelle and Shelden Terman 31,240 ------- TOTAL 419,583 II-2 3. On November 2, 1999, the Company issued 600,000 shares of Common Stock in consideration of the cancellation of $1,000,000 of outstanding indebtedness and additional equity incentives and 75,000 shares of Common Stock in consideration of the advance of a bridge loan in the principal amount of $500,000. These securities were sold to accredited investors in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions to the following accredited investor: Name Number of Shares ---- ---------------- Meris Capital Partners, L.P. 600,000 Imperium Capital Corporation 75,000 ------- Total 675,000 4. During July 1999, the Company issued 359,081 shares of Common Stock in consideration of the cancellation of $547,253 of outstanding indebtedness. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions to the following accredited investors: Name Number of Shares ---- ---------------- Larry Kaplan 347,574 Keith and Carol Henrichsen 11,507 5. During July and August 1999, the Company issued 65,000 shares of Common Stock together with promissory notes in the aggregate principal amount of $650,000. These securities were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions to the following accredited investors:
Principal Amount Number Name of Notes of Shares ---- ---------------- --------- Daljit S. Battar $150,000 15,000 Creative Business (Asia Online Publications) 100,000 10,000 Enrico E. Divito DDS 50,000 5,000 Allen and Jane Kelsey 50,000 5,000 Kerzner Revocable Trust 50,000 5,000 Larfer Family Trust 100,000 10,000 Blair Portigal 100,000 10,000 Myron Reinhart 50,000 5,000 -------- ------ TOTAL $650,000 65,000
6. After the completion of the Merger, during June 1999, the Company issued 167,500 shares of Common Stock in connection with the issuance of the Promissory Notes in the aggregate principal amount of $1,675,000. These shares were sold in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions. These shares were issued to the following accredited investors in consideration of II-3 the substantial additional risk undertaken by such investors by advancing unsecured funds to CNF, Inc. prior to completion of the Merger:
Principal Amount Number Name of Notes of Shares ---- ---------------- --------- Jim Caljeen $ 100,000 10,000 Michael G. Glynn 125,000 12,500 Helen and Jerry Holden 50,000 5,000 Lanny Lahr 100,000 10,000 Meris Capital Partners, LP 1,000,000 100,000 Harold Rubenstein 250,000 25,000 Rochelle and Sheldon Terman 50,000 5,000 ---------- -------- TOTAL $1,675,000 167,500
7. On June 8, 1999, the Company issued 5,163,188 shares of Series A Preferred Stock to the holders of all outstanding shares of Common Stock of CNF, Inc. in connection with the Merger. These shares were issued in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof directly by the Company without payment of underwriting discounts or commissions to the following accredited investors: Name Number of Shares ---- ---------------- Paul Charles 5,157,000 Howard Lindzon 6,188 8. During May and June 1999, the Company issued and sold an aggregate of 8,000,000 shares of Common Stock raising gross proceeds of $1,120,000. These shares were issued to accredited investors in a private placement transaction exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Regulation D promulgated thereunder. This offering was undertaken by the Company without payment of underwriting discounts or commissions prior to the closing of the Merger. At that time the Company was an inactive Company with no assets or liabilities. Investors in such offering were, therefore, subject to a number of risks and uncertainties, including the material contingencies associated with completion of the Merger. Name Number of Shares ---- ---------------- ACA Trading Intermediates 370,000 All Pro Security 65,000 Avalon Financial Services LLC 130,000 Beaumont Investment Holding Ltd. 340,000 Jeff Berman 70,000 Blake Group Inc. 395,000 Boyett Investment Ltd. 318,000 Brookabby Investments Ltd. 5,000 Edmund J. Burgassi 5,000 Capital Growth Trust 175,000 II-4 Name Number of Shares ---- ---------------- Kenny Cook 100,000 Dwyer Investments LP 5,000 EBR Investments 50,000 FAC Enterprises Inc. 292,000 Clifford Feldstein 25,000 Fincord Holding Corp. 425,000 Michele R. Ganz 20,000 Geneco Investment Corp. 578,000 Marvin Gersten 125,000 Michael Glynn 10,000 Godwin Finance Ltd. 400,000 Michael Goldstein 10,000 Carolyn Gordon 5,000 Cathy Graham 45,000 Gunhill Capital Inc. 50,000 Huber Family Trust 12,000 Imperium Capital 175,000 Allan E. Jacobson 15,000 Ron Jaffe 10,000 Jay Josephs 15,000 KAB Investments Inc. 225,000 Robert S. Kant 20,000 Alan and Jan Kelsey 25,000 Kenneth Kirshcenbaum 50,000 Steven Kram 25,000 Jack Leadbeater 100,000 Howard Lindzon 332,500 Lindzon Capital Partners 60,000 Sara L. Marold Bypass Trust 150,000 Vincent J. Marold Exempt Trust 1,000,000 MCZ Corp 48,000 William Meris 15,000 Meris Capital Partners LP 50,000 Anna Maria Mintz 20,000 Carolyn J. Orena 25,000 Robert Perlitz 5,000 Tom Peterson 25,000 RMLH Holding, LLC 120,000 Harold and Beverly Rubenstein 25,000 Lynda Rufo 20,000 Mark Scatterday 45,000 Arthur Van Beuren Seavey 5,000 Seavey Funds Inc. 108,000 Rob Segal 90,000 Michael S. Siegal 35,000 SPH Investments 257,000 Synergy Group 177,500 Patricia Trish Trust 30,000 Troy Funding Corp. 212,000 II-5 Name Number of Shares ---- ---------------- Richard Tully 20,000 Wabering Investment Group Ltd. 400,000 Wexler & Burkhart 30,000 Gordon Douglas Young 10,000 ---------- TOTAL 8,000,000 ITEM 27. EXHIBITS THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 2.1 Agreement and Plan of Merger (the "Merger Agreement") dated April Filed herewith 16, 1999 by and among JLL Ventures (Delaware) Corp., JLL Ventures Acquisition Corp., CNF, Inc. and Paul Charles 2.2 Amendment No. 1 to Merger Agreement dated May 24, 1999 Filed herewith 2.3 Agreement dated November 1, 1999 (resulting in a second amendment Filed herewith to Merger Agreement) 3.1 Certificate of Incorporation Filed herewith 3.2 Certificate of Amendment to Certificate of Incorporation Filed herewith 3.3 Certificate of Designation of Series A Convertible Preferred Stock Filed herewith 3.4 By-Laws, as amended to date Filed herewith 5.1 Opinion of Buchanan Ingersoll Professional Corporation To be filed by amendment 10.1 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith and Paul Charles 10.2 Addendum to Employment Agreement dated November 2, 1999 by and between the Company and Paul Charles 10.3 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith and David Thompson
II-6
Exhibit No. Description Method of Filing ----------- ----------- ---------------- 10.4 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith and R. Daniel Rudich 10.5 Addendum to Employment Agreement dated November 2, 1999 by and Filed herewith between the Company and R. Daniel Rudich 10.6 Employment Agreement dated May 19, 1999 by and between the Company Filed herewith and Frank Layland 10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, the Filed herewith Company, Synergy Group International, Inc. and certain shareholders of the Company (as amended by Exhibit 2.3) 10.8 Escrow Agreement dated June 8, 1999 by and among, inter alia, the Filed herewith Company and Paul Charles (as substantially amended by Exhibit 2.3) 21.1 Subsidiaries of the Registrant Filed herewith 23.1 Consent of Buchanan Ingersoll Professional Corporation Filed under Exhibit 5.1 23.2 Consent of Deloitte and Touche LLP Filed herewith 27.1 Financial Data Schedule Filed herewith
ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: 1. To file, during any period in which offers or sales are being made, 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, as amended; (ii) reflect in the prospectus any facts or events arising after the effective date of the registration statement which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) include any additional or changed material information on the plan of distribution. 2. For the purpose of determining liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 3. To file a post-effective amendment to remove from registration any of the securities being registered which remain unsold at the termination of the offering. 4. 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 foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission 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 a successful defense of any action, suit or proceeding) is asserted by a 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. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized in the City of Scottsdale, Arizona on December 3, 1999. CNF TECHNOLOGIES, INC. By: /s/ David G. Thompson --------------------------------------- Interim Chief Executive Officer and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints DAVID G. THOMPSON his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments (including, without limitation, post-effective amendments) to this Registration Statement and any related Registration Statements filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. II-8 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date - --------- ----- ---- /s/ Paul D. Charles Chairman December 3, 1999 - --------------------------------- Paul D. Charles
II-9 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Merger (the "Merger Agreement") dated April 16, 1999 by and among JLL Ventures (Delaware) Corp., JLL Ventures Acquisition Corp., CNF, Inc. and Paul Charles 2.2 Amendment No. 1 to Merger Agreement dated May 24, 1999 2.3 Agreement dated November 1, 1999 (resulting in a second amendment to Merger Agreement) 3.1 Certificate of Incorporation 3.2 Certificate of Amendment to Certificate of Incorporation 3.3 Certificate of Designation of Series A Convertible Preferred Stock 3.4 By-Laws, as amended to date 5.1 Opinion of Buchanan Ingersoll Professional Corporation* 10.1 Employment Agreement dated May 19, 1999 by and between the Company and Paul Charles 10.2 Addendum to Employment Agreement dated November 2, 1999 by and between the Company and Paul Charles 10.3 Employment Agreement dated May 19, 1999 by and between the Company and David Thompson 10.4 Employment Agreement dated May 19, 1999 by and between the Company and R. Daniel Rudich 10.5 Addendum to Employment Agreement dated November 2, 1999 by and between the Company and R. Daniel Rudich 10.6 Employment Agreement dated May 19, 1999 by and between the Company and Frank Layland
Exhibit No. Description ----------- ----------- 10.7 Escrow Agreement dated June 8, 1999 by and among, inter alia, the Company, Synergy Group International, Inc. and certain shareholders of the Company (as amended by Exhibit 2.3) 10.8 Escrow Agreement dated June 8, 1999 by and among, inter alia, the Company and Paul Charles (as substantially amended by Exhibit 2.3) 21.1 Subsidiaries of the Registrant 23.1 Consent of Buchanan Ingersoll Professional Corporation* 23.2 Consent of Deloitte and Touche LLP 27.1 Financial Data Schedule
- --------------- * To Be Filed By Amendment. EX-2.1 2 AGREEMENT AND PLAN OF MERGER Exhibit 2.1 AGREEMENT AND PLAN OF MERGER BY AND AMONG JLL VENTURES (DELAWARE) CORP. JLL VENTURES ACQUISITION CORP. CNF, INC. AND PAUL CHARLES, THE PRINCIPAL SHAREHOLDER OF CNF, INC. Dated: April 16, 1999 TABLE OF CONTENTS ARTICLE I: MERGER OF CNF WITH AND INTO JLL AND RELATED MATTERS.................1 1.1 The Merger........................................................1 1.2 Conversion of Stock; Conversion of Outstanding Options............2 1.3 Merger Consideration..............................................3 1.4 Escrow Agreements.................................................4 1.5 Additional Rights; Taking of Necessary Action; Further Action.....5 1.6 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..........................................9 3.1 CNF Corporate Action; Shareholder Consent.........................9 3.2 Acquiror and JLL Corporate Action.................................9 ARTICLE IV: REPRESENTATIONS AND WARRANTIES.....................................9 4.1 Representations and Warranties of CNF and the Shareholder.........9 4.2 Representations and Warranties of Acquiror and JLL...............21 ARTICLE V: AGREEMENTS OF THE PARTIES..........................................24 5.1 Access to Information............................................24 5.2 Confidentiality; No Solicitation.................................25 5.3 Interim Operations...............................................27 5.4 Consents.........................................................29 5.5 Registration Statements..........................................29 5.6 All Reasonable Efforts...........................................29 5.7 Public Announcements.............................................30 5.8 Notification of Certain Matters..................................30 5.9 Expenses.........................................................30 5.10 Financial Statements............................................30 5.11 Lock-Up.........................................................31 5.12 Bridge Notes....................................................31 5.13 Private Placement...............................................31 5.14 Documents at Closing............................................32 5.15 Prohibition on Trading in Acquiror Stock........................33 5.16 Reservation of Shares...........................................33 5.17 Acquiror Post-Closing Actions...................................33 5.18 Acknowledgment of Approvals; Written Consent of Stockholders....33 5.19 Matters of Corporate Governance.................................33 5.20 Grant of Proxy..................................................34 i 5.21 Production of Schedules and Exhibits............................34 ARTICLE VI: CONDITIONS TO CONSUMMATION OF THE MERGER..........................35 6.1 Conditions to Obligations of CNF and the Shareholder.............35 6.2 Conditions to Acquiror's Obligations.............................36 ARTICLE VII: INDEMNIFICATION..................................................38 7.1 Indemnification..................................................38 ARTICLE VIII: TERMINATION.....................................................40 8.1 Termination......................................................40 8.2 Notice and Effect of Termination.................................40 8.3 Extension; Waiver................................................41 8.4 Amendment and Modification.......................................41 ARTICLE IX: MISCELLANEOUS.....................................................41 9.1 Survival of Representations and Warranties; Remedies.............41 9.2 Notices..........................................................42 9.3 Agreement; Assignment............................................42 9.4 Binding Effect; Benefit..........................................43 9.5 Headings.........................................................43 9.6 Counterparts.....................................................43 9.7 Governing Law....................................................43 9.8 Arbitration......................................................43 9.9 Severability.....................................................44 9.10 Release and Discharge...........................................44 9.11 Certain Definitions.............................................45 ii EXHIBITS AND SCHEDULES ---------------------- EXHIBITS - -------- Exhibit 1.2(c) - Form of Acquiror Option Agreement Exhibit 1.3(a) - Certificate of Designation of Series A Convertible Preferred Stock Exhibit 1.4(a) - Form of Acquiror Escrow Agreement Exhibit 1.4(b) - Form of Shareholder Escrow Agreement Exhibit 2.2(a)(ii) - Form of Investment Letter Exhibit 5.5(b) - Form of Registration Rights Agreement Exhibit 5.20 - Form of Voting Proxy SCHEDULES - --------- 1.1(c)(vii) Officers and Directors of the Surviving Corporation 1.2(c) Schedule of Option Holders 1.3(b) Allocation of Merger Consideration 4.1(a) Articles of Incorporation and Bylaws of CNF 4.1(c) Consents 4.1(c)(ii) Conflicts 4.1(d) Capitalization and Share Ownership 4.1(e) Financial Statements 4.1(f)(i) Location of Leased Property 4.1(f)(ii) Written Notice 4.1(g) No Contingent Liabilities 4.1(h) Litigation 4.1(i) Taxes 4.1(j)(i) Employee Benefit Plan 4.1(j)(ii) Employee Benefit Plan (for which CNF has obligation to contribute) 4.1(j)(iv) Material Employment Arrangements, Contracts, etc. 4.1(k) Insurance Coverage 4.1(n) Personal Property 4.1(q) Material Contracts 4.1(o) Intellectual Property 4.1(p) Accounts Receivable 4.1(r)(i) Labor Relations; Employees 4.1(r)(ii) List of Employees 4.1(r)(v) Strikes, grievance proceedings, arbitrations, etc. 4.1(r)(vii) Employment and Benefit Arrangements 4.1(s) Suppliers and Clients iii 4.1(t) Conflicting Interests 4.1(u) Absence of Certain Changes or Events 4.2(a) Certificate of Incorporation and Bylaws of Acquiror 4.2(e) Acquiror Financial Statements 4.2(g) Contingent Liabilities 4.2(h) Litigation 4.2(k) Material Contracts 9.10 Shareholder Release and Discharge iv AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is made and entered into as of April __, 1999, by and among JLL VENTURES INC., a (DELAWARE) CORP., a Delaware corporation, ("Acquiror"), JLL ACQUISITION CORP., a Delaware corporation and wholly owned subsidiary of Acquiror ("JLL"), CNF, INC., a California corporation ("CNF"), and Paul Charles, an individual residing at 10931 East Laurel Lane, Scottsdale, AZ 85260___________________________________, and the principal shareholder of CNF ("Charles" or "Shareholder"). Recitals WHEREAS, Acquiror and CNF have determined that it is in the best interests of their respective shareholders for CNF to merge with and into JLL upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, the respective Boards of Directors of Acquiror, CNF and JLL 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 MERGER OF CNF WITH AND INTO JLL AND RELATED MATTERS 1.1 The Merger. (a) Upon the terms and conditions of this Agreement, at the "Effective Time" (as defined herein), CNF shall be merged with and into JLL (the "Merger") in accordance with the provisions of the General Corporation Law of the State of Delaware (the "DGCL") and the California General Corporation Law ("CGCL"), the separate corporate existence of CNF shall cease and JLL shall continue as the surviving corporation under the laws of the State of Delaware. (b) The Merger shall become effective upon the later of (i) the filing of a certificate of merger with the Secretary of State of the State of Delaware (the "Certificate of Merger"); and (ii) the filing of articles of merger (the "Articles of Merger") with the Secretary of State of the State of California in accordance with the provisions of Section 252 of the DGCL and Sections 1103 and 1108 of the CGCL, respectively, and the confirmation by the Certificate of Merger and the Articles of Merger that the Merger is effective as of such filing date. The date and time when the Merger shall become effective is referred to herein as the "Effective Time." (c) At the Effective Time: (i) JLL shall continue its existence under the laws of the State of Delaware as the surviving corporation as "CNF, Inc."; (ii) the separate corporate existence of CNF shall cease; (iii) all rights, title and interests to all assets, whether tangible or intangible and any property or property rights owned by CNF shall be allocated to and vested in JLL as 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 CNF shall be allocated to JLL as 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 JLL as the surviving corporation, shall be liable therefor; (iv) the Certificate of Incorporation of the surviving corporation shall be the Certificate of Incorporation of JLL as in effect immediately prior to the consummation of the Merger; (v) Each of JLL and CNF 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 Secretary of State of the State of California, the Articles of Merger, with such amendments thereto as the parties hereto shall deem mutually acceptable; (vi) the Bylaws of the surviving corporation shall be the Bylaws of JLL as in effect immediately prior to the consummation of the Merger, and shall continue in full force and effect until thereafter amended as provided by law and such Bylaws; and (vii) the officers and directors of JLL shall resign upon the Effective Time and the officers and directors of the surviving corporation shall consist of those individuals identified on Schedule 1.1(c)(vii), and such persons shall serve in such positions for their respective terms provided by law or in the Bylaws of the surviving corporation and until their respective successors are elected and qualified. 1.2 Conversion of Stock; Conversion of Outstanding Options. (a) Conversion of Stock. At the Effective Time: (i) the shares representing 100% of the issued and outstanding common stock, no par value per share, of CNF ("CNF Common Stock") as of the Closing shall, by virtue of the Merger and without any action on the part of Charles, be converted into and represent the right to receive, and shall be exchangeable for the merger consideration identified at Section 1.3 hereafter (the "Merger Consideration"); 2 (ii) each share of capital stock of CNF 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; (iii) each share of Common Stock of CNF 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 CNF of shares of its Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, certificates for shares of CNF Common Stock that were outstanding immediately prior to the Effective Time, shall be delivered to CNF, they shall be canceled and exchanged for the consideration to be received therefor in connection with the Merger as provided in this Agreement. (c) Conversion of Outstanding Options. (i) As of the date of the Closing, there will be outstanding options, warrants or other rights to purchase an aggregate of 405,658 shares of CNF Common Stock or approximately 13.96% of the outstanding shares of CNF Common Stock on a fully diluted basis (collectively, the "CNF Options"). At the Effective Time, holders of the CNF Options shall be entitled to receive, in exchange therefor, options to purchase that number of shares of common stock, $.0001 par value per share, of Acquiror ("Common Stock") equal to 13.96% of the total number of shares of Common Stock issuable upon conversion of the Preferred Shares (as that term is defined in Section 1.3(a)). Specifically, immediately prior to the Effective Time, each holder of a CNF Option identified on Schedule 1.2(c) shall surrender to the Acquiror for cancellation any certificate or agreement evidencing a CNF Option and receive in exchange therefor, an Acquiror option ("Acquiror Option"), on terms, and for exercise prices substantially similar to the CNF Options being exchanged thereof. Each Acquiror Option shall be evidenced by a written option agreement issued by Acquiror in the form attached hereto as Exhibit 1.2(c). (ii) The Shareholder shall assume responsibility for the issuance of Common Stock upon exercise, if at all, of the Acquiror Options such that upon any exercise thereof, the Shareholder shall surrender for cancellation that number of shares of Common Stock equal to the number of shares issuable upon exercise of such Acquiror Option. 1.3 Merger Consideration. (a) Subject to the provisions of Section 1.4(b) hereafter, the Merger Consideration, consisting of the total purchase price payable to the holders of 100% of the outstanding CNF Common Stock (the "CNF Shareholders") in connection with the acquisition by merger of CNF, shall be delivered and shall consist exclusively of 6,000,000 newly issued shares of Series A Convertible Preferred Stock, $.0001 par value per share, of Acquiror (the "Preferred Shares"). The Preferred Shares shall be convertible at the option of the holder thereof into shares of Common Stock of Acquiror and have those rights, preferences and designations set forth in 3 that certain Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock (the "Certificate Of Designation"), a true and correct copy of which is attached hereto and made a part hereof as Exhibit 1.3(a). (b) The Merger Consideration shall be allocated among the CNF Shareholders in the proportion of their share ownership of the outstanding shares of CNF Common Stock at the Closing 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 Preferred Shares 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 (i) be "restricted securities" pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended (the "Securities Act"); and (ii) be subject to the lock-up provisions set forth in Section 5.11 hereof. 1.4 Escrow Agreements. (a) Acquiror Shares to be Placed Into Escrow. Upon Closing, certain historic shareholders of Acquiror (the "Historic Acquiror Shareholders") shall place an aggregate of 4,000,000 shares of Common Stock (the "Acquiror Escrow Shares") into escrow pursuant to the terms of the Escrow Agreement attached hereto as Exhibit 1.4(a) (the "Acquiror Escrow Agreement"). The Acquiror Escrow Shares shall secure the Historic Acquiror Shareholders' obligations under Section 5.13(a) hereof. While retained in escrow, the beneficial owners of the Acquiror Escrow Shares shall retain full voting rights with respect to any such Acquiror Escrow Shares. (b) Shareholder Shares to be Placed Into Escrow. In order to secure the Shareholder's indemnification obligations under Article 7 hereof, 2,000,000 of the Preferred Shares issuable to the Shareholder hereunder (the "Shareholder Indemnification Escrow Shares") shall be placed into escrow pursuant to the escrow agreement attached hereto as Schedule 1.4(b) (the "Shareholder Escrow Agreement"); 1,000,000 of which shall be retained for a period of six (6) months after the Closing and 1,000,000 of which shall be retained for a period of eighteen (18) months after the Closing. Shareholder shall place an additional 850,000 of the Preferred Shares issuable to the Shareholder hereunder (the "Option Escrow Shares" and together with the Shareholder Indemnification Escrow Shares, the "Shareholder Escrow Shares") into escrow pursuant to the Shareholder Escrow Agreement in order to secure the Shareholder's obligations under Section 1.2(c) hereof. The Option Escrow Shares shall be released, if at all, to the Shareholder in accordance with the terms of the Shareholder Escrow Agreement upon the earlier of (A) the expiration of all Acquiror Options; or (B) the exercise of all Acquiror Options. While retained in escrow, the Shareholder shall retain full voting rights with respect to the Shareholder Escrow Shares. 1.5 Additional Rights; Taking of Necessary Action; Further Action. Each of Acquiror, CNF, JLL and the Shareholder, respectively, shall use their best efforts to take all such action as may be necessary and appropriate to effectuate the Merger under 4 the CGCL and DGCL as promptly as possible, including, without limitation, the filing of the Articles of Merger and Certificate of Merger 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. 1.6 No Further Rights or Transfers. At and after the Effective Time, the CNF capital stock outstanding immediately prior to the Effective Time shall cease to provide the holder thereof any rights as a shareholder of CNF, 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 counsel to CNF at 2 North Central Avenue, Suite 1800, Phoenix, Arizona 85004, at 10:00 a.m., local time on (a) the later of: (i) the first Business Day following the day upon which all appropriate Acquiror, JLL and CNF corporate action has been taken in accordance with Section 3 of this Agreement; or (ii) the day on which the last of the conditions precedent set forth in Section 6 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 April 30, 1999 unless such date is extended by the mutual agreement of the parties. 2.2 Closing Transactions. At the Closing, the following transactions shall occur, all of such transactions being deemed to occur simultaneously: (a) CNF and the Shareholder shall deliver, or cause to be delivered, to the Acquiror and JLL, the following documents and shall take the following actions: (i) The CNF Shareholders shall surrender and deliver to Acquiror as the surviving corporation certificates representing all of the issued and outstanding shares of CNF Common Stock; (ii) The CNF Shareholders shall, to the extent necessary to comply with applicable federal and state securities laws, execute and deliver at the Closing a copy of an investment letter in the form attached to this Agreement as Exhibit 2.2(a)(ii) (the "Investment Letter");. 5 (iii) The CNF Options and any certificate or agreement evidencing the CNF Options shall have been surrendered to CNF for cancellation in accordance with Section 1.2(c) hereof; (iv) Any outstanding shareholder agreements relating to the CNF capital stock shall have been terminated and evidence of such termination satisfactory to Acquiror shall have been delivered to Acquiror; (v) CNF and the Shareholder shall execute and deliver, and file or cause to be filed with the Secretary of State of the State of California, Articles of Merger with such amendments thereto as the parties hereto shall deem mutually acceptable; (vi) A certificate shall be executed by an authorized officer of CNF and the Shareholder to the effect that all representations and warranties made by CNF and the Shareholder in this Agreement are true and correct on and as of the Closing, as though originally given to Acquiror and JLL on said date; (vii) A certificate of good standing shall be delivered by CNF and the Shareholder from the Secretary of State of the State of California, dated at or about the Closing, to the effect that such corporation is in good standing under the laws of said state; (viii) An incumbency certificate shall be delivered by CNF signed by all of the officers thereof dated at or about the Closing; (ix) Articles of Incorporation certified by the Secretary of State of the State of California at or about the Closing Date and a copy of the Bylaws of CNF certified by the Secretary of CNF dated at or about the Closing shall be delivered by CNF; (x) Board and shareholder resolutions shall be delivered by the Secretary of CNF dated at or about the Closing authorizing the transactions contemplated by this Agreement; (xi) The Shareholder Escrow Agreement in the form attached hereto as Schedule 1.4(b) shall be executed and delivered by the Shareholder; (xii) The Shareholder Escrow Shares shall be delivered into escrow pursuant to the Shareholder Escrow Agreement; (xiii) CNF and the Shareholder shall deliver those documents deemed adequate and necessary by Acquiror to evidence (i) the consent of Wells Fargo Bank to the 6 transactions contemplated by this Agreement; and (ii) compliance with the terms of Section 6.2(j) hereof, unless otherwise waived by Acquiror; (xiv) Shareholder shall have executed an assignment of intellectual property rights to Acquiror in form and substance satisfactory to Acquiror;. (xv) Shareholder shall execute and deliver the Registration Rights Agreement in the form attached to this Agreement as Exhibit 5.5(b); and (xvi) Each of the parties to this Agreement shall have otherwise executed whatever documents and agreements, provided whatever consents or approvals and taken all such actions as are required under this Agreement. (b) Acquiror will deliver, or shall cause to be delivered, to CNF and the Shareholder, the following documents and shall take the following actions: (i) Subject to Section 1.4(b), Acquiror shall deliver or shall cause to be delivered to the CNF Shareholders certificates evidencing 6,000,000 Preferred Shares in payment of the Purchase Price. 2,850,000 of the Preferred Shares issuable to the Shareholder shall be delivered into escrow pursuant to the terms of the Shareholder Escrow Agreement; (ii) Acquiror shall deliver certificates evidencing the Acquiror Options to the persons and in the amounts set forth on Schedule 1.2(c); (iii) Acquiror shall cause certain shareholders of Acquiror to deliver voting proxies to the Shareholder with respect to an aggregate of 1,600,000 shares of Common Stock, in the form attached to this Agreement as Exhibit 5.20; (iv) JLL 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 with such amendments thereto as the parties hereto shall deem mutually acceptable; (v) A certificate shall be 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 CNF and the Shareholder on said date; (vi) A certificate shall be executed by an authorized officer of JLL to the effect that all representations and warranties of JLL under this Agreement are true and correct as of the Closing, as though originally given to CNF and the Shareholder on said date; (vii) A certificate of good standing shall be delivered by Acquiror from the Secretary of State of the State of Delaware dated at or about the Closing that Acquiror is in good standing under the laws of said state; (viii) A certificate of good standing shall be delivered by JLL from the Secretary of State of the State of Delaware dated at or about the Closing that JLL is in good standing under the laws of said state; 7 (ix) An incumbency certificate shall be delivered by Acquiror signed by all of its officers dated at or about the Closing; (x) An incumbency certificate shall be delivered by JLL signed by all of its officers dated at or about the Closing; (xi) Certificate of Incorporation of Acquiror certified by the Secretary of State of the State of Delaware 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 JLL certified by the Secretary of State of the State of Delaware at or about the Closing Date and a copy of the Bylaws of JLL certified by the Secretary of JLL dated at or about the Closing; (xiii) Certified Board resolution shall be delivered by the Secretary of Acquiror dated at or about the Closing authorizing the transactions contemplated by this Agreement; (xiv) Certified Board and shareholder resolutions shall be delivered by the Secretary of JLL dated at or about the Closing authorizing the transactions contemplated by this Agreement; (xv) Acquiror will execute and deliver and cause the Historic Acquiror Shareholders to execute and deliver the Escrow Shares pursuant to the Escrow Agreement in, the form attached to this Agreement as Exhibit 1.4(a); (xvi) Cause the Historic Acquiror Shareholders to deliver the Acquiror Escrow Shares (4,000,000 shares of Acquiror Common Stock) into escrow pursuant to the Acquiror Escrow Agreement; (xvii) Each of the officers and directors of Acquiror shall have tendered their resignation in form and substance satisfactory to CNF and the Shareholder; (xviii) Acquiror shall execute and deliver the Registration Rights Agreement in the form attached to this Agreement as Exhibit 5.5(b); and (xix) 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. 8 ARTICLE III CERTAIN CORPORATE ACTION 3.1 CNF Corporate Action; Shareholder Consent. (a) CNF, acting through its Board of Directors, shall, in accordance with applicable California law, its Articles of Incorporation and Bylaws obtain the unanimous written consent of the CNF Shareholders to this Agreement and the transactions contemplated hereby, including the Merger in accordance with the CGCL. The execution of this Agreement by the Shareholder shall constitute his written consent to the Merger in accordance with Section 604 of the CGCL on and as of the date hereof with respect to all of the shares of CNF Common Stock owned by the Shareholder. (b) CNF 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 JLL Corporate Action. Acquiror and JLL 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 CNF and the Shareholder. As a material inducement to Acquiror and JLL to execute this Agreement and consummate the Merger and other transactions contemplated hereby, CNF and the Shareholder, jointly and severally, hereby make the following representations and warranties to Acquiror and JLL. 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. CNF is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, 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. Except as set forth on Schedule 4.1(a), CNF is duly qualified to do business as a foreign corporation and is in good standing in Arizona and in each other 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 Incorporation and Bylaws of CNF, as amended to date, are attached hereto as Schedule 4.1(a) and are made a part hereof. CNF owns no interest in any other entity and has no subsidiaries. 9 (b) Due Authorization and requisite approvals. (i) This Agreement has been duly authorized, executed and delivered by CNF and the Shareholder and constitutes a valid and binding agreement of CNF and the Shareholder, 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 CNF required under applicable law in order to consummate the Merger will have occurred; and (ii) the Board of Directors of CNF has approved the execution of this Agreement and the consummation of the Merger and related actions 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 Incorporation or Bylaws of CNF; or (ii) except as set forth in Schedule 4.1(c)(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, or, to the best of their knowledge, statute, law, ordinance, rule or regulation applicable to CNF, or the Shareholder, 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") on any assets of CNF, except such as is not reasonably likely to have a Material Adverse Effect or prevent CNF or the Shareholder 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 CNF in connection with the execution and delivery of this Agreement by CNF and the Shareholder or the consummation by CNF and the Shareholder of the transactions contemplated hereby, except the filing of the Articles of Merger and Certificate of Merger. (d) Capitalization and Share Ownership. As of the Closing, the authorized capital stock of CNF will consist solely of Twenty-Five Million (25,000,000) shares of common stock, no par value per share, of which there will be outstanding 2,503,000 shares of CNF Common Stock, all of which are owned by the shareholders identified on Schedule 1.3(b). By his signature at the end hereof, the Shareholder has indicated his consent to the Merger and the transactions contemplated hereby. The outstanding shares of capital stock of CNF 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) and on Schedule 4.1(d), there are outstanding (A) no shares of capital stock or other voting securities of CNF, (B) no securities of CNF convertible into or exchangeable for shares of capital stock or voting securities of CNF and (C) no options, warrants or other rights to acquire from CNF, the Shareholder or any other person, and no obligation of CNF to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of CNF, 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 CNF. The CNF Common Stock to be surrendered in the Merger will be owned of record and beneficially by the Shareholder, free and clear of all liens 10 and encumbrances of any kind and nature, and have not been sold, pledged, assigned or otherwise transferred. There are no agreements (other than this Agreement) to sell, pledge, assign or otherwise transfer such securities. (e) Financial Statements. Attached on Schedule 4.1(e) are unaudited consolidated financial statements of CNF for the fiscal years ended March 31, 1999 and March 31, 1998 (collectively, the "Financial Statements"). Such Financial Statements will have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods reported upon and will fairly present in all material respects the financial position of CNF as of the dates thereof and the results of operations for the periods then ended. The books and records of CNF have been maintained, and the Financial Statements have been prepared, in a manner that will permit an unqualified audit of the Financial Statements in compliance with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (f) Real Properties. (i) CNF currently leases real property at those locations 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). CNF owns or leases no other real estate. None of the leasehold interests held by CNF 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 CNF 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. (ii) Except as described on Schedule 4.1(f)(ii) hereto, neither CNF nor the Shareholder has received any written notice from any governmental entity having jurisdiction over CNF or over any of the real property leased by CNF of any violation by CNF 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 CNF 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 CNF 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), CNF is not a party to any lease, sublease, lease assignment or other agreement for the use or occupancy of any of the leasehold premises wherein CNF 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. 11 (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 CNF 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 Liabilities. Except contained within the Financial Statements or otherwise as described on Schedule 4.1(g), at the Closing, CNF shall have no material liabilities, 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 best knowledge of the Shareholder and CNF, after due inquiry, 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 and as accurately reflected on the books and records of CNF. (h) Litigation. Except as described on Schedule 4.1(h) hereto there is no action, suit, investigation or proceeding (or, to the knowledge of CNF or the Shareholder, any basis therefor) pending against, or to the knowledge of CNF or the Shareholder, threatened against or affecting CNF or any of its properties before any court or arbitrator or any governmental body, agency or official that (i) if adversely determined against CNF, 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. (i) Taxes. Attached hereto on Schedule 4.1(i) are true and correct copies of all federal and state tax returns of CNF for the period of its three (3) most recent fiscal years. Except as disclosed on Schedule 4.1(i), CNF has 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. CNF has 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 financial statements of CNF reflect, or will reflect, adequate reserves for all taxes payable by CNF which have been, or will be, accrued but are not yet due. CNF is not delinquent in the payment of any material tax, assessment or governmental charge. No deficiencies for any taxes have been proposed to CNF, asserted or assessed against CNF. CNF and the Shareholder are 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 CNF, asserting any deficiency in the payment of taxes. All taxes which CNF is 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 CNF nor any member of any affiliated or combined group of which CNF 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 CNF except Encumbrances for current taxes not yet due. There are no tax sharing or tax allocation agreements to which CNF is now or ever has been a party. CNF will not be 12 required under Section 481(c) of the Internal Revenue Code of 1986, as amended (the "Code"), to include any material adjustment in taxable income for any period subsequent to the Merger. CNF (a) 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 CNF) and (b) has no liability for the taxes of any person (other than CNF) 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) ERISA. (i) Schedule 4.1(j)(i) identifies each "employee benefit plan," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is subject to any provision of ERISA, and either (i) is maintained, administered or contributed to by CNF or any affiliate (as defined below), (ii) covers any employee or former employee of CNF or any affiliate or (iii) under which CNF or any affiliate has any liability. Copies of such plans and, if applicable, related trust agreements) and all amendments thereto and any written interpretations thereof have been furnished to Acquiror, together, if applicable, with (A) the most recent annual reports (Form 5500 including, if applicable, Schedule B thereto) prepared in connection with any such plan and (B) the most recent actuarial valuation report prepared in connection with any such plan. Such plans are referred to collectively herein as the "Employee Plans." Any Form 5500 for any plan year of any Employee Plan that has not been filed, but for which the filing date has passed on the date of this Agreement, shall be filed prior to the date of the Merger. For purposes of this Section, "affiliate" of any Person means any other Person which, together with such Person, would be treated as a single employer for any purpose under Section 414 of the Code. (ii) Schedule 4.1(j)(ii) identifies all Employee Plans to which CNF currently has any obligation to contribute. CNF is not a party to any multiemployer plan as defined in Section 4001(a) (3) of ERISA ("Multiemployer Plans"), and neither CNF nor any affiliate has any outstanding liability to contribute to any Multiemployer Plan, for delinquent contributions or for withdrawal liability pursuant to Section 4201 of ERISA. (iii) There are no Employee Plans that are intended to be qualified plans under Section 401(a) of the Code, except as may have been shown and identified as such on the list referred to in subparagraphs (i) or (ii) above. Each Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Plan, other than any failure to comply that is not reasonably likely to have a Material Adverse Effect. (iv) Schedule 4.1(j)(iv) identifies each material employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation rights or other forms of incentive compensation or post-retirement insurance, compensation or benefits that is not an Employee Plan and (A) is entered into, maintained or contributed to, as the case may be by CNF or any of its affiliates or (B) covers any employee or 13 former employee of CNF or any of its affiliates or (C) under which CNF or any of its affiliates has liability. Such contracts, plans and arrangements as are described above, copies of all of which have been furnished previously to Acquiror, are referred to collectively herein as the "Benefit Arrangements." Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Benefit Arrangement other than any failure to comply that is not reasonably likely to have a Material Adverse Effect. (v) Neither CNF nor any affiliate has or maintains nor has maintained any Employee Plan or Benefit Arrangement providing post-retirement health or medical benefits in respect of any active or former employee of CNF or any affiliate or former affiliate, except as may be required pursuant to the provisions of COBRA. (k) Insurance Coverage. Schedule 4.1(k) sets forth a list of all CNF key-man life insurance policies and other insurance policies material to the current and proposed business of CNF. CNF maintains insurance covering its assets, business, equipment, properties, operations, employees, officers and directors with such coverage, in such amounts, and with such deductibles and premiums as management believes is adequate and necessary for the operation of its business. All of such policies are in full force and effect and all premiums payable have been paid in full and CNF is in full compliance with the terms and conditions of such policies. Neither CNF nor the Shareholder has 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. Except as set forth on Schedule 4.1(k), 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 CNF pending under any of such policies as to which coverage has been questioned or denied. (l) Compliance with Laws. To the best knowledge of CNF and the Shareholder, CNF is not 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, to the best knowledge of the Shareholder and CNF, CNF has all licenses, permits, certificates and authorizations needed or required for the conduct of business of CNF 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. (m) Investment Banking Fees. There is no investment banker, broker, finder or other similar intermediary, including, but not limited to, Hogan Company and Carriage House LLP which has been retained by, or is authorized by CNF or the Shareholder to act on its or his behalf who might be entitled to any fee or commission from CNF, the Shareholder, Acquiror, JLL or any of their respective affiliates upon consummation of this Merger, the issuance of the Bridge Notes (as defined in Section 5.12 below) or the Private Placement (as defined in Section 5.13 below) irrespective of the amount of proceeds raised by the Private Placement. 14 (n) Personal Property. CNF has good and valid title to all of its personal property, tangible and intangible, reflected on the Financial Statements and to all other personal property owned by it, free and clear of any Encumbrance. CNF is 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. (o) Intellectual Property; Intangible Property. The corporate names of CNF and the trade names and service marks listed on Schedule 4.1(o) are the only names and service marks which are used by CNF in the operation of its business (the "Names and Service Marks"). CNF has not done business and have not been known by any other name other than by its Names and Service Marks. Schedule 4.1(o) also includes all patents and patent applications held by or filed by or on behalf of CNF (collectively, the "Patents"). To the best of its knowledge, CNF owns and has the exclusive right within the states and countries in which it operates, to use all intellectual property presently in use by it and necessary for the operation of its business as now being conducted, which intellectual property includes, but is not limited to, the Patents, any trademarks, trade names, service marks, including the Names and Service Marks, copyrights, trade secrets, proprietary customer lists, inventions, formulas, methods, processes and other proprietary information. Except as set forth on Schedule 4.1(o), there are no outstanding licenses or consents granting third parties the right to use any intellectual property, including any of the Patents, owned by CNF. Except as set forth on Schedule 4.1(o), no royalties or fees are payable by CNF to any third party by reason of the use of any of its intellectual property, including, but not limited to, the Patents. CNF has not received notice of any adversely held patent, invention, trademark, copyright, service mark or tradename of any person, or any claims of any other person relating to any of the intellectual property subject hereto, and to the best knowledge of CNF and the Shareholder, there is no reasonable basis for any such charge or claim. To the best knowledge of CNF and the Shareholder, there is no presently known or threatened use or encroachment of any such intellectual property, including any of the Patents. (p) Accounts Receivable. The accounts receivable of CNF referred to within the Financial Statements constitute valid claims in the full amount thereof against the debtors charged therewith on the books of CNF 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(p), 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. To the best knowledge of the Shareholder, no account debtor has any valid setoff, deduction or defense with respect thereto, and no account debtor has asserted any such setoff, deduction or defense. There are no accounts receivable which arise pursuant to an agreement with the United States Government or any agency or instrumentality thereof. (q) Contracts, Leases, Agreements and Other Commitments. CNF is not a party to or bound by 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 (which do not exceed $100,000 in 15 liabilities or commitments in the aggregate), except for the following (which are hereinafter collectively called the "Material Contracts"): (i) The leases and agreements described on Schedules 4.1(f), 4.1(j)(i) and (ii) and 4.1(r)(i); and (ii) Agreements involving a maximum possible expenditure or obligation on the part of CNF to spend not more than Twenty-Five Thousand Dollars ($25,000) separately or more than Fifty Thousand Dollars ($50,000) in the aggregate. The Material Contracts constitute all of the material agreements and instruments which are necessary and desirable to operate the business as currently conducted by CNF. True, correct and complete copies of each Material Contract described and listed under subsection 4.1(q) are listed on Schedule 4.1(a) and will be made available to Acquiror prior to the date hereof. The term "Material Contract" excludes purchase orders entered into in the ordinary course for personal or inventory which may be returned to the vendor without penalty. All of the Material Contracts are valid, binding and enforceable against the respective parties thereto in accordance with their respective terms. Except as set forth in Schedule 4.1(q), following the Merger, the Acquiror as the surviving entity shall become entitled to all rights of CNF under such of the Material Contracts as if the Acquiror were the original party to such Material Contracts. All parties to all of the Material Contracts have performed all obligations required to be performed to date under such Material Contracts, and neither CNF, and, to the best of its knowledge, nor 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 CNF under any Material Contract.. (r) Labor Relations; Employees. (i) Set forth on Schedule 4.1(r)(i) is a list of: (A) All collective bargaining agreements and other agreements requiring arbitration of employment disputes, and any written amendments thereto, as well as all arbitration awards decided under any such agreements, and all oral assurances or modifications, past practices, and/or arrangements made in relation thereto, to which CNF is a party or by which it is bound; and (B) All employment agreements, and all severance agreements which have not been fully performed, to which CNF is a party or by which it is bound. (ii) Set forth on Schedule 4.1(r)(ii) is a list of all key management employees of CNF, broken down by location, together with their rate of compensation and title. 16 (iii) CNF will deliver to Acquiror true and correct copies of all of the documents referred to on Schedule 4.1(r)(i) hereof and all of the personnel policies, employee and/or supervisor handbooks, procedures and forms of employment applications relating to the employees of CNF. (iv) There is no union representing or purporting to represent any of the employees of CNF, and CNF is not subject to or currently negotiating any collective bargaining agreements with any union representing or purporting to represent the employees of any of the foregoing. (v) Except as set forth on Schedule 4.1(r)(v): (A) There are no strikes, slow downs or other work stoppages, grievance proceedings, arbitrations, labor disputes or representation questions pending or, to the best knowledge of CNF and the Shareholder, threatened; (B) CNF has complied in all material respects with all laws relating to labor, employment and employment practices, including without limitation, any provisions thereof relating to wages, hours and other terms of employment, collective bargaining, nondiscrimination and the payment of social security, unemployment compensation and similar taxes, and CNF is not (1) liable for any arrearages of wages or any taxes or penalties for failure to comply with any of the foregoing or (2) delinquent in the payment of any severance, salary, bonus, commission or other direct or indirect compensation for services performed by any employee to the date hereof, or any amount required to be reimbursed to any employee or former employee; and (C) There are no charges, suits, actions, administrative proceedings, investigations and/or claims pending or threatened against CNF, whether domestic or foreign, before any court, governmental agency, department, board or instrumentality, or before any arbitrator (collectively "Actions"), concerning or in any way relating to the employees or employment practices of CNF, including, without limitation, Actions involving unfair labor practices, wrongful discharge and/or any other restrictions on the right of CNF to terminate its respective employees, employment discrimination, occupational safety and health, and workers' compensation. (vi) There are no express or implied agreements, policies, practices, or procedures, whether written or oral, pursuant to which any employee of CNF is not terminable at 17 will and except as required by law, no employee is entitled to any benefit or to participate in any employee benefit plan of CNF following such termination of employment. (vii) Except as set forth in Schedule 4.1(r)(vii), CNF is not a party to any oral or written (A) agreement with any executive officer or other key employee of CNF (1) the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving CNF of the nature of the transactions contemplated by this Agreement, (2) providing any term of employment or compensation guarantee extending for a period longer than one year, or (3) providing severance benefits or other benefits after the termination of employment of such executive officer or key employee regardless of the reason for such termination of employment; or (B) agreement or plan which will remain in effect after the Closing, including, without limitation, any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. (viii) CNF has not taken any action which requires or, taken together with the transactions contemplated hereby, would require the giving of any notice under the Worker Adjustment Retraining and Notification Act or any comparable state or local law or regulation. (s) Suppliers and Customers. Set forth on Schedule 4.1(s) is a list of the ten largest customers of CNF based on the percentage of revenue represented by those customers for the fiscal year ended March 31, 1999. The relationship of CNF with its suppliers and customers are good commercial working relationships and no material supplier or customer of CNF has canceled, curtailed or otherwise terminated or threatened to cancel or otherwise terminate, his or its relationship with CNF. CNF 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. (t) Conflicting Interests. Except as set forth on Schedule 4.1(t), neither the Shareholder nor any director, officer or employee of CNF nor relative or affiliate of any of the foregoing (i) sells or purchases goods or services from CNF or has any pecuniary interest in any supplier or client of any of the foregoing or in any other business enterprise with which CNF conducts business or with which any of the foregoing is in competition, or (ii) is indebted to CNF except for money borrowed and as set forth on the Financial Statements. (u) Environmental Protection. CNF has not been notified by any governmental authority, agency or third party, and CNF and the Shareholder have no knowledge, of any violation by CNF of any Environmental Statute (as defined below). All registrations by CNF with, licenses from or permits issued by governmental agencies pursuant to environmental, health and safety laws are in full force and effect. The term "Environmental Statutes" means all statutes, ordinances, regulations, orders and requirements of common law concerning discharges to the air, soil, surface water or groundwater and concerning the storage, treatment or disposal of any waste or hazardous substance. To the knowledge of CNF and the Shareholder, there is no 18 hazardous substance at any premises currently or previously occupied by CNF. CNF has not received any notice or any request for information, notice of claim, demand or other notification that it may be potentially responsible with respect to any investigation or clean-up of any threatened or actual release of hazardous substances. To the knowledge of CNF and the Shareholder, all hazardous wastes and substances, if any, have been stored, treated, disposed of and transported in conformance with all requirements applicable to such hazardous substances and wastes. (v) 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(v), between March 31, 1999 (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 CNF, (ii) any entry by CNF into any material commitment or transaction which is not in the ordinary course of business; (iii) any change by CNF 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 CNF, or any direct or indirect redemption, purchase or any other type of acquisition by CNF, or any direct or indirect redemption, purchase or any other type of acquisition by CNF of any shares of its capital stock or any other securities for an aggregate sum not in excess of $5,000, (v) any agreement by CNF, 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 CNF, other than in the ordinary course of business and consistent with past practice and not in excess of $5,000 in the aggregate; or (vii) any execution of any agreement with any executive officer of CNF providing for his or her employment, or any increase in the compensation or in severance or termination benefits payable or to become payable by CNF 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 CNF. Since the date of the Financial Statements, there has not been and to the knowledge of CNF and the Shareholders 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. (w) Investment Intent. The Shareholder represents as follows: (i) The Preferred Shares and the shares of Common Stock issuable upon the conversion thereof (collectively, the "Securities") are not being registered under the Securities Act on the basis of the statutory exemption provided by Section 4(2) thereof and Regulation D promulgated thereunder, relating to transactions not involving a public offering, and 19 the Acquiror's reliance on the statutory exemption thereof is based in part on the representations contained in this Agreement; (ii) The Shareholder (A) has such knowledge and experience in financial and business matters that he is capable of adequately evaluating the risk of investing in the Acquiror; (B) he has been advised that the Securities will not be registered under the Securities Act and accordingly, he may only be able to sell or otherwise dispose of such Securities in accordance with Rule 144 or as otherwise provided in this Agreement; (C) the Securities will be held for investment and not with a view to, or for resale in connection with the public offering or distribution thereof; (D) the Securities will not be sold without registration thereof under the Securities Act (unless such shares are subject to registration or in the opinion of counsel to the Acquiror an exemption from such registration is available), or in violation of any law; (E) the Securities will be subjected to the lock-up provisions set forth in Paragraph 5.11 hereof; and (F) the certificate or certificates representing the Securities will be imprinted with a legend in form and substance substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION, UNDER THE SECURITIES ACT OF 1933, AS AMENDED, BASED ON AN OPINION LETTER OF COUNSEL FOR THE COMPANY OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION." Acquiror is hereby authorized to notify its transfer agent of the status of the Securities and to take such other action including, but not limited to, the placing of a "stop-transfer" order on the transfer agent's books and records to assure compliance with the Securities Act, as amended. (iii) The Shareholder has, either upon the date hereof or before the Closing hereunder, been afforded the opportunity to review and is familiar with all material information regarding Acquiror and has based his decision to invest solely on the information contained therein, and the information contained within this Agreement and the associated exhibits and schedules, and had not been furnished with any other literature, prospectus or other information except as included in such material or this Agreement; (iv) The Shareholder is able to bear the economic risks of an investment in the Securities; and (v) The Shareholder understands that no federal or state agency has approved or disapproved the Securities, passed upon or endorsed the merits of the transfer of such shares set forth within this Agreement or made any finding or determination as to the fairness of such shares for investment. 20 (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 CNF or the Shareholder to Acquiror in connection with the Merger or the other transactions contemplated hereby, or any information furnished by CNF to Acquiror 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 CNF or the Shareholder taken as a whole which may have a Material Adverse Effect on the business, prospects, financial condition or results of operations of CNF or of any of its properties or assets which has not been set forth in this Agreement as an exhibit or schedule hereto. 4.2 Representations and Warranties of Acquiror and JLL. As a material inducement to CNF and the Shareholder to execute this Agreement and to consummate the Merger and the other transactions contemplated hereby, Acquiror and JLL hereby jointly and severally, make the following representations and warranties: (a) Corporate Existence and Power. Each of Acquiror and JLL is presently a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Each of Acquiror and JLL 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. Each of Acquiror and JLL is duly qualified to do business as a foreign 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 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, complete and correct copies of the Certificate of Incorporation and Bylaws of Acquiror and JLL, as amended to date, are attached hereto as Schedule 4.2(a) and are made a part hereof. (b) Due Authorization. This Agreement, and as of the Closing the other agreements described herein to which Acquiror or JLL is a party, has been, or as of the Closing will be, duly authorized, executed and delivered by Acquiror or JLL, as applicable, and constitutes, or as of the Closing will constitute, a valid and binding agreement of Acquiror or JLL, 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 JLL 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 JLL 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 21 or obligation or to a loss or a benefit under, any provision of the Certificate of Incorporation or Bylaws of Acquiror or JLL 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 JLL or their properties or assets or result in the creation or imposition of any Encumbrance on any asset of Acquiror or JLL, except, only as to clause (ii) above, such as is not reasonably likely to have a Material Adverse Effect or prevent Acquiror or JLL from consummating the transactions contemplated by this Agreement. 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 Acquiror or JLL in connection with the execution and delivery of this Agreement or the consummation by them of the transactions contemplated hereby, except the filing of a Certificate of Merger with the Secretary of the State of Delaware and Articles of Merger with the Secretary of State of the State of California. (d) Capitalization. (i) The authorized capital stock of Acquiror consists of 50,000,000 shares of common stock, $.0001 par value per share and 10,000,000 shares of preferred stock, $.0001 par value per share. As of the Closing, the outstanding capital stock of the Acquiror shall consist solely of 9,000,000 shares of common stock, $.0001 par value per share. All shares of capital stock of Acquiror outstanding as of the Closing, will have been duly authorized and validly issued and subject to the Acquiror Escrow Agreement, are fully paid and nonassessable and free of preemptive rights. Subject to Section 1.4(b), upon the issuance of the Preferred Shares, such shares will be duly authorized, validly issued, fully paid and nonassessable shares of preferred stock of Acquiror. Except for the Acquiror Options, Acquiror shall as of the Closing, have no outstanding options, warrants other convertible securities, stock appreciation rights or other rights to acquire securities of Acquiror. At Closing, Acquiror shall deliver to Shareholder a complete and accurate list of the stockholders of Acquiror. (ii) The authorized capital stock of JLL consists solely of 1,000 shares of common stock, par value $.01 per share, of which 100 shares are issued and outstanding and owned of record and beneficially by Acquiror. The outstanding shares of JLL common stock have been duly authorized and validly issued is fully paid and nonassessable and free of preemptive rights. (iii) Acquiror has a sufficient number of its authorized but unissued shares of Common Stock to permit it to issue the number of shares of Common Stock due upon conversion of the Preferred Shares and exercise of the Acquiror Options. (e) Financial Statements. Acquiror shall deliver to CNF and the Shareholder, no less than five (5) days prior to Closing, copies of audited financial statements of Acquiror for the fiscal years ended December 31, 1997, December 31, 1996 and the interim period ended September 30, 1998 (collectively, the "Acquiror Financial Statements"). Such Acquiror Financial Statements will have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods reported upon and will fairly 22 present in all material respects the financial position of Acquiror as of the dates thereof and the results of operations for the periods then ended. (f) Real Properties. Neither Acquiror nor JLL owns or leases any real property. (g) No Liabilities. Except contained within the Acquiror Financial Statements or otherwise as described on Schedule 4.2(g) or agreed to by the parties hereto, at the Closing, Acquiror and JLL shall have no material liabilities, 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 the Acquiror, 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 and as accurately reflected on the books and records of Acquiror. (h) Litigation. Except as described on Schedule 4.2(h) hereto there is no action, suit, investigation or proceeding (or, to the knowledge of Acquiror or JLL any basis therefor) pending against, or to the knowledge of Acquiror or JLL threatened, against or affecting Acquiror, JLL or any of their respective properties before any court or arbitrator or any governmental body, agency or official including, but not limited to, the Securities and Exchange Commission ("SEC") that (i) if adversely determined against Acquiror or JLL, 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. (i) Compliance with Laws. To the knowledge of Acquiror and JLL, neither Acquiror nor JLL is in violation of, nor has either Acquiror or JLL 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) Non-Reporting Company. Certain shares of Common Stock of Acquiror are eligible for trading on the OTC Electronic Bulletin Board by virtue of certain broker-dealers having filed a Form 211 with the National Association of Securities Dealers, Inc. ("NASD") and Acquiror having provided information required under SEC Rule 15(c)2-11 to certain broker dealers and all such information included therein is true and correct in all material respects. Acquiror does not file reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (k) Material Contracts. Except for this Agreement, the agreements evidenced by the exhibits hereto and a registration rights agreement identified on Schedule 4.2(k) (relating to the Registration Statement defined in Section 5.5(b) hereof), Acquiror is not a party to or bound by any oral, written or implied contract, agreement, lease, power of attorney, guaranty, surety arrangement or other commitment involving a maximum possible expenditure or obligation on the part of Acquiror to spend in excess of Twenty-Five Thousand Dollars ($25,000) following the Closing. 23 (l) Taxes. Except as disclosed on Schedule 4.2(i), Acquiror has timely filed all tax returns required to be filed by it or will timely file when due all tax returns required to be filed by it between the date hereof and the Closing. Acquiror has 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. (m) Investment Banking Fees. There is no investment banker, broker, finder or other similar intermediary which has been retained by, or is authorized by Acquiror or JLL to act on its behalf who might be entitled to any fee or commission from CNF, the Shareholder, Acquiror or JLL 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 other financial statement, document or other instrument heretofore or hereafter furnished by Acquiror or JLL to CNF or the Shareholder in connection with the Merger or the other transactions contemplated hereby, or any information furnished by Acquiror or JLL 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 JLL taken as a whole which may have a Material Adverse Effect on the business, prospects, financial condition or results of operations of Acquiror or JLL 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 CNF-Related Information. With respect to information concerning CNF that is made available to Acquiror pursuant to the terms of this Agreement, Acquiror agrees that it shall hold such information in strict confidence, shall not use such information except for the sole purpose of evaluating the Merger and related transactions 24 and shall not disseminate or disclose any of such information other than to its 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 of the confidential nature of such information and directed by Acquiror in writing to treat such information confidentially). If this Agreement is terminated pursuant to the provisions of Section 8, Acquiror shall immediately return all such information, all copies thereof and all information prepared by Acquiror based upon the same; provided, however, that one copy of all such material may be retained by Acquiror's outside legal counsel for purposes only of resolving any disputes under this Agreement. The above limitations on use, dissemination and disclosure shall not apply to information that (i) is learned by Acquiror from a third party entitled to disclose it; (ii) becomes known publicly other than through Acquiror or any party who received the same through Acquiror, provided that Acquiror 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 Acquiror; or (iv) is disclosed with the express prior written consent thereto of CNF. Acquiror 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 CNF and the Shareholder pursuant to the provisions of this Agreement, CNF and the Shareholder 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 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 CNF or the Shareholder 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, CNF and the Shareholder agree to return immediately all such information, all copies thereof and all information prepared by either of them based upon the same; provided, however, that one copy of all such material may be retained by the Shareholder's outside legal counsel for purposes only of resolving any disputes under this Agreement. The above limitations on use, dissemination and disclosure shall not apply to information that (i) is learned by CNF or the Shareholder from a third party entitled to disclose it; (ii) becomes known publicly other than through CNF, the Shareholder or any party who received the same through CNF or the Shareholder, provided that CNF or the Shareholder have no knowledge that the disclosing party was subject to an obligation of confidentiality; (iii) is required by law or court order to be 25 disclosed by CNF; or (iv) is disclosed with the express prior written consent thereto of Acquiror. CNF and the Shareholder agree 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. (c) Nondisclosure. Neither CNF, the Shareholder, Acquiror nor JLL 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 in connection with the transactions contemplated by this Agreement, neither the Shareholder, CNF nor any of their respective affiliates will, prior to the earlier of the Closing or ninety (90) days after the termination of this Agreement 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 CNF 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 CNF 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 CNF 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. CNF or the Shareholder shall promptly notify Acquiror 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 Acquiror terminates this Agreement or fails to close for any reason other than CNF's or Shareholder's failure to satisfy the conditions set forth in Section 6.2, 26 the foregoing provision shall be of no force or effect. 5.3 Interim Operations. During the period from the date of this Agreement and continuing until the Closing: (a) Interim Operations of CNF. CNF 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. CNF shall carry on its 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 its present business organizations, keep available the services of their present officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it; (ii) Dividends; Changes in Stock. CNF 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) Issuance of Securities. Except as contemplated by this Agreement, CNF 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. (iv) Governing Documents. CNF shall not amend its Articles of Incorporation or its Bylaws. (v) No Dispositions. CNF 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 $100,000 in value of such assets. (vi) Indebtedness. CNF 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 $100,000. (vii) Benefit Plans; Etc. CNF 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. 27 (viii) Executive Compensation. CNF 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. (ix) Acquisitions. CNF 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. (x) Tax Elections. CNF shall not make any material tax election or settle or compromise any material federal, state, local or foreign tax liability. (xi) Waivers and Releases. CNF 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. (xii) Other Actions. CNF shall not enter into any agreement or arrangement to do any of the foregoing. CNF 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 JLL. Acquiror and JLL agree (except as expressly contemplated by this Agreement, including any Exhibits and Schedules hereto, or to the extent that CNF and the Shareholder shall otherwise consent) that: (i) Ordinary Course. Acquiror and JLL shall conduct no business activity other than in connection with the transactions contemplated by this Agreement in connection with the Merger. (ii) Dividends; Changes in Stock. Neither Acquiror nor JLL 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) No Dispositions. Neither Acquiror nor JLL shall sell, lease, pledge, encumber or otherwise dispose of, or agree to sell, lease, pledge, encumber or otherwise dispose of, any of its assets that are material, or any other assets except in the ordinary course of business consistent with prior practice. (iv) Placement Activities. Prior to the Closing, Acquiror shall have completed a private placement of shares of Common Stock to accredited investors which, after expenses, yields net proceeds of no less than $1,000,000 to Acquiror. 28 (v) Other Actions. Acquiror shall 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 Consents. Acquiror, CNF and the Shareholder shall cooperate and use their best efforts to obtain, prior to the Closing, all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts as are necessary for the consummation of the transactions contemplated by this Agreement; provided, however, that no loan agreement or contract for borrowed monies shall be repaid and no contract shall be amended materially to increase the amount payable thereunder or otherwise to be materially more burdensome in order to obtain any such consent, approval or authorization without first obtaining the written approval of the other parties hereto. 5.5 Registration Statements. (a) Form 10. As promptly as possible following the completion of the Audited Financial Statements, Acquiror shall prepare and file with the Securities and Exchange Commission, a registration statement on Form 10 for the purposes of registering Acquiror's Common Stock under the Exchange Act and shall, by virtue of such undertaking, become a "reporting company" under the Exchange Act. (b) Registration of Resale of Certain Shares of Common Stock. As soon as practicable following the effectiveness of the registration statement on Form 10, or earlier in the discretion of Acquiror's Board of Directors, Acquiror shall prepare and file a registration statement with the SEC under the Securities Act in order to register the reoffer and redistribution of certain shares of Acquiror Common Stock (the "Registration Statement"). The only shares of Acquiror Common Stock to be included for the public reoffer and redistribution as part of the Registration Statement shall include: (i) 900,000 shares of Acquiror common stock outstanding prior to the Closing; (ii) the shares sold in the Private Placement identified at Section 5.13 hereafter; (iii) the shares previously issued by Acquiror as part of the private placement transaction identified at Section 5.3 (b)(iv); and (iv) the 150,000 shares of Acquiror Common Stock issuable to the Shareholder upon conversion of Preferred Shares. The resale of the shares issued to the Shareholder are included within the terms of the registration rights agreement in substantially the form attached to this Agreement as Exhibit 5.5(b) (the "Registration Rights Agreement"). 5.6 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 impediments or delays, legal or otherwise, as soon as reasonable practicable, to consummate the Merger and the other transactions contemplated by this Agreement. 29 5.7 Public Announcements. Acquiror, JLL, CNF and the Shareholder 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 NASD. 5.8 Notification of Certain Matters. CNF and the Shareholder shall give prompt notice to Acquiror, and Acquiror shall give prompt notice to CNF and the Shareholder, 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 CNF and the Shareholder, at or prior to the Closing, and, as to Acquiror or JLL, as of the Closing and (b) any material failure of CNF and the Shareholder, on the one hand, or Acquiror and JLL, 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. 5.9 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; provided, however, that the costs and expenses to be paid by CNF shall not exceed $35,000. 5.10 Financial Statements. CNF and the Shareholder shall cooperate with the Acquiror following the Closing so that within sixty (60) days of the Closing, Acquiror shall cause to be prepared an audit of the Financial Statements of CNF prepared in compliance with generally accepted accounting principles, consistently applied, and in accordance with all applicable SEC rules and regulations (the "Audited Financial Statements"). The Audited Financial Statements shall not reflect any material adverse changes from the Financial Statements. For the purpose of this Section 5.10 only, the term "material adverse change" shall mean any reduction reflected within the Audited Financial Statements of five percent (5%) or more of the CNF revenues, or shareholder's equity or any 5% or greater increase in loss from the corresponding period of the Financial Statements provided under Section 4.1(e). 5.11 Lock-Up. In addition to any prohibition on transfers or sales under applicable federal or state securities laws, the Shareholder shall not sell, transfer, encumber or otherwise dispose of the Securities issued or issuable to him for a period of two (2) years following the Closing. 30 Notwithstanding such limitation, the Shareholder may include the resale of 150,000 shares of Acquiror Common Stock (issuable upon conversion of the Preferred Shares) upon the terms set forth within the Registration Rights Agreement attached hereto as Exhibit 5.5(b). 5.12 Bridge Notes. (a) Within thirty (30) days after the later of: (i) the Closing; or (ii) the completion of the Audited Financial Statements, Acquiror shall secure gross proceeds of at least $2,000,000 through the issuance of promissory notes on standard and customary terms (the "Bridge Notes"). The Bridge Notes shall be in the aggregate principal amount of $2,000,000 (subject to adjustment as set forth in subsection (b) below), have a maturity date of the earlier of (A) two (2) years after the Closing Date; and (B) the closing of the Private Placement described in Section 5.13 hereof and bear interest at the rate of 10% per annum payable upon maturity. (b) Any interim debt financing provided or secured by Acquiror, Synergy or any affiliate thereof for, or on behalf of, CNF, commencing April 6, 1999, shall reduce the amount of gross proceeds Acquiror is required to secure under Section 5.12(a) by the amount of any such interim financing provided. Within 48 hours after the date of this Agreement, Acquiror shall secure $250,000 of interim debt financing for CNF. Within seven (7) days of the date of this Agreement, Acquiror shall secure an additional $250,000 of interim debt financing for CNF; however, this requirement shall be of no further force or effect if a Closing occurs prior to such seventh day or if the Agreement is otherwise terminated prior to such seventh day. (c) In the event that Acquiror issues any shares of capital stock in connection with the sale of any of the Bridge Notes, other than shares issuable in the Private Placement (as defined in Section 5.13) upon cancellation of such Bridge Notes, and other than in connection with the interim debt financing provided under Section 5.12(b) above, Acquiror shall cause certain of the Historic Acquiror Shareholders to surrender that number of shares of Common Stock equal to the number of shares of Common Stock so issued. 5.13 Private Placement. (a) After the Closing, Acquiror shall undertake a private placement transaction to accredited and institutional investors which is intended to yield net proceeds of no less than $5,000,000 through the sale of shares of Common Stock (the "Private Placement"). For the purposes of this Section 5.13, the term "net proceeds" shall mean cash or cancellation of indebtedness evidenced by surrender of the Bridge Notes (whether converted at the offering price or any discount thereto) in payment for the shares of Common Stock offered in the Private Placement. The Private Placement shall be completed during an offering period of ninety (90) days, which shall be subject to an automatic extension of sixty (60) days unless the Board of Directors of Acquiror resolves, by the affirmative vote of 80% of its members, not to grant such extension (the "Offering Period"), which shall commence upon the completion of a standard and customary private placement memorandum which shall be within no later than 30 days after receipt of the Audited Financial Statements. Acquiror's obligation to complete the Private Placement is conditioned upon (i) there 31 being no material adverse change, or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of CNF, or the earnings, business affairs, management or business prospects of CNF; and (ii) there being no pending material indemnification claim hereunder regarding the breach of any of the representations, warranties, agreements or covenants of CNF or the Shareholder hereunder on and as of the date of the closing of the Private Placement. If the Acquiror's Board of Directors is unable to agree on whether an event set forth in Section 5.13(a)(i) or 5.13(a)(ii) has occurred, such dispute shall be submitted to arbitration in accordance with Section 9.8 hereof. The proceeds of the Private Placement shall be utilized for working capital purposes and to repay the Bridge Notes which are not canceled in payment for shares issuable in the Private Placement. The Private Placement may be completed through the use of a placement agent which is a broker-dealer registered with the Securities and Exchange Commission and in good standing with the NASD, upon payment of sales commissions, expenses and warrants which are reasonable and customary in transactions of this nature. (b) Subject to Section 5.13(c) below, if a closing with respect to the Private Placement is not completed within fifteen (15) days after the expiration of the Offering Period, the Historic Acquiror Shareholders shall surrender that number of Acquiror Escrow Shares determined by multiplying the total number of Acquiror Escrow Shares by a fraction the numerator of which shall be an amount equal to 5,000,000 less the amount of net proceeds raised in the Private Placement and the denominator of which shall be 5,000,000. (c) Notwithstanding the provisions of Section 5.13(b) above, the Historic Acquiror Shareholders shall not be required to surrender any of the Acquiror Escrow Shares in the event that a closing with respect to the Private Placements is not completed within fifteen (15) days after the expiration of the Offering Period as a result of: (i) the occurrence of any events set forth at Section 5.13(a)(i); (ii) the occurrence of any events set forth at Section 5.13(a)(ii); or (iii) Acquiror or Shareholder failing to execute a definitive placement agent or similar agreement for the placement of securities within 30 days from the time first proposed in writing by any placement agent or broker-dealer in connection with the Private Placement. 5.14 Documents at Closing. Each party to this Agreement agrees to execute and deliver at the Closing those documents identified in Section 2.2. 5.15 Prohibition on Trading in Acquiror Stock. CNF and the Shareholder acknowledge that the United States Securities Laws prohibit any person who has received material non-public information concerning the matters which are the subject 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 the Closing, the Shareholder agree that they will not purchase or sell any 32 securities of the Acquiror, or communicate such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell securities of the Acquiror, until counsel for Acquiror believes that any such non-public information has been adequately disseminated to the public. 5.16 Reservation of Shares. As of the Closing, Acquiror shall have authorized and reserved for issuance sufficient shares of Common Stock to permit the issuance of the shares of Acquiror Common Stock due upon conversion of the Preferred Shares. 5.17 Acquiror Post-Closing Actions. As soon as practicable after the Closing, Acquiror shall take all necessary corporate action in order to (i) change its name to CNF Holdings, Inc.; and (ii) change its fiscal year such that it ends on March 31 of each year. 5.18 Acknowledgment of Approvals; Written Consent of Stockholders. By virtue of their respective signatures to this Agreement, Acquiror, JLL, CNF and the Shareholder acknowledge their approval of this Agreement and their consent to the consummation of the transactions identified herein and, with respect to the Shareholder, shall constitute his approval of the Merger and this Agreement by written consent in accordance with Section 603 of the California General Corporation Law on and as of the date hereof with respect to all of the shares of CNF Common Stock owned by the Shareholder on and as of the date hereof. 