<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DATAWAVE SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BRITISH COLUMBIA, CANADA 4812 98-0186455
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
101 WEST 5TH AVENUE
VANCOUVER, BRITISH COLUMBIA
CANADA V5Y 1H9
(604) 874-1302
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CLIVE BARWIN
PRESIDENT
DATAWAVE SYSTEMS INC.
101 WEST 5TH AVENUE
VANCOUVER, BRITISH COLUMBIA
CANADA V5Y 1H9
(604) 874-1302
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MORGAN P. GUENTHER, ESQ. THOMAS FURLONG, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP GRAY CARY WARE & FREIDENRICH LLP
345 CALIFORNIA STREET 400 HAMILTON AVENUE
SAN FRANCISCO, CALIFORNIA 94104 PALO ALTO, CALIFORNIA 94301
(415) 835-1600 (650) 328-6561
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date 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, as amended (the "Securities Act"), check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
-------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
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<S> <C> <C> <C> <C>
Common Shares (no par 3,087,750
value)................. shares $5.50 $16,982,625 $5,010
</TABLE>
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(1) Includes 402,750 Common Shares which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Calculated in accordance with Rule 457(c) on the basis of the average of
the high and low prices reported on the OTC Bulletin Board on June 2, 1998
and adjusted to reflect a 1-for-4 reverse stock split to be effected
immediately prior to the commencement of the proposed sale to the public.
---------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY +
+OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 4, 1998
[LOGO]
2,685,000 COMMON SHARES
DATAWAVE SYSTEMS INC.
-----------
Of the 2,685,000 Common Shares offered hereby, 2,500,000 shares are being
sold by DataWave Systems Inc. ("DataWave" or the "Company") and 185,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Common Shares are currently traded on the Vancouver Stock Exchange (the
"VSE") under the symbol "DTV" and on the Over-the-Counter Electronic Bulletin
Board (the "OTCBB") in the United States under the symbol "DWVSF." On ,
1998, the last reported sale price of the Common Shares, as reported on the
VSE, was US$ per share, based upon an exchange rate of US$ to C$ , and
as adjusted to reflect a 1-for-4 reverse stock split to be effected immediately
prior to this offering (the "Offering"). See "Price Range of Common Shares."
See "Underwriting" for factors to be considered in determining the Offering
price. The Company intends to apply for listing of its Common Shares on the
Nasdaq National Market under the symbol "DWAV."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)(3)
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<S> <C> <C> <C> <C>
Per Share... $ $ $ $
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Total(4).... $ $ $ $
</TABLE>
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of $765,000 payable by the Company.
(3) The Proceeds to Selling Shareholders does not include the reimbursement of
underwriting discounts and commissions payable by the Company to one of the
Selling Shareholders.
(4) The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
402,750 additional Common Shares on the same terms and conditions as set
forth above. If all such shares are purchased by the Underwriters, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See "Underwriting."
-----------
The Common Shares are offered by the several Underwriters subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
Underwriters' right to withdraw, cancel or modify such offer and reject any
order in whole or in part. It is expected that delivery of the Common Shares
will be made on or about , 1998.
MORGAN KEEGAN & COMPANY, INC. LAIDLAW GLOBAL SECURITIES INC.
The date of this Prospectus is , 1998
<PAGE>
[SCHEMATIC DIAGRAM OF THE DATAWAVE NETWORK SYSTEM ON FOLD-OUT PAGE; MAP
OF NORTH AMERICA DISPLAYING THE LOCATION OF THE COMPANY'S INSTALLED
DATAWAVE TELECARD MERCHANDISERS ("DTM") AND
OVER-THE-COUNTER "SWIPE" UNITS; PHOTOGRAPH OF
A DTM AND PICTURE OF AN AT&T-BRANDED
PREPAID CALLING CARD]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE COMMON SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
"DATAWAVE" TOGETHER WITH DESIGN IS A REGISTERED TRADEMARK OF THE COMPANY. ALL
TRADEMARKS AND TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE OWNERS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
all information in this Prospectus assumes that the Underwriters' over-
allotment option will not be exercised and gives effect to (a) the 1-for-4
reverse stock split (the "Reverse Stock Split") to be effected immediately
prior to the Offering, (b) an assumed Offering price of $10.00 per Common
Share, (c) the exercise of warrants to purchase 35,000 Common Shares by two
Selling Shareholders and (d) no exercise of options and other warrants
outstanding as of June 2, 1998 to purchase 1,258,972 Common Shares. Unless
otherwise indicated, all monetary amounts in this Prospectus are expressed in
United States dollars and, if converted from Canadian dollars, have been
converted at historical monthly average rates. The exercise prices for
unexercised options and warrants of the Company have been determined based upon
the exchange rate applicable on March 31, 1998. See "Exchange Rate
Information." Fiscal year references are to the fiscal years ended March 31.
All references to the "Company" or "DataWave" refer to DataWave Systems Inc.
and its consolidated subsidiaries.
THE COMPANY
DataWave Systems Inc. ("DataWave" or the "Company") designs, develops,
produces, owns and manages a proprietary, intelligent, automated direct-
merchandising network (the "DataWave System"). The Company uses the DataWave
System to distribute prepaid calling cards, primarily under the AT&T brand. The
DataWave System is scalable and flexible and can be modified to offer other
premium prepaid products such as cellular telecommunications, paging and
overnight courier services.
The DataWave System is comprised of DataWave Telecard Merchandisers ("DTMs"),
which are free-standing "smart" machines capable of dispensing multiple prepaid
products and services, and over-the-counter "swipe" units ("OTCs"), for point-
of-sale prepaid retailing, both of which are connected to the Company's
proprietary server and database software through a wireless and/or land line
wide area network. As of June 1, 1998, the DataWave System consisted of 743
DTMs and 420 OTCs. The DataWave System has been designed to work both with the
telephone switches of other parties as well as a switch operated by the
Company. In the United States, the Company has elected to operate solely with
other parties' switches, such as those of AT&T and other long distance
carriers, while in Canada the Company operates a switch through a joint
venture.
The United States prepaid calling card market has grown from approximately
$20 million in sales in 1990 to almost $1.0 billion in 1996, and is expected to
grow to approximately $2.6 billion in sales by 2001 according to industry data
from The Yankee Group, an independent research company. The predominant
channels of distribution for prepaid calling cards are through retail
establishments and traditional vending machines, most of which sell "live"
prepaid calling cards purchased in bulk. "Live" prepaid calling cards are
preactivated with telephone time prior to sale to the retailer or placement in
a machine.
In comparison to other prepaid calling card distribution methods, the
DataWave System distributes unactivated prepaid calling cards which are
activated only upon purchase by the consumer. Because the cards are not
preactivated, the Company avoids certain costs incurred by distributors of
"live" prepaid calling cards, such as paying for long distance telephone time
prior to sale to consumers, losses due to theft and other costs associated with
the management of inventory. The DataWave System also features: (i) real-time
remote monitoring of DTMs, including cash balances, card inventory and machine
functioning; (ii) remote adjustable pricing of prepaid products and services at
each DTM location; (iii) consumer convenience by permitting purchases of
customer selected dollar amounts of long distance time, by cash or credit card,
and providing detailed receipts and multilingual instructions; and (iv)
scalability, enabling the Company to increase the number of DTMs with limited
hardware and software upgrades and to offer multiple future prepaid products
and services at existing and future locations.
3
<PAGE>
In January 1998, the Company entered into a series of agreements with AT&T
Corp. ("AT&T") providing for, among other things, the purchase of long distance
telephone service from AT&T, the right to resell the service under AT&T's brand
name and the joint marketing and promotion of AT&T-branded prepaid calling
cards (the "AT&T Prepaid Cards") and the DataWave System in the United States.
The Company believes its relationship with AT&T will enable the Company to
create and implement a marketing program that will bring the advantages of
DataWave's technology and the AT&T brand to consumers within the United States
and to provide businesses with a national merchandising program for AT&T
Prepaid Cards. The Company believes that its relationship with AT&T will
provide it with competitive advantages in the prepaid calling card market due
to the national recognition of the AT&T brand, the quality long distance
telephone and customer service provided by AT&T, the support of AT&T's sales
and marketing capabilities and the development of joint relationships with
current and future AT&T customers. In addition, the Company believes that
working with AT&T will help DataWave gain access to additional sites and
locations where AT&T has a presence. For example, AT&T has a significant
presence as a telephone service provider to the hospitality industry, which the
Company believes represents a significant segment of the prepaid calling card
market.
The Company's business strategy is to deliver premium prepaid products and
services such as calling cards, cellular telecommunications, paging and
overnight courier services through the DataWave System. Elements of the
strategy include increasing the Company's penetration of premier site
locations, expanding its strategic relationship with AT&T, delivering new,
premium prepaid product and service offerings, developing relationships with
other providers of premium prepaid products and services, and maintaining its
electronic distribution network technological leadership.
To pursue its business strategy in Canada, effective April 1, 1998, the
Company combined its prepaid calling card business operations in Canada with
those of DCI Telecommunications, Inc. ("DCI") to create PhoneLine Cardcall
International Inc. ("PhoneLine"), a joint venture operating as an independent,
switch-based provider of prepaid calling cards. PhoneLine's primary
distribution channel for these prepaid calling cards is directly through retail
sites. The Company's objective with respect to PhoneLine is to utilize the
DataWave System in conjunction with PhoneLine's current distribution operations
to become a leading prepaid calling card provider in Canada.
In April 1998, the Company acquired Metrophone Telecommunications, Inc.
("Metrophone"), which owns and operates "intelligent" pay phones in Washington,
California, Arizona and Oregon. As of June 1, 1998, Metrophone owned 210
intelligent pay phones and has agreed to install and manage an additional 720
pay phones pursuant to agreements with members of the National Association of
RV Parks and Campgrounds ("ARVC"). The Company plans to bundle its service
offerings by including DTMs and OTCs at certain existing and future pay phone
locations.
The Company's principal executive offices are located at 101 West 5th Avenue,
Vancouver, British Columbia, Canada, V5Y 1H9. The Company's telephone number is
(604) 874-1302.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Shares offered by the Company................ 2,500,000 shares
Common Shares offered by the Selling Shareholders... 185,000 shares
Common Shares to be outstanding after the Offering.. 9,251,462 shares(1)
Use of proceeds..................................... To repay indebtedness and
for general corporate
purposes, primarily
expansion of the DataWave
System and purchase of
intelligent pay phones.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............. DWAV
</TABLE>
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(1) Excludes 1,258,972 Common Shares reserved for issuance upon exercise of
options and warrants outstanding as of June 2, 1998.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARES OUTSTANDING)
The following summary consolidated financial information should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ 511 $ 1,263 $ 3,149 $ 9,676
Cost of revenues........ -- 431 1,076 3,439 6,211
Gross profit (loss)..... -- 80 187 (290) 3,465
Operating expenses...... 667 1,259 2,470 3,003 3,034
Operating (loss)
income................. (667) (1,029) (2,283) (3,293) 431
Net (loss) income....... $ (693) $ (1,052) $ (2,328) $ (3,626) $ 65
========= ========= ========= ========= =========
Net (loss) income per
Common Share(1)........ $ (0.27) $ (0.27) $ (0.46) $ (0.60) $ 0.01
========= ========= ========= ========= =========
Weighted average number
of Common Shares
outstanding............ 2,537,493 3,885,546 5,010,812 6,013,758 6,747,805
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit).......................... $ (43) $20,923
Total assets....................................... 5,094 26,060
Long-term obligations, including current portion of
long-term debt.................................... 1,519 --
Shareholders' equity............................... 1,614 24,099
</TABLE>
- --------
(1) For information concerning the number of shares used in the computation of
net (loss) income per Common Share, see Note 2(l) of Notes to the
Consolidated Financial Statements.
(2) As adjusted to give effect to the exercise of warrants to purchase 35,000
Common Shares by two Selling Shareholders and the sale of 2,500,000 Common
Shares offered by the Company hereby assuming an Offering price of $10.00
per share, the payment of discounts and commissions and estimated Offering
expenses and the application of net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in evaluating an
investment in the Common Shares offered by this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties.
Discussions containing such forward-looking statements may be found in the
material set forth under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." In addition, when used in this Prospectus, the words "believes,"
"expects," "anticipates," "intends," "estimates," "should," "will likely,"
"considers that" and similar expressions are intended to identify such
forward-looking statements. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. Because such forward-looking
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company began offering merchandising services in 1994 and first offered
prepaid calling card services in 1996. Accordingly, the Company has a limited
operating history upon which investors may base an evaluation of the Company's
performance. As a result of operating expenses and development expenditures,
the Company has incurred net losses prior to the fiscal year ended March 31,
1998, in which the Company recorded net income of $65,099. Net losses for the
fiscal years ended March 31, 1996 and 1997 were $2,328,186 and $3,626,411,
respectively. The Company expects that its operating expenses will increase
with the expansion of its installed base of DTMs and OTCs and with increasing
marketing and development of its prepaid products and services. There can be
no assurance that the Company's revenues will increase sufficiently to support
the Company's anticipated expenditures or that the Company will be able to
sustain profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON AT&T
In the United States, the Company relies primarily on its relationship with
AT&T for prepaid long distance telephone service, as well as for joint
marketing of the AT&T Prepaid Card and the DataWave System. A significant
portion of the prepaid calling cards sold in the United States by the Company
are AT&T Prepaid Cards, and the Company utilizes the AT&T brand name as the
primary identity on most of its DTMs. Because the Company's relationship with
AT&T commenced in January 1998, there is limited history on which to evaluate
the current and future success of the relationship. The Company obtains long
distance telephone time from AT&T pursuant to an agreement which requires the
Company to purchase a minimum of $5.25 million of long distance time per year.
If the Company does not purchase such minimum amount, it incurs a shortfall
charge consisting of the cost of the time not purchased and a penalty. The
failure to meet the minimum purchase requirements may adversely affect the
Company's relationship with AT&T and could have a material adverse effect on
the Company's business, financial condition and results of operations. The
current agreements with AT&T expire in March 2000 unless terminated earlier by
either party for breach of such agreements. If the Company were to terminate
the agreements prior to that time, it would be obligated to pay a termination
fee. In addition, if either the Company or AT&T terminated the existing
agreements, the Company would be required to obtain long distance service from
other long distance carriers. See "-- Risk of Termination of Carrier
Arrangements; Dependence on Telecommunications Providers." The agreements with
AT&T are non-exclusive and AT&T has entered into agreements with other
distributors of prepaid calling cards. The Company expects to place many of
its DTMs and OTCs pursuant to subcontracting arrangements with existing and
future AT&T customers. If the contracts between AT&T and such customers or
AT&T and the Company are terminated, there could be a substantial decrease in
DTM and OTC placements. To date, the Company has only one subcontract with
AT&T for DTM placements, and there can be no assurance additional subcontracts
will be entered into. In addition, the Company has focused its marketing and
strategic development activities on the AT&T relationship and promoting the
AT&T Prepaid Card, including joint marketing efforts with certain AT&T sales
personnel to promote the DataWave System. The termination of the AT&T
relationship would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Strategic
Relationship with AT&T."
6
<PAGE>
RISK OF TERMINATION OF CARRIER ARRANGEMENTS; DEPENDENCE ON TELECOMMUNICATIONS
PROVIDERS
The Company does not own a transmission network in the United States and,
accordingly, depends on interexchange carriers, local exchange carriers and
long distance carriers for transmission of local and long distance calls made
using its prepaid calling cards and its pay phones. The Company's agreements
with its carriers are generally short-term (e.g., two year) contracts subject
to termination by either party. In the past, agreements between the Company
and its carriers have been terminated. In October 1997, an agreement with
Frontier Communications International Inc. ("Frontier") was terminated when
Frontier sold its prepaid calling card business to a competitor of DataWave.
In December 1997, an agreement between the Company and MCI Telecommunications
Corporation ("MCI") was terminated, although the Company continues to provide
limited distribution of MCI-branded prepaid calling cards. The Company did not
experience any interruption of service due to these terminations; however,
there can be no assurance that the Company will not experience such an
interruption if its current or future carrier arrangements are terminated. The
Company's ability to maintain and expand its business depends, in part, upon
its ability to continue to obtain services at favorable rates and terms from
its current or alternate carriers. In addition, regulatory changes,
competitive pressures and changes in access charges may adversely affect the
charges imposed upon the Company by telecommunications providers, some of
which may be applied retroactively. No assurance can be given that the Company
will continue to be able to obtain origination, transport or termination
services at favorable rates and terms. The failure to obtain such services, an
interruption of service, material increases in the prices at which the Company
obtains such services or the imposition of any retroactive charges could have
an adverse effect on the Company's business, financial condition and results
of operations. See "Business--Products and Services; Existing Products and
Services" and "--Strategic Relationship with AT&T."
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY; COMPENSATION EXPENSE
The Company's revenues and operating results are subject to significant
variation from quarter to quarter due to a number of factors, including:
variations in sales generated from each DTM, OTC and retail location;
additions or reductions in the number of DTMs, OTCs and retail locations;
competitive pricing pressure; limitations on pricing imposed by long distance
tariffs; changes in the telephone rates paid by the Company to its telephone
carriers; changes in operating expenses; the timing of the introduction of new
products and services; the mix of products and services sold and the mix of
channels through which they are sold; changes in legislation and regulations
which affect the competitive environment for the Company's products and
services; and other competitive conditions and economic conditions in the
markets served by the Company. The Company's sales of prepaid calling cards
are seasonal, as many consumers purchase the cards while traveling during the
peak travel months of July, August and September. Sales decrease during spring
and fall and are lowest in the winter. A significant proportion of the
Company's operating expenses are fixed in advance for a quarter and therefore,
if the Company's sales are below expectations in a particular quarter, this
could have a material adverse effect on the Company's financial condition and
results of operations. The Company believes that period-to-period statements
of its operating results are not necessarily meaningful, should not be relied
upon as indications of future performance and may result in volatility in the
price of the Common Shares. Due to the foregoing factors, among others, the
Company's operating results may from time to time be below the expectations of
analysts and investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As a condition of the Company's acquisition of DataWave Vending (Canada)
Inc. ("DVI") in January 1994, 781,875 Common Shares were required by the
British Columbia Securities Commission ("BCSC") to be placed in escrow
including 561,875 shares owned by current Directors, officers and employees of
the Company and 220,000 shares held by outside shareholders. The escrow shares
are restricted from trading unless released from escrow as and if the Company
meets certain net income and positive cash flow requirements. The requirements
for release of the escrow shares had not been met as of March 31, 1998. In
accordance with Securities and Exchange Commission ("SEC") positions on
similar escrow arrangements, this arrangement has been deemed to be
compensatory for 561,875 shares contributed to the escrow. Accordingly, the
Company will record a non-recurring, non-cash expense equal to the fair value
of the shares at the time of their release from escrow. Based on the assumed
Offering price of $10.00 per share, the amount of this charge would be
7
<PAGE>
$5,618,750. The Company expects to request an early release of all the escrow
shares upon or after completion of the Offering, which, if approved, will
result in recognition of this non-cash expense in the fiscal quarter during
which such release occurs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions."
RISK OF TERMINATION OF SITE CONTRACTS
The contracts pursuant to which the Company places DTMs and OTCs in site
locations are generally short-term and easily terminable by either party.
There can be no assurance that contracts to place DTMs and OTCs will not be
terminated at any time. While to date, nearly all of the Company's site
contracts involve a single DTM or OTC, the Company anticipates that in the
future multiple DTMs and OTCs will be placed pursuant to single contracts with
large clients such as hotel chains or pursuant to subcontracting arrangements.
The termination of a contract or other arrangement with a provider of multiple
sites would significantly reduce the installed base of DTMs and OTCs and limit
access to prime site locations in the future. Such a termination could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's relationship with AT&T may
preclude the Company from contracting with potential large corporations which
have contracted with other long distance service providers. See "Business--
Strategic Relationship with AT&T" and "--Business Strategy."
SUBSTANTIAL COMPETITION
The prepaid calling card market is highly competitive and is served by
numerous international, national and local firms. In the United States, the
Company competes with major long-distance providers, including but not limited
to WorldCom, MCI and Sprint, as well as with other prepaid calling card
distributors, including but not limited to, IDT Corporation, Pacific Gateway
Exchange, Inc., PT-1 Communications Inc., RSL Communications, SmarTalk
Teleservices, Inc., Star Telecommunications, Inc., and Telegroup, Inc. In
Canada, the Company's competitors include BayLine Communications, Canada
Telecom Network, Inc., Cardinal VoiceCard, Ltd., Channel Telecom, Gold Line
Telemanagement, Inc. and Phonetime International, Inc. The Company also
competes with AT&T in certain locations where AT&T offers prepaid calling
cards directly or through other distributors. Many of these competitors have
significantly greater financial, technical and marketing resources, and much
larger distribution networks, and generate greater revenues and have greater
name recognition than the Company. These competitors may be able to institute
and sustain price wars, or imitate the features of the Company's DataWave
System products, resulting in a reduction of the Company's share of the market
and reduced price levels and profit margins. In addition, there are relatively
low barriers to entry into the prepaid calling card market, and the Company
has faced, and expects to continue to face, additional competition from new
entrants. In the United States, the Company also competes with prepaid calling
card distributors which own and operate switch and transmission platforms.
Such distributors may provide long distance services at lower cost than the
Company, and offer additional bundled features not available from the
Company's long-distance provider such as voicemail and facsimile services. The
barriers to entry into the independent pay phone provider market are also low
and there is substantial competition in this market from both other
independent pay phone providers and from the large telecommunication carriers
who dominate the pay phone market. The Company believes that its ability to
compete also depends in part on a number of competitive factors outside its
control, including the reliability of competitors' products and services, the
ability of competitors to hire, retain and motivate qualified personnel, the
price at which competitors offer comparable services and the extent of
competitors' responsiveness to customer needs. There can be no assurance that
the Company will be able to compete effectively on pricing or other
requirements with current and future competitors or that competitive pressures
will not materially adversely affect the Company's business, financial
condition and results of operations. See "Business--Competition."
RISKS APPLICABLE TO INVESTMENT IN PHONELINE
The Company holds a 40% interest in PhoneLine, a Canadian joint venture
engaged in the marketing and sale of prepaid calling cards in Canada. Because
the Company controls only 50% of the Board of Directors of PhoneLine, the
Company does not control PhoneLine's operations. Pursuant to the joint venture
agreement, the
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Company and DCI each made loans and contributed certain assets of their
subsidiaries to PhoneLine. The Company and DCI also agreed not to compete
otherwise in the Canadian prepaid calling card market. In addition, the
Company and DCI each have the right to initiate, at any time, a buy-out of the
other party's interest in PhoneLine. As a result, the Company may in the
future own all or no interest in PhoneLine. The joint venture agreement
provides that capital calls may be made on either party upon 30 days prior
notice. In June 1998, the Company will contribute approximately $275,000 to
PhoneLine pursuant to such a capital call. Future capital calls may be
required in response to unanticipated needs of PhoneLine and may be
significant and could have a material adverse effect on the Company's
business, financial condition and results of operations. Failure to meet a
capital call requirement could result in a reduction of the Company's equity
interest in PhoneLine. The Company also participates in joint marketing
efforts with PhoneLine, and works to recruit, maintain and motivate a network
of independent distributors through whom substantially all of PhoneLine's
prepaid calling cards are distributed in Canada. The inability to maintain and
grow this distribution network would have a material adverse effect on
PhoneLine and consequently, the Company. PhoneLine's agreements with retail
site locations for the distribution of prepaid calling cards are generally on
a month-to-month basis. Because there are few long-term retail agreements,
PhoneLine competes continually with other prepaid calling card providers for
retail locations. PhoneLine is a switch-based reseller of prepaid long
distance time. Any disruption to PhoneLine's switch and transmission
facilities due to fire, natural disaster, power loss or other event could
materially adversely affect PhoneLine's operations. See "Business--Canadian
Operations."
BUSINESS INTERRUPTIONS AND DEPENDENCE ON LIMITED FACILITIES
The Company's primary operations, including engineering, assembly,
information systems (including the server and databases for the DataWave
System), customer service and general administration, are housed in a single
facility in Vancouver, British Columbia (the "Vancouver Facility"). Any
disruption in the Company's operations at the Vancouver Facility due to fire,
natural disaster or otherwise, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's operations are also dependent on the integrity of the DataWave
System. In the event that the DataWave System network (including the wireless
and wireline networks of other parties used by the DataWave System)
experiences substantial down time due to power loss, technical failure,
unauthorized intrusion or other interruptions, the Company's business and
operations could be materially adversely affected. The Company has implemented
procedures to reduce business interruptions due to network failure such as
redundancy for most components susceptible to failure, multiple on-site and
off-site storage of mission-critical data, and a backup network server at its
New Jersey offices. However, there can be no assurance that such procedures
will be effective. PhoneLine, the Company's joint venture providing prepaid
calling card services in Canada, is a switch-based distributor of prepaid
calling cards. PhoneLine's switch and transmission facilities are housed in a
single location in Toronto, Canada. Any disruption in switch operations due to
fire, natural disaster, power loss or other event could materially affect
PhoneLine's operations which could have a material adverse effect on the
Company. See "Business--Facilities" and "-- Canadian Operations."
ABILITY TO MANAGE GROWTH; NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF;
RELIANCE ON INDEPENDENT SERVICES
The Company's growth has placed, and is expected to continue to place,
significant demands on all aspects of the Company's business including its
management, financial, technical and administrative personnel and systems. The
Company's future operating results will depend upon its ability to manage
growth, including improving and implementing new systems and attracting,
retaining, training, managing and motivating skilled employees, particularly
managers and other senior technical personnel. There can be no assurance that
a sufficient number of skilled employees will continue to be available to the
Company, or that the Company will be successful in training, retaining and
motivating current or future employees or that such employees will achieve
expected levels of performance. In addition, as the Company increases its
service offerings and expands its target markets, there will be additional
demands on its sales and marketing resources. The Company also relies on
outside contractors to install and maintain its DTMs. The inability of the
Company to find and contract with sufficiently experienced contractors could
have a material adverse effect on the Company's operations, including
decreased DTM placements and increased machine servicing costs. See
"Business--Employees" and "Management."
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RISKS ASSOCIATED WITH ACQUISITIONS
Since May 1997, the Company has completed four acquisitions. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations, technologies and products of the acquired companies, the diversion
of management's attention from other business concerns, risks associated with
entering markets or conducting operations with which the Company has no or
limited direct prior experience, risks of non-disclosed liabilities and the
potential loss of key employees of the acquired company. Moreover, there can
be no assurance that the anticipated benefits of an acquisition will be
realized. There can be no assurance that the Company will be effective in
identifying and effecting attractive acquisitions or assimilating
acquisitions. The Company's acquisitions to date have resulted in, and future
acquisitions by the Company could also result in, potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, all of which could materially adversely affect the Company's business,
financial condition and results of operations.
DEPENDENCE ON A SINGLE PRODUCT; RAPID TECHNOLOGICAL CHANGE
Currently the Company derives substantially all of its revenues from prepaid
calling cards. The prepaid products and services industry is characterized by
rapid technological change, new products and services, new sales channels,
evolving industry standards and changing client preferences. The Company's
success will depend, in significant part, upon its ability to make timely and
cost-effective enhancements and additions to its technology and to introduce
new products and services that meet customer demands. The Company expects new
products and services to be developed and introduced by other companies that
compete with its products and services. The proliferation of new
telecommunications technology, including personal and voice communication
services over the Internet, may reduce demand for long distance services,
including prepaid calling cards. There can be no assurance that the Company
will be successful in responding to these or other technological changes, to
evolving industry standards or to new products and services offered by the
Company's current and future competitors. In addition, the Company may not
have access to sufficient capital for its research and development needs in
order to develop new products and services. See "Business--Competition" and
"--Products and Services."
DISRUPTION IN MANUFACTURING SUPPLIES; INABILITY TO MANUFACTURE SUFFICIENT DTMS
Production of DTMs consists of the assembly and testing by the Company of a
high volume of quality components manufactured by third parties. The Company
is dependent on a limited number of suppliers for certain of its key
components, such as radio modems. The Company purchases component parts on a
purchase order basis and has no supply commitments from any of its suppliers.
The Company's reliance on certain vendors, as well as industry supply
conditions generally, subject it to various risks, including the possibility
of a shortage or a lack of availability of key components, quality control
problems, increases in component costs and reduced control over delivery
schedules, any of which could adversely affect the Company's manufacturing and
assembly process and thus its business and results of operations. In
situations where the Company is unable to rectify supply or quality problems
associated with one or more components from particular vendors, redesign of
the Company's products may be required and costly delays could result.
Although the Company believes that its current manufacturing capabilities will
be able to produce sufficient DTMs through fiscal 1999, there can be no
assurance that the process will be adequate for unanticipated future growth.
The Company expects that it may be required to expand its manufacturing
capabilities or outsource such capabilities after fiscal 1999. See "Business--
Manufacturing and Supply."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend in large part
upon the efforts and abilities of a number of key employees, including its
President and Chief Executive Officer, Clive Barwin, its Chief Financial
Officer and Secretary, Peter Hough, and the Vice President of Sales and
Marketing of a subsidiary of the Company, Joshua Emanuel. The loss of the
services of any of Messrs. Barwin, Hough or Emanuel or of one or more of the
Company's other key personnel could have a material adverse effect on the
Company's business.
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Although the Company has entered into an employment agreement with Mr. Emanuel
and plans to enter into employment agreements with each of Messrs. Barwin and
Hough upon the closing of this Offering, such employment agreements are
terminable at any time by the employee. See "Management--Employment
Agreements."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; INFRINGEMENT OF OTHER PARTIES'
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other forms of intellectual
property protection to protect its proprietary technology. The Company has
filed two patent applications with the United States Patent and Trademark
Office ("PTO"), including one for the DTM and its method of operation, which
were denied because the PTO found previously developed technology prevented
patenting of the Company's technology. On May 13, 1997, the Company filed a
continuation of the application for the DTM and its method of operations with
the PTO. In addition, the Company has filed a patent application with the PTO
for its overnight courier pack dispensing mechanism. As of the date of this
Prospectus, no further communication had been received from the PTO regarding
these applications. There can be no assurance that any of the Company's
pending patent applications will issue and if issued, whether the claims
allowed are or will be sufficiently broad to protect the Company's technology.
The Company owns a United States federal registration for the trademark
"DATAWAVE" and design. There can be no assurance that the Company's operations
do not or will not violate the intellectual property rights of others, that
the Company's intellectual property rights would be upheld if challenged or
that the Company, would, in such an event, not be prevented from using such
intellectual property rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In addition, failure of the Company to obtain needed licenses from third
parties for other technology and intellectual property could delay or prevent
the development, manufacture or sale of products. Although the Company relies,
in part, on contractual provisions to protect its trade secrets and
proprietary know-how, there is no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently developed by competitors. Although no lawsuits against the
Company regarding infringement of any existing patents or other intellectual
property rights are pending, nor have any claims been asserted, there can be
no assurance that such infringement claims will not be asserted by third
parties in the future. There also can be no assurance in the event of such
claims of infringement that the Company will be able to obtain licenses on
reasonable terms. The Company's involvement in any intellectual property
dispute or action to protect trade secrets and know-how, including actions
brought by the Company, could result in a material adverse effect on the
Company's business. Adverse determinations in litigation in which the Company
may become involved could subject the Company to significant liabilities to
third parties, require the Company to grant licenses to or seek licenses from
third parties and prevent the Company from manufacturing and selling its
products. Any of these situations could have a material adverse effect on the
Company's business, financial condition and results of operations.
THEFT OF SERVICES; CREDIT CARD FRAUD
Although the Company has not experienced any material losses from theft to
date, prepaid calling card users may attempt to obtain calling card services
without rendering payment to the Company by unlawfully using the Company's
access numbers and PINs. The Company attempts to manage these theft and fraud
risks through its internal controls and its monitoring and blocking systems.
The Company utilizes national credit card clearance systems for electronic
credit card settlement. The Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by unauthorized use, disputes, theft or fraud. To minimize
its financial exposure, the Company limits the total amount that a customer
may charge to purchase a prepaid calling card and also limits the amount that
a customer may charge within a specified time frame using any DTM. Although
the Company believes that its risk management practices and bad debt reserves
are adequate, there can be no assurance that such practices and reserves will
protect the Company from theft of services, fraud and credit card losses, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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YEAR 2000 ISSUES
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have a time-sensitive software that recognize a date using "00" as
the Year 1900. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, activate prepaid calling cards, or engage
in similar normal business activities. The Company has completed a preliminary
assessment and will have to modify portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The total Year 2000 cost is not expected to be material to the
Company's financial position or operating results and will be expensed as
incurred. The project is estimated to be completed no later than December 31,
1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software, the Year 2000
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 could have a material impact on the
operations of the Company. The Company's most significant risk on the Year
2000 issue relates to interfacing the DataWave System with the networks of
other business entities, such as AT&T. The Company has initiated preliminary
communications with AT&T to determine the extent of Year 2000 issues. There is
no guarantee that the systems of AT&T on which the Company's distribution
network rely will be timely converted and would not have an adverse effect on
the Company's systems. The cost of the project and the date on which the
Company believes it will complete the Year 2000 modification are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GOVERNMENT REGULATION
The telecommunications industry is highly regulated in the United States at
the federal, state and local levels and in Canada at the federal, provincial
and local level. Various international authorities also may seek to regulate
the services provided or to be provided by the Company. In the United States,
federal laws and the regulations of the Federal Communications Commission
("FCC") generally apply to interstate telecommunications, while state public
utility commissions, public service commissions or other state regulatory
authorities generally exercise jurisdiction over telecommunications that
originate and terminate within the same state. The Company is a switchless
distributor of long distance telephone time purchased from carriers such as,
but not limited to, AT&T and MCI. The Company believes that it is not
regulated as a carrier because the Company's name is not on its prepaid
calling cards and the telephone number on the prepaid calling cards is that of
the underlying, regulated carrier and not that of the Company. Accordingly,
the Company has not obtained any federal or state authorizations. To the
extent that federal or state regulators interpret or enforce applicable laws
and regulations differently, the Company may be found in violation of such
laws or regulations and may be required to alter its business strategy.
The Company recently determined that, in certain instances during calendar
1998, the Company's rates for telecommunications services were above those
specified in the tariffs of the underlying carrier. In these instances,
certain states and the FCC would likely deem the Company to have been acting
as a carrier and to have been operating in non-compliance with the requirement
that such carriers be certified and/or have their own tariffs on file. As a
result of such non-compliance, the FCC and state regulators could subject the
Company to fines, penalties, or other sanctions which, in certain
circumstances, could be applied on a per day or per violation basis. In June
1998, the Company adjusted its rates for prepaid calling card services to fall
within those specified in the long distance tariffs of its underlying carriers
and therefore believes it is compliant with the foregoing regulatory
requirements.
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In addition, the regulation of prepaid calling card providers, particularly
by state regulators, is unsettled. Even where the Company's rates do not
exceed the tariffed rate, state and federal regulators might attempt to assert
jurisdiction over the Company's operations. Certain states in which the
Company operates, such as Florida and Louisiana, have promulgated specific
laws or regulations regarding prepaid calling cards. Such laws or regulations
may require, among other things, that the cards specify cost-per-minute, extra
fees, expiration dates, and toll-free customer service telephone numbers.
Although the Company believes that it is or will be able to comply with state
laws and regulations, there can be no assurance that such laws or regulations
will not have a material adverse effect on the Company's business, financial
condition or results of operation.
The Company's wholly owned subsidiary, Metrophone, is a pay phone service
provider ("PSP") and is subject to certain rules of the FCC, including rules
regarding rates and the provision of services such as unrestricted access to
operators. Some state commissions also regulate certain aspects of PSP
activity such as the location of pay phones and quality of service standards.
There can be no assurance that the Company's operations will not become
subject to increased federal and state regulation or be able to comply with
any applicable regulations. Failure to comply with applicable regulations may
have a material adverse effect on the Company's business, financial condition
and results of operations.
In Canada, federal laws and the regulations and rulings of the Canadian
Radio-Television and Telecommunications Commission ("CRTC") generally apply to
interprovincial communications, while provincial public utility commissions or
other provincial regulatory authorities generally exercise jurisdiction over
telecommunications that originate and terminate within the same province. In
Canada, PhoneLine is a reseller of long-distance telephone time purchased from
long distance carriers and is thus required to register with the CRTC but is
not otherwise directly regulated as a carrier by the CRTC or provincial
regulatory authorities. The business of PhoneLine may become subject to
increased or adverse regulation or regulatory requirements, which may have a
material adverse effect upon it. See "Business--Government Regulation."
While the Company believes that it has adequately reserved for any taxes it
may ultimately be required to pay, there can be no assurance that this will be
the case. In addition, certain authorities may enact legislation which
specifically provides for taxation of prepaid telephone cards or other
services provided by the Company or may interpret current laws in a manner
resulting in additional tax liabilities to the Company.
VOLATILITY OF STOCK PRICE; VANCOUVER STOCK EXCHANGE; OVER-THE-COUNTER
ELECTRONIC BULLETIN BOARD
The Common Shares are currently traded on the VSE under the symbol "DTV" and
on the OTCBB under the symbol "DWVSF." The Offering price of the Common Shares
offered hereby will be determined through negotiations between the Company and
the Representatives of the Underwriters, and may be different from recent
trading prices of the Common Shares on the VSE and OTCBB. See "Underwriting."
The Company intends to list the Common Shares on the Nasdaq National Market
upon commencement of the Offering. The Company intends to delist its shares
from trading on the VSE promptly following completion of the Offering. The
Company also intends to delist its shares from trading on the OTCBB concurrent
with the Offering. There can be no assurance that an active trading market in
the United States will develop and continue after completion of this Offering
or that the trading price of the Common Shares on the Nasdaq National Market
will not decline below the Offering price or recent trading prices on the VSE
and OTCBB. During fiscal 1998, the price of the Company's Common Shares as
reported on the VSE ranged from a low of $0.50 to a high of $8.48. See "Price
Range of Common Shares." Future announcements concerning the Company or its
competitors, technological innovations, new product and service offerings,
changes in government regulations, conditions in the Company's market segment
or changes in earnings estimates by analysts may cause the price of the Common
Shares to fluctuate substantially. In addition, stock prices for many
technology and telecommunications companies fluctuate widely for reasons that
may be unrelated to their operating results. These fluctuations, as well as
general economic, political and market conditions, may adversely affect the
trading price of the Common Shares.
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CONTROL OF COMPANY
Upon the consummation of the Offering, the Company's Directors, officers and
affiliates will own approximately 15.2% of the outstanding Common Shares
including options and warrants exercisable within sixty days of June 3, 1998
(14.6% if the Underwriters' over-allotment option is exercised in full).
Accordingly, such persons, acting in concert, may be able to influence Company
matters requiring shareholder approval, including the election of Directors
and the approval of significant corporate transactions. See "Certain
Transactions" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Shares offered hereby will experience immediate and
substantial dilution in the pro forma net tangible book value per share at
March 31, 1998 of $7.43 at an assumed Offering price of $10.00 per share,
after deducting underwriting discounts and commissions. In addition, as of
June 3, 1998, the Company had issued warrants to purchase 394,985 Common
Shares and options to purchase 898,987 Common Shares. If such warrants and
options are exercised in full, purchasers of the Common Shares offered hereby
would experience an immediate and substantial dilution in the pro forma net
tangible book value per share of $7.55. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
After the completion of this Offering, 9,251,462 Common Shares will be
outstanding, assuming no exercise of the Underwriters' over-allotment option.
Of such outstanding Common Shares, the 2,685,000 Common Shares sold pursuant
to this Offering and 3,939,288 additional Common Shares will be eligible for
immediate sale in the public market. The remaining 2,627,174 Common Shares are
restricted securities as that term is defined under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act. As a result of Rules 144, such
Restricted Shares will be available for sale in the public market as follows:
(i) 1,559,839 Restricted Shares will be eligible for sale pursuant to Rule 144
upon completion of the Offering and (ii) the remaining 1,067,335 Restricted
Shares will be eligible for sale from time to time thereafter upon expiration
of their respective one-year holding periods under Rule 144. In addition, the
directors and executive officers of the Company as well as the Selling
Shareholders, who collectively hold 1,338,574 Common Shares, have agreed not
to offer to sell, sell, contract to sell, grant any option to sell, encumber,
pledge or otherwise dispose of, or exercise any demand rights with respect to,
any Common Shares or securities convertible into or exercisable or
exchangeable for Common Shares for a period of 180 days after the date of this
Prospectus without the prior written consent of Morgan Keegan & Company, Inc.
