**Exhibit10.5**

 

EXCHANGEAGREEMENT

 

THIS EXCHANGE AGREEMENT (this “Agreement”) isentered into as of the 11th day of December, 2001, by and betweenLotus Pacific, Inc., a Delaware corporation (“Lotus”), and ARESCOM Inc., aCalifornia corporation (the “Company”). Lotus and the Company are referred tocollectively herein as the parties.

 

RECITALS

 

WHEREAS, Lotus is the holder of the followingpromissory notes issued by the Company: (i) that certain promissory note, datedMarch 23, 2000, for the principal sum of $8,000,000 (the “March Note”), (ii)that certain promissory note, dated May 22, 2000, for the principal sum of$2,000,000 (the “May Note”), (iii) that certain promissory note, dated July 26,2000, for the principal sum of $1,000,000 (the “July Note”), (iv) that certainpromissory note, dated August 25, 2000, for the principal sum of $500,000 (the“August Note”), and (v) that certain promissory note, dated September 1, 2000,for the principal sum of $500,000 (the “September Note”, and together with theMarch Note, May Note, July Note and August Note, the “Prior Notes”);

 

WHEREAS as of December 3, 2001, the aggregateaccrued but unpaid interest on the March Note and the May Note is$1,047,829.19, and the aggregate accrued but unpaid interest on the July Note,August Note and September Note is $191,996.15.

 

WHEREAS, the Company and Lotus desire to (A)exchange the Prior Notes, plus accrued but unpaid interest thereon, for sharesof Series B Preferred Stock of the Company, and (B) exchange the May Note, plusaccrued but unpaid interest thereon, for a promissory note in principal amountof $2,191,996.15, all on the terms and conditions set forth in this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of theforegoing and the mutual agreements herein contained and other good andvaluable consideration, the receipt and sufficiency of which is herebyacknowledged, the parties hereby agree as follows:

 

1.                                       Exchange.

 

As of the date of this Agreement, the Companyhas filed its Third Amended and Restated Articles of Incorporation (the“Articles”) with the Secretary of State of the State of California. Concurrentwith the execution of this Agreement (A) Lotus shall cancel all indebtedness,including, without limitation, accrued interest, and other obligations of theCompany under, relating to, or arising out of the Prior Notes, and shalldeliver to the Company the original Prior Notes, stamped “cancelled”, and (B)the Company shall issue to Lotus (i) 11,048 shares (the “Shares”) of Series BPreferred Stock of the Company, and (ii) a promissory note substantially in theform attached hereto as Exhibit A, in the principal amount of $2,191,996.15(the “New Note”).

 

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2.                                       Grant of Security Interest.

 

The payment of principal under the New Noteand interest thereon, shall be secured by the grants to Lotus of a securityinterest in all of the Company’s right, title and interest in all amounts owingto the Company from Microsoft Corporation under that certain Modem PurchaseAgreement, dated February 7, 2000, among the Company and Microsoft Corporationand all amendments, replacements, successors or additions thereto, whether nowexisting or receivable or hereafter acquired or arising (collectively, the“Collateral’), pursuant to the Loan and Security Agreement of even date, attachedhereto as Exhibit B.

 

3.                                       Representations and Warranties of theCompany.

 

The Company hereby represents and warrants toLotus the following:

 

3.1           Incorporation,Good Standing and Qualification. The Company represents that it is acorporation duly incorporated, validly existing and in good standing under thelaws of the State of California, and has all required power and authoritynecessary to carry out the transactions contemplated by this Agreement.

 

3.2           Authorization.All corporate action on the part of the Company and its respective officers,directors and shareholders necessary for the authorization, execution anddelivery of this Agreement, and all other agreements contemplated hereby towhich the Company is a party, the performance of all obligations of the Companyhereunder and thereunder, and the sale and issuance of the Shares and the NewNote being sold hereunder has been taken. This Agreement and the New Noteconstitute valid and legally binding obligations of the Company, enforceable inaccordance with their respective terms, except (i) as limited by applicablebankruptcy, insolvency, reorganization, moratorium and other laws of generalapplication affecting enforcement of creditors’ rights generally, and (ii) aslimited by laws relating to the availability of specific performance,injunctive relief or other equitable remedies.