5.19 Matters of Corporate Governance. (a) Concurrent with the Closing, members of Acquiror's Board of Directors shall resign and shall be replaced with a Board of Directors of five (5) members, consisting of: (i) two (2) designees of Acquiror's Board of Directors immediately prior to the Closing (the "Acquiror Designees"); and (ii) three (3) designees of the Shareholder. (b) For a period of two (2) years following the Closing, the Shareholder agrees to vote all voting securities of Acquiror owned beneficially or of record by him at every Annual Meeting of Stockholders, at any Special Meeting of Stockholders called for the purpose of electing members to the Board of Directors, or will act by written consent or otherwise take such action as is required, to vote for and elect a Board of Directors in the manner identified in subparagraph (a) above. The Shareholder further agrees not to take any action inconsistent with this Section 5.19, including voting any voting securities of Acquiror to amend the Acquiror's By-laws or Certificate of Incorporation in a manner inconsistent with this Section 5.19. (c) For a period of two (2) years following the Closing, approval of any of the following transactions shall require the affirmative vote of 80% of the members of Acquiror's Board of Directors: (i) any merger, consolidation, sale of all or substantially all of the assets of Acquiror or recapitalization involving Acquiror; (ii) transactions between Acquiror and any 33 interested party (including all directors, officers, employees or principal stockholders); and executive officers, or principal (i.e., over 5%) stockholders); (iii) any modification to the terms of this Agreement or any other agreements entered into upon the Closing; (iv) any issuance of shares of Acquiror's Common Stock, Preferred Stock or securities exercisable or convertible into shares of Acquiror's Common Stock or Preferred Stock, equal to or exceeding 10% of the Acquiror's then outstanding shares of Common Stock or voting power; (v) any amendment to the Company's By-laws or Certificate of Incorporation; and (vi) the determination of an event specified in Section 5.13(a)(i) or Section 5.13(a)(ii). Notwithstanding the foregoing, in the event that a closing with respect to the Private Placement is not completed within fifteen (15) days after the expiration of the Offering Period, Sections 5.19(c)(i) and 5.19(c)(iv) shall be of no force or effect. Notwithstanding anything contained in this Agreement to the contrary, commencing two (2) years after the Closing, a super-majority vote of the Acquiror's Board of Directors shall not be required to approve any transaction except as may be required under applicable Delaware law. 5.20 Grant of Proxy. (a) Upon Closing, certain shareholders of Acquiror shall grant a voting proxy to the Shareholder with respect to 1,600,000 shares of Common Stock which shall terminate on the earlier of (i) the completion of audited financial statements of Acquiror for the fiscal year ending March 31, 2000; or (ii) June 30, 2000 (the "Initial Proxy Term"). (b) In the event that Acquiror achieves any of the Financial Performance Targets set forth in the Certificate of Designation attached hereto and made a part hereof as Exhibit 1.3(a), certain shareholders of Acquiror shall upon the expiration of the Initial Proxy Term: (i) adjust, upward or downward, as the case may be, the number of shares covered by the voting proxy so as to equal that number of shares necessary to grant voting power to the Shareholder equal to 51% of the total voting power of all outstanding voting securities of Acquiror; and (ii) extend the term of the voting proxy granted pursuant to Section 5.20(a) hereof for a period of one (1) year following the expiration of the Initial Proxy Term. 5.21 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 upon the execution hereof. In the event that any party has not produced all Schedules and Exhibits required to be produced by it hereunder upon the execution of this Agreement, all such Schedules and Exhibits shall be produced by such party within fifteen (15) business days thereafter but in no event shall such Schedules and Exhibits be delivered less than five (5) business days prior to the Closing Date. 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. 34 ARTICLE VI CONDITIONS TO CONSUMMATION OF THE MERGER 6.1 Conditions to Obligations of CNF and the Shareholder. The obligations of CNF and the Shareholder to consummate the Merger and the other transactions contemplated to be consummated by it at the Closing are subject to the satisfaction (or waiver by CNF and the Shareholder) 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 Acquiror and JLL 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 JLL in accordance with the provisions of the DGCL. The Board of Directors of JLL and Acquiror shall have approved the execution of this Agreement and the Merger thereby. (d) Acquiror shall and shall cause the Historic Acquiror Shareholders to enter into, and the Acquiror Escrow Shares shall be delivered pursuant to the, the Acquiror Escrow Agreement the form of which is attached hereto as Exhibit 1.4(a). (e) Acquiror shall deliver certificates evidencing the Acquiror Options to the persons and in the amounts set forth on Schedule 1.2(c); (f) Certain shareholders of Acquiror shall have delivered voting proxies to the Shareholder the form of which is attached hereto as Exhibit 5.20 with respect to an aggregate of 1,6000,000 shares of Common Stock; (g) CNF and the Shareholder shall not have received written advice from their tax advisors to the effect that the Merger will not qualify as a tax-free reorganization under the Code; (h) There shall be delivered to CNF and the Shareholder an officer's certificate of Acquiror to the effect that all of the representations and warranties of Acquiror set forth herein are true and complete 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. (i) There shall be delivered to CNF and the Shareholder an officer's certificate of JLL to the effect that all of the representations and warranties of JLL set forth herein are true and complete in all material respects as of the Closing, and JLL has complied in all material 35 respects with the covenants and agreements set forth herein that are required to be complied with by the Closing. (j) Acquiror shall have completed a private placement to accredited investors which, after expenses, produced net proceeds of no less than $1,000,000. Acquiror shall, upon the Effective Time, have cash on deposit of no less than $1,000,000, subject only to those liabilities reflected within the Acquiror Financial Statements, Schedule 4.2(g) and any additional liabilities incurred in connection with this transaction that have been agreed to by all parties hereto. (k) 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. (l) 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 obligation of Acquiror to consummate the Merger and the other transactions contemplated to be consummated by it at the Closing are subject to the satisfaction (or waiver by Acquiror) 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 CNF and the Shareholder 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) CNF and the Shareholder shall have complied in a timely manner and in all material respects with its covenants and agreements set out in this Agreement; (c) There shall be delivered to Acquiror an officer's certificate of CNF to the effect that all of the representations and warranties of CNF set forth herein are true and complete in all material respects as of the Closing, and that CNF has complied in all material respects with covenants and agreements set forth herein required to be complied with by the Closing; and there shall be delivered to Acquiror a certificate signed by the Shareholder to the effect that the representations and warranties of CNF and the Shareholder set forth herein are true and correct in all material respects and that CNF and the Shareholder have complied in all material respects with their covenants and agreements required to be complied with them by Closing; (d) CNF shall have secured the written consent of the holder of 100% of the outstanding shares of CNF Common Stock and shall have delivered a certificate of an authorized officer of CNF to this effect; 36 (e) All CNF Shareholders .shall have executed and delivered an Investment Letter the form of which is attached hereto as Exhibit 2.2(a)(ii); (f) The Shareholder shall have entered into, and the Shareholder Escrow Shares shall be delivered pursuant to, the Shareholder Escrow Agreement the form of which is attached hereto as Schedule 1.4(b); (g) Holders of the CNF Options shall have surrendered to CNF for cancellation any certificates or agreements evidencing the CNF Options in accordance with Section 1.2(c); (h) CNF shall have restructured to the reasonable satisfaction of Acquiror, the employment agreements of certain key CNF personnel with respect to: (i) the development of financial targets to evaluate employee performance; and (ii) the addition of standard and customary non-competition, non-solicitation and confidentiality provisions; (i) CNF and the Shareholder shall have paid in full or restructured the terms of all obligations of CNF to Wells Fargo Bank to the satisfaction of Acquiror or obtained the consent of Wells Fargo Bank to this Agreement and the consummation of the transactions contemplated hereby; (j) CNF shall have paid in full or restructured the terms of any and all other outstanding indebtedness which is accelerated, in whole or in part upon consummation of the Merger or any of the transactions contemplated by this Agreement to the satisfaction of Acquiror or obtained the consent of such creditor to this Agreement and the consummation of the transactions contemplated hereby; (k) 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; 37 (l) The Acquiror shall have completed a due diligence review of the business, operations, financial condition and prospects of CNF and shall have been satisfied with the results of its due diligence review in its sole and absolute discretion; (m) Shareholder shall have executed an assignment of its intellectual property rights to Acquiror in form and substance satisfactory to Acquiror. (n) The Board of Directors of CNF and the Shareholders shall have approved the Merger in accordance with the CGCL; and (o) 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. ARTICLE VII INDEMNIFICATION 7.1 Indemnification. (a) Shareholder. The Shareholder shall indemnify, defend and hold harmless Acquiror and JLL 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") incurred by Acquiror which arise out of or result from a misrepresentation, breach of warranty, or breach of any covenant or agreement of CNF or the Shareholder contained herein or in the Schedules annexed hereto or in any deed, exhibit, closing certificate, schedule or any ancillary certificates or other documents or instruments furnished by CNF or the Shareholder pursuant hereto or in connection with the transactions contemplated hereby or thereby; provided that such indemnification obligations hereunder shall be limited to the Shareholder Indemnification Escrow Shares delivered into escrow pursuant to the Shareholder Escrow Agreement. The Shareholder shall also indemnify Acquiror against (i) any Claims that may arise out of the EEOC proceeding referred to upon Schedule 4.1(r)(v), should the costs, fees, awards, assessments or losses associated with such matter exceed $25,000; and (ii) any Claims that may arise in connection with the settlement or litigation with Greg LeVeille referenced upon Schedule 4.1(r)(v), should the costs, fees, awards, judgments, assessments or losses associated with such matter exceed $60,000. (b) Acquiror. Acquiror shall indemnify, defend and hold harmless CNF and the Shareholder from and against any and all Claims, as defined at subsection 7.1(a) above, incurred by CNF and/or the Shareholder which arise out of or result from a misrepresentation, breach of warranty or breach of any covenant of Acquiror contained herein or in the Schedules annexed hereto or in any deed, exhibit, closing certificate, schedule or any ancillary certificates or other documents or instruments furnished by Acquiror pursuant hereto or in connection with the transactions contemplated hereby or thereby. Acquiror shall also indemnify CNF against any 38 claims that may arise out of the assertion of dissenters rights by the former Shareholders of JLL Ventures Corp., in connection with the reincorporation of JLL Ventures Corp. into Acquiror. (c) Methods of Asserting Claims for Indemnification. All claims for indemnification under this Agreement shall be asserted as follows: (i) Third Party Claims. In the event that any Claim for which a party (the "Indemnitee") would be entitled to indemnification under this Agreement is asserted against or sought to be collected from the Indemnitee by a third party the Indemnitee shall promptly notify the other party (the "Indemnitor") of such Claim, specifying the nature thereof, the applicable provision in this Agreement or other instrument under which the Claim arises, and the amount or the estimated amount thereof (the "Claim Notice"). The Indemnitor shall have thirty (30) days (or, if shorter, a period to a date not less than ten (10) days prior to when a responsive pleading or other document is required to be filed but in no event less than ten (10) days from delivery or mailing of the Claim Notice) (the "Notice Period") to notify the Indemnitee (a) whether or not it disputes the Claim and (b) if liability hereunder is not disputed, whether or not it desires to defend the Indemnitee. If the Indemnitor elects to defend by appropriate proceedings, such proceedings shall be promptly settled or prosecuted to a final conclusion in such a manner as to avoid any risk of damage to the Indemnitee; and all costs and expenses of such proceedings and the amount of any judgment shall be paid by the Indemnitor. If the Indemnitee desires to participate in, but not control, any such defense or settlement, it may do so at its sole cost and expense. If the Indemnitor has disputed the Claim, as provided above, and shall not defend such Claim, the Indemnitee shall have the right to control the defense or settlement of such Claim, in its sole discretion, and shall be reimbursed by the Indemnitor for its reasonable costs and expenses of such defense. Neither Indemnitee nor Indemnitor shall be liable for any settlement of any Claim without the prior written consent of the other party. (ii) Non-Third Party Claims. In the event that the Indemnitee should have a Claim for indemnification hereunder which does not involve a Claim being asserted against it or sought to be collected by a third party, the Indemnitee shall promptly send a Claim Notice with respect to such Claim to the Indemnitor. If the Indemnitor does not notify the Indemnitee within the Notice Period that it disputes such Claim, the Indemnitor shall pay the amount thereof to the Indemnitee. If the Indemnitor disputes the amount of such Claim, the controversy in question shall be submitted to arbitration pursuant to Section 9.8 hereafter. (d) Right of Set-Off. Subject to the terms of the Shareholder Escrow Agreement, in the event a Claim arises pursuant to subparagraph 7.1(a), Acquiror shall have the right to apply the amount of the Claim which is agreed to by the other parties against the Shareholder Indemnification Escrow Shares identified at subparagraph 1.4(b). 39 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, CNF and the Shareholder; (b) by any of Acquiror, CNF or the Shareholder; (i) if the Closing shall not have occurred on or before April 30, 1999, 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 CNF and the Shareholder 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 of CNF or the Shareholder to comply with their respective obligations under this Agreement) and CNF and the Shareholder have 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 to comply with their respective obligations under this Agreement) and Acquiror 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, 5.7 and 5.9, 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. 40 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, JLL, CNF and the Shareholder. 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 eighteen (18) months from the Closing Date, unless otherwise specified in such agreement, certificate or document; provided, however, that notwithstanding the foregoing, (i) the representations and warranties set forth in Section 4.(d) (relating to the title to the CNF Common Stock and the capitalization of CNF), Section 4.1(u) (relating to environmental matters), Section 4.1(e) (relating to the Financial Statements), Section 4.1(g) (relating to contingent liabilities) and Section 4.1(i) (relating to taxes) and all covenants and agreements of the parties relating to the subject matter(s) thereof shall survive the Closing 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 by JLL or Acquiror, 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 CNF and the Shareholder under this Agreement. 41 9.2 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): (a) if to CNF, Inc. to it at with a copy to: 7722 East Gray Road Stephen Boatwright, Esquire Scottsdale, AZ 85260 Gammage & Burnham Attn: Paul Charles 2 North Central, 18th Floor Phoenix, AZ 85004 (b) if to Paul Charles, to him at with a copy to: c/o CNF, Inc. Stephen Boatwright, Esquire 7722 East Gray Road Gammage & Burnham Scottsdale, AZ 85260 2 North Central, 18th Floor Phoenix, AZ 85004 (c) if to Acquiror, to it at: with a copy to: c/o Synergy Group International, Inc. Stephen M. Cohen, Esquire 2390 E. Camelback Road Buchanan Ingersoll, P.C. Phoenix, AZ 85016 Eleven Penn Center, 14th Floor Attention: Vincent J. Marold Philadelphia, PA 19103 (d) if to JLL, to it at: with a copy to: c/o Synergy Group International, Inc. Stephen M. Cohen, Esquire 2390 E. Camelback Road Buchanan Ingersoll, P.C. Phoenix, AZ 85016 Eleven Penn Center, 14th Floor Attention: Vincent J. Marold Philadelphia, PA 19103 9.3 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. 9.4 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 42 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. 9.5 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. 9.6 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. 9.7 Governing Law. This Agreement 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 principles of conflicts of laws applicable thereto. 9.8 Arbitration. Any claim, dispute or other matter in controversy (collectively referred to herein as "Dispute"), whether based on contract, tort, statute, or other legal theory (including but not limited to any claim of fraud or misrepresentation), arising out of or related to this Agreement, any exhibits or schedule hereto, or any subsequent agreement between the parties, or the breach thereof, shall be settled according to the procedures set forth below exclusively; provided however, that either party may seek preliminary judicial relief if, in its judgment, such action is necessary to avoid irreparable damage during the pendency of such procedures. Any Dispute shall be settled by arbitration in Phoenix, Arizona, in accordance with the then current Commercial Rules of Arbitration (the "Rules") of the American Arbitration Association ("AAA"), as supplemented or modified by the following: (a) Notwithstanding any choice of law or other provisions of this Agreement to the contrary, this agreement to arbitrate shall be governed by the Federal Arbitration Act, 9 U.S.C. ss.1 et seq. (the "Act"), which shall not be superseded or supplemented by any other arbitration act, statute or regulation. (b) In no event shall a demand for arbitration be made when the institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by laches or any applicable statute of limitations. (c) The arbitration panel shall consist of three (3) members, one of whom shall be selected by each party and the third shall be selected by the two (2) so selected. If either party fails to select an arbitrator within ten (10) days after the last of them have been appointed, then 43 AAA shall select the arbitrator(s). All arbitrators must be familiar with private and public capital raising transactions. (d) The award may not grant any relief that could not be granted in court litigation to resolve the dispute under the law of the place governing the substance of the dispute. The arbitration panel shall award the prevailing party its reasonable attorneys' fees and costs incurred in connection with the arbitration. Otherwise, the parties shall equally share costs of arbitration. (e) The arbitration award shall be in writing and shall include a statement of the reasons for the award. Subject to Section 9.8(f) below, the award rendered by the arbitrator(s) shall be final and judgment may be entered upon it in accordance with the Act in any court having jurisdiction. As to the facts found, the arbitration award shall be final and conclusive. (f) Either party can appeal to the U.S. District Court for the District of Arizona if such court has jurisdiction, and otherwise to any state court of record in Arizona having jurisdiction, to vacate and remand, or modify or correct the arbitration award for any of the grounds specified in the Act. 9.9 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. 9.10 Release and Discharge. By virtue of their execution of this Agreement, except as set forth in Schedule 9.10, as of the Closing and thereafter, the Shareholder hereby agree to release, remise and forever discharge CNF from and against any and all debts, obligations, liabilities and amounts owing from CNF to the Shareholder prior to the Closing, and CNF is not obligated to take any action or make any payments to third parties on behalf of the Shareholder. 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 Securities Exchange Act of 1934, as amended to date (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 Phoenix, Arizona. 44 (c) "Knowledge" shall mean the actual current knowledge of the party , and/or the executive management of the party to this Agreement, as the case may be, to whom knowledge is ascribed. (d) "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; (e) "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; and 45 IN WITNESS WHEREOF, Acquiror, CNF and the Shareholder have caused this Agreement to be signed by their respective officers hereunto duly authorized, all as of the date first written above. JLL VENTURES (DELAWARE) CORP., a Delaware Corporation By: /s/ Vincent J. Marold ------------------------------ Name: Vincent J. Marold Title: President JLL VENTURES ACQUISITION CORP., a Delaware Corporation By: /s/ Vincent J. Marold ------------------------------ Name: Vincent J. Marold Title: President CNF, INC., a California Corporation By: /s/ Paul Charles ------------------------------ Name: Paul Charles Title: President PAUL CHARLES /s/ Paul Charles ---------------------------- Signature 46 EX-2.2 3 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER Exhibit 2.2 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER DATED APRIL 16, 1999 BY AND AMONG JLL VENTURES (DELAWARE) CORP. JLL VENTURES ACQUISITION CORP. CNF, INC. AND PAUL CHARLES, THE PRINCIPAL SHAREHOLDER OF CNF, INC. Dated: May 24, 1999 AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF MERGER THIS AMENDMENT NO. 1 (the "Amendment") to that certain AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered into as of May ___, 1999 by and among JLL VENTURES (DELAWARE) CORP., a Delaware corporation ("Acquiror"), JLL VENTURES ACQUISITION CORP., a Delaware corporation and wholly owned subsidiary of Acquiror ("JLL"), CNF, INC., a California corporation ("CNF"), and PAUL CHARLES, an individual residing at 10931 East Laurel Lane, Scottsdale, AZ 85260, and the principal shareholder of CNF ("Charles" or "Shareholder"). Recitals WHEREAS, the parties to the Agreement wish to amend the Agreement in accordance with the following terms and conditions. NOW, THEREFORE, in consideration of the foregoing premises 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: 1. Exhibits and Schedules. The table of Exhibits and Schedules is hereby amended to delete Exhibit 1.2 (c) - Form of Acquiror Option Agreement in its entirety and to include the following additional Exhibit: "Exhibit 5.20 - Form of Proxy" 2. Exhibits and Schedules. The table of Exhibits and Schedules is hereby amended to include the following additional Schedules: "Schedule 4.1(f)(iv) - Sublease Agreements Schedule 4.1(y) - CNF Stock Option Plan Schedule 5.22 - Personal Guarantees" 3. Recitals. The third "WHEREAS" clause is hereby deleted in its entirety. 4. Name of Surviving Corporation. Section 1.1(c)(i) is hereby amended to provide in its entirety as follows: "JLL shall continue its existence under the laws of the State of Delaware as the surviving corporation as "CNF Mobile Solutions, Inc.";" 5. Officers and Directors of JLL and Acquiror. Section 1.1(c)(vii) is hereby amended to provide in its entirety as follows: "The officers and directors of each of JLL and Acquiror shall resign upon the Effective Time and the officers and directors of the Surviving Corporation and the Acquiror shall consist of those individuals identified on Schedule 1.1(c)(vii), and such persons shall serve in such positions for their respective terms provided by law or in the Bylaws of the Surviving Corporation or Acquiror, as applicable, and until their respective successors are elected and qualified." 6. Title of Section 1.2. The title of Section 1.2 is hereby amended to provide in its entirety as follows: "1.2 Conversion of Stock; Assumption of Outstanding Options." 7. Assumption of Outstanding Options. Section 1.2(c) is hereby amended to provide in its entirety as follows: "(c) Assumption of Outstanding Options. As of the Closing, there will be outstanding options, warrants or other rights to purchase an aggregate of 405,658 shares of CNF Common Stock or approximately 13.96% of the outstanding shares of CNF Common Stock on a fully diluted basis (collectively, the "CNF Options" and individually, a "CNF Option"). The CNF Options were issued under the CNF 1997 Equity Incentive Plan (the "Plan"). At the Effective Time, Acquiror shall assume the Plan and all obligations of CNF under the Plan including, but not limited to, the obligation to issue shares of CNF Common Stock upon the exercise of the CNF Options. At the Effective Time, in accordance with the terms of the CNF Options, each CNF Option shall represent the right to purchase that number of Preferred Shares equal to the product obtained by multiplying that number of shares of CNF Common Stock purchasable upon exercise of such option by 2.0628. The exercise price of each CNF Option shall be reduced to an amount equal to the quotient obtained by dividing the current exercise price of such CNF Option by 2.0628. Schedule 1.2(c) identifies each holder of a CNF Option, the exercise price and number of shares of CNF Common Stock issuable upon exercise of such option prior to the Effective Time and the exercise price and number of Preferred Shares issuable upon exercise of such option after the Effective Time." 2 8. Merger Consideration. Sections 1.3(a) and 1.3(b) are hereby amended to provide in their entirety as follows: "(a) Subject to the provisions of Section 1.4(b) hereafter, the Merger Consideration, consisting of the total purchase price payable to the holders of 100% of the outstanding CNF Common Stock (the "CNF Shareholders") in connection with the acquisition by merger of CNF, shall be delivered and shall consist exclusively of the issuance of 2.0628 newly issued shares of Series A Convertible Preferred Stock, $.0001 par value per share, of Acquiror (the "Preferred Shares") for each share of CNF Common Stock outstanding (on a fully diluted basis), thus resulting in the issuance of 5,163,202 Preferred Shares to the CNF Shareholders at Closing and the reservation of an additional 836,798 Preferred Shares issuable upon exercise of the CNF Options resulting in an aggregate of 6,000,000 Preferred Shares on a fully diluted basis. The Preferred Shares shall be convertible at the option of the holder thereof into shares of common stock, $.0001 par value per share, of Acquiror (the "Common Stock") and have those rights, preferences and designations set forth in that certain Certificate of Designation, Preferences and Rights of Series A Preferred Stock (the "Certificate of Designation"), a true and correct copy of which is attached hereto and made a part hereof as Exhibit 1.3(a). (b) The Merger Consideration shall be allocated among the CNF Shareholders in the proportion of their share ownership of the outstanding shares of CNF Common Stock at the Closing as set forth on Schedule 1.3(b)." 9. Shareholder Shares to be Placed Into Escrow. Section 1.4(b) is hereby amended to provide in its entirety as follows: "In order to secure the Shareholder's indemnification obligations under Article VII hereof, 2,000,000 of the Preferred Shares issuable to the Shareholder hereunder (the "Shareholder Indemnification Escrow Shares") shall be placed into escrow pursuant to the escrow agreement attached hereto as Schedule 1.4(b) (the "Shareholder Escrow Agreement"); 1,000,000 of which shall be retained for a period of six (6) months after the Closing and 1,000,000 of which shall be retained for a period of eighteen (18) months after the Closing. While retained in escrow, the Shareholder shall retain full voting rights with respect to the Shareholder Escrow Shares." 10. Closing Transactions. Section 2.2(a)(iii) is hereby deleted in its entirety. 3 11. Closing Transactions. Section 2.2(b)(i) is hereby amended to provide in its entirety as follows: "Subject to Section 1.4(b), Acquiror shall deliver or shall cause to be delivered to the CNF Shareholders certificates evidencing 5,163,202 Preferred Shares in payment of the Purchase Price. 2,000,000 of the Preferred Shares issuable to the Shareholder shall be delivered into escrow pursuant to the terms of the Shareholder Escrow Agreement;" 12. Closing Transactions. Section 2.2(b)(ii) is hereby deleted in its entirety. 13. Closing Transactions. Section 2.2(b)(xvii) is hereby amended to provide in its entirety as follows: "Each of the officers and directors of each of Acquiror and JLL shall have tendered their resignations in form and substance satisfactory to CNF and the Shareholder;" 14. Representations and Warranties of CNF and Shareholder. Section 4.1(y) is hereby added to provide in its entirety as follows: "(y) CNF Stock Option Plan. Attached hereto as Schedule 4.1(y) is a true, correct and complete copy of the CNF 1997 Equity Incentive Plan (the "Plan"). The Plan is in full force and effect on and as of the date hereof and has not been amended, modified, superseded or qualified in any manner whatsoever. The Plan has been duly adopted by all necessary corporation action on the part of CNF. All of the CNF Options were issued under the Plan in accordance with the terms of the Plan. All CNF Options have been duly and validly authorized by all necessary corporate action on the part of CNF and have not been amended, modified, superseded or qualified in any manner whatsoever." 15. Acquiror Post-Closing Actions. Section 5.1(vii) is hereby amended to delete the words "CNF Holdings, Inc." and replace them with the words "CNF Technologies, Inc." 16. Voting Agreement. Section 5.20 is hereby amended to provide in its entirety as follows: "(a) Subject to Section 5.20(b) below, until the later of (i) the completion of audited financial statements of Acquiror for the fiscal year ending March 31, 2000; or (ii) June 30, 2000 (the "Term"), those shareholders of Acquiror holding an aggregate of 2,100,000 shares of Common Stock as of the Closing identified as signatories to this Amendment (the "JLL Shareholders") agree to vote all voting securities of Acquiror owned beneficially or of 4 record by such holder at every Annual Meeting of Stockholders, at any Special Meeting of Stockholders called for the purpose of electing members to the Board of Directors, or will act by written consent or otherwise take such action as is required, to vote for and elect a Board of Directors in the manner identified in Section 5.19(a) of this Agreement and not to take any action inconsistent with Section 5.19 of this Agreement, including voting any voting securities of Acquiror to amend the Company's By-laws or Certificate of Incorporation in a manner inconsistent with Section 5.19. (b) In the event that the Acquiror issues additional shares of Common Stock during the Term, it shall cause shareholders of Acquiror holding that number of additional shares of Common Stock equal to 50% of the number of additional shares of Common Stock so issued to be subject to the provisions of Section 5.20(a). In addition, if during the Term certain of the Historic Acquiror Shareholders are caused to surrender certain shares held in escrow or any events occur such that the Shareholder holds voting power over more than 51% of the total number of Acquiror securities outstanding, then, and in that event, the number of shares subject to section 5.20(a) shall be reduced to equal only that number necessary to grant voting power to the Shareholder (when added to his then record and beneficial direct or indirect ownership) equal to 51% of the total voting power of all outstanding voting securities of Acquiror. Any shares of Common Stock or other securities of Acquiror issued during the Term upon exercise of any CNF Options shall be deemed to be beneficially owned by Shareholder for the purpose of determining whether Shareholder holds voting power over more than 51% of the total number of Acquiror securities outstanding. 17. Indemnification of Certain Obligations. Section 5.22 is hereby added to provide in its entirety as follows: "5.22 Indemnification of Certain Obligations. As set forth on Schedule 5.22, Shareholder, Julie Charles, the wife of the Shareholder, and David Thompson, the Chief Financial Officer of CNF are personal guarantors of certain obligations of CNF outstanding as of the Closing (the "Guarantees"). By executing below, JLL and Acquiror hereby agree to indemnify, defend and hold harmless, Shareholder, Julie Charles and David Thompson from and against any and all demands, claims, actions or causes of action, judgment, assessments, losses, liabilities, damages or 5 penalties and reasonable attorneys' fees and related disbursements incurred by such person which arise out of or result from any obligation of such person under any of the Guarantees." 18. Capitalized Terms. All capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed thereto in the Merger Agreement. 19. Full Force and Effect. All other provisions in the Merger Agreement shall remain in full force and effect except those identified within this Amendment. 20. Counterpart and Facsimile. This Amendment 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. 6 IN WITNESS WHEREOF, Acquiror, JLL, CNF 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. JLL VENTURES (DELAWARE) CORP., a Delaware Corporation By: /s/ Vincent J. Marold --------------------------- Name: Vincent J. Marold Title: President JLL VENTURES ACQUISITION CORP., a Delaware Corporation By: /s/ Vincent J. Marold --------------------------- Name: Vincent J. Marold Title: President CNF, INC., a California Corporation By: /s/ Paul Charles --------------------------- Name: Paul Charles Title: President PAUL CHARLES /s/ Paul Charles --------------------------- Signature 7 For the sole purpose of evidencing their agreement to the provisions of Section 5.20 of the Agreement, the undersigned have executed this Agreement as of the date first written above. JLL SHAREHOLDERS By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- 8 By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- 9 By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- By: -------------------------------- Name: ------------------------ Number of Shares of Common Stock: ------- 10 Schedule 4.1(f)(iv) Sublease Agreements Sublease of 7722 East Gray Road, Scottsdale, AZ 85260, as amended Located at Pages 02477-02478 of the Due Diligence Binders 11 Schedule 4.1(y) CNF Stock Option Plan 1997 Equity Incentive Plan Located at Pages 01574-01590 of the Due Diligence Binders 12 Schedule 5.22 Personal Guarantees U.S. Small Business Administration Guarantee Located at Pages 02753-02755 of the Due Diligence Binder Commercial Guarantee Loan #SJ02535721 Located at Pages 02757-02760 of the Due Diligence Binder Commercial Guarantee Loan #SJ04340901 Located at pages 02762-02768 of the Due Diligence Binder 13 EX-2.3 4 AGREEMENT EXHIBIT 2.3 AGREEMENT AGREEMENT made as of the first day of November, 1999, by and among CNF TECHNOLOGIES, INC., a Delaware corporation (the "Company"), SYNERGY GROUP INTERNATIONAL, INC., a Nevada corporation ("Synergy"), VINCENT MAROLD, an individual residing at 4725 East Sunrise Drive, #228, Tucson, Arizona 85718 ("Marold"), and PAUL CHARLES, an individual residing at 10931 East Laurel Lane, Scottsdale, Arizona 85260 ("Charles"). W I T N E S S E T H: WHEREAS, on April 16, 1999, an Agreement and Plan of Merger was entered into among JLL Ventures (Delaware) Corp., ("JLL"), JLL Ventures Acquisition Corp. ("JLL Acquisition"), CNF, INC., a California corporation ("CNF") and Paul Charles as the principal shareholder of CNF (the "Original Merger Agreement"), the purpose of which was to effectuate the merger of CNF with and into JLL Acquisition (the "Merger"); WHEREAS, on May 24, 1999, the parties to the Original Merger Agreement entered into Amendment No. 1 to the Agreement and Plan of Merger dated April 16, 1999 ("Amendment No. 1 to the Merger Agreement"); WHEREAS, in connection with the Original Merger Agreement and Amendment No. 1 to the Merger Agreement (referred to in the aggregate as the "Merger Agreement"), Charles entered into an escrow agreement pursuant to which certain of his shares of JLL were to be placed in escrow for indemnification claims, among others (the "Shareholder Escrow Agreement"), and certain historic stockholders of JLL entered into an escrow agreement pursuant to which certain of their shares of JLL were placed in escrow to assure certain post-closing placement activities (the "Acquiror Escrow Agreement"); WHEREAS, effective as of June 19, 1999, the Merger was completed (the "Closing") pursuant to which CNF merged into JLL Acquisition, JLL Acquisition changed its corporate name to "CNF Mobile Solutions, Inc." and JLL changed its corporate name to "CNF Technologies, Inc."; WHEREAS, on July 14, 1999, the Company commenced a private placement of shares of its common stock in a manner contemplated in the Merger Agreement (the "Private Placement"); WHEREAS, in order to induce the interest of certain investors to invest in the Private Placement, the Company and the parties hereto have agreed to modify certain components of the Private Placement, which, in turn, require an amendment to certain of the agreements entered into in connection with the Merger; and WHEREAS, the parties hereto have agreed to enter into this Agreement (the "Agreement") which is intended to constitute a formal amendment to the Original Merger Agreement, Amendment No. 1 to the Merger Agreement, the Shareholder Escrow Agreement and the Acquiror Escrow Agreement. NOW THEREFORE, in consideration of the premises and agreements contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Matters of Corporate Governance (a) Section 5.19 of the Original Merger Agreement shall be deleted in its entirety, and shall be replaced by the following: "Until May 19, 2001, Synergy, plus those other shareholders who execute the signature page hereof, will agree to vote their shares of common stock of the Company at any regular or special meeting of its stockholders, or by written consent, solicitation or otherwise, called or required for the purpose of electing the Company's Board of Directors, for the nomination of Charles to the Company's Board of Directors should there be a Board consisting of less than -2- five (5) members; and for the nomination of Charles and an additional designee of Charles, should the Board consist of five (5) or more members." (b) The Company shall amend its bylaws as promptly following the date hereof as is practicable in order to effectuate the foregoing. 2. Voting Agreement. Section 5.20 of the Original Merger Agreement and Section 16 of Amendment No. 1 to the Merger Agreement shall be deleted in their entirety, and that portion of Amendment No. 1 to the Merger Agreement pursuant to which certain of the Company's stockholders executed the agreement to evidence their agreement to the provisions of Section 5.20 shall be null and void. 3. Employment Arrangements. (a) The Company shall enter into amended employment agreements with Paul Charles, David Thompson and Reuben Daniel Rudich on terms agreed to by the parties, as evidenced by a Term Sheet dated October 22, 1999. (b) Charles has agreed to relinquish his position as Chief Executive Officer and to cooperate with the Company's newly constituted Board of Directors to select a replacement candidate with industry and other corporate experience deemed acceptable to the investors of the Private Placement. 4. Surrender of Preferred Shares. (a) In order to accommodate the issuance of equity considerations by the Company to a new chief executive officer, and to encourage the conversion to equity of holders of bridge indebtedness, Charles agrees to surrender to the Company for cancellation 1,000,000 shares of Series A Convertible Preferred Stock (the "Preferred Shares"). (b) The Company agrees to accord to Charles' remaining Preferred Shares the same terms and conditions as may be provided to any other holders of the Preferred Shares, should the -3- Company elect to modify, extend, alter or waive any of the terms and conditions of the Preferred Shares. 5. Removal of Certain Charles Shares Held in Escrow. (a) Section 9 of Amendment No. 1 to the Merger Agreement shall be modified such that the 1,000,000 Preferred Shares surrendered according to Section 4 of this Agreement shall be removed from the Preferred Shares held in escrow for eighteen (18) months. Accordingly, the Shareholder Escrow Agreement is deemed amended and modified to the extent necessary to remain consistent with the above. 6. Private Placement: Modification to Acquiror Escrow. (a) Section 5.13 of the Original Merger Agreement shall be deleted in its entirety and shall be replaced by the following: "(a) After the Closing, the Company shall undertake a private placement transaction to accredited and institutional investors which is intended to yield gross proceeds (the "Gross Proceeds") of no less than $2 million, nor more than $6 million, through the sale of shares of Common Stock (the "Private Placement"). For the purposes of this Section 5.13, the term "Gross Proceeds" shall mean cash realized from the sale of Common Stock, as well as the principal and accrued interest cancelled by conversion of the Bridge Notes or other unsecured indebtedness into equity (whether converted at the offering price or any discount thereto) however issued during the "Offering Period" (as herein defined). The Private Placement shall be completed during an offering period (the "Offering Period") commencing July 14, 1999 through February 15, 2000. The Company's obligation to complete the Private Placement is conditioned upon (i) there being no material adverse change, or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of CNF Mobile Solutions, Inc. ("CNF"), or the earnings, business affairs, management or business prospects of CNF; and (ii) there being no pending material indemnification claim hereunder regarding the breach of any of the representations, warranties, agreement or covenants of CNF or Charles hereunder on and as of the date of the closing of the Private Placement. If the Company's Board of Directors is unable to agree on whether an event set forth in Section 5.13(a)(i) or 5.13(a)(ii) above has -4- occurred, such dispute shall be submitted to arbitration in accordance with Section 9.8 hereof. The Gross Proceeds of the Private Placement shall be utilized for working capital purposes and, depending on the amount of Gross Proceeds, to repay the Bridge Notes which are not canceled in payment for shares issuable in the Private Placement or otherwise. The Private Placement may be completed through the use of a placement agent which is a broker-dealer registered with the Securities and Exchange Commission and in good standing with the NASD, upon payment of sales commissions, expenses and warrants which are reasonable and customary in transactions of this nature. (b) Subject to Section 5.13(c) below, the Historic Acquiror Shareholders shall surrender that number of Acquiror Escrow Shares to the Company for cancellation in accordance with the following: (i) If Gross Proceeds of less than $2 million are realized by the Company through either the Private Placement or through conversion of Bridge Notes or other unsecured indebtedness by December 6, 1999, the Historic Acquiror Shareholders shall surrender 2,000,000 shares, and the Acquiror Escrow Agreement shall terminate thereafter with no further obligation on the Historic Acquiror Shareholders to surrender any additional shares; (ii) If $2 million of Gross Proceeds are raised by December 6, 1999, however, an additional $2 million of Gross Proceeds are not realized by the Company through either the Private Placement or through conversion of Bridge Notes or other unsecured indebtedness by December 15, 1999, the Historic Acquiror Shareholders shall surrender 1,000,000 shares; and (iii) If $4 million of Gross Proceeds are raised by December 15, 1999, however, an additional $2 million of Gross Proceeds are not realized by the Company through either the Private Placement or through conversion of Bridge Notes or other unsecured indebtedness by February 15, 2000, the Historic Acquiror Stockholders shall surrender 1,000,000 shares. (c) Notwithstanding the provisions of Section 5.13(b) above, the Historic Acquiror Shareholders shall not be required to surrender any of the Acquiror Escrow Shares in the event that a closing with respect to the Private Placement is not completed within fifteen (15) days after the expiration of the Offering Period as a result of: (i) the occurrence of any events set forth at Section 5.13(a)(i); (ii) the occurrence of any events set forth at -5- Section 5.13(a)(ii); or (iii) Acquiror or Shareholder failing to execute a definitive placement agent or similar agreement for the placement of securities within 30 days from the time first proposed in writing by any placement agent or broker-dealer in connection with the Private Placement." (b) The Acquiror Escrow Agreement shall be deemed amended so as to reflect terms and conditions consistent with those set forth in Section 5.13(b) of the Original Merger Agreement, as amended by the foregoing Section 6(a) of this Agreement. 