Upon expiration of the 180-day period, 1,134,408 of such Common Shares will be
eligible for immediate resale under the Securities Act, subject, in certain
cases, to certain volume, manner of sale and other requirements of Rule 144
promulgated under the Securities Act. The Company may file one or more
registration statements on Form S-8 immediately following this Offering,
registering under the Securities Act Common Shares covered by the Company's
1997 and 1998 Stock Option Plans. No prediction can be made as to the effect,
if any, that future sales of shares, or the availability of shares for future
sale, will have on the market price of the Common Shares prevailing from time
to time. Sales of substantial amounts of Common Shares, or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Common Shares. See "Principal and Selling Shareholders," "Shares Eligible
for Future Sale" and "Underwriting."
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN BRITISH COLUMBIA, CANADA;
CERTAIN ANTI-TAKEOVER EFFECTS
The Company is organized under the laws of British Columbia, Canada.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, Directors and
controlling shareholders and the rights of the Company's shareholders differ
from, and may not be as protective of shareholders as those that would apply
if the Company were incorporated in a jurisdiction within the United States.
Among other matters, the Company's Altered Memorandum and Articles of
Association provide that (i) the Board may increase the number of Directors by
up to one-third of the then existing number of Directors
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without shareholder approval; (ii) each Director may appoint another person to
attend Board meetings and vote on his behalf; (iii) the Board may appoint an
executive committee with authority to take action on any matter on which the
Board could act; and (iv) the Company's President must be a Director. In
addition, shareholders may (i) initiate a shareholder's meeting upon the
affirmative vote of five percent of the Common Shares; (ii) declare a quorum
at a shareholders' meeting with the presence of 10% of the Common Shares; and
(iii) make decisions based upon the affirmative vote of the holders of 75% of
the Common Shares present at a meeting in which a quorum is present. In
addition, the courts of British Columbia, Canada may not enforce liabilities
predicated upon United States federal securities laws.
At the Annual General Meeting (the "AGM"), the Company will seek shareholder
approval to amend the Altered Memorandum and Articles of Association in order
to (i) eliminate the right of each Director to appoint an alternate Director
to attend meetings of the Board of Directors and (ii) require the presence of
holders of 50% of the outstanding Common Shares to constitute a quorum for
purposes of meetings of shareholders of the Company. Certain of these
provisions could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise.
THE COMPANY
The Company was incorporated in 1986 and was initially a mining and
development company. In January 1994, the Company acquired North American
Photo Vending Inc. (which was subsequently renamed DataWave Vending (Canada)
Inc.).
The Company's principal executive offices are located at 101 West 5th
Avenue, Vancouver, British Columbia, Canada V5Y 1H9. The Company's telephone
number is (604) 874-1302.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 Common Shares
offered by it hereby are estimated to be approximately $22.5 million, after
deducting underwriting discounts and commissions and estimated Offering
expenses payable by the Company. The Company intends to use such proceeds to
repay indebtedness and for general corporate purposes, primarily expansion of
the DataWave System and purchase of intelligent pay phones.
The indebtedness to be repaid includes:
(i) approximately $1.5 million to repay Applied Telecommunications
Technologies Inc. ("ATTI") pursuant to an equipment financing agreement
entered into in October 1996 (the "ATTI Equipment Financing"). The ATTI
Equipment Financing bears interest at an effective annual rate of
approximately 33%. The ATTI Equipment Financing matures, as to specific loans,
on dates ranging from June 2000 to July 2001;
(ii) approximately $1.6 million to repay ATTI under a line of credit
extended subsequent to April 1998 by ATTI (the "ATTI Line of Credit"). The
annual interest rate on amounts advanced is 14%. The term of the ATTI Line of
Credit matures on the earlier of August 31, 1998 or the date by which the
Company is able to raise capital in excess of $8,000,000;
(iii) approximately $270,000 to repay TeleCapital, L.P. pursuant to a lease
financing agreement for Metrophone. The agreement provides for an effective
annual rate of approximately 15% and matures in July 2002;
(iv) approximately $120,000 to repay Manufacturers Bank pursuant to a lease
financing agreement for certain equipment. The agreement provides for an
effective annual rate of approximately 35% and matures in October 1999.
The Company regularly evaluates acquisition opportunities and may use a
portion of the net proceeds for future acquisitions, although there are no
present agreements or commitments with respect to any such transaction.
Pending such uses, the Company intends to invest the remaining net proceeds of
this Offering in investment-grade securities, including short-term, interest-
bearing money market funds.
15
<PAGE>
PRICE RANGE OF COMMON SHARES
The Common Shares are traded on the VSE under the symbol "DTV" and on the
OTCBB under the symbol "DWVSF."
The following table sets forth, for the fiscal quarters indicated, the high
and low closing prices for the Common Shares on the VSE as reported by the VSE
and the high and low bid information for the Common Shares, as regularly
quoted on the OTCBB. All closing prices reported by the VSE have been
converted to U.S. dollars based upon the exchange rates in effect on the date
of the transactions. All quotations for the OTCBB reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Trading on the OTCBB commenced in the second
quarter of fiscal 1998. All of the following prices have been adjusted to
reflect the Reverse Stock Split.
<TABLE>
<CAPTION>
VSE OTCBB
----------- ----------
HIGH LOW HIGH LOW
----- ----- ----- ----
<S> <C> <C> <C> <C>
Fiscal 1997
First Quarter......................................... $3.87 $2.77 $ -- $--
Second Quarter........................................ 4.09 2.66 -- --
Third Quarter......................................... 2.94 1.47 -- --
Fourth Quarter........................................ 2.46 0.64 -- --
Fiscal 1998
First Quarter......................................... 1.05 0.59 -- --
Second Quarter........................................ 2.37 0.50 2.36 0.48
Third Quarter......................................... 3.51 1.68 3.52 0.50
Fourth Quarter........................................ 8.48 2.07 8.24 2.15
Fiscal 1999
First Quarter (to , 1998 )..........................
</TABLE>
On June 2, 1998, the last reported sales price on the VSE was $5.90 per
share and the last reported bid price on the OTCBB was $5.75 per share. As of
May 26, 1998, the Common Shares were held by approximately 172 holders of
record.
16
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Shares.
The ATTI Equipment Financing and the ATTI Line of Credit contain restrictions
on the Company's ability to pay cash dividends. The Company currently intends
to retain its earnings, if any, to fund the development and growth of its
business and does not anticipate declaring or paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on an actual basis as adjusted to give effect to the exercise of
warrants to purchase 35,000 Common Shares by two Selling Shareholders and the
sale of 2,500,000 Common Shares offered by the Company hereby assuming an
Offering price of $10.00 per share, the payment of discounts and commissions
and estimated Offering expenses and the application of net proceeds therefrom.
See "Use of Proceeds." This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto
included elsewhere in this Prospectus. See "Use of Proceeds" and "Description
of Capital Stock."
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities:
Current portion of long-term debt.......................... $ 498 $ --
Long-term debt, excluding current portion.................. 1,021 --
------- -------
Total long-term liabilities.............................. 1,519 --
------- -------
Shareholders' equity:
Common Shares, no par value, 12,500,000 shares authorized,
6,609,541 shares issued actual; 6,706,332 shares issued
and outstanding and as adjusted(1)........................ 9,711 32,196
Share warrants............................................. 63 63
Accumulated deficit........................................ (8,160) (8,160)
------- -------
Total shareholders' equity................................. 1,614 24,099
------- -------
Total capitalization .................................... $ 3,133 $24,099
======= =======
</TABLE>
- --------
(1) Excludes 1,293,972 Common Shares reserved for issuance upon exercise of
options and warrants outstanding as of June 2, 1998. See "Description of
Capital Stock."
17
<PAGE>
DILUTION
The net tangible book value of the Common Shares as of March 31, 1998 was
$1,057,900 or $0.16 per share. "Net tangible book value per share" represents
the amount of net tangible book value (total tangible assets less total
liabilities), divided by the number of Common Shares outstanding. After giving
effect to the sale of the 2,500,000 Common Shares offered hereby by the
Company, and after deducting underwriting discounts and commissions and
estimated Offering expenses payable by the Company and receipt of the net
proceeds therefrom by the Company, and as adjusted to give effect to the
exercise of warrants to purchase 35,000 Common Shares by a Selling
Shareholder, the pro forma net tangible book value of the Company as of March
31, 1998 would have been $23,542,900, or $2.57 per share, representing an
immediate increase in pro forma net tangible book value of $2.41 per share to
existing shareholders and an immediate dilution of $7.43 per share to
purchasers of Common Shares in this Offering. The following table illustrates
the resulting per share dilution:
<TABLE>
<S> <C>
Assumed Offering price per share...................................... $10.00
Net tangible book value per share at March 31, 1998................. $ 0.16
Increase per share attributable to new shareholders................. $ 2.41
Pro forma net tangible book value per share after Offering............ $ 2.57
Dilution of net tangible book value per share to new shareholders..... $ 7.43
</TABLE>
If the over-allotment option is exercised in full, the pro forma net
tangible book value and dilution per share to new investors would be $2.86 and
$7.14, respectively.
The foregoing computations assume no exercise of stock options or warrants
prior to completion of the Offering. Options to purchase an aggregate of
898,987 Common Shares at exercise prices ranging from C$1.20 (US$0.85) to
C$9.00 (US$6.32) per share, with a weighted average exercise price of C$1.99
(US$1.40) per share, and warrants to purchase an aggregate of 359,985 Common
Shares at exercise prices ranging from C$0.80 (US$0.56) to C$6.23 (US$4.39),
with a weighted average exercise price of C$2.87 (US$2.02) per share, will be
outstanding and unexercised upon completion of the Offering. If all of such
stock options and warrants had been exercised at March 31, 1998, the pro forma
net tangible book value per share after the Offering would be $2.45,
representing an increase in pro forma net tangible book value of $2.29 per
share and dilution to new shareholders of $7.55 per share.
The following table summarizes the difference between existing shareholders
and new shareholders with respect to the number of Common Shares purchased
from the Company, the total consideration paid to the Company before deducting
estimated underwriting discounts and commissions and estimated Offering
expenses and the weighted average price paid per share by the existing
shareholders and by new shareholders purchasing Common Shares in the Offering,
at an assumed Offering price of $10.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders.. 6,566,422 71% $ 10,378,226 28% $ 1.59
New investors.......... 2,685,000 29 26,850,000 72 10.00
--------- --- ------------ --- ------
Total................ 9,251,462 100% $ 37,228,226 100% $ 2.91
========= === ============ === ======
</TABLE>
The foregoing information assumes no exercise of the Underwriters' over-
allotment option or the exercise of options and warrants to purchase 1,293,972
Common Shares outstanding as of June 2 1998.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SHARES OUTSTANDING)
The selected consolidated financial data set forth below as of and for the
fiscal years ended March 31, 1996, 1997 and 1998 have been derived from the
Consolidated Financial Statements of the Company which have been audited by
Deloitte & Touche, independent auditors. The selected consolidated financial
data for the fiscal years ended March 31, 1994 and 1995 is unaudited. The
Selected Consolidated Financial Data should be read in conjunction with, and
are qualified by, the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ 511 $ 1,263 $ 3,149 $ 9,676
Cost of revenues........ -- 431 1,076 3,439 6,211
Gross profit (loss)..... -- 80 187 (290) 3,465
Operating expenses...... 667 1,259 2,470 3,003 3,034
Operating (loss) income
....................... (667) (1,029) (2,283) (3,293) 431
Net (loss) income ...... $ (693) $ (1,052) $ (2,328) $ (3,626) $ 65
========= ========= ========= ========= =========
Net (loss) income per
Common Share(1)........ $ (0.27) $ (0.27) $ (0.46) $ (0.60) $ 0.01
========= ========= ========= ========= =========
Weighted average number
of Common Shares
outstanding............ 2,537,493 3,885,546 5,010,812 6,013,758 6,747,805
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)........................... $ (43) $ 20,923
Total assets........................................ 5,094 26,060
Long-term obligations, including current portion of
long-term debt..................................... 1,519 --
Shareholders' equity................................ 1,614 24,099
</TABLE>
- --------
(1) For information concerning the number of shares used in the computation of
net (loss) income per Common Share, see Note 2(l) to Notes to Consolidated
Financial Statements.
(2) As adjusted to give effect to the exercise of warrants to purchase 35,000
Common Shares by two Selling Shareholders and the sale of 2,500,000 Common
Shares offered by the Company hereby assuming an Offering price of $10.00
per share, the payment of discounts and commissions and estimated Offering
expenses and the application of net proceeds therefrom. See "Use of
Proceeds."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
DataWave designs, develops, produces, owns and manages a proprietary,
intelligent, automated direct-merchandising network known as the DataWave
System. The Company uses the DataWave System to distribute prepaid calling
cards, primarily under the AT&T brand. The DataWave System is scalable and
flexible and can be modified to offer other premium prepaid products such as
cellular telecommunications, paging and overnight courier services. The
DataWave System is comprised of DTMs, which are free-standing "smart" machines
capable of dispensing multiple prepaid products, and OTCs, for point-of-sale
prepaid retailing, both of which are connected to the Company's proprietary
server and database software through a wireless and/or land line wide area
network.
The Company was incorporated in 1986 and was initially a mining and
development company. In January 1994, the Company acquired North American
Photo Vending Inc. (which was subsequently renamed DataWave Vending (Canada)
Inc.). The management of DVI assumed managerial control of the Company and
initiated development of the DTM, which was first placed in operation in
fiscal 1996. Since the Company began selling prepaid calling cards utilizing
the DataWave System, revenues have increased substantially.
DataWave's operations were primarily based in the United States until June
1997, when the Company expanded its operations in Canada through its
acquisition of Phone Line International (PLI) Inc. ("PLI"). Effective April 1,
1998, the Company contributed the assets of PLI pursuant to an agreement with
DCI Telecommunications, Inc. to create PhoneLine, a joint venture operating a
switch-based telecommunications platform in Canada (See Note 5 to the
Consolidated Financial Statements). PhoneLine's revenues are primarily derived
from the direct sale of "live" prepaid calling cards to retailers.
The Company has derived, and believes that it will continue to derive,
substantially all of its revenues from the resale of prepaid long distance
telephone time supplied by long distance carriers. During the fiscal years
ended March 31, 1997 and 1998, the resale of prepaid long distance telephone
time supplied by MCI accounted for approximately 69% and 65% of revenues,
respectively. In December 1997, the Company's exclusive agreement with MCI was
terminated, although the Company continues to provide limited distribution of
MCI-branded prepaid calling cards. In January 1998, the Company entered into
non-exclusive agreements with AT&T, primarily to purchase long distance
telephone service from AT&T, which replaced its long distance supply
relationship with MCI. The Company's future growth is substantially dependent
upon its relationship with AT&T, and termination or non-renewal of its
agreements with AT&T would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Consolidated Financial Statements for the fiscal years ended March 31,
1996, 1997 and 1998, included herein, were previously prepared under Canadian
generally accepted accounting principles and stated in Canadian dollars. These
Consolidated Financial Statements have been restated to conform with United
States generally accepted accounting principles and are stated in United
States dollars.
20
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of revenues for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues............................................. 100% 100% 100%
Cost of revenues..................................... 85 109 64
------ ------ ------
Gross profit (loss).................................. 15 (9) 36
------ ------ ------
Operating expenses:
General and administrative.......................... 58 50 14
Selling and marketing............................... 51 25 6
Research and development............................ 16 5 1
Depreciation and amortization....................... 10 14 9
(Gain) loss on foreign exchange..................... (1) 1 1
Loss on investment in limited partnership........... 19 -- --
Loss on termination of distribution agreements
and write-down of related inventory................ 42 -- --
------ ------ ------
Total operating expenses............................. 195 95 31
------ ------ ------
Operating (loss) income.............................. (180) (104) 5
Interest expense..................................... (4) (11) (4)
------ ------ ------
Net (loss) income.................................... (184)% (115)% 1%
====== ====== ======
</TABLE>
The following table lists the number of DTM, OTC and non-networked machine
unit placements, and the retail locations, in which the Company's prepaid
calling cards are sold for each of the dates indicated.
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
DTM units............................................... 335 623 670
OTC units............................................... 146 407 439
Non-networked machine units............................. 0 179 189
Retail locations(1)..................................... 0 270 893
</TABLE>
--------
(1) For fiscal 1998, includes site contracts for 602 retail locations held
by PLI and contributed to PhoneLine effective April 1, 1998.
The Company's revenues have been and will continue to be substantially
dependent upon the number of unit placements and locations offering prepaid
calling cards. The Company has experienced several significant changes in
expenses in individual years during the three fiscal years ended March 31,
1998. In particular, the Company incurred write-downs of inventory and other
charges in fiscal 1996 relating to discontinuation of a line of equipment
which preceded the DTMs. In addition, the Company began an expense-cutting
effort in fiscal 1997, which continued during 1998, particularly with respect
to selling and marketing and general and administrative expenses. As a result
of the Company's increased revenues over the past three fiscal years and
because its principal operating expenses have not been consistent over
sequential periods, period-to-period expenses as percentages of revenues have
varied significantly. These percentages should not be relied upon as
indications of future performance.
21
<PAGE>
REVENUES
DataWave's revenues are primarily generated from the resale of prepaid long
distance telephone time. The Company recognizes revenue on the sale of prepaid
calling cards at the date of sale.
Revenues increased $6,527,869, or 207%, to $9,676,434 in fiscal 1998 from
$3,148,565 in fiscal 1997, and increased $1,885,404, or 149%, in fiscal 1997
from $1,263,161 in fiscal 1996. The substantial growth in revenues from fiscal
1996 to fiscal 1998 is primarily due to a greater number of units and
locations at which the Company's prepaid calling cards are sold and improved
utilization of the DataWave System as a result of reduced downtime. Growth in
the number of units and locations was partially achieved through acquisitions.
For the fiscal year ended March 31, 1998, one customer, Grand Union Company
("Grand Union"), accounted for approximately 11% of the Company's revenues.
Prior to fiscal 1998, substantially all of the Company's revenues were
generated in the United States. For the fiscal year ended March 31, 1998, the
Company's Canadian operations, which consisted of PLI, accounted for
approximately 22% of the Company's revenues. Effective April 1, 1998, the
Company contributed assets of PLI to PhoneLine. The Company's 40% interest in
PhoneLine will be recorded using the equity method and the results of PLI will
not be included in the Company's revenues in future periods.
COST OF REVENUES
DataWave's cost of revenues consists principally of payments to carriers who
provide long distance telephone time, commissions to landlords and site agents
for DTM and OTC placements and volume discounts to retailers in Canada. Cost
of revenues also includes various service-related and supply costs to maintain
the DataWave System.
Cost of revenues increased $2,772,498 to $6,211,310, or 64% of revenues, in
fiscal 1998, from $3,438,812, or 109% of revenues, in fiscal 1997, and
increased $2,362,434 in fiscal 1997 from $1,076,378, or 85% of revenues, in
fiscal 1996. The reduction in cost of revenues as a percentage of revenues in
fiscal 1998 as compared to fiscal 1997 is due to a reduction in the charges
for cost of time and other direct costs as a percentage of revenues. The
reduction in charges for cost of time is due to an increase in the resale of
promotional telephone time which is typically purchased by the Company at a
lower cost per minute, a lower cost per minute for revenues generated by PLI
and a reduction in the cost per minute due to a reconciliation of final
charges on long distance time purchased from telecommunication carriers. The
reduction in other direct costs is due to primarily a reduction in the
commissions paid to landlords and site agents and reduced service-related and
supply costs as a result of the reduced downtime associated with the DataWave
System. Also recorded in cost of revenues for the fourth quarter of fiscal
1997 is a $328,740 write-down for obsolete inventory. The increase in cost of
revenues as a percentage of revenues for fiscal 1997 from fiscal 1996 is due
primarily to greater upgrade and service costs associated with the DataWave
System and the aforementioned write-down for obsolete inventory.
GENERAL AND ADMINISTRATIVE
General and administrative expenses ("G&A") consist primarily of managerial
and administrative salaries and wages and other general expenses, which
include rent and legal, investor relations, office supplies and travel
expenses.
G&A decreased $160,827 to $1,425,578, or 14% of revenues in fiscal 1998,
from $1,586,405, or 50% of revenues in fiscal 1997, and increased $854,626 in
fiscal 1997 from $731,779, or 58% of revenues in fiscal 1996. The increase in
the G&A from fiscal 1996 to fiscal 1997 is principally due to greater payroll
and office operating expenses to support the Company's growth in revenues,
including expenses related to the opening of its U.S. sales and marketing
office. During the fourth quarter of fiscal 1997, the Company commenced an
expense-cutting effort, including reducing payroll and relocating its U.S.
sales and marketing office. Although the Company was able to sustain
substantial growth in revenues for fiscal 1998 without an increase in G&A, the
Company began hiring additional personnel in the latter half of fiscal 1998
and expects that its G&A will increase in the future as it continues to add
personnel and infrastructure.
22
<PAGE>
SELLING AND MARKETING
Selling and marketing expenses consist primarily of salaries and commissions
to its sales and marketing personnel and advertising and travel expenses.
Selling and marketing expenses decreased $222,096 to $551,599, or 6% of
revenues in fiscal 1998, from $773,695, or 25% of revenues in fiscal 1997, and
increased $135,049 in fiscal 1997, from $638,646, or 51% of revenues in fiscal
1996. In the fourth quarter of fiscal 1996, the Company increased its sales
force and opened a U.S. sales and marketing office, thereby increasing its
selling and marketing expenses during the same quarter and for all of fiscal
1997. Additionally, during fiscal 1997, an advance of $300,000 from MCI to
fund selling and marketing expenses was forgiven and was recorded as a
reduction in such expenses for that year. The decrease in selling and
marketing expenses for fiscal 1998 reflects the Company's expense-cutting
efforts that resulted in a reduction in its sales force and the relocation of
its U.S. sales office in the fourth quarter of fiscal 1997. Although the
Company was able to sustain substantial growth in revenues for fiscal 1998 the
Company began hiring additional personnel in the latter half of fiscal 1998
and expects its selling and marketing expenses to increase in the future.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and wages
for technical personnel.
Research and development expenses decreased $29,267 to $134,070, or 1% of
revenues in fiscal 1998 from $163,337, or 5% of revenues in fiscal 1997, and
decreased $43,372 in fiscal 1997 from $206,709, or 16% of revenues in fiscal
1996. The Company incurs research and development expenses relating to the
development of the DataWave System, and these expenses declined during fiscal
1997 and 1998 as the Company changed its primary focus from development to the
implementation and enhancement of the DataWave System. The Company, however,
began hiring additional technical personnel in the latter half of fiscal 1998,
and expects research and development expenses to increase in the future.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses consist primarily of depreciation of
machinery and equipment and amortization of goodwill relating to acquisitions.
Depreciation and amortization expenses increased $448,120 to $894,765, or 9%
of revenues in fiscal 1998, from $446,645, or 14% of revenues in fiscal 1997,
and increased $316,779 in fiscal 1997, from $129,866, or 10% of revenues in
fiscal 1996. The increase in depreciation and amortization over the past two
years is primarily due to the increase in DTM and OTC placements and
amortization of goodwill from acquisitions made during these periods. The
Company expects its depreciation and amortization expenses to increase in the
future due primarily to increased DTM and OTC placements and the
capitalization of approximately $1.7 million of goodwill incurred in the
acquisition of Metrophone in April 1998, which is expected to be amortized
over ten years.
OTHER EXPENSES
Other expenses consist of non-recurring expenses and interest expenses
pertaining to financing activities.
The loss on investment in limited partnership and the loss on termination of
distribution agreements and write-down of related inventory in the amounts of
$242,390 and $531,458, respectively, in fiscal 1996, are attributable to the
Company's decision to discontinue a line of equipment which preceded the DTMs.
Interest expense increased $31,936 to $365,576, or 4% of revenues in fiscal
1998, from $333,640, or 11% of revenues in fiscal 1997, and increased $288,713
from $44,927, or 4% of revenues in fiscal 1996. The increase was primarily due
to interest associated with long-term debt.
23
<PAGE>
COMPENSATION EXPENSE RELATED TO ESCROW SHARES
As a condition of the Company's acquisition of DVI in January 1994, 781,875
Common Shares were required by the BCSC to be placed in escrow including
561,875 Common Shares owned by current Directors, officers and employees of
the Company and 220,000 Common Shares held by outside shareholders. The escrow
shares are restricted from trading unless released from escrow as and if the
Company meets certain net income and positive cash flow requirements .
Requirements for release of the escrow shares had not been met as of March 31,
1998. In accordance with SEC positions on similar escrow arrangements, this
arrangement has been deemed to be compensatory for 561,875 shares contributed
to the escrow. Accordingly, the Company will record a non-recurring, non-cash
expense equal to the fair value of the shares at the time of their release
from escrow. Based on the assumed Offering price of $10.00 per share, the
amount of this charge would be $5,618,750. The Company expects to request an
early release of all the escrow shares upon or after completion of the
Offering, which, if approved, will result in recognition of this non-cash
expense in the fiscal quarter during which such release occurs.
INCOME TAXES
The Company has net operating loss carryforwards for tax purposes from prior
years. Accordingly, there was no provision for income taxes during fiscal
1998. At March 31, 1998, the Company had net operating loss carryforwards of
approximately $1.9 million in the United States and $4.4 million in Canada,
which can be used to offset future taxable income. To the extent not used,
these net operating loss carryforwards expire in varying amounts beginning in
2001. Approximately $850,000 of the U.S.-based net operating loss
carryforwards are subject to significant limitations on use.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial data
for the eight consecutive quarters ended March 31, 1998. In the opinion of
management, the unaudited information set forth below has been prepared on the
same basis as the audited information and includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
information set forth herein. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERLY RESULTS (IN THOUSANDS)
--------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................. $ 479 $ 759 $ 843 $ 1,068 $1,747 $3,105 $2,636 $2,188
Cost of revenues.......... 443 735 644 1,617 1,249 2,124 1,622 1,216
----- ----- ----- ------- ------ ------ ------ ------
Gross profit.............. 36 24 199 (549) 498 981 1,014 972
----- ----- ----- ------- ------ ------ ------ ------
Operating expenses:
General and
administrative.......... 318 338 465 465 254 329 366 477
Selling and marketing.... 184 198 (36) 428 92 155 159 146
Research and
development............. 44 40 43 36 22 19 39 53
Depreciation and
amortization............ 81 95 125 146 154 247 244 250
Loss on foreign
exchange................ 4 6 6 16 5 9 8 6
----- ----- ----- ------- ------ ------ ------ ------
Total operating expenses.. 631 677 603 1,091 527 759 816 932
----- ----- ----- ------- ------ ------ ------ ------
Operating (loss) income... (595) (653) (404) (1,640) (29) 222 198 40
Interest expense.......... 95 102 72 65 67 78 111 110
----- ----- ----- ------- ------ ------ ------ ------
Net (loss) income......... $(690) $(755) $(476) $(1,705) $ (96) $ 144 $ 87 $ (70)
===== ===== ===== ======= ====== ====== ====== ======
</TABLE>
The Company's revenues and operating results are subject to significant
variation from quarter to quarter due to a number of factors, including:
variations in sales generated from each DTM, OTC and retail location;
additions or reductions in the number of DTM, OTC and retail locations;
competitive pricing pressure; limitations on pricing imposed by long distance
tariffs; changes in the telephone rates paid by the Company to
24
<PAGE>
its telephone carriers; changes in operating expenses; the timing of the
introduction of new products and services; the mix of products and services
sold and the mix of channels through which they are sold; changes in
legislation and regulations which affect the competitive environment for the
Company's products and services; and other competitive and economic conditions
in the markets served by the Company. The Company's sales of prepaid calling
cards are seasonal, as many consumers purchase the cards while traveling
during the peak travel months of July, August and September. Sales decrease
during spring and fall and are lowest in the winter. The Company believes that
period-to-period statements of its operating results are not necessarily
meaningful, should not be relied upon as indications of future performance and
may result in volatility in the price of the Common Shares. Due to the
foregoing factors, among others, the Company's operating results will from
time to time be below the expectations of analysts and investors.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations principally through the
private placement of equity securities, asset based financing, and, in fiscal
1998, cash flow from operating activities. The Company had a working capital
deficit of $285,202 and $42,564 at March 31, 1997 and 1998, respectively.
The Company's operating activities used cash of $2,058,177 and $2,652,550 in
fiscal 1996 and 1997, respectively, primarily due to losses in those years,
and provided cash of $756,391 for fiscal 1998. Net cash used for investing
activities was $759,621, $438,626 and $1,514,214 for fiscal 1996, 1997 and
1998, respectively. Cash used for investing activity was attributable to
capital expenditures for machinery and equipment for all years and for
acquisitions in fiscal 1998. Cash provided by financing activities was
$2,158,997, $2,855,580, and $1,319,051 for fiscal 1996, 1997 and 1998,
respectively. Cash provided by financing activities resulted primarily from
the issuance of equity and asset based financing.
In October 1996, a subsidiary of the Company entered into the ATTI Equipment
Financing for up to approximately $2 million of equipment. Approximately $1.4
million was outstanding as of March 31, 1998 at an effective rate of
approximately 33% after taking into account interest on funds withheld as
collateral. The ATTI Equipment Financing matures as to specific leases on
dates ranging from June 2000 to July 2001 and is secured by a first charge
over the equipment and a general charge over all the assets of the Company
including its subsidiaries. As partial consideration for the financing
arrangement, the Company granted ATTI and an affiliate warrants to purchase
100,000 Common Shares at per share exercise prices ranging from C$1.16
(US$0.82) to C$3.12 (US$2.20).
Subsequent to March 31, 1998, the Company entered into the ATTI Line of
Credit which provides for borrowings of up to $5 million in three separate
tranches at an annual interest rate of 14%. Approximately $1.6 million was
outstanding under the ATTI Line of Credit at June 1, 1998. The term of the
ATTI Line of Credit expires on the earlier of August 31, 1998 and the date on
which the Company raises equity capital in excess of $8 million (the "Maturity
Date"). Amounts outstanding on the Maturity Date are converted to a fully
amortizing 30 month loan at an annualized rate of 14%. The ATTI Line of Credit
is secured by all assets of the Company and its subsidiaries, excluding the
Company's interest in PhoneLine. As partial consideration for the ATTI Line of
Credit, the Company agreed to issue to ATTI and an affiliate warrants to
purchase up to $1 million aggregate value in Common Shares, with the number of
warrants to be determined on a pro rata basis upon approval of each of the
three funding tranches based on the average closing price for the ten business
days preceding such approval. To date, warrants to purchase 72,902 Common
Shares have been issued to ATTI pursuant to the ATTI Line of Credit at a per
share exercise price of C$6.24 (US$4.39).
The Company also has an equipment financing agreement to finance certain pay
phones of Metrophone with Telecapital, L.P. The lease financing provides for
an approximate annual interest rate of 15% and matures on July 2002. As of
June 1, 1998, the total borrowings under the equipment financing were
approximately $270,000. In addition, the Company is indebted to Manufacturers
Bank pursuant to a lease financing agreement for an approximate amount of
$120,000 as of June 1, 1998. The agreement provides for an approximate
effective interest rate of 35% per annum, and matures on October 1999.
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The Company's revenue growth has in the past required, and is expected in
the future to require, significant capital, primarily associated with
equipment and other expenses related to the deployment and support of the
DataWave System and the deployment of additional pay phones. The Company
believes that the net proceeds from the Offering, together with the funds
anticipated to be generated from operations, will be sufficient to finance the
Company's operations for the next 12 months.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have a time-sensitive software that recognize a date using "00" as
the Year 1900. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, activate prepaid calling cards, or engage
in similar normal business activities. The Company has completed a preliminary
assessment and will have to modify portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The total Year 2000 cost is not expected to be material to the
Company's financial position or operating results and will be expensed as
incurred. The project is estimated to be completed no later than December 31,
1998, which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software, the Year 2000
will not pose significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 could have a material impact on the
operations of the Company. The Company's most significant risk on the Year
2000 issue relates to interfacing the DataWave System with the networks of
other business entities such as AT&T. The Company has initiated preliminary
communications with AT&T to determine the extent of Year 2000 issues. There is
no guarantee that the systems of AT&T on which the Company's distribution
network rely will be timely converted and would not have an adverse effect on
the Company's systems.The cost of the project and the date on which the
Company believes it will complete the Year 2000 modification are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, and similar uncertainties.
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BUSINESS
OVERVIEW
DataWave designs, develops, produces, owns and manages a proprietary,
intelligent, automated direct-merchandising network (the "DataWave System").
The Company uses the DataWave System to distribute prepaid calling cards,
primarily under the AT&T brand. The DataWave System is scalable and flexible
and can be modified to offer other premium prepaid products such as cellular
telecommunications, paging and overnight courier services.
The DataWave System is comprised of DataWave Telecard Merchandisers
("DTMs"), which are free-standing "smart" machines capable of dispensing
multiple prepaid products, and over-the-counter "swipe" units ("OTCs"), for
point-of-sale prepaid retailing, both of which are connected to the Company's
proprietary server and database software through a wireless and/or land line
wide area network. As of June 1, 1998, the DataWave System consisted of 743
DTMs and 420 OTCs. The DataWave System has been designed to work both with the
telephone switches of other parties as well as switches operated by the
Company. In the United States, the Company has elected to operate solely with
other parties' switches, such as those of AT&T and other long distance
carriers, while in Canada the Company operates a switch through a joint
venture.
INDUSTRY TRENDS AND MARKET BACKGROUND
The United States prepaid calling card market has grown from approximately
$20 million in sales in 1990 to almost $1.0 billion in 1996, and is expected
to grow to approximately $2.6 billion in sales by 2001 according to industry
data from The Yankee Group. The prepaid calling card market primarily targets
two groups of potential consumers: credit-challenged consumers and persons who
make long distance calls, both domestically and internationally, when they are
away from their home or office, such as business and other travelers. The
prepaid calling card market provides growth opportunities to long distance
companies because of the potential to reach new customers and reduce credit
and fraud risk.
The predominant channels of distribution for prepaid calling cards are
through retail establishments and traditional vending machines, most of which
sell "live" prepaid calling cards purchased in bulk. "Live" prepaid calling
cards are preactivated with telephone time prior to sale to the retailer.
These traditional channels of distribution require vendors to pay long
distance telephone time costs prior to sale and expose vendors to losses due
to theft and costs associated with the financing and management of inventory.
These channels are also inconvenient for consumers in that they limit the
customer's control of the transaction, method of payment and available
denominations and time of day of purchase. In addition, because the points of
sale in these traditional distribution channels are not networked, it is
difficult to optimize the management of operating expenses in connection with
the monitoring of cash balances, card inventory and machine functioning for
such points of sale.
In recent years, there has been a consumer trend in the United States
towards the use of cost-effective, self-service, automated distribution
systems that are conveniently located. Examples of this trend are the
increased use of automated teller machines and the use of credit cards at
gasoline station pumps. There has also been a trend towards increasingly
automated distribution systems and networked distribution systems which permit
superior information about, and management of, distribution. Examples of this
trend include the tracking network established by overnight delivery services
and the point-of-sale networks used by retailers to interface with management
inventory systems.
As consumers are increasingly looking for self-service and vendors are
increasingly looking for "smarter" distribution systems, there is an
opportunity to offer prepaid calling cards and telecommunications services as
well as other prepaid products and services via a "smart" distribution
network. The Company believes that it is well positioned to capitalize upon
the expanding prepaid calling card market and the market for other prepaid
products and services because of the features and benefits of the DataWave
System, as well as other components of the Company's strategy.
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THE DATAWAVE SYSTEM
The DataWave System offers unique features that benefit the Company, long
distance carriers, retail locations, consumers and other potential product and
service providers. The following features distinguish the DataWave System from
the traditional channels of distribution for prepaid products and services:
FEATURES BENEFITS
- -------------------------------------------------------------------------------
International wireless and landline .Enables international DTM and OTC
network distribution
.Permits flexibility and mobility
in site placement
- -------------------------------------------------------------------------------
Scalable and flexible network and . Enables the Company to offer a
point-of-sale architectures variety of branded products and
services and increase DTM and OTC
placements
. Permits integration into third
party switches eliminating post-
sale customer service obligations
of DataWave
- -------------------------------------------------------------------------------
Point-of-sale activation of prepaid . Reduces losses and shrinkage from
calling cards theft of "live" inventory
. Reduces inventory financing and
management control costs
- -------------------------------------------------------------------------------
Remote download of information to . Enables efficient updating of
DTMs and OTCs information including price and
tax changes
- -------------------------------------------------------------------------------
Remote self-diagnostic every three . Ensures efficient maintenance
minutes and servicing notification scheduling and reduces down time
via national paging network
- -------------------------------------------------------------------------------
Remote cash and inventory monitoring . Reduces operating expenses and
improves cash management
. Reduces down time by maintaining
inventory levels
- -------------------------------------------------------------------------------
Real-time credit card verifications, .Reduces credit risks
approval and limits
- -------------------------------------------------------------------------------
Consumer convenience: customer . Increases consumer appeal and
determined card amounts; cash or broadens potential consumer base
credit card acceptances; itemized
customer sales receipt; multi-
lingual instructions; 24 hour access
. Provides receipt for record of
charges, including taxes
- -------------------------------------------------------------------------------
Detailed audit trail of transactions . Permits timely and accurate
monthly commission payments
. Produces management information
such as DTM utilization history
and service history
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BUSINESS STRATEGY
The Company's business strategy is to become a leader in delivering premium
prepaid products and services such as calling cards, and in the future,
prepaid cellular telecommunications, paging and courier services through the
DataWave System. Key elements of the Company's business strategy are
summarized below:
. Increase penetration of premier site locations: The Company's objective
is to increase the number of DTM and OTC placements by increasing its
penetration of existing and new sites. To accomplish this objective, the
Company intends to develop new strategic relationships and expand its
current relationship with AT&T to gain access to sites such as airports,
hotel chains, shopping malls, travel plazas, supermarkets and other prime
locations.
. Expand strategic relationship with AT&T: The Company's relationship with
AT&T allows the Company to market prepaid calling card services under the
AT&T brand name, which is nationally recognized as representative of
quality telecommunications services. The Company seeks to expand its
current relationship with AT&T to contract with current and future AT&T
customers for installation of the DataWave System at client locations. The
Company also seeks to enter into additional relationships similar to its
recent agreement with AHA TelePLAN to market AT&T Prepaid Cards to the
approximately 6,000 American Hospital Association members throughout the
United States. The Company may also enter into new agreements with AT&T
for the provision and joint marketing of future products and services
similar to the recent agreement between AT&T and Metrophone for pay phone
services.
. Deliver new, premium prepaid product and service offerings: The Company
believes that the trend towards convenient, self-service, cost-efficient
merchandising provides it with the opportunity to utilize the flexibility
of the DataWave System to offer new prepaid products and services. The
Company currently provides prepaid calling cards and has recently begun
testing prepaid overnight courier services. The Company intends to offer
prepaid cellular telecommunications and paging services, and to otherwise
evaluate the market for potential new product and service offerings.
. Develop relationships with other providers of premium prepaid products
and services: The Company is continually evaluating new strategic
relationships that will enable it to offer additional premium prepaid
products and services of brand-name vendors. For example, the Company
recently entered into an agreement with Airborne Express for the testing
of prepaid overnight courier delivery available through the DataWave
System. The six-month test will involve between 50 and 150 DTMs enhanced
with an electronic drop box to allow for automated package pickup.
. Maintain electronic distribution network technological leadership: The
DataWave System's wireless, remote, real-time monitoring capabilities
provide superior consumer convenience and risk management compared to
traditional prepaid calling card channels of distribution. The Company
intends to continue to develop its proprietary technology in order to
enhance and improve the DataWave System and maintain its unique
technological advantages.
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DATAWAVE SYSTEM
[SCHEMATIC DIAGRAM OF THE DATAWAVE SYSTEM]
Each DTM machine is connected by a public wireless or land line network and
each OTC device is connected by land line to the Company's server, which in
turn is interfaced into credit card clearing houses and telecommunication
switches and to the Company's calling card management system. The Company's
network technology permits speed and ease of installation of DTMs and OTCs,
remote programming for price and tax rate changes, enhanced mobility and
portability, particularly when the DTM is connected by a wireless connection,
and on-line servicing and data transmission, which includes real time data
capture for transaction records used to generate monthly management and
statistic reports. The computerized management system enables the DTM to alert
the Company when accumulated cash should be picked up, when inventory levels
are low, when malfunctions occur or when other technical service is required.