 

3.3           ValidIssuance of Preferred and Common Stock. The Shares issued, sold and deliveredin accordance with the terms of this Agreement for the consideration expressedherein, have been duly and validly issued, fully paid and nonassessable and arefree of restrictions on transfer, other than restrictions on transfer underthis Agreement and under applicable state and federal securities laws. TheCommon Stock issuable upon conversion of the Shares (together with the Shares,the “Securities’) purchased under this Agreement has been duly and validlyreserved for issuance and, upon issuance in accordance with the terms of theArticles, will be duly and validly issued, fully paid and nonassessable andwill be free of restrictions on transfer, other than restrictions on transferunder this Agreement and federal and state securities laws.

 

3.4           Offering.Subject in part to the truth and accuracy of Lotus’s representations set forthin Section 3 of this Agreement, the offer, sale and issuance of the Securitiesas contemplated by this Agreement are exempt from the registration requirementsof the Securities Act of 1933, as amended (the “Act”), and the qualification orregistration requirements of the Act or other applicable blue sky laws. Neitherthe Company nor any authorized agent acting on the Company’s behalf will takeany action hereafter that would cause the loss of such exemptions.

 

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3.5           NoOther Liabilities. Except for indebtedness under the Prior Notes which is beingcancelled pursuant to this Agreement, indebtedness under the New Note andobligations under this Agreement, the Company represents and warrants thatthere are no other liabilities, obligations or indebtedness of Lotus to theCompany, and there are no other liabilities, obligations or indebtedness of theCompany to Lotus, whether now or hereafter due and payable, and whether accruedor contingent.

 

4.             Representations,Warranties and Covenants of Lotus.

 

Lotus hereby represents, warrants andcovenants to the Company the following:

 

4.1           Incorporation,Good Standing and Qualification. Lotus represents that it is a corporation dulyincorporated, validly existing and in good standing under the laws of the Stateof Delaware, and has all required power and authority necessary to carry outthe transactions contemplated by this Agreement.

 

4.2           Authorization.All corporate action on the part of Lotus and its respective officers,directors and stockholders necessary for the authorization, execution anddelivery of this Agreement, and all other agreements contemplated hereby towhich Lotus is a party, the performance of all obligations of Lotus hereunderand thereunder, and the purchase of the Securities being purchased hereunderhas been taken. This Agreement, and all other agreements contemplated hereby towhich Lotus is a party constitute valid and legally binding obligations ofLotus, enforceable in accordance with their respective terms, except (i) aslimited by applicable bankruptcy, insolvency, reorganization, moratorium andother laws of general application affecting enforcement of creditors’ rightsgenerally, and (ii) as limited by laws relating to the availability of specificperformance, injunctive relief or other equitable remedies.

 

4.3           PurchaseEntirely for Lotus’s Own Account. The Securities are being acquired forinvestment for Lotus’s own account, not as a nominee or agent, and not with aview to the resale or distribution of any part thereof, and Lotus has no presentintention of selling, granting any participation in or otherwise distributingthe same. Lotus further represents that Lotus does not have any contract,undertaking, agreement or arrangement with any person to sell, transfer orgrant participations to such person or to any third person, with respect to anyof the Securities.

 

4.4           Disclosureof Information. Lotus believes it has received all the information it considersnecessary or appropriate for deciding whether to acquire the Shares. Lotusfurther represents that it has had an opportunity to ask questions and receiveanswers from the Company regarding the terms and conditions of the offering ofthe Shares and the business, properties, prospects and financial condition ofthe Company.

 

4.5           NoPublic Market. Lotus understands that no public market now exists for any ofthe securities issued by the Company and that there is no assurance that apublic market will ever exist for the Securities.

 

4.6           Businessor Financial Experience. By reason of Lotus’s business or financial experienceor the business or financial experience of Lotus’s professional advisors whoare unaffiliated with and who are not compensated, directly or indirectly, bythe Company, or any

 

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affiliate or selling agent of the Company, Lotushas the capacity to protect its own interests in connection with its investmentin the Shares.

 

4.7           AccreditedInvestor. Lotus is an “accredited investor” within the meaning of Securitiesand Exchange Commission (“SEC) Rule 501 of Regulation D, promulgated under theAct, as presently in effect.

