Exhibit 10.23.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated October 30, 1998,
among XXXXXXXXX X. XXXXXXX ("Shareholder"), PAETEC CORP., a Delaware corporation
with its principal place of business at 000 Xxxxxxxxx Xxxxx, Xxxxxxxx, Xxx Xxxx
00000 (the "Company"), PAETEC COMMUNICATIONS, INC., a Delaware corporation and
wholly-owned subsidiary of the Company with its principal place of business at
000 Xxxxxxxxx Xxxxx, Xxxxxxxx, Xxx Xxxx 00000 ("Subsidiary"), and XXXXXX X.
XXXXXXXX ("Founder").
RECITALS
A. The Company is a Delaware corporation having 35,000,000 shares of
authorized capital stock, 27,500,000 of which are designated Class A common and
7,500,000 of which are designated Class B common. Founder is one of the founding
shareholders of the Company.
B. Shareholder is an employee of the Subsidiary and is subject to the terms
of a non-competition covenant set forth in an Incentive Stock Option Agreement,
effective as of July 27, 1998, between Shareholder and the Company (the "ISO
Agreement").
C. The Company has offered to issue to Shareholder, and Shareholder has
agreed to purchase, 20,000 shares of Class A common stock of the Company at a
purchase price of $2.50 per share, subject to certain restrictions.
D. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Class A common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class A common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Modification of ISO Agreement Provisions. To the extent that any
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provision of this Agreement modifies or contradicts any provision contained in
the ISO Agreement, this Agreement shall control.
2. Issuance of Shares.
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(a) The Company confirms its offer to issue 20,000 shares of Class A
common stock (the "Class A Shares") to Shareholder at a price of $2.50 per
share, payable
in full upon issuance of the Class A Shares. A stock certificate evidencing the
Class A Shares shall be issued in the name of Shareholder upon receipt of this
executed Amendment and payment in full of the purchase price.
(b) In order to induce the Company to issue the Class A Shares,
Shareholder represents and warrants to the Company as follows:
(i) Shareholder (A) understands that an investment in the Class A
Shares is speculative due to factors including (but not limited to) the start-up
nature of the Company and the risk of economic loss from the operations of the
Company, but believes that such an investment is suitable for Shareholder based
upon Shareholder's financial needs, (B) can withstand a complete loss of the
investment in the Class A Shares, and (C) has the net worth to undertake these
risks.
(ii) Shareholder is acquiring the Class A Shares for the personal
account of Shareholder, with no present intention of reselling, distributing or
otherwise transferring the Class A Shares or any portion of the Class A Shares
to anyone else.
(iii) Shareholder understands and acknowledges that the Class A
Shares are being offered and sold under one or more exemptions provided in the
Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the economic
risk of investment for an indefinite period of time because (A) the Class A
Shares have not been registered under the Securities Act and cannot be resold by
Shareholder unless they are subsequently registered under the Securities Act or
an exemption from registration is available, (B) the transferability of the
Class A Shares is restricted by the terms of this Agreement, and (C) there
currently is no public market for the Class A Shares, and Shareholder may not be
able to liquidate the investment in the Class A Shares in the event of an
emergency. Shareholder has adequate means of providing for Shareholder's current
financial needs and personal contingencies, and has no need for liquidity of
investment with respect to the Class A Shares.
(v) Shareholder believes that Shareholder, either alone or together
with the assistance of professional advisor(s), has knowledge and experience in
business and financial matters sufficient to make Shareholder capable of
evaluating the merits and risks of an investment in the Class A Shares.
(vi) Shareholder is fully familiar with the business of the Company
and its present and proposed operations. Shareholder has been given reasonable
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opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Class A Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Class A Shares.
(vii) Shareholder confirms that Shareholder has been advised to rely
on professional accounting, tax, legal and financial advisers with respect to an
investment in the Class A Shares and has obtained, to the extent Shareholder
deems it necessary, professional advice with respect to the risks inherent in an
investment in the Class A Shares and the suitability of an investment in the
Class A Shares in light of Shareholder's financial condition and investment
needs.
3. Restriction on Transfer of Class A Shares.
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(a) Shareholder may not sell, transfer, pledge, assign, or otherwise
encumber or dispose of, in any manner or by any means, any Class A Shares that
are subject to the Company's Purchase Option described in Section 4 of this
Agreement, except as set forth in subparagraph (b) below. This restriction on
transfer does not apply to any Class A Shares that, pursuant to Section 4, no
longer are subject to the Company's Purchase Option or to any additional shares
of capital stock of the Company that Shareholder might acquire in the future.