The DTM is compact, can be wall mounted, counter mounted, flush wall mounted
or placed on a floor stand and holds up to 500 programmable prepaid calling
cards.
One of the principal features of the DataWave System is the ability to
activate a calling card by assigning to the calling card the amount of
telephone time purchased at the time of sale. When the appropriate amount of
cash has been deposited into the DTM (or given to retailers using the OTC
device), or when a credit card transaction has been approved, the DTM or OTC
contacts the DataWave server through its radio or land line modem, which in
turn forwards the activation request to the applicable long distance telephone
switch. The DTM or OTC reads the control number on the magnetic strip on the
back of the calling card and forwards the information to the long distance
telephone switch through the server. The long distance telephone switch
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acknowledges the control number and then associates the number with the long
distance time assigned to the calling card. Point of sale activation by the
DTM and OTC eliminates the need for the Company or a retailer to invest in an
inventory of preactivated "live" cards. This reduces the risk of vandalism to
the DTM and theft of the calling cards since the calling cards have no value
until purchased and activated, reducing inventory carrying costs and improving
management controls.
The Company has recently upgraded and enhanced the DataWave System, which
will allow the Company's computer system to support a larger number of
installed DTMs and OTCs. The Company has established a backup server for the
DataWave System at its New Jersey facility.
STRATEGIC RELATIONSHIP WITH AT&T
In January 1998, the Company entered into a series of agreements with AT&T
(the "AT&T Agreements") providing for, among other things, the purchase of
long distance telephone service from AT&T, the right to resell the service
under AT&T's brand name and the joint marketing and promotion of AT&T Prepaid
Cards and the DataWave System in the United States. AT&T is one of the world's
largest telecommunications providers, processing over 240 million calls per
day, and providing services to more than 280 countries and locations
worldwide. Pursuant to the AT&T Agreements, the Company is obligated to
purchase a minimum of $5.25 million of long distance telephone time each year
at a fixed rate. If the Company does not purchase such minimum amount, it
incurs a shortfall charge consisting of the cost of the time not purchased and
a penalty. The Company has the right to produce AT&T branded cards, machine
graphics and other promotional materials on a non-exclusive basis, including
display of the AT&T logo on its DTMs. AT&T provides a toll-free number for its
prepaid calling card customers as well as customer support and service. AT&T
also has provided funds for certain joint marketing efforts. The AT&T
Agreements commenced on March 1, 1998 and their initial term is for two years.
Although the Company has only recently begun to place DTMs and OTCs in
cooperation with AT&T, the Company expects that most of its additional
locations for DTMs and OTCs will be derived from relationships originated by
AT&T from its existing customer base. In April 1998, the Company commenced
joint marketing and promotional programs with AT&T including training of
certain AT&T sales personnel and performing joint sales calls with AT&T.
CANADIAN OPERATIONS
Effective April 1, 1998, the Company entered into an agreement with DCI
Telecommunications, Inc. to create PhoneLine, a joint venture engaged in the
marketing and sale of prepaid calling cards in Canada, which lacks a national
long distance carrier offering prepaid calling card services. Pursuant to the
joint venture agreement, the Company and DCI each made loans and contributed
certain assets to PhoneLine. In return, DCI received a 60% interest in
PhoneLine and the Company received a 40% interest. The Company has an option
to purchase from DCI an additional 9% interest in PhoneLine for approximately
$175,000. The Company and DCI also agreed not to compete in the Canadian
prepaid calling card market. In addition, the Company and DCI each have a
right of first refusal to purchase shares held in PhoneLine as well as the
right to initiate at anytime a buy-out of the other party's interest in
PhoneLine. At present PhoneLine sells "live" calling cards through
approximately 3,000 retail outlets. PhoneLine expects to expand its base of
retail outlets and also to introduce DTMs and OTCs into its system.
PhoneLine operates a telecommunications switch, located in Toronto, Ontario.
Switched long distance services are provided through switching and
transmission facilities that automatically route calls to circuits based upon
a predetermined set of routing criteria. A switch-based reseller purchases
long distance services on a variable, per-route basis from a long distance
carrier. A single international call, for example, may pass through the
facilities of multiple long distance resellers before it reaches the foreign
facilities-based carrier that ultimately terminates the call. PhoneLine is in
the process of negotiating rates with various long distance carriers in order
to obtain the lowest cost per call for its long distance services.
PhoneLine's principal administrative offices are in Vancouver, British
Columbia. PhoneLine employs 12 full-time persons, together with 12 independent
sales representatives.
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SERVICING OF THE DTMS
Each DTM performs a self-diagnostic evaluation every three minutes and
signals the DataWave System server in the event of circumstances requiring
attention. The evaluation contains information on inventory levels, cash
accumulation, machine malfunctions and when other technical service is
required. The diagnostic information by the DataWave System permits the
Company to evaluate and rate the urgency of the service required, thereby
permitting the efficient and economical coordination of service to the DTM.
The Company employs dedicated service personnel available by pager to
coordinate the installation, maintenance and servicing of its machines in
Texas, southern California and the northeast United States and has also
contracted with a national service provider and independent service agents to
perform these functions in other territories.
PRODUCTS AND SERVICES
EXISTING PRODUCTS AND SERVICES
Prepaid Calling Cards. In the United States, the Company distributes prepaid
calling cards primarily through the DataWave System and, to a lesser extent,
through a limited number of retailers. Prepaid calling cards can be purchased
from a DTM for any dollar denomination up to a limit of $100 using cash or a
credit card. Prepaid calling cards purchased from a retailer using an OTC
device can be purchased for specific dollar amounts up to $100 or for specific
allotments of long distance time. Calls using prepaid calling cards can be
made from any touch tone telephone by dialing a "1-800" number printed on the
back of the calling card and by providing the personal identification number
assigned to the calling card. When a calling card is used, a message informs
the user of how many prepaid telephone minutes remain on the calling card.
Once the total numbers of minutes or dollar amount on the calling card has
been used, the calling card may be discarded or, in the case of certain
carriers, recharged over any telephone. AT&T Prepaid Cards currently cannot be
recharged, although the Company expects to establish the ability to recharge
these cards in the near future. Typically, prepaid long distance calling cards
provide savings on calls made away from the office or home and provide the
same rate any time of day for domestic and international calls.
The Company also generates revenue through a loyalty prepaid calling card
program agreement with the Grand Union supermarket chain under which Grand
Union customers can earn MCI long-distance minutes each time they purchase
products at Grand Union stores. The Company also operates non-networked
prepaid calling card machines, which distribute "live" cards, that were
acquired in various acquisitions. The Company also supplies prepaid calling
cards to certain retailers which are "batch" activated with specific long
distance time when the retailer calls the Company. This is a small part of the
Company's business and is provided mainly to a single customer.
The Company purchases long distance time and services from several carriers,
although it expects that most of its future purchases will be supplied by
AT&T. See "Risk Factors--Risk of Termination of Carrier Arrangements;
Dependence on Telecommunications Providers."
"Intelligent" Pay Phone Products and Services. As part of its strategy to
increase site penetration and develop strategic relationships, the Company
acquired Metrophone in April 1998. Metrophone operates intelligent pay phones
in Washington, California, Arizona and Oregon which are networked to a
dedicated server, independent of the DataWave System. As a PSP, Metrophone
negotiates with local and long distance carriers for telecommunications
services. Long distance carriers pay Metrophone a percentage of the revenue
generated from collect and "800" number calls, and Metrophone pays a
commission or fee to the owner of the site where the pay phone is located. As
of June 1, 1998, Metrophone owned 210 intelligent pay phones. The Company has
begun marketing its DTMs in conjunction with its pay phones to existing and
prospective sites. The Company has also entered into a pay phone agreement
with AT&T, separate from the AT&T Agreements, to provide and advertise AT&T
long distance services from its pay phones.
As of November 1997, Metrophone entered into a five year contract with ARVC
pursuant to which Metrophone has the right to market its intelligent pay
phones. As of June 3, 1998, Metrophone had entered into 235 contracts for the
placement of 720 pay phones, of which 48 have been installed. The term of each
pay phone
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<PAGE>
site agreement is five years, subject to certain renewal provisions. In May
1998, DataWave entered into a three year contract with ARVC pursuant to which
the Company has the right to market the AT&T Prepaid Card directly to ARVC's
3,500 member sites.
Other Merchandising Services. The Company also operates merchandising
equipment for instant photographs, business card production and photo
stickers. These machines were obtained pursuant to the Company's acquisition
of Cardxpress Vending, Inc. and are operated in approximately 150 sites.
FUTURE PRODUCTS AND SERVICES
The DataWave System is scalable and flexible, permitting the Company to
offer new premium prepaid products and services through its network of DTMs.
The Company intends to offer the following:
Prepaid Courier Services. On April 17, 1998, the Company entered into an
agreement with Airborne Express providing for the testing of prepaid overnight
courier delivery services. Airborne Express is the third-largest air express
delivery carrier in the United States. During the six-month test period ending
in November 1998, approximately 50 to 150 of the Company's DTMs will be
equipped with an electronic drop box. Once a consumer drops a package in the
electronic drop box, a sensor will alert the Company's central computer, which
in turn will alert Airborne Express' dispatch center to pick up the package.
This system will eliminate the need for unnecessary routine pickup schedules
to those locations, thereby reducing costs. The consumer can purchase the
courier service using cash or a credit card, and will receive a tracking
number for each courier delivery request. Upon the completion of the six-month
test period, the Company and Airborne Express will decide whether to place
additional DTMs in other locations.
Prepaid Cellular Telecommunications. The Company is reviewing potential
strategic relationships to enter into the prepaid cellular telecommunications
market. The Company believes it is positioned to take advantage of the rapid
growth in the prepaid cellular, or wireless, telecommunications market, which
is expected to grow in the United States from approximately $360 million in
sales in 1997 to approximately $1.3 billion in sales in 2001, according to
industry data from the Yankee Group.
Prepaid Paging Services. The Company is reviewing potential strategic
relationships to enter into the prepaid paging services market, as the Company
believes that this market may provide future opportunities to utilize the
DataWave System.
Postage Stamps. The Company has recently introduced a limited number of DTMs
capable of selling U.S. postage stamps and is evaluating the feasibility of
this product offering.
SALES AND MARKETING
The Company employs both in-house sales and marketing personnel and
contracts with independent agents in the United States. The independent agents
generally concentrate on identifying new site locations and arranging site
contracts on behalf of the Company. The Company's sales and marketing strategy
now focuses on joint marketing efforts with AT&T. The Company has devoted five
full-time sales staff to promote such joint marketing efforts including
providing educational training and support to the AT&T sales force in
connection with the sales and marketing of the AT&T Prepaid Card and the
DataWave System. On May 4, 1998, the Company also began a telemarketing
program in support of its prepaid products and services.
COMPETITION
The prepaid calling card market is highly competitive and is served by
numerous international, national and local firms. In the United States, the
Company competes with major long-distance providers, including but not limited
to WorldCom, MCI and Sprint, as well as with other prepaid calling card
distributors including but not limited to, IDT Corporation, Pacific Gateway
Exchange, Inc., PT-1 Communications Inc., RSL Communications,
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SmarTalk Teleservices, Inc., Star Telecommunications, Inc. and Telegroup, Inc.
In Canada, the Company's competitors include BayLine Communications, Canada
Telecom Network, Inc., Cardinal VoiceCard, Ltd., Channel Telecom, Gold Line
Telemanagement Inc., Phonetime International, Inc. The Company also competes
with AT&T in certain locations where AT&T offers prepaid calling cards
directly or through other distributors. Many of these competitors have
significantly greater financial, technical and marketing resources, and much
larger distribution networks, and generate greater revenues and have greater
name recognition than the Company. These competitors may be able to institute
and sustain price wars, or imitate the features of the Company's DataWave
System products, resulting in a reduction of the Company's share of the market
and reduced price levels and profit margins. In addition, there are relatively
low barriers to entry into the prepaid calling card market, and the Company
has faced, and expects to continue to face, additional competition from new
entrants. In the United States, the Company also competes with prepaid calling
card distributors who also own and operate their own switch and transmission
platforms. Such distributors may provide long distance service at a lower cost
than the Company, and offer additional bundled features such as voicemail and
facsimile services.The barriers to entry into the independent pay phone
provider market are also low and there is substantial competition in this
market from both other independent pay phone providers and from the large
telecommunications carriers who dominate the pay phone market. The Company
believes that its ability to compete also depends in part on a number of
competitive factors outside its control, including the reliability of
competitors' products and services, the ability of competitors to hire, retain
and motivate qualified personnel, the price at which others offer comparable
services and the extent of its competitors' responsiveness to client needs.
There can be no assurance that the Company will be able to compete effectively
on pricing or other requirements with current and future competitors or that
competitive pressures will not materially adversely affect the Company's
business, financial condition and results of operations.
MANUFACTURING AND SUPPLY
Production of DTMs consists of the assembly and testing by the Company of a
high volume of quality components manufactured by third parties. The Company
is dependent on a limited number of suppliers for certain of its key
components, such as radio modems. The Company purchases component parts on a
purchase order basis and has no supply commitments from any of its suppliers.
Final assembly of the DTM and various quality control procedures are completed
at the Vancouver Facility. The Company then ships the DTM directly to the
service provider or site location where it is to be placed. OTC units are
supplied by VeriFone, Inc. The Company currently employs six persons in one
shift per day to assemble up to approximately 150 DTMs per month, and with a
second shift, the Company believes it could produce up to approximately 300
DTMs per month. Although the Company believes that its current manufacturing
capabilities will be able to produce sufficient DTMs through fiscal 1999,
there can be no assurance that the process will be adequate for unanticipated
future growth. The Company expects that it may be required to expand its
manufacturing capabilities or outsource such capabilities after fiscal 1999.
FACILITIES
The Company occupies approximately 9,000 square feet in Vancouver, British
Columbia for its executive offices and for assembly operations under a lease
expiring on March 31, 2001. DataWave Services (US) Inc. and Cardxpress occupy
approximately 3,900 square feet in Pompton Plains, New Jersey under a lease
expiring on June 14, 1999. Metrophone, leases approximately 2,750 square feet
in Bellevue, Washington pursuant to a lease expiring on October 31, 2000. The
Company believes that its current lease arrangements provide adequate space
for its foreseeable future needs as well as those of its subsidiaries.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other forms of intellectual
property protection to protect its proprietary technology. The Company has
filed two patent applications with the PTO, including one for the DTM and its
method of operation, which were denied because the PTO found previously
developed technology prevented patenting of the Company's
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technology. On May 13, 1997, the Company filed a continuation of the
application for the DTM and its method of operations with the PTO. In
addition, the Company has filed a patent application with the PTO for its
overnight courier pack disbursing mechanism. As of the date of this
Prospectus, no further communication had been received from the PTO regarding
these applications for the DTM and its method of operation. There can be no
assurance that any of the Company's pending patent applications will issue and
if issued, whether the claims allowed are or will be sufficiently broad to
protect the Company's technology. The Company owns a United States federal
registration for the trademark "DATAWAVE" and design. There can be no
assurance that the Company's operations do not or will not violate the
intellectual property rights of others, that they would be upheld if
challenged or that the Company, would, in such an event, not be prevented from
using such Company's intellectual property rights, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, failure of the Company to obtain needed licenses from third
parties for other technology and intellectual property could delay or prevent
the development, manufacture or sale of products. Although the Company relies,
in part, on contractual provisions to protect its trade secrets and
proprietary know-how, there is no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently developed by competitors. Although no lawsuits against the
Company regarding infringement of any existing patents or other intellectual
property rights are pending, nor have any claims been asserted, there can be
no assurance that such infringement claims will not be asserted by third
parties in the future. There also can be no assurance in the event of such
claims of infringement that the Company will be able to obtain licenses on
reasonable terms. The Company's involvement in any intellectual property
dispute or action to protect trade secrets and know-how, including actions
brought by the Company, could result in a material adverse effect on the
Company's business. Adverse determinations in litigation in which the Company
may become involved could subject the Company to significant liabilities to
third parties, require the Company to grant licenses to or seek licenses from
third parties and prevent the Company from manufacturing and selling its
products. Any of these situations could have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
regulations and legislation affecting the telecommunications industry. Other
existing federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company can be predicted at this time.
The telecommunications industry is highly regulated in the United States at
the federal, state and local levels and in Canada at the federal, provincial
and local levels. Various international authorities may also seek to regulate
the services provided or to be provided by the Company. In the United States,
federal laws and the regulations of the FCC generally apply to interstate
telecommunications, while state public utility commissions, public service
commissions or other state regulatory authorities generally exercise
jurisdiction over telecommunications that originate and terminate within the
same state. The FCC and state regulatory authorities may address regulatory
non-compliance with a variety of enforcement mechanisms, including monetary
forfeitures, refund orders, injunctive relief, license conditions, and/or
license revocation. In Canada, federal laws and the regulations and rulings of
the CRTC generally apply to telecommunications companies.
The regulation of the telecommunications industry is changing rapidly and
the regulatory environment varies substantially from state to state. Moreover,
as deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to telecommunications
companies. There can be no assurance that future regulatory, judicial or
legislative activities will not have a material adverse effect on the
Company's business, financial condition and results of operations.
35
<PAGE>
United States. The Company is a switchless distributor of long distance
telephone time purchased from carriers such as, but not limited to, AT&T and
MCI. The Company believes that it is not regulated as a carrier because the
Company's name is not on its prepaid calling cards and the telephone number on
the prepaid calling cards is that of the underlying, regulated carrier and not
that of the Company. Accordingly, the Company has not obtained any federal or
state authorizations. To the extent that federal or state regulators enforce
applicable laws and regulations differently, the Company may be found in
violation of such laws or regulations and may be required to alter its
business strategy.
The Company recently determined that, in certain instances during calendar
1998, the Company's rates for telecommunications services were above those
specified in the tariffs of the underlying carrier. In these instances,
certain states and the FCC would likely deem the Company to have been acting
as a carrier and to have been operating in non-compliance with the requirement
that such carriers be certified and/or have their own tariffs on file. As a
result of such non-compliance, the FCC and state regulators could subject the
Company to fines, penalties, or other sanctions which, in certain
circumstances, could be applied on a per day or per violation basis. In June
1998, the Company adjusted its rates for prepaid calling card services to the
rates specified in the long distance tariffs of its underlying carriers and
therefore believes it is compliant with the foregoing regulatory requirements.
In addition, the regulation of prepaid calling card providers, particularly
by state regulators is, unsettled. Even where the Company's rates do not
exceed the tariffed rate, state and federal regulators might attempt to assert
jurisdiction over the Company's operations. Certain states in which the
Company operates, such as Florida and Louisiana, have promulgated specific
laws or regulations regarding prepaid calling cards. Such laws or regulations
may require, among other things, that the cards specify cost-per-minute, extra
fees, expiration dates, and toll-free customer service telephone numbers.
Although the Company believes that it is or will be able to comply with state
laws and regulations, there can be no assurance that such laws or regulations
will not have a material adverse effect on the Company's business, financial
condition or results of operation.
The sale of long distance telephone service through prepaid calling cards
may be subject to "escheat" laws in various states. These laws generally
provide that payments or deposits received in advance or in anticipation of
the provision of utility services, including telephone service, that remain
unclaimed for a specific period of time after the termination of such services
are deemed "abandoned property" and must be submitted to the state. In the
event such laws are deemed applicable. In such event, the Company may be
required to deliver such amounts to certain states in accordance with these
laws, which could have a material adverse effect on the Company's business,
financial condition or results of operations.
Pursuant to the Telecommunications Act of 1996 (the "Communications Act"),
the FCC was granted the authority to implement certain policy objectives,
including the establishment of the Universal Service Fund. The purpose of the
Universal Service Fund is to subsidize the provision of local
telecommunications services to low-income consumers, schools, libraries,
health care providers and rural and insular areas that are costly to serve.
Pursuant to an FCC order (the "Universal Service Order"), Universal Service
fund contributions are generally equal to approximately four percent of a
carrier's interstate and international gross revenues, and approximately one
percent of its intra-state "end user" gross revenues, effective January 1,
1998. The FCC will adjust the amount of these contributions each calendar
quarter, and they may increase significantly in future periods. The Company's
underlying carriers may pass their respective costs through to the Company.
AT&T has included a charge for the Universal Service Fund in its most recent
biling to the Company.
The Company's wholly owned subsidiary, Metrophone, provides pay phone
services in the United States. PSPs are subject to certain federal and state
regulations. The 1996 amendments to the Communications Act empowered the FCC
to promulgate rules to assure that PSPs and Independent Pay Phone Providers
("IPP") are fairly compensated for each completed intrastate and interstate
call initiated at a pay phone. This authority has been interpreted by the FCC
and a reviewing court to empower the FCC to regulate rates for pay phones,
including rates for local coin calls, and to preempt the power previously
exercised by the state regulatory commissions to set these rates. The FCC has
adopted a scheme that allows local pay phone call rates to be established by
market forces. On
36
<PAGE>
May 15, 1998, the United States Court of Appeals for the District of Columbia
Circuit reviewed a challenge to the compensation scheme adopted by the FCC,
and found inadequate the FCC's explanation of its market-based rate.
Recognizing the disruption that would result in the industry if the FCC's
order was vacated, the court remanded the FCC rule for further explanation,
leaving intact the current FCC rule pending the outcome of these proceedings.
The FCC's rules governing PSPs require that local exchange carriers make
available and transmit pay phone-specific coding digits to PSPs on a tariffed
basis, and that PSPs transmit these digits from pay phones to interexchange
carriers ("IXCs") as a condition to receiving per-call compensation from IXCs
for toll-free and access code calls placed from pay phones. This requirement
has been partially waived to allow PSPs to receive compensation for such calls
pending network changes that are necessary to allow PSPs to transmit pay
phone-specific coding digits. The waiver has been the subject of litigation
and the Company cannot be certain that the waiver will be maintained for as
long as will be necessary for the Company to comply with the coding digit
requirements. Other federal regulations require PSPs to offer, among other
things, unrestricted access from their pay phones to operator service
providers ("OSP"), the prompt routing of emergency calls and keypads that
include both numbers and letters. PSPs that fail to provide unrestricted
access are not entitled to receive commissions due from OSPs. FCC regulations
also impose obligations for posting in the pay phone certain consumer
information.
Notwithstanding federal preemption of state rate authority, state
commissions continue to have authority to regulate certain aspects of PSPs'
activities, including public interest pay phone programs, reporting
requirements, the location of pay phones and quality of service standards. For
instance, PSPs may be required in certain states to install volume
amplification devices and to insure the capability of pay phones to place both
outgoing calls and receive incoming calls.
In most states, PSPs and IPPs such as the Company may not install or offer
use of a pay phone unless that telephone has the capability of accepting an
emergency "911" call, and in some cases calls to an operator, without the need
for the caller to insert a coin or to make any other type of payment. In
certain cases, any expenses incurred in converting the capability of an
existing pay phone may be considered a cost of complying with a state's
emergency communications program, which may allow the PSP or IPP to receive
compensation from pay phone user fees upon approval of such conversion costs
by the state PUC. Some state laws assess fees for the inspection and
supervision of pay phone facilities. A state also may subject PSPs and IPPs to
pay phone taxes, and may prohibit the PSP or IPP from spreading the burden of
these taxes to all billed customers. Some state laws regulate the types of
calls which may be placed from a pay phone, particularly prohibiting calls to
700, 900, 950 or 800 numbers, other than the 800 number printed on the card.
Additionally, some states prohibit PSPs and IPPs from imposing any charge on
local directory assistance calls.
Canada. Because PhoneLine is a reseller of long-distance telephone time
purchased from carriers such as Fonorola, it is required to register with the
CRTC but is not otherwise directly regulated as a carrier by the CRTC or
provincial regulatory authorities. As the CRTC regulates the carriers which
supply the telephone time resold by PhoneLine, PhoneLine is indirectly subject
to CRTC decisions applicable to those carriers.
TAX MATTERS
United States. There is currently a 3% excise tax assessed on the retail
value of the long distance telephone time resold by the Company as well as a
4.4% universal tax assessed on the wholesale price of long distance telephone
time by federal regulation. These taxes are included in the cost to the
Company of its purchase of long distance time from AT&T. The taxation of
prepaid telephone cards sales and use is evolving and is not specifically
addressed by the laws of many of the states in which the Company does
business. Some states and localities charge a tax on the point-of-sale
purchase of prepaid telephone cards while others charge a tax on usage of
prepaid telephone cards. While the Company believes that it has adequately
reserved for any state taxes it may ultimately be required to pay, there can
be no assurance that this will be the case. In addition, certain states may
enact legislation which specifically provides for taxation of prepaid
telephone cards or may interpret current laws in a manner resulting in
additional tax liabilities.
37
<PAGE>
Canada. Certain Canadian provinces may impose a direct point of sale tax on
long distance telephone charges or other telecommunications services.
Depending on the jurisdiction involved, this tax may be included in the cost
to the Company of its long distance time from its long distance providers, or
the Company may be able to acquire the long distance telephone time exempt of
the tax and simply pass on the charge to its customers with the sale of
prepaid calling cards. As in the United States, the taxation of prepaid
telephone card sales and use is evolving and may not be specifically addressed
by the laws of Canada or many of the provinces in which the company does
business. While the Company believes it has adequately reserved for any taxes
it may ultimately be required to pay, there can be no assurance that this will
be the case; and neither the Company nor its advisors have yet undertaken any
independent investigation in this regard. In addition, Canada or certain
provinces could enact legislation, which specifically provides for taxation of
prepaid telephone cards or may interpret current laws in a manner resulting in
additional tax liabilities. In addition, because the manufacturing or the
Company's DTMs and OTCs occurs in Canada for subsequent sale to the United
States, there is a possibility that either Canada or the United States taxing
authorities could take issue with the Company's agreed upon transfer price.
While the Company believes that the transfer prices charged between the
Company and its related affiliates are appropriate, there is a possibility
that additional tax could be paid in Canada if Revenue Canada takes issues
with the prices charged, and reassess on the basis that greater income should
have been realized in Canada.
EMPLOYEES
As of June 1, 1998, the Company had 58 employees, 12 in management and
administrative positions, 14 in the sales and marketing group, eight in
manufacturing and assembly positions, seven in research and development and 17
in a service and support capacity. None of the Company's employees is a member
of a labor union or is covered by a collective bargaining agreement.
LEGAL PROCEEDINGS
The Company entered into an agreement with Frontier in April 1997 to provide
Frontier's services through the Company's DTMs and OTCs through August 4,
1999. In October 1997, Frontier terminated its contract to provide the Company
with long distance time and service. In 1998, the Company delivered demand
letters to Frontier stating that Frontier had breached its agreement and
requesting settlement discussions. To date no response has been received from
Frontier.
The Company is not aware of any pending legal proceedings against the
Company that, individually or in the aggregate, would have a material adverse
effect upon the Company's business, results of operations or financial
condition.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth the names, ages and titles of the executive
officers, Directors and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Clive Barwin(1)..................... 44 Chief Executive Officer, President and Director
Peter Hough(1)(2)................... 40 Chief Financial Officer, Secretary and Director
Joshua Emanuel(3)................... 47 Vice President of Sales and Marketing
Garth Braun(2)(4)................... 39 Director
Louis Eisman(2)(4).................. 55 Director
</TABLE>
- --------
(1) Executive officer.
(2) Member of Canadian Audit Committee.
(3) Mr. Emanuel is employed by DataWave Services (US) Inc.
(4) Member of United States Audit Committee and the Compensation Committee.
Mr. Barwin has been the President and a Director of the Company since
November 1993. He has served as the Company's Chief Executive Officer since
March 1997 and for the period from September 1994 to October 1996. From 1984
to 1992, Mr. Barwin was President and Chief Executive Officer of Modatech
Systems, Inc. ("Modatech"), which was involved in developing and marketing
sales force automation software for Fortune 1000 companies and other
businesses. Prior to 1984, Mr. Barwin was Chief Financial Officer of Mr. Jax
Fashions, Inc., a Canadian company specializing in the manufacturing and sale
of women's apparel. Mr. Barwin received a Bachelor of Commerce Degree from the
University of Witwatersrand, South Africa, and a Chartered Accountant
designation from Transvaal, South Africa.
Mr. Hough has been a Director of the Company since August 1993.
Additionally, he has served as the Company's Secretary since August 1997 and
as the Company's Chief Financial Officer since March 1997 and for the period
from September 1994 to April 1996. From April 1996 through March 1997, Mr.
Hough served as the Company's Vice President of Operations. Prior to 1992, Mr.
Hough served as the Chief Financial Officer and Vice President of Development
and Client Services for Modatech. Mr. Hough received a Bachelor of Commerce
Degree from the University of Witwatersrand, South Africa, and is qualified as
a Chartered Accountant in Canada.
Mr. Emanuel has been Vice President of Sales and Marketing of DataWave
Services (US) Inc. since March 1997. Since 1983, Mr. Emanuel has served in
various executive capacities in several private companies, including
Interurbain, a prepaid card company acquired by the Company, Colorama Photo,
Inc., a one-hour photo lab company, and Freemont Quality Products, a
distributor of sporting goods. Mr. Emanuel received a Bachelor of Mechanical
Engineering Degree from Arya-Mehr University of Technology, Iran.
Mr. Braun has been a Director of the Company since August 1997. Since
November 1992, Mr. Braun has been the Chief Executive Officer of Karmel
Capital Corporation, a Canadian real estate development company. Mr. Braun
also serves as a Director of RJZ Mining Corporation, Cabo Exploration Ventures
Inc. and Uganda Gold Mining Ltd. Mr. Braun received a Business Administration
Degree from Simon Fraser University, Canada.
Mr. Eisman has been a Director of the Company since August 1997. From 1980
through 1992, Mr. Eisman was the President and Chief Executive Officer of Mr.
Jax Fashions, Inc. Since 1980, Mr. Eisman has been a Director of Eisman
Holdings Ltd., where he manages a private venture capital investment fund.
39
<PAGE>
Executive officers of the Company are appointed by the Board and serve at
its discretion. All Directors hold office until the next annual shareholders'
meeting of the Company or until their successors have been duly elected and
qualified. There are no family relationships between any of the executive
officers or Directors of the Company. The Company anticipates appointing one
additional non-employee Director within six months of this Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board maintains two audit committees. The Canadian audit committee,
consisting of Messrs. Hough, Braun and Eisman, reviews the results and scope
of the annual audit and the services provided by the Company's independent
auditors. The United States audit committee, consisting of Messrs. Braun and
Eisman, separately reviews the results and scope of the annual audit and the
services provided by the Company's independent auditors.
The Board also maintains a compensation committee consisting of Messrs.
Braun and Eisman (the "Compensation Committee"). The Compensation Committee
establishes and administers the compensation of officers and employees of the
Company and will administer the Company's compensation programs, including the
grant of stock options. See "--Incentive Plans."
DIRECTOR COMPENSATION
The members of the Board may be reimbursed for such reasonable travel
expenses incurred in attending Board meetings. To date, the members of the
Board have not received any monetary compensation. However, the two outside
Directors, Messrs. Braun and Eisman, each received an initial grant of options
to purchase 25,000 Common Shares at an exercise price of C$1.20 (US$0.85) per
share as compensation for serving on the Board.
EMPLOYMENT AGREEMENTS
Upon the closing of this Offering, the Company plans to enter into an
employment agreement with Clive Barwin, the Chief Executive Officer and
President, for a term of three years. The agreement will provide for a minimum
annual base salary of $200,000, annual incentive compensation of up to 100% of
the current base salary and benefits under the Company's benefit plans. The
agreement also will provide, among other things, that if Mr. Barwin's
employment with the Company is terminated (i) by the Company for cause (as
defined in the agreement), the Company will pay to Mr. Barwin his base salary
and benefits through the date of termination; or (ii) by the Company without
cause or by Mr. Barwin for good reason (as defined in the agreement), all
outstanding unvested options held by Mr. Barwin will immediately vest and the
Company will pay Mr. Barwin a lump sum amount equal to the discounted present
value of 24 months of his base salary plus 100% of the maximum amount of
incentive compensation Mr. Barwin could have earned during the year in which
the termination occurs. Benefits substantially similar to those set forth in
clause (ii) above are provided in the event of termination of Mr. Barwin's
employment due to death or disability. Pursuant to this agreement, Mr. Barwin
will also receive an option to purchase at least 100,000 Common Shares per
year at an exercise price equal to the fair market value of such stock on the
date of grant, which shall vest monthly over a two-year period.
Upon the closing of this Offering, the Company plans to enter into an
employment agreement with Peter Hough, the Chief Financial Officer and
Secretary, for a term of three years. The agreement will provide for a minimum
annual base salary of $160,000, annual incentive compensation of up to 100% of
Mr. Hough's then current base salary and benefits under the Company's benefit
plans. The agreement also will provide, among other things, that if Mr.
Hough's employment with the Company is terminated (i) by the Company for cause
(as defined in the agreement), the Company will pay to Mr. Hough his then
current base salary and benefits through the date of termination; or (ii) by
the Company without cause or by Mr. Hough for good reason (as defined in the
agreement), all outstanding unvested options held by Mr. Hough will
immediately vest and the Company will pay Mr. Hough a lump sum amount equal to
the discounted present value of 18 months of his then current base salary plus
100% of the maximum amount of incentive compensation Mr. Hough could have
earned during
40
<PAGE>
the year in which the termination occurs. Benefits substantially similar to
those set forth in clause (ii) above are provided in the event of termination
of Mr. Hough's employment due to death or disability. Pursuant to this
agreement, Mr. Hough will also receive an option to purchase at least 50,000
Common Shares per year at an exercise price equal to the fair market value of
such stock on the date of grant, which vest monthly over a two-year period.
EXECUTIVE COMPENSATION
The following table sets forth a summary of certain information concerning
compensation paid by the Company for the services rendered during the fiscal
years ended March 31, 1998, 1997 and 1996 with respect to the Chief Executive
Officer and Chief Financial Officer (collectively, the "Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- -------------------
NUMBER OF SHARES
NAME AND PRINCIPAL UNDERLYING
POSITION FISCAL YEAR SALARY ($) BONUS ($) OPTIONS GRANTED (#)
- ------------------ ----------- ---------- --------- -------------------
<S> <C> <C> <C> <C>
Clive Barwin.............. 1998 $78,400 -- 345,062(1)
Chief Executive Officer 1997 75,062 -- --
and President 1996 62,063 -- 62,500(2)
Peter Hough............... 1998 $69,300 -- 345,062(3)
Chief Financial Officer 1997 67,200 -- --
and Secretary 1996 53,200 -- 37,500(4)
</TABLE>
- --------
(1) This number includes options to purchase 226,312 Common Shares granted in
the fiscal year ended March 31, 1998 as well as the following repriced
options to purchase: (i) 62,500 Common Shares originally granted on
January 1, 1996, which were repriced from $3.53 to C$1.20 (US$0.85) per
share on May 20, 1997 and (ii) 56,250 Common Shares originally granted in
November 1993, which were repriced from $2.82 to C$1.20 (US$0.85).
(2) As noted in footnote (1), these options were repriced in May 1997.
(3) This number includes options to purchase 276,312 Common Shares granted in
the fiscal year ended March 31, 1998 as well as the following repriced
options to purchase: (i) 37,500 Common Shares originally granted on
January 8, 1996, which were repriced from $3.66 to C$1.20 (US$0.85) per
share and (ii) 31,250 Common Shares originally granted on November 16,
1993, which were repriced from $2.82 to C$1.20 (US$0.85) per share.
(4) As noted in footnote (3), these options were repriced in May 1997.
41
<PAGE>
OPTION GRANTS, EXERCISES AND HOLDINGS
Option Grants
The following table sets forth information concerning options granted to the
Executive Officers during the fiscal year ended March 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(5)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) FISCAL 1998(2) SHARE(3) DATE(4) 5% 10%
- ---- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Clive Barwin............ 64,750 7.6% $0.85 05/16/02 $ 15,206 $ 33,601
101,562 11.9 1.13 08/01/02 31,707 70,065
60,000 7.0 1.86 09/26/02 30,833 68,133
Peter Hough............. 41,500 4.8 0.85 05/16/02 9,746 21,536
174,812 20.4 1.13 08/01/02 54,576 120,599
60,000 7.0 1.86 09/26/02 30,833 68,133
</TABLE>
- --------
(1) The options granted to the Executive Officers were made pursuant to the
Company's 1997 Stock Option Plan ("1997 Plan"). The options granted to the
Executive Officers are not subject to a vesting period. See "--Incentive
Plans--1997 Stock Option Plan."
(2) Based on options to purchase an aggregate of 856,500 Common Shares granted
to Directors, employees and Executive Officers in the fiscal year ended
March 31, 1998.
(3) The exercise prices were established at fair market value as determined in
accordance with the 1997 Plan.
(4) The options may be exercised at any time up until the expiration date
subject to certain early termination provisions. See "--Incentive Plans--
1997 Stock Option Plan."
(5) This column shows the hypothetical gains on the options granted based on
assumed annual compound stock appreciation rates of 5% and 10% over the
full five-year term of the options. The assumed rates of appreciation are
mandated by the rules of the SEC and do not represent the Company's
estimate or projection of future prices of its Common Shares.
Option Exercises and Holdings
The following table sets forth certain information regarding option
exercises during the fiscal year ended March 31, 1998 and the value of
unexercised options held as of March 31, 1998 by the Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT MARCH 31, 1998 AT MARCH 31, 1998(2)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clive Barwin............ 62,500 $63,750 282,562 -- $1,756,093 --
Peter Hough............. 62,500 63,750 282,562 -- 1,735,582 --
</TABLE>
- --------
(1) The value realized is based on the closing price of $1.87 for the Common
Shares on the VSE on the exercise date, less the exercise price of the
option.
(2) The value of unexercised in-the-money options is calculated based on the
difference between the closing price of $7.38 of the Common Shares on the
VSE on March 31, 1998 and the option exercise price for each such option.
42
<PAGE>
INCENTIVE PLANS
The Company has established two stock option plans for the Company's
employees, Directors and consultants. The Company does not intend to grant any
further options pursuant to the Company's 1997 Plan, and the Company has not
yet granted any options pursuant to the Company's 1998 Stock Option Plan (the
"1998 Plan").
1998 Stock Option Plan. The 1998 Plan provides for grants to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and for grants to employees,
Directors and consultants of non-qualified stock options, restricted stock and
stock bonuses. The purposes of the 1998 Plan are to attract and retain the
best available personnel for positions of substantial responsibility, to
provide additional incentives to the employees and consultants of the Company
and to promote business.
The 1998 Plan authorizes the grant of options to purchase a total of
2,000,000 Common Shares. As of the date of this Prospectus, no options to
purchase Common Shares under the 1998 Plan were outstanding and all of these
shares are available for future grant under the 1998 Plan.
The 1998 Plan is administered by the Compensation Committee of the Board.
The Compensation Committee has the power to determine the terms of the options
granted, including the exercise price, the number of shares subject to the
option and the exercisability thereof, and the form of consideration payable
upon exercise. Except as permitted by the Compensation Committee, options
granted under the 1998 Plan will not be transferable by the optionee, and each
option is exercisable during the lifetime of the optionee only by such
optionee. The exercise price of all incentive stock options granted under the
1998 Plan must be at least equal to the fair market value of the Common Shares
on the date of the grant. The exercise price of non-qualified stock options
may not be less than 85% of the fair market value of a Common Share on the
date of grant. With respect to any optionee who owns 10% or more of the
Company's outstanding capital stock, the exercise price of all options granted
to such optionee must equal or exceed 110% of the fair market value of the
Common Shares on the grant date and the term of the option must not exceed
five years. The aggregate fair market value of the Common Shares (determined
at the time the option is granted) with respect to which incentive stock
options granted to any individual first become exercisable in any calendar
year shall not exceed $100,000. No more than 300,000 Common Shares may be
granted pursuant to options to any one person under the 1998 Plan in any
single fiscal year. The term of all options (other than options granted to any
optionee who owns 10% or more of the Company's outstanding capital stock) may
not exceed ten years. Stock options and performance-based restricted stock
granted under the 1998 Plan are intended to be "performance-based
compensation" and therefore not subject to the deduction limitation of Code
Section 162(m).