 

4.8           RestrictedSecurities. Lotus understands that the Securities it is purchasing arecharacterized as “restricted securities” under the federal securities lawsinasmuch as they are being acquired from the Company in a transaction notinvolving a public offering and that under such laws and applicable regulationsthe Securities may not be resold without registration under the Act except incertain limited circumstances. In the absence of an effective registrationstatement covering the Securities or an available exemption from registrationunder the Act, the Securities must be held indefinitely. In this connection,Lotus represents that it is familiar with SEC Rule 144, as presently in effect,and understands the resale limitations imposed thereby and by the Act,including without limitation the Rule 144 condition that current informationabout the Company be available to the public. Such information is not nowavailable and the Company has no present plans to make such informationavailable.

 

4.9           FurtherLimitations on Disposition. Without in any way limiting the representations setforth above, Lotus further agrees not to make any disposition of all or anyportion of the Securities unless and until the transferee has agreed in writingfor the benefit of the Company to be bound by this Section 3, and:

 

(a)           thereis then in effect a registration statement under the Act covering such proposeddisposition and such disposition is made in accordance with such registrationstatement; or

 

(b)           (i)Lotus shall have notified the Company of the proposed disposition and shallhave furnished the Company with a detailed statement of the circumstancessurrounding the proposed disposition, and (ii) if requested by the Company,Lotus shall have furnished the Company with an opinion of counsel, reasonablysatisfactory to the Company and its counsel that such disposition will notrequire registration of such shares under the Act.

 

4.10         StopTransfer Instructions and Legends. Lotus understands that the Company willissue, and Lotus consents to the issuing of, stop transfer instructions to theCompany’s transfer agent with respect to the Securities to assure compliancewith the Act. Lotus consents to the placement of the following legend, insubstantially the form below, on each certificate representing the Securities:

 

THE SECURITIES REPRESENTED HEREBY HAVE NOTBEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), ORANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD,TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO AREGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDERTHE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THEACT RELATING TO

 

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THE DISPOSITION OF SECURITIES AND (3) INACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.

 

4.11         “MarketStand-Off” Agreement. Lotus hereby agrees that, during the period of durationspecified by the Company and an underwriter of common stock or other securitiesof the Company, following the effective date of a registration statement of theCompany filed under the Act, it shall not, to the extent requested by theCompany and such underwriter, directly or indirectly sell, offer to sell,contract to sell (including, without limitation, any short sale), grant anyoption to purchase or otherwise transfer or dispose of (other than to doneeswho agree to be similarly bound) any securities of the Company held by it atany time during such period except common stock included in such registration;provided, however, that:

 

(a)           suchagreement shall be applicable only to the first such registration statement ofthe Company which covers common stock (or other securities) to be sold on itsbehalf to the public in an underwritten offering;

 

(b)           allofficers, directors and one percent (1%) or greater shareholders of the Companyenter into similar agreements; and

 

(c)           suchmarket stand-off time period shall not exceed 180 days from the effective dateof such registration statement.

 

In order to enforce the foregoing covenant,the Company may impose stop-transfer instructions with respect to the Shares,the common stock issuable upon conversion of the Shares and any othersecurities of the company held by Lotus until the end of such period.

 

Notwithstanding the foregoing, theobligations described in this Section 3.11 shall not apply to a registrationrelating solely to employee benefit plans on Form S-1 or Form S-8 or similarforms which may be promulgated in the future, or a registration relating solelyto a SEC Rule 145 transaction on Form S-4 or similar forms which may bepromulgated in the future.

 

4.12         NoOther Liabilities. Except for indebtedness under the Prior Notes which is beingcancelled pursuant to this Agreement, indebtedness under the New Note andobligations under this Agreement, Lotus represents and warrants that there areno other liabilities, obligations or indebtedness of the Company to Lotus, andthere are no other liabilities, obligations or indebtedness of Lotus to theCompany, and whether now or hereafter due and payable, and whether accrued orcontingent.

 

5. Miscellaneous.

 

5.1           FurtherAssurances. From and after the date hereof, the Company and Lotus shall executeall certificates, instruments, documents or agreements and shall take any othercommercially reasonable action which it is requested to execute or take tofurther effectuate the transaction contemplated by this Agreement.

 

5.2           Successorsand Assigns. This Agreement shall be binding upon and inure to the benefit ofthe parties named herein and their respective successors and permitted assigns.No party may

 

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assign either this Agreement or any of therights, interests, or obligations hereunder without the prior written approvalof the other party.