(b) The restrictions on transfer of Shareholder's Class A Shares, set
forth in subparagraph (a) above, shall not operate to prohibit Shareholder from
selling, assigning, or transferring any or all of the Class A Shares held by
Shareholder to the following:
(i) Shareholder's spouse, parent(s), siblings, or natural or adopted
lineal descendants, or the spouses of Shareholder's parent(s), siblings, or
lineal descendants (collectively, together with the Shareholder, referred to as
"Shareholder's Family Members");
(ii) the trustee of a trust (including a voting trust) principally
for the benefit of Shareholder and/or one or more of Shareholder's Family
Members; provided that the trust may also grant a general or special power of
appointment to one or more of Shareholder's Family Members and may permit trust
assets to be used to pay taxes, legacies, and other obligations of the trust or
of the estates of one or more of Shareholder's Family Members payable by reason
of the death of any of Shareholder's Family Members; and
(iii) a corporation, partnership, or limited liability company, a
majority of the voting equity interest in which is owned by Shareholder or by
one or more of Shareholder's transferees under subparagraphs (i) or (ii) of this
subparagraph.
4. Repurchase of Class A Shares upon Termination of Employment with
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Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
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the Company
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shall have an option, but shall not be obligated, to repurchase (the
"Purchase Option") from Shareholder or Shareholder's personal representative all
or a portion of Shareholder's Class A Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates due to
voluntary separation or dismissal for Cause (as defined below), the number of
Class A Shares that are subject to the Company's Purchase Option shall be
determined as follows:
(i) The Company shall have the option to repurchase up to 100% of
the Class A Shares should Shareholder's employment terminate at any time prior
to the first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to 60% of
the Class A Shares should Shareholder's employment terminate on the first
anniversary date, or at any time between the first and second anniversary dates,
of Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to 40% of
the Class A Shares should Shareholder's employment terminate on the second
anniversary date, or at any time between the second and third anniversary dates,
of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to 20% of
the Class A Shares should Shareholder's employment terminate on the third
anniversary date, or at any time between the third and fourth anniversary dates,
of Shareholder's employment with the Subsidiary.
(b) If Shareholder's employment with the Subsidiary terminates because
of Shareholder's death or disability, Shareholder or Shareholder's personal
representative may negotiate a transfer of all or a portion of Shareholder's
Class A Shares back to the Company at any time. With respect to Class A Shares
that were subject to the Company's Purchase Option and that are not transferred
back to the Company, the transfer restrictions set forth in Section 3 above
shall apply to the same extent that they would have applied if Shareholder's
employment had continued. This restriction on transfer does not apply to any
Class A Shares that would no longer have been subject to the Company's Purchase
Option, or to any additional shares of capital stock of the Company that
Shareholder might acquire in the future.
(c) In the event that Shareholder's employment with the Subsidiary
terminates for any reason not addressed in subparagraphs (a) and (b) above, the
Company's Purchase Option, together with all transfer restrictions set forth in
Section 3, shall fully expire effective as of the date of termination.
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(d) The Company's Purchase Option shall fully expire on the fourth
anniversary of Shareholder's employment with the Subsidiary. Class A Shares as
to which the Company's Purchase Option has expired are no longer subject to the
transfer restrictions set forth in Section 3.
(e) To exercise its Purchase Option, the Company must notify Shareholder
or Shareholder's personal representative of its intention to exercise its
Purchase Option within 60 days after the date of termination of Shareholder's
employment with the Subsidiary. Should the Company fail to exercise the Purchase
Option within such 60-day period, the Class A Shares shall no longer be subject
to the transfer restrictions set forth in Section 3.
(f) In the event of a consolidation or merger of the Company with or
into any other person or entity, a sale of all or substantially all of the
assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall not
be terminated or in any other way affected by an initial public offering of
stock by the Company.
5. Repurchase Price and Payment Terms. The price for all Class A Shares
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repurchased by the Company pursuant to the Purchase Option shall be the fair
market value of the Class A Shares as of the date of the exercise of the
Purchase Option by the Company. "Fair market value" shall be determined by the
accounting firm then retained by the Company, which shall promptly perform an
appraisal. The determination shall be made in accordance with generally accepted
accounting principles and shall be binding on all parties.