The Compensation Committee may grant restricted shares, i.e., Common Shares
which are subject to transfer restrictions determined by the Compensation
Committee and subject to substantial risk of forfeiture unless and until
specific conditions established by the Compensation Committee at the time of
grant are met. Such conditions may be based on continuing employment or
achievement of pre-established performance goals, or both, as determined by
the Compensation Committee.
The 1998 Plan also authorizes the Compensation Committee to award or to
offer bonuses of Common Shares, either restricted or unrestricted, and as
current or deferred compensation, in lieu of all or any portion of the cash
compensation to which the employee is entitled, for a number of shares having
a value on the grant date equal to the amount of such cash compensation.
The Company will account for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and will adopt the disclosure-only alternative described in
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation." Restricted and unrestricted stock bonuses under the 1998
Plan would, however, involve an earnings charge.
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<PAGE>
The 1998 Plan was approved by the Board on , 1998, and, subject to
shareholder approval, will be effective as of , 1998. Unless terminated
sooner, the 1998 Plan will terminate automatically on , 2008. The Board
has the authority to amend, suspend or terminate the 1998 Plan, subject to any
required shareholder approval under applicable law. Notwithstanding the
foregoing, no amendment, suspension or termination of the 1998 Plan shall
alter or impair an interest granted to a beneficiary under the 1998 Plan
without such beneficiary's written consent.
1997 Stock Option Plan. The purpose of the 1997 Plan is to provide the
Company with a share-related mechanism to attract, retain and motivate
qualified Directors and employees, to reward such of those Directors and
employees as may be awarded options under the 1997 Plan by the Board from time
to time for their contributions toward the long term goals of the Company and
to enable and encourage such Directors and employees to acquire shares as long
term investments. This includes options granted prior to the implementation of
the 1997 Plan, which were deemed to be re-granted under the 1997 Plan. The
Board will, from time to time and in its sole discretion, determine those
Directors and employees, if any, to whom the options are to be awarded. The
aggregate number of options granted to consultants of the Company will not
exceed 2% of the issued and outstanding share capital as of the award date.
However, in no case will an optionee be granted an option where the number of
shares that may be purchased pursuant to that option exceed, when added to the
number of shares available for purchase pursuant to options previously granted
to the optionee which remain exercisable, 5% of the Company's issued and
outstanding share capital as of the award date of the option being granted.
1,129,750 Common Shares were reserved for issuance under the 1997 Plan and no
Common Shares are available for issuance.
The 1997 Plan is currently administered by the Secretary of the Company on
the instructions of the Board. Options granted under the 1997 Plan are not
transferable by an optionee, and each option is exercisable during the
lifetime of an optionee only by such optionee; provided, however, that an
optionee's personal representative may exercise an optionee's options within
the exercise period. The expiration date of each option will be fixed by the
Board, provided that such date will be no later than the tenth anniversary of
the award date of the option.
In general, the options will terminate 30 days following an optionee's
termination of service, except in the following instances: (i) if termination
resulted from death, the option will expire one year after death, or (ii) if
termination of service results for cause, the option will expire the date the
optionee ceases to be an employee of the Company. As set forth in the 1997
Plan, the exercise price of each option generally will not be less than the
market price for the shares of the Company for the ten trading days
immediately preceding the day on which the VSE receives the required notice
that the Board granted the option.
In granting the options under the 1997 Plan, the Board may provide for
additional terms and conditions, including without limitation, that all
outstanding options shall accelerate and be immediately exercisable in full
upon certain corporate transactions, such as a merger or amalgamation.
The 1997 Plan was approved by the Board and shareholders and became
effective on August 1, 1997. The Board may terminate the 1997 Plan at any time
provided that such termination will not alter the terms or conditions of any
option or impair any right of any optionee pursuant to any option awarded
prior to the date of such termination, which will continue to be governed by
the provisions of the 1997 Plan.
CERTAIN TRANSACTIONS
Clive Barwin and Peter Hough, or companies in which they hold an interest,
have made offers to purchase certain Common Shares that are held in escrow
pursuant to two escrow agreements each dated November 16, 1993 (collectively,
the "Escrow Agreements") among the Company, the Montreal Trust Company of
Canada ("Montreal Trust"), Mr. Barwin, Mr. Hough and certain other individuals
("Other Escrow Shareholders"). Pursuant to the Escrow Agreements, the escrow
shares are restricted from trading until released from escrow as the Company
meets certain net income and positive cash flow requirements. 781,875 Common
Shares are
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currently subject to the Escrow Agreements and held in escrow by Montreal
Trust. Mr. Barwin currently holds 257,812 Common Shares which are subject to
the Escrow Agreements. Marble Arch Development Corp. ("Marble Arch"), which is
equally owned by Mr. Hough and his wife, also holds 257,812 Common Shares
which are subject to the Escrow Agreements pursuant to its execution of an
Acknowledgment and Agreement To Be Bound dated June 22, 1995. Messrs. Barwin
and Hough have offered (the "Escrow Offer") to purchase 70% of the escrow
shares held by the Other Escrow Shareholders for a nominal amount. Such
purchased escrow shares would be transferred in escrow to each of Messrs.
Barwin and Hough. The Escrow Offer provides that as part of the consideration
for the escrow share purchase, any remaining shares (the "Remaining Shares")
held by the Other Escrow Shareholders would be released from escrow subject to
a hold period, one-third of such Remaining Shares to be released on the first
day of each consecutive month following the closing of the transaction.
Concurrent with the release of the Remaining Shares, Messrs. Barwin and Hough
will place into escrow pursuant to the Escrow Agreements a number of their
unrestricted Common Shares equal to the number of the Remaining Shares being
released from escrow. Concurrent with the closing of the transactions
contemplated by the Escrow Offer, the parties to certain pooling agreements,
including the Company, will terminate the pooling agreements. Thereafter,
Messrs. Barwin and Hough will seek the approval of the VSE, the Board, and the
Company's shareholders to have the 781,875 Common Shares released from escrow.
See "Description of Capital Stock--Common Shares" and "Risk Factors--
Variability of Quarterly Operating Results; Seasonality; Compensation
Expense."
On March 11, 1997, certain officers and Directors participated in a private
placement of 375,000 units. Each unit consisted of one Common Share and one
non-transferrable share purchase warrant, at a price of $0.58 per unit, which
price was determined based on the average ten-day trading price of the Common
Shares on the VSE. Each warrant entitled the purchaser to subscribe for one
additional Common Share at a price of $0.56 per share until March 11, 1998,
and thereafter at a price of $0.65 per share until March 11, 1999. Messrs.
Hough, Barwin and Braun purchased 66,250, 43,750 and 20,000 units,
respectively.
In 1995, the Company entered into a letter agreement and lease financing
agreement with Financial Solutions Designed, Inc. ("FSD") concerning the
financing and leasing of DTMs. The first phase of the lease financing was
arranged by FSD through Norwest Equipment Financing, Inc. ("Norwest") and
Manufacturers' Bank. Both FSD and Ted Steffien, founder and chief executive
officer of FSD and, at the time, a Director of the Company, guaranteed the
lease financing. In October 1996, the Company repurchased the outstanding
balance on the Norwest portion of the lease financing.
In September 1995, the Company agreed to subscriptions from Clive Barwin and
Peter Hough to purchase 37,500 and 56,250 Common Shares, respectively, from
the Company at a price of $3.70 per share. Messrs. Barwin and Hough abstained
from voting on this transaction.
The Company believes that each of the above transactions was made on terms
no less favorable to the Company than it could have obtained from unaffiliated
third parties. All future transactions between the Company and its officers,
Directors, principal shareholders and their affiliates will be approved by a
majority of the Board, including a majority of the independent and
disinterested outside Directors on the Board, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
45
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of June 4, 1998 certain information
regarding the beneficial ownership of Common Shares held by (i) each Director
and executive officer of the Company, (ii) all the Directors and officers as a
group, (iii) each person who is known by the Company to be the owner (or
beneficial owner) of 5.0% or more of the Company's outstanding Common Shares
and (iv) each of the Company's current shareholders who is offering to sell
shares in this Offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP SHARES TO BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) BE SOLD AFTER THE OFFERING(1)
--------------------------- IN THE ------------------------
SHARES PERCENT OFFERING SHARES PERCENT
------------- ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS(2):
- -----------------------
Clive Barwin(3)......... 722,335 10.3% 32,500 689,835 7.2%
Peter Hough(4).......... 735,503 10.4 32,500 703,003 7.3
Garth Braun(5).......... 104,625 1.6 20,000 84,625 *
Louis Eisman(6)......... 45,000 * 10,000 35,000 *
All Directors and
Executive Officers
as a Group (4
persons)............... 1,607,463 22.9 95,000 1,512,463 15.2
OTHER PRINCIPAL AND
SELLING SHAREHOLDERS:
- ----------------------
Joshua Emanuel(7)....... 146,708 2.2 12,500 134,208 1.4
David Emanuel(8)........ 154,166 2.3 12,500 141,666 1.5
Freemont Quality
Products, Inc.(9)...... 50,000 * 30,000 20,000 *
Applied
Telecommunications
Technologies IV,
N.V.(10)............... 164,257 2.4 33,250 131,007 1.4
Applied
Telecommunications
Technologies,
Inc.(11)............... 91,145 1.4 1,750 89,395 1.0
</TABLE>
- --------
* Less than one percent.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised. Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power with
respect to all Common Shares beneficially owned by them. For purposes of
the table, Common Shares are considered beneficially owned by a person if
such person has or shares voting or investment power with respect to such
share. As a result, the same security may be beneficially owned by more
than one person and, accordingly, in some cases, the same shares are
listed opposite more than one name in the table.
(2) Unless otherwise indicated, the address of each of the named individuals
is c/o DataWave Systems Inc., 101 West 5th Avenue, Vancouver, British
Columbia, Canada V5Y 1H9.
(3) Mr. Barwin is the President, Chief Executive Officer and a Director of the
Company. The total number of shares beneficially owned by Mr. Barwin
includes (i) options to purchase 282,562 Common Shares, (ii) warrants for
43,750 Common Shares, (iii) 33,333 Common Shares held by Clive Barwin
Computer Consultants, which is owned equally by Mr. Barwin and his wife,
and (iv) 257,812 Common Shares held in escrow pursuant to certain escrow
agreements. See "Description of Capital Stock" and "Certain Transactions."
(4) Mr. Hough is the Chief Financial Officer, Secretary and a Director of the
Company. The total number of shares beneficially owned by Mr. Hough
includes (i) options to purchase 282,562 Common Shares and (ii) warrants
for 66,250 Common Shares. In addition, the total number of shares
beneficially owned by Mr.
46
<PAGE>
Hough includes 302,287 Common Shares which are held by Marble Arch, 257,812
of these shares are held in escrow pursuant to those certain escrow
agreements. See "Description of Capital Stock" and "Certain Transactions."
Mr. Hough and his wife equally own Marble Arch.
(5) Mr. Braun is a Director of the Company. The total number of shares
beneficially owned by Mr. Braun includes options to purchase 25,000
Common Shares.
(6) Mr. Eisman is a Director of the Company. The total number of shares
beneficially owned by Mr. Eisman includes options to purchase 25,000
Common Shares.
(7) Mr. Joshua Emanuel is the Vice President of Sales and Marketing of
DataWave Services (US) Inc. The total number of shares beneficially owned
by Mr. Emanuel includes (i) options to purchase 21,708 Common Shares and
(ii) warrants for 12,500 Common Shares. (This number excludes options to
purchase 43,416 Common Shares.)
(8) Mr. David Emanuel is an employee of DataWave (US). The total number of
shares beneficially owned by Mr. Emanuel includes (i) options to purchase
4,166 Common Shares and (ii) warrants for 12,500 Common Shares. (This
number excludes options to purchase 8,333 Common Shares.)
(9) Freemont Quality Products, Inc., c/o 231 West Parkway, Pompton Plains,
New Jersey 07444. A 25% ownership interest in of Freemont Quality
Products, Inc. is held by each of Messrs. Joshua Emanuel and David
Emanuel.
(10) Applied Telecommunications Technologies IV, N.V. ("ATT IV"), B.
Gorsiraweg, Curacao, Netherlands Antilles. This number includes warrants
to purchase 132,590 Common Shares.
(11) ATTI, 20 William Street, Wellesley, MA 02181. The amount indicated
includes warrants to purchase 8,645 Common Shares. ATTI and the Company
entered into a lease financing agreement as of October 22, 1996 and the
Company and ATTI have recently negotiated a new financing arrangement.
See "Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
As of May 26, 1998, the authorized capital stock of the Company consisted
of 12,500,000 Common Shares, without par value, and 6,716,462 Common Shares
were outstanding held by 172 holders of record. At the AGM scheduled for July
20, 1998, the Company intends to request approval to increase its authorized
capital stock to 50,000,000. As of June 3, 1998, there were 898,987 Common
Shares subject to stock options pursuant to the 1997 Plan. The following
summary does not purport to be complete and is subject to and qualified in its
entirety by the provisions of the Company's Altered Memorandum and Articles of
Association, copies of which are attached as exhibits to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.
COMMON SHARES
Generally. Each Common Share entitles the holder to one vote on all matters
submitted to a vote of the shareholders. The Board may from time to time
declare and authorize payment of such dividends, if any, as they may deem
advisable out of funds or assets properly available. There are no pre-emptive
rights to subscribe for any additional shares that the Company may issue and
there are no redemption provisions or sinking fund provisions applicable to
the Common Shares, nor are the Common Shares subject to calls or assessments
by the Company. All outstanding Common Shares are, and all Common Shares to be
outstanding upon completion of this Offering will be, legally issued, fully
paid and nonassessable.
Escrow Shares. As of May 26, 1998, there were 781,875 Common Shares (the
"Escrow Shares") held in escrow by Montreal Trust Company of Canada ("Montreal
Trust"), as escrow agent, pursuant to escrow arrangements with certain
shareholders, including Messrs. Barwin and Hough. Holders of the Escrow Shares
generally hold all voting and other rights applicable to Escrow Shares;
however, such holders have waived their rights to vote to cancel the Escrow
Shares, to receive dividends on the Escrow Shares and to participate in the
assets and property of the Company on a winding up or a dissolution of the
Company with respect to the Escrow Shares. The Escrow Shares are eligible for
release as the Company meets certain net income and positive cash flow
requirements, subject to approval by the VSE. A transaction is currently being
negotiated whereby Messrs. Barwin and Hough, or companies in which they hold
an interest, will purchase all of the Escrow Shares. See "Certain
Transactions."
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<PAGE>
Pooling Agreements. Pursuant to pooling agreements dated November 16, 1993,
February 9, 1996 and June 30, 1997 between the Company, Montreal Trust and
certain shareholders of the Company, such shareholders have agreed to place
176,938 of the Escrow Shares released from escrow in a pool (the "Pooled
Shares"), which provides for a time based release of the Pooled Shares to the
shareholders. Of the total Pooled Shares, 96,000 will be released from the
pool in equal annual installments over a four year period. The remaining
Pooled Shares will be released from the pool in equal annual installments over
a three year period. Some or all or these pooling agreements will be
terminated if the proposed purchase of Escrow Shares is consummated. See
"Certain Transactions."
REGISTRATION RIGHTS
As of June 2, 1998, ATTI and ATT IV held non-transferable share purchase
warrants to purchase an aggregate of 141,235 Common Shares. Under the terms of
these warrants, ATTI and ATT IV may require the Company to register Common
Shares held by them in connection with a registration statement filed by the
Company for the public offering of its shares or shares held by another
shareholder. The Company will pay all expenses of such registration including,
under the terms of certain warrants, fees and disbursements of counsel for
ATTI and ATT IV and underwriters discounts applicable to their shares. ATTI
and ATT IV plan to exercise warrants to purchase 1,750 and 33,250 Common
Shares, respectively, in connection with this Offering, and plan to sell these
shares in the Offering. See "Principal and Selling Shareholders."
Upon completion of this Offering, the Company will issue warrants to
purchase an aggregate of up to 268,500 Common Shares (308,775 Common Shares if
the Underwriters over-allotment option is exercised) to Morgan Keegan &
Company, Inc. and Laidlaw Global Securities Inc. (the "Representatives"). The
Representatives may require the Company to register these Common Shares with a
registration statement filed by the Company for the public offering of its
Common Shares or the Common Shares held by another shareholder of the Company.
The Company will pay all expenses of such registration.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Altered Memorandum and Articles of Incorporation of the Company limit
the liability of the Directors to the fullest extent permitted by the British
Columbia Company Act. In addition, the Articles of Incorporation and
Memorandum provide that the Company shall indemnify Directors and officers of
the Company to the fullest extent permitted by such law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is ChaseMellon
Shareholder Services, L.L.C. ("ChaseMellon"). ChaseMellon's address is 235
Montgomery Street, 23rd Floor, San Francisco, California 94104, and its
telephone number is (415) 743-1421. The co-transfer agent and registrar for
the Common Shares is Montreal Trust. Montreal Trust's address is 510 Burrard
Street, 4th Floor, Vancouver, British Columbia, Canada, V6C 3B9, and its
telephone number is (604) 661-9400.
CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN BRITISH COLUMBIA, CANADA
The Company is organized under the laws of British Columbia, Canada.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, Directors and
controlling shareholders and the rights of the Company's shareholders differ
from, and may not be as protective of shareholders as those that would apply
if the Company were incorporated in a jurisdiction within the United States.
Among other matters, the Company's Altered Memorandum and Articles of
Association provide that (i) the Board may increase the number of Directors by
up to one-third of the then existing number of Directors without shareholder
approval; (ii) each Director may appoint another person to attend Board
meetings and vote on his behalf; (iii) the Board may appoint an executive
committee with authority to take action on any matter on which the Board could
act; and (iv) the Company's President must be a Director. In addition,
shareholders may (i) initiate a shareholder's meeting upon the affirmative
vote of five percent of the Common Shares; (ii) declare a
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<PAGE>
quorum at a shareholders' meeting with the presence of 10% of the Common
Shares; and (iii) make decisions based upon the affirmative vote of the
holders of 75% of the Common Shares present at a meeting in which a quorum is
present. In addition, the courts of British Columbia, Canada may not enforce
liabilities predicated upon United States federal securities laws.
At the AGM, the Company will seek shareholder approval to amend the Altered
Memorandum and Articles of Association in order to (i) eliminate the right of
each Director to appoint an alternate Director to attend meetings of the Board
of Directors and (ii) require the presence of holders of 50% of the
outstanding Common Shares to constitute a quorum for purposes of meetings of
shareholders of the Company. Certain of these provisions could render more
difficult or discourage an attempt to obtain control of the Company by means
of a tender offer, merger, proxy contest or otherwise.
CERTAIN CANADIAN FEDERAL INCOME TAX AND OTHER LAW CONSIDERATIONS
A brief description is included below of certain taxes, including
withholding taxes, to which United States security holders are subject under
existing tax laws and regulations of Canada. The consequences, if any, of
provincial taxes are not considered. The following information is general and
security holders should seek the advice of their own tax advisors, tax counsel
or accountants with respect to the applicability or effect on their own
individual circumstances of the matters referred to herein.
The discussion under this heading summarizes the principal Canadian federal
income tax consequences of acquiring, holding and disposing of Common Shares
by a shareholder of the Company who is not a resident of Canada but is a
resident of the United States and who will acquire and hold shares of Common
Shares as capital property for the purposes of the Income Tax Act (Canada)
(the "Tax Act"). This summary does not apply to a shareholder who carries on
business in Canada through a "permanent establishment" situated in Canada or
performs independent personal services in Canada . This summary is based on
the provisions of the Tax Act and the regulations thereunder and on an
understanding of the administrative practices of Revenue Canada, and takes
into account all specific proposals to amend the Tax Act or regulations made
by the Minister of Finance of Canada as of the date hereof. It has been
assumed that there will be no other relevant amendment of any governing law
although no assurance can be given in this respect. This discussion is general
only and is not a substitute for independent advice from a shareholder's own
Canadian and U.S. tax advisor.
The provisions of the Tax Act are subject to income tax treaties to which
Canada is a party, including the Canada-United States Income Tax Convention
(1980) (the "Convention").
Dividends on Common Shares. Under the Tax Act, a nonresident of Canada is
subject to Canadian withholding tax at the rate of 25% on dividends paid or
deemed to have been paid by a corporation resident in Canada. The Convention
limits the rate to 15% if the shareholder is a resident of the United States
and the dividends are beneficially owned by and paid to him, and to 5 percent
if the shareholder is also a corporation that beneficially owns at least 10%
of the voting stock of the payor corporation.
The Convention generally exempts from Canadian income tax dividends paid to
a religious, scientific, literary, educational or charitable organizations if
the organization is a resident of the United States and such dividend income
is exempt from income tax under the laws of the United States or to an
organization constituted and operated exclusively to administer a pension,
retirement or employee benefit fund or plan.
Disposition of Common Shares. Under the Tax Act, a taxpayer's capital gain
or capital loss from the disposition of Common Shares of the Company is the
amount, if any, by which his proceeds of disposition exceed (or are exceeded
by, respectively) the aggregate of his adjusted cost base of such shares and
reasonable expenses of disposition. Three-quarters of a capital gain (the
"taxable capital gain") is included in income, and three-quarters of a capital
loss in a year (the "allowable capital loss") is deductible from taxable
capital gains realized in the same year. The amount by which a shareholder's
allowable capital loss exceeds the taxable capital gain in a year may be
deducted from a taxable capital gain realized by the shareholder in the three
previous or
49
<PAGE>
any subsequent year, subject to certain restrictions in the case of a
corporate shareholder and subject to adjustment when the capital gains
inclusion rate in the year of disposition differs from the inclusion rate in
the year the deduction is claimed.
If a Common Share is disposed of to the Company other than in the open
market in the manner in which shares would normally be purchased by the
public, the proceeds of disposition will be considered as limited to the paid-
up capital of the share as defined in the Tax Act and the balance will be
deemed to be a dividend and subject to withholding tax as discussed above. In
the case of a shareholder that is a corporation, the amount of any capital
loss otherwise determined will be reduced by the amount of dividends
previously received in respect of the shares disposed of, unless the
corporation owned the shares for at least 365 days prior to the sustaining the
loss and (together with corporations, persons and other entities, with whom
the corporation was not dealing at arm's length) did not own more than five
percent of the shares of any class of the corporation from which the dividend
was received. These loss limitation rules may also apply where a corporation
is a member of a Partnership or a beneficiary of a trust that owned the shares
disposed of, and to, certain individuals who have received capital dividends.
Under the Tax Act, a nonresident of Canada is subject to Canadian tax on
taxable capital gains, and may deduct allowable capital losses, realized on a
disposition of "taxable Canadian property." Common Shares will constitute
taxable Canadian property of a shareholder at a particular time if the
shareholder used the shares in carrying on business in Canada, or if at any
time in the five years immediately preceding the disposition 25 percent or
more of the issued shares of any class or series in the capital stock of the
Company belonged to one or more persons in a group comprising the shareholder
and persons with whom the shareholder did not deal at arm's length.
The Convention relieves United States residents from liability for Canadian
tax on capital gains derived on a disposition of shares unless
(a) the value of the shares is derived principally from "real property" in
Canada, including the right to explore for or exploit natural resources
and rights to amounts computed by reference to production,
(b) the shareholder was resident in Canada for 120 months during any period
of 20 consecutive years preceding, and at any time during the 10 years
immediately preceding, the disposition and the shares were owned by him
when he ceased to be resident in Canada, or
(c) the shares formed part of the business property of a "permanent
establishment" that the holder has or had in Canada within the 12
months preceding the disposition.
When a holder dies holding Common Shares, such holder will be deemed for
Canadian tax purposes to have disposed of such Common Shares for an amount
equal to the fair market value thereof immediately before such holder's death
and will be subject to the tax treatment with respect to dispositions
described above. Any person who acquires such Common Shares as a consequence
of the death of such holder will be deemed to have acquired such shares for
the fair market value at that time. There is currently no Canadian federal
estate tax.
Investment Canada Act. The Investment Canada Act (the "ICA") prohibits the
acquisition of control of a Canadian business by non-Canadians without review
and approval of the Investment Review Division of Industry Canada, the agency
that administers the ICA, unless such acquisition is exempt from review under
the provisions of the ICA. The Investment Review Division of Industry Canada
must be notified of such exempt acquisitions. The ICA covers acquisitions of
control of corporate enterprises, whether by purchase of assets, shares or
"voting interests" of an entity that controls, directly or indirectly, another
entity carrying on a Canadian business. The ICA will have no effect on the
acquisition of shares covered by this Prospectus.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian
law or the Company's Memorandum or Articles. There are no other decrees or
regulations in Canada that restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends,
interest or other payments to nonresident holders of the Company's Common
Shares, except as discussed elsewhere herein.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company expects to have 9,251,462
Common Shares outstanding (assuming the Underwriters' over-allotment option is
not exercised). Of these shares, the 2,685,000 Common Shares sold in the
Offering and 3,939,288 additional Common Shares will be tradeable without
restriction under the Securities Act, except for any such shares which may be
acquired by an "affiliate" of the Company (an "Affiliate"), as that term is
defined in Rule 144 under the Securities Act ("Rule 144"), which will be
subject to the resale limitations of Rule 144. The remainder of the shares
outstanding will be unregistered but will be eligible for trading pursuant to
Rule 144, as more fully discussed below.
SALE OF RESTRICTED SHARES
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the "Restricted Securities,"
as that phrase is defined in Rule 144, were acquired from the Company and the
date they are acquired from an Affiliate, then the holder of such restricted
securities (including an Affiliate) is entitled to sell a number of shares
within any three-month period that does not exceed the greater of one percent
(1%) of the then outstanding Common Shares (approximately 92,515 shares
immediately after this Offering based upon the number of Common Shares
outstanding on June 3, 1998) or the average weekly reported volume of trading
of the Common Shares on the Nasdaq National Market during the four calendar
weeks preceding such sale. The holder may only sell such shares through
unsolicited brokers' transactions. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notice of such
sales and the availability of current public information concerning the
Company. Affiliates may sell shares not constituting restricted shares in
accordance with the foregoing volume limitations and other requirements
without regard to the one-year period. As a result of Rule 144, such
Restricted Shares will be available for sale in the public market as follows:
(i) 1,559,839 Restricted Shares will be eligible for sale pursuant to Rule 144
upon completion of the Offering and (ii) the remaining 1,067,335 Restricted
Shares will be eligible for sale from time to time thereafter upon expiration
of their respective one-year holding periods under Rule 144.
Under Rule 144(k), if a period of at least two years has lapsed between the
later of the date Restricted Shares were acquired from the Company and the
date they were acquired from an Affiliate, as applicable, a holder of such
Restricted Shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least 90 days prior to the sale would be entitled to
sell the shares immediately without regard to the volume limitations and other
conditions described above.
LOCK-UP AGREEMENTS
Notwithstanding the foregoing, the Company, and certain of its Directors,
executive officers and shareholders will enter into lock-up agreements ("Lock-
up Agreements"). The Lock-up Agreements prohibit sales, offers to sell,
contracts to sell and otherwise prohibit the disposition of any Common Shares
or securities convertible into or exercisable or exchangeable for Common
Shares for a period of 180 days after the date of the Offering. 1,338,574
Common Shares held by the Selling Shareholders will be subject to the Lock-up
Agreements.
ESCROW SHARES
As of June 4, 1998, 781,875 Common Shares were held in escrow by Montreal
Trust pursuant to escrow agreements with certain shareholders, including
Messrs. Barwin and Hough. The Company expects to request an early release of
all the Escrow Shares upon or after completion of the Offering. Upon any such
release, the holders of the Escrow Shares would be able to sell such shares on
the public market pursuant to the conditions and limitations of Rule 144 and
subject to any Lock-up Agreements. . See "Certain Transactions" and
"Description of Capital Stock."
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of
the Common Shares in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices. See "Risk Factors--
Shares Eligible for Future Sale; " and "Principal and Selling Shareholders."
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Morgan
Keegan & Company, Inc. and Laidlaw Global Securities Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Shareholders the respective number of Common
Shares set forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Morgan Keegan & Company, Inc. ..................................
Laidlaw Global Securities Inc...................................
---------
Total......................................................... 2,685,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
obligations of the several Underwriters to pay for and accept delivery of the
Common Shares offered hereby are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all shares offered hereby (other than those
covered by Underwriters' over-allotment option described below), if any such
shares are taken.
The Underwriters initially propose to offer part of the Common Shares
directly to the public at the public offering price set forth on the cover
page of this Prospectus, and part to certain securities dealers at a price
that represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to certain
brokers and dealers. After the Common Shares are released for sale to the
public, the offering price and other selling terms may from time to time be
varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 402,750
additional Common Shares at the public offering price set forth at the cover
of this Prospectus, less underwriting discounts and commission. To the extent
such option is exercised, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage of such
additional Common Shares as the number set forth next to such underwriters
name in the preceding table, bears to the 2,685,000 Common Shares offered
hereby. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the
Common Shares offered hereby.
The Company has agreed to pay the Representatives a financial advisor fee of
$150,000 upon consummation of this Offering. The Company has also agreed to
issue to the Representatives warrants to purchase from the Company up to
268,500 Common Shares (308,775 Common Shares if the Underwriters over-
allotment option is exercised) at an exercise price per share equal to 135% of
the Offering price (the "Underwriter's Warrants"). The Underwriter's Warrants
are exercisable for a period of four years beginning one year from the date of
this Prospectus. The Underwriter's Warrants are transferable, subject to
compliance with applicable securities laws, and will contain provisions for
appropriate adjustments in the event of stock splits, stock dividends,
combinations, reorganizations or recapitalizations. In addition, the Company
has granted certain rights to the holders of the Underwriter's Warrants to
register the Common Shares underlying the Underwriter's Warrants under the
Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which the officers, directors, and certain shareholders of the
Company have agreed not to sell or otherwise dispose of Common Shares or
convertible securities of the Company for up to 180 days after the date of
this Prospectus without the prior consent of Morgan Keegan & Company, Inc. The
Company has agreed in the Underwriting Agreement
52
<PAGE>
that it will not, offer, pledge, issue, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, or announce any offer,
pledge, sale, grant of any option to purchase or other disposition, directly
or indirectly, any Common Shares or securities convertible into, exercisable
or exchangeable for, Common Shares, for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Keegan & Company, Inc.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of the Common Shares, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares. Specifically, the Underwriters may over-allot the
Common Shares in connection with this Offering, creating a short position in
the Common Shares for their own account. In addition, to cover over-allotments
or to stabilize the price of the Common Shares, the Underwriters may bid for,
and purchase, the Common Shares in the open market. The Underwriters may also
reclaim selling concessions allowed to an underwriter or a dealer for
distributing Common Shares in this Offering, if the Underwriters repurchase
previously distributed Common Shares in transactions to cover their short
positions, in stabilization transactions or otherwise. Finally, the
Underwriters may bid for, and purchase, the Common Shares in market making
transactions and impose penalty bids. Any of these activities may stabilize or
maintain the market price of the Common Shares above the market level that may
otherwise prevail. The Underwriters are not required to engage in these
activities, and may terminate any such activities at any time.
Prior to this Offering, the public market for the Common Shares has been in
Canada on the VSE and in the United States on the OTCBB. The Offering price
will be negotiated among the Company and the Representatives. Among the
factors to be considered in determining the Offering price of the Common
Shares, in addition to prevailing market conditions, will be the Company's
current share price as posted on the VSE, historical performance, estimates of
the business potential and earnings prospects of the Company, an assessment of
the Company's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
The Common Shares have been approved for listing, subject to official notice
of issuance, on the Nasdaq National Market under the symbol "DWAV."
The Company and each Selling Shareholder have agreed to indemnify the
several Underwriters against, or contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act.
53
<PAGE>
LEGAL MATTERS
The validity of the Common Shares offered hereby and certain other matters
will be passed upon for the Company by Paul, Hastings, Janofsky & Walker LLP,
San Francisco, California and Campney & Murphy, Vancouver, British Columbia.
Certain legal matters will be passed upon for the Underwriters by Gray Cary
Ware & Freidenrich LLP, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of DataWave Systems Inc. as of March
31, 1998, 1997 and 1996, and for the years then ended appearing in this
Prospectus and the Registration Statement have been audited by Deloitte &
Touche, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The Financial Statements of Metrophone Telecommunication Inc. as of March
31, 1998 and December 31, 1997 and for the year ended December 31, 1997 and
the three month period ended March 31, 1998 have been audited by Deloitte &
Touche, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of Section 13 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files certain reports with the SEC. The Company has
filed with the SEC a Registration Statement on Form S-1 (together with all
amendments thereto, the "Registration Statement") under the Securities Act,
with respect to the Common Shares offered hereby. This Prospectus, filed as
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain portions of which are omitted as permitted by the rules and
regulations of the SEC. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract, agreement or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Shares offered hereby, reference is made to any reports filed with the SEC in
accordance with the Exchange Act, the Registration Statement and to the
exhibits and schedules thereto, which may be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the regional offices of the SEC at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World
Trade Center, Suite 1300, New York, New York 10048 at prescribed rates. The
SEC maintains a web site (http://www.sec.gov) that contains material regarding
issuers that file electronically with the SEC.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing updated summary financial information for each of
the first three quarters of each fiscal year.
54
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company is organized under the laws of British Columbia, Canada where
the Company's principal executive office is located. The Company has appointed
DataWave Services (US) Inc. as its agent upon whom process may be served in
any action brought against the Company under the securities laws of the United
States. However, outside the United States, it may be difficult for investors
to enforce judgments against the Company obtained in the United States in any
such actions, including actions, predicated upon civil liability provisions of
Federal securities laws. In addition, most of the Company's officers and all
of its directors reside outside the United States and nearly all of the assets
of these persons and of the Company are located outside of the United States.
As a result, it may not be possible for investors to effect service of process
within the United States upon such persons, or to enforce against the Company
or such persons judgments predicated upon the liability provisions of the
United States securities laws. There is substantial doubt as to the
enforceability against the Company or any of its directors and officers
located outside the United States in original actions or in actions of
enforcement of judgments of United States courts of liabilities predicated on
the civil liability provisions of United States federal securities laws.
EXCHANGE RATE INFORMATION
All monetary amounts in this Prospectus are expressed in United States
dollars except where otherwise indicated. The following table sets forth the
exchange rates, based on the noon buying rates in New York City for cable
transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York, for the conversion of United States dollars
into Canadian dollars in effect at the end of the following periods, and the
average exchange rates (based on the average of the exchange rates on the last
day of each month in such periods) and the range of high and low exchange
rates for such periods. Stated in terms of U.S. Dollars per one Canadian
Dollar.
FISCAL YEAR ENDED MARCH 31,
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High US$0.732 US$0.746 US$0.743 US$0.740 US$0.792
Low US$0.683 US$0.722 US$0.726 US$0.708 US$0.733
Average US$0.713 US$0.735 US$0.734 US$0.724 US$0.764
- --------------------------------------------------------------------------------------
Period End US$0.705 US$0.722 US$0.732 US$0.710 US$0.733
</TABLE>
On June 3, 1998, the noon rate of exchange, as reported by the Federal
Reserve Bank of New York for the conversion of U.S. Dollars into Canadian
Dollars, was US$0.688 to C$1.00.
55
<PAGE>
DATAWAVE SYSTEMS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of DataWave Systems Inc.
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Shareholders' Equity............... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to the Consolidated Financial Statements........................... F-8
Financial Statements of Metrophone Telecommunications, Inc.
Independent Auditors' Report............................................. F-18
Balance Sheets........................................................... F-19
Statements of Loss and Deficit........................................... F-20
Statements of Cash Flows................................................. F-21
Notes to the Financial Statements........................................ F-22
Selected Unaudited Pro Forma Consolidated Financial Information............ F-25
Pro Forma Consolidated Balance Sheet..................................... F-26
Pro Forma Consolidated Statement of Operations .......................... F-27
Note to the Pro Forma Consolidated Financial Information................. F-28
</TABLE>
F-1
<PAGE>
The accompanying Consolidated Financial Statements give effect to the
completion of the 1-for-4 reverse split of the Company's outstanding common
shares which will take place immediately prior to the Offering. The following
report is in the form which will be furnished by Deloitte & Touche upon
completion of the reverse stock split of the Company's outstanding common
shares described in Note 13 to the Consolidated Financial Statements and
assuming that, from June 4, 1998 to the date of such event, no other events
have occurred which would alter the accompanying Consolidated Financial
Statements and Notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Directors of
DataWave Systems Inc.:
We have audited the consolidated balance sheets of DataWave Systems Inc. as
at March 31, 1998 and 1997 and the consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the years in the
three year period ended March 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at March 31,
1998 and 1997 and the results of its operations and cash flows for each of the
years in the three year period ended March 31, 1998 in accordance with
accounting principles generally accepted in the United States.