 

5.3           Notices.All notices required or permitted hereunder shall be in writing and shall bedeemed effectively given (i) upon personal delivery to the party to benotified, (ii) when sent by confirmed telex or facsimile if sent during normalbusiness hours of the recipient, if not, then on the next business day, (iii)five days after having been sent by registered or certified mail, returnreceipt requested, postage prepaid, or (iv) one day after deposit with anationally recognized overnight courier, specifying next day delivery, withwritten verification of receipt. All communications shall be sent to theaddress as set forth on the signature page hereof or at such other address assuch party may designate by ten days advance written notice to the otherparties hereto.

 

5.4           GoverningLaw. This Agreement shall be governed and interpreted by the internal laws (andnot the laws of conflicts) of the State of California as applied to agreementsamong California residents entered into and to be performed entirely withinCalifornia.

 

5.5           Consentto Jurisdiction and Forum Selection. The parties hereto agree that any action,suit or proceeding relating to or arising out of this Agreement and theconsummation of the transactions contemplated herein that result in judicialproceedings shall be brought, tried and litigated exclusively in the state andfederal courts located in the County of Santa Clara, State of California. Theaforementioned choice of venue is intended by the parties to be mandatory andnot permissive in nature, thereby precluding the possibility of litigationbetween the parties with respect to or arising out of this Agreement or theconsummation of the transactions contemplated herein in any jurisdiction otherthan that specified in this paragraph. Each party hereby waives any right itmay have to assert the doctrine of forum non conveniens or similar doctrine orto object to venue with respect to any proceeding brought in accordance withthis paragraph, and stipulates that the state and federal courts located in theCounty of Santa Clara, State of California shall have in personam jurisdictionand venue over each of them for the purpose of litigating any dispute,controversy, or proceeding arising out of or related to this Agreement. Eachparty hereby authorizes and accepts service of process sufficient for personaljurisdiction in any action against it as contemplated by this paragraph byregistered or certified mail, return receipt requested, postage prepaid, to itsaddress for the giving of notices as set forth in this Agreement, or in themanner set forth in Section 5.3 of this Agreement for the giving of notice. Anyfinal judgment rendered against a party in any action or proceeding shall beconclusive as to the subject of such final judgment and maybe enforced in otherjurisdictions in any manner provided by law.

 

5.6           EntireAgreement. This Agreement together and the documents referred to hereinconstitute the entire agreement between the parties and supersedes any priorunderstandings, agreements, or representations by or between the parties,written or oral, to the extent they have related in any way to the subjectmatter hereof.

 

5.7           Amendmentsand Waivers. Any term of this Agreement may be amended and the observance ofany term of this Agreement may be waived (either generally or in a particularinstance and either retroactively or prospectively), only with the writtenconsent of the parties.

 

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5.8           Severability.If one or more provisions of this Agreement are held to be unenforceable underapplicable law, such provision shall be excluded from this Agreement and thebalance of the Agreement shall be interpreted as if such provision were soexcluded and shall be enforceable in accordance with its terms.

 

5.9           Expenses.The parties will bear their own costs and expenses (including legal fees andexpenses) incurred in connection with this Agreement and the transactioncontemplated hereby.

 

5.10         Counterparts.This Agreement may be executed in one or more counterparts, including counterpartstransmitted by facsimile or other electronic means, each of which shall bedeemed an original but all of which together will constitute one and the sameinstrument.

 

5.11         Headings.The section headings contained in this Agreement are used for convenience onlyand shall not affect in any way the meaning or interpretation of thisAgreement.

 

5.12         NoThird Party Beneficiaries. This Agreement shall not confer any rights orremedies on any person other than the parties hereto and their respective successorsand permitted assigns.

 

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IN WITNESS WHEREOF, the parties hereto haveexecuted this Agreement as of the date first above written.

 
| LOTUS:                                                                           |
|----------------------------------------------------------------------------------|
| LOTUS PACIFIC, INC.                                                              |
|                                                                             |
| By:                                                                              | /s/ Vincent Y. Yan,  President |   |
|                                                                             |
| Address:                                                                         |
| 8001 Irvine Center Drive  Suite 400                                              |
| Irvine, CA 92618 Attn:  President Facsimile: (949) 754-4394                      |
|                                                                             |
|                                                                             |
| THE COMPANY:                                                                     |
| ARESCOM, INC.                                                                    |
|                                                                             |
|                                                                             |
| By:                                                                              | /s/ Max Lu, President |   |
|                                                                             |
| Address:                                                                         |
| 3 541 Gateway Blvd.  Fremont, CA 94538 Attn: President Facsimile: (510) 445-3606 |
|                                                                                  |  |  |  |  |

 

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