Payment shall be made in full for all repurchased Class A Shares within 30
days after the date on which the Company delivers notice of its intention to
exercise the Purchase Option. Upon payment, Shareholder or Shareholder's
personal representative shall deliver all stock certificates for repurchased
Class A Shares, properly endorsed in blank, to the Company or its designee.
6. Legends. Each certificate for Class A Shares owned by Shareholder shall
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bear the following legends:
(a) The shares represented by this certificate were issued to
the shareholder with restrictions. Neither the shares, nor any interest
in them, may be sold, transferred, assigned, pledged, hypothecated, or
otherwise disposed of, unless that transfer is expressly permitted by a
stock rights agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at the office of
the Company in Fairport, New York.
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(b) The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred in the absence of such registration unless the Company
receives an opinion of counsel reasonably acceptable to it stating the
such sale or transfer is exempt from registration.
With respect to Class A Shares that are subject to the Company's Purchase
Option, described in Section 4 of the Agreement, however, Shareholder shall be
entitled to a certificate without the legend set forth in subparagraph (a),
evidencing any Class A Shares as to which the Purchase Option has expired.
7. Non-competition. The portion of the non-competition covenant between
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Shareholder and the Company that is set forth in subparagraph 8(a)(iii) of the
ISO Agreement is modified to read as follows:
(iii) hold five percent (5%) or more of the shares of a corporation,
or serve as a partner, officer, member, manager, director, consultant or other
representative of any third party, which engages in any line of business
competitive with the Company or any affiliate of the Company (including any
subsidiary) anywhere in the world.
8. Co-Sale Rights.
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(a) In the event that Founder receives a bona fide offer from any person
to purchase any of Founder's Common Stock (the "Founder's Shares") in a private
transaction exempt from registration under the Securities Act, Founder shall
give Shareholder notice of his intention to sell Founder's Shares, describing
the amount of Founder's Shares proposed to be transferred, the identity of the
proposed transferee, and the price and terms upon which he proposes to make such
transfer (the "Transfer Notice").
(b) Within 15 days after delivery of the Transfer Notice, Shareholder
may elect to sell up to Shareholder's pro rata share of the total number of
shares to be purchased by the transferee described in the Transfer Notice by
giving written notice thereof to Founder and tendering to Founder a certificate
representing the shares to be sold, properly endorsed for transfer, with written
instructions to transfer the shares to the transferee described in the Transfer
Notice upon receipt of payment for such shares from such transferee for the
benefit of Shareholder. Founder shall thereupon notify the transferee of the
co-sale arrangements hereunder, and instruct the transferee to deliver payment
for the shares to be purchased from Shareholder to Shareholder. For the purpose
of the co-sale right set forth in this Section, the pro rata share of
Shareholder shall be determined based on the number of Shares held by
Shareholder that are subject to co-sale rights, divided by the sum of (A) the
total number of shares of common stock held by all stockholders of the Company
(including
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Shareholder) holding similar co-sale rights plus (B) the number of shares of
common stock held by Founder at the date of the Transfer Notice (assuming
conversion of all convertible securities and exercise of all options and
warrants). The resulting percentage shall then be multiplied by the number of
Shares proposed to be purchased by the transferee to determine the actual number
of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale right as
allowed by this Section, Founder may, within 90 days after the date on which
Shareholder's co-sale rights lapsed, transfer some or all of Founder's Shares
which were the subject of the Transfer Notice at a price and on terms no less
favorable to the transferee(s) than specified in the Transfer Notice. Founder's
Shares transferred in accordance with the provisions of this Section shall no
longer be subject to the restrictions on Founder's Shares forth in this Section.
After the expiration of said 90-day period, Founder shall not transfer any of
Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a family
member of Founder or a trust or custodian for the benefit of Founder or a family
member of Founder, and transfers pursuant to a pledge to secure indebtedness,
shall not be subject to the provisions of this Section, provided that the
transferee agrees in writing to be bound by the provisions of this Section with
respect to any subsequent transfer of such shares.