Deloitte & Touche
Chartered Accountants
Vancouver, British Columbia, Canada
June 4, 1998
F-2
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1998
---------- ----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................ $ 326,162 $ 860,247
Inventory............................................ 380,481 769,338
Accounts receivable.................................. 209,300 557,800
Prepaid expenses..................................... 102,532 228,418
---------- ----------
Total current assets............................... 1,018,475 2,415,803
ADVANCES AND DEPOSIT ON ACQUISITION (Note 3(d))........ -- 438,330
MACHINERY AND EQUIPMENT, NET (Note 4).................. 1,171,098 1,476,466
INVESTMENT IN JOINT VENTURE (Note 5)................... -- 207,001
GOODWILL, NET.......................................... 188,669 470,664
OTHER ASSETS........................................... -- 85,543
---------- ----------
TOTAL ASSETS........................................... $2,378,242 $5,093,807
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable..................................... $ 947,299 $1,666,689
Other accrued liabilities............................ 108,094 266,644
Security deposits.................................... 51,787 27,193
Current portion of long-term debt (Note 6)........... 196,497 497,841
---------- ----------
Total current liabilities.......................... 1,303,677 2,458,367
LONG-TERM DEBT, LESS CURRENT PORTION (Note 6).......... 588,514 1,021,333
---------- ----------
TOTAL LIABILITIES...................................... 1,892,191 3,479,700
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
SHAREHOLDERS' EQUITY:
Common Shares, no par value, 12,500,000 shares
authorized, 5,221,632 and 6,609,541 shares issued
and outstanding at March 31, 1997 and March 31,
1998, respectively (Note 7)......................... 8,058,492 9,711,122
Share warrants....................................... -- 62,952
Shares to be issued.................................. 652,625 --
Accumulated deficit.................................. (8,225,066) (8,159,967)
---------- ----------
Total shareholders' equity......................... 486,051 1,614,107
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $2,378,242 $5,093,807
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES................................. $ 1,263,161 $ 3,148,565 $9,676,434
COST OF REVENUES......................... 1,076,378 3,438,812 6,211,310
----------- ----------- ----------
GROSS PROFIT (LOSS)...................... 186,783 (290,247) 3,465,124
----------- ----------- ----------
OPERATING EXPENSES
General and administrative............. 731,779 1,586,405 1,425,578
Selling and marketing.................. 638,646 773,695 551,599
Research and development............... 206,709 163,337 134,070
Depreciation and amortization.......... 129,866 446,645 894,765
(Gain) loss on foreign exchange........ (10,806) 32,442 28,437
Loss on investment in limited
partnership........................... 242,390 -- --
Loss on termination of distribution
agreements and write-down of related
inventory............................. 531,458 -- --
----------- ----------- ----------
Total operating expenses............. 2,470,042 3,002,524 3,034,449
----------- ----------- ----------
OPERATING (LOSS) INCOME.................. (2,283,259) (3,292,771) 430,675
----------- ----------- ----------
Interest expense......................... (44,927) (333,640) (365,576)
----------- ----------- ----------
NET (LOSS) INCOME........................ $(2,328,186) $(3,626,411) $ 65,099
=========== =========== ==========
BASIC AND DILUTED NET (LOSS) INCOME PER
SHARE (Note 2(l))....................... $ (0.46) $ (0.60) $ 0.01
=========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING...... 5,010,812 6,013,758 6,747,805
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
TOTAL
COMMON SHARE SHARES TO ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT WARRANTS BE ISSUED DEFICIT EQUITY
--------- ---------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1,
1995................... 2,819,299 $1,991,955 $1,592,919 $ -- $(2,270,469) $1,314,405
Shares issued for cash.. 395,000 1,388,866 -- -- -- 1,388,866
Conversion of special
warrants............... 833,333 1,592,919 (1,592,919) -- -- --
Shares issued on pur-
chase of partnership... 90,070 232,411 -- -- -- 232,411
Shares issued on exer-
cise of share purchase
warrants............... 373,013 1,052,141 -- -- -- 1,052,141
Shares issued on exer-
cise of stock options.. 12,167 35,526 -- -- -- 35,526
Net loss................ -- -- -- -- (2,328,186) (2,328,186)
--------- ---------- ---------- -------- ----------- ----------
BALANCE AT MARCH 31,
1996................... 4,522,882 6,293,818 -- -- (4,598,655) 1,695,163
Shares issued on exer-
cise of share purchase
warrants............... 93,750 178,636 -- -- -- 178,636
Shares issued on exer-
cise of stock options.. 5,000 14,598 -- -- -- 14,598
Shares to be issued on
acquisition of
Interurbain assets..... -- -- -- 652,625 -- 652,625
Shares issued on exer-
cise of special war-
rants (net of issue ex-
penses of $205,943).... 600,000 1,571,440 -- -- -- 1,571,440
Net loss................ -- -- -- -- (3,626,411) (3,626,411)
--------- ---------- ---------- -------- ----------- ----------
BALANCE AT MARCH 31,
1997................... 5,221,632 8,058,492 -- 652,625 (8,225,066) 486,051
Shares issued for cash.. 375,000 213,888 -- -- -- 213,888
Warrants issued to ATTI
(Note 6)............... -- -- 85,543 -- -- 85,543
Shares issued on exer-
cise of share purchase
warrants............... 232,917 164,831 (22,591) -- -- 142,240
Shares issued on acqui-
sitions (Note 3)....... 530,617 934,414 -- (652,625) -- 281,789
Shares issued for costs
relating to the joint
venture (Note 5)....... 41,250 147,591 -- -- -- 147,591
Shares issued on exer-
cise of stock options.. 208,125 191,906 -- -- -- 191,906
Net income.............. -- -- -- -- 65,099 65,099
--------- ---------- ---------- -------- ----------- ----------
BALANCE AT MARCH 31,
1998................... 6,609,541 $9,711,122 $ 62,952 $ -- $(8,159,967) $1,614,107
========= ========== ========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income..................... $(2,328,186) $(3,626,411) $ 65,099
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization........ 129,866 446,645 894,765
Provision for loss on inventory...... 352,258 328,740 --
Loss on investment in limited part-
nership............................. 242,390 -- --
Net change in non-cash working capital
items:
Inventory............................ (534,693) (198,868) (259,552)
Accounts receivable.................. 26,541 (168,100) (51,321)
Prepaid expenses..................... (69,319) (24,735) (125,886)
Accounts payable..................... 158,511 488,017 114,769
Other accrued liabilities............ 38,213 50,371 143,111
Security deposits.................... (73,758) 51,791 (24,594)
----------- ----------- -----------
Net cash (used in) provided by operating
activities............................. (2,058,177) (2,652,550) 756,391
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of machinery and equipment... (750,861) (438,626) (804,096)
Acquisition of businesses, net of cash
acquired (Note 3).................... -- -- (212,378)
Investment in limited partnership..... (8,760) -- --
Advances and deposit on acquisition... -- -- (438,330)
Investment in joint venture........... -- -- (59,410)
----------- ----------- -----------
Net cash (used in) investing activi-
ties................................... (759,621) (438,626) (1,514,214)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt.......... 753,852 839,160 1,209,244
Repayment of long-term debt........... (77,971) (176,699) (438,227)
Amount paid on cancellation of lease.. -- (556,756) --
Term deposit used for collateral on
debt................................. (985,200) 985,200 --
Issue of common shares................ 2,476,533 1,764,675 548,034
Repayment of other loans.............. (8,217) -- --
----------- ----------- -----------
Net cash provided by financing activi-
ties................................... 2,158,997 2,855,580 1,319,051
----------- ----------- -----------
Effect of Exchange Rate Changes......... 5,912 (6,505) (27,143)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ (652,889) (242,101) 534,085
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................... 1,221,152 568,263 326,162
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 568,263 $ 326,162 $ 860,247
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest.................. $ 43,928 $ 301,585 $ 319,722
=========== =========== ===========
Cash paid for income taxes.............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
DATAWAVE SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES (CONTINUED):
Common shares issued to acquire assets and
businesses (Note 3)......................... $ -- $ -- $ 934,579
========== ========== ==========
Obligation to issue shares incurred in
exchange for specified assets (Note 3)...... $ -- $ 652,625 $ --
========== ========== ==========
Common shares issued for costs in connection
with formation of the joint venture (Note
5).......................................... $ -- $ -- $ 147,591
========== ========== ==========
Share purchase warrants granted to ATTI (Note
6).......................................... $ -- $ -- $ 85,543
========== ========== ==========
Conversion of share warrants outstanding to
common shares .............................. $1,592,919 $ -- $ 22,591
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(EXPRESSED IN UNITED STATES DOLLARS)
1. NATURE OF OPERATIONS
DataWave Systems Inc. designs, develops, produces, owns and manages a
proprietary, intelligent, automated direct merchandising network (the
"DataWave System"). The Company uses the DataWave System to distribute prepaid
calling cards. The DataWave System is comprised of DataWave Telecard
Merchandisers ("DTMs"), which are free-standing "smart" machines capable of
dispensing multiple prepaid product offerings, and over-the-counter "swipe"
units ("OTCs") for point-of-sale prepaid retailing, all of which are connected
to the Company's proprietary server software and databases through a wireless
and/or land line wide area network. Effective January 15, 1997, the Company
changed its name from DataWave Vending Inc. to DataWave Systems Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
These Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles in the United States and include
the following significant accounting policies:
(a) Accounting 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
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Principles of consolidation
The Consolidated Financial Statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances have
been eliminated.
(c) Revenue recognition
The Company's revenues are primarily generated from the resale of prepaid
long distance telephone time, principally from the sale of prepaid calling
cards. The Company recognizes revenue on the sale of prepaid calling cards at
the date of sale.
(d) Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid money
market instruments with original terms to maturity of less than 90 days.
(e) Inventory
Inventory includes raw materials, parts and supplies and work-in-progress
which are valued at the lower of average cost and net realizable value.
F-8
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Machinery and equipment
Machinery and equipment are recorded at cost less accumulated depreciation.
Depreciation is calculated over the estimated useful lives of machinery and
equipment as follows:
Computer equipment and software 30% declining balance
Office equipment 20% declining balance
Other machinery and equipment 30% declining balance
Vending, DTM and OTC equipment 3 years straight-line
Leasehold improvements 4 years straight-line
(g) Goodwill
Goodwill represents purchase costs in excess of the fair value of net assets
acquired and is being amortized over the period of expected benefit.
(h) Long-lived assets
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of, issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 121 establishes accounting standards for the measurement
and impairment of long-lived assets, certain identifiable intangibles, and
goodwill. The Company periodically reviews the values assigned to long-lived
assets, such as vending and other machinery, equipment, software costs, and
goodwill to determine whether any impairments are other than temporary.
(i) Income taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred income taxes are recorded using tax laws and
enacted rates for the years in which the taxes are expected to be paid.
Deferred income taxes are recorded for items when there is a temporary
difference in recording such items for financial reporting and income tax
reporting.
(j) Foreign currency translation
The Company's functional currency is the U.S. dollar since it is the
currency of the primary economic environment in which the Company and its
subsidiaries operate.
Assets and liabilities denominated in foreign currencies have been
translated into U.S. dollars at the exchange rate in effect at the balance
sheet date. Revenues and expenses denominated in foreign currencies have been
translated at rates approximating exchange rates in effect at the time of the
transactions. Exchange gains or losses arising from foreign currency
transactions have been included in the statement of operations .
(k) Stock-based compensation plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Effective fiscal 1996, the Company adopted the disclosure only option of SFAS
No. 123, Accounting for Stock-based Compensation. SFAS No. 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by the statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted.
F-9
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(l) Net (loss) income per share
In February 1997, FASB issued SFAS No. 128, Earnings per Share (SFAS No.
128), which established new standards for computing and presenting earnings
per share effective for fiscal years ending after December 15, 1997. With SFAS
No. 128, primary earnings per share is replaced by basic earnings per share
which is computed by dividing income available to common shareholders by the
weighted average number of shares outstanding for the period. In addition,
SFAS No. 128 requires the presentation of diluted earnings per share which
includes the potential dilution that could occur if potentially dilutive
securities were exercised or converted into common shares. Potentially
dilutive securities are excluded from the computation if their effect is anti-
dilutive. The Company has applied SFAS No. 128 in its computation of (loss)
income per share.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 (SAB 98). Under SAB 98 certain options and warrants
to purchase common shares and warrants issued within a one year period prior
to the initial filing of a registration statement relating to an initial
public offering are treated as outstanding for all reported periods in the
same manner as shares issued in a stock split. The basic net (loss) income per
share has been restated for all periods.
(m) Recent pronouncements
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
(SFAS No. 130) which is required to be adopted for fiscal years beginning on
or after December 15, 1997. SFAS No. 130 establishes standards for the
reporting of comprehensive income and its components in financial statements.
Reclassification of financial statements for earlier periods presented is
required. The impact of SFAS No. 130 on the Company's financial statements is
not expected to be material.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, (SFAS No. 131) which is required to be
adopted for fiscal years beginning on or after December 15, 1997. SFAS No. 131
establishes new standards for the reporting of segmented information in annual
financial statements and requires the reporting of certain selected segmented
information on interim reports to shareholders. The Company adopted SFAS No.
131 during fiscal 1998 (Note 8).
(n) Fair value of financial instruments
The Company estimates that the carrying values of its cash and cash
equivalents, accounts receivable, advances and deposit on acquisition,
accounts payable, other accrued liabilities, and security deposits approximate
fair value at March 31, 1997 and 1998. The fair value of long-term debt has
been estimated at $2,031,306 as of March 31, 1998 (March 31, 1997--$829,214)
as compared to net carrying value of $1,519,174 (March 31, 1997--$785,011).
3. ACQUISITIONS
(a) On June 10, 1997, the Company purchased all of the issued and
outstanding shares of Phone Line International (PLI) Inc. ("PLI"), a company
which distributes prepaid calling cards, for cash of $252,890, the issue of
126,689 common shares of the Company at a value of $270,954, and the payment
of costs associated with the acquisition of $19,328. The acquisition was
accounted for by the purchase method and goodwill recognized on acquisition
amounted to $457,613. The results of operations of PLI have been consolidated
from June 10, 1997.
(b) On November 17, 1997, the Company acquired all the issued and
outstanding shares of Cardxpress Vending, Inc. ("Cardxpress"), a company which
operates vending equipment, for cash of $156,914 and 3,928 common shares of
the Company valued at $11,000. The acquisition was accounted for by the
purchase method and the results of operations of Cardxpress have been
consolidated from November 17, 1997.
F-10
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) On January 20, 1997, the Company purchased certain assets and rights of
Interurbain Communications, Inc. ("Interurbain") for 400,000 common shares of
the Company at a value of $ 652,625. All shares were issued during fiscal
1998. The Company has recorded the acquisition by the purchase method during
the year ended March 31, 1997 and recognized goodwill on acquisition of
$205,613. The assets acquired and operating results have been consolidated
from January 20, 1997.
(d) Effective April 21, 1998, the Company purchased all of the issued and
outstanding shares of Metrophone Telecommunications Inc. ("Metrophone"), a
company that operates payphones, for $1.3 million, consisting of cash of
$700,000 and 84,290 common shares at a value of $7.12 per share.
At March 31, 1998, an initial deposit of $150,000 and cumulative advances to
Metrophone of $288,330 have been accounted for at cost as the closing date of
the acquisition was April 21, 1998 and the assets and operations of Metrophone
were not acquired until that date. In addition, in April 1998, 12,500 common
shares at a value of $4.08 per share were issued in connection with costs
associated with the acquisition. The acquisition of Metrophone was recorded by
the purchase method in April 1998 and resulted in the recognition of goodwill
in the amount of approximately $1.7 million. This goodwill will be amortized
over ten years commencing with the date of acquisition.
(e) The following pro forma information combines the consolidated results
of operations of the Company and the unaudited results of operations of PLI
and Cardxpress for the years ended March 31, 1997 and 1998, as if PLI and
Cardxpress had been purchased by the Company on April 1, 1996, after including
the impact of the pro forma adjustment for revised amortization expense due to
recording of goodwill and the fair value of assets acquired on each
acquisition.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues.............................................. $ 5,209,195 $10,541,338
Net (loss) income for the year........................ $(3,710,940) $ 78,308
Basic and diluted (loss) income per common share...... $ (0.62) $ 0.01
</TABLE>
The pro forma results of operations are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for the
entire period presented and are not intended to be a projection of future
results.
4. MACHINERY AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31,
1997 MARCH 31, 1998
---------- ----------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST DEPRECIATION VALUE
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Computer equipment and
software................... $ 81,342 $ 189,119 $ 107,781 $ 81,338
Office equipment............ 34,436 65,933 22,999 42,934
Other machinery and
equipment.................. 5,423 38,004 6,803 31,201
Vending, DTM and OTC
equipment.................. 1,048,804 2,425,291 1,120,596 1,304,695
Leasehold improvements...... 1,093 18,818 2,520 16,298
---------- ---------- ---------- ----------
$1,171,098 $2,737,165 $1,260,699 $1,476,466
========== ========== ========== ==========
</TABLE>
F-11
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INVESTMENT IN JOINT VENTURE
Effective April 1, 1998, the Company entered into a corporate joint venture
with DCI Telecommunications, Inc. ("DCI"), which was incorporated under the
Canada Business Corporations Act under the name Phone Line CardCall
International Inc. ("PhoneLine"). In connection with the formation of
PhoneLine, on March 31, 1998, the Company issued 41,250 common shares at a
value of $147,591 and incurred additional costs of $59,410 on behalf of
PhoneLine for an aggregate cost to March 31, 1998 of $207,001.
Under the terms of the agreement, a subsidiary of DCI provided initial
capital of $280,958; $42,144 for 60,000 common shares of PhoneLine and
$238,814 by way of loan (the "DCI Loan"). DCI also contributed specified
assets with an attributed value of $238,814. DataWave provided initial capital
of $449,533; $28,096 for 40,000 common shares of PhoneLine, and $421,440 by
way of loan (the "DW Loan"). The Company also contributed specified assets
with an attributed value of $421,440 for cash.
The DW Loan and DCI Loan rank pari passu, bear interest at 12% per annum and
are repayable as the directors of PhoneLine may determine.
For a period of two years from the closing date the Company shall also have
the right to purchase 9,000 of the PhoneLine shares held by DCI at a price of
C$27.77 (US$19.56) per share.
PhoneLine has a board of six directors, three of whom shall be nominees of
DCI and three of whom shall be nominees of the Company.
The Company's investment in PhoneLine will be recorded on the equity basis
whereby the investment is initially recorded at cost and the carrying value
adjusted thereafter to include the Company's pro rata share of the earnings or
loss of PhoneLine.
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Applied Telecommunications Technologies Inc................ $604,935 $1,390,841
Manufacturers Bank......................................... 180,076 128,333
-------- ----------
785,011 1,519,174
Less: current portion...................................... 196,497 497,841
-------- ----------
$588,514 $1,021,333
======== ==========
</TABLE>
(a) In December 1996, a subsidiary of the Company entered into a financing
arrangement with Applied Telecommunications Technologies Inc. ("ATTI") to
finance up to approximately $2 million of equipment at effective interest
rates approximating 33% with varying terms to July 2001. On December 23, 1996,
ATTI assigned the arrangement to an affiliate. Funding was received in a
series of tranches and is secured by a first charge over the equipment and a
general charge over all the assets of the Company including its subsidiaries.
As partial consideration for the financing arrangement, the Company granted
ATTI and/or an affiliate non-transferable share purchase warrants to acquire
100,000 common shares of the Company. The exercise price of the warrants was
determined by calculating the average trading price of the Company's common
shares for the previous 10 business days preceding each funding. To March 31,
1998, the Company had granted warrants to purchase 100,000 shares at exercise
prices between C$1.16 (US$0.82) and C$3.12 (US$2.20) per share. At March 31,
1998, warrants to purchase 68,333 common shares were outstanding.
F-12
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) The following are the minimum payments due in each of the succeeding
years:
<TABLE>
<S> <C>
1999............................................................. $ 836,903
2000............................................................. 823,543
2001............................................................. 425,699
2002............................................................. 51,967
----------
Total............................................................ 2,138,112
Less Interest.................................................... (618,938)
----------
$1,519,174
==========
</TABLE>
7. COMMON SHARES
(a) Escrow and pooling arrangements
As at March 31, 1998, 1997 and 1996, there were 781,875 common shares
held in escrow by the Company's registrar and transfer agent. The escrow
shares will be released from escrow pro rata to the holders of the shares
as, and if, the Company meets certain net earnings and cash flow
requirements. Certain shares held in escrow will become subject to pool
upon release from escrow.
Pursuant to pooling agreements dated November 16, 1993, February 9, 1996
and June 30, 1997 between the Company, Montreal Trust Company of Canada and
certain shareholders of the Company, such shareholders have agreed to place
176,938 of the shares released from escrow in pool. A total of 96,000 of
the pooled shares will be released on the basis of 25% one year from the
initial release of the pooled shares from escrow and a further 25% each
year thereafter. The remaining pooled shares will be released from the pool
on the basis of 33 1/3% one year from the initial release of the pooled
shares from escrow and a further 33 1/3% each year thereafter.
(b) Share purchase warrants
As at March 31, 1998, there were outstanding share purchase warrants to
purchase an aggregate of 322,084 common shares. Each warrant entitles the
holder to purchase common shares of the Company at prices between C$0.80
(US$0.56) and C$4.60 (US$3.24) per share and expire at various dates to
December 14, 1999.
(c) Share purchase options
(i) 1997 Stock Option Plan
In August 1997, the Board of Directors and the shareholders of the
Company approved the 1997 Stock Option Plan (the "1997 Plan"), whereby the
Board of Directors may make awards to directors and employees of the
Company and its subsidiaries for their contributions to the Company. This
includes options granted prior to the implementation of the 1997 Plan which
were deemed to be re-granted under the 1997 Plan. Options granted under the
1997 Plan are not transferable by an optionee, and each option is
exercisable only by such optionee. The expiry date will be fixed by the
Board of Directors but will be not later than the tenth anniversary of the
award date and the exercise price of each option will be not less than the
market price for the shares of the Company for the ten trading days
immediately preceding the day on which the Vancouver Stock Exchange
receives the required notice that the Board granted the option. In no cases
will an optionee be granted an option where the number of shares that may
be purchased pursuant to the option exceed, when added to the number of
shares available for purchase pursuant to options previously granted to the
optionee which remain exercisable, 5% of the Company's issued and
outstanding share capital as of the award date of the option being granted.
F-13
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As at March 31, 1998, the following stock options were outstanding:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE EXPIRY DATES
--------- --------------- ---------------------------------------------
<S> <C> <C>
397,625 C$1.20 (US$0.85) Between November 16, 1998 and August 1, 2002
276,375 C$1.60 (US$1.13) August 1, 2002
228,875 C$2.64 (US$1.86) Between August 1, 2002 and September 26, 2002
25,000 C$3.32 (US$2.34) January 28, 2003
2,500 C$4.16 (US$2.94) June 26, 2000
1,250 C$4.00 (US$2.82) November 16, 1998
-------
931,625
=======
</TABLE>
Subsequent to March 31, 1998, 10,137 common shares were issued on
exercise of options for proceeds of $16,104 and options to acquire an
additional 27,500 shares were granted at an exercise price of C$9.00
(US$6.32) per share and an expiry date of May 12, 2003 and options to
acquire 50,000 shares originally exercisable at C$1.20 (US$0.84) per share
were cancelled.
(ii) Pro forma disclosure of the effect of stock-based compensation
For SFAS No. 123 purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions: risk-free interest
rate of 6 percent, dividend rate of zero percent and expected volatility of
between 25 and 128 percent depending on the date of grant. Using these
assumptions, the fair value of the stock options granted and/or repriced in
fiscal 1996, 1997 and 1998 is $629,005, $102,327 and $935,416,
respectively. Had compensation cost been determined consistent with SFAS
No. 123, utilizing the assumptions detailed above, the Company's net (loss)
income and net (loss) income per share would have been increased or
decreased to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
Net (loss) income
As reported........................... $(2,328,186) $(3,626,411) $ 65,099
Pro forma............................. (2,957,191) (3,728,738) (870,317)
Basic and diluted (loss) income per
share
As reported........................... $ (0.46) $ (0.60) $ 0.01
Pro forma............................. (0.59) (0.62) (0.13)
</TABLE>
8. SEGMENTED GEOGRAPHIC INFORMATION
(a) Segmented information
The Company manufactures and operates prepaid calling card merchandising
machines and re-sells long distance telephone time through prepaid calling
cards distributed through its machines and at retail locations. In accordance
with SFAS No. 131 the Company considers its business to consist of one
reportable operating segment.
F-14
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Geographic information
The Company has long-lived assets and has earned revenue from sales to
customers in the following geographic locations:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States........... $1,091,954 $ 818,506 $3,055,827 $1,263,897 $7,905,936 $1,451,318
Canada.................. 171,207 100,880 92,738 95,870 1,770,498 495,812
</TABLE>
Long-lived assets consist of capital assets and goodwill.
9. INCOME TAXES
The difference in income tax expense (recovery) due to differences between
the statutory federal income tax rate and the Company's effective income tax
rate applied to (loss) income before income taxes was as follows for the years
ended March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1996 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
Income taxes (recovery) based on
statutory Canadian federal tax rate
of 45.4%............................. $(1,056,996) $(1,646,391) $ 29,555
Tax loss and related benefit not
recognized in the period of the
loss................................. 1,006,106 1,560,457 225,019
Tax benefit realized from previously
unrecognized prior year loss
carryforward......................... -- -- (250,763)
Lower rate on loss (income) of U.S.
affiliates........................... 40,390 78,273 (32,327)
Other permanent differences........... 10,500 7,661 28,516
----------- ----------- ---------
Income taxes at the Company's
effective rate....................... $ -- $ -- $ --
=========== =========== =========
</TABLE>
The major components of deferred tax assets arising from temporary
differences at March 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Non-current
Depreciation and amortization.................... $ (17,511) $ 6,654
Net operating loss carryforwards................. 2,731,060 2,717,766
Other............................................ 344,169 283,487
----------- -----------
Subtotal......................................... 3,057,718 3,007,907
Valuation allowance.............................. (3,057,718) (3,007,907)
----------- -----------
Net non-current deferred tax assets.............. $ -- $ --
=========== ===========
</TABLE>
F-15
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had net operating loss carryforwards of approximately $6,357,249
and $6,400,608 at March 31, 1998 and 1997, respectively. To the extent not
used, net operating loss carryforwards expire in varying amounts beginning in
the year 2001. In addition, approximately $850,000 of the U.S. based net
operating loss carryforwards are subject to significant limitations on use.
Based on available evidence, including the Company's history of operating
losses, the uncertainty of future profitability and the impact of tax laws
which may limit the Company's ability to utilize such loss carryforwards,
management has recorded valuation allowances against the realization of the
deferred tax assets.
10. TELECOMMUNICATIONS SERVICE AGREEMENTS
On January 30, 1998, the Company entered into certain non-exclusive
telecommunications service agreements with AT&T Corp. (the "AT&T Agreements")
which provides for, among other things, the purchase of long distance
telephone service from AT&T, the right to resell the service under AT&T's
brand name and the joint marketing and promotion of branded AT&T prepaid cards
and the DataWave System in the United States. Under the AT&T Agreements, the
Company is obligated to purchase $5.25 million of long distance time each year
over the two-year term of the agreement. If the Company does not purchase the
minimum, it incurs a shortfall charge consisting of the cost of the time not
purchased and a penalty.
Termination or non-renewal of the AT&T Agreements or failure to meet the
minimum annual purchase commitment set forth therein could have a material
adverse effect on the Company's business, financial condition and results of
operations.
11. COMMITMENTS AND CONTINGENCIES
(a) The Company has the following future minimum payments with respect to
operating leases for office space, computer and office equipment:
<TABLE>
<S> <C>
1999................................................................ $122,346
2000................................................................ 81,583
2001................................................................ 72,836
2002................................................................ 6,518
--------
$283,283
========
</TABLE>
(b) The Company recently determined that, in certain instances during
calendar 1998, the Company's rates for telecommunications services were above
those specified in the tariffs of the underlying carrier. In these instances,
certain states and the FCC would likely deem the Company to have been acting
as a carrier and to have been operating in non-compliance with the requirement
that such carriers be certified and/or have their own tariffs on file. As a
result of such non-compliance, the FCC and state regulators could subject the
Company to fines, penalties, or other sanctions which, in certain
circumstances, could be applied on a per day or per violation basis. In June
1998, the Company adjusted its rates for prepaid calling card services to fall
within those specified in the long distance tariffs of its underlying carriers
and therefore believes it is compliant with the foregoing regulatory
requirements.
12. CREDIT CONCENTRATION
The Company's largest customer accounted for 11% of revenues during fiscal
1998.
F-16
<PAGE>
DATAWAVE SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. REVERSE STOCK SPLIT
In connection with the proposed offering of common shares in the United
States as described in Note 14, the Company intends to complete a 1-for-4
reverse stock split of the Company's common shares which will be effected
immediately prior to the Offering. Accordingly, all shares, per share data and
related capital amounts for all periods presented in these financial
statements reflect the effects of this reverse stock split.
14. SUBSEQUENT EVENTS
(a) Subsequent to March 31, 1998, the Company entered into the ATTI Line of
Credit which provides for borrowings of up to $5 million in three separate
tranches at an annual interest rate of 14%. Approximately $1.6 million was
outstanding under the ATTI Line of Credit at June 1, 1998. The term of the
ATTI Line of Credit expires on the earlier of August 31, 1998 and the date on
which the Company raises equity capital in excess of $8 million (the "Maturity
Date"). Amounts outstanding on the Maturity Date are converted to a fully
amortizing 30 month loan at an annualized rate of 14%. The ATTI Line of Credit
is secured by all assets of the Company and its subsidiaries, excluding the
Company's interest in PhoneLine. As partial consideration for the ATTI Line of
Credit, the Company agreed to issue to ATTI and an affiliate warrants to
purchase up to $1 million aggregate value in Common Shares, with the number of
warrants to be determined on a pro rata basis upon approval of each of the
three funding tranches based on the average closing price for the ten business
days preceding such approval. To date, warrants to purchase 72,902 Common
Shares have been issued to ATTI pursuant to the ATTI Line of Credit at
exercise price per share of C$6.24 (US$4.39).
(b) On June 4, 1998 the Company filed a registration statement on Form S-1
with the United States Securities and Exchange Commission for an offering of
268,500 of its Common Shares, of which 2,500,000 shares will be issued and
sold by the Company and 185,000 will be sold by certain selling shareholders.
The Company has also granted to the underwriters an over-allotment option to
purchase up to 402,750 additional common shares on similar terms and
conditions.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of
Metrophone Telecommunications Inc.:
We have audited the balance sheets of Metrophone Telecommunications Inc. as
at December 31, 1997 and March 31, 1998 and the statements of loss and deficit
and cash flows for the year ended December 31, 1997 and the three month period
ended March 31, 1998. 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 an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1997 and
March 31, 1998 and the results of its operations and cash flows for the year
ended December 31, 1997 and the three month period ended March 31, 1998 in
accordance with accounting principles generally accepted in the United States.
Deloitte & Touche
Chartered Accountants
Vancouver, British Columbia, Canada
June 1, 1998
F-18
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash................................................. $ 4,869 $ 24,456
Accounts receivable.................................. 10,787 15,666
Deposits and loan fees............................... 23,269 24,632
--------- ---------
Total current assets............................... 38,925 64,754
MACHINERY AND EQUIPMENT, NET (Note 3).................. 268,751 370,507
DEFERRED FINANCING COSTS ON EQUIPMENT
FINANCING LOANS, NET.................................. 23,791 22,316
DEFERRED EXPENSES, NET (Note 4)........................ 158,299 151,708
--------- ---------
TOTAL ASSETS........................................... $ 489,766 $ 609,285
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable..................................... $ 337,465 $ 224,855
Due to DataWave Systems Inc. (Note 9)................ -- 388,869
Current portion of obligations under equipment
financing loans (Note 5)............................ 52,645 54,619
--------- ---------
Total current liabilities.......................... 390,110 668,343
OBLIGATIONS UNDER EQUIPMENT FINANCING LOANS (Note 5)... 232,393 215,295
--------- ---------
TOTAL LIABILITIES...................................... $ 622,503 $ 883,638
--------- ---------
COMMITMENTS (Note 6)
SHAREHOLDERS' DEFICIT
Preferred shares, $0.01 par value, 1,000,000
authorized, none issued and outstanding at December
31, 1997 and March 31, 1998......................... -- --
Common shares, $0.01 par value, 10 million shares
authorized, 755,000 issued and outstanding at
December 31, 1997 and March 31, 1998................ 1 1
Deficit.............................................. (132,738) (274,354)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT............................ (132,737) (274,353)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............ $ 489,766 $ 609,285
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-19
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
STATEMENTS OF LOSS AND DEFICIT
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
REVENUES.............................................. $ 253,783 $ 62,091
COSTS OF REVENUES..................................... 98,181 30,376
--------- ---------
GROSS PROFIT.......................................... 155,602 31,715
--------- ---------
OPERATING EXPENSES
General and administrative.......................... 109,345 121,490
Selling and marketing............................... 15,652 7,298
Depreciation and amortization....................... 37,181 19,290
Loss on write-off of machinery and equipment........ 4,944 --
--------- ---------
Total operating expenses.......................... 167,122 148,078
--------- ---------
OPERATING LOSS........................................ (11,520) (116,363)
Interest and bank charges............................. (32,453) (8,537)
--------- ---------
NET LOSS.............................................. (43,973) (124,900)
DEFICIT, BEGINNING OF PERIOD.......................... (29,187) (132,738)
DIVIDENDS DISTRIBUTED................................. (59,578) (16,716)
--------- ---------
DEFICIT, END OF PERIOD................................ $(132,738) $(274,354)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-20
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (43,973) $(124,900)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 37,181 19,290
Loss on write-off of machinery and equipment...... 4,944 --
Net change in non-cash working capital items:
Accounts receivable............................... 1,593 (4,879)
Deposits and loan fees............................ (17,220) (1,363)
Accounts payable.................................. 239,812 (112,610)
--------- ---------
Net cash provided by (used in) operating activi-
ties.............................................. 222,337 (224,462)
--------- ---------
INVESTING ACTIVITY
Purchase of machinery and equipment................ (27,955) (111,780)
--------- ---------
Net cash (used in) investing activity.............. (27,955) (111,780)
--------- ---------
FINANCING ACTIVITIES
Proceeds from equipment financing loans............ 71,721 --
Repayment of equipment financing loans............. (33,111) (15,124)
Increase in deferred financing costs............... (20,000) --
Increase in deferred expenses...................... (145,762) (1,200)
Dividends paid..................................... (59,578) (16,716)
Due to DataWave Systems Inc........................ -- 388,869
--------- ---------
Net cash (used in) provided by financing activi-
ties.............................................. (186,730) 355,829
--------- ---------
INCREASE IN CASH..................................... 7,652 19,587
(BANK INDEBTEDNESS) CASH, BEGINNING OF PERIOD........ (2,783) 4,869
--------- ---------
CASH, END OF PERIOD.................................. $ 4,869 $ 24,456
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................... $ 32,453 $ 8,537
========= =========
Taxes paid........................................... $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Purchase of machinery financed through equipment fi-
nance loans......................................... $(148,282) $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-21
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
1. NATURE OF OPERATIONS
The Company owns and operates pay phones located in the United States.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and include the following
significant accounting policies:
(a) Accounting 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
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Revenue recognition
The Company's revenues consist primarily of local and long distance payphone
revenue. Revenue is recognized when the customer completes the phone call and
makes payment by coin or calling card.
(c) Machinery and equipment
Machinery and equipment are recorded at cost, less accumulated depreciation.
Depreciation is calculated over the estimated useful lives of capital assets
as follows:
Computer equipment and software 3 years straight line
Office equipment 5 years straight line
Furniture and fixtures 10 years straight line
Telephone equipment 10 years straight line
Automobile 5 years straight line
(d) Long-lived assets
The Company has adopted SFAS No. 121, Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed of. SFAS No. 121
establishes accounting standards for the measurement and impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The Company periodically reviews the values
assigned to long-lived assets, such as telephone and other machinery,
equipment and software costs, to determine whether any impairments are other
than temporary.
(e) Deferred expenses
Deferred expenses consist of initial sign up fees on customer contracts and
deferred financing costs. The Company pays initial sign up fees to new
customers on contracts that have terms ranging from five to ten years. These
sign up fees are amortized over the term of the contract. Deferred financing
costs consist of a 10% financing charge on equipment loans which are due at
the end of the term. These costs have been amortized over the term of the loan
contract.
F-22
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
(f) Fair value of financial instruments
The Company estimates that the carrying values of its cash, accounts
receivable, accounts payable, due to DataWave Systems Inc., and obligations
under equipment financing loans approximate fair value at December 31, 1997 and
March 31, 1998.
3. MACHINERY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
1997 MARCH 31, 1998
------------ ------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST DEPRECIATION VALUE
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Computer equipment and
software..................... $ 4,315 $ 6,537 $ 1,559 $ 4,978
Office equipment.............. 2,203 2,447 367 2,080
Furniture and fixtures........ 3,143 3,309 248 3,061
Telephone equipment........... 239,112 383,793 42,273 341,520
Automobile.................... 19,978 22,199 3,331 18,868
-------- -------- ------- --------
$268,751 $418,285 $47,778 $370,507
======== ======== ======= ========
</TABLE>
4. DEFERRED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
1997 MARCH 31, 1998
------------ ------------------------------
NET BOOK ACCUMULATED NET BOOK
VALUE COST AMORTIZATION VALUE
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Deferred expenses................ $158,299 $167,632 $15,924 $151,708
</TABLE>
5. OBLIGATIONS UNDER EQUIPMENT FINANCING LOANS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Telecapital L.P. ..................................... $285,038 $269,914
Less: current portion................................. 52,645 54,619
-------- --------
$232,393 $215,295
======== ========
</TABLE>
The Telecapital equipment financing loans are repayable in aggregate average
monthly installments of approximately $7,316 including principal and interest,
bear interest at a rate of approximately 15% per annum, mature at various dates
until April 2002 and are secured by the equipment.
The following are the minimum loan payments for the aforementioned loans as
of December 31, 1997:
<TABLE>
<S> <C>
1998............................................................... $ 87,806
1999............................................................... 87,806
2000............................................................... 87,806
2001............................................................... 96,097
2002............................................................... 9,847
--------
Total minimum loan payments........................................ 369,361
Less: interest..................................................... 84,323
--------
$285,038
========
</TABLE>
F-23
<PAGE>
METROPHONE TELECOMMUNICATIONS INC.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
The Company has the following future minimum payments with respect to
operating leases for office space at December 31, 1997:
<TABLE>
<S> <C>
1998................................................................. $18,368
1999................................................................. 23,652
2000................................................................. 19,710
</TABLE>
7. INCOME TAXES
During the year ended December 31, 1997 and the three months ended March 31,
1998, the Company was a registered subchapter S corporation under United
States tax legislation. As such, income is distributed to the shareholders as
dividend distributions and income taxes are assessed upon the individual
shareholders.
8. STOCK SPLIT
On January 1, 1998, the Company's Articles were amended to effect a 7,550-
to-1 stock split on each issued and outstanding share. The number of issued
and outstanding shares at December 31, 1997 have been restated to reflect the
effect of this stock split.
9. RELATED PARTY TRANSACTIONS
Amounts due to DataWave Systems Inc. are unsecured, bear no interest and
have no specific terms of repayment.
10. SUBSEQUENT EVENTS
Effective April 21, 1998, all of the issued and outstanding shares of the
Company were sold to DataWave Systems Inc. for $1.3 million, consisting of
cash of $700,000 and 84,290 common shares of DataWave Systems Inc. payable to
shareholders of the Company.
F-24
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The selected unaudited pro forma consolidated financial information for the
Company set forth below gives effect to the acquisition of the shares of
Metrophone Telecommunications Inc. ("Metrophone") and the transfer of
specified assets to a corporate joint venture, Phone Line Cardcall
International Inc. ("PhoneLine"). The historical financial information set
forth below has been derived from and is qualified by reference to, the
financial statements of the Company and Metrophone and should be read in
conjunction with those financial statements and the notes thereto included
elsewhere herein.
The March 31, 1998 pro forma balance sheet has been prepared as if the
transactions described in Note 1 had occurred on March 31, 1998, and
represents the consolidation of the March 31, 1998 balance sheet of Metrophone
with the March 31, 1998 balance sheet of the Company.
The pro forma statement of net loss for the year ended March 31, 1998 has
been prepared as if the transactions described in Note 1 had occurred on April
1, 1997. It represents the consolidation of the Metrophone statement of loss
for the year ended December 31, 1997 with the statement of income of the
Company for the year ended March 31, 1998, and the effect on revenues and
expenses of the Company for the year ended March 31, 1998 of the transfer of
specific assets to PhoneLine.
The pro forma consolidated financial statements are not intended to reflect
the results of operations or the financial position of the Company which would
have actually resulted had the proposed transactions described in Note 1 been
effected on the dates indicated. Further, the pro forma financial information
is not necessarily indicative of the results of operations or the financial
position that may be obtained in the future.
F-25
<PAGE>
DATAWAVE SYSTEMS INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
DATAWAVE METROPHONE
MARCH 31, MARCH 31, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS NOTE 1 CONSOLIDATED
--------- ---------- ----------- -------- ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equiva-
lents................ $ 860 $ 24 $ (28) (550) 1(b) 1(a) $ 306
Inventory............. 769 -- (72) 1(b) 697
Accounts receivable... 558 16 574
Prepaid expenses...... 229 24 253
------- ----- ----------- -------
Total current
assets............. 2,416 64 (650) 1,830
MACHINERY AND EQUIPMENT,
NET.................... 1,476 371 (53) 1(b) 1,794
GOODWILL, NET........... 471 -- (296) 1,700 1(b) 1(a) 1,875
ADVANCES AND DEPOSIT ON
ACQUISITION............ 438 -- (438) 1(a) --
INVESTMENT IN JOINT VEN-
TURE................... 207 -- 449 1(b) 656
OTHER ASSETS............ 86 174 (174) 1(a) 86
------- ----- ----------- -------
TOTAL ASSETS............ $ 5,094 $ 609 $ 538 $ 6,241
======= ===== =========== =======
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and
accrued liabilities.. $ 1,933 $ 225 $ 2,158
Security deposits..... 27 -- 27
Due to DataWave Sys-
tems Inc............. -- 388 (388) 1(a) --
Current portion of
long-term debt....... 498 55 553
------- ----- ----------- -------
Total current
liabilities........ 2,458 668 2,738
LONG-TERM DEBT, LESS
CURRENT
PORTION................ 1,022 215 1,237
------- ----- ----------- -------
TOTAL LIABILITIES....... 3,480 883 (388) 3,975
------- ----- ----------- -------
SHAREHOLDERS' EQUITY
COMMON SHARES........... 9,711 1 651 1(a) 10,363
SHARE WARRANTS.......... 63 -- 63
DEFICIT................. (8,160) (275) 275 1(a) (8,160)
------- ----- ----------- -------
TOTAL SHAREHOLDERS' EQ-
UITY................... 1,614 (274) 926 2,266
------- ----- ----------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY... $ 5,094 $ 609 $ 538 $ 6,241
======= ===== =========== =======
</TABLE>
F-26
<PAGE>
DATAWAVE SYSTEMS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
PRO FORMA
DATAWAVE METROPHONE CONSOLIDATED
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, PRO FORMA MARCH 31,
1998 1997 ADJUSTMENTS NOTE 1 1998
---------- ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 9,676 $ 254 $ (1,685) 1(b) $ 8,245
COST OF REVENUES........ 6,211 98 (1,115) 1(b) 5,194
--------- -------- --------- ---------
GROSS PROFIT............ 3,465 156 (570) 3,051
--------- -------- --------- ---------
OPERATING EXPENSES
General and adminis-
trative.............. 1,426 109 (155) 1(b) 1,380
Selling and market-
ing.................. 552 16 (133) 1(b) 435
Research and develop-
ment................. 134 -- -- 134
Depreciation and amor-
tization............. 895 37 170 (39) 1(a) 1(b) 936
(127) 1(b)
Loss on foreign ex-
change............... 28 -- -- 28
Loss on disposal of
machinery and
equipment............ -- 5 -- 5
--------- -------- --------- ---------
Total operating
expenses........... 3,035 167 (284) 2,918
--------- -------- --------- ---------
INCOME (LOSS) FROM OPER-
ATIONS................. 430 (11) (286) 133
--------- -------- --------- ---------
Earnings from joint
venture.............. -- -- (127) 253 1(b) 1(b) 126
Interest expense...... (365) (32) 1 (11) 1(b) 1(b) (407)
--------- -------- --------- ---------
(365) (32) 116 (281)
--------- -------- --------- ---------
NET INCOME (LOSS)....... $ 65 $ (43) $ (170) $ (148)
========= ======== ========= =========
Pro forma basic and
diluted net loss per
share................ $ (0.02)
=========
Shares used in
computing pro forma
basic and diluted net
loss per share....... 6,747,805
=========
</TABLE>
F-27
<PAGE>
DATAWAVE SYSTEMS INC.