7. Private Sale of Securities. Synergy will either purchase, or arrange for the purchase, of 200,000 of the Preferred Shares owned by Charles, at a price of $1.25 per share, within no more than ninety (90) days of the date the Company first files a registration statement (on either Form 10 or Form SB-2) with the Securities and Exchange Commission. The Preferred Shares shall be paid for at least 25% upon the date of purchase, with the balance paid in three ratable monthly installments thereafter. 8. Effective Date. This Agreement shall be of full legal force and effect upon execution, however, shall automatically terminate and be of no further force and effect, and all of the actions contained herein shall be rescinded in the event that the Company does not realize Gross Proceeds of $2 million by December 6, 1999 through the sale of stock in the Private Placement or through the conversion into equity of Bridge Notes or other unsecured indebtedness. 9. Capitalized Terms. All capitalized terms utilized herein and not otherwise defined herein, shall have the meaning ascribed thereto in the Merger Agreement. 10. Full Force and Effect. All other provisions in the Merger Agreement shall remain in full force and effect except those identified in this Agreement. -6- 11. Counterpart and Facsimile. 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. (This Space Left Blank Intentionally) -7- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the date and year first written above. CNF TECHNOLOGIES, INC. By: /s/Paul Charles ----------------------------------------------- Name: Paul Charles Title: Chief Executive Officer SYNERGY GROUP INTERNATIONAL, INC. By: /s/Vincent Marold ---------------------------------------------- Name: Vincent Marold Title: President /s/Vincent Marold ---------------------------------------------- Vincent Marold, as designee of Acquiror's Board of Directors pursuant to Section 5.19(a) of the Original Merger Agreement /s/Paul Charles ---------------------------------------------- Paul Charles For the sole purpose of acknowledging their agreement to vote their shares in the manner provided at Section 1(a) of this Agreement: BY:____________________________ BY:____________________________ Name:__________________________ Name:__________________________ Number of Shares:______________ Number of Shares:______________ BY:____________________________ BY:____________________________ Name:__________________________ Name:__________________________ Number of Shares:______________ Number of Shares:______________ -8- BY:____________________________ BY:____________________________ Name:__________________________ Name:__________________________ Number of Shares:______________ Number of Shares:______________ BY:____________________________ BY:____________________________ Name:__________________________ Name:__________________________ Number of Shares:______________ Number of Shares:______________ BY:____________________________ Name:__________________________ Number of Shares:______________ -9- EX-3.1 5 CERTIFICATE OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF JLL VENTURES (DELAWARE) CORP. 1. The name of the Corporation is: JLL VENTURES (DELAWARE) CORP. 2. The address of its registered office in the State of Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 4. The Corporation is authorized to issue capital stock to the extent of: (a) Fifty Million (50,000,000) Shares Common Stock Par Value $.0001 per Share; and (b) Fifteen Million (15,000,000) Shares Preferred Stock Par Value $.0001 Per Share (the "Preferred Stock") The board of directors of the Corporation shall have the authority to issue shares of Preferred Stock in series or subseries and to fix by resolution the designations, powers, preferences, rights and the qualifications, limitations, or restrictions in respect of any such series or subseries. 5. The name and mailing address of the Sole Incorporator is as follows: Paula S. Belcher Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, PA 19103 6. The Corporation is to have perpetual existence. 7. Indemnification and Insurance: (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) Right of Claimant to Bring Suit: If a claim under paragraph (a) of this Section is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense -2- shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Notwithstanding any limitation to the contrary contained in subparagraphs 7(a) and 7(b), the Corporation shall to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law or agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (d) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Delaware General Corporation Law. 8. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director for any act or omission; provided, however, that the foregoing shall not eliminate or limit the liability of a director (a) for any breach of the director's duty or loyalty to the Corporation or its stockholders, (b) for any act or omission not in good faith or which involves intentional misconduct or a knowing violation of law, (c) under Section 174 of the General Corporation Law of the State of Delaware, or (d) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. 9. In furtherance and not in limitation of the powers conferred by the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation is expressly authorized to make, alter, or repeal the By-Laws of the Corporation. -3- 10. Elections of directors need not be by written ballot except and to the extent provided in the By-Laws of the corporation. I, Paula S. Belcher, being the Sole Incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying and this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 17th day of March, 1999. /s/ Paula S. Belcher ----------------------------------------- Paula S. Belcher, Sole Incorporator -4- EX-3.2 6 CERTIFICATE OF AMENDMENT Exhibit 3.2 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF JLL VENTURES (DELAWARE) CORP. The undersigned, desiring to amend the Certificate of Incorporation of JLL Ventures (Delaware) Corp., a Delaware corporation (the "Corporation"), pursuant to Section 242 of the Delaware General Corporation law, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation, by unanimous written consent evidenced by board resolutions, and approval of the requisite vote of the stockholders of the Corporation, has duly adopted the following resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation: RESOLVED, that Article I of the Certificate of Incorporation of the Corporation be amended to provide in its entirety as follows: "1. The name of the Corporation is: CNF Technologies, Inc." SECOND: That the aforesaid amendment has been duly adopted in accordance with Section 242 of the Delaware General Corporation Law. THIRD: That this amendment shall become effective upon the filing of this Certificate with the Secretary of State of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by, Paul Charles, its Chief Executive Officer, and David Thompson, its Chief Financial Officer this 10th day of June, 1999. JLL VENTURES (DELAWARE) CORPORATION By:/s/Paul Charles ----------------------------- Paul Charles Chief Executive Officer By:/s/David Thompson ----------------------------- David Thompson Chief Financial Officer EX-3.3 7 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS Exhibit 3.3 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS of SERIES A Convertible Preferred Stock of JLL VENTURES (DELAWARE) CORP. Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware JLL Ventures (Delaware) Corp. a Delaware corporation (the "Company"), certifies that pursuant to the authority contained in its Certificate of Incorporation, as amended, and in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware, its Board of Directors (the "Board of Directors") in an action taken as of April 16, 1999, has duly adopted the following resolution amending a series of its Preferred Stock, $.0001 par value, designating a segment thereof as Series A Convertible Preferred Stock: WHEREAS, the Certificate of Incorporation of the Company presently authorizes the issuance of up to 15,000,000 shares of Preferred Stock, $.0001 par value, in one or more series upon terms and conditions that are to be designated by the Board of Directors, of which no shares are currently issued and outstanding; WHEREAS, in order to effectuate a merger transaction deemed to be in the Company's best interests by the Board of Directors, the Board of Directors does hereby seek to provide for the designation of a segment of the Company's Preferred Stock as "Series A Convertible Preferred Stock"; and WHEREAS, the terms, conditions, voting rights, preferences, limitations and special rights of the Series A Convertible Preferred Stock in their entirety are as provided herein. NOW, THEREFORE, be it: RESOLVED, that a series of the class of authorized Preferred Stock, $.0001 par value, of the Company hereinafter designated "Series A Convertible Preferred Stock," be hereby created, and that the designation and amount thereof and the voting powers, preferences and relative, participating and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as the "Series A Convertible Preferred Stock" (the "Series A Convertible Preferred Stock") and the number of shares initially constituting such series shall be 6,000,000, which may be issued in whole shares. Section 2. Dividends and Distributions. The holders of shares of Series A Convertible Preferred Stock shall be entitled to receive such dividends or other distributions as are declared by the Company's Board of Directors on the same basis, and to the same extent as if the Series A Convertible Preferred Stock had already been converted into shares of the Company's Common Stock, based upon the Conversion Ratio applicable on the record date of the dividend or other distribution. Section 3. Voting Rights. The holders of all Series A Convertible Preferred Stock issued and outstanding, in the aggregate, shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series A Convertible Preferred Stock are convertible on any record date, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not separately as a class. Fractional votes by the holders of Series A Convertible Preferred Stock shall not, however, be permitted, and any fractional voting rights shall (after aggregating all shares into which shares of Series A Convertible Preferred Stock held by each holder could be converted) be rounded to the nearest whole number. Section 4. Liquidation, Dissolution, Winding Up or Certain Mergers or Consolidations. (a) If the Company shall adopt a plan of liquidation or of dissolution, or commence a voluntary case under the federal bankruptcy laws or any other applicable state or federal bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in any involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due and on account of such event the Company shall liquidate, dissolve or wind up, or upon any other liquidation, dissolution or winding up of the Company, or engage in a merger, plan of reorganization or consolidation in which the Company is not the surviving corporation, then and in that event, the holders of the Series A Convertible Preferred Stock shall be entitled to no preference over the holders of the Company's Common Stock; rather, in that event, the holders of the Series A Convertible Preferred Stock shall be entitled, pari-passu with the holders of the Common Stock, to receive whatever cash, securities or other consideration is payable or distributable to the holders of the outstanding Common Stock of the Company, as if the Series A Convertible Preferred Stock had already been converted into shares of the Company's Common Stock, based upon the Conversion Ratio applicable on the record date of the payment or distribution. (b) Except as provided in subparagraph (a) above, neither the consolidation, merger or other business combination of the Company with or into any other person or persons in which the Company is the surviving corporation nor the sale, lease, exchange or conveyance of all 2 or any part of the property, assets or business of the Company to a person or persons other than the holders of the Company's Common Stock, shall be deemed to be a liquidation, dissolution or winding up of the Company. Section 5. Conversion. (a) The shares of Series A Convertible Preferred Stock shall convert into shares of the Company's Common Stock (the "Conversion Date") upon the earlier of: (i) the completion of audited financial statements of the Company for the fiscal year ending March 31, 2000; (ii) June 30, 2000; or (iii) upon whatever earlier date the holder elects to convert. (b) Subject to the provisions for adjustment hereinafter set forth, the shares of Series A Convertible Preferred Stock shall be convertible into fully paid and non-assessable shares of Common Stock, based upon the conversion ratio hereinafter set forth (the "Conversion Ratio"): (i) Subject to subparagraph (ii) below, the Conversion Ratio shall be one (1) share of Common Stock issuable for each share of Series A Convertible Preferred stock converted or subject to conversion. (ii) If, however, the Company achieves any of the financial performance targets identified in the chart below, relating to the Company's audited results of operations for the year ending March 31, 2000 (the "Financial Performance Targets"), in lieu of the Conversion Ratio identified in Subparagraph (i) above, the Conversion Ratio shall be as set forth in the chart below:
Conversion Ratio: Shares of Common Stock to be Issued Upon Conversion Financial Performance Targets(1) of each Share of Preferred Stock Held -------------------------------- ------------------------------------- Gross Revenues of $22.5 million(2) and Net Income 1.5 of $900,000(3) Gross Revenues of $38.25 million(2) and Net Income 1.75 of $1.53 million(3) Gross Revenues of $51 million(2) and Net Income of 2.00 $2.04 million(3) Gross Revenues of $64 million(2) and Net Income 2.25 of $2.56 million(3)
(1) The Financial Performance Targets are to be derived from the results of operations reflected within the Company's audited financial statements for the fiscal year ending March 31, 2000. (2) The Financial Performance Targets with respect to Gross Revenues shall be considered to have been achieved if actual Gross Revenues are within 10% of the targeted amount. (3) The Financial Performance Targets with respect to Net Income shall be considered to have been achieved if actual Net Income is within 10% of the targeted amount. 3 (c) The number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible also shall be subject to adjustment from time to time as follows: (i) In case the Company shall, at any time or from time to time while any shares of Series A Convertible Preferred Stock are outstanding, declare a dividend, or make a distribution, on the outstanding shares of Common Stock in shares of Common Stock or subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares or combine or reclassify the outstanding shares of Common Stock into a smaller number of shares of Common Stock, then in each case, (A) the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible shall be adjusted so that the holder of each share thereof shall be entitled to receive, upon the conversion thereof, the number of shares of Common Stock which the holder of a share of Series A Convertible Preferred Stock would have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the happening of such event or the record date therefor, whichever is earlier; and (B) an adjustment made pursuant to this clause (i) shall become effective (I) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (II) in the case of any such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective. (ii) In case there shall be, at any time or from time to time while any shares of Series A Convertible Preferred Stock are outstanding, a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 5) or a merger or consolidation of the Company with or into another corporation pursuant to which the Company is not the acquiring entity and pursuant to which the stockholders of the Company are requested to exchange or convert their securities for securities of an acquiring entity, or the sale of all or substantially all of the Company's assets, then, as a condition of the consummation of such transaction, in addition to the requirements of paragraph 4(a), lawful and adequate provision shall be made so that each holder of shares of Series A Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Convertible Preferred Stock, the number of shares of Common Stock or other securities or property of the Company, or of the successor corporation of such merger or consolidation to which such holder would have been entitled if such holder had converted its shares immediately prior to the consummation of such transaction. (d) If the nature and/or character of the Common Stock issuable upon the conversion of the Series A Convertible Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (except as provided pursuant to Section 5(c) above), then and in each such event, the holders of Series A Convertible Preferred Stock shall have the right thereafter to convert such shares into the kind and amount of shares of stock and other securities and property 4 receivable upon such capital reorganization, reclassification or other change which such holders would have received had their shares of Series A Convertible Preferred Stock been converted immediately prior to such capital reorganization, reclassification or other change. (e) The holder of any shares of Series A Convertible Preferred Stock may exercise his right to convert such shares into shares of Common Stock by surrendering for such purpose to the Company, at the address set forth below, or any successor location, a certificate or certificates representing the shares of Series A Convertible Preferred Stock to be converted with the form of election to convert (the "Election to Convert") attached hereto as Exhibit A completed and executed as indicated, thereby stating that such holder elects to convert all or a specified whole number of such shares in accordance with the provisions of this Section 5 and specifying the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. The Election to Convert and the stock certificate(s) to be converted shall be delivered as follows: JLL Ventures (Delaware) Corp. 4725 East Sunrise Drive, #228 Tucson, Arizona 85718 Attention: Vincent Marold, President Telephone: (520) 615-1100 Facsimile: (520) 299-5149 with a copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll Professional Corporation Eleven Penn Center 1835 Market Street, 14th Floor Philadelphia, PA 19103 Telephone: (215) 665-3873 Facsimile: (215) 665-8760 In case the Election to Convert shall specify a name or names other than that of such holder, it shall be accompanied by payment of all transfer or other taxes payable upon the issuance of shares of Common Stock in such name or names that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of Series A Convertible Preferred Stock pursuant hereto. The Company will have no responsibility to pay any taxes with respect to the Series A Convertible Preferred Stock. As promptly as practicable, and in any event within five business days after the surrender of such certificate or certificates and the receipt of the Election to Convert, and, if applicable, payment of all transfer or other taxes (or the demonstration to the satisfaction of the Company that such taxes have been paid), the Company shall deliver or cause to be delivered (i) certificates representing the number of validly issued, fully paid and nonassessable full shares of Common stock to which the holder of shares of Series A Convertible Preferred Stock so converted shall be entitled and (ii) if less than the full number of shares of Series A Convertible Preferred Stock evidenced by the surrendered certificate or certificates are being converted, a new certificate or certificates, of like tenor, for the number of 5 shares evidenced by such surrendered certificate or certificates less the number of shares converted. Such conversion shall be deemed to have been made at the close of business on the date of giving of the Election to Convert and of such surrender of the certificate or certificates representing the shares of Series A Convertible Preferred Stock to be converted so that the rights of the holder thereof as to the shares being converted shall cease except for the right to receive shares of Common Stock in accordance herewith, and the person entitled to receive the shares of Common Stock shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time. The Company shall not be required to convert, and no surrender of shares of Series A Convertible Preferred Stock shall be effective for that purpose, while the transfer books of the Company for the Common Stock are closed for any purpose (but not for any period in excess of 15 calendar days); but the surrender of shares of Series A Convertible Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books, as if the conversion had been made on the date such shares of Series A Convertible Preferred Stock were surrendered, and at the conversion rate in effect at the date of such surrender. (f) In connection with the conversion of any shares of Series A Convertible Preferred Stock, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the fair market value of such fractional interest, as determined by the Company's Board of Directors in the good faith exercise of its reasonable business judgment. Section 6. Reports as to Adjustments. Whenever the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible is adjusted as provided in Section 5 hereof, the Company shall promptly mail to the holders of record of the outstanding shares of Series A Convertible Preferred Stock at their respective addresses as the same shall appear in the Company's stock records a notice stating that the number of shares of Common Stock into which the shares of Series A Convertible Preferred Stock are convertible has been adjusted and setting forth the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each share of Series A Convertible Preferred Stock is convertible, as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof, and when such adjustment became effective. Section 7. Redemption. The Company shall not have the right to redeem all or any part of the Series A Convertible Preferred Stock and the Holder shall not have the right to cause or request such a redemption. 6 Section 8. Registration Rights. The holders of the Series A Convertible Preferred Stock shall have the registration rights as set forth in the Registration Rights Agreements attached as Exhibit 5.5(b) to the Merger Agreement dated as of April 16, 1999. Section 9. Amendment. So long as any shares of Series A Convertible Preferred Stock are outstanding, the Company shall not, without first obtaining the approval of the holders of at least a majority of the aggregate number of then outstanding shares of Series A Convertible Preferred Stock, take any action that alters the rights, preferences or privileges of the Series A Convertible Preferred Stock. Section 10. Reacquired Shares. Any shares of Series A Convertible Preferred Stock converted, purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof, and, if necessary to provide for the lawful purchase of such shares, the capital represented by such shares shall be reduced in accordance with the General Corporation Law of the State of Delaware. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, $.0001 par value, of the Company and may be reissued as part of another series of Preferred Stock, $.0001 par value, of the Company. RESOLVED FURTHER, that appropriate officers of the Company are hereby authorized to execute and acknowledge a certificate setting forth these resolutions and to cause such certificate to be filed and recorded, all in accordance with the requirements of Section 151 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Certificate of Designation of Series A Convertible Preferred Stock to be duly executed by its President this 19th day of May, 1999. JLL VENTURES (DELAWARE) CORP. By:/s/Vincent Marold ------------------------------ Vincent Marold, President 7 EXHIBIT A ELECTION TO CONVERT (To be Executed by Holder in order to Convert Shares of Series A Convertible Preferred Stock) The undersigned, as a holder ("Holder") of shares of Series A Convertible Preferred Stock ("Preferred Shares") of JLL Ventures (Delaware) Corp. (the "Company"), hereby irrevocably elects to convert _____________ Preferred Shares for shares ("Common Shares") of common stock, par value $.0001 per share (the "Common Stock"), of the Company according to the terms and conditions of the Certificate of Designation for the Preferred Shares as of the date written below. The undersigned hereby requests that share certificates for the Common Stock to be issued to the undersigned pursuant to this Election to Convert be issued in the name of, and delivered to, the undersigned or its designee as indicated below. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Certificate of Designation. Conversion Date: __________________________ Conversion Information: NAME OF HOLDER: ____________________________________ By: ____________________________________ Print Name: ____________________________________ Print Title: ____________________________________ Print Address: ____________________________________ ____________________________________ ____________________________________ Issue Common Stock to: _____________________________ at: _____________________________ _____________________________ If Common Stock is to be issued to a person other than Holder, Holder's signature must be guaranteed below: SIGNATURE GUARANTEED BY: _____________________________ THE COMPUTATION OF NUMBER OF SHARES OF COMMON STOCK TO BE RECEIVED IS SET FORTH ON PAGE 2 OF THE CONVERSION NOTICE. Page 1 of Conversion Notice COMPUTATION OF NUMBER OF SHARES OF COMMON STOCK TO BE RECEIVED Number of shares of Preferred Stock converted: ________ shares Conversion Ratio: _________________ Explain method and basis of computation of Conversion Ratio (include cross-reference to applicable section, if necessary): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Please issue and deliver _____ certificate(s) for shares of Common Stock in the following amount(s): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ If the Holder is receiving certificate(s) for shares of Preferred Stock upon the conversion, please issue and deliver _____ certificate(s) for shares of Preferred Stock in the following amounts: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Page 2 of Conversion Notice EX-3.4 8 BY-LAWS OF JLL VENTURES (DELAWARE) CORP. Exhibit 3.4 BY-LAWS of JLL VENTURES (DELAWARE) CORP. 1. Offices JLL Ventures (Delaware) Corp. (hereinafter the "Corporation") may have offices and places of business at such places, within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. 2. Meeting of Stockholders 2.1 Place of Meetings. All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver thereof. 2.2 Annual Meeting. Annual meetings of stockholders commencing with the year 2000 shall be held on the date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver thereof. 2.3 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President or Board of Directors and shall be called by the President or Secretary at the request in writing of stockholders owning not less than one-fifth of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. 2.4 Notice. Written notice of each meeting of stockholders shall be given in the manner prescribed in Article IV of these By-laws which shall state the place, date and hour of the meeting and, in the case of a special meeting, shall state the purpose or purposes for which the meeting is called. In the case of a meeting to vote on a proposed merger or consolidation, such notice shall state the purpose of the meeting and shall contain a copy of the agreement or brief summary thereof and, in the case of a meeting to vote on a proposed sale, lease or exchange of all of the Corporation's assets, such notice shall specify that such a resolution shall be considered. Such notice shall be given to each stockholder of record entitled to vote at the meeting not less than ten (10) nor more than sixty (60) days prior to the meeting, except that where the matter to be acted on is a merger or consolidation of the Corporation or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than twenty (20) nor more than sixty (60) days prior to such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 2.5 Business. Business transacted at any special meeting of stockholders shall be limited to the purpose or purposes stated in the notice. 2.6 Quorum and Adjournment. Except as otherwise provided by statute or the Certificate of Incorporation, the holders of a majority of the shares of the Corporation issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be necessary to and shall constitute a quorum for the transaction of business at each meeting of stockholders but in no event shall a quorum consist of less than one-third of the shares entitled to vote at the meeting. If a quorum shall not be present at the time fixed for any meeting, the stockholders present, in person or by proxy, and entitled to vote thereat shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.7 Voting. Unless otherwise provided in the Certificate of Incorporation and subject to the provisions of Article VI, Section 4 of these By-laws, each stockholder shall be entitled to one vote, in person or by proxy, for each share of capital stock held by such stockholder. If the Certificate of Incorporation provides for more or less than one vote for any share, on any matter, every reference in these By-laws to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. 2.8 Vote Required. When a quorum is present at any meeting, in all matters other than the election of directors, the vote of the holders of a majority of the shares present in person or represented by -2- proxy and entitled to vote on the subject matter shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. 2.9 Voting Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.10 Proxy. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. 2.11 Consents. Any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Where corporate action is taken in such manner by less than unanimous written -3- consent, prompt written notice of the taking of such action shall be given to all stockholders who have not consented in writing thereto. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by statute to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. 3. Directors 3.1 Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things, except as provided in the Certificate of Incorporation. 3.2 Number; Election and Tenure. The number of directors which shall constitute the whole Board shall be not less than one (1) nor more than five (5). The first Board shall consist of one (1) director. Thereafter, within the limits above specified, the number of directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3 of this Article, and each director elected shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Any director may resign at any time upon written notice to the Corporation. Directors need not be stockholders. 3.3 Vacancies. Vacancies in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, or until his earlier resignation or removal. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the Certificate of Incorporation or -4- the By-laws or may apply to the Court of Chancery for a decree summarily ordering an election as provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. 3.4 Meetings. The Board of Directors of the Corporation may hold its meetings, and have an office or offices, within or without the State of Delaware. 3.5 First Meeting. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. 3.6 Notice. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. A special meeting of the Board may be called by the President or any Vice President and a special meeting shall be called by the President on the written request of two directors. Notice of each special meeting of the Board of Directors, specifying the place, day and hour of the meeting, shall be given in the manner prescribed in Article IV of these By-Laws and in this Section 6, either personally or by mail, by courier, telex or telegram to each director, at the address or the telex number supplied by the director to the Corporation for the purpose of notice, at least 48 hours before the time set for the meeting. Neither the business to be transacted at, nor the purpose of any meeting of the Board, need be specified in the notice of the meeting. 3.7 Quorum and Voting. Except as may be otherwise specifically provided by statute or by the Certificate of Incorporation, a majority of the total number of directors shall constitute a quorum for the -5- transaction of business. The vote of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Members of the Board or members of any committee designated by the Board may participate in meetings of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meeting shall constitute presence in person at such meeting. 3.8 Consents. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.9 Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation; and, unless the resolution, By-laws or Certificate of Incorporation provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. 3.10 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. -6- 3.11 Compensation of Directors. The directors as such, and as members of any standing or special committee, may receive such compensation for their services as may be fixed from time to time by resolution of the Board. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. The directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.12 Removal of Directors. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 4. Notices 4.1 Form of Notice. Whenever, under the provisions of the Delaware General Corporation Law or of the Certificate of Incorporation or of these By-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by first class or express mail, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail, except that, in the case of directors, notice sent by first class mail shall be deemed to have been given forty-eight hours after being deposited in the United States mail. Whenever, under these By-laws, notice may be given by telegraph, courier or telex, notice shall be deemed to have been given when deposited with a telegraph office or courier service for delivery or, in the case of telex, when dispatched. 4.2 Waiver of Notice. Whenever notice is required to be given under any provisions of the Delaware General Corporation Law or the Certificate of Incorporation or these By-laws, a written waiver, signed by the person or persons entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a -7- committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or the By-laws. 5. Officers 5.1 Selection of Officers. The officers of the Corporation shall be chosen by the directors and shall consist of a president and secretary. The Board of Directors may also choose a treasurer, one or more vice presidents, and one or more assistant secretaries. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-laws otherwise provide. A failure to elect officers shall not dissolve or otherwise affect the Corporation. 5.2 Term of Office, Removal and Vacancies. Each officer of the Corporation shall hold his office until his successor is elected and qualifies or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring by death, resignation, removal or otherwise, in any office of the Corporation, shall be filled by the Board of Directors. 5.3 Compensation. The salaries of the officers of the Corporation may be fixed by the Board of Directors. 5.4 Bond. The Corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. 5.5 The President. The President shall be the chief executive officer of the Corporation, shall preside at all meetings of the stockholders and the Board of Directors, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall have the power to appoint and remove such subordinate officers and agents other than those actually appointed or elected by the Board of Directors as the business of the Corporation may require. -8- 5.6 Vice President. Each Vice President, if any, shall perform such duties as shall be assigned to him by the Board of Directors or President, and, in the absence or disability of the President, the most senior in rank of the Vice Presidents shall perform the duties of the President. 5.7 Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Board of Directors and the stockholders in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President. He shall be the custodian of the seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. 5.8 Assistant Secretary. The Assistant Secretary, if any, or assistant secretaries, if more than one, shall perform the duties of the secretary in his or her absence and shall perform such other duties as the Board of Directors, the President or the Secretary may from time to time designate. 5.9 Treasurer. The Treasurer shall have custody of the corporate funds and securities and shall keep, or cause to be kept, full and accurate amounts of receipts and disbursements in books kept for that purpose. He shall deposit all monies, and other valuable effects, in the name and to the credit of the Corporation, in such depository as the Board of Directors shall designate. As directed by the Board of Directors or the President, he shall disburse monies of the Corporation, taking proper vouchers for such disbursements and shall render to the President and directors an account of all his transactions as Treasurer and of the financial condition of the Corporation. In addition, he shall perform all the usual duties incident to the office of Treasurer. 6. Certificates of Stock and Transfers 6.1 Certificates of Stock; Uncertificated Shares. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. -9- Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation by, the President or any Vice President, and countersigned by the Secretary or any Assistant Secretary or the Treasurer, representing the number of shares registered in certificate form. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificate or Uncertificated Shares. The Board of Directors may issue a new certificate of stock or uncertificated shares in place of any certificate therefore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 6.3 Record Date. In order that the Corporation may determine the stockholders entitled to notice of, or to vote at, any meeting of stockholders or at any adjournment thereof in respect of which a new record date is not fixed, or to consent to corporate action without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than ten (10) days after the date on which the date fixing the record date for the consent of stockholders without a meeting is adopted by the Board of Directors, nor more than sixty (60) days prior to any other such action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6.4 Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as of any record date fixed or determined pursuant to Section 3 of this Article as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part -10- of any other person, regardless of whether it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. 7. General Provisions 7.1 Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock, subject to the provisions of the Certificate of Incorporation. 7.2 Liability of Directors as to Dividends or Stock Redemption. A member of the board of directors, or a member of any committee designated by the board of directors, shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors, or by any other person as to matters the director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid, or with which the Corporation's stock might properly be purchased or redeemed. 7.3 Reserve for Dividends. Before declaring any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 7.4 Annual Statement. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. 7.5 Signing Checks, Notes, etc. All checks or other orders for the payment of money and all notes or other instruments evidencing indebtedness of the Corporation shall be signed on its behalf by such -11- officer or officers or such other person or persons as the Board of Directors may from time to time designate, or, if not so designated, by the President or any Vice President of the Company. 7.6 Fiscal Year. The fiscal year of the Corporation shall end on December 31of each year or as otherwise determined by resolution of the Board of Directors. 7.7 Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. 7.8 Voting of Securities of Other Corporations. In the event that the Corporation shall, at any time or from time to time, own and have power to vote any securities (including but not limited to shares of stock or partnership interests) of any other issuer, they shall be voted by such person or persons, to such extent and in such manner, as may be determined by the Board of Directors or, if not so determined, by any duly elected officer of the Corporation. 8. Indemnification 8.1 Indemnification. Except as otherwise provided below, each person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding") and whether or not by or in the right of the Corporation or otherwise, by reason of the fact that he or she, or a person of whom he or she is the heir, executor or administrator, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as director or officer or trustee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or trustee, or in any other capacity while serving as a director or officer or trustee, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by law, as the same exist or may hereinafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than are permitted the corporation to provide prior to such amendment), against all reasonable expenses, including attorneys' fees, and any liability and loss, including judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement, incurred or paid by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer or trustee; provided, however, that except as provided in paragraph (b) -12- hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of the final disposition thereof; provided, however, that to the extent required by the law, the payment of such expenses incurred by an officer or director in advance of the final disposition of a proceeding shall be made only upon receipt of an undertaking, by or on behalf of such person, to repay all amounts so advanced if it shall ultimately be determined that he or she is not entitled to be indemnified under this section or otherwise. The right to indemnification and advancement of expenses provided herein shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. 8.2 Right to Claimant to Bring Suit. If a claim under Section 1 of this Article is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may, at any time thereafter, bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. 