9. Piggy-Back Registration Rights.
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(a) If at any time or from time to time the Company shall determine to
register any of its equity securities, either for its own account or the account
of a security holder or holders (other than a registration of securities
relating solely to employee benefit plans or to effect a merger or other
reorganization), the Company will promptly give to Shareholder written notice
thereof and, upon the written request of Shareholder, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Class A Shares
specified in the written request made within 10 business days after receipt of
such written notice from the Company.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In such
event the right of any Shareholder to registration pursuant to this Section
shall be conditioned upon Shareholder's participation in such underwriting, and
the inclusion of Class A Shares in the underwriting shall be limited to the
extent provided herein. Shareholder (together with the Company and the other
holders distributing their securities through such underwriting) shall enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may exclude some or all of the Class A Shares or
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securities of other holders of similar registration rights from such
registration. The Company shall so advise Shareholder and other stockholders
distributing their securities through such underwriting, and the number of Class
A Shares or securities of other holders of similar registration rights that may
be included in the registration and underwriting, as determined by the managing
underwriter, shall be allocated on a pro rata basis. If Shareholder disapproves
of the terms of any such underwriting, Shareholder may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration, and shall continue to be subject to the terms of this
Section.
(c) The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section prior to the effectiveness of
such registration whether or not Shareholder has elected to include securities
in such registration.
(d) All expenses associated with the registration (including, without
limitation, registration, qualification and filing fees, printing expenses, blue
sky fees, and fees and disbursements of counsel and accountants for the Company)
shall be borne by the Company. Selling expenses, including underwriters'
discounts, shall be borne by Shareholder pro rata in proportion to the number of
securities being registered.
(e) In the case of each registration under this Section, the Company
will:
(i) prepare and file a registration statement with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
(ii) furnish to Shareholder such reasonable number of copies of the
registration statement, preliminary prospectus, final prospectus and such other
documents as Shareholder may reasonably request in order to facilitate the
public offering of the Class A Shares; and
(iii) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by Shareholder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or to file a general consent to service of process in any such states
or jurisdictions in which it has not already done so and except as may be
required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any
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registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration, or based on
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation by the
Company of the Securities Act of 1933, the Securities Exchange Act of 1934,
state securities law or any rule or regulation promulgated under such laws
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse Shareholder for any
legal and any other expenses reasonably incurred, as such expenses are incurred,
in connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission, or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by
Shareholder.
(g) Shareholder will, if Class A Shares held by such Shareholder are
included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Shareholders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by Shareholder and stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information regarding
Shareholder, the Class A Shares held by Shareholder, and the distribution
proposed by Shareholder as the Company may request in writing and as shall be
required in connection with any registration referred to in this Agreement.
(i) The registration rights granted to Shareholder in this Section shall
expire at such time (if ever) as Shareholder is free to sell the Class A Shares
under Rule 144 promulgated under the Securities Act (or any successor thereto)
without limitation as to volume or manner of sale restrictions.
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10. Notices. All notices and communications under this Agreement shall be
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in writing and shall be given by personal delivery or by registered or certified
mail, return receipt requested, addressed to the respective residences of
Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
11. Miscellaneous.
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(a) Neither this Agreement, nor any action taken under it, shall be
construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the written
consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under it, may
be assigned by any party without the prior written consent of the other parties.
(e) This Agreement shall benefit and be binding upon the parties and
their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and agreement of
the parties with respect to its subject matter and supersedes all prior letters,
agreements, covenants, communications, understandings, representations, or
warranties, whether oral or written, by any officer, employee, or representative
of either party.
(g) The waiver of any provision of this Agreement, or of any breach of
this Agreement, shall not constitute a subsequent waiver of any provision or
breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement shall be
deemed by a court or other body having jurisdiction over this Agreement to be
illegal, invalid, or unenforceable, those provisions shall be deemed severed
from this Agreement. The remaining provisions of this Agreement shall be valid
and binding as if this Agreement had never contained any illegal, invalid, or
otherwise unenforceable provisions, without the requirement that the amendment
be recorded in a writing signed by the parties.
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The parties' assent to the terms of this Agreement is confirmed by their
signatures below.
PAETEC CORP.
By: /s/ Xxxxxx X. Xxxxxxxx
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Xxxxxx X. Xxxxxxxx, President
PAETEC COMMUNICATIONS, INC.
By: /s/ Xxxxxx X. Xxxxxxxx
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Xxxxxx X. Xxxxxxxx, President
Address: /s/ Xxxxxxxxx X. Xxxxxxx
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Xxxxxxxxx X. Xxxxxxx
000 Xxxxx Xxxxx Xxxxx
Xxxxx Xxxxxxx, Xxxxxxxxxx 00000
Address: /s/ Xxxxxx X. Xxxxxxxx
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Xxxxxx X. Xxxxxxxx
00 Xxxxxxxxx Xxx
Xxxxxx, Xxx Xxxx 00000
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