NOTE TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED MARCH 31, 1998
(UNAUDITED)
1. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
The pro forma consolidated financial statements of the Company incorporate
the following pro forma adjustments and assumptions:
(a) The acquisition by the Company of the issued and outstanding shares
of Metrophone for $1.3 million consisting of cash of $700,000 ($150,000 of
which was previously paid on deposit) and 84,290 common shares at a value
of $7.12 per share. 12,500 common shares at a value of $4.08 per share were
also issued in connection with costs associated with the acquisition.
The transaction has been accounted for as an acquisition by the Company
and the purchase method of accounting has been applied.
The excess of the purchase price of Metrophone over the fair value of the
net assets acquired has been allocated to goodwill on a preliminary basis,
subject to final assessment of fair values acquired, and is being amortized
on a straight-line basis over 10 years.
(b) The investment by the Company in a corporate joint venture,
PhoneLine, with DCI Telecommunications, Inc. Under terms of the agreement,
DataWave provided initial capital of $449,533; $28,096 for 40,000 common
shares of PhoneLine, representing 40% of PhoneLine, and $421,440 by way of
loan. The Company also contributed specified assets with a book value
approximating fair value of $422,595 in exchange for cash of $422,595.
The specified assets to be contributed to PhoneLine will consist of
inventory, license and capital assets of Phone Line International (PLI)
Inc. (PLI), a company acquired by the Company on June 10, 1997. Accordingly
revenues, expenses, and the net earnings relating to the specified assets
of PLI for the year ended March 31, 1998, which were contributed to
PhoneLine, have been reclassified to earnings from joint venture in the pro
forma statement of net loss.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 15
Use of Proceeds.......................................................... 15
Price Range of Common Shares............................................. 16
Dividend Policy.......................................................... 17
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Management............................................................... 39
Certain Transactions..................................................... 44
Principal and Selling Shareholders....................................... 46
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Available Information.................................................... 54
Enforceability of Civil Liabilities Against Foreign Persons.............. 55
Exchange Rate Information................................................ 55
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,685,000 COMMON SHARES
[LOGO]
DATAWAVE SYSTEMS INC.
------------
PROSPECTUS
------------
MORGAN KEEGAN & COMPANY, INC.
LAIDLAW GLOBAL SECURITIES INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
issuance and distribution of the Common Shares offered hereby, other than
underwriting discounts and commissions. The Company will bear all such
expenses. All amounts shown are estimates except for the Securities and
Exchange Commission Registration Fee, the National Association of Securities
Dealers, Inc. Filing Fee and the Nasdaq National Market Listing Fee.
<TABLE>
<CAPTION>
COMPANY
-------
<S> <C>
Securities and Exchange Commission Registration Fee............... $5,010
National Association of Securities Dealers, Inc. Filing Fee....... $2,199
Nasdaq National Market Listing Fee................................ *
Printing and Engraving Expenses................................... *
Blue Sky Fees and Expenses........................................ *
Legal Fees and Expenses........................................... *
Accounting Fees and Expenses...................................... *
Transfer Agent and Registrar Fees and Expenses.................... *
Miscellaneous Fees and Expenses................................... *
------
Total $ *
======
</TABLE>
- --------
*To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 128 of the Company Act of the Province of British Columbia, Canada
(the "Company Act") provides that a corporation may, with the approval of the
court, indemnify a Director or officer, or a former Director or officer, of
the corporation or its subsidiaries against all costs, charges and expenses in
any action to which he or she is made a party by reason of being or having
been a Director or officer, subject to certain limitations. In addition,
Section 128 of the Company Act provides that a corporation may purchase and
maintain insurance for the benefit of a Director or officer, or former
Director or officer, against any liability incurred by such person as a
Director or officer.
Section 20 of the Company's Articles of Association (the "Articles")
provides that, subject to the provisions of the Company Act, the Directors
may, with the approval of the court, cause the Company to indemnify a Director
or officer, or a former Director or officer, of the Company or its
subsidiaries against all costs, charges and expenses in any action to which he
is made a party by reason of being or having been a Director or officer,
including any action or proceeding brought by the Company. Each Director of
the Company on being elected or appointed is deemed to have contracted with
the Company on the terms of the foregoing indemnity. The failure of a Director
or officer of the Company to comply with the provisions of the Company Act, or
the Altered Memorandum (the "Memorandum") and Articles of the Company will not
invalidate any indemnity to which he is entitled. In addition, the Directors
may cause the Company to purchase and maintain insurance for the benefit of
any person who is or was serving as a Director or officer of the Company or
its subsidiaries against any liability incurred by him as a Director or
officer.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its Directors and officers, certain other persons and the
Selling Shareholders, and by the Company and the Selling Shareholders of the
Underwriters, for certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") and affords certain
rights of contribution with respect thereto.
The Company may enter into indemnification agreements with its Directors and
officers and intends to maintain insurance for the benefit of its Directors
and officers insuring such persons against certain liabilities, including
liabilities under the securities laws.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the Company has issued and sold the securities
described below. For those issuances of securities to residents of the United
States, the Company relied upon the exemption from registration provided by
Section 4(2) of the Securities Act except as may otherwise be noted. The US$
figures provided herein are based upon the monthly average US-Canadian
conversion rate as of the month of the transaction; provided, however, that
the US$ figures for unexercised options and warrants are based upon the US-
Canadian conversion rates as of March 31, 1998.
1. On June 7, 1995, the Company issued in a private placement to 45 non-U.S.
residents special warrants to purchase an aggregate of 833,333 Common Shares
(the "January 1995 Units"). Each January 1995 Unit was issued for cash
consideration of C$3.00 (US$2.16) and was convertible into one Common Share at
no additional consideration and one warrant to purchase one half of a Common
Share at an exercise price of C$5.00 (US$3.60) per share (the "January 1995
Warrants").
2. On June 9, 1995 and June 30, 1995, the Company issued an aggregate of
90,070 Common Shares, valued at C$4.36 (US$3.18) per share, to 15 non-U.S.
residents, as consideration for the acquisition of all of the outstanding
partnership interests of DataWave Vending Marketing Limited Partnership.
3. On August 31, 1995 and January 11, January 31, April 24, June 3, June 6,
June 7, and June 13, 1996, the Company issued an aggregate of 250,000 Common
Shares, upon the exercise of warrants by nine warrant-holders, each a non-U.S.
resident, for cash consideration of C$1.58 (US$1.82) per share.
4. On October 5, 1995, the Company issued an aggregate of 395,000 Common
Shares, for cash consideration of C$5.00 (US$3.73) per share, excluding
expenses of the issuance, to 11 non-U.S. residents, including certain
executive officers of the Company, in a private placement. C.M. Oliver &
Company Limited acted as agent for the Company in connection with the private
placement of 231,250 Common Shares and received (i) a commission of $51,695,
(ii) a corporate finance fee of $26,080 and (iii) a warrant to purchase 35,000
Common Shares at an exercise price of C$5.00 (US$3.73) per share.
5. On January 19, January 30 and January 31, 1996, the Company issued an
aggregate of 216,763 Common Shares upon the exercise of certain January 1995
Warrants to nine warrant-holders, each a non-U.S. resident, for cash
consideration of C$5.00 (US$3.65) per share.
6. On July 10, 1996, the Company granted special warrants to purchase an
aggregate of 600,000 Common Shares for cash consideration of C$4.00 (US$2.92)
per share to four investors. These special warrants were subsequently
exercised on or around July 1996. Marleau, Lemire Securities Inc. and
Griffiths, McBurney & Partners acted as agents in connection with this private
placement and were issued warrants to purchase 30,000 Common Shares at an
exercise price of C$4.60 (US$3.36) per share.
7. Since October 22, 1996, in connection with a lease financing agreement, the
Company has granted warrants to purchase an aggregate of 100,000 Common Shares
to Applied Telecommunications Technologies IV N.V. ("ATT IV") and Applied
Telecommunications Technologies, Inc. ("ATTI") (the "1996 ATTI Warrants"),
with exercise prices ranging from C$1.16 (US$0.82) to C$3.12 (US$2.20) per
share.
8. On May 12, 1997, pursuant to an agreement dated March 11, 1997, the Company
issued an aggregate of 375,000 Common Shares, together with warrants to
purchase an additional 375,000 Common Shares, for cash consideration of C$0.80
(US$0.57) per share (the "1997 Warrants"). The 1997 Warrants currently have an
exercise price of C$0.92 (US$0.65) per share. The Common Shares and the 1997
Warrants were offered and sold to a total of 13 investors, including certain
executive officers of the Company.
II-2
<PAGE>
9. As consideration for the acquisition of certain assets of Interurbain
Communications, Inc. ("Interurbain"), on May 16, July 21 and October 3, 1997
and January 1, 1998, the Company issued to four shareholders of Interurbain an
aggregate of 400,000 Common Shares, valued at C$2.20 (US$1.63) per share. In
addition, the Company granted warrants to purchase an aggregate of 50,000
Common Shares, at an exercise price of C$4.00 (US$2.82) per share, to each of
the four shareholders of Interurbain.
10. As consideration for the acquisition of the issued and outstanding capital
stock of Phone Line International (PLI) Inc. ("PLI"), on December 4, 1997, the
Company issued 126,689 Common Shares, valued at C$2.96 (US$2.14) per share to
the shareholders of PLI.
11. As consideration for the acquisition of the issued and outstanding capital
stock of Cardxpress Vending Inc. ("Cardxpress"), on December 5, 1997, the
Company issued 3,928 Common Shares, valued at C$3.98 (US$2.80) per share to
the shareholders of Cardxpress.
12. Effective as of March 2, 1998, the Company issued warrants to purchase
72,902 Common Shares at an exercise price of C$5.64 (US$3.97) to ATTI and ATT
IV as partial consideration for the first tranche of a new $5 million line of
credit.
13. Upon the exercise of certain 1997 Warrants, on March 11, 1998, the Company
issued an aggregate of 201,250 Common Shares for cash consideration of C$0.80
(US$0.56) per share to six investors.
14. On March 19, 1998, the Company issued 31,666 Common Shares to ATT IV upon
the exercise of certain 1996 ATTI Warrants.
15. On March 26, 1998, the Company issued an aggregate of 41,250 Common Shares
to Arlington Worldwide Limited, a non-U.S. resident, for cash consideration of
C$5.08 (US$3.58) per share as a finder's fee in connection with the PLI joint
venture.
16. As consideration for the acquisition of the issued and outstanding capital
stock of MetroPhone Telecommunications Inc. ("Metrophone"), on April 16, 1998,
the Company issued an aggregate of 84,290 Common Shares, valued at C$10.18
(US$7.12) per share, to the shareholders of Metrophone. In addition, the
Company issued an aggregate of 12,500 Common Shares, valued at C$5.83
(US$4.08) per share to Minnie Offstein Cart, as a finders fee.
17. Upon the exercise of options to purchase Common Shares pursuant to the
Company's 1997 Plan, on August 21, August 27, August 28, September 4 and
September 25, 1997, March 10, March 17, March 30, April 6, May 11 and May 13,
1998, the Company issued an aggregate of 214,512 Common Shares, for cash
consideration of C$1.20 (US$0.86 for options exercised in August 1997, US$0.86
for options exercised in September 1997, US$0.85 for options exercised in
March 1998, US$0.84 for options exercised in April 1998, and US$0.84 for
options exercised in May 1998) per share to certain employees of the Company,
including certain executive officers of the Company. Upon the exercise of
options to purchase Common Shares pursuant to the Company's 1997 Plan, on
February 6, and April 15, 1998, the Company issued an aggregate of 15,000
Common Shares for cash consideration of C$2.64 (US$1.85 for options exercised
in February 1998, and US$1.85 for options exercised in April 1998) per share
to certain employees of the Company. Upon the exercise of options to purchase
shares of Common Shares pursuant to the Company's 1997 Plan, on March 11 and
May 31, 1996 and April 24, 1998, the Company issued an aggregate of 14,250
shares of Common Shares for cash consideration of C$4.00 (US$2.92 for options
exercised in March 1996, US$2.90 for options exercised in April 1996, and
US$2.80 for options exercised in April 1998) per share are to certain
employees of the Company.
18. As of June 3, 1998, there were 898,987 options outstanding under the
Company's 1997 Stock Option Plan.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Altered Memorandum of Association
3.2 Articles of Association
4.1* Form of Common Shares Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Altered Memorandum of
Association and Articles of Association of the Registrant defining
rights of the holders of Common Shares of the Registrant
5.1* Opinion regarding the legality of the securities being registered
10.1 Stock Option Plan dated August 1, 1997
10.2* Form of 1998 Stock Option Plan
10.3* Form of Employment Agreement between the Registrant and Clive Barwin
10.4* Form of Employment Agreement between the Registrant and Peter Hough
10.5 Form of Warrant to Purchase Common Shares of the Registrant granted
October 22, 1996 to Applied Telecommunications Technologies IV N.V.
("ATT IV") and Applied Telecommunications Technologies, Inc. ("ATTI")
10.6 Lease Financing Agreement dated October 22, 1996 between DataWave
Services (US) Inc. and ATTI
10.7 Form of Warrant to Purchase Common Shares of the Registrant granted
March 11, 1997 to certain investors
10.8* Line of Credit Agreement dated June 3, 1998 between DataWave Systems
(US) Inc. and ATTI
10.9* Form of Warrant to Purchase Common Shares of the Registrant granted
1998 to ATTI and ATT IV
10.10 Agreement and Plan of Merger dated March 25, 1998 among DataWave
Systems (US) Inc., Metrophone Telecommunications Inc. ("Metrophone"),
DW Merger Corporation and certain shareholders of Metrophone
10.11 Loan and Security Agreement dated as of April 14, 1997 between
Metrophone and TeleCapital, L.P. ("TeleCapital")
10.12 Letter of Conditional Commitment dated November 11, 1997 between
Metrophone and TeleCapital
10.13 AT&T Independent Private Payphone Owner Commission Agreement dated
March 16, 1998 between Metrophone and AT&T Corp. ("AT&T")
10.14 ARVC Contract for Telephone Services dated as of November 1, 1997
between Metrophone and the National Association of RV Parks and
Campgrounds
10.15 Share Purchase Agreement dated June 10, 1997 among the Registrant,
PhoneLine International (PLI) Inc. ("PLI") and certain shareholders of
PLI
10.16 Heads of Agreement dated as of March 1, 1998 among the Registrant,
PLI, DCI and Cardcaller Canada Inc.
10.17 Unanimous Shareholders' Agreement dated March 1, 1998 among the
Registrant, DCI Telecommunications, Inc. ("DCI") and certain
shareholders of the Registrant
10.18 License Agreement dated March 31, 1998 between the Registrant and
PhoneLine Cardcall International Inc.
10.19 Asset Purchase Agreement dated as of January 1, 1997 among the
Registrant, Interurbain Communications, Inc. ("Interurbain"), DTV
Telecommunications (US) Inc. and certain shareholders of Interurbain
10.20 Escrow Agreement dated November 16, 1993 among the Registrant,
Montreal Trust Company of Canada ("Montreal Trust") and certain
shareholders of the Registrant
10.21 Second Escrow Agreement dated November 16, 1993 among the Registrant,
Montreal Trust, and certain shareholders of the Registrant
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.22 Form of Voluntary Pooling Agreement among the Registrant, Montreal
Trust and certain shareholders of the Registrant
10.23 Form of Acknowledgment and Agreement to be Bound entered into by
certain transferees of Common Shares held in escrow pursuant to the
Escrow Agreements
10.24 Prepaid Card Co-Marketing Fund Agreement dated January 16, 1998
between the Registrant and AT&T
10.25 Professional Services Agreement dated January 30, 1998 between the
Registrant and AT&T
10.26 Contract Tariff Agreement dated January 30, 1998 between the
Registrant and AT&T
10.27 Indenture of Lease dated as of April 1, 1996 among DataWave Vending
(Canada) Inc., Haymur Enterprises Ltd. and Alexander David Macaulay
11.1 Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
23.2* Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit
5.1)
23.3* Consent of Campney & Murphy (included in Exhibit 5.1)
24.1 Power of Attorney (included in signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
Financial Statements.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the claims specified in the Underwriters Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to such purchases.
The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
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, thereunto duly authorized, in Vancouver, British Columbia, Canada,
on June 4, 1998.
DATAWAVE SYSTEMS INC.
By: /s/ Peter Hough
----------------------------
Name: Peter Hough
Title: C.F.O.
POWER OF ATTORNEY
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 indicated. Each person whose signature appears below hereby authorizes
and appoints Clive Barwin and Peter Hough, and any one of them, as his
attorneys-in-fact, to sign and file on his behalf, in the capacities stated
below, any and all pre-effective and post-effective amendments to this
Registration Statement.
/s/ Clive Barwin Chief Executive June 4, 1998
- ---------------------------------- Officer, President
CLIVE BARWIN and Director
(principal
executive officer)
/s/ Peter Hough Chief Financial June 4, 1998
- ---------------------------------- Officer and
PETER HOUGH Director
(principal
financial and
accounting
officer)
/s/ Garth Braun Director June 4, 1998
- ----------------------------------
GARTH BRAUN
/s/ Louis Eisman Director June 4, 1998
- ----------------------------------
LOUIS EISMAN
/s/ Joshua Emanuel Authorized June 4, 1998
- ---------------------------------- Representative in
JOSHUA EMANUEL the United States
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Altered Memorandum of Association
3.2 Articles of Association
4.1* Form of Common Shares Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions of the Altered
Memorandum of Association and Articles of Association of the
Registrant defining rights of the holders of Common Shares of
the Registrant
5.1* Opinion regarding the legality of the securities being
registered
10.1 Stock Option Plan dated August 1, 1997
10.2* Form of 1998 Stock Option Plan
10.3* Form of Employment Agreement between the Registrant and Clive
Barwin
10.4* Form of Employment Agreement between the Registrant and Peter
Hough
10.5 Form of Warrant to Purchase Common Shares of the Registrant
granted October 22, 1996 to Applied Telecommunications
Technologies IV N.V. ("ATT IV") and Applied Telecommunications
Technologies, Inc. ("ATTI")
10.6 Lease Financing Agreement dated October 22, 1996 between
DataWave Services (US) Inc. and ATTI
10.7 Form of Warrant to Purchase Common Shares of the Registrant
granted March 11, 1997 to certain investors
10.8* Line of Credit Agreement dated June 3, 1998 between DataWave
Systems (US) Inc. and ATTI
10.9* Form of Warrant to Purchase Common Shares of the Registrant
granted 1998 to ATTI and ATT IV
10.10 Agreement and Plan of Merger dated March 25, 1998 among
DataWave Systems (US) Inc., Metrophone Telecommunications Inc.
("Metrophone"), DW Merger Corporation and certain shareholders
of Metrophone
10.11 Loan and Security Agreement dated as of April 14, 1997 between
Metrophone and TeleCapital, L.P. ("TeleCapital")
10.12 Letter of Conditional Commitment dated November 11, 1997
between Metrophone and TeleCapital
10.13 AT&T Independent Private Payphone Owner Commission Agreement
dated March 16, 1998 between Metrophone and AT&T Corp.
("AT&T")
10.14 ARVC Contract for Telephone Services dated as of November 1,
1997 between Metrophone and the National Association of RV
Parks and Campgrounds
10.15 Share Purchase Agreement dated June 10, 1997 among the
Registrant, PhoneLine International (PLI) Inc. ("PLI") and
certain shareholders of PLI
10.16 Heads of Agreement dated as of March 1, 1998 among the
Registrant, PLI, DCI and Cardcaller Canada Inc.
10.17 Unanimous Shareholders' Agreement dated March 1, 1998 among
the Registrant, DCI Telecommunications, Inc. ("DCI") and
certain shareholders of the Registrant
10.18 License Agreement dated March 31, 1998 between the Registrant
and PhoneLine Cardcall International Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
------- ----
<C> <S> <C>
10.19 Asset Purchase Agreement dated as of January 1, 1997 among the
Registrant, Interurbain Communications, Inc. ("Interurbain"),
DTV Telecommunications (US) Inc. and certain shareholders of
Interurbain
10.20 Escrow Agreement dated November 16, 1993 among the Registrant,
Montreal Trust Company of Canada ("Montreal Trust") and
certain shareholders of the Registrant
10.21 Second Escrow Agreement dated November 16, 1993 among the
Registrant, Montreal Trust, and certain shareholders of the
Registrant
10.22 Form of Voluntary Pooling Agreement among the Registrant,
Montreal Trust and certain shareholders of the Registrant
10.23 Form of Acknowledgment and Agreement to be Bound entered into
by certain transferees of Common Shares held in escrow
pursuant to the Escrow Agreements
10.24 Prepaid Card Co-Marketing Fund Agreement dated January 16,
1998 between the Registrant and AT&T
10.25 Professional Services Agreement dated January 30, 1998 between
the Registrant and AT&T
10.26 Contract Tariff Agreement dated January 30, 1998 between the
Registrant and AT&T
10.27 Indenture of Lease dated as of April 1, 1996 among DataWave
Vending (Canada) Inc., Haymur Enterprises Ltd. and Alexander
David Macaulay
11.1 Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche
23.2* Consent of Paul, Hastings, Janofsky & Walker LLP (included in
Exhibit 5.1)
23.3* Consent of Campney & Murphy (included in Exhibit 5.1)
24.1 Power of Attorney (included in signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
<PAGE>
EXHIBIT 1.1
DATAWAVE SYSTEMS INC.
UNDERWRITING AGREEMENT
_________ __, 1998
Morgan Keegan & Company, Inc.
Laidlaw Global Securities Inc.
As Representative of the Several
Underwriters Named in Schedule A hereto
c/o Morgan Keegan & Company, Inc.
50 Front Street
Memphis, Tennessee 38103
Dear Sirs:
DataWave Systems Inc., a British Columbia corporation (the "Company"),
proposes to issue and sell to the underwriters named in Schedule A
----------
(collectively, the "Underwriters") an aggregate of 2,500,000 Common Shares, no
par value per share (the "Common Stock"), of the Company (the "Firm Company
Shares") and the selling shareholders of the Company named in Schedule B (the
----------
"Selling Shareholders") propose to sell to the Underwriters an aggregate of
185,000 shares of Common Stock (the "Firm Selling Shareholder Shares" and,
together with the Firm Company Shares, the "Firm Shares"). The Firm Shares are
to be sold to each Underwriter, acting severally and not jointly, in such
amounts as are set forth in Schedule A opposite the name of such Underwriter.
----------
The Company also grants to the Underwriters, severally and not jointly, the
option described in Section 3 to purchase, on the same terms as the Firm Shares,
up to 402,750 additional shares of Common Stock (the "Option Shares") solely to
cover over-allotments. The Firm Shares, together with all or any part of the
Option Shares, are collectively herein called the "Shares."
Section 1. Representations and Warranties of the Company. The Company
---------------------------------------------
and each of Clive Barwin and Peter Hough (each a "Principal Shareholder")
jointly and severally represents and warrants to and agrees with each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-__________)
with respect to the Shares, including a preliminary form of prospectus, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and the applicable
rules and regulations (the "1933 Act Regulations") of the Securities and
Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have
been
<PAGE>
required prior to the date hereof have been filed with the Commission,
and such amendments have been similarly prepared. Copies of such
registration statement and amendment or amendments and of each related
preliminary prospectus, and the exhibits, financial statements and
schedules, as finally amended and revised, have been delivered to you. The
Company has prepared in the same manner, and proposes so to file with the
Commission, one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of
final prospectus, (ii) if the Company does not rely on Rule 434 of the 1933
Act, a final prospectus in accordance with Rules 430A and 424(b) of the 1933
Act Regulations or (iii) if the Company relies on Rule 434 of the 1933 Act,
a term sheet relating to the Shares that shall identify the preliminary
prospectus that it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) of the 1933 Act. The Company also
may file a related registration statement with the Commission pursuant to
Rule 462(b) of the 1933 Act for the purpose of registering certain
additional shares of Common Stock, which registration statement will be
effective upon filing with the Commission. As filed, such amendment, any
registration statement filed pursuant to Rule 462(b) of the 1933 Act and any
term sheet and form of final prospectus, or such final prospectus, shall
include all Rule 430A Information (as defined below) and, except to the
extent that you shall agree in writing to a modification, shall be in all
respects in the form furnished to you prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the
extent not completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest preliminary prospectus) as the Company shall have previously advised
you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Time (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include all Rule 430A Information contained in any
Prospectus and any Term Sheet (as hereinafter defined) and deemed to be
included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the 1933 Act
Regulations. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A Information. The term "Prospectus" as used
in this Agreement shall mean (a) if the Company relies on Rule 434 of the
1933 Act, the Term Sheet relating to the Shares that is first filed pursuant
to Rule 424(b)(7) of the 1933 Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements or (b) if the Company
does not rely on Rule 434 of the 1933 Act, the prospectus relating to the
Shares in the form in which it is first filed with the Commission pursuant
to Rule 424(b) of the 1933 Act Regulations or, if no filing pursuant to Rule
424(b) of the 1933 Act Regulations is required, shall mean the form of final
prospectus included in the Registration Statement at the time such
Registration Statement
2
<PAGE>
becomes effective. The term "Rule 430A Information" means information with
respect to the Shares and the offering thereof permitted pursuant to Rule
430A of the 1933 Act Regulations to be omitted from the Registration
Statement when it becomes effective. The term "462(b) Registration
Statement" means any registration statement filed with the Commission
pursuant to Rule 462(b) under the 1933 Act (including the Registration
Statement and any Preliminary Prospectus or Prospectus incorporated
therein at the time such registration statement becomes effective). The
term "Term Sheet" means any term sheet that satisfies the requirements of
Rule 434 of the 1933 Act. Any reference to the "date" of a Prospectus that
includes a Term Sheet shall mean the date of such Term Sheet.
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and no proceedings for that
purpose have been instituted or threatened by the Commission or the state
securities or blue sky authority of any jurisdiction, and each Preliminary
Prospectus and any amendment or supplement thereto, at the time of filing
thereof, conformed in all material respects to the requirements of the 1933
Act and the 1933 Act Regulations, and did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information furnished
in writing to the Company by an Underwriter expressly for use in the
Registration Statement or any 462(b) Registration Statement.
(c) When the Registration Statement and any 462(b) Registration
Statement shall become effective, or any Term Sheet that is part of the
Prospectus is filed with the Commission pursuant to Rule 434, when the
Prospectus is first filed pursuant to Rule 424(b) of the 1933 Act
Regulations, when any amendment to the Registration Statement or any 462(b)
Registration Statement becomes effective, and when any supplement to the
Prospectus or any Term Sheet is filed with the Commission and at the Closing
Time and Date of Delivery (as hereinafter defined), (i) the Registration
Statement, the 462(b) Registration Statement, the Prospectus, the Term Sheet
and any amendments thereof and supplements thereto will conform in all
material respects with the applicable requirements of the 1933 Act and the
1933 Act Regulations, and (ii) neither the Registration Statement, the
462(b) Registration Statement, the Prospectus, any Term Sheet nor any
amendment or supplement thereto will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to
any statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter expressly
for use in the Registration Statement or any 462(b) Registration Statement.
(d) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of British Columbia with all
requisite
3
<PAGE>
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus. The Company is duly qualified to transact business as a
foreign corporation and is in good standing in each of the jurisdictions
in which the ownership or leasing of its properties or the nature or
conduct of its business as described in the Registration Statement and the
Prospectus requires such qualification, except where the failure to do so
would not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the
Company and the Subsidiaries (as hereinafter defined) taken as a whole.
(e) All of the Company's subsidiaries are named on an exhibit to the
Registration Statement (each a "Subsidiary" and collectively the
"Subsidiaries"). Each of the Subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
state or jurisdiction of its incorporation with all requisite corporate
power and authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement and the Prospectus. Each
such entity is duly qualified to do business and is in good standing as a
foreign corporation in each other jurisdiction in which the ownership or
leasing of its properties or the nature or conduct of its business as
described in the Registration Statement and the Prospectus conducted
requires such qualification, except where the failure to do so would not
have a material adverse effect on the condition (financial or other),
business, properties, net worth or results of operations of the Company and
the Subsidiaries.
(f) The Company has full corporate right, power and authority to enter
into this Agreement, to issue, sell and deliver the Shares as provided
herein and to consummate the transactions contemplated herein. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding agreement of the Company, enforceable in
accordance with its terms, except to the extent that enforceability may be
limited by bankruptcy, insolvency, moratorium, reorganization or other laws
of general applicability relating to or affecting creditors' rights, or by
general principles of equity whether considered at law or at equity and
except to the extent enforcement of the indemnification provisions set forth
in Section 8 of this Agreement may be limited by federal or state securities
laws or the public policy underlying such laws. The agreements to which the
Company or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company
and its Subsidiaries (as applicable), except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally
or by general equitable principles and, to the best of the Company's
knowledge, the other contracting party or parties thereto are not in
material breach or material default under any of such agreements.
(g) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary
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<PAGE>
for the valid authorization, issuance, sale and delivery of the Shares,
the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby has
been made or obtained and is in full force and effect, except as may be
required under applicable state securities laws.
(h) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement, nor
the consummation of the transactions contemplated hereby will conflict with
or result in a breach or violation of any of the terms and provisions of, or
(with or without the giving of notice or the passage of time or both)
constitute a default under the charter documents of the Company or the
Subsidiaries, or under any indenture, mortgage, deed of trust, any of that
loan agreement, note, lease or other agreement or instrument to which the
Company or any of the Subsidiaries is a party or to which the Company or
the Subsidiaries, any of their properties or any of their other assets is
subject; or any applicable statute, judgment, decree, order, rule or
regulation of any court or governmental agency or body applicable to any of
the foregoing or any of their respective properties; or result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or the Subsidiaries.
(i) The Shares to be issued and sold to the Underwriters hereunder
have been validly authorized by the Company. When issued and delivered
against payment therefor as provided in this Agreement, the Shares will be
duly and validly issued, fully paid and nonassessable. No preemptive rights
of shareholders exist with respect to any of the Shares which have not been
satisfied or waived. No person or entity holds a right to require or
participate in the registration under the 1933 Act of the Shares pursuant to
the Registration Statement which has not been satisfied or waived; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company
at any other time which has not been satisfied or waived.
(j) The Company's authorized, issued and outstanding capital stock is
as disclosed in the Prospectus. All of the issued shares of capital stock
of the Company have been duly authorized and validly issued, are fully paid
and nonassessable and conform to the description of the Company's capital
stock contained in the Prospectus.
(k) All of the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned directly, or indirectly through another
Subsidiary, by the Company free and clear of all liens, security interests,
pledges, charges, encumbrances, defects, shareholders' agreements, voting
trusts, equities or claims of any nature whatsoever. Other than the
Subsidiaries, the Company does not own, directly or indirectly, any capital
stock or other equity securities of any other corporation or any ownership
interest in any partnership, joint venture or other association except for
PhoneLine Cardcall International, Inc., a British Columbia
5
<PAGE>
corporation in which the Company owns a 40% equity interest and DCI
Telecommunications, Inc. owns a 60% equity interest.
(l) Except as disclosed in the Prospectus, there are no outstanding
(i) securities or obligations of the Company or any of its Subsidiaries
convertible into or exchangeable for any capital stock of the Company or any
such Subsidiary, (ii) warrants, rights or options to subscribe for or
purchase from the Company or any such Subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or (iii)
obligations of the Company or any such Subsidiary to issue any shares of
capital stock, any such convertible or exchangeable securities or
obligation, or any such warrants, rights or options.
(m) The Company and the Subsidiaries have good and marketable title in
fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except
such as are disclosed in the Prospectus or such as do not materially and
adversely affect the value of such property and do not interfere with the
use made or proposed to be made of such property by the Company and the
Subsidiaries; and any real property and buildings held under lease by the
Company or any Subsidiary are held under valid, existing and enforceable
leases, with such exceptions as are disclosed in the Prospectus or are not
material and do not interfere with the use made or proposed to be made of
such property and buildings by the Company or such Subsidiary.
(n) The financial statements of the Company and its consolidated
Subsidiaries included in the Registration Statement and Prospectus present
fairly the financial position of the Company and its consolidated
Subsidiaries as of the dates indicated and the results of operations and
cash flows for the Company and its consolidated Subsidiaries for the periods
specified, all in conformity with United States generally accepted
accounting principles applied on a consistent basis. The financial
statement schedules included in the Registration Statement and the amounts
in the Prospectus under the captions "Prospectus Summary -- Summary
Consolidated Financial Information", "Capitalization", "Dilution", "Selected
Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" fairly present
the information shown therein and have been compiled on a basis consistent
with the financial statements included in the Registration Statement and the
Prospectus. The unaudited pro forma financial information (including the
related notes) included in the Prospectus or any Preliminary Prospectus
complies as to form in all material respects to the applicable accounting
requirements of the 1933 Act and the 1933 Act Regulations, and management of
the Company believes that the assumptions underlying the pro forma
adjustments are reasonable. Such pro forma adjustments have been properly
applied to the historical amounts in the compilation of the information and
such information fairly presents with respect to the Company and the
Subsidiaries, the
6
<PAGE>
financial position, results of operations and other information purported
to be shown therein at the respective dates and for the respective periods
specified.
(o) Deloitte & Touche, LLP, which has examined and are reporting upon
the audited financial statements and schedules included in the Registration
Statement, are, and were during the periods covered by their reports
included in the Registration Statement and the Prospectus, independent
public accountants within the meaning of the 1933 Act and the 1933 Act
Regulations.
(p) None of the Company or the Subsidiaries has sustained, since March
31, 1998 any material loss or interference with its business from fire,
explosion, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or arbitrators' or court or
governmental action, order or decree; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
and except as otherwise stated in the Registration Statement and Prospectus,
there has not been (i) any material change in the capital stock, long-term
debt, obligations under capital leases or short-term borrowings of the
Company or any Subsidiary, or (ii) any material adverse change, or any
development which could reasonably be seen as involving a prospective
material adverse change, in or affecting the business, prospects,
properties, assets, results of operations or condition (financial or other)
of the Company or any Subsidiary.
(q) Neither the Company nor its Subsidiaries is in violation of their
respective charter or by-laws, and no default exists, and no event has
occurred, nor state of facts exists, which, with notice or after the lapse
of time to cure or both, would constitute a default in the due performance
and observance of any obligation, agreement, term, covenant, consideration
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, note, lease or other agreement or instrument to which any such
entity is a party or to which any such entity or any of its properties is
subject. None of the Company or its Subsidiaries is in violation of, or in
default with respect to, any statute, rule, regulation, order, judgment or
decree, except as may be properly described in the Prospectus or such as in
the aggregate do not now have and will not in the future have a material
adverse effect on the financial position, results of operations or business
of each such entity, respectively.
(r) There is not pending or, to the Company's knowledge, threatened
any action, suit, proceeding, inquiry or investigation against the Company,
the Subsidiaries or any of their respective officers and directors or to
which the properties, assets or rights of any such entity are subject,
before or brought by any court or governmental agency or body or board of
arbitrators that (i) might result in any material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets
or rights, (ii) might prevent consummation of the
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<PAGE>
transactions contemplated hereby or (iii) is required to be described in
the Registration Statement or the Prospectus but are not described as
required.
(s) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts,
leases, or other documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required.
(t) Each of the Company and the Subsidiaries owns, possesses or has
obtained all material permits, licenses, franchises, certificates, consents,
orders, approvals and other authorizations of governmental or regulatory
authorities or other entities as are necessary to own or lease, as the case
may be, and to operate its properties and to carry on its business as
presently conducted, or as contemplated in the Prospectus to be conducted,
and the Company or the Subsidiaries have not received any notice of
proceedings relating to revocation or modification of any such licenses,
permits, franchises, certificates, consents, orders, approvals or
authorizations.
(u) Each of the Company and the Subsidiaries owns or possesses
adequate license or other rights to use all patents, patent rights,
inventions, trademarks, service marks, trade names, copyrights, software and
design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to
conduct its business as described in the Prospectus, and neither the Company
nor any Subsidiary has received notice of infringement of or conflict with
(and the Company knows of no such infringement of or conflict with) asserted
rights of others with respect to any Intangibles which could materially and
adversely affect the business, prospects, properties, assets, results of
operations or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole.
(v) The Company's and each Subsidiary's respective systems of internal
accounting controls taken as a whole is sufficient to meet the objectives of
internal accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's or the Subsidiary's financial
statements; and, none of the Company, the Subsidiaries or any employee or
agent thereof has made any payment of funds of the Company or the
Subsidiaries, or received or retained any funds and no funds of the Company
or the Subsidiaries have been set aside to be used for any payment, in each
case in violation of any law, rule or regulation.
(w) The Company and each Subsidiary has filed on a timely basis all
necessary federal, provincial, state, local and foreign income and franchise
tax returns required to be filed through the date hereof and have paid all
taxes shown as due thereon; and no tax deficiency has been asserted against
any such entity, nor does the Company
8
<PAGE>
know of any tax deficiency which is likely to be asserted against any such
entity which if determined adversely to any such entity, could materially
adversely affect the business, prospects, properties, assets, results of
operations or condition (financial or otherwise) of any such entity,
respectively. All tax liabilities are adequately provided for on the
respective books of such entities.
(x) The Company and each Subsidiary maintains insurance (issued by
insurers of recognized financial responsibility) of the types and in the
amounts generally deemed adequate for their respective businesses and,
consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real
and personal property owned or leased by the Company and its Subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect.
(y) Each of the Company, the Subsidiaries, and their officers,
directors or affiliates has not taken and will not take, directly or
indirectly, any action designed to, or that might reasonably be expected to,
cause or result in or constitute the stabilization or manipulation of any
security of the Company or to facilitate the sale or resale of the Shares.
(z) The Company is not, will not become as a result of the
transactions contemplated hereby, or will not conduct its respective
businesses in a manner in which the Company would become, "an investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
(aa) Except as set forth in the Registration Statement and
Prospectus, (i) the Company and each Subsidiary is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, (ii) neither
the Company nor any Subsidiary has received notice from any governmental
authority or third party of an asserted claim under Environmental Laws,
which claim is required to be disclosed in the Registration Statement and
the Prospectus, (iii) neither the Company nor any Subsidiary will be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied
by the Company or any Subsidiary has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a
-- ----
contaminated site under applicable federal, provincial, state or local law.
(bb) To the Company's knowledge, no labor disturbance by the
employees of the Company or any of its Subsidiaries exists or is imminent;
and the Company is not aware of any existing or imminent labor disturbance
by the employees of
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<PAGE>
any of its principal suppliers, value added resellers, subcontractors,
original equipment manufacturers, authorized dealers or international
distributors that might be expected to result in a material adverse change
in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its Subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's or Subsidiaries' employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(cc) Neither the Company nor the Principal Shareholders are aware
that (i) any executive, key employee or significant group of employees of
the Company or any of the Subsidiaries plans to terminate employment with
the Company or such Subsidiary or (ii) any such executive or key employee is
subject to any noncompetition, nondisclosure, confidentiality, employment,
consulting or similar agreement that would be violated by the present or
proposed activities of the Company or the Subsidiaries.