8.3 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of a final disposition conferred in this Article VIII shall not be exclusive of any other rights to which those seeking indemnification or advancement of expenses hereunder may be entitled under any bylaw, agreement, vote of stockholders or directors or otherwise, both as to action in his official capacity and as to action in any other capacity while holding that office. 8.4 Funding. The Corporation may create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner its indemnification obligations, whether arising under or pursuant to this bylaw or otherwise. 9. Amendments These By-laws may be altered, amended or repealed, and new By-laws may be adopted, by the stockholders, or by the Board of Directors when such power is conferred upon the Board of Directors by the Certificate of Incorporation. Dated: March 26, 1999 -13- Amendment to the ByLaws: EXCERPT FROM 5-19-99 WRITTEN CONSENT "RESOLVED, that pursuant to the authority vested in this Board of Directors under Article IX of the Bylaws, Article 7.6 of the Bylaws is hereby amended to read in its entirety as follows: "7.6 Fiscal Year. The fiscal year of the Corporation shall end on March 31 of each year or as otherwise determined by resolution of the Board of Directors." -14- EX-10.1 9 EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 19th day of May, 1999, by and between JLL VENTURES (Delaware) CORP., a Delaware corporation (hereinafter "Company"), and Paul D. Charles an individual (hereinafter "Executive"). W I T N E S S E T H: WHEREAS, on the date hereof, JLL Ventures Acquisition Corp., a Delaware corporation ("JLL"), and wholly-owned subsidiary of the Company, acquired CNF Inc., a California corporation ("CNF"), pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"); WHEREAS in connection with the Merger Agreement, Executive agreed to become employed with the Company upon the terms and conditions herein contained. NOW, THEREFORE, in consideration of the mutual premises and covenants of the parties contained within the Merger Agreement and in this Agreement, the parties hereto, do hereby agree as follows: 1. Employment and Term. A. The Company hereby employs Executive and Executive hereby accepts employment by the Company as its Chief Executive Officer and President. Executive agrees to serve the Company in such capacity, subject to the terms and conditions of this Agreement, for a term, commencing on the date hereof and expiring three years from that date of this Agreement (the "Term"). 2. Duties. A. During the Term, Executive shall use his best efforts to perform all duties required in furtherance of his position, including without limitation all such duties as are customarily associated with such position or as are assigned to him from time to time by the Board of Directors of the Company. B. Executive shall diligently and faithfully devote his entire time, energy, skill, and best efforts to the performance of his duties under this Agreement during reasonable business hours. Executive shall conduct himself at all times so as to advance the best interests of the Company, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Board of Directors of the Company. Executive also agrees that he shall not usurp or misappropriate, either to himself, or to any other person or entity, any corporate or other opportunities that would otherwise be available to the Company. 3. Compensation. A. The Company shall pay Executive and Executive shall accept, as his base compensation ("Base Compensation") for all services rendered to the Company pursuant hereto, an annual salary of $250,000, to be paid in accordance with the general payroll practices of the Company as from time to time in effect, subject to all applicable federal and state tax withholding requirements. Executive shall also be entitled, subject to the terms and conditions of particular plans and programs, to all fringe benefits afforded to other executives of Company in the discretion of the Board of Directors, including, but not limited to, the right to participate in any pension, retirement, major medical, group health, disability, accident and life insurance, and other employee benefit programs made generally available, from time to time, by the Company (collectively, "Benefits"). 2 B. In addition to Base Compensation, a "Discretionary Bonus" may be awarded to Executive on the basis of merit performance on an annual basis in the discretion of the Company's Board of Directors or Compensation Committee. Base Compensation and Discretionary Bonus shall hereinafter collectively be referred to as "Compensation." C. Executive shall be entitled to participate in any stock option programs adopted by the Company to the extent determined on a discretionary basis by the Board of Directors of the Company or Compensation Committee thereof. 4. Vacation and Reimbursement of Expenses. A. Executive shall receive paid vacation in each calendar year in accordance with the written policy of the Company, or as otherwise determined by the board of Directors of the Company, to be taken at times which do not unreasonably interfere with the performance of the Employee's duties hereunder and in no event shall Executive schedule more than ten (10) consecutive days of vacation during any three month period without the prior written consent of the Board of Directors; B. Executive shall be reimbursed for such reasonable expenses as are directly incurred for the business of the Company upon presentation by Executive of an itemized account of such expenditures, but only to the extent that such expenses are deductible to the Company pursuant to rules and regulations adopted by the United States Internal Revenue Service; provided, however, that any expenses are in accordance with Company policy. 5. Termination. A. Executive's employment and rights to Compensation and Benefits hereunder shall terminate immediately if Executive voluntarily leaves the employment of the Company; except that the Company shall have the obligation to pay Executive such portion of his 3 Base Compensation provided for in Section 3.A hereof as may be accrued but unpaid on the date Executive voluntarily leaves the employment of the Company. In the event that Executive voluntarily leaves the employment of the Company, he shall provide at least ninety (90) days' written notice. B. The Company may at any time, upon written notice to Executive giving the reasons therefor, terminate Executive's employment and his right to Compensation hereunder "For Cause." As used herein, the term "For Cause" shall be defined to include: (i) with respect to the fiscal year ending March 31, 2000, the Company's audited financial statements for such period reflecting: (a) revenues of less than $17,500,000; or (b) a net loss exclusive of extraordinary items determined in accordance with generally accepted accounting principles in excess of $500,000; (ii) with respect to all subsequent periods during the Term, if the Company fails to achieve for two (2) consecutive quarters such quarterly financial performance targets for revenue and pre-tax net income as are determined by the Compensation or similar committee of the Board of Directors (a majority of whose members shall be non-employee directors), in consultation with executive management, as determined prior to or during the first fiscal quarter of each fiscal year; (iii) conviction of Executive of any felony, fraud, embezzlement, or crime of moral turpitude; (iv) controlled substance abuse or drug addiction; (v) alcoholism which interferes with or affects Executive's responsibilities; (vi) grossly negligent, reckless or intentional misconduct which is materially injurious to the Company; (vii) violation of any express written direction of or any reasonable written rule or regulation established by the Company's Board of Directors from time to time which violation has not been cured to the Company's satisfaction within thirty (30) calendar days of the dispatch of written notice to the Executive of the violation. In the event of a termination For Cause, Executive's employment and right to Compensation and Benefits 4 hereunder shall terminate immediately, except that the Company shall have the obligation to pay Executive such portion of his Base Compensation as may be accrued but unpaid on the date his employment is terminated. C. Commencing on the one (1) year anniversary of the Agreement, Executive may also be terminated for any reason ("Without Cause") in the discretion of the Board of Directors of the Company. In the event of a termination Without Cause, Executive's employment and right to Compensation and Benefits shall terminate immediately and Executive shall, in lieu thereof, be entitled to severance pay consisting of a continuation of Base Compensation and Benefits for a period of one (1) year. During the period in which payments are made to Executive pursuant to this Section 5.C, Executive shall remain subject to the limitations identified in Section 6 hereafter. D. Unless Executive's employment hereunder is terminated by reason of: (i) his voluntary resignation or retirement; or (ii) by reason of any of the "For Cause" events set forth at Section 5.B(ii) (vii), Executive shall be removed as a guarantor of any Company obligations in force as of the date of this Agreement prior to any termination becoming effective and by virtue of this agreement Executive does hereby grant the Company the right in his place and stead to secure the removal of any such guaranteed obligations at no cost to Executive. 6. Confidentiality and Related Matters. A. Acknowledgment of Nature and Value of Confidential Information: For the purposes of this Section 6 only, the term "Company" shall include the Company, all subsidiaries of the Company and CNF. Executive recognizes, acknowledges and agrees: (i) that in the course of Executive's employment by the Company, it has been, and will continue to be, necessary for Executive to acquire, in a fiduciary capacity of trust, information which could 5 include, in whole or in part, but is not limited to: information concerning the Company's rate schedules; rate quotations; the names, addresses, credit terms and nature of services provided by the vendors utilized by the Company; the names, addresses, credit terms and nature of services provided to customers of the Company; the identity of the Company's suppliers, sales representatives, shippers or other entities with whom Executive has come into contact as a result of his employment with the Company, or which should otherwise come into his knowledge during the term of this Agreement; the salaries, skills, education or abilities of the Company's employees; the Company's sales, sales volume, sales methods and sales proposals; the identities of the Company's customers and/or prospective customers; the identities of key purchasing personnel in the employ of customers and prospective customers; the amounts and/or kinds of customers' purchases from the Company; the Company's sources of information and supply; the Company's products and product designs; the Company's computer programs, system documentation, source code and algorithms, special hardware or software, service or product hardware or software, and related software or hardware development; any useful process, machine or other device or composition of matter which is new and which is being used or studied by the Company and is not described in a patent or described in any literature already published and distributed externally by the Company; the Company's manuals, formulae, tools, processes, methods, machines, compositions, ideas, improvements, trade secrets, including but not limited to information falling under the definition of a "trade secret" pursuant to the Uniform Trade Secret Act (or, if applicable, the version thereof adopted by Delaware), patents, inventions, intellectual property, or other information or materials relating to the Company's affairs (collectively referred to herein as the "Confidential Information"); (ii) that the Confidential Information is the property of the Company and constitutes a major asset of the Company; (iii) that the use, misappropriation or 6 disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company; and (iv) that it is essential to the protection of the Company's goodwill and to the maintenance of the Company's competitive position that the Confidential Information be kept secret and that Executive neither disclose the Confidential Information to others nor use the Confidential Information to Executive's own advantage or to the advantage of others. B. Acknowledgment of Necessity for Protections of Company's Business. Executive further recognizes, acknowledges and agrees that it is essential for the proper protection of the business of the Company that Executive shall not: (i) solicit or induce any employee of the Company to leave the employ of the Company; (ii) hire or attempt to hire any employee of the Company; (iii) solicit the trade of, or trade with, the customers or suppliers of the Company for any business purpose other than that of the Company; and (iv) compete against the Company for a reasonable period of time and within a reasonable geographic area following the termination or nonrenewal of Executive's employment with the Company, as more fully addressed in Section 6.F, below. C. Work Made For Hire. Executive hereby acknowledges and agrees that each of the copyrightable related to the business of the Company works authored by Executive (including without limitation, all software and related documentation, and all written and graphic materials prepared or conceived by Employee), alone or with others, during Executive's employment with the Company shall be deemed to be works prepared by Executive within the scope of Executive's employment with the Company and, as such, shall be deemed to be "works made for hire" under the United States copyright laws from the inception of creation of such works. In the event that any of such works shall be deemed by a court of competent jurisdiction 7 not to be a "work made for hire," this Agreement shall operate as an irrevocable assignment by Executive to the Company of all right, title and interest in and to such works, including, without limitation, all worldwide copyright interests therein, in perpetuity. The fact that such copyrightable works are created by Executive outside of the Company's facilities or other than during Executive's working hours with the Company shall not diminish the Company's right with respect to such works which otherwise fall within this paragraph. Executive agrees to execute and deliver to the Company such further instruments or documents as may be requested by the Company in order to effectuate the purposes of this paragraph. D. Non-Disclosure of Confidential Information. In recognition and consideration of Executive's employment, Compensation and Benefits, the information which the Company has given and will give Executive regarding the Company's business, the Executive's introduction to the Company's customers and prospective customers made in the course of Executive's employment with the Company, and the carefully-guarded methods of doing business which the Company utilizes and deems crucial to the successful operation of its business, Executive has held, and agrees to continue to hold and safeguard, the Confidential Information in trust and in a fiduciary capacity for the Company, its successors and assigns. Executive expressly agrees that he shall not, without the prior written consent of the Company, misappropriate or disclose or make available to anyone for use outside the Company's organization at any time, either during Executive's employment with the Company or subsequent to the termination or nonrenewal of such employment with the Company, for any reason, including without limitation termination by the Company For Cause or Without Cause, any of the Confidential Information, whether or not developed by Executive, except as required by the Company in the performance of Executive's duties to the Company. Notwithstanding the above, term "Confidential Information" 8 shall not include information which becomes generally available to the public (other than as a result of disclosure by the Executive). Furthermore, if you are formally required to disclose any Confidential Information in the context of a civil, governmental or regulatory proceeding, you shall provide the Company with prompt notice of any such requirement so that the Company may seek an appropriate protective order or waive compliance with the provisions of this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, you are, in the opinion of your counsel, compelled to disclose Confidential Information or else stand liable for contempt of suffer other censure or penalty, you may disclose that portion of the Confidential Information which your counsel advises you to disclose. In any event, you will not oppose action by, and will cooperate with the civil, governmental or regulatory agency to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. E. Disclosure of Works and Inventions/Assignment of Patents. In consideration of the promises set forth herein, Employee agrees to disclose promptly and fully to the Company, or to such person whom the Company may expressly designate for this specific purpose (its "Designee"), any and all works, inventions, discoveries and improvements authored, conceived or made by Employee, solely or with others, during the period of employment by the Company and where the subject matter of such works, inventions, discoveries or improvements results from or is suggested by any work which Employee may do for or on behalf of the Company shall have all rights to such works, inventions, discoveries and improvements, whether they are patentable or not. The fact that such works, inventions, discoveries and improvements are made or conceived by Employee outside of the Company's facilities or other than during the Employee's working hours with the Company shall not diminish the Company's rights with respect 9 to such works, inventions, discoveries and improvements which otherwise fall within this paragraph. Employee agrees that, whenever he is requested to do so by the Company, during or after termination of Employee's employment by the Company, Employee shall execute or join in executing any and all applications, assignments or other instruments which the Company shall deem necessary to apply for and obtain Letters Patent or Copyrights of the United States or any foreign country or to otherwise protect the Company's interest therein, and Employee shall assign all such applications to the Company or its Designee, and shall provide the Company or its agents or attorneys with all reasonable assistance in the preparation and prosecution of patent applications, drawings, specifications and the like, all at the expense of the Company, and shall do all that may be necessary to establish, protect and maintain the rights of the Company or its Designee in the works, inventions, discoveries, improvements, patent applications and Letters Patent in accordance with the spirit of this paragraph. Such obligations shall continue beyond the termination or nonrenewal of Employee's employment with respect to any works, inventions, discoveries and/or improvements that are authored, conceived of, or made by Employee during the period of Employee's employment, and shall be binding upon Employee's successors, assigns, executors, heirs, administrators or other legal representatives. The Company shall have no rights pursuant to this Agreement in any work, invention, discovery or improvement of the Employee made during the Term of Employee's employment by the Company if such work, invention, discovery or improvement has not arisen out of the or by reason of Employee's work with the Company or does not relate to the products, business or operations of the Company, although Employee shall nonetheless inform the Company of any such work, invention, discovery or improvement. 10 F. Restrictions on Competition. Executive covenants and agrees that, for and in consideration of the Compensation received hereunder, the sufficiency and receipt of which is hereby acknowledged, during the period of Executive's employment hereunder (and for the period during which payments are made pursuant to Section 5.C. hereof), and for a period of one (1) year thereafter, Executive shall not, in any state or foreign country in which the Company does business, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder, or otherwise, alone or in association with any other person, corporation or other entity, in any "Competing Business". For purposes of this Agreement, the term "shareholder" shall exclude any interest owned by Executive in a public company to the extent the Executive owns less than ten percent (10%) of any such company's outstanding common stock. For the further purposes of this Agreement, the term "Competing Business", shall mean any person, corporation or other entity that is engaged in the business of selling portable computer peripherals or similar products being manufactured, developed, sold, distributed or licensed by the Company which directly competes with the business of the Company at the time of such termination or nonrenewal. Accordingly, the Company is granted the right by Executive to apply to any court of competent jurisdiction for one or more temporary or permanent injunctions enjoining Executive, his agents and employees, from violating the provisions of this Agreement and/or from continuing to breach such provisions. This Section 6.F shall not be effective for any purpose whatsoever if Executive is terminated Without Cause; except during the period which payments are being made pursuant to Section 5.C hereof. G. Non-Solicitation of Customers and Suppliers. Executive agrees that during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C. hereof), and for a period of one (1) year thereafter, he shall not, 11 directly or indirectly, solicit the trade of, or trade with, any past or present customer or supplier of the Company for any business purpose that competes directly or indirectly with the business being undertaken by the Company. H. Non-Solicitation of Employees. Executive agrees that, during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C hereof) and for two (2) years following any termination or nonrenewal of Executive's employment with the Company, including, without limitation, termination by the Company For Cause or Without Cause, Executive shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the Company for any reason whatsoever, or assist or participate in the hiring of any employee of the Company to work for another entity. I. No Prior Agreements. Executive represents and warrants that Executive is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect Executive's ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in this Section 6. Executive further represents and warrants that his employment with the Company will not under any circumstances require him to disclose or use any confidential information belonging to prior employers or other persons or entities, or to engage in any conduct which may potentially interfere with the contractual, statutory or common-law rights of such other employers, persons or entities. In the event that Executive knows or learns of any facts whatsoever which suggest that such interference might arguably occur as the result of any proposed actions by either 12 Executive or the Company, Executive expressly promises that he will immediately bring such facts to the Company's attention. J. Remedies. In the event of a breach by Executive of any of the terms of this Agreement, the Company shall be entitled, if it shall so elect, to institute legal proceedings to obtain damages for any such breach, or to enforce the specific performance of this Agreement by Executive and to enjoin Executive from any further violation of this Agreement, and to exercise such remedies cumulatively or in conjunction with all other rights and remedies provided by law. Executive acknowledges and agrees that money damages for any breach by him of any of the provisions of this Agreement may be inadequate to compensate the Company for the injuries it may suffer as the result of any such breach, and accordingly that the Company shall be entitled to injunctive relief against Executive, in addition to money damages, in the event of any such breach by Executive. K. Review by Counsel. Executive expressly acknowledges and represents that Executive has been given a full and fair opportunity to review this Agreement with an attorney of Executive's choice, and that Executive has satisfied himself, with or without consulting with counsel, that the terms and provisions of this Agreement, specifically including, but not limited to, the restrictive covenant and related provisions of Section 6 hereof, are reasonable and enforceable. L. Return of Materials. Upon the termination or nonrenewal of Executive's employment with the Company for any reason, including without limitation termination by the Company For Cause or Without Cause, or at any time upon demand, Executive shall promptly deliver to the Company all Company property and materials, including without limitation all documents or other materials constituting, containing, referencing or relating to the "Confidential 13 Information" referred to in this Section 6, and any other Company property of any nature whatsoever, including without limitation correspondence, computer disks or other electronically-stored information, drawings, blueprints, manuals, letters, notes, notebooks, reports, flow-charts, programs, proposals and any documents concerning the Company's customers, or concerning services, products or processes provided by or to, or used by, the Company. M. Company-Created Materials. All material that may be furnished to the Executive, together with literature, rate schedules, customer lists, forms, filing systems and any other property, documents or other materials furnished or made available by the Company to the Executive, shall be and remain the property of the Company, and shall be returned by the Executive to the Company upon any termination or nonrenewal of employment or at any time upon demand. N. Executive-Created Materials. All material created by the Executive during the term of his employment with the Company which is incidental to or related in any way to the Executive's employment, or to the Company's business, shall be the property of the Company, and shall be delivered to the Company upon any termination or nonrenewal of Executive's employment or at any time upon demand. O. Definitions. For purposes of this Section 6, the term, "material(s)" shall include, but shall not be limited to, data stored in computers, voicemail or any other electronic, magnetic, or mechanical storage device, any passwords, codes or keys required to access all or any portion of such material, and the "Confidential Information" referred to in Section 6.A. hereof. 14 7. Conflict of Interest. Executive covenants that, during the Term, he will disclose to the Company, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could potentially interfere with his ability to perform under this Agreement or create a conflict of interest for him with the Company. For purposes of this paragraph 7 only, "conflict of interest" shall mean ownership of greater than one percent (1%) of, or $250,000 worth of equity in, another company which conducts business similar to that undertaken by the Company. 8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: A. If to Executive, to: Paul D. Charles 10931 East Laurel Lane Scottsdale, AZ 85260 With a copy to: Stephen Boatwright, Esquire Gammage & Burnham 2 North Central, 18th Floor Phoenix, AZ 85004 B. If to Company, to: JLL Ventures (Delaware) Corp. 7722 East Gray Road Scottsdale, AZ 85260 15 With a copy to: Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, Pa. 19103 Attn.: Stephen M. Cohen, Esquire 9. Basic Indemnification. Company shall indemnify and defend Executive and his heirs, executors and administrators against any costs or expense (including reasonable attorneys' fees and amounts paid in settlement, if such settlement is approved by the Company), fine, penalty, judgment and liability reasonably incurred by or imposed upon Executive in connection with any action, suit or proceeding, civil or criminal, to which Executive may be made a party or with which Executive shall be threatened, by reason of Executive's being or having been an Officer, unless with respect to such matter Executive shall have been adjudicated in any proceeding not to have acted in good faith or in the reasonable belief that the action was in the best interests of the Company, or unless such indemnification is precluded by law, public policy, or in the judgment of the Company's Board of Directors, such indemnification is being sought as a result of actions of Executive which were either : (i) grossly negligent; (ii) reflective of Executive misconduct; (iii) in violation of rules, regulations or laws applicable to the Company; or (iv) in disregard of Company policies. Company shall utilize its best efforts to obtain Directors and Officers Liability Insurance in an amount which is standard and customary for a business such as the Company. 10. Additional Provisions. A. Binding Agreement. This Agreement, including without limitation its confidentiality, restrictive covenant and related provisions, shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Executive, his heirs, executors, 16 administrators and legal representatives, subject to the provisions of Section 10.F. hereof, which expressly prohibits the assignment or delegation of any of Executive's personal rights or obligations hereunder. B. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be modified orally. This Agreement supersedes all prior and contemporaneously-made written or oral agreements between the parties or between Executive and CNF relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless set forth in a writing that specifically states that it is intended to be a modification of this Agreement and that is signed by the Chief Executive Officer of the Company. C. Modification. If any provision(s) of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting, and any invalid or unenforceable provision(s) shall be deemed modified to the least extent possible so as to make them valid and enforceable and so as to give the maximum effect allowable by law to the parties' original intent as expressed by the terms hereof. D. No Waiver. No failure on the part of the Company to exercise, and no delay by the Company in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Company of any right, power or remedy hereunder, preclude any other or further exercise thereof, or the exercise of any other right, power or remedy by the Company. 17 E. Person. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. F. Personal Services Contract. This is a personal services contract and the rights and obligations set forth herein may not be assigned or delegated by Executive, except as otherwise specifically provided in this Agreement with respect to benefits payable upon Executive's disability or death, without the express, written consent of the Company. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may be assigned by the Company to any party, without the consent of Executive. The transfer of Executive to any parent, affiliate or subsidiary of the Company shall constitute an assignment of this Agreement. G. Headings. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way be used to restrict, modify, or explain any of the terms or provisions hereof. H. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to its, or any other sovereignty's, conflicts of laws principles. The parties agree that any claims brought pursuant to this Agreement shall be brought in a court of competent jurisdiction located in Phoenix, Arizona. I. Tolling Period. The non-competition, non-disclosure and non-solicitation obligations contained in Section 6 of this Agreement shall be extended by the length of time during which Executive shall have been in breach of any of the provisions of such Section 6. 18 J. Company Violation Not a Defense. In an action by the Company to enforce any provision of this Agreement, any claims asserted by Executive against the Company shall not constitute a defense to the Company's action. K. Release. In consideration of Executive's employment hereafter with the Company, Executive acknowledges and represents that, with the exception of ordinary course reimbursement of business expenses and accrued vacations reflected within the financial statements of CNF, Inc., he has no outstanding claims of any kind whatsoever, including but not limited to, any claim for outstanding indebtedness, past salary, reimbursements, or benefits of any type against CNF or any of its affiliates or subsidiaries and that if he has any such claim, any and all such claims are hereby forever waived and released. L. Construction. This Agreement shall be construed according to the plain meaning of its terms, and not strictly for or against either party hereto. M. Counterparts. This Agreement may be executed in counterpart, and the counterparts, taken together, shall constitute the entire Agreement. The Agreement may further be executed by facsimile transmission, and the facsimile signatures may be deemed original signatures for all purposes, including for purposes of the Best Evidence Rule and all other rules or doctrines of similar effect. 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. IMPORTANT NOTICE: THIS AGREEMENT RESTRICTS EXECUTIVE'S RIGHTS TO OBTAIN OTHER EMPLOYMENT FOLLOWING HIS EMPLOYMENT WITH THE COMPANY. BY SIGNING IT, EXECUTIVE ACKNOWLEDGES THIS FACT, AND FURTHER ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO READ THE AGREEMENT CAREFULLY, AND/OR TO CONSULT WITH COUNSEL OF HIS CHOICE CONCERNING THE LEGAL EFFECTS OF SIGNING THE AGREEMENT, PRIOR TO SIGNING IT. By: /s/ Vincent J. Marold Dated: -------------------------------- ------------------------------ Vincent J. Marold, President By: /s/ Paul D. Charles Dated: -------------------------------- ------------------------------ Paul D. Charles as Executive WITNESS: 20 EX-10.2 10 ADDENDUM Exhibit 10.2 ADDENDUM To May 19, 1999 JLL Ventures Employment Agreement of Paul D. Charles Employment Agreement shall be amended to reduce Employee's salary to the following beginning December 1, 1999: Paul Charles - $125,000. Mr. Charles will resign as President and CEO concurrent with the receipt of $2,000,000 in the private placement, and will continue to serve as the Chairman of the Board pursuant to the Company's Bylaws and Certificate of Incorporation and will also be employed by the Company in an outside sales capacity. Employee /s/ Paul D. Charles 10-3-99 - ---------------------- --------------------- Paul D. Charles Date EX-10.3 11 EMPLOYMENT AGREEMENT Exhibit 10.3 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 19th day of May , 1999, by and between JLL VENTURES (Delaware) CORP., a Delaware corporation (hereinafter "Company"), and David G. Thompson an individual (hereinafter "Executive"). W I T N E S S E T H: WHEREAS, on the date hereof, JLL Ventures Acquisition Corp., a Delaware corporation ("JLL"), and wholly-owned subsidiary of the Company, acquired CNF Inc., a California corporation ("CNF"), pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"); WHEREAS, pursuant to the Merger Agreement the Company assumed CNF's Stock Option Plan and all obligations of CNF thereunder including the obligation to issue securities to Executive upon exercise of options owned of record by Executive which have been issued under such plan; and WHEREAS in connection with the Merger Agreement, Executive agreed to become employed with the Company upon the terms and conditions herein contained. NOW, THEREFORE, in consideration of the mutual premises and covenants of the parties contained within the Merger Agreement and in this Agreement, the parties hereto, do hereby agree as follows: 1. Employment and Term. A. The Company hereby employs Executive and Executive hereby accepts employment by the Company as its Chief Financial Officer and Treasurer. Executive agrees to serve the Company in such capacity, subject to the terms and conditions of this Agreement, for a term, commencing on the date hereof and expiring three years from that date of this Agreement (the "Term"). 2. Duties. A. During the Term, Executive shall use his best efforts to perform all duties required in furtherance of his position, including without limitation all such duties as are customarily associated with such position or as are assigned to him from time to time by the Board of Directors of the Company. B. Executive shall diligently and faithfully devote his entire time, energy, skill, and best efforts to the performance of his duties under this Agreement during reasonable business hours. Executive shall conduct himself at all times so as to advance the best interests of the Company, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Board of Directors of the Company. Executive also agrees that he shall not usurp or misappropriate, either to himself, or to any other person or entity, any corporate or other opportunities that would otherwise be available to the Company. 3. Compensation. A. The Company shall pay Executive and Executive shall accept, as his base compensation ("Base Compensation") for all services rendered to the Company pursuant hereto, an annual salary of $208,000, to be paid in accordance with the general payroll practices of the Company as from time to time in effect, subject to all applicable federal and state tax withholding requirements. Executive shall also be entitled, subject to the terms and conditions of particular plans and programs, to all fringe benefits afforded to other executives of Company in the discretion of the Board of Directors, including, but not limited to, the right to participate in any pension, retirement, major medical, group health, disability, accident and life insurance, and 2 other employee benefit programs made generally available, from time to time, by the Company (collectively, "Benefits"). B. In addition to Base Compensation, for the fiscal year ending March 31, 2000, Executive shall be entitled to a mandatory bonus ("Mandatory Bonus") equal to (i) $21,000 if the Company achieves the first of the Financial Performance Targets set forth within the Certificate of Designation for the Company's Series A Convertible Preferred Stock, which are attached hereto and made a part hereof as Exhibit A; and (ii) an additional $10,500 for each additional Financial Performance Target achieved. For example, if the Company achieves the third Financial Performance Target, Executive would be entitled to $42,000. The Mandatory Bonus for the fiscal year ending March 31, 2000 shall be payable within thirty (30) days after completion of the Company's audited financial statements for such period. For each fiscal year during the term of the Agreement ending after March 31, 2000, Executive shall be entitled to a Mandatory Bonus in an amount equal to up to the maximum amount of the Mandatory Bonus payable during fiscal year ending March 31, 2000 upon achieving certain annual individual and Company performance goals ("Performance Goals"). The Performance Goals shall be determined by the Compensation or similar committee of the Board of Directors, a majority of whose members shall be non-employee directors, prior to or during the first fiscal quarter of each fiscal year during the Term. The Performance Goals for each fiscal year ending after March 31, 2000 shall, upon determination, be attached hereto and made a part hereof as Exhibit B. C. In addition to Base Compensation and the Mandatory Bonus, a "Discretionary Bonus" may be awarded to Executive on the basis of merit performance on an annual basis in the discretion of the Company's Board of Directors or Compensation Committee. 3 Base Compensation, Mandatory Bonus and Discretionary Bonus shall hereinafter collectively be referred to as "Compensation." D. Executive shall be entitled to participate in any stock option programs adopted by the Company to the extent determined on a discretionary basis by the Board of Directors of the Company or Compensation Committee thereof. 4. Vacation and Reimbursement of Expenses. A. Executive shall receive paid vacation in each calendar year in accordance with the written policy of the Company, or as otherwise determined by the board of Directors of the Company, to be taken at times which do not unreasonably interfere with the performance of the Employee's duties hereunder and in no event shall Executive schedule more than ten (10) consecutive days of vacation during any three month period without the prior written consent of the Chairman of the Board of Directors; B. Executive shall be reimbursed for such reasonable expenses as are directly incurred for the business of the Company upon presentation by Executive of an itemized account of such expenditures, but only to the extent that such expenses are deductible to the Company pursuant to rules and regulations adopted by the United States Internal Revenue Service; provided, however, that any expenses are in accordance with Company policy. 5. Termination. A. Executive's employment and rights to Compensation and Benefits hereunder shall terminate immediately if Executive voluntarily leaves the employment of the Company; except that the Company shall have the obligation to pay Executive such portion of his Base Compensation provided for in Section 3.A hereof as may be accrued but unpaid on the date Executive voluntarily leaves the employment of the Company. In the event that Executive 4 voluntarily leaves the employment of the Company, he shall provide at least ninety (90) days' written notice. B. The Company may at any time, upon written notice to Executive giving the reasons therefor, terminate Executive's employment and his right to Compensation hereunder "For Cause." As used herein, the term "For Cause" shall be defined to include: (i) with respect to the fiscal year ending March 31, 2000, the Company's audited financial statements for such period reflecting: (a) revenues of less than $17,500,000; or (b) a net loss exclusive of extraordinary items determined in accordance with generally accepted accounting principles in excess of $500,000; (ii) with respect to all subsequent periods during the Term, if the Company fails to achieve for two (2) consecutive quarters such quarterly financial performance targets for revenue and pre-tax net income as are determined by the Compensation or similar committee of the Board of Directors (a majority of whose members shall be non-employee directors), in consultation with executive management, as determined prior to or during the first fiscal quarter of each fiscal year; (iii) conviction of Executive of any felony, fraud, embezzlement, or crime of moral turpitude; (iv) controlled substance abuse or drug addiction; (v) alcoholism which interferes with or affects Executive's responsibilities; (vi) grossly negligent, reckless or intentional misconduct which is materially injurious to the Company; (vii) violation of any express written direction of or any reasonable written rule or regulation established by the Company's Board of Directors from time to time which violation has not been cured to the Company's satisfaction within thirty (30) calendar days of the dispatch of written notice to the Executive of the violation. In the event of a termination For Cause, Executive's employment and right to Compensation and Benefits hereunder shall terminate immediately, except that the 5 Company shall have the obligation to pay Executive such portion of his Base Compensation as may be accrued but unpaid on the date his employment is terminated. C. Commencing on the one (1) year anniversary of the Agreement, Executive may also be terminated for any reason ("Without Cause") in the discretion of the Board of Directors of the Company. In the event of a termination Without Cause, Executive's employment and right to Compensation and Benefits shall terminate immediately and Executive shall, in lieu thereof, be entitled to severance pay consisting of a continuation of Base Compensation and Benefits for a period of one (1) year. During the period in which payments are made to Executive pursuant to this Section 5.C, Executive shall remain subject to the limitations identified in Section 6 hereafter. D. Unless Executive's employment hereunder is terminated by reason of: (I) his voluntary resignation or retirement; or (ii) by reason of any of the "For Cause" events set forth at Section 5.B(ii) (vii), Executive shall be removed as a guarantor of any Company obligations in force as of the date of this Agreement prior to any termination becoming effective, and by virtue of this agreement Executive does hereby grant the Company the right in his place and stead to secure the removal of any such guaranteed obligations at no cost to Executive. 