(dd) The Company has not and will not incur any liability for a
fee, commission or other compensation on account of the employment of a
broker or finder in connection with the transactions contemplated by this
Agreement other than specifically as contemplated hereby.
Section 2. Representations and Warranties of the Selling Shareholders.
----------------------------------------------------------
Each of the Selling Shareholders severally and not jointly represents and
warrants to, and agrees with, each of the several Underwriters and the Company
that:
(a) The Selling Shareholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement
(as hereinafter defined) and to sell, assign, transfer and deliver to the
Underwriters the Shares to be sold by the Selling Shareholder hereunder; and
the execution and delivery of this Agreement, the Power of Attorney and the
Custody Agreement have been duly authorized by all necessary action of the
Selling Shareholder.
(b) The Selling Shareholder has duly executed and delivered this
Agreement, the Power of Attorney and the Custody Agreement, and each
constitutes the valid and binding agreement of the Selling Shareholder
enforceable against the Selling Shareholder in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting
the enforcement of creditors' rights generally and to general equitable
principles.
(c) All consents, approvals, authorizations, orders or declarations of
or from, or registration, qualification or filing with, any court or
governmental agency or body required for the sale of the Shares to be sold
by the Selling Shareholder or the consummation of the transactions
contemplated by this Agreement, the Power of Attorney or the Custody
Agreement, except the registration of such Shares under the 1933 Act
10
<PAGE>
(which, if the Registration Statement is not effective as of the time of
execution hereof, shall be obtained as provided in this Agreement) and
such as may be required under state securities or blue sky laws in
connection with the offer, sale and distribution of such Shares by the
Underwriters, have been obtained and are in full force and effect; such
Selling Shareholder, if other than a natural person, has been duly
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization as the type of entity that it purports to
be; and such Selling Shareholder has full legal right, power and authority
to enter into and perform its obligations under this Agreement and such
Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Shareholder under this
Agreement.
(d) The sale of the Shares to be sold by such Selling Shareholder and
the performance of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which the Selling Shareholder is a party or to which any of
its properties or assets is subject, nor will such action conflict with or
violate any provision of the charter or bylaws or other governing
instruments of the Selling Shareholder, if any, or any statute, rule or
regulation or any order, judgment or decree of any court or governmental
agency or body having jurisdiction over the Selling Shareholder or any of
the Selling Shareholder's properties or assets.
(e) The Selling Shareholder has, and at the Closing Time (as defined
in Section 3 hereof) or, at the Date of Delivery, as the case may be, the
Selling Shareholder will have, good and valid title to the Shares to be sold
by the Selling Shareholder hereunder, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature whatsoever; and,
upon delivery of such Shares against payment therefor as provided herein,
good and valid title to such Shares, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature whatsoever, will
pass to the several Underwriters.
(f) The Selling Shareholder has not (i) taken, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Shares; (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased or paid anyone any compensation for soliciting purchases
of, the Shares or (B) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company; or
(iii) has not distributed and will not distribute any Prospectus or other
offering material in connection with the offering and sale of the Shares.
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<PAGE>
(g) Each Selling Shareholder other than the Principal Shareholders
represents and warrants that (i) such Selling Shareholder has carefully
reviewed the Registration Statement and Prospectus and (ii) to the best
knowledge of such Selling Shareholder the Registration Statement or any
amendment thereto or any 462(b) Registration Statement or any amendment
thereto or the Prospectus did not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (g) do not
apply to statements or omissions made in the Registration Statement, any
462(b) Registration Statement or any amendment thereto or the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through you
specifically for use therein.
(h) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986,
as amended, with respect to the transactions herein contemplated, each of
the Selling Shareholders agrees to deliver to you prior to or at the Closing
Time (as hereinafter defined) a properly completed and executed United
States Treasury Department form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof).
(i) Each of the Selling Shareholders represents and warrants that
certificates in negotiable form representing all of the Shares to be sold by
such Selling Shareholder hereunder have been placed in custody under a
custody agreement (the "Custody Agreement"), in the form heretofore
furnished to and approved by you, duly executed and delivered by such
Selling Shareholder to [INSERT NAME OF CUSTODIAN], as custodian (the
"Custodian"), and that such Selling Shareholder has duly executed and
delivered a Power of Attorney (the "Power of Attorney"), in the form
heretofore furnished to and approved by you, appointing [INSERT NAME(S) OF
ATTORNEYS-IN-FACT] as such Selling Shareholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement on
behalf of such Selling Shareholder, to determine the purchase price to be
paid by the Underwriters to the Selling Shareholders as provided in Section
3 hereof, to authorize the delivery of the Shares to be sold by such
Selling Shareholder hereunder and otherwise to act on behalf of such Selling
Shareholder in connection with the transactions contemplated by this
Agreement and the Custody Agreement.
(j) Each of the Selling Shareholders specifically agrees that the
Shares represented by the certificates held in custody for such Selling
Shareholder under the Custody Agreement are subject to the interests of the
Underwriters hereunder, and that the arrangements made by such Selling
Shareholder for such custody, and the appointment by such Selling
Shareholder of the Attorneys-in-Fact by the Power of Attorney, are
irrevocable. Each of the Selling Shareholders specifically agrees that the
obligations of the Selling Shareholders hereunder shall not be terminated by
operation of law, whether by the
12
<PAGE>
death or incapacity of any individual Selling Shareholder or, in the case
of an estate or trust, by the death or incapacity of any executor or
trustee or the termination of such estate or trust, or in the case of a
partnership or corporation, by the dissolution of such partnership or
corporation, or by the occurrence of any other event.
(k) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the
Closing Date and will advise one of its Attorneys-in-Fact and Morgan Keegan
& Company, Inc. prior to the Closing Date if any statement to be made on
behalf of such Selling Shareholder in the certificate contemplated by
Section 6(e) would be inaccurate if made as of the Closing Date.
(l) Such Selling Shareholder does not have, or has waived prior to the
date hereof, any preemptive right, co-sale right or right of first refusal
or other similar right to purchase any of the Shares that are to be sold by
the Company or any of the other Selling Shareholders to the Underwriters
pursuant to this Agreement; such Selling Shareholder does not have, or has
waived prior to the date hereof, any registration right or other similar
right to participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of such
Selling Shareholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Shareholder
does not own any warrants, options or similar rights to acquire, and does
not have any right or arrangement to acquire, any capital stock, rights,
warrants, options or other securities from the Company, other than those
described in the Registration Statement and the Prospectus.
Section 3. Sale and Delivery of the Shares to the Underwriters; Closing.
------------------------------------------------------------
(a) On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to each of the Underwriters the Firm
Company Shares, and the Selling Shareholders agree to sell to each of the
Underwriters the Firm Selling Shareholder Shares, and each Underwriter
agrees, severally and not jointly, to purchase from the Company and the
Selling Shareholders the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule A (the proportion which each Underwriter's
----------
share of the total number of the Firm Shares bears to the total number of
Firm Shares is hereinafter referred to as such Underwriter's "underwriting
obligation proportion"), at a purchase price of $__________ per share.
(b) In addition, on the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the Underwriters, severally and not
jointly, to purchase up to an additional 402,750 Option Shares at the same
purchase price as shall be applicable to the Firm Shares. The option hereby
granted will expire if not exercised within the thirty (30)
13
<PAGE>
day period after the date of the Prospectus by giving written notice to
the Company. The option granted hereby may be exercised in whole or in
part (but not more than once), only for the purpose of covering over-
allotments that may be made in connection with the offering and
distribution of the Firm Shares. The notice of exercise shall set forth
the number of Option Shares as to which the several Underwriters are
exercising the option, and the time and date of payment and delivery
thereof. Such time and date of delivery (the "Date of Delivery") shall be
determined by you but shall not be later than three full business days
after the exercise of such option, nor in any event prior to the Closing
Time. If the option is exercised as to all or any portion of the Option
Shares, the Option Shares as to which the option is exercised shall be
purchased by the Underwriters, severally and not jointly, in their
respective underwriting obligation proportions.
(c) Payment of the purchase price for and delivery of certificates in
definitive form representing the Firm Shares shall be made at the offices of
Morgan Keegan & Company, Inc., 50 Front Street, Memphis, Tennessee 38103 or
at such other place as shall be agreed upon by the Company and you, at 10:00
a.m., either (i) on the third full business day after the execution of this
Agreement, or (ii) at such other time not more than ten full business days
thereafter as you and the Company shall determine (unless, in either case,
postponed pursuant to the term hereof) (such date and time of payment and
delivery being herein called the "Closing Time"). In addition, in the event
that any or all of the Option Shares are purchased by the Underwriters,
payment of the purchase price for and delivery of certificates in definitive
form representing the Option Shares shall be made at the offices of Morgan
Keegan & Company, Inc. in the manner set forth above, or at such other place
as the Company and you shall determine, on the Date of Delivery as specified
in the notice from you to the Company. Payment for the Firm Shares and the
Option Shares shall be made to the Company and the Selling Shareholders,
respectively, by wire transfer in same-day funds to the accounts designated
to the Underwriters in writing by the Company and the Selling Shareholders,
respectively, against delivery to you for the respective accounts of the
Underwriters of the Shares to be purchased by them.
(d) The certificates representing the Shares to be purchased by the
Underwriters shall be in such denominations and registered in such names as
you may request in writing at least two full business days before the
Closing Time or the Date of Delivery, as the case may be. The certificates
representing the Shares will be made available at the offices of Morgan
Keegan & Company, Inc. or at such other place as Morgan Keegan & Company,
Inc. may designate for examination and packaging not later than 10:00 a.m.
at least one full business day prior to the Closing Time or the Date of
Delivery as the case may be.
(e) After the Registration Statement becomes effective, you intend to
offer the Shares to the public as set forth in the Prospectus, but after the
initial public offering of such Shares you may in your discretion vary the
public offering price.
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(f) Subject to the terms and conditions herein set forth, on the
Closing Time the Company shall issue to the Representatives warrants in the
form attached hereto as Exhibit A (the "Representatives' Warrants") to
---------
purchase an aggregate of ______ shares of Common Stock at an exercise
price equal to 135% of the public offering price. The number of shares of
Common Stock subject to each Representative's Warrant is as set forth in
Schedule A.
Section 4. Certain Covenants of the Company. The Company covenants and
--------------------------------
agrees with each Underwriter as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time
that this Agreement is executed and delivered by the parties hereto). If the
Company elects to rely upon Rule 430A of the 1933 Act Regulations or the
filing of the Prospectus is otherwise required under Rule 424(b) of the 1933
Act Regulations, the Company will comply with the requirements of Rule 430A
and will file the Prospectus, properly completed, pursuant to the applicable
provisions of Rule 424(b), or a Term Sheet pursuant to and in accordance
with Rule 434, within the time period prescribed. If the Company elects to
rely upon Rule 462(b), the Company shall file a 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m.,
Washington, D.C. time on the date of this Agreement, and the Company shall
at the time of filing either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or give irrevocable instructions for the
payment of such fee. The Company will notify you immediately, and confirm
the notice in writing, (i) when the Registration Statement, 462(b)
Registration Statement or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus
or any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to
amend the Registration Statement or 462(b) Registration Statement or amend
or supplement the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or any 462(b) Registration Statement or of any
order preventing or suspending the use of any Preliminary Prospectus or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending
such use and, if any such order is issued, to obtain the withdrawal thereof
at the earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement (i) to the
Prospectus, if the Company has not elected to rely upon Rule 430A, (ii) if
the Company has elected to rely upon Rule 430A, to either the Prospectus
included in the Registration Statement at the time it becomes effective or
to the Prospectus filed in accordance with Rule 424(b) or any Term Sheet
filed in accordance with Rule 434, or (iii) if the Company has elected to
rely upon
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Rule 462(b), to any 462(b) Registration Statement in any case if you shall
not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or counsel for the
Underwriters shall object to such amendment or supplement.
(c) The Company has furnished or will furnish to you, at its expense,
as soon as available, copies of the Registration Statement as originally
filed and of all amendments thereto, whether filed before or after the
Registration Statement becomes effective, copies of all exhibits and
documents filed therewith and signed copies of all consents and certificates
of experts, as you may reasonably request, and has furnished or will furnish
to each Underwriter, one conformed copy of the Registration Statement as
originally filed and of each amendment thereto.
(d) The Company will deliver to each Underwriter, at the Company's
expense, from time to time, as many copies of each Preliminary Prospectus as
such Underwriter may reasonably request, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company
will deliver to each Underwriter, at the Company's expense, as soon as the
Registration Statement shall have become effective and thereafter from time
to time as requested during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Prospectus (as
supplemented or amended) as each Underwriter may reasonably request. The
Company will comply to the best of its ability with the 1933 Act and the
1933 Act Regulations so as to permit the completion of the distribution of
the Shares as contemplated in this Agreement and in the Prospectus. If the
delivery of a prospectus is required at any time prior to the expiration of
nine months after the time of issue of the Prospectus or any Term Sheet in
connection with the offering or sale of the Shares and if at such time any
events shall have occurred as a result of which the Prospectus or any Term
Sheet as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made when such Prospectus or any Term Sheet is delivered not misleading, or,
if for any reason it shall be necessary during such same period to amend or
supplement the Prospectus or any Term Sheet in order to comply with the 1933
Act or the 1933 Act Regulations, the Company will notify you and upon your
request prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or any Term Sheet or a supplement to the
Prospectus or any Term Sheet or an amendment or supplement to any such
incorporated document which will correct such statement or omission or
effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus or any Term Sheet,
upon your request but at the expense of such Underwriter, the Company will
prepare and deliver to such Underwriter as many copies as you may request of
an amended or supplemented Prospectus or any Term Sheet complying with
Section 10(a)(3) of the 1933 Act.
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(e) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and
other jurisdictions as you may designate and to maintain such qualifications
in effect for as long as may be necessary to complete the distribution of
the Shares; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified or to make
any undertakings in respect of doing business in any jurisdiction in which
it is not otherwise so subject. The Company will file such statements and
reports as may be required by the laws of each jurisdiction in which the
Shares have been qualified as above provided.
(f) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the
fiscal quarter first occurring after the first anniversary of the "effective
date of the Registration Statement" (as defined in Rule 158(c) of the 1933
Act Regulations), an earnings statement (in reasonable detail but which need
not be audited) complying with the provisions of Section 11(a) of the 1933
Act and Rule 158 thereunder and covering a period of at least 12 months
beginning after the effective date of the Registration Statement.
(g) The Company will use the net proceeds received by it from the sale
of the Shares in the manner specified in the Prospectus under the caption
"Use of Proceeds."
(h) The Company will furnish to its securityholders, as soon as
practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants)
and unaudited quarterly reports of operations for each of the first three
quarters of the fiscal year. During a period of five years after the date
hereof, the Company will furnish to you: (i) concurrently with furnishing
such reports to its securityholders, statements of operations of the Company
for each of the first three quarters in the form furnished to the Company's
securityholders; (ii) concurrently with furnishing to its securityholders, a
balance sheet of the Company as of the end of such fiscal year, together
with statements of operations, of cash flows and of securityholders' equity
of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent public accountants; (iii) as
soon as they are available, copies of all reports (financial or otherwise)
mailed to securityholders; (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission,
any securities exchange or the National Association of Securities Dealers,
Inc. (the "NASD"); (v) every material press release in respect of the
Company or its affairs which is released by the Company; and (vi) any
additional information of a public nature concerning the Company or its
business that you may reasonably request. During such five-year period, the
foregoing financial statements shall be on a consolidated basis to the
extent that the accounts of the Company are consolidated with any
subsidiaries, and shall be accompanied by similar financial statements for
any significant subsidiary that is not so consolidated.
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(i) During the period beginning from the date hereof and continuing to
and including the date one hundred eighty (180) days after the date of the
Prospectus, the Company will not, without the prior written consent of
Morgan Keegan & Company, Inc., offer, pledge, issue, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, or announce any
offer, pledge, sale, grant of any option to purchase or other disposition,
directly or indirectly, any shares of Common Stock or securities convertible
into, exercisable or exchangeable for, shares of Common Stock, except as
provided in Section 3 of this Agreement and pursuant to the Company's 1998
Stock Option Plan, as described in the Registration Statement and
Prospectus.
(j) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be
the same entity as the transfer agent) for its Common Stock.
(k) The Company will cause the Shares to be listed, subject to notice
of issuance, on the Nasdaq National Market and will maintain the listing of
the Shares on the Nasdaq National Market.
(l) The Company is familiar with the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder, and has in the past
conducted its affairs, and will in the future conduct its affairs, in such a
manner so as to ensure that the Company was not and will not be an
"investment company" or an entity "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(m) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in
the future reasonably be expected to cause or result in, the stabilization
or manipulation of the price of any security of the Company, to facilitate
the sale or resale of any of the Shares, (ii) sell, bid for, purchase or pay
anyone any compensation for soliciting purchases of the Shares or (iii) pay
or agree to pay to any person any compensation for soliciting any order to
purchase any other securities of the Company.
(n) If at any time during the 30-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus) and after
written notice from you advising the Company to the effect set forth above,
the Company agrees to forthwith prepare, consult with you concerning the
substance of, and
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disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor,
publication or event.
(o) The Company will file timely and accurate information with the
Commission in accordance with Rule 463 of the Commission under the 1933 Act
or any successor provision.
Section 5. Covenants of the Selling Shareholders. Each of the Selling
-------------------------------------
Shareholders covenants and agrees with each of the Underwriters:
(a) During the period beginning from the date hereof and continuing to
and including the date one hundred eighty (180) days after the date of the
Prospectus, the Selling Shareholder will not, without the prior written
consent of Morgan Keegan & Company, Inc., offer, pledge, issue, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of
(or announce any offer, pledge, sale, grant of an option to purchase or
other disposition, directly or indirectly) any shares of Common Stock or
securities convertible into, exercisable or exchangeable for, shares of
Common Stock, except as provided in Section 3 of this Agreement.
(b) The Selling Shareholder will not (i) take, directly or indirectly,
prior to the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of, the Shares or (iii) pay to or
agree to pay any person any compensation for soliciting another to purchase
any other securities of the Company.
Section 6. Payment of Expenses. The Company will pay and bear all costs,
-------------------
fees and expenses incident to the performance of its obligations under this
Agreement (excluding fees and expenses of counsel for the Underwriters, except
as specifically set forth in this Agreement), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Preliminary
Prospectuses, the Prospectus and any Term Sheet and any amendments or
supplements thereto, and the cost of furnishing copies thereof to the
Underwriters, (b) the preparation, printing and distribution of this Agreement,
the certificates representing the Shares, a Blue Sky memoranda and any
instruments relating to any of the foregoing, (c) the issuance and delivery of
the Shares to the Underwriters, including any transfer taxes payable upon the
sale of the Shares to the Underwriters (other than transfer taxes on resales by
the Underwriters), (d) the fees and disbursements of the Company's counsel and
accountants, (e) the qualification of the Shares under the applicable securities
laws in accordance with the terms of this Agreement, including filing fees and
fees and disbursements of counsel for the Underwriters in connection therewith
and in connection with the Blue Sky memoranda, (f) all costs, fees and expenses
in connection
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with the notification to the Nasdaq National Market of the proposed issuance
of the Shares, (g) filing fees relating to the review of the offering by the
NASD, (h) the transfer agent's and registrar's fees and all miscellaneous
expenses referred to in Part II of the Registration Statement, (i) costs
related to travel and lodging incurred by the Company and its representatives
relating to meetings with and presentations to prospective purchasers of the
Shares reasonably determined by the Underwriters to be necessary or desirable
to effect the sale of the Shares to the public, and (j) all other costs and
expenses incident to the performance of the Company's obligations hereunder
(including costs incurred in closing the purchase of the Option Shares, if
any) that are not otherwise specifically provided for in this section. The
Company, upon your request, will provide funds in advance for filing fees in
connection with "blue sky" qualifications.
Section 7. Conditions of Underwriters' Obligations. The obligations of
---------------------------------------
the Underwriters to purchase and pay for (i) the Firm Shares that they have
respectively agreed to purchase pursuant to this Agreement (and any Option
Shares as to which the option granted in Section 3 has been exercised and the
Date of Delivery determined by you is the same as the Closing Time) at the
Closing Time and (ii) the Option Shares at the Date of Delivery of the Option
Shares, are subject to the accuracy of the representations and warranties of the
Company and the Selling Shareholders contained herein as of the Closing Time or
the Date of Delivery, as the case may be, and to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in certificates of any officer of the Company and the Selling
Shareholders delivered pursuant to the provisions hereof, to the performance by
the Company and the Selling Shareholders of their obligations hereunder, and to
the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m. on the date of this Agreement or, with your consent, at a
later time and date not later, however, than 5:30 p.m. on the first business
day following the date hereof, or at such later time or on such later date
as you may agree to in writing; if the Company has elected to rely upon Rule
462(b), the 462(b) Registration Statement shall have become effective by
10:00 p.m., Washington, D.C. time, on the date of this Agreement; and at the
Closing Time no stop order suspending the effectiveness of the Registration
Statement or any 462(b) Registration Statement shall have been issued under
the 1933 Act and no proceedings for that purpose shall have been instituted
or shall be pending or, to your knowledge or the knowledge of the Company,
shall be contemplated by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
satisfaction of counsel for the Underwriters. If the Company has elected to
rely upon Rule 430A, a Prospectus or a Term Sheet containing the Rule 430A
Information shall have been filed with the Commission in accordance with
Rule 424(b) (or a post-effective amendment providing such information shall
have been filed and declared effective in accordance with the requirements
of Rule 430A).
(b) At the Closing Time, you shall have received a favorable opinion
of Paul, Hastings, Janofsky & Walker LLP, United States counsel for the
Company, or Campney &
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Murphy, Canadian counsel for the Company, dated as of the Closing Time,
together with signed or reproduced copies of such opinion for each of the
other Underwriters, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
British Columbia, Canada, with the corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus. The Company is qualified to
transact business as a foreign corporation and is in good
standing in each of the jurisdictions in which the ownership
or leasing of the Company's properties or the nature or
conduct of its business requires such qualification, except
where the failure to do so would not have a material adverse
effect on the condition (financial or other), business,
properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole.
(ii) Each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the state of its incorporation. Each such entity
has all requisite corporate power and authority to own,
lease and operate its properties and conduct its business as
described in the Registration Statement and the Prospectus.
Each such entity is duly qualified to do business and is in
good standing as a foreign corporation in each other
jurisdiction in which the ownership or leasing of its
properties or the nature or conduct of its business requires
such qualification, except where the failure to do so would
not have a material adverse effect on the condition
(financial or other), business, properties, net worth or
results of operations of the Company and the Subsidiaries
taken as a whole.
(iii) The Company has the corporate power and authority to enter
into this Agreement, to issue, sell and deliver the Shares
as provided herein and to consummate the transactions
contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and,
assuming due authorization, execution and delivery by the
Underwriters, constitutes a valid and binding agreement of
the Company, enforceable in accordance with its terms,
except to the extent enforceability may be limited by
bankruptcy, insolvency, moratorium, reorganization or other
laws affecting creditors' rights or by general principles of
equity whether considered at law or in equity and except to
the extent that enforcement of the indemnification
provisions set forth in
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Section 8 of this Agreement may be limited by federal or
state securities laws or the public policy underlying such
laws.
(iv) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by
or with any governmental agency or body necessary for the
valid authorization, issuance, sale and delivery of the
Shares, the execution, delivery and performance of this
Agreement and the consummation by the Company of the
transactions contemplated hereby, has been made or obtained
and is in full force and effect, except such as may be
necessary under state securities laws or required by the
NASD in connection with the purchase and distribution of the
Shares by the Underwriters, as to which such counsel need
express no opinion.
(v) Neither the issuance, sale and delivery by the Company of
the Shares, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions
contemplated hereby will conflict with or result in a breach
or violation of any of the terms and provisions of, or (with
or without the giving notice or the passage of time or both)
constitute a default under, the charter documents of the
Company or the Subsidiaries, respectively, or, under any
indenture, mortgage, deed of trust, loan agreement, note,
lease or other agreement or instrument to which the Company
or the Subsidiaries, respectively, is a party or to which
the Company or the Subsidiaries, respectively, any of their
respective properties or other assets, is subject; or, to
such counsel's knowledge, any applicable statute, judgment,
decree, order, rule or regulation of any court or
governmental agency or body; or to such counsel's knowledge,
result in the creation or imposition of any lien, charge,
claim or encumbrance upon any property or asset of the
Company or the Subsidiaries, respectively.
(vi) The Common Stock conforms in all material respects as to
legal matters to the description thereof contained in the
Registration Statement and the Prospectus under the heading
"Description of Capital Stock."
(vii) The Shares to be issued and sold to the Underwriters
hereunder have been validly authorized by the Company. When
issued and delivered against payment therefor as provided in
this Agreement, such shares will be validly issued, fully
paid and nonassessable. To such counsel's knowledge, no
preemptive rights of shareholders
22
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exist with respect to any of the Shares which have not
been satisfied or waived. To such counsel's knowledge, no
person or entity holds a right to require or participate
in the registration under the 1933 Act of the Shares
pursuant to the Registration Statement which has not been
satisfied or waived; and, except as set forth in the
Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common
Stock of the Company at any other time which has not been
satisfied or waived. The form of certificates evidencing
the Shares complies with all applicable requirements of
the law of British Columbia, Canada
(viii) The Company has an authorized capitalization as set forth
in the Prospectus under the caption "Capitalization." All
of the issued shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and
nonassessable. None of the issued shares of capital stock
of the Company has been issued or is owned or held in
violation of any preemptive right or to such counsel's
knowledge, co-sale right, registration right, right of first
refusal or other similar right. All offers and sales of the
Company's capital stock prior to the date hereof were at all
relevant times duly registered under the 1933 Act or were
exempt from the registration requirements of the 1933 Act by
reason of Sections 3(b), 4(2) or 4(6) thereof and were duly
registered or the subject of an available exemption from the
registration requirements of the applicable state securities
or blue sky laws, provided, however, that such counsel need
not express any opinion with respect to the registration or
availability of an exemption under applicable state
securities or blue sky laws for shares of Common Stock
issued pursuant to an underwritten public offering.
(ix) All of the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable and are owned directly, or
indirectly through another Subsidiary, by the Company free
and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements,
voting trusts, equities or claims of any nature whatsoever.
Other than the Subsidiaries and as disclosed in the
Registration Statement and Prospectus, the Company does not
own, directly or indirectly, any capital stock or other
equity securities of any other corporation or any ownership
interest in any partnership, joint venture or other
association.
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(x) Except as disclosed in the Prospectus, to such counsel's
knowledge there are no outstanding (i) securities or
obligations of the Company or any of its Subsidiaries
convertible into or exchangeable for any capital stock of
the Company or any such Subsidiary, (ii) warrants, rights or
options to subscribe for or purchase from the Company or any
such Subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or
(iii) obligations of the Company or any such Subsidiary to
issue any shares of capital stock, any such convertible or
exchangeable securities or obligation, or any such warrants,
rights or options.
(xi) To such counsel's knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or
investigation against the Company, the Subsidiaries or any
of their respective officers and directors or to which the
properties, assets or rights of any such entity are subject,
before or brought by any court or governmental agency or
body or board of arbitrators, that are required to be
described in the Registration Statement or the Prospectus
but are not described as required.
(xii) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal
documents therein described present fairly the information
required to be shown and there are no contracts, leases or
other documents known to such counsel of a character
required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as
required.
(xiii) The Registration Statement and any 462(b) Registration
Statement have become effective under the 1933 Act and, to
the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any 462(b)
Registration Statement has been issued and no proceeding for
that purpose has been instituted or is pending or
contemplated under the 1933 Act. Other than financial
statements and other financial and operating data and
schedules contained therein, as to which counsel need
express no opinion, the Registration Statement, any 462(b)
Registration Statement, all Preliminary Prospectuses, the
Prospectus and any amendment or supplement thereto, conform
as to form in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations.
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(xiv) The Company is not, or solely as a result of the
consummation of the transactions contemplated hereby will
not become, an "investment company," or a company
"controlled" by an "investment company," within the meaning
of the Investment Company Act of 1940, as amended.
(xv) The information in the Prospectus under the captions "Risk
Factors - Government Regulation," "Risk Factors - Control of
Company," "Risk Factors - Shares Eligible for Future Sale,"
"Business-Strategic Relationship with AT&T," "Business -
Canadian Operations," "Business - Intellectual Property,"
"Business - Government Regulation," "Business - Tax
Matters," "Management - Employment Agreements," "Management
- Incentive Plans," "Certain Transactions," "Description of
Capital Stock" and "Shares Available for Future Sale" to the
extent that such information constitutes a summary of
documents referred to therein or matters of law or legal
conclusions, as been reviewed by such counsel, is correct
and presents fairly the information required to be disclosed
therein under the 1933 Act and the 1933 Act Regulations.
Such counsel also shall state that they have no reason to believe
that the Registration Statement, any 462(b) Registration Statement or
any further amendment thereto made prior to the Closing Time or the
Date of Delivery, as the case may be, on its effective date and as of
the Closing Time or the Date of Delivery, as the case may be,
contained or contains any untrue statement of a material fact or
omitted or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or
that the Prospectus, or any amendment or supplement thereto made prior
to the Closing Time or the Date of Delivery, as the case may be, as of
its issue date and as of the Closing Time or the Date of Delivery, as
the case may be, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading (provided that such counsel
need express no belief regarding the financial statements and related
schedules and other financial data contained in the Registration
Statement, any 462(b) Registration Statement, any amendment thereto,
or the Prospectus, or any amendment or supplement thereto).
(c) You shall have received an opinion, dated such Time of Delivery,
of counsel for the Selling Shareholders, in form and substance satisfactory
to you and your counsel, to the effect that:
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(i) The Power of Attorney and the Custody Agreement have been
duly executed and delivered by each Selling Shareholder, and
each is enforceable against each Selling Shareholder in
accordance with its terms subject, as to enforcement, to
applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the
enforcement of creditors' rights generally and to general
equitable principles.
(ii) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly
executed and delivered by or on behalf of each Selling
Shareholder.
(iii) Upon delivery of such Shares against payment therefor as
provided herein, good and valid title to such Shares, free
and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements,
voting trusts, equities or claims of any nature whatsoever,
will pass to the several Underwriters.
In rendering the opinions set forth in Sections 7(b) and (c),
such counsel may rely on the following:
(A) as to matters involving the application of laws
other than the laws of the jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the
extent specified in such opinion, upon an opinion or
opinions (in form and substance reasonably satisfactory to
Underwriters' counsel) of other counsel familiar with the
applicable laws, and
(B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the
Company and certificates or other written statements of
officers or departments of various jurisdictions, having
custody of documents respecting the existence or good
standing of the Company provided that copies of all such
opinions, statements or certificates shall be delivered to
Underwriters' counsel. The opinion of counsel for the
Company shall state that the opinion of any other counsel,
or certificate or written statement, on which such counsel
is relying is in form satisfactory to such counsel and that
you and they are justified in relying thereon.
(d) At the Closing Time, you shall have received a favorable opinion
from Gray Cary Ware Freidenrich LLP, counsel for the Underwriters, dated as
of the Closing Time, with respect to the incorporation of the Company, the
issuance and sale of the
26
<PAGE>
Shares, the Registration Statement, the Prospectus and other related matters
as the Underwriters may reasonably require, and the Company shall have
furnished to such counsel such documents as they may reasonably request
for the purpose of enabling them to pass on such matters.
(e) At the Closing Time, (i) the Registration Statement, any 462(b)
Registration Statement, and the Prospectus, as they may then be amended or
supplemented, shall contain all statements that are required to be stated
therein under the 1933 Act and the 1933 Act Regulations and in all material
respects shall conform to the requirements of the 1933 Act and the 1933 Act
Regulations; the Company shall have complied in all material respects with
Rule 430A (if it shall have elected to rely thereon) and neither the
Registration Statement, any 462(b) Registration Statement, nor the
Prospectus, as they may then be amended or supplemented, shall contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) no action, suit or proceeding at law or in equity shall
be pending or, to the best of Company's knowledge, threatened against the
Company that would be required to be set forth in the Prospectus other than
as set forth therein and no proceedings shall be pending or, to the best
knowledge of the Company, threatened against the Company before or by any
federal, state or other commission, board or administrative agency wherein
an unfavorable decision, ruling or finding could materially adversely affect
the business, prospects, assets, results of operations or condition
(financial or otherwise) of the Company, other than as set forth in the
Prospectus, (iii) the Company shall have complied with all agreements and
satisfied all conditions on their part to be performed or satisfied at or
prior to the Closing Time, and (iv) the representations and warranties of
the Company set forth in Section 1 shall be accurate as though expressly
made at and as of the Closing Time. At the Closing Time, you shall have
received a certificate executed by the President and Chief Financial Officer
of the Company dated as of the Closing Time, to such effect and with
respect to the following additional matters: (A) the Registration Statement
has become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or preventing or suspending the
use of the Prospectus has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best of their knowledge,
threatened under the 1933 Act; and (B) they have reviewed the Registration
Statement and the Prospectus and, when the Registration Statement and any
462(b) Registration Statement became effective and at all times subsequent
thereto up to the delivery of such certificate, the Registration Statement,
any 462(b) Registration Statement and the Prospectus and any amendments or
supplements thereto contained all statements and information required to be
included therein or necessary to make the statements therein not misleading
and neither the Registration Statement, any 462(b) Registration Statement,
nor the Prospectus nor any amendment or supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and, since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amended or
supplemented Prospectus that has not
27
<PAGE>
been so set forth. The representations and warranties of the Selling
Shareholders set forth herein shall be accurate as though expressly made
at and as of the Closing Time. At the Closing Time, you shall have
received a certificate executed on behalf of the Selling Shareholders to
such effect.
(f) You shall have received from Deloitte & Touche LLP letters dated,
respectively, the date hereof (or, if the Registration Statement has been
declared effective prior to the execution and delivery of this Agreement,
dated such effective date and the date of this Agreement) and the Closing
Time and the Date of Delivery, in form and substance satisfactory to you,
confirming that they are independent public accountants within the meaning
of the 1933 Act and the applicable 1933 Act Regulations and stating that in
their opinion the financial statements and schedules examined by them and
included in the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
related published 1933 Act Regulations; and containing such other statements
and information as is ordinarily included in accountants' "comfort letters"
to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration
Statement and Prospectus. In the event that the letters referred to in this
subsection set forth any changes, decreases or increases in financial items,
it shall be a further condition to the obligations of the Underwriters that
(i) such letters shall be accompanied by a written explanation by the
Company as to the significance thereof, unless the Underwriters deem such
explanation unnecessary, and (ii) such changes, decreases or increases do
not, in your sole judgment, make it impracticable or inadvisable to proceed
with the purchase, sale and delivery of the Shares as contemplated by the
Registration Statement, as amended as of the date of such letter.
(g) At the Closing Time, you shall have received from Deloitte &
Touche a letter, in form and substance satisfactory to you and dated as of
the Closing Time, to the effect that they reaffirm the statements made in
the letter furnished pursuant to subsection (f) above, except that the
specified date referred to shall be a date not more than five days prior to
the Closing Time.
(h) At the Closing Time, counsel for the Underwriters shall have been
furnished with all such documents, certificates and opinions as they may
request for the purpose of enabling them to pass upon the issuance and sale
of the Shares as contemplated in this Agreement and the matters referred to
in Section 7(d) and in order to evidence the accuracy and completeness of
any of the representations, warranties or statements of the Company, the
performance of any of the covenants of the Company, or the fulfillment of
any of the conditions herein contained; and all proceedings taken by the
Company at or prior to the Closing Time in connection with the
authorization, issuance and sale of the Shares as contemplated in this
Agreement shall be reasonably satisfactory in form and substance to you and
to counsel for the Underwriters. The Company will furnish you with
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<PAGE>
such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
(i) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or the
Underwriters' participation in the same.
(j) Since the date of the latest audited financial statements included
in the Prospectus, neither the Company nor any of its subsidiaries shall
have sustained (i) any loss or interference with their respective businesses
from fire, explosion, flood, hurricane or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by
the Prospectus or (ii) any change, or any development involving a
prospective change (including without limitation any change in management or
control of the Company), in or affecting the position (financial or
otherwise), results of operations, net worth or business prospects of the
Company and its subsidiaries, otherwise than as disclosed in or contemplated
by the Prospectus, the effect of which, in either such case, is in your
judgment so material and adverse as to make it impracticable or inadvisable
to proceed with the purchase, sale and delivery of the Shares being
delivered at such time as contemplated by the Registration Statement, as
amended as of the date hereof.
(k) Subsequent to the date hereof, there shall not have occurred any
of the following: (i) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political
conditions the effect of which on the financial markets of the United States
is such as to make it, in your judgment, impracticable to market the Shares
or enforce contracts for the sale of the Shares, (ii) any suspension or
limitation in trading in any securities of the Company by the Commission or
by the Nasdaq Stock Market, or any suspension or limitation in trading
generally on the New York Stock Exchange or in the over-the-counter market,
(iii) any downgrading in the rating of any of the Company's debt securities
or preferred stock by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the 1933 Act),
or (iv) a banking moratorium declared by federal or New York or Tennessee
authorities.
(l) The Company shall have obtained and delivered to you an agreement
from each officer and director of the Company and each Selling Shareholder
in writing prior to the date hereof that such person will not, during the
one hundred eighty (180) day period following the date of the Prospectus
(the "Lock-up Period"), effect the disposition of any Common Stock now owned
or hereafter acquired directly by such person or with respect to which such
person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree
in writing to be bound by this restriction, (ii) as a distribution to
partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction, or
(iii) with the prior written consent of Morgan Keegan & Company, Inc. The
foregoing
29
<PAGE>
restriction shall have been expressly agreed to preclude such holder from
engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in a disposition of Common Stock
during the Lock-up Period, even if such Common Stock would be disposed of
by someone other than the such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or
not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to
any Common Stock or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any
significant part of its value from the Common Stock. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Common Stock held by such person except in compliance with this
restriction.
The several obligations of the Underwriters to purchase Option Shares
hereunder are subject to the satisfaction on and as of any Date of Delivery for
Option Shares of the conditions set forth in this Section 7, except that, if any
Date of Delivery for Option Shares is other than the Closing Time, the
certificates, opinions and letters referred to in paragraphs (b), (c) and (d)
shall be revised to reflect the sale of Option Shares.
Section 8. Indemnification and Contribution.
--------------------------------
(a) The Company and each of the Principal Shareholders, jointly and
severally, will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject under the 1933 Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
(i) arise out of or are based upon any breach of any warranty or covenant of
the Company herein contained, (ii) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in (A)
any Preliminary Prospectus, the Registration Statement, any 462(b)
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or (B) any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities or blue sky
laws thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"), or (iii) arise out of or are
based upon the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement, any 462(b) Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission
30
<PAGE>
or alleged omission made in any Preliminary Prospectus, the Registration
Statement, any 462(b) Registration Statement or the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by any Underwriter expressly
for use therein. In addition to its other obligations under this Section
8(a), the Company and each Principal Shareholder agrees that, as an
interim measure during the pendency of any such claim, action,
investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described
in this Section 8(a), it will reimburse the Underwriters on a monthly
basis for all reasonable legal and other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of their obligation
to reimburse the Underwriters for such expenses and the possibility that
such payments might later be held to have been improper by a court of
competent jurisdiction. Any such interim reimbursement payments that are
not made to an Underwriter within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other
commercial lending rate for borrowers of the highest credit standing)
published from time to time by The Wall Street Journal (the "Prime Rate")
from the date of such request. This indemnity agreement shall be in
addition to any liabilities that the Company and each Principal
Shareholder may otherwise have. The Company and each Principal Shareholder
will not, without the prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such
cause of action in respect of which indemnification may be sought
hereunder (whether or not such Underwriter is a party to such action or
claim), unless such settlement, compromise or consent includes an
unconditional release of such Underwriter from all liability arising out
of such action or claim (or related cause of action or portion thereof).
Notwithstanding the foregoing, no Principal Shareholder shall be required
to provide indemnification pursuant to this Section 8(a) unless the
Underwriter seeking indemnification shall have first made a written demand
for payment to the Company with respect to any losses, claims, damages or
liabilities for which the Company and the Principal Shareholders are
required to indemnify the Underwriters pursuant to this Section 8(a) and
the Company shall have failed to make such demanded payment within sixty
(60) days after receipt thereof. In no event, however, shall the liability
of any Principal Shareholder for indemnification under this Section 8(a)
or for breaches of the representations and warranties set forth in Section
1 exceed the proceeds received by such Principal Shareholder from the
Underwriters in the offering. This indemnity agreement will be in addition
to any liability which the Company or any of the Principal Shareholders
may have other than pursuant to this Agreement.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the 1933
Act to the same extent as such agreement applies to the Underwriters.