6. Confidentiality and Related Matters. A. Acknowledgment of Nature and Value of Confidential Information: For the purposes of this Section 6 only, the term "Company" shall include the Company, all subsidiaries of the Company and CNF. Executive recognizes, acknowledges and agrees: (i) that in the course of Executive's employment by the Company, it has been, and will continue to be, necessary for Executive to acquire, in a fiduciary capacity of trust, information which could include, in whole or in part, but is not limited to: information concerning the Company's rate schedules; rate quotations; the names, addresses, credit terms and nature of services provided by 6 the vendors utilized by the Company; the names, addresses, credit terms and nature of services provided to customers of the Company; the identity of the Company's suppliers, sales representatives, shippers or other entities with whom Executive has come into contact as a result of his employment with the Company, or which should otherwise come into his knowledge during the term of this Agreement; the salaries, skills, education or abilities of the Company's employees; the Company's sales, sales volume, sales methods and sales proposals; the identities of the Company's customers and/or prospective customers; the identities of key purchasing personnel in the employ of customers and prospective customers; the amounts and/or kinds of customers' purchases from the Company; the Company's sources of information and supply; the Company's products and product designs; the Company's computer programs, system documentation, source code and algorithms, special hardware or software, service or product hardware or software, and related software or hardware development; any useful process, machine or other device or composition of matter which is new and which is being used or studied by the Company and is not described in a patent or described in any literature already published and distributed externally by the Company; the Company's manuals, formulae, tools, processes, methods, machines, compositions, ideas, improvements, trade secrets, including but not limited to information falling under the definition of a "trade secret" pursuant to the Uniform Trade Secret Act (or, if applicable, the version thereof adopted by Delaware), patents, inventions, intellectual property, or other information or materials relating to the Company's affairs (collectively referred to herein as the "Confidential Information"); (ii) that the Confidential Information is the property of the Company and constitutes a major asset of the Company; (iii) that the use, misappropriation or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company; and (iv) that it is essential to 7 the protection of the Company's goodwill and to the maintenance of the Company's competitive position that the Confidential Information be kept secret and that Executive neither disclose the Confidential Information to others nor use the Confidential Information to Executive's own advantage or to the advantage of others. B. Acknowledgment of Necessity for Protections of Company's Business. Executive further recognizes, acknowledges and agrees that it is essential for the proper protection of the business of the Company that Executive shall not: (i) solicit or induce any employee of the Company to leave the employ of the Company; (ii) hire or attempt to hire any employee of the Company; (iii) solicit the trade of, or trade with, the customers or suppliers of the Company for any business purpose other than that of the Company; and (iv) compete against the Company for a reasonable period of time and within a reasonable geographic area following the termination or nonrenewal of Executive's employment with the Company, as more fully addressed in Section 6.F, below. C. Work Made For Hire. Executive hereby acknowledges and agrees that each of the copyrightable related to the business of the Company works authored by Executive (including without limitation, all software and related documentation, and all written and graphic materials prepared or conceived by Employee), alone or with others, during Executive's employment with the Company shall be deemed to be works prepared by Executive within the scope of Executive's employment with the Company and, as such, shall be deemed to be "works made for hire" under the United States copyright laws from the inception of creation of such works. In the event that any of such works shall be deemed by a court of competent jurisdiction not to be a "work made for hire," this Agreement shall operate as an irrevocable assignment by Executive to the Company of all right, title and interest in and to such works, including, without 8 limitation, all worldwide copyright interests therein, in perpetuity. The fact that such copyrightable works are created by Executive outside of the Company's facilities or other than during Executive's working hours with the Company shall not diminish the Company's right with respect to such works which otherwise fall within this paragraph. Executive agrees to execute and deliver to the Company such further instruments or documents as may be requested by the Company in order to effectuate the purposes of this paragraph. D. Non-Disclosure of Confidential Information. In recognition and consideration of Executive's employment, Compensation and Benefits, the information which the Company has given and will give Executive regarding the Company's business, the Executive's introduction to the Company's customers and prospective customers made in the course of Executive's employment with the Company, and the carefully-guarded methods of doing business which the Company utilizes and deems crucial to the successful operation of its business, Executive has held, and agrees to continue to hold and safeguard, the Confidential Information in trust and in a fiduciary capacity for the Company, its successors and assigns. Executive expressly agrees that he shall not, without the prior written consent of the Company, misappropriate or disclose or make available to anyone for use outside the Company's organization at any time, either during Executive's employment with the Company or subsequent to the termination or nonrenewal of such employment with the Company, for any reason, including without limitation termination by the Company For Cause or Without Cause, any of the Confidential Information, whether or not developed by Executive, except as required by the Company in the performance of Executive's duties to the Company. Notwithstanding the above, term "Confidential Information" shall not include information which becomes generally available to the public (other than as a result of disclosure by the Executive). Furthermore, if 9 you are formally required to disclose any Confidential Information in the context of a civil, governmental or regulatory proceeding, you shall provide the Company with prompt notice of any such requirement so that the Company may seek an appropriate protective order or waive compliance with the provisions off this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, you are, in the opinion of your counsel, compelled to disclose Confidential Information or else stand liable for contempt of suffer other censure or penalty, you may disclose that portion of the Confidential Information which your counsel advises you to disclose. In any event, you will not oppose action by, and will cooperate with the civil, governmental or regulatory agency to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. E. Disclosure of Works and Inventions/Assignment of Patents. In consideration of the promises set forth herein, Employee agrees to disclose promptly and fully to the Company, or to such person whom the Company may expressly designate for this specific purpose (its "Designee"), any and all works, inventions, discoveries and improvements authored, conceived or made by Employee, solely or with others, during the period of employment by the Company and where the subject matter of such works, inventions, discoveries or improvements results from or is suggested by any work which Employee may do for or on behalf of the Company shall have all rights to such works, inventions, discoveries and improvements, whether they are patentable or not. The fact that such works, inventions, discoveries and improvements are made or conceived by Employee outside of the Company's facilities or other than during the Employee's working hours with the Company shall not diminish the Company's rights with respect to such works, inventions, discoveries and improvements which otherwise fall within this paragraph. Employee agrees that, whenever he is requested to do so by the Company, during or 10 after termination of Employee's employment by the Company, Employee shall execute or join in executing any and all applications, assignments or other instruments which the Company shall deem necessary to apply for and obtain Letters Patent or Copyrights of the United States or any foreign country or to otherwise protect the Company's interest therein, and Employee shall assign all such applications to the Company or its Designee, and shall provide the Company or its agents or attorneys with all reasonable assistance in the preparation and prosecution of patent applications, drawings, specifications and the like, all at the expense of the Company, and shall do all that may be necessary to establish, protect and maintain the rights of the Company or its Designee in the works, inventions, discoveries, improvements, patent applications and Letters Patent in accordance with the spirit of this paragraph. Such obligations shall continue beyond the termination or nonrenewal of Employee's employment with respect to any works, inventions, discoveries and/or improvements that are authored, conceived of, or made by Employee during the period of Employee's employment, and shall be binding upon Employee's successors, assigns, executors, heirs, administrators or other legal representatives. The Company shall have no rights pursuant to this Agreement in any work, invention, discovery or improvement of the Employee made during the Term of Employee's employment by the Company if such work, invention, discovery or improvement has not arisen out of the or by reason of Employee's work with the Company or does not relate to the products, business or operations of the Company, although Employee shall nonetheless inform the Company of any such work, invention, discovery or improvement. F. Restrictions on Competition. Executive covenants and agrees that, for and in consideration of the Compensation received hereunder, the sufficiency and receipt of which is hereby acknowledged, during the period of Executive's employment hereunder (and for the 11 period during which payments are made pursuant to Section 5.C. hereof), and for a period of one (1) year thereafter, Executive shall not, in any state or foreign country in which the Company does business, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder, or otherwise, alone or in association with any other person, corporation or other entity, in any "Competing Business". For purposes of this Agreement, the term "shareholder" shall exclude any interest owned by Executive in a public company to the extent the Executive owns less than ten percent (10%) of any such company's outstanding common stock. For the further purposes of this Agreement, the term "Competing Business", shall mean any person, corporation or other entity that is engaged in the business of selling portable computer peripherals or similar products being manufactured, developed, sold, distributed or licensed by the Company which directly competes with the business of the Company at the time of such termination or nonrenewal. Accordingly, the Company is granted the right by Executive to apply to any court of competent jurisdiction for one or more temporary or permanent injunctions enjoining Executive, his agents and employees, from violating the provisions of this Agreement and/or from continuing to breach such provisions. This Section 6.F shall not be effective for any purpose whatsoever if Executive is terminated Without Cause; except during the period which payments are being made pursuant to Section 5.C hereof. G. Executive's Abilities. Executive represents that Executive's experience and capabilities, and the limited provisions of the immediately-preceding Section 6.F, are such that he will not be prevented from earning his livelihood in businesses similar to the Company, other than the "Competing Business," as specifically defined in the immediately preceding Section 6.F. Executive acknowledges that there are a significant number of businesses for which his qualifications and experience would render him qualified for employment that are within the 12 states and foreign countries referred to in Section 6.F. which do not constitute a "Competing Business" such that his ability to become employed after the termination or nonrenewal of this Agreement would not be impaired. H. Non-Solicitation of Customers and Suppliers. Executive agrees that during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C. hereof), and for a period of one (1) year thereafter, he shall not, directly or indirectly, solicit the trade of, or trade with, any past or present customer or supplier of the Company for any business purpose that competes directly or indirectly with the business being undertaken by the Company. I. Non-Solicitation of Employees. Executive agrees that, during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C hereof) and for two (2) years following any termination or nonrenewal of Executive's employment with the Company, including, without limitation, termination by the Company For Cause or Without Cause, Executive shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the Company for any reason whatsoever, or assist or participate in the hiring of any employee of the Company to work for another entity. J. No Prior Agreements. Executive represents and warrants that Executive is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect Executive's ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in this Section 6. Executive further represents and warrants that his employment with the Company 13 will not under any circumstances require him to disclose or use any confidential information belonging to prior employers or other persons or entities, or to engage in any conduct which may potentially interfere with the contractual, statutory or common-law rights of such other employers, persons or entities. In the event that Executive knows or learns of any facts whatsoever which suggest that such interference might arguably occur as the result of any proposed actions by either Executive or the Company, Executive expressly promises that he will immediately bring such facts to the Company's attention. K. Remedies. In the event of a breach by Executive of any of the terms of this Agreement, the Company shall be entitled, if it shall so elect, to institute legal proceedings to obtain damages for any such breach, or to enforce the specific performance of this Agreement by Executive and to enjoin Executive from any further violation of this Agreement, and to exercise such remedies cumulatively or in conjunction with all other rights and remedies provided by law. Executive acknowledges and agrees that money damages for any breach by him of any of the provisions of this Agreement may be inadequate to compensate the Company for the injuries it may suffer as the result of any such breach, and accordingly that the Company shall be entitled to injunctive relief against Executive, in addition to money damages, in the event of any such breach by Executive. L. Review by Counsel. Executive expressly acknowledges and represents that Executive has been given a full and fair opportunity to review this Agreement with an attorney of Executive's choice, and that Executive has satisfied himself, with or without consulting with counsel, that the terms and provisions of this Agreement, specifically including, but not limited to, the restrictive covenant and related provisions of Section 6 hereof, are reasonable and enforceable. 14 M. Return of Materials. Upon the termination or nonrenewal of Executive's employment with the Company for any reason, including without limitation termination by the Company For Cause or Without Cause, or at any time upon demand, Executive shall promptly deliver to the Company all Company property and materials, including without limitation all documents or other materials constituting, containing, referencing or relating to the "Confidential Information" referred to in this Section 6, and any other Company property of any nature whatsoever, including without limitation correspondence, computer disks or other electronically-stored information, drawings, blueprints, manuals, letters, notes, notebooks, reports, flow-charts, programs, proposals and any documents concerning the Company's customers, or concerning services, products or processes provided by or to, or used by, the Company. N. Company-Created Materials. All material that may be furnished to the Executive, together with literature, rate schedules, customer lists, forms, filing systems and any other property, documents or other materials furnished or made available by the Company to the Executive, shall be and remain the property of the Company, and shall be returned by the Executive to the Company upon any termination or nonrenewal of employment or at any time upon demand. O. Executive-Created Materials. All material created by the Executive during the term of his employment with the Company which is incidental to or related in any way to the Executive's employment, or to the Company's business, shall be the property of the Company, and shall be delivered to the Company upon any termination or nonrenewal of Executive's employment or at any time upon demand. P. Definitions. For purposes of this Section 6, the term, "material(s)" shall include, but shall not be limited to, data stored in computers, voicemail or any other electronic, 15 magnetic, or mechanical storage device, any passwords, codes or keys required to access all or any portion of such material, and the "Confidential Information" referred to in Section 6.A. hereof. 7. Conflict of Interest. Executive covenants that, during the Term, he will disclose to the Company, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could potentially interfere with his ability to perform under this Agreement or create a conflict of interest for him with the Company. For purposes of this paragraph 7 only, "conflict of interest" shall mean ownership of greater than one percent (1%) of, or $250,000 worth of equity in, another company which conducts business similar to that undertaken by the Company. 8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: A. If to Executive, to: David G. Thompson 17221 N 60th Place Scottsdale, AZ 85254 With a copy to: Stephen Boatwright, Esquire Gammage & Burnham 2 North Central, 18th Floor Phoenix, AZ 85004 16 B. If to Company, to: JLL Ventures (Delaware) Corp. 7722 East Gray Road Scottsdale, AZ 85260 With a copy to: Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, Pa. 19103 Attn.: Stephen M. Cohen, Esquire 9. Basic Indemnification. Company shall indemnify and defend Executive and his heirs, executors and administrators against any costs or expense (including reasonable attorneys' fees and amounts paid in settlement, if such settlement is approved by the Company), fine, penalty, judgment and liability reasonably incurred by or imposed upon Executive in connection with any action, suit or proceeding, civil or criminal, to which Executive may be made a party or with which Executive shall be threatened, by reason of Executive's being or having been an Officer, unless with respect to such matter Executive shall have been adjudicated in any proceeding not to have acted in good faith or in the reasonable belief that the action was in the best interests of the Company, or unless such indemnification is precluded by law, public policy, or in the judgment of the Company's Board of Directors, such indemnification is being sought as a result of actions of Executive which were either : (i) grossly negligent; (ii) reflective of Executive misconduct; (iii) in violation of rules, regulations or laws applicable to the Company; or (iv) in disregard of Company policies. Company shall utilize its best efforts to obtain Directors and Officers Liability Insurance in an amount which is standard and customary for a business such as the Company. 17 10. Additional Provisions. A. Binding Agreement. This Agreement, including without limitation its confidentiality, restrictive covenant and related provisions, shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Executive, his heirs, executors, administrators and legal representatives, subject to the provisions of Section 10.F. hereof, which expressly prohibits the assignment or delegation of any of Executive's personal rights or obligations hereunder. B. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be modified orally. This Agreement supersedes all prior and contemporaneously-made written or oral agreements between the parties or between Executive and CNF relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless set forth in a writing that specifically states that it is intended to be a modification of this Agreement and that is signed by the Chief Executive Officer of the Company. C. Modification. If any provision(s) of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting, and any invalid or unenforceable provision(s) shall be deemed modified to the least extent possible so as to make them valid and enforceable and so as to give the maximum effect allowable by law to the parties' original intent as expressed by the terms hereof. D. No Waiver. No failure on the part of the Company to exercise, and no delay by the Company in exercising, any right, power or 18 remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Company of any right, power or remedy hereunder, preclude any other or further exercise thereof, or the exercise of any other right, power or remedy by the Company. E. Person. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. F. Personal Services Contract. This is a personal services contract and the rights and obligations set forth herein may not be assigned or delegated by Executive, except as otherwise specifically provided in this Agreement with respect to benefits payable upon Executive's disability or death, without the express, written consent of the Company. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may be assigned by the Company to any party, without the consent of Executive. The transfer of Executive to any parent, affiliate or subsidiary of the Company shall constitute an assignment of this Agreement. G. Headings. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way be used to restrict, modify, or explain any of the terms or provisions hereof. H. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to its, or any other sovereignty's, conflicts of laws principles. The parties agree that any claims brought pursuant to this Agreement shall be brought in a court of competent jurisdiction located in Phoenix, Arizona. I. Tolling Period. The non-competition, non-disclosure and non-solicitation obligations contained in Section 6 of this Agreement shall be extended by the length of time during which Executive shall have been in breach of any of the provisions of such Section 6. 19 J. Company Violation Not a Defense. In an action by the Company to enforce any provision of this Agreement, any claims asserted by Executive against the Company shall not constitute a defense to the Company's action. K. Release. In consideration of Executive's employment hereafter with the Company, Executive acknowledges and represents that, with the exception of ordinary course reimbursement of business expenses and accrued vacations reflected within the financial statements of CNF, Inc., he has no outstanding claims of any kind whatsoever, including but not limited to, any claim for outstanding indebtedness, past salary, reimbursements, or benefits of any type against CNF or any of its affiliates or subsidiaries and that if he has any such claim, any and all such claims are hereby forever waived and released. L. Construction. This Agreement shall be construed according to the plain meaning of its terms, and not strictly for or against either party hereto. M. Counterparts. This Agreement may be executed in counterpart, and the counterparts, taken together, shall constitute the entire Agreement. The Agreement may further be executed by facsimile transmission, and the facsimile signatures may be deemed original signatures for all purposes, including for purposes of the Best Evidence Rule and all other rules or doctrines of similar effect. 20 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. IMPORTANT NOTICE: THIS AGREEMENT RESTRICTS EXECUTIVE'S RIGHTS TO OBTAIN OTHER EMPLOYMENT FOLLOWING HIS EMPLOYMENT WITH THE COMPANY. BY SIGNING IT, EXECUTIVE ACKNOWLEDGES THIS FACT, AND FURTHER ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO READ THE AGREEMENT CAREFULLY, AND/OR TO CONSULT WITH COUNSEL OF HIS CHOICE CONCERNING THE LEGAL EFFECTS OF SIGNING THE AGREEMENT, PRIOR TO SIGNING IT. By: /s/ Vincent J. Marold Dated: ---------------------------------- ------------------------------ Vincent J. Marold, President By: /s/ David G. Thompson Dated: ---------------------------------- ------------------------------ David G. Thompson as Executive WITNESS: - --------------------------- 21 EXHIBIT "A" Financial Performance Targets(1) First: Gross Revenues of $22.5 million(2) and Net Income of $900,000(3) Second: Gross Revenues of $38.25 million(2) and Net Income of $1.53 million(3) Third: Gross Revenues of $51 million(2) and Net Income of $2.04 million(3) Fourth: Gross Revenues of $64 million(2) and Net Income of $2.56 million(3) - ---------- (1) The Financial Performance Targets are to be derived from the results of operations reflected within the Company's audited financial statements for the fiscal year ending March 31, 2000. (2) The Financial Performance Targets with respect to Gross Revenues shall be considered to have been achieved if actual Gross Revenues are within 10% of the targeted amount. (3) The Financial Performance Targets with respect to Net Income shall be considered to have been achieved if actual Net Income is within 10% of the targeted amount. EXHIBIT "B" EX-10.4 12 EMPLOYMENT AGREEMENT Exhibit 10.4 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 19th day of May, 1999, by and between JLL VENTURES (Delaware) CORP., a Delaware corporation (hereinafter "Company"), and Ruben Daniel Rudich an individual (hereinafter "Executive"). W I T N E S S E T H: WHEREAS, on the date hereof, JLL Ventures Acquisition Corp., a Delaware corporation ("JLL"), and wholly-owned subsidiary of the Company, acquired CNF Inc., a California corporation ("CNF"), pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"); WHEREAS, pursuant to the Merger Agreement the Company assumed CNF's Stock Option Plan and all obligations of CNF thereunder including the obligation to issue securities to Executive upon exercise of options owned of record by Executive which have been issued under such plan; and WHEREAS in connection with the Merger Agreement, Executive agreed to become employed with the Company upon the terms and conditions herein contained. NOW, THEREFORE, in consideration of the mutual premises and covenants of the parties contained within the Merger Agreement and in this Agreement, the parties hereto, do hereby agree as follows: 1. Employment and Term. A. The Company hereby employs Executive and Executive hereby accepts employment by the Company as its Vice president of Marketing. Executive agrees to serve the Company in such capacity, subject to the terms and conditions of this Agreement, for a term, commencing on the date hereof and expiring three years from that date of this Agreement (the "Term"). 2. Duties. A. During the Term, Executive shall use his best efforts to perform all duties required in furtherance of his position, including without limitation all such duties as are customarily associated with such position or as are assigned to him from time to time by the Board of Directors of the Company. B. Executive shall diligently and faithfully devote his entire time, energy, skill, and best efforts to the performance of his duties under this Agreement during reasonable business hours. Executive shall conduct himself at all times so as to advance the best interests of the Company, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Board of Directors of the Company. Executive also agrees that he shall not usurp or misappropriate, either to himself, or to any other person or entity, any corporate or other opportunities that would otherwise be available to the Company. 3. Compensation. A. The Company shall pay Executive and Executive shall accept, as his base compensation ("Base Compensation") for all services rendered to the Company pursuant hereto, an annual salary of $120,000, to be paid in accordance with the general payroll practices of the Company as from time to time in effect, subject to all applicable federal and state tax withholding requirements. Executive shall also be entitled, subject to the terms and conditions of particular plans and programs, to all fringe benefits afforded to other executives of Company in the discretion of the Board of Directors, including, but not limited to, the right to participate in any pension, retirement, major medical, group health, disability, accident and life insurance, and 2 other employee benefit programs made generally available, from time to time, by the Company (collectively, "Benefits"). B. In addition to Base Compensation, the Executive will, unless otherwise agreed to, be entitled to receive a commission equal to $0.35 for each unit of CNF InnerBay ZIP, CNF Digitari, and all products developed by CNF or JLL as a successor thereto (exclusive of monitor stands, keypads and auto adapters) subsequent to January 1, 1998, sold and paid for during the year of sale, subject to a maximum commission of $200,000. Commissions are to be earned and paid per company policy only during the term of employment. For OEM accounts, commissions will only be paid on those accounts which Executive is actively involved in originating and servicing the account. This commission doesn't apply to the Siemen's account. C. In addition to Base Compensation, a "Discretionary Bonus" may be awarded to Executive on the basis of merit performance on an annual basis in the discretion of the Company's Board of Directors or Compensation Committee. Base Compensation and Discretionary Bonus shall hereinafter collectively be referred to as "Compensation." D. Executive shall be entitled to participate in any stock option programs adopted by the Company to the extent determined on a discretionary basis by the Board of Directors of the Company or Compensation Committee thereof. 4. Vacation and Reimbursement of Expenses. A. Executive shall receive paid vacation in each calendar year in accordance with the written policy of the Company, or as otherwise determined by the board of Directors of the Company, to be taken at times which do not unreasonably interfere with the performance of the Employee's duties hereunder and in no event shall Executive schedule more than ten (10) consecutive days of vacation during any three month period without the prior written consent of the Chairman of the Board of Directors; 3 B. Executive shall be reimbursed for such reasonable expenses as are directly incurred for the business of the Company upon presentation by Executive of an itemized account of such expenditures, but only to the extent that such expenses are deductible to the Company pursuant to rules and regulations adopted by the United States Internal Revenue Service; provided, however, that any expenses are in accordance with Company policy. Additionally, the Executive will be reimbursed for all reasonable legal expenses and costs to obtain his green card, but not to exceed $4,000 from the Executive's first date of employment with CNF. 5. Termination. A. Executive's employment and rights to Compensation and Benefits hereunder shall terminate immediately if Executive voluntarily leaves the employment of the Company; except that the Company shall have the obligation to pay Executive such portion of his Base Compensation provided for in Section 3.A hereof as may be accrued but unpaid on the date Executive voluntarily leaves the employment of the Company. In the event that Executive voluntarily leaves the employment of the Company, he shall provide at least ninety (90) days' written notice. B. The Company may at any time, upon written notice to Executive giving the reasons therefor, terminate Executive's employment and his right to Compensation hereunder "For Cause." As used herein, the term "For Cause" shall be defined to include: (i) with respect to the fiscal year ending March 31, 2000, the Company's audited financial statements for such period reflecting: (a) revenues of less than $17,500,000; or (b) a net loss exclusive of extraordinary items determined in accordance with generally accepted accounting principles in excess of $500,000; (ii) with respect to all subsequent periods during the Term, if the Company fails to achieve for two (2) consecutive quarters such quarterly financial performance targets for revenue and pre-tax net income as are determined by the Compensation or similar committee of 4 the Board of Directors (a majority of whose members shall be non-employee directors), in consultation with executive management, as determined prior to or during the first fiscal quarter of each fiscal year; (iii) conviction of Executive of any felony, fraud, embezzlement, or crime of moral turpitude; (iv) controlled substance abuse or drug addiction; (v) alcoholism which interferes with or affects Executive's responsibilities; (vi) grossly negligent, reckless or intentional misconduct which is materially injurious to the Company; (vii) violation of any express written direction of or any reasonable written rule or regulation established by the Company's Board of Directors from time to time which violation has not been cured to the Company's satisfaction within thirty (30) calendar days of the dispatch of written notice to the Executive of the violation. In the event of a termination For Cause, Executive's employment and right to Compensation and Benefits hereunder shall terminate immediately, except that the Company shall have the obligation to pay Executive such portion of his Base Compensation as may be accrued but unpaid on the date his employment is terminated. C. Commencing on the one (1) year anniversary of the Agreement, Executive may also be terminated for any reason ("Without Cause") in the discretion of the Board of Directors of the Company. In the event of a termination Without Cause, Executive's employment and right to Compensation and Benefits shall terminate immediately and Executive shall, in lieu thereof, be entitled to severance pay consisting of a continuation of Base Compensation and Benefits for a period of one (1) year. During the period in which payments are made to Executive pursuant to this Section 5.C, Executive shall remain subject to the limitations identified in Section 6 hereafter. 6. Confidentiality and Related Matters. A. Acknowledgment of Nature and Value of Confidential Information: For the purposes of this Section 6 only, the term "Company" shall include the Company, all 5 subsidiaries of the Company and CNF. Executive recognizes, acknowledges and agrees: (i) that in the course of Executive's employment by the Company, it has been, and will continue to be, necessary for Executive to acquire, in a fiduciary capacity of trust, information which could include, in whole or in part, but is not limited to: information concerning the Company's rate schedules; rate quotations; the names, addresses, credit terms and nature of services provided by the vendors utilized by the Company; the names, addresses, credit terms and nature of services provided to customers of the Company; the identity of the Company's suppliers, sales representatives, shippers or other entities with whom Executive has come into contact as a result of his employment with the Company, or which should otherwise come into his knowledge during the term of this Agreement; the salaries, skills, education or abilities of the Company's employees; the Company's sales, sales volume, sales methods and sales proposals; the identities of the Company's customers and/or prospective customers; the identities of key purchasing personnel in the employ of customers and prospective customers; the amounts and/or kinds of customers' purchases from the Company; the Company's sources of information and supply; the Company's products and product designs; the Company's computer programs, system documentation, source code and algorithms, special hardware or software, service or product hardware or software, and related software or hardware development; any useful process, machine or other device or composition of matter which is new and which is being used or studied by the Company and is not described in a patent or described in any literature already published and distributed externally by the Company; the Company's manuals, formulae, tools, processes, methods, machines, compositions, ideas, improvements, trade secrets, including but not limited to information falling under the definition of a "trade secret" pursuant to the Uniform Trade Secret Act (or, if applicable, the version thereof adopted by Delaware), patents, inventions, 6 intellectual property, or other information or materials relating to the Company's affairs (collectively referred to herein as the "Confidential Information"); (ii) that the Confidential Information is the property of the Company and constitutes a major asset of the Company; (iii) that the use, misappropriation or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company; and (iv) that it is essential to the protection of the Company's goodwill and to the maintenance of the Company's competitive position that the Confidential Information be kept secret and that Executive neither disclose the Confidential Information to others nor use the Confidential Information to Executive's own advantage or to the advantage of others. B. Acknowledgment of Necessity for Protections of Company's Business. Executive further recognizes, acknowledges and agrees that it is essential for the proper protection of the business of the Company that Executive shall not: (i) solicit or induce any employee of the Company to leave the employ of the Company; (ii) hire or attempt to hire any employee of the Company; (iii) solicit the trade of, or trade with, the customers or suppliers of the Company for any business purpose other than that of the Company; and (iv) compete against the Company for a reasonable period of time and within a reasonable geographic area following the termination or nonrenewal of Executive's employment with the Company, as more fully addressed in Section 6.F, below. C. Work Made For Hire. Executive hereby acknowledges and agrees that each of the copyrightable related to the business of the Company works authored by Executive (including without limitation, all software and related documentation, and all written and graphic materials prepared or conceived by Employee), alone or with others, during Executive's employment with the Company shall be deemed to be works prepared by Executive within the 7 scope of Executive's employment with the Company and, as such, shall be deemed to be "works made for hire" under the United States copyright laws from the inception of creation of such works. In the event that any of such works shall be deemed by a court of competent jurisdiction not to be a "work made for hire," this Agreement shall operate as an irrevocable assignment by Executive to the Company of all right, title and interest in and to such works, including, without limitation, all worldwide copyright interests therein, in perpetuity. The fact that such copyrightable works are created by Executive outside of the Company's facilities or other than during Executive's working hours with the Company shall not diminish the Company's right with respect to such works which otherwise fall within this paragraph. Executive agrees to execute and deliver to the Company such further instruments or documents as may be requested by the Company in order to effectuate the purposes of this paragraph. D. Non-Disclosure of Confidential Information. In recognition and consideration of Executive's employment, Compensation and Benefits, the information which the Company has given and will give Executive regarding the Company's business, the Executive's introduction to the Company's customers and prospective customers made in the course of Executive's employment with the Company, and the carefully-guarded methods of doing business which the Company utilizes and deems crucial to the successful operation of its business, Executive has held, and agrees to continue to hold and safeguard, the Confidential Information in trust and in a fiduciary capacity for the Company, its successors and assigns. Executive expressly agrees that he shall not, without the prior written consent of the Company, misappropriate or disclose or make available to anyone for use outside the Company's organization at any time, either during Executive's employment with the Company or subsequent to the termination or nonrenewal of such employment with the Company, for any reason, 8 including without limitation termination by the Company For Cause or Without Cause, any of the Confidential Information, whether or not developed by Executive, except as required by the Company in the performance of Executive's duties to the Company. Notwithstanding the above, term "Confidential Information" shall not include information which becomes generally available to the public (other than as a result of disclosure by the Executive). Furthermore, if you are formally required to disclose any Confidential Information in the context of a civil, governmental or regulatory proceeding, you shall provide the Company with prompt notice of any such requirement so that the Company may seek an appropriate protective order or waive compliance with the provisions off this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, you are, in the opinion of your counsel, compelled to disclose Confidential Information or else stand liable for contempt of suffer other censure or penalty, you may disclose that portion of the Confidential Information which your counsel advises you to disclose. In any event, you will not oppose action by, and will cooperate with the civil, governmental or regulatory agency to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. E. Disclosure of Works and Inventions/Assignment of Patents. In consideration of the promises set forth herein, Employee agrees to disclose promptly and fully to the Company, or to such person whom the Company may expressly designate for this specific purpose (its "Designee"), any and all works, inventions, discoveries and improvements authored, conceived or made by Employee, solely or with others, during the period of employment by the Company and where the subject matter of such works, inventions, discoveries or improvements results from or is suggested by any work which Employee may do for or on behalf of the Company shall have all rights to such works, inventions, discoveries and improvements, whether 9 they are patentable or not. The fact that such works, inventions, discoveries and improvements are made or conceived by Employee outside of the Company's facilities or other than during the Employee's working hours with the Company shall not diminish the Company's rights with respect to such works, inventions, discoveries and improvements which otherwise fall within this paragraph. Employee agrees that, whenever he is requested to do so by the Company, during or after termination of Employee's employment by the Company, Employee shall execute or join in executing any and all applications, assignments or other instruments which the Company shall deem necessary to apply for and obtain Letters Patent or Copyrights of the United States or any foreign country or to otherwise protect the Company's interest therein, and Employee shall assign all such applications to the Company or its Designee, and shall provide the Company or its agents or attorneys with all reasonable assistance in the preparation and prosecution of patent applications, drawings, specifications and the like, all at the expense of the Company, and shall do all that may be necessary to establish, protect and maintain the rights of the Company or its Designee in the works, inventions, discoveries, improvements, patent applications and Letters Patent in accordance with the spirit of this paragraph. Such obligations shall continue beyond the termination or nonrenewal of Employee's employment with respect to any works, inventions, discoveries and/or improvements that are authored, conceived of, or made by Employee during the period of Employee's employment, and shall be binding upon Employee's successors, assigns, executors, heirs, administrators or other legal representatives. The Company shall have no rights pursuant to this Agreement in any work, invention, discovery or improvement of the Employee made during the Term of Employee's employment by the Company if such work, invention, discovery or improvement has not arisen out of the or by reason of Employee's work with the Company or does not relate to the products, business or operations of the Company, 10 although Employee shall nonetheless inform the Company of any such work, invention, discovery or improvement. F. Restrictions on Competition. Executive covenants and agrees that, for and in consideration of the Compensation received hereunder, the sufficiency and receipt of which is hereby acknowledged, during the period of Executive's employment hereunder (and for the period during which payments are made pursuant to Section 5.C. hereof), and for a period of one (1) year thereafter, Executive shall not, in any state or foreign country in which the Company does business, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder, or otherwise, alone or in association with any other person, corporation or other entity, in any "Competing Business". For purposes of this Agreement, the term "shareholder" shall exclude any interest owned by Executive in a public company to the extent the Executive owns less than ten percent (10%) of any such company's outstanding common stock. For the further purposes of this Agreement, the term "Competing Business", shall mean any person, corporation or other entity that is engaged in the business of selling portable computer peripherals or similar products being manufactured, developed, sold, distributed or licensed by the Company which directly competes with the business of the Company at the time of such termination or nonrenewal. Accordingly, the Company is granted the right by Executive to apply to any court of competent jurisdiction for one or more temporary or permanent injunctions enjoining Executive, his agents and employees, from violating the provisions of this Agreement and/or from continuing to breach such provisions. This Section 6.F shall not be effective for any purpose whatsoever if Executive is terminated Without Cause; except during the period which payments are being made pursuant to Section 5.C hereof. 11 G. Executive's Abilities. Executive represents that Executive's experience and capabilities, and the limited provisions of the immediately-preceding Section 6.F, are such that he will not be prevented from earning his livelihood in businesses similar to the Company, other than the "Competing Business," as specifically defined in the immediately preceding Section 6.F. Executive acknowledges that there are a significant number of businesses for which his qualifications and experience would render him qualified for employment that are within the states and foreign countries referred to in Section 6.F. which do not constitute a "Competing Business" such that his ability to become employed after the termination or nonrenewal of this Agreement would not be impaired. H. Non-Solicitation of Customers and Suppliers. Executive agrees that during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C. hereof), and for a period of one (1) year thereafter, he shall not, directly or indirectly, solicit the trade of, or trade with, any past or present customer or supplier of the Company for any business purpose that competes directly or indirectly with the business being undertaken by the Company. I. Non-Solicitation of Employees. Executive agrees that, during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C hereof) and for two (2) years following any termination or nonrenewal of Executive's employment with the Company, including, without limitation, termination by the Company For Cause or Without Cause, Executive shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the Company for any reason whatsoever, or assist or participate in the hiring of any employee of the Company to work for another entity. 12 J. No Prior Agreements. Executive represents and warrants that Executive is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect Executive's ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in this Section 6. Executive further represents and warrants that his employment with the Company will not under any circumstances require him to disclose or use any confidential information belonging to prior employers or other persons or entities, or to engage in any conduct which may potentially interfere with the contractual, statutory or common-law rights of such other employers, persons or entities. In the event that Executive knows or learns of any facts whatsoever which suggest that such interference might arguably occur as the result of any proposed actions by either Executive or the Company, Executive expressly promises that he will immediately bring such facts to the Company's attention. K. Remedies. In the event of a breach by Executive of any of the terms of this Agreement, the Company shall be entitled, if it shall so elect, to institute legal proceedings to obtain damages for any such breach, or to enforce the specific performance of this Agreement by Executive and to enjoin Executive from any further violation of this Agreement, and to exercise such remedies cumulatively or in conjunction with all other rights and remedies provided by law. Executive acknowledges and agrees that money damages for any breach by him of any of the provisions of this Agreement may be inadequate to compensate the Company for the injuries it may suffer as the result of any such breach, and accordingly that the Company shall be entitled to injunctive relief against Executive, in addition to money damages, in the event of any such breach by Executive. 13 L. Review by Counsel. Executive expressly acknowledges and represents that Executive has been given a full and fair opportunity to review this Agreement with an attorney of Executive's choice, and that Executive has satisfied himself, with or without consulting with counsel, that the terms and provisions of this Agreement, specifically including, but not limited to, the restrictive covenant and related provisions of Section 6 hereof, are reasonable and enforceable. M. Return of Materials. Upon the termination or nonrenewal of Executive's employment with the Company for any reason, including without limitation termination by the Company For Cause or Without Cause, or at any time upon demand, Executive shall promptly deliver to the Company all Company property and materials, including without limitation all documents or other materials constituting, containing, referencing or relating to the "Confidential Information" referred to in this Section 6, and any other Company property of any nature whatsoever, including without limitation correspondence, computer disks or other electronically-stored information, drawings, blueprints, manuals, letters, notes, notebooks, reports, flow-charts, programs, proposals and any documents concerning the Company's customers, or concerning services, products or processes provided by or to, or used by, the Company. N. Company-Created Materials. All material that may be furnished to the Executive, together with literature, rate schedules, customer lists, forms, filing systems and any other property, documents or other materials furnished or made available by the Company to the Executive, shall be and remain the property of the Company, and shall be returned by the Executive to the Company upon any termination or nonrenewal of employment or at any time upon demand. 14 O. Executive-Created Materials. All material created by the Executive during the term of his employment with the Company which is incidental to or related in any way to the Executive's employment, or to the Company's business, shall be the property of the Company, and shall be delivered to the Company upon any termination or nonrenewal of Executive's employment or at any time upon demand. P. Definitions. For purposes of this Section 6, the term, "material(s)" shall include, but shall not be limited to, data stored in computers, voicemail or any other electronic, magnetic, or mechanical storage device, any passwords, codes or keys required to access all or any portion of such material, and the "Confidential Information" referred to in Section 6.A. hereof. 7. Conflict of Interest. Executive covenants that, during the Term, he will disclose to the Company, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could potentially interfere with his ability to perform under this Agreement or create a conflict of interest for him with the Company. For purposes of this paragraph 7 only, "conflict of interest" shall mean ownership of greater than one percent (1%) of, or $250,000 worth of equity in, another company which conducts business similar to that undertaken by the Company. 8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: 15 A. If to Executive, to: Ruben Daniel Rudich 9641 East Friess Drive Scottsdale, AZ 85260 With a copy to: Stephen Boatwright, Esquire Gammage & Burnham 2 North Central, 18th Floor Phoenix, AZ 85004 B. If to Company, to: JLL Ventures (Delaware) Corp. 7722 East Gray Road Scottsdale, AZ 85260 With a copy to: Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, Pa. 19103 Attn.: Stephen M. Cohen, Esquire 9. Basic Indemnification. Company shall indemnify and defend Executive and his heirs, executors and administrators against any costs or expense (including reasonable attorneys' fees and amounts paid in settlement, if such settlement is approved by the Company), fine, penalty, judgment and liability reasonably incurred by or imposed upon Executive in connection with any action, suit or proceeding, civil or criminal, to which Executive may be made a party or with which Executive shall be threatened, by reason of Executive's being or having been an Officer, unless with respect to such matter Executive shall have been adjudicated in any proceeding not to have acted in good faith or in the reasonable belief that the action was in the best interests of the Company, or unless such indemnification is precluded by law, public policy, or in the judgment of the 16 Company's Board of Directors, such indemnification is being sought as a result of actions of Executive which were either : (i) grossly negligent; (ii) reflective of Executive misconduct; (iii) in violation of rules, regulations or laws applicable to the Company; or (iv) in disregard of Company policies. Company shall utilize its best efforts to obtain Directors and Officers Liability Insurance in an amount which is standard and customary for a business such as the Company. 10. Additional Provisions. A. Binding Agreement. This Agreement, including without limitation its confidentiality, restrictive covenant and related provisions, shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Executive, his heirs, executors, administrators and legal representatives, subject to the provisions of Section 10.F. hereof, which expressly prohibits the assignment or delegation of any of Executive's personal rights or obligations hereunder. B. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be modified orally. This Agreement supersedes all prior and contemporaneously-made written or oral agreements between the parties or between Executive and CNF relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless set forth in a writing that specifically states that it is intended to be a modification of this Agreement and that is signed by the Chief Executive Officer of the Company. C. Modification. If any provision(s) of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting, and any invalid or unenforceable provision(s) shall be deemed modified to the least extent possible so as to make 17 them valid and enforceable and so as to give the maximum effect allowable by law to the parties' original intent as expressed by the terms hereof. D. No Waiver. No failure on the part of the Company to exercise, and no delay by the Company in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Company of any right, power or remedy hereunder, preclude any other or further exercise thereof, or the exercise of any other right, power or remedy by the Company. E. Person. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. F. Personal Services Contract. This is a personal services contract and the rights and obligations set forth herein may not be assigned or delegated by Executive, except as otherwise specifically provided in this Agreement with respect to benefits payable upon Executive's disability or death, without the express, written consent of the Company. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may be assigned by the Company to any party, without the consent of Executive. The transfer of Executive to any parent, affiliate or subsidiary of the Company shall constitute an assignment of this Agreement. G. Headings. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way be used to restrict, modify, or explain any of the terms or provisions hereof. H. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to its, or any other 18 sovereignty's, conflicts of laws principles. The parties agree that any claims brought pursuant to this Agreement shall be brought in a court of competent jurisdiction located in Phoenix, Arizona. I. Tolling Period. The non-competition, non-disclosure and non-solicitation obligations contained in Section 6 of this Agreement shall be extended by the length of time during which Executive shall have been in breach of any of the provisions of such Section 6. J. Company Violation Not a Defense. In an action by the Company to enforce any provision of this Agreement, any claims asserted by Executive against the Company shall not constitute a defense to the Company's action. K. Release. In consideration of Executive's employment hereafter with the Company, Executive acknowledges and represents that, with the exception of ordinary course reimbursement of business expenses and accrued vacations reflected within the financial statements of CNF, Inc., he has no outstanding claims of any kind whatsoever, including but not limited to, any claim for outstanding indebtedness, past salary, reimbursements, or benefits of any type against CNF or any of its affiliates or subsidiaries and that if he has any such claim, any and all such claims are hereby forever waived and released. L. Construction. This Agreement shall be construed according to the plain meaning of its terms, and not strictly for or against either party hereto. M. Counterparts. This Agreement may be executed in counterpart, and the counterparts, taken together, shall constitute the entire Agreement. The Agreement may further be executed by facsimile transmission, and the facsimile signatures may be deemed original signatures for all purposes, including for purposes of the Best Evidence Rule and all other rules or doctrines of similar effect. 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. IMPORTANT NOTICE: THIS AGREEMENT RESTRICTS EXECUTIVE'S RIGHTS TO OBTAIN OTHER EMPLOYMENT FOLLOWING HIS EMPLOYMENT WITH THE COMPANY. BY SIGNING IT, EXECUTIVE ACKNOWLEDGES THIS FACT, AND FURTHER ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO READ THE AGREEMENT CAREFULLY, AND/OR TO CONSULT WITH COUNSEL OF HIS CHOICE CONCERNING THE LEGAL EFFECTS OF SIGNING THE AGREEMENT, PRIOR TO SIGNING IT. By:_/s/ Vincent J. Marold________ Dated:__________________ Vincent J. Marold, President By:_/s/ Ruben Daniel Rudich______ Dated:__________________ Ruben Daniel Rudich as Executive WITNESS: __________________________ 20 EX-10.5 13 ADDENDUM Exhibit 10.5 ADDENDUM To May 19, 1999 JLL Ventures Employment Agreement of Reuben Daniel Rudich Employment Agreement shall be amended to reduce Employee's salary to the following beginning December 1, 1999: Reuben Daniel Rudich - $85,000. Mr. Rudich's salary will return to his Base Compensation level, as defined in section "3. Compensation" of the Employment Agreement, upon achieving two consecutive profitable quarters. Employee /s/ Reuben Daniel Rudich Nov 2 / 99 - --------------------------- --------------------- Reuben Daniel Rudich Date EX-10.6 14 EMPLOYMENT AGREEMENT Exhibit 10.6 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 19th day of May, 1999, by and between JLL VENTURES ACQUISITION CORP., a Delaware corporation (hereinafter "Company"), and Frank Layland an individual (hereinafter "Employee"). W I T N E S S E T H: WHEREAS, on the date hereof, the Company acquired CNF Inc., a California corporation ("CNF"), pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"); WHEREAS, pursuant to the Merger Agreement the parent of the Company assumed CNF's Stock Option Plan and all obligations of CNF thereunder, including the obligation to issue securities to Employee upon exercise of options owned of record by Employee which have been issued under such plan; and WHEREAS in connection with the Merger Agreement, Employee agreed to become employed with the Company upon the terms and conditions herein contained. NOW, THEREFORE, in consideration of the mutual premises and covenants of the parties contained within the Merger Agreement and in this Agreement, the parties hereto, do hereby agree as follows: 1. Employment and Term. A. The Company hereby employs Employee and Employee hereby accepts employment by the Company as its Director of Operations. Employee agrees to serve the Company in such capacity, subject to the terms and conditions of this Agreement, for a term, commencing on the date hereof and expiring three years from that date of this Agreement (the "Term"). 2. Duties. A. During the Term, Employee shall use his best efforts to perform all duties required in furtherance of his position, including without limitation all such duties as are customarily associated with such position or as are assigned to him from time to time by executive management or the Board of Directors of the Company. B. Employee shall diligently and faithfully devote his entire time, energy, skill, and best efforts to the performance of his duties under this Agreement. Employee shall conduct himself at all times so as to advance the best interests of the Company, and shall not undertake or engage in any other business activity or continue or assume any other business affiliations which conflict or interfere with the performance of his services hereunder without the prior written consent of the Board of Directors of the Company. Employee also agrees that he shall not usurp or misappropriate, either to himself, or to any other person or entity, any corporate or other opportunities that would otherwise be available to the Company. 3. Compensation. A. The Company shall pay Employee and Employee shall accept, as his base compensation ("Base Compensation") for all services rendered to the Company pursuant hereto, an annual salary of $85,000, to be paid in accordance with the general payroll practices of the Company as from time to time in effect, subject to all applicable federal and state tax withholding requirements. Employee shall also be entitled, subject to the terms and conditions of particular plans and programs, to all fringe benefits afforded to other employees holding similar positions with the Company in the discretion of the Board of Directors, including, but not limited to, the right to participate in any pension, retirement, major medical, group health, disability, accident 2 and life insurance, and other employee benefit programs made generally available, from time to time, by the Company (collectively, "Benefits"). B. In addition to Base Compensation, a "Discretionary Bonus" may be awarded to Employee on the basis of merit performance on an annual basis in the discretion of the Company's Board of Directors or Compensation Committee. Base Compensation and Discretionary Bonus shall hereinafter collectively be referred to as "Compensation." C. Employee shall be entitled to participate in any stock option programs adopted by the Company to the extent determined on a discretionary basis by the Board of Directors of the Company or Compensation Committee thereof. 4. Vacation and Reimbursement of Expenses. A. Employee shall receive paid vacation in each calendar year in accordance with the written policy of the Company, or as otherwise determined by executive management or the Board of Directors of the Company, applicable to employees holding similar positions within the Company to be taken at times which do not unreasonably interfere with the performance of the Employee's duties hereunder; provided, however, in the event that Employee is entitled to in excess of ten (10) paid vacation days, Employee shall not schedule more than ten (10) consecutive days of vacation during any three month period without the prior written consent of the Company's Chief Executive Officer or the Chief Financial Officer. B. Employee shall be reimbursed for such reasonable expenses as are directly incurred for the business of the Company upon presentation by Employee of an itemized account of such expenditures, but only to the extent that such expenses are deductible to the Company pursuant to rules and regulations adopted by the United States Internal Revenue Service; 3 provided, that any expenses are in accordance with Company policy, only if such expenses are pre-approved in writing by the Company's Chief Executive Officer or Chief Financial Officer. 5. Termination. A. Employee's employment and rights to Compensation and Benefits hereunder shall terminate immediately if Employee voluntarily leaves the employment of the Company; except that the Company shall have the obligation to pay Employee such portion of his Base Compensation provided for in Section 3.A hereof as may be accrued but unpaid on the date Employee voluntarily leaves the employment of the Company. In the event that Employee voluntarily leaves the employment of the Company, he shall provide at least ninety (90) days' written notice. B. The Company may at any time, upon written notice to Employee giving the reasons therefor, terminate Employee's employment and his right to Compensation hereunder "For Cause." As used herein, the term "For Cause" shall be defined to include: (i) failure to achieve those individual or corporate performance goals which shall be determined from time to time by executive management of the Company; (iii) conviction of Employee of any felony, fraud, embezzlement, or crime of moral turpitude; (iv) controlled substance abuse or drug addiction; (v) alcoholism which interferes with or affects Employee's responsibilities; (vi) grossly negligent, reckless or intentional misconduct which is materially injurious to the Company; (vii) violation of any express written direction of or any reasonable written rule or regulation established by the Company' Board of Directors from time to time which violation has not been cured to the Company's satisfaction within thirty (30) calendar days of the dispatch of written notice to the Employee of the violation. In the event of a termination For Cause, Employee's employment and right to Compensation and Benefits hereunder shall terminate immediately, except that the 4 Company shall have the obligation to pay Employee such portion of his Base Compensation as may be accrued but unpaid on the date his employment is terminated. C. Commencing on the one (1) year anniversary of the Agreement, Employee may also be terminated for any reason ("Without Cause") in the discretion of the Board of Directors of the Company. In the event of a termination Without Cause, Employee's employment and right to Compensation and Benefits shall terminate immediately and Employee shall, in lieu thereof, be entitled to severance pay consisting of a continuation of Base Compensation and Benefits for a period of six (6) months. During the period in which payments are made to Employee pursuant to this Section 5.C, Employee shall remain subject to the limitations identified in Section 6 hereafter. 6. Confidentiality and Related Matters. A. Acknowledgment of Nature and Value of Confidential Information: For the purposes of this Section 6 only, the term "Company" shall include the Company, CNF, JLL Ventures (Delaware) Corp., a Delaware Corporation ("JLL"), and all subsidiaries of JLL. Employee recognizes, acknowledges and agrees: (i) that in the course of Employee's employment by the Company it has been and will continue to be necessary for Employee to acquire, in a fiduciary capacity of trust, information which could include, in whole or in part, but is not limited to: information concerning the Company's rate schedules; rate quotations; the names, addresses, credit terms and nature of services provided by the vendors utilized by the Company; the names, addresses, credit terms and nature of services provided to customers of the Company; the identity of the Company's suppliers, sales representatives, shippers or other entities with whom Employee has come into contact as a result of his employment with the Company, or which should otherwise come into his knowledge during the term of this Agreement; the salaries, skills, education or abilities of the Company's employees; the Company's sales, sales volume, sales 5 methods and sales proposals; the identities of the Company's customers and/or prospective customers; the identities of key purchasing personnel in the employ of customers and prospective customers; the amounts and/or kinds of customers' purchases from the Company; the Company's sources of information and supply; the Company's products and product designs; the Company's computer programs, system documentation, source code, algorithms, special hardware or software, service or product hardware or software, and related software or hardware development; any useful process, machine or other device or composition of matter which is new and which is being used or studied by the Company and is not described in a patent or described in any literature already published and distributed externally by the Company; the Company's manuals, formulae, tools, processes, methods, machines, compositions, ideas, improvements, trade secrets, including but not limited to information falling under the definition of "trade secret" pursuant to the Uniform Trade Secret Act (or, if applicable, the version thereof adopted by Delaware), patents, inventions, intellectual property, or other information or materials relating to the Company's affairs (collectively referred to herein as the "Confidential Information"); (ii) that the Confidential Information is the property of the Company and constitutes a major asset of the Company; (iii) that the use, misappropriation or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to the Company; and (iv) that it is essential to the protection of the Company's goodwill and to the maintenance of the Company's competitive position that the Confidential Information be kept secret and that Employee neither disclose the Confidential Information to others nor use the Confidential Information to Employee's own advantage or to the advantage of others. B. Acknowledgment of Necessity for Protections of Company's Business. Employee further recognizes, acknowledges and agrees that it is essential for the proper 6 protection of the business of the Company that Employee shall not: (i) solicit or induce any employee of the Company to leave the employ of the Company; (ii) hire or attempt to hire any employee of the Company; (iii) solicit the trade of, or trade with, the customers or suppliers of the Company for any business purpose other than that of the Company; and (iv) compete against the Company for a reasonable period of time and within a reasonable geographic area following the termination or nonrenewal of Employee's employment with the Company, as more fully addressed in Section 6.F, below. C. Work Made For Hire. Employee hereby acknowledges and agrees that each of the copyrightable works authored by Employee related to the business of the Company (including without limitation, all software and related documentation, and all written and graphic materials prepared or conceived by Employee), alone or with others, during Employee's employment with the Company shall be deemed to be works prepared by Employee within the scope of Employee's employment with the Company and, as such, shall be deemed to be "works made for hire" under the United States copyright laws from the inception of creation of such works. In the event that any of such works shall be deemed by a court of competent jurisdiction not to be a "work made for hire," this Agreement shall operate as an irrevocable assignment by Employee to the Company of all right, title and interest in and to such works, including, without limitation, all worldwide copyright interests therein, in perpetuity. The fact that such copyrightable works are created by Employee outside of the Company's facilities or other than during Employee's working hours with the Company shall not diminish the Company's right with respect to such works which otherwise fall within this paragraph. Employee agrees to execute and deliver to the Company such further instruments or documents as may be requested by the Company in order to effectuate the purposes of this paragraph. 7 D. Non-Disclosure of Confidential Information. In recognition and consideration of Executive's employment, Compensation and Benefits, the information which the Company has given and will give Executive regarding the Company's business, the Executive's introduction to the Company's customers and prospective customers made in the course of Executive's employment with the Company, and the carefully-guarded methods of doing business which the Company utilizes and deems crucial to the successful operation of its business, Executive has held, and agrees to continue to hold and safeguard, the Confidential Information in trust and in a fiduciary capacity for the Company, its successors and assigns. Employee expressly agrees that he shall not, without the prior written consent of the Company, misappropriate or disclose or make available to anyone for use outside the Company's organization at any time, either during Employee's employment with the Company or subsequent to the termination or nonrenewal of such employment with the Company, for any reason, including without limitation termination by the Company For Cause or Without Cause, any of the Confidential Information, whether or not developed by Employee, except as required by the Company in the performance of Employee's duties to the Company. Notwithstanding the above, term "Confidential Information" shall not include information which becomes generally available to the public (other than as a result of disclosure by the Executive). Furthermore, if you are formally required to disclose any Confidential Information in the context of a civil, governmental or regulatory proceeding, you shall provide the Company with prompt notice of any such requirement so that the Company may seek an appropriate protective order or waive compliance with the provisions off this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, you are, in the opinion of your counsel, compelled to disclose Confidential Information or else stand liable for contempt of suffer other censure or penalty, you may disclose that portion of the Confidential 8 Information which your counsel advises you to disclose. In any event, you will not oppose action by, and will cooperate with the civil, governmental or regulatory agency to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. E. Disclosure of Works and Inventions/Assignment of Patents. In consideration of the promises set forth herein, Employee agrees to disclose promptly and fully to the Company, or to such person whom the Company may expressly designate for this specific purpose (its "Designee"), any and all works, inventions, discoveries and improvements authored, conceived or made by Employee, solely or with others, during the period of employment by the Company and where the subject matter of such works, inventions, discoveries or improvements results from or is suggested by any work which Employee may do for or on behalf of the Company shall have all rights to such works, inventions, discoveries and improvements, whether they are patentable or not. The fact that such works, inventions, discoveries and improvements are made or conceived by Employee outside of the Company's facilities or other than during the Employee's working hours with the Company shall not diminish the Company's rights with respect to such works, inventions, discoveries and improvements which otherwise fall within this paragraph. Employee agrees that, whenever he is requested to do so by the Company, during or after termination of Employee's employment by the Company, Employee shall execute or join in executing any and all applications, assignments or other instruments which the Company shall deem necessary to apply for and obtain Letters Patent or Copyrights of the United States or any foreign country or to otherwise protect the Company's interest therein, and Employee shall assign all such applications to the Company or its Designee, and shall provide the Company or its agents or attorneys with all reasonable assistance in the preparation and prosecution of patent 9 applications, drawings, specifications and the like, all at the expense of the Company, and shall do all that may be necessary to establish, protect and maintain the rights of the Company or its Designee in the works, inventions, discoveries, improvements, patent applications and Letters Patent in accordance with the spirit of this paragraph. Such obligations shall continue beyond the termination or nonrenewal of Employee's employment with respect to any works, inventions, discoveries and/or improvements that are authored, conceived of, or made by Employee during the period of Employee's employment, and shall be binding upon Employee's successors, assigns, executors, heirs, administrators or other legal representatives. The Company shall have no rights pursuant to this Agreement in any work, invention, discovery or improvement of the Employee made during the Term of Employee's employment by the Company if such work, invention, discovery or improvement has not arisen out of the or by reason of Employee's work with the Company or does not relate to the products, business or operations of the Company, although Employee shall nonetheless inform the Company of any such work, invention, discovery or improvement. F. Restrictions on Competition. Employee covenants and agrees that, for and in consideration of the Compensation received hereunder, the sufficiency and receipt of which is hereby acknowledged, during the period of Employee's employment hereunder (and for the period during which payments are made pursuant to Section 5.C. hereof) and for a period of one (1) year thereafter, Employee shall not, in any state or foreign country in which the Company does business, engage, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder, or otherwise, alone or in association with any other person, corporation or other entity, in any "Competing Business". For purposes of this Agreement, the term "shareholder" shall exclude any interest owned by Employee in a public company to the 10 extent the Employee owns less than ten percent (10%) of any such company's outstanding common stock. For the further purposes of this Agreement, the term "Competing Business", shall mean any person, corporation or other entity that is engaged in the business of selling portable computer peripherals or similar products being manufactured, developed, sold, distributed or licensed by the Company which directly competes with the business of the Company at the time of such termination or nonrenewal. Accordingly, the Company is granted the right by Employee to apply to any court of competent jurisdiction for one or more temporary or permanent injunctions enjoining Employee, his agents and employees, from violating the provisions of this Agreement and/or from continuing to breach such provisions. This Section 6.F shall not be effective for any purpose whatsoever if Employee is terminated Without Cause, except during the period during which payments are made pursuant to Section 5.C hereof. G. Employee's Abilities. Employee represents that Employee's experience and capabilities, and the limited provisions of the immediately-preceding Section 6.F, are such that he will not be prevented from earning his livelihood in businesses similar to the Company, other than the "Competing Business," as specifically defined in the immediately preceding Section 6.F. Employee acknowledges that there are a significant number of businesses for which his qualifications and experience would render him qualified for employment that are within the states and foreign countries referred to in Section 6.F. which do not constitute a "Competing Business" such that his ability to become employed after the termination or nonrenewal of this Agreement would not be impaired. H. Non-Solicitation of Customers and Suppliers. Employee agrees that during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C hereof), and for a period of one (1) year thereafter, he shall not, 11 directly or indirectly, solicit the trade of, or trade with, any past or present customer or supplier of the Company for any business purpose that competes directly or indirectly with the business undertaken by the Company. I. Non-Solicitation of Employees. Employee agrees that during the course of his employment with the Company (and for the period during which payments are made pursuant to Section 5.C hereof) and for two (2) years following any termination or nonrenewal of Employee's employment with the Company, including, without limitation, termination by the Company For Cause or Without Cause, Employee shall not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee of the Company to leave the Company for any reason whatsoever, or assist or participate in the hiring of any employee of the Company to work for another entity. J. No Prior Agreements. Employee represents and warrants that Employee is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect Employee's ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in this Section 6. Employee further represents and warrants that his employment with the Company will not under any circumstances require him to disclose or use any confidential information belonging to prior employers or other persons or entities, or to engage in any conduct which may potentially interfere with the contractual, statutory or common-law rights of such other employers, persons or entities. In the event that Employee knows or learns of any facts whatsoever which suggest that such interference might arguably occur as the result of any proposed actions by either 12 Employee or the Company, Employee expressly promises that he will immediately bring such facts to the Company's attention. K. Remedies. In the event of a breach by Employee of any of the terms of this Agreement, the Company shall be entitled, if it shall so elect, to institute legal proceedings to obtain damages for any such breach, or to enforce the specific performance of this Agreement by Employee and to enjoin Employee from any further violation of this Agreement, and to exercise such remedies cumulatively or in conjunction with all other rights and remedies provided by law. Employee acknowledges and agrees that money damages for any breach by him of any of the provisions of this Agreement may be inadequate to compensate the Company for the injuries it may suffer as the result of any such breach, and accordingly that the Company shall be entitled to injunctive relief against Employee, in addition to money damages, in the event of any such breach by Employee. L. Review by Counsel. Employee expressly acknowledges and represents that Employee has been given a full and fair opportunity to review this Agreement with an attorney of Employee's choice, and that Employee has satisfied himself, with or without consulting with counsel, that the terms and provisions of this Agreement, specifically including, but not limited to, the restrictive covenant and related provisions of Section 6 hereof, are reasonable and enforceable. M. Return of Materials. Upon the termination or nonrenewal of Employee's employment with the Company for any reason, including without limitation termination by the Company For Cause or Without Cause, or at any time upon demand, Employee shall promptly deliver to the Company all Company property and materials, including without limitation all documents or other materials constituting, containing, referencing or relating to the "Confidential 13 Information" referred to in this Section 6, and any other Company property of any nature whatsoever, including without limitation correspondence, computer disks or other electronically-stored information, drawings, blueprints, manuals, letters, notes, notebooks, reports, flow-charts, programs, proposals and any documents concerning the Company's customers, or concerning services, products or processes provided by or to, or used by, the Company. N. Company-Created Materials. All material that may be furnished to the Employee, together with literature, rate schedules, customer lists, forms, filing systems and any other property, documents or other materials furnished or made available by the Company to the Employee, shall be and remain the property of the Company, and shall be returned by the Employee to the Company upon any termination or nonrenewal of employment or at any time upon demand. O. Employee-Created Materials. All material created by the Employee during the term of his employment with the Company which is incidental to or related in any way to the Employee's employment, or to the Company's business, shall be the property of the Company, and shall be delivered to the Company upon any termination or nonrenewal of Employee's employment or at any time upon demand. P. Definitions. For purposes of this Section 6, the term, "material(s)" shall include, but shall not be limited to, data stored in computers, voicemail or any other electronic, magnetic, or mechanical storage device, any passwords, codes or keys required to access all or any portion of such material, and the "Confidential Information" referred to in Section 6.A. hereof. 14 7. Conflict of Interest. Employee covenants that, during the Term, he will disclose to the Company, in writing, any and all interests he may have, whether for profit or compensation or not, in any venture or activity which could potentially interfere with his ability to perform under this Agreement or create a conflict of interest for him with the Company. For purposes of this paragraph 7 only, "conflict of interest" shall mean ownership of greater than one percent (1%) of, or $250,000 worth of equity in, another company which conducts business similar to that undertaken by the Company. 8. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, at the following addresses or to such other address as either party may designate by like notice: A. If to Employee, to: Frank Layland 17221 N. 60th Place Scottsdale, AZ 85254 With a copy to: Stephen Boatwright, Esquire Gammage & Burnham 2 North Central, 18th Floor Phoenix, AZ 85004 B. If to Company, to: JLL Ventures (Delaware) Corp. 7722 East Gray Road Scottsdale, AZ 85260 15 With a copy to: Buchanan Ingersoll Professional Corporation 11 Penn Center, 14th Floor 1835 Market Street Philadelphia, Pa. 19103 Attn.: Stephen M. Cohen, Esquire 9. Basic Indemnification. Company shall indemnify and defend Employee and his heirs, executors and administrators against any costs or expense (including reasonable attorneys' fees and amounts paid in settlement, if such settlement is approved by the Company), fine, penalty, judgment and liability reasonably incurred by or imposed upon Employee in connection with any action, suit or proceeding, civil or criminal, to which Employee may be made a party or with which Employee shall be threatened, by reason of Employee's being or having been an employee, unless with respect to such matter Employee shall have been adjudicated in any proceeding not to have acted in good faith or in the reasonable belief that the action was in the best interests of the Company, or unless such indemnification is precluded by law, public policy, or in the judgment of the Company's Board of Directors, such indemnification is being sought as a result of actions of Employee which were either : (i) grossly negligent; (ii) reflective of Employee misconduct; (iii) in violation of rules, regulations or laws applicable to the Company; or (iv) in disregard of Company policies. 10. Additional Provisions. A. Binding Agreement. This Agreement, including without limitation its confidentiality, restrictive covenant and related provisions, shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Employee, his heirs, executors, administrators and legal representatives, subject to the provisions of Section 10.F. hereof, which 16 expressly prohibits the assignment or delegation of any of Employee's personal rights or obligations hereunder. B. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and cannot be modified orally. This Agreement supersedes all prior and contemporaneously-made written or oral agreements between the parties or between Employee and CNF relating to the subject matter hereof. No modification or waiver of any of the provisions hereof shall be effective unless set forth in a writing that specifically states that it is intended to be a modification of this Agreement and that is signed by the Chief Executive Officer of the Company. C. Modification. If any provision(s) of this Agreement shall be or shall become illegal or unenforceable in whole or in part, for any reason whatsoever, the remaining provisions shall nevertheless be deemed valid, binding and subsisting, and any invalid or unenforceable provision(s) shall be deemed modified to the least extent possible so as to make them valid and enforceable and so as to give the maximum effect allowable by law to the parties' original intent as expressed by the terms hereof. D. No Waiver. No failure on the part of the Company to exercise, and no delay by the Company in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by the Company of any right, power or remedy hereunder, preclude any other or further exercise thereof, or the exercise of any other right, power or remedy by the Company. E. Person. "Person" as used herein shall mean a natural person, joint venture, corporation, partnership, trust, estate, sole proprietorship, governmental agency or authority or other juridical entity. 17 F. Personal Services Contract. This is a personal services contract and the rights and obligations set forth herein may not be assigned or delegated by Employee, except as otherwise specifically provided in this Agreement with respect to benefits payable upon Employee's disability or death, without the express, written consent of the Company. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may be assigned by the Company to any party, without the consent of Employee. The transfer of Employee to any parent, affiliate or subsidiary of the Company shall constitute an assignment of this Agreement. G. Headings. The headings of the several sections of this Agreement have been inserted for convenience of reference only and shall in no way be used to restrict, modify, or explain any of the terms or provisions hereof. H. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to its, or any other sovereignty's, conflicts of laws principles. The parties agree that any claims brought pursuant to this Agreement shall be brought in a court of competent jurisdiction located in Phoenix, Arizona. I. Tolling Period. The non-competition, non-disclosure and non-solicitation obligations contained in Section 6 of this Agreement shall be extended by the length of time during which Employee shall have been in breach of any of the provisions of such Section 6. J. Company Violation Not a Defense. In an action by the Company to enforce any provision of this Agreement, any claims asserted by Employee against the Company shall not constitute a defense to the Company's action. K. Release. In consideration of Executive's employment hereafter with the Company, Executive acknowledges and represents that, with the exception of ordinary course 18 reimbursement of business expenses and accrued vacations reflected within the financial statements of CNF, Inc., he has no outstanding claims of any kind whatsoever, including but not limited to, any claim for outstanding indebtedness, past salary, reimbursements, or benefits of any type against CNF or any of its affiliates or subsidiaries and that if he has any such claim, any and all such claims are hereby forever waived and released. L. Construction. This Agreement shall be construed according to the plain meaning of its terms, and not strictly for or against either party hereto. M. Counterparts. This Agreement may be executed in counterpart, and the counterparts, taken together, shall constitute the entire Agreement. The Agreement may further be executed by facsimile transmission, and the facsimile signatures may be deemed original signatures for all purposes, including for purposes of the Best Evidence Rule and all other rules or doctrines of similar effect. 19 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first above written. IMPORTANT NOTICE: THIS AGREEMENT RESTRICTS EXECUTIVE'S RIGHTS TO OBTAIN OTHER EMPLOYMENT FOLLOWING HIS EMPLOYMENT WITH THE COMPANY. BY SIGNING IT, EXECUTIVE ACKNOWLEDGES THIS FACT, AND FURTHER ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO READ THE AGREEMENT CAREFULLY, AND/OR TO CONSULT WITH COUNSEL OF HIS CHOICE CONCERNING THE LEGAL EFFECTS OF SIGNING THE AGREEMENT, PRIOR TO SIGNING IT. By:_/s/ Vincent J. Marold__________ Dated:______________________________ Vincent J. Marold, President By:_/s/ Frank Layland______________ Dated:______________________________ Frank Layland as Executive WITNESS: ___________________________________ 20 EX-10.7 15 ACQUIROR ESCROW AGREEMENT Exhibit 10.7 ACQUIROR ESCROW AGREEMENT THIS ESCROW AGREEMENT ("Agreement") dated as of June __, 1999 by and among JLL VENTURES (DELAWARE) CORP., a Delaware corporation ("Acquiror"), SYNERGY GROUP INTERNATIONAL, INC., an Arizona corporation ("Synergy"), those stockholders identified on the signature page hereto (the "Signatories") and STOCKTRANS, INC., a Pennsylvania corporation, as escrow agent ("Escrow Agent"). Synergy and the Signatories are hereinafter collectively referred to as the "Shareholders" and individually as a "Shareholder". WHEREAS, Acquiror, CNF, Inc., a California corporation ("CNF"), and the principal shareholder of CNF are parties to an Agreement and Plan of Merger dated as of April 16, 1999, and as amended thereafter (the "Merger Agreement"), providing for Acquiror's acquisition of all of the issued and outstanding capital stock of CNF; and WHEREAS, the Merger Agreement provides in Section 1.4(a) for the establishment of an escrow fund (the "Escrow Fund") to be delivered by certain stockholders of Acquiror prior to the closing of the Merger Agreement consisting of 4,000,000 shares of common stock, $.0001 par value per share, of Acquiror (the "Escrow Shares"). NOW, THEREFORE, in consideration of Acquiror and CNF executing the Merger Agreement and of the mutual premises and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions, Other Agreements. (a) All capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Merger Agreement. (b) It is expressly understood and agreed by the parties hereto that all references in this Agreement to the Merger Agreement and to any exhibits to such Merger Agreement are for the convenience of the parties hereto other than the Escrow Agent, and the Escrow Agent shall have no obligations or duties with respect thereto other than the obligation to refer to the Merger Agreement for the purpose of determining the definitions of certain capitalized terms used herein and not otherwise defined herein or to interpret any provisions of such other agreements referred to in this Agreement for purposes of implementation thereof. 2. Appointment of Escrow Agent. StockTrans, Inc. hereby accepts its appointment as Escrow Agent to serve in accordance with the terms, conditions and provisions of this Agreement. The acceptance by the Escrow Agent of its duties under this Agreement is subject to the terms and conditions set forth at Section 7 hereafter, which the parties to this Agreement hereby agree shall govern and control with respect to the rights, duties, liabilities and immunities of the Escrow Agent. 3. Establishment of Escrow Fund; Power of Attorney. (a) Pursuant to Section 1.4(a) of the Merger Agreement, at the Closing, Shareholders shall deposit with the Escrow Agent, the Escrow Shares constituting the Escrow Fund in order to secure Acquiror's obligations under Section 5.13 of the Merger Agreement. The Escrow Agent shall hold the Escrow Shares in trust on behalf of the Shareholders, who shall remain the record and beneficial owners of the Escrow Shares comprising the Escrow Fund in the amounts as set forth on the signature page hereof. If dividends are paid or a distribution is made by Acquiror with respect to the Escrow Shares in cash or in property, such dividends or distributions shall be held as a part of the Escrow Fund. In the event of any stock splits, recapitalizations or other adjustments to the capital stock of Acquiror, the resulting number of shares, or other securities into which the Escrow Shares convert, shall be included in the Escrow Fund. (b) By virtue of the Shareholders' execution of this Escrow Agreement, each of the Shareholders has, without any further act, consented to: (i) the establishment of this escrow pursuant to the Merger Agreement in the manner set forth herein, and (ii) all of the other terms, conditions and limitations in this Agreement. (c) By virtue of the Shareholders' execution of this Escrow Agreement, each of the Shareholders hereby irrevocably constitutes and appoints the Escrow Agent the true and lawful agent and attorney-in-fact of the Shareholders with respect to all matters arising in connection with this Escrow Agreement, including the administration of the Escrow Fund pursuant to Section 4 below and the subsequent surrender and cancellation of the Escrow Shares pursuant to Section 4 herein. 4. Operation and Administration of the Escrow Fund; Release of Escrow Shares. (a) To the extent provided herein and in the Merger Agreement, the Escrow Fund shall be established and thereafter applied as set forth in this Section 4 to secure the performance of Acquiror with respect to the completion of the Private Placement pursuant to Section 5.13 of the Merger Agreement. (b) Upon the closing, if any, with respect to the Private Placement in accordance with Section 5.13 of the Merger Agreement, Synergy, on behalf of the Shareholders, shall deliver an application to the Escrow Agent, with a copy to Acquiror (the "Synergy Application"). The Synergy Application shall set forth the amount of net proceeds raised in the Private Placement, the number of Escrow Shares to be delivered to Shareholders and the number of Escrow Shares to be delivered to the Acquiror, if any, for cancellation as determined pursuant to Section 5.13(b) of the Merger Agreement and, subject to Section 4(e) herein, shall instruct the Escrow Agent to apply the Escrow Shares in the manner set forth in this Section 4. (c) In the event that fifteen (15) days after expiration of the Offering Period a closing with respect to the Private Placement is not completed in accordance with Section 5.13 of the, Merger Agreement, other than by reason contained within Section 5.13(c) of the Merger Agreement, Acquiror shall deliver an application to the Escrow Agent (the "Acquiror Application"), with a copy to Synergy on behalf of the Shareholders. The Acquiror Application 2 shall state that a closing with respect to the Private Placement has not occurred and shall instruct Escrow Agent to apply, subject to Section 4(e) herein, the Escrow Shares in the manner set forth in this Section 4. If a closing with respect to the Private Placement does not occur as a result of the conditions stated within Section 5.13(c) of the Merger Agreement, then, at the time of the occurrence of any of such conditions, Synergy shall make application to the Escrow Agent to release the Escrow Shares in full to the Shareholders. Such application shall also be referred to as the "Synergy Application". (d) Unless the Escrow Agent is otherwise informed in writing by Synergy (with respect to the Acquiror Application) or by Acquiror (with respect to the Synergy Application) within thirty (30) days from the date of its receipt of either the Acquiror Application or the Synergy Application, as applicable, disputing the direction contained within such application then the Escrow Agent shall apply the Escrow Shares in the manner set forth in either the Acquiror Application or the Synergy Application. (e) If the Escrow Agent is notified that Synergy (with respect to the Acquiror Application) or Acquiror (with respect to the Synergy Application) in good faith contests the direction contained within such application, then, and in that event, the Escrow Agent shall be permitted to submit the issues in dispute to arbitration in accordance with the provisions of Section 9.8 of the Merger Agreement. (f) Any cash received in respect of the Escrow Shares (e.g., dividends) shall be placed in an interest bearing account of Escrow Agent and shall become a part of the Escrow Fund. 5. Termination. (a) The Escrow Shares shall remain in escrow until Escrow Agent's receipt of either the Acquiror Application or the Synergy Application. Notwithstanding the above, in the event that there is a dispute with respect to an application, the Escrow Shares which are subject to such dispute shall remain subject to escrow until resolution of the matters identified herein. (b) Once all of the Escrow Shares have been either released to Acquiror for cancellation or returned to the Shareholders, the provisions of this Escrow Agreement other than Section 17 shall no longer be of any force and effect and this Escrow Agreement shall be deemed to have terminated. 6. Fees and Expenses of Escrow Agent. The Escrow Agent shall be entitled to a fee of $1,250 and reimbursement of all reasonable out-of-pocket expenses incurred by the Escrow Agent in connection with the performance of its duties hereunder, including reasonable fees and disbursements of counsel. The responsibility for payment of the $1,250 fee and reimbursement to the Escrow Agent shall be paid by Acquiror. 7. Duties and Liabilities of the Escrow Agent. (a) The Escrow Agent shall act hereunder as depository only, and it shall not be responsible or liable in any manner whatever for any determinations regarding the cancellation and 3 forfeiture of the Escrow Shares to be made pursuant to Section 4 hereof. It is agreed that the duties and obligations of the Escrow Agent are those herein specifically provided and no other. Except as otherwise specifically provided in this Agreement, the Escrow Agent shall not have any liability under, nor duty to inquire into, the terms and provisions of any agreement or instrument, other than this Agreement. The duties of the Escrow Agent are ministerial in nature, and the Escrow Agent shall not incur any liability whatsoever other than for its own willful misconduct or gross negligence. (b) The Escrow Agent shall not incur any liability for following the instructions herein contained or expressly provided for, or written instructions given by the parties hereto. The Escrow Agent shall not have any responsibility for the genuineness or validity of any document or other material presented to or deposited with it nor shall it have any liability for any action taken, suffered or omitted in accordance with any written instructions or certificates given to it hereunder and believed by it in good faith to be what it purports to be and to be signed by the proper party or parties, nor for retaining the Escrow Fund in the absence of instructions to the contrary. (c) The Escrow Agent shall not be liable for any error of judgment, or for any act done or step taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection with this Agreement, except its own gross negligence or willful misconduct. (d) The Escrow Agent may consult with, and obtain the advice of, legal counsel selected by it in the event of any question as to any of the provisions hereof or its duties hereunder, and the Escrow Agent shall incur no liability and shall be fully protected for any action taken, suffered or omitted by it in good faith in accordance with the advice of such counsel, provided that the Escrow Agent shall have used reasonable care in the selection of such counsel. (e) In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder or shall have received instructions, claims or demands from any party hereto which, in its reasonable opinion, conflict with any of the provisions of this Agreement or with instructions, claims or demands of any other party hereto, the Escrow Agent shall refrain from taking any action and its sole obligation shall be to keep safely all property held in escrow hereunder until it shall be directed otherwise in writing by all of the parties hereto or by a final order or judgment of an arbitration panel or court of competent jurisdiction, or an award of an arbitrator pursuant to an arbitration conducted pursuant to Section 9.8 of the Merger Agreement. (f) The Escrow Agent shall not be required to institute legal proceedings of any kind and shall not be required to initiate or defend any legal proceedings which may be instituted against it in respect of the subject matter of this Agreement, provided that the Escrow Agent shall at all times take such action as is reasonably necessary to keep safely all property held in escrow hereunder. If the Escrow Agent does elect to so act or is required to so act in order to keep safely all property held in escrow hereunder, the Escrow Agent will do so only to the extent that it is indemnified to its reasonable satisfaction against the cost and expense of such defense or initiation. 4 8. Amendment. This Agreement may be amended, modified or rescinded only by a writing executed by Acquiror, Shareholder and Escrow Agent. 9. Voting of Escrow Shares; Rights During Escrow Period; Restriction on Transfer. All rights to vote the Escrow Shares while they are part of the Escrow Fund shall be retained by the Shareholders. The Shareholders shall not have any right to transfer or assign their interest in the Escrow Shares in the Escrow Fund during such period of time as such Escrow Shares remain a part of the Escrow Fund unless Acquiror shall first have consented thereto in writing and provided that any such transferee shall deliver to the Escrow Agent a duly signed stock power covering such Escrow Shares and the Escrow Agent shall hold such transferee's shares and stock powers in escrow subject to this Agreement. 10. Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by certified mail, postage prepaid and return receipt requested, or by hand delivery or by telecopy (promptly confirmed by delivery of an original copy of such notice or communication): (i) If to the Acquiror, to: c/o Synergy Group International, Inc. 4825 East Sunrise Drive Tucson, AZ 85718 Attention: Vincent J. Marold (ii) If to the Principal Shareholders, to Synergy Group International, Inc. 4725 East Sunrise Drive Tucson, AZ 85718 Attention: Vincent J. Marold (iii) If to Escrow Agent, to: StockTrans, Inc. 7 East Lancaster Avenue Ardmore, PA 19003 Attention: Jonathan Miller 5 11. Parties in Interest. This Agreement shall be binding upon and shall inure to the benefit of the successors and permitted assigns of each of the parties hereto. 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware applicable to contracts executed and to be performed entirely within said State. 14. Severability. In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby, unless the provisions held invalid shall substantially impair the benefits of the remaining portions of this Agreement. 15. Consent to Limited Jurisdiction. The Escrow Agent hereby agrees that any legal action or proceeding with respect to disputes arising out of this Agreement not otherwise subject to arbitration under Section 9.8 of the Merger Agreement may be brought in the state or federal courts of the State of Pennsylvania, Philadelphia County, and, by execution and delivery of this Agreement, the Escrow Agent irrevocably accepts for itself and in respect of the property held by it as Escrow Agent hereunder the jurisdiction of the aforesaid courts, it being understood and agreed that such consent to jurisdiction is for the sole and limited purpose of resolving disputes under this Agreement and shall in no way be deemed to be a general and unconditional consent to the jurisdiction of the aforesaid courts. 16. Resignation and Removal of Escrow Agent. (a) The Escrow Agent may at any time resign as Escrow Agent hereunder by giving written notice of its resignation to each of the parties hereto, at their respective addresses set forth in Section 10 of this Agreement, at least thirty (30) days prior to the date specified for such resignation to take effect. The Escrow Agent may be removed at any time by an instrument in writing executed by a majority of the parties hereto other than Escrow Agent and delivered to the Escrow Agent. (b) If at any time the Escrow Agent shall resign or shall be removed in accordance with the provisions of clause (a) above, Acquiror and Synergy shall use their respective best efforts to jointly appoint a successor escrow agent under this Agreement. In the event of the 6 resignation or removal of the Escrow Agent, if no appointment of a successor escrow agent shall have been made pursuant to the preceding sentence within the thirty (30) day period referred to in the first sentence of paragraph (a) above, then the retiring Escrow Agent may apply to any court of competent jurisdiction to appoint a successor escrow agent. Such court may thereupon, after such notice, if any, as such court may deem proper and prescribe, appoint a successor escrow agent hereunder. 17. Indemnification. Acquiror and the Shareholders, jointly and severally agree to indemnify, defend and hold the Escrow Agent harmless from and against any and all loss, damage, liability and expense that may be incurred by the Escrow Agent arising out of or in connection with its duties, obligations or performance as Escrow Agent hereunder, except as caused by its gross negligence or willful misconduct, including without limitation the reasonable legal costs and expenses of defending itself against any claim or liability in connection with its performance hereunder. The terms of this Section 17 shall survive the termination of this Agreement and, with respect to claims arising in connection with the Escrow Agent's duties while acting as such, the resignation or removal of the Escrow Agent. The Escrow Agent agrees to notify Acquiror and the Shareholders in writing of the written assertion of a claim against the Escrow Agent or of any suit or proceeding commenced against the Escrow Agent promptly after the Escrow Agent has received any such written assertion of a claim or has been served with the summons or other legal process, in each case giving information as to the nature and basis of the claim, but in no event will the failure to give such notice affect the obligation of Acquiror to indemnify the Escrow Agent pursuant to this Section 17 unless the rights of Acquiror and Shareholders shall have been materially impaired by such failure. Each of Acquiror and the Shareholders will be entitled to participate at its own expense in the defense of any suit or proceeding brought to enforce any such claim and, if it so elects in writing, may assume the entire defense and control of any such suit or proceeding. Neither Acquiror nor the Shareholders shall be liable for any counsel fees or other expenses incurred by the Escrow Agent after the date that Acquiror or the Shareholders shall have so elected to assume the defense and control of any such suit or proceeding. In addition, neither Acquiror nor the Shareholders shall be liable for any settlement of any such suit, proceeding or claim without the prior written consent of Acquiror and the Shareholders. 18. 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. (THIS SPACE LEFT BLANK INTENTIONALLY) 7 IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be executed as of the date first written above. JLL VENTURES (DELAWARE) CORP., a Delaware corporation By: /s/ Vincent J. Marold ----------------------------- Name: Vincent J. Marold Title: President SYNERGY GROUP INTERNATIONAL, INC., a Delaware corporation By: /s/ Vincent J. Marold ----------------------------- Name: Vincent J. Marold Title: President STOCKTRANS, INC. By: /s/ Jonathan Miller ------------------------------ Name: Jonathan Miller Title: President Shareholders contributing Shares to be held in Escrow We, the Historic Acquiror Shareholders, hereby agree that the certain Agreement and Plan of Merger by and among JLL Ventures (Delaware) Corp., JLL Ventures Acquisition Corp., a Delaware corporation, CNF, Inc., a California corporation and Paul Charles, an individual residing in Scottsdale, Arizona, is for our benefit and shall be bound by the terms and conditions contained in Section 1.4(a), 5.12(c) and 5.13 thereof. - ------------------------------------- ------------------------------------ Name Name - ------------------------------------- ------------------------------------ Signature Signature - ------------------------------------- ------------------------------------ No. of Escrow Shares No. of Escrow Shares - ------------------------------------- ------------------------------------ Name Name - ------------------------------------- ------------------------------------ Signature Signature - ------------------------------------- ------------------------------------ No. of Escrow Shares No. of Escrow Shares 8 EX-10.8 16 SHAREHOLDER ESCROW AGREEMENT Exhibit 10.8 SHAREHOLDER ESCROW AGREEMENT THIS ESCROW AGREEMENT ("Agreement") dated as of May __, 1999 by and among JLL VENTURES (DELAWARE) CORP., a Delaware corporation ("Acquiror"), PAUL CHARLES ("Shareholder"), the principal shareholder of CNF, Inc., a California corporation ("CNF"), and STOCKTRANS, INC., a Pennsylvania corporation, as escrow agent ("Escrow Agent"). WHEREAS, Acquiror, CNF and the Shareholder are parties to an Agreement and Plan of Merger dated as of April 16, 1999, and as amended thereafter (the "Merger Agreement"), providing for Acquiror's acquisition of all of the issued and outstanding capital stock of CNF; and WHEREAS, Section 1.4(b) of the Merger Agreement provides for the establishment of an escrow fund delivered from the Merger Consideration consisting of an aggregate of 2,000,000 shares of Series A Convertible Preferred Stock, $.0001 par value per share (the "Preferred Stock"), of Acquiror. NOW, THEREFORE, in consideration of Acquiror and the Shareholder executing the Merger Agreement and of the mutual premises and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions, Other Agreements. (a) All capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to such terms in the Merger Agreement. (b) It is expressly understood and agreed by the parties hereto that all references in this Agreement to the Merger Agreement and to any exhibits to such Merger Agreement are for the convenience of the parties hereto other than the Escrow Agent, and the Escrow Agent shall have no obligations or duties with respect thereto other than the obligation to refer to the Merger Agreement for the purpose of determining the definitions of certain capitalized terms used herein and not otherwise defined herein or to interpret any provisions of such other agreements referred to in this Agreement for purposes of implementation thereof. 2. Appointment of Escrow Agent. StockTrans, Inc. hereby accepts appointment as Escrow Agent to serve in accordance with the terms, conditions and provisions of this Agreement. The acceptance by the Escrow Agent of its duties under this Agreement is subject to the terms and conditions set forth at Section 7 hereafter, which the parties to this Agreement hereby agree shall govern and control with respect to the rights, duties, liabilities and immunities of the Escrow Agent. 3. Establishment of Escrow Fund; Power of Attorney. (a) Pursuant to Section 1.4(b) of the Merger Agreement, at the Closing, Acquiror shall deposit with the Escrow Agent: 2,000,000 shares of Preferred Stock (the "Escrow Shares") into an escrow fund (the "Escrow Fund") in order to secure Shareholder's indemnification obligations under Article 7 of the Merger Agreement. The Escrow Agent shall hold the Escrow Shares on behalf of the Shareholder who shall remain the record and beneficial owner of the Escrow Shares comprising the Escrow Fund. If dividends are paid or a distribution is made by Acquiror with respect to the Escrow Shares in cash or in property, such dividends or distributions shall be held as a part of the Escrow Fund. In the event of any stock splits, recapitalizations, other adjustments to the capital stock of Acquiror or conversion of the Preferred Stock, the resulting number of shares or other securities into which the Escrow Shares convert shall be included in the Escrow Fund. (b) By virtue of the Shareholder's execution of this Escrow Agreement, Shareholder has, without any further act, consented to: (i) the establishment of this escrow pursuant to the Merger Agreement in the manner set forth herein, and (ii) all of the other terms, conditions and limitations in this Agreement. (c) By virtue of the Shareholder's execution of this Escrow Agreement, the Shareholder hereby irrevocably constitutes and appoints the Escrow Agent the true and lawful agent and attorney-in-fact of the Shareholder with respect to all matters arising in connection with this Escrow Agreement, including the administration of the Escrow Fund pursuant to Section 4 below and the subsequent surrender and cancellation of the Escrow Shares pursuant to Section 4 below. 4. Operation and Administration of the Escrow Fund. (a) To the extent provided herein and in the Merger Agreement, the Escrow Fund shall be established and thereafter applied to the payment of indemnification claims ("Claims") asserted by Acquiror during the eighteen (18) month period following Closing for the benefit of Acquiror as provided in Article 7 of the Merger Agreement. (b) Acquiror shall make application to the Escrow Agent, with a copy to the Shareholder (each an "Application"), if it has incurred or suffered damages or losses pursuant to Section 7.1(a) of the Merger Agreement. The Application shall identify the amount of the damages or losses (the "Claim Amount") and shall include proof that such damage or loss has been paid or incurred by Acquiror and shall instruct the Escrow Agent to apply, the Claim Amount, as subject to potential adjustment in paragraph 4(e) below, in the manner set forth in paragraph 4(g) below. (c) Unless the Escrow Agent is otherwise notified in writing by the Shareholder within thirty (30) days from the date of its receipt of the Application, that Shareholder is disputing the Claim Amount or the application thereof against the Escrow Fund, then the Escrow Agent shall apply the Claim Amount against the Escrow Fund in the manner set forth in paragraph 4(g) below. 2 (d) If the Escrow Agent is notified in writing by the Shareholder within thirty (30) days from the date of Shareholder's receipt of the Application that the Shareholder in good faith contests the Claim Amount or the application of the Claim Amount against the Escrow Fund, then, and in that event, the Escrow Agent shall be permitted to submit the issues in dispute to arbitration in accordance with the provisions of Section 9.8 of the Merger Agreement. (e) If the arbitration results in a finding (or settlement between the parties) in support of the Application (which for this purpose shall include any finding, conclusion or settlement which awards Acquiror at least 80% of the Claim Amount (hereafter, the "Adjusted Claim Amount")); then, and in that event, there shall be added to the Adjusted Claim Amount interest on the Adjusted Claim Amount in the amount of ten (10%) percent per annum, applied from the date of the Application. (f) Any cash received in respect of the Escrow Shares (e.g., dividends) shall be placed in an interest bearing account of Escrow Agent and shall become a part of the Escrow Fund. (g) The Claim Amount shall be applied against the Escrow Fund; first against any cash therein and thereafter, against the Escrow Shares in the following manner. The Claim Amount shall be applied against the Escrow Shares by surrender of such number of Escrow Shares to Acquiror for cancellation as determined by dividing the Claim Amount by the "fair market value" of the Escrow Shares. For this purpose, the "fair market value" of the Escrow Shares shall be sixty percent (60%) of the average closing price of the Acquiror's common stock (on the exchange, NASDAQ or OTC Electronic Bulletin Board on which the shares principally trade) for the ten (10) trading days prior to the final determination of the Claim Amount. 5. Release of Escrow Shares; Termination. (a) Subject to Section 5(c) below, 1,000,000 of the Escrow Shares shall remain in escrow until six (6) months following the Closing whereupon, at the expiration of such period, such Escrow Shares shall be delivered and released to the Shareholder. (b) Subject to Section 5(c) below , the remainder of the Escrow Shares shall remain in escrow hereof for a period of eighteen (18) months following the Closing; whereupon, at the expiration of such period, the Escrow Fund shall be delivered and released to the Shareholder. (c) Notwithstanding the above, the Escrow Agent may continue to retain in escrow, subject to the terms of this Agreement, any Escrow Shares that may be necessary to satisfy any pending, outstanding or contested Claim(s) timely submitted prior to the release of such Escrow Shares. The Escrow Shares retained pursuant to this subparagraph shall remain subject to escrow until resolution of the matters identified herein. (d) Once all of the Escrow Shares have been either released to Acquiror for cancellation or returned to the Shareholder, the provisions of this Agreement other than Section 17 shall no longer be of any force and effect and this Agreement shall be deemed to have terminated. 3 6. Fees and Expenses of Escrow Agent. The Escrow Agent shall be entitled to a fee of $1,250 and reimbursement of all reasonable out-of-pocket expenses incurred by the Escrow Agent in connection with the performance of its duties hereunder, including reasonable fees and disbursements of counsel. The responsibility for payment of the $1,250 fee and reimbursement to the Escrow Agent shall be paid by Acquiror. 7. Duties and Liabilities of the Escrow Agent. (a) The Escrow Agent shall act hereunder as depository only, and it shall not be responsible or liable in any manner whatever for any determinations regarding the cancellation and forfeiture of the Escrow Shares to be made pursuant to Section 4 hereof. It is agreed that the duties and obligations of the Escrow Agent are those herein specifically provided and no other. Except as otherwise specifically provided in this Agreement, the Escrow Agent shall not have any liability under, nor duty to inquire into, the terms and provisions of any agreement or instrument, other than this Agreement. The duties of the Escrow Agent are ministerial in nature, and the Escrow Agent shall not incur any liability whatsoever other than for its own willful misconduct or gross negligence. (b) The Escrow Agent shall not incur any liability for following the instructions herein contained or expressly provided for, or written instructions given by the parties hereto. The Escrow Agent shall not have any responsibility for the genuineness or validity of any document or other material presented to or deposited with it nor shall it have any liability for any action taken, suffered or omitted in accordance with any written instructions or certificates given to it hereunder and believed by it in good faith to be what it purports to be and to be signed by the proper party or parties, nor for retaining the Escrow Fund in the absence of instructions to the contrary. (c) The Escrow Agent shall not be liable for any error of judgment, or for any act done or step taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection with this Agreement, except its own gross negligence or willful misconduct. (d) The Escrow Agent may consult with, and obtain the advice of, legal counsel selected by it in the event of any question as to any of the provisions hereof or its duties hereunder, and the Escrow Agent shall incur no liability and shall be fully protected for any action taken, suffered or omitted by it in good faith in accordance with the advice of such counsel, provided that the Escrow Agent shall have used reasonable care in the selection of such counsel. (e) In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder or shall have received instructions, claims or demands from any party hereto which, in its reasonable opinion, conflict with any of the provisions of this Agreement or with instructions, claims or demands of any other party hereto, the Escrow Agent shall refrain from taking any action and its sole obligation shall be to keep safely all property held in escrow hereunder until it shall be directed otherwise in writing by all of the parties hereto or by a final order or judgment of 4 an arbitration panel or court of competent jurisdiction, or an award of an arbitrator pursuant to an arbitration conducted pursuant to Section 9.8 of the Merger Agreement. (f) The Escrow Agent shall not be required to institute legal proceedings of any kind and shall not be required to initiate or defend any legal proceedings which may be instituted against it in respect of the subject matter of this Agreement, provided that the Escrow Agent shall at all times take such action as is reasonably necessary to keep safely all property held in escrow hereunder. If the Escrow Agent does elect to so act or is required to so act in order to keep safely all property held in escrow hereunder, the Escrow Agent will do so only to the extent that it is indemnified to its reasonable satisfaction against the cost and expense of such defense or initiation. 8. Amendment. This Agreement may be amended, modified or rescinded only by a writing executed by Acquiror, Shareholder and Escrow Agent. 9. Voting of Escrow Shares; Rights During Escrow Period; Restriction on Transfer. All rights to vote the Escrow Shares while they are part of the Escrow Fund shall be retained by the Shareholder. The Shareholder shall not have any right to transfer or assign his interest in the Escrow Shares in the Escrow Fund during such period of time as such Escrow Shares remain a part of the Escrow Fund unless Acquiror shall first have consented thereto in writing and provided that any such transferee shall deliver to the Escrow Agent a duly signed stock power covering such Escrow Shares and the Escrow Agent shall hold such transferee's shares and stock powers in escrow subject to this Agreement. 10. Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by certified mail, postage prepaid and return receipt requested, or by hand delivery or by telecopy (promptly confirmed by delivery of an original copy of such notice or communication): (i) If to the Acquiror, to: c/o Synergy Group International, Inc. 4825 East Sunrise Drive Tucson, AZ 85718 Attention: Vincent J. Marold 5 with a copy to: Stephen M. Cohen, Esquire Buchanan Ingersoll, P.C. Eleven Penn Center 1835 Market Street, 14th Floor Philadelphia, PA 19103 (ii) If to Shareholder, to Mr. Paul Charles c/o CNF, Inc. 7722 East Gray Road Scottsdale, AZ 85260 with a copy to: Stephen Boatwright, Esquire Gammage & Burnham 2 North Central, 18th Floor Phoenix, AZ 85004 (iii) If to Escrow Agent, to: StockTrans, Inc. 7 East Lancaster Avenue Ardmore, PA 19003 Attention: Jonathan Miller 11. Parties in Interest. This Agreement shall be binding upon and shall inure to the benefit of the successors and permitted assigns of each of the parties hereto. 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. Governing Law. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware applicable to contracts executed and to be performed entirely within said State. 14. Severability. 6 In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby, unless the provisions held invalid shall substantially impair the benefits of the remaining portions of this Agreement. 15. Consent to Limited Jurisdiction. The Escrow Agent hereby agrees that any legal action or proceeding with respect to disputes arising out of this Agreement not otherwise subject to arbitration under Section 9.8 of the Merger Agreement may be brought in the state or federal courts of the State of Pennsylvania, Philadelphia County, and, by execution and delivery of this Agreement, the Escrow Agent irrevocably accepts for itself and in respect of the property held by it as Escrow Agent hereunder the jurisdiction of the aforesaid courts, it being understood and agreed that such consent to jurisdiction is for the sole and limited purpose of resolving disputes under this Agreement and shall in no way be deemed to be a general and unconditional consent to the jurisdiction of the aforesaid courts. 16. Resignation and Removal of Escrow Agent. (a) The Escrow Agent may at any time resign as Escrow Agent hereunder by giving written notice of its resignation to each of the parties hereto, at their respective addresses set forth in Section 11 of this Agreement, at least thirty (30) days prior to the date specified for such resignation to take effect. The Escrow Agent may be removed at any time by an instrument in writing executed by a majority of the parties hereto other than Escrow Agent and delivered to the Escrow Agent. (b) If at any time the Escrow Agent shall resign or shall be removed in accordance with the provisions of clause (a) above, Acquiror and the Shareholder shall use their respective best efforts to jointly appoint a successor escrow agent under this Agreement. In the event of the resignation or removal of the Escrow Agent, if no appointment of a successor escrow agent shall have been made pursuant to the preceding sentence within the thirty (30) day period referred to in the first sentence of paragraph (a) above, then the retiring Escrow Agent may apply to any court of competent jurisdiction to appoint a successor escrow agent. Such court may thereupon, after such notice, if any, as such court may deem proper and prescribe, appoint a successor escrow agent hereunder. 17. Indemnification. Except for the expenses in Section 6 of this Agreement, Acquiror and the Shareholder, jointly and severally agree to indemnify, defend and hold the Escrow Agent harmless from and against any and all loss, damage, liability and expense that may be incurred by the Escrow Agent arising out of or in connection with its duties, obligations or performance as Escrow Agent hereunder, except as caused by its gross negligence or willful misconduct, including without limitation the reasonable legal costs and expenses of defending itself against any claim or liability in connection with its performance hereunder. The terms of this Section 17 shall survive the termination of this Agreement and, with respect to claims arising in connection with the Escrow 7 Agent's duties while acting as such, the resignation or removal of the Escrow Agent. The Escrow Agent agrees to notify Acquiror and the Shareholder in writing of the written assertion of a claim against the Escrow Agent or of any suit or proceeding commenced against the Escrow Agent promptly after the Escrow Agent has received any such written assertion of a claim or has been served with the summons or other legal process, in each case giving information as to the nature and basis of the claim, but in no event will the failure to give such notice affect the obligation of Acquiror to indemnify the Escrow Agent pursuant to this Section 17 unless the rights of Acquiror and Shareholder shall have been materially impaired by such failure. Each of Acquiror and the Shareholder will be entitled to participate at its own expense in the defense of any suit or proceeding brought to enforce any such claim and, if it so elects in writing, may assume the entire defense and control of any such suit or proceeding. Neither Acquiror nor the Shareholder shall be liable for any counsel fees or other expenses incurred by the Escrow Agent after the date that Acquiror or the Shareholder shall have so elected to assume the defense and control of any such suit or proceeding. In addition, neither Acquiror nor the Shareholder shall be liable for any settlement of any such suit, proceeding or claim without the prior written consent of Acquiror and the Shareholder. 18. 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. (THIS SPACE LEFT BLANK INTENTIONALLY) 8 IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be executed as of the date first written above. JLL VENTURES (DELAWARE) CORP., a Delaware corporation By: /s/ Vincent J. Marold ----------------------------- Name: Vincent J. Marold Title: President PAUL CHARLES /s/ Paul Charles ---------------------------- Signature STOCKTRANS, INC. By: /s/ Jonathan Miller ---------------------------- Name: Jonathan Miller Title: President 9 EX-21.1 17 CNF MOBILE DOLUTIONS, INC. EXHIBIT 21.1 1. CNF Mobile Solutions, Inc. EX-23.2 18 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of CNF Technologies, Inc. on Form SB-2 of our report dated May 25, 1999 (June 11, 1999 as to paragraph 1 of Note 1, paragraph 2 of Note 4, and paragraphs 4, 5 and 7 of Note 13), (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the Company's ability to continue as a going concern) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Phoenix, Arizona December 2, 1999 EX-27 19 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CNF TECHNOLOGIES, INC'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1999 AND THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENT. U.S. DOLLARS 12-MOS 6-MOS MAR-31-1999 MAR-31-2000 APR-01-1998 APR-01-1999 MAR-31-1999 SEP-30-1999 1 1 184,663 166,675 0 0 1,224,383 2,433,536 (390,000) (390,000) 1,656,001 1,647,513 2,915,282 4,122,347 805,974 936,407 (223,741) (307,826) 3,538,687 4,789,207 5,978,025 7,583,201 0 0 0 0 0 516 1,000 959 (2,727,637) (3,047,350) 3,538,687 4,789,207 9,425,947 6,114,459 9,425,947 6,114,459 6,088,549 3,865,261 6,088,549 3,865,261 6,208,781 3,900,634 0 0 248,342 709,243 (3,119,725) (2,360,679) (45,200) 0 0 0 0 0 0 0 0 0 (3,074,525) (2,360,679) (1.23) (.31) (1.23) (.31)
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