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<PAGE>
(b) Each Selling Shareholder, (other than the Principal Shareholders),
severally but not jointly, will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject under the 1933 Act, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) (i) arise out of or are based upon any breach of any
warranty or covenant of such Selling Shareholder herein contained, (ii)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in (A) any Preliminary Prospectus,
the Registration Statement, any 462(b) Registration Statement or the
Prospectus, or any amendment or supplement thereto, or (B) any Application,
or (iii) arise out of or are based upon the omission or alleged omission to
state in any Preliminary Prospectus, the Registration Statement, any 462(b)
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that such Selling
-------- -------
Shareholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in any Preliminary Prospectus, the Registration Statement, any 462(b)
Registration Statement, or the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter expressly for use therein;
provided, however, that the indemnification obligation arising under the
-------- -------
subsection (b) shall apply only to the extent that such loss, claim, damage
or liability is caused by an untrue statement or omission or alleged
omission made in reliance upon and in conformity with information relating
to such Selling Shareholder furnished to the Company by or on behalf of such
Selling Shareholder expressly for use in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendments or supplements
thereto. In no event, however, shall the liability of any such Selling
Shareholder for indemnification under this Section 8(b) or for breaches of
the representations and warranties set forth in Section 2 exceed the
proceeds received by such Selling Shareholder from the Underwriters in the
offering. This indemnity agreement will be in addition to any liability
which such Selling Shareholders may otherwise have. In addition to their
other obligations under this Section 8(b), each Selling Shareholder agrees
that, as an interim measure during the pendency of any such claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
this Section 8(b), such Selling Shareholder will reimburse the Underwriters
on a monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of such
Selling Shareholder's obligation to reimburse the Underwriters for such
expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. Any such interim
reimbursement payments that are not made to an Underwriter within 30
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<PAGE>
days of a request for reimbursement shall bear interest at the prime rate
(or reference rate or other commercial lending rate for borrowers of the
highest credit standing) published from time to time by The Wall Street
Journal (the "Prime Rate") from the date of such request. This indemnity
agreement shall be in addition to any liabilities that such Selling
Shareholder may otherwise have. Such Selling Shareholder will not, without
the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened action
or claim or related cause of action or portion of such cause of action in
respect of which indemnification may be sought hereunder (whether or not
such Underwriter is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of
such Underwriter from all liability arising out of such action or claim
(or related cause of action or portion thereof). The liability of each
Selling Shareholder under the representations, warranties and agreements
contained herein and under the indemnity agreements contained in the
provisions of this Section 8(b) shall be limited to an amount equal to the
proceeds to such Selling Shareholder of the Selling Shareholder Shares
sold by such Selling Shareholder to the Underwriters.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the 1933
Act to the same extent as such agreement applies to the Underwriters.
(c) Each Underwriter, severally but not jointly, will indemnify and
hold harmless the Company and each Selling Shareholder against any losses,
claims, damages or liabilities to which the Company and such Selling
Shareholder may become subject, under the 1933 Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any breach of any warranty or covenant by
such Underwriter herein contained or any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement, any 462(b) Registration Statement or the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter expressly for use therein; and will reimburse the Company and
each Selling Shareholder for any legal or other expenses reasonably incurred
by the Company and such Selling Shareholder in connection with investigating
or defending any such loss, claim, damage, liability or action. In addition
to its other obligations under this Section 8(c), the Underwriters agree
that, as an interim measure during the pendency of any such claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged
33
<PAGE>
statement or omission, described in this Section 8(c), they will reimburse
the Company and each Selling Shareholder on a monthly basis for all
reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of their obligation
to reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to
the Company within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement shall be in addition to any liabilities that the Underwriters
may otherwise have. No Underwriter will, without the prior written consent
of the Company, settle or compromise or consent to the entry of judgment
in any pending or threatened action or claim or related cause of action or
portion of such cause of action in respect of which indemnification may be
sought hereunder (whether or not the Company is a party to such action or
claim), unless such settlement, compromise or consent includes an
unconditional release of the Company from all liability arising out of
such action or claim (or related cause of action or portion thereof).
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
officer and director of the Company and each person, if any, who controls
the Company and each Selling Shareholder within the meaning of the 1933 Act
to the same extent as such agreement applies to the Company and the Selling
Shareholder.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; no indemnification provided for in
subsection (a), (b) or (c) shall be available to any party who shall fail to
give notice as provided in this subsection (d) if the party to whom notice
was not given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice, but the
omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability that it may have to any indemnified
party otherwise than under Section 8. In case any such action shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense
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<PAGE>
thereof other than reasonable costs of investigation, except that if the
indemnified party has been advised by counsel in writing that there are
one or more defenses available to the indemnified party which are
different from or additional to those available to the indemnifying party,
then the indemnified party shall have the right to employ separate counsel
and in that event the reasonable fees and expenses of such separate
counsel for the indemnified party shall be paid by the indemnifying party;
provided, however, that if the indemnifying party is the Company, the
Company shall only be obligated to pay the reasonable fees and expenses of
a single law firm (and any reasonably necessary local counsel) employed by
all of the indemnified parties. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent,
but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement
or judgment.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 8(a), (b) and
(c) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts
shall be apportioned among the indemnifying parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the
National Association of Securities Dealers, Inc. Any such arbitration must
be commenced by service of a written demand for arbitration or a written
notice of intention to arbitrate, therein electing the arbitration tribunal.
In the event the party demanding arbitration does not make such designation
of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 8(a), (b) and (c) hereof and will not
resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses that is created by the provisions of Sections 8(a),
(b) and (c).
(f) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 8 is
for any reason judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the right of appeal) to be unenforceable by the
indemnified parties although applicable in accordance with its terms, the
Company and the Selling Shareholders, on the one hand and the Underwriters
on the other shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity incurred
by the Company and the Selling Shareholders, and one or more of the
Underwriters, as incurred, in such proportions that (a) the Underwriters are
responsible pro rata for that portion represented by the percentage that the
underwriting discount appearing on the cover page of the Prospectus bears to
the public offering price (before deducting expenses) appearing thereon, and
(b) the Company and the Selling Shareholders are responsible for the
balance, provided, however, that no person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the 1933
35
<PAGE>
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation; provided, further, that if the
allocation provided above is not permitted by applicable law, the Company
and the Selling Shareholders, on the one hand, and the Underwriters on the
other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company and the Selling Shareholders,
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations.
Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company and the Selling Shareholders, on the one hand or by the
Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the Selling Shareholders, and the
Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 8(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8(f).
The amount paid or payable by a party as a result of the losses, claims,
damages or liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Notwithstanding the provisions of this Section 8(f), no Underwriter shall
be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. The
Underwriters' obligations in this Section 8(f) to contribute are several
in proportion to their respective underwriting obligations and not joint.
For purposes of this Section 8(f), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act shall have
the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company or the
Selling Shareholders, within the meaning of Section 15 of the 1933 Act
shall have the same rights to contribution as the Company or the Selling
Shareholders.
Section 9. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. The representations, warranties, indemnities, agreements and other
- --------
statements of the Company, the Principal Shareholders and the Selling
Shareholders, or their respective officers set forth in or made pursuant to this
Agreement will remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company, any Principal Shareholder,
any Selling Shareholder, or any Underwriter or controlling person, and with
respect to an Underwriter or the Company and the Selling Shareholders, will
survive delivery of and payment for the Shares or termination of this Agreement.
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Section 10. Effective Date of Agreement and Termination.
-------------------------------------------
(a) This Agreement shall become effective immediately as to Sections 6
and 8 and, as to all other provisions, (i) if at the time of execution of
this Agreement the Registration Statement has not become effective, at 10:00
a.m., on the first full business day following the effectiveness of the
Registration Statement, or (ii) if at the time of execution of this
Agreement the Registration Statement has been declared effective, at 10:00
a.m. on the first full business day following the date of execution of this
Agreement; but this Agreement shall nevertheless become effective at such
earlier time after the Registration Statement becomes effective as you may
determine on and by notice to the Company or by release of any of the Shares
for sale to the public. For the purposes of this Section 10, the Shares
shall be deemed to have been so released upon the release of publication of
any newspaper advertisement relating to the Shares or upon the release by
you of telegrams (i) advising the Underwriters that the Shares are released
for public offering, or (ii) offering the Shares for sale to securities
dealers, whichever may occur first. By giving notice before the time this
Agreement becomes effective, you, as representative of the several
Underwriters, or the Company, may prevent this Agreement from becoming
effective, without liability of any party to any other party, except that
the Company shall remain obligated to pay costs and expenses to the extent
provided in Section 6 hereof.
(b) This Agreement may be terminated with respect to the Firm Shares
or the Option Shares in your sole discretion by notice to the Company given
prior to the Closing Time or the Date of Delivery, as the case may be, in
the event that (i) any condition to the obligations of the Underwriters set
forth in Section 7 hereof has not been satisfied or (ii) the Company or the
Selling Shareholders shall have failed, refused or been unable to deliver
the Shares or to perform all obligations and satisfy all conditions on their
respective parts to be performed or satisfied hereunder at or prior to such
Closing Time or Date of Delivery, as applicable, other than by reason of a
default by any of the Underwriters. If this Agreement is terminated
pursuant to this Section 10(b), the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Shares.
(c) If this Agreement is terminated pursuant to this Section 10, such
termination shall be without liability of any party to any other party,
except to the extent provided in this Section 10. Notwithstanding any such
termination, the provisions of Section 8 shall remain in effect.
Section 11. Default by One or More of the Underwriters. If one or more
------------------------------------------
of the Underwriters shall fail at the Closing Time to purchase the Shares that
it or they are obligated to purchase pursuant to this Agreement (the "Defaulted
Securities"), you shall have the right, within 36 hours thereafter, to make
arrangements for one or more of the non-defaulting Underwriters, or
37
<PAGE>
any other underwriters, to purchase all, but not less than all, of the
Defaulted Securities in such amounts as may be agreed upon and upon the terms
set forth in this Agreement; if, however, you have not completed such
arrangements within such 36-hour period, then:
(a) If the aggregate number of Firm Shares which are Defaulted
Securities does not exceed 10% of the aggregate number of Firm Shares to be
purchased pursuant to this Agreement, the non-defaulting Underwriters shall
be obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligation proportions bear to the
underwriting obligations of all non-defaulting Underwriters, and
(b) If the aggregate number of Firm Shares which are Defaulted
Securities exceeds 10% of the aggregate number of Firm Shares to be
purchased pursuant to this Agreement, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section 11 shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default that does not result in a termination of
this Agreement, either you or the Company shall have the right to postpone the
Closing Time for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus that
may thereby be made necessary. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 11.
Section 12. Notices. All notices and other communications under this
-------
Agreement shall be in writing and shall be deemed to have been duly given if
delivered, mailed or transmitted by any standard form of telecommunication.
Notices to the Underwriters shall be directed c/o Morgan Keegan & Company, Inc.,
50 Front Street, Memphis, TN 38103, Attention: Gib Vestal (with a copy sent in
the same manner to Gray Cary Ware Freidenrich LLP, 400 Hamilton Avenue, Palo
Alto, CA 94301-1825 Attention: Thomas W. Furlong, Esq.; and notices to the
Company and the Selling Shareholders, shall be directed to them at DataWave
Inc., 101 W. Fifth Avenue, Vancouver, BC, Canada V5Y 1H9 Attention: Peter Hough
(with a copy sent in the same manner to _________________ Attention:
________________).
Section 13. Parties. This Agreement is made solely for the benefit of
-------
and is binding upon the Underwriters, the Company and the Selling Shareholders,
to the extent provided in Section 8, any person controlling the Company and the
Selling Shareholders, or any of the Underwriters, the officers and directors of
the Company, and their respective executors, administrators, successors and
assigns and subject to the provisions of Section 8, no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and
38
<PAGE>
assigns" shall not include any purchaser, as such purchaser, from any of the
several Underwriters of the Shares.
All of the obligations of the Underwriters hereunder are several and not
joint.
Section 14. Governing Law and Time. This Agreement shall be governed by
----------------------
the laws of the State of California, without application of conflict of law
principles. Specified time of the day refers to United States Eastern Time.
Time shall be of the essence of this Agreement.
Section 15. Counterparts. This Agreement may be executed in one or more
------------
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
39
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us a counterpart hereof, and upon the acceptance
hereof by Morgan Keegan & Company, Inc., on behalf of each of the Underwriters,
this instrument will become a binding agreement among the Company, the Selling
Shareholders, and the several Underwriters in accordance with its terms. It is
understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in the Master Agreement
among Underwriters, a copy of which shall be submitted to the Company for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
DataWave Systems Inc.
By:________________________________
Name: Clive Barwin
Title: President
SELLING SHAREHOLDERS
By:________________________________
[NAME]
Attorney-in-Fact
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above:
MORGAN KEEGAN & COMPANY, INC.
LAIDLAW GLOBAL SECURITIES INC.
By: Morgan Keegan & Company, Inc.
By:_________________________________
(Authorized Representative)
On behalf of each of the Underwriters
40
<PAGE>
SCHEDULE A
Number of
Firm Shares
to be Purchased
---------------
Underwriter
- -----------
Morgan Keegan & Company, Inc.
Laidlaw Global Securities Inc.
TOTAL
===============
<PAGE>
SCHEDULE B
SELLING SHAREHOLDERS
Number of
Firm Selling
Name Shareholder Shares
- ---- ------------------
------------------
TOTAL
==================
<PAGE>
EXHIBIT A
FORM OF UNDERWRITERS' WARRANTS
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, TOGETHER WITH THE REGULATIONS PROMULGATED THEREUNDER (THE "SECURITIES
ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT
AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF
OF ANY U.S. PERSON UNLESS REGISTERED UNDER THE SECURITIES ACT, OR AN EXEMPTION
FROM REGISTRATION IS AVAILABLE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
STOCK PURCHASE WARRANT
To Purchase Shares of Common Stock of
DATAWAVE SYSTEMS, INC.
THIS CERTIFIES that, for value received, Morgan Keegan & Company, Inc. (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after the first anniversary of the date hereof and
on or prior to _________, 2003 (the "Termination Date") but not thereafter, to
subscribe for and purchase from DATAWAVE SYSTEMS, INC., a British Columbia
corporation (the "Company"), that number of shares of Common Stock equal to ten
percent (10%) of the total number of shares of Common Stock issued in the
Company's initial underwritten public offering of Common Stock (the "IPO") under
the Securities Act (the "Warrant Shares"). The purchase price of one share of
Common Stock (the "Exercise Price") under this Warrant shall be equal to one
hundred thirty-five percent (135%) of the offering price at which the Company's
Common Stock is offered to the public in the IPO. The Exercise Price and the
number of shares for which the Warrant is exercisable shall be subject to
adjustment as provided herein.
1. Title of Warrant. Prior to the expiration hereof and subject to
----------------
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, pursuant to paragraph 10 hereof.
2. Authorization of Shares. The Company covenants that all shares of
-----------------------
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant.
-------------------
(a) Procedure for Exercise. Exercise of the purchase rights
represented by this Warrant may be made at any time or times after the date
hereof, in whole or in part, before the close of business on the Termination
Date, or such earlier date on which this Warrant may terminate as provided in
paragraph 13 below, by the surrender of this Warrant and the Notice of
<PAGE>
Exercise annexed hereto duly executed, at the office of the Company (or such
other office or agency of the Company as it may designate by notice in writing
to the registered Holder hereof at the address of such Holder appearing on the
books of the Company) and upon payment of the Exercise Price of the shares
thereby purchased; whereupon the Holder of this Warrant shall be entitled to
receive a certificate for the number of shares of Common Stock so purchased.
Certificates for shares of Common Stock purchased hereunder shall be delivered
to the holder hereof within five (5) NASDAQ trading days after the date on which
this Warrant shall have been exercised as aforesaid. Payment of the Exercise
Price of the shares may be by certified check or cashier's check or by wire
transfer to an account designated by the Company in an amount equal to the
Exercise Price multiplied by the number of shares of Common Stock being
purchased.
(b) Net Exercise Rights. Notwithstanding the payment provisions set
-------------------
forth in this Section 3, the holder may elect to receive the amount of Warrant
Shares equal to the value (as determined below) of this Warrant by surrender of
this Warrant at the principal office of the Company together with notice of such
election, in which event the Company shall issue to the holder the number of
shares of Common Stock determined by use of the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Common Stock to be issued to the
holder.
Y = the number of Warrant Shares subject to this Warrant.
A = the Fair Market Value (as defined below) of one (1) Warrant
Share.
B = the Exercise Price per share of the Warrant Shares.
For purposes of this Section 3, fair market value of a share as of a particular
date shall mean the closing price (the last reported sales price; if not so
reported, the average of the last reported bid and asked prices) of the
Company's stock as of the last business day immediately prior to the exercise of
this Warrant.
-2-
<PAGE>
4. Registration Rights.
-------------------
(a) If the Company proposes to register (under the laws of the United
States) any of its common shares for sale to the public, whether for its own
account or for the account of other security holders or both, each such time it
will give at least 45 days' prior written notice to the holder hereof of its
intention so to do. Upon the written request of the Holder, received by the
Company within 30 days after the giving of any such notice by the Company, to
register any of the common stock owned or to be owned by the holder hereof
pursuant to the exercise of this Warrant, the Company will cause such common
shares to be covered by the registration statement proposed to be filed by the
Company. Notwithstanding the foregoing, the Company may withdraw any
registration statement without thereby incurring any liability to the Holder,
except as to expenses as set forth below.
(b) All expenses, including without limitation all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, the fees and disbursements of
special counsel to the Holder, fees and expenses incurred in connection with
complying with federal or state securities or "blue sky" laws, fees of the
National Association of Securities Dealers, Inc., fees and expenses of United
States regulatory authorities, transfer taxes, fees or transfer agents and
registrars, underwriting discounts, selling commissions and costs of insurance,
will be paid directly by the Company.
5. No Fractional Shares or Scrip. No fractional shares or scrip
-----------------------------
representing fractional shares shall be issued upon the exercise of this
Warrant.
6. Charges, Taxes and Expenses. Issuance of certificates for shares of
---------------------------
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the Holder of this Warrant or in such name or names as may be directed by the
Holder of this Warrant; provided, however, that in the event certificates for
-----------------
shares of Common Stock are to be issued in a name other than the name of the
Holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the Holder
hereof; and provided further, that upon any transfer involved in the issuance or
----------------
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
7. Holder Representations. The Holder of the Warrant agrees and
----------------------
acknowledges that the Warrant is being purchased for the Holder's own account,
for investment purposes only, and not for the account of any other person, and
not with a view to distribution, assignment, pledge or resale to others or to
fractionalization in whole or in part. The Holder further represents, warrants
and agrees as follows: no other person has or will have a direct or indirect
beneficial interest in this Warrant and the Holder will not sell, hypothecate or
otherwise transfer the Warrant except in accordance with the Securities Act and
Regulation D thereunder and applicable state securities laws or unless, in the
opinion of counsel for the Holder acceptable to
-3-
<PAGE>
the Company, an exemption from the registration requirements of the Securities
Act and such laws is available.
8. Closing of Books. The Company will at no time close its shareholder
----------------
books or records in any manner which interferes with the timely exercise of this
Warrant.
9. No Rights as Shareholder until Exercise. This Warrant does not entitle
---------------------------------------
the Holder hereof to any voting rights or other rights as a Shareholder of the
Company prior to the exercise thereof. If, however, at the time of the surrender
of this Warrant and purchase the Holder hereof shall be entitled to exercise
this Warrant, the shares so purchased shall be and be deemed to be issued to
such holder as the record owner of such shares as of the close of business on
the date on which this Warrant shall have been exercised.
10. Assignment and Transfer of Warrant. This Warrant may be assigned by
----------------------------------
the surrender of this Warrant and the Assignment Form annexed hereto duly
executed at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company); provided,
however, that this Warrant may not be resold or otherwise transferred except
with the prior consent of the Company and (i) in a transaction registered under
the Securities Act, or (ii) in a transaction pursuant to an exemption, if
available, from such registration and whereby, if requested by the Company, an
opinion of counsel reasonably satisfactory to the Company is obtained by the
holder of this Warrant to the effect that the transaction is so exempt.
11. Loss, Theft, Destruction or Mutilation of Warrant. The Company
-------------------------------------------------
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
12. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
---------------------------------
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
13. Effect of Certain Events.
------------------------
(a) If at any time the Company proposes (i) to sell or otherwise
convey all or substantially all of its assets, or (ii) to effect a transaction
(by merger or otherwise) in which more than 50% of the voting power of the
Company is disposed of (collectively, a "Sale or Merger Transaction") in which
the consideration to be received by the Company or its Shareholders consists
solely of cash, the Company shall give the Holder of this Warrant thirty
-4-
<PAGE>
(30) days notice of the proposed effective date of the transaction specifying
that the Warrant shall terminate if the Warrant has not been exercised by the
effective date of the transaction.
(b) In case the Company shall at any time effect a Sale or Merger
Transaction in which the consideration to be received by the Company or its
Shareholders consists in part of consideration other than cash, the Holder of
this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
14. Adjustments of Exercise Price and Number of Warrant Shares. The number
----------------------------------------------------------
and kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following:
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock, or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, the number of Warrant Shares purchasable
upon exercise of this Warrant immediately prior thereto shall be adjusted so
that the holder of this Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or have been entitled to receive had such Warrant been exercised in advance
thereof. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
15. Voluntary Adjustment by the Company. The Company may at its
-----------------------------------
discretion, at any time during the term of this Warrant, reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
16. Notice of Adjustment. Whenever the number of Warrant Shares or number
--------------------
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by registered or certified mail, return receipt requested, to the
Holder of this Warrant notice of such adjustment or adjustments setting forth
the number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of such Warrant Shares after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth computation by which such adjustment was made. Such
notice, in absence of manifest error, shall be conclusive evidence of the
correctness of such adjustment.
-5-
<PAGE>
17. Authorized Shares. The Company covenants that during the period the
-----------------
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of Common Stock
upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary
to assure that such shares of Common Stock may be issued as provided herein
without violation of any applicable law or regulation, or of any requirements of
the NASDAQ (or on the principal national securities exchange on which the Common
Stock is admitted to trading or listed or, if not listed or admitted to trading
on NASDAQ or a national securities exchange, as reported by the National
Quotation Bureau, Inc. or other similar organization ("Other Exchanges")) for
the three (3) trading days immediately prior to the date such dividend is
payable.
18. Miscellaneous.
-------------
(a) Issue Date; Jurisdiction. The provisions of this Warrant shall be
------------------------
construed and shall be given effect in all respects as if it had been issued and
delivered by the Company on the date hereof. This Warrant shall be binding upon
any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws and jurisdictions of Delaware and for all purposes shall
be construed in accordance with and governed by the laws of said state without
regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the Common Stock
------------
acquired upon the exercise of this Warrant, if not registered, may have
restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions hereof
-----------------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
-------
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officers thereunto duly authorized.
Dated:_________________, 1998
DATAWAVE SYSTEMS, INC.
By:__________________________________
Title:_______________________________
-7-
<PAGE>
NOTICE OF EXERCISE
------------------
To: DATAWAVE SYSETEMS, INC.
(1) The undersigned hereby elects to purchase ________ shares of Common Stock
of DATAWAVE SYSTEMS, INC. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full, together with all
applicable transfer taxes, if any.
(2) By signing below, the undersigned hereby certifies that the shares
of Common Stock to be issued upon exercise of this Warrant have been registered
under the Securities Act of 1933 (the "Act"), or that an exemption from
registration under the Securities Act is available for such shares of Common
Stock.
(3) Please issue a certificate or certificates representing said
shares of Common Stock in the name of the undersigned or in such other name as
is specified below:
_______________________________
(Name)
_______________________________
(Address)
_______________________________
Dated:
______________________________
Signature
NOTE: Signature must conform in all respects to holder's name as specified on
the face of the attached warrant.
-8-
<PAGE>
ASSIGNMENT FORM
---------------
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, 199___
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
-9-
<PAGE>
EXHIBIT 3.1
COMPANY ACT
DATAWAVE SYSTEMS INC.
ALTERED MEMORANDUM
------------------
(as altered by special resolution
passed September 30, 1996)
1. The name of the Company is Datawave Systems Inc.
2. The authorized capital of the Company consists of 50,000,000 common shares
without par value.
<PAGE>
EXHIBIT 3.2
SCHEDULE "A"
ARTICLES
- of -
DATAWAVE SYSTEMS INC.
TABLE OF CONTENTS
-----------------
Part Page
- ---- ----
1. Interpretation 1
2. Shares and Share Certificates 2
3. Issue of Shares 4
4. Share Registers 4
5. Transfer of Shares 5
6. Transmission of Shares 6
7. Alteration of Capital 7
8. Purchase and Redemption of Shares 9
9. Borrowing Powers 10
10. General Meetings 11
11. Proceedings at General Meetings 12
12. Votes of Members 15
13. Directors 17
14. Election and Removal of Directors 18
15. Powers and Duties of Directors 20
16. Disclosure of Interest of Directors 21
17. Proceedings of Directors 22
18. Executive and Other Committees 24
19. Officers 25
20. Indemnity and Protection of Directors,
Officers and Employees 26
21. Dividends and Reserve 27
<PAGE>
22. Record Dates 29
23. Documents, Records and Financial Statements 29
24. Notices 30
25. Seal 31
26. Prohibitions 32
-2-
<PAGE>
COMPANY ACT
ARTICLES
DATAWAVE SYSTEMS INC.
PART 1 - INTERPRETATION
-----------------------
1.1 In these Articles, unless the context otherwise requires:
(a) "Company Act" means the Company Act of the Province of British
Columbia from time to time in force and all amendments thereto and
includes all regulations and amendments thereto made pursuant to that
Act;
(b) "designated security" means a security of the Company that is not a
debt security and that:
(i) carries a voting right in all circumstances or under some
circumstances that have occurred and are continuing, or
(ii) carries a residual right to participate in the earnings of the
Company or, upon the liquidation or winding up of the Company, in
its assets;
(c) "Directors", "Board of Directors" or "Board" means the Directors or,
if the Company has only one Director, the Director of the Company for
the time being;
(d) "month" means calendar month;
(e) "registered address" of a Director means the address of the Director
recorded in the register of directors;
(f) "registered address" of a member means the address of the member
recorded in the register of members;
(g) "registered owner" or "registered holder" when used with respect to a
share in the capital of the Company means the person registered in the
register of members in respect of such share;
(h) "regulations" means the regulations made pursuant to the Company Act;
(i) "seal" means the common seal of the Company, if the Company has one.
-1-
<PAGE>
1.2 Expressions referring to writing shall be construed as including references
to printing, lithography, typewriting, photography and other modes of
representing or reproducing words in a visible form.
1.3 Words importing the singular include the plural and vice versa, words
importing male persons include female persons and words importing persons shall
include corporations.
1.4 The meaning of any words or phrases defined in the Company Act shall, if
not inconsistent with the subject or context, bear the same meaning in these
Articles.
1.5 The rules of construction contained in the Interpretation Act shall apply,
mutatis mutandis, to the interpretation of these Articles.
1.6 The provisions contained in Table A in the First Schedule to the Company
Act shall not apply to the Company.
PART 2 - SHARES AND SHARE CERTIFICATES
--------------------------------------
2.1 Every share certificate issued by the Company shall be in such form as the
Directors may approve from time to time and shall contain such statements as are
required by, and shall otherwise comply with, the Company Act.
2.2 Every member is entitled, without charge, to one certificate representing
the share or shares of each class held by him except that, in respect of a share
or shares held jointly by several members, the Company shall not be bound to
issue more than one certificate, and delivery of a certificate for a share to
one of several joint registered holders or to his duly authorized agent shall be
sufficient delivery to all. The Company shall not be bound to issue certificates
representing redeemable shares if such shares are to be redeemed within one
month of the date on which they were allotted.
2.3 Any share certificate may be sent by registered mail to the member entitled
thereto, and neither the Company nor any transfer agent shall be liable for any
loss occasioned to the member resulting from the loss or theft of any such share
certificate so sent.
2.4 If a share certificate:
(a) is worn out or defaced, the Directors may, upon production to the
Company of the certificate and upon such other terms, if any, as they
may think fit, order the certificate to be cancelled and issue a new
certificate in lieu thereof;
(b) is lost, stolen or destroyed, the Directors may, upon proof thereof to
their satisfaction and upon such indemnity, if any, being given as
they consider
-2-
<PAGE>
adequate, issue a new share certificate in lieu thereof to the person
entitled to such lost, stolen or destroyed certificate; or
(c) represents more than one share and the registered owner thereof
surrenders it to the Company with a written request that the Company
issue in his name two or more certificates each representing a
specified number of shares and in the aggregate representing the same
number of shares as the certificate so surrendered, the Directors
shall cancel the certificate so surrendered and issue in lieu thereof
certificates in accordance with such request.
2.5 If a member owns shares of a class or series represented by more than one
share certificate and surrenders the certificates to the Company with a written
request that the Company issue in his name one certificate representing in the
aggregate the same number of shares as the certificates so surrendered, the
Directors shall cancel the certificates so surrendered and issue in lieu thereof
a certificate in accordance with such request.
2.6 The Directors may from time to time determine the amount of a charge, not
exceeding an amount prescribed by the regulations or the Company Act, to be
imposed for each certificate issued pursuant to Articles 2.4 and 2.5.
2.7 Every share certificate shall be signed manually by at least one officer or
Director of the Company, or by or on behalf of a registrar, branch registrar,
transfer agent or branch transfer agent of the Company and any additional
signature may be printed or otherwise mechanically reproduced and, in such
event, a certificate so signed is as valid as if signed manually,
notwithstanding that any person whose signature is so printed or mechanically
reproduced shall have ceased to hold the office that he is stated on such
certificate to hold at the date of the issue of the certificate.
2.8 Except as required by law, statute or these Articles, no person shall be
recognized by the Company as holding any share upon any trust, and the Company
shall not be bound by or compelled in any way to recognize (even when having
notice thereof) any equitable, contingent, future or partial interest in any
share or in any fractional part of a share or (except as provided by law,
statute or these Articles or as ordered by a court of competent jurisdiction)
any other rights in respect of any share except an absolute right to the
entirety thereof in its registered holder.
PART 3 - ISSUE OF SHARES
------------------------
3.1 Except as provided in the Company Act, the Memorandum of the Company and
these Articles, and subject to any direction to the contrary contained in a
resolution of the members authorizing any increase or alteration of capital, the
shares of the Company shall be under the control of the Directors who may,
subject to the rights of the holders of issued shares of the Company, allot and
issue, or grant options in respect of shares authorized but not issued
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or issued and redeemed or purchased, at such times and to such persons,
including Directors, and in such manner and upon such terms and conditions, and
at such price or for such consideration, as the Directors in their absolute
discretion may determine.
3.2 If the Company is, or becomes, a company which is not a reporting company
and the Directors are required by the Company Act before allotting any shares to
offer them pro rata to the members, the Directors shall, before allotting any
shares, comply with the applicable provisions of the Company Act.
3.3 Subject to the provisions of the Company Act, the Company may pay a
commission or allow a discount to any person in consideration of his subscribing
or agreeing to subscribe, whether absolutely or conditionally, for its shares,
or procuring or agreeing to procure subscriptions, whether absolutely or
conditionally, for any such shares, but if the Company is not a specially
limited company, the rate of the commission and discount shall not in the
aggregate exceed 25% of the amount of the subscription price of such shares.
3.4 No share may be issued until it is fully paid and the Company shall have
received the full consideration therefor in cash, property or past services
actually performed for the Company. A document evidencing indebtedness of the
allottee is not property for the purpose of this Article. The value of property
or services for the purpose of this Article shall be the value determined by the
Directors by resolution to be, in all the circumstances of the transaction, no
greater than the fair market value thereof. The full consideration received for
a share issued by way of dividend shall be the amount determined by the
Directors to be the amount of the dividend.
PART 4 - SHARE REGISTERS
------------------------
4.1 The Company shall keep or cause to be kept a register of members, a
register of transfers and a register of allotments within British Columbia, all
as required by the Company Act, and may combine one or more of such registers.
If the Company's capital shall consist of more than one class of shares, a
separate register of members, register of transfers and register of allotments
may be kept in respect of each class of shares. The Directors may appoint a
trust company to keep the aforesaid registers or, if there is more than one
class of shares, the Directors may appoint a trust company, which need not be
the same trust company, to keep the registers for each class of shares. The
Directors may also appoint one or more trust companies, including the trust
company which keeps the said registers of its shares or of a class thereof, as
transfer agent for its shares or such class thereof, as the case may be, and the
same or another trust company or companies as registrar for its shares or such
class thereof, as the case may be. The Directors may terminate the appointment
of any such trust company at any time and may appoint another trust company in
its place.
4.2 Unless prohibited by the Company Act, the Company may keep or cause to be
kept within the Province one or more branch registers of members and may, if the
Company is,
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or becomes, a reporting company, cause to be kept outside the Province one or
more branch register of members.
4.3 The Company shall not at any time close its register of members.
PART 5 - TRANSFER OF SHARES
---------------------------
5.1 Subject to the provisions of the Memorandum of the Company and these
Articles and to restrictions on transfer, if any, contained in these Articles,
any member may transfer any of his shares by instrument of transfer executed by
or on behalf of such member and delivered to the Company or its transfer agent.
The instrument of transfer shall be in the form, if any, on the back of the
Company's share certificates or in such other form as the Directors may from
time to time approve. If the Directors so require, each instrument of transfer
shall be in respect of only one class of shares. Except to the extent that the
Company Act may otherwise provide, the transferor shall be deemed to remain the
holder of the shares until the name of the transferee is entered in the register
of members or a branch register of members in respect thereof.
5.2 The signature of the registered owner of any shares, or of his duly
authorized attorney, upon an authorized instrument of transfer shall constitute
a complete and sufficient authority to the Company, its Directors, officers and
agents to register in the name of the transferee as named in the instrument of
transfer the number of shares specified therein or, if no number is specified,
all the shares of the registered owner represented by share certificates
deposited with the instrument of transfer. If no transferee is named in the
instrument of transfer, the instrument of transfer shall constitute a complete
and sufficient authority to the Company, its Directors, officers and agents to
register, in the name of the person on whose behalf any certificate for the
shares to be transferred is deposited with the Company for the purpose of having
the transfer registered, the number of shares specified in the instrument of
transfer or, if no number is specified, all the shares represented by all share
certificates deposited with the instrument of transfer.
5.3 The Company and its Directors, officers and transfer agent or agents shall
not be bound to enquire into the title of the person named in the form of
transfer as transferee or, if no person is named therein as transferee, of the
person on whose behalf the certificate is deposited with the Company for the
purpose of having the transfer registered, or be liable to any claim by such
registered owner or by any intermediate owner or holder of the certificate or of
any of the shares represented thereby or any interest therein for registering
the transfer, and the transfer, when registered, shall confer upon the person in
whose name the shares have been registered a valid title to such shares.
5.4 Every instrument of transfer shall be executed by the transferor and left
at the registered office of the Company or at the office of its transfer agent
or registrar for registration together with the share certificate for the
shares to be transferred and such other
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evidence, if any, as the Directors, the transfer agent or registrar may require
to prove the title of the transferor or his right to transfer the shares and the
right of the transferee to have the transfer registered. All instruments of
transfer where the transfer is registered shall be retained by the Company or
its transfer agent or registrar and any instrument of transfer, where the
transfer is not registered, shall be returned to the person depositing the same
together with the share certificate which accompanied the same when tendered for
registration.
5.5 There shall be paid to the Company in respect of the registration of any
transfer such sum, if any, as the Directors may from time to time determine.
PART 6 - TRANSMISSION OF SHARES
-------------------------------
6.1 In the case of the death of a member, the survivor or survivors where the
deceased was a joint registered holder of shares, and the legal personal
representative of the deceased member where he was the sole holder, shall be the
only persons recognized by the Company as having any title to his interest in
the shares. Before recognizing any legal personal representative the Directors
may require him to produce a certified copy of a grant of probate or letters of
administration, or grant of representation, will, order or other instrument or
other evidence of the death under which title to the shares is claimed to vest,
and such other documents as the Company Act requires.
6.2 Upon the death or bankruptcy of a member, his personal representative or
trustee in bankruptcy, as the case may be, although not a member, shall have the
same rights, privileges and obligations that attach to the shares formerly held
by the deceased or bankrupt member if the documents required by the Company Act
shall have been deposited at the Company's registered office.
6.3 Any person becoming entitled to a share in consequence of the death or
bankruptcy of a member shall, upon such documents and evidence being produced to
the Company as the Company Act requires, or who becomes entitled to a share as a
result of an order of a Court of competent jurisdiction or a statute, have the
right either to be registered as a member in his representative capacity in
respect of such share or, if he is a personal representative or trustee in
bankruptcy, instead of being registered himself, to make such transfer of the
share as the deceased or bankrupt person could have made; but the Directors
shall, as regards a transfer by a personal representative or trustee in
bankruptcy, have the same right, if any, to decline or suspend registration of a
transferee as they would have in the case of a transfer of a share by the
deceased or bankrupt person before the death or bankruptcy.
PART 7 - ALTERATION OF CAPITAL
------------------------------
7.1 The Company may by ordinary resolution amend its Memorandum to increase its
authorized capital by:
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(a) creating shares with par value or shares without par value, or both;
(b) increasing the number of shares with par value or shares without par
value, or both; or
(c) increasing the par value of a class of shares with par value, if no
shares of that class are issued.
7.2 The Company may by special resolution alter its Memorandum to:
(a) subdivide all or any of its unissued or fully paid issued shares with
par value into shares with smaller par value;
(b) subdivide all or any of its unissued or fully paid issued shares
without par value so that the number of those shares is increased;
(c) consolidate all or any of its shares with par value into shares of
larger par value;
(d) consolidate all or any of its shares without par value so that the
number of those shares authorized is reduced;
(e) change all or any of its unissued or fully paid issued shares with par
value into shares without par value;
(f) change all or any of its unissued shares without par value into shares
with par value;
(g) alter the name or designation of all or any of its issued or unissued
shares; or
(h) alter the provisions as to the maximum price or consideration at or
for which shares without par value may be issued,
but only to such extent, in such manner and with such consents of members
holding shares of a class or series which are the subject of or are affected by
such alteration as the Company Act provides.
7.3 The Company may alter its Memorandum or these Articles:
(a) by special resolution, to create, define and attach special rights or
restrictions to any shares, whether issued or unissued, and
(b) by special resolution and by otherwise complying with any applicable
provision of its Memorandum or these Articles, to vary or abrogate any
special rights or restrictions attached to any shares, whether issued
or unissued,
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and in each case by filing a certified copy of such resolution with the
Registrar but no right or special right attached to any issued shares shall be
prejudiced or interfered with unless all members holding shares of each class or
series whose right or special right is so prejudiced or interfered with consent
thereto in writing, or unless a separate resolution is consented thereto by the
members holding shares of each such class or series passed by a majority of 3/4
of the votes cast, or such greater majority as may be specified by the special
rights attached to the class or series, of the issued shares of such class or
series.
7.4 Notwithstanding such consent in writing or such separate resolution, no
such alteration shall be valid as to any part of the issued shares of any class
or series unless the holders of the rest of the issued shares of such class or
series either all consent thereto in writing or consent thereto by a separate
resolution passed by a majority of 3/4 of the votes
cast.
7.5 If the Company is, or becomes, a reporting company, no resolution to
create, vary or abrogate any special right of conversion or exchange attaching
to any shares shall be submitted to any general meeting, class meeting or series
meeting of members unless, if so required by the Company Act, the Superintendent
of Brokers, the British Columbia Securities Commission, or other applicable
regulatory authority, as the case may be, has first consented to the resolution.
7.6 Unless these Articles otherwise provide, the provisions of these Articles
relating to general meetings shall apply, with the necessary changes and so far
as they are applicable, to a class meeting or series meeting but the quorum at a
class meeting or series meeting shall be one person holding or representing by
proxy one-third of the shares affected.
PART 8 - PURCHASE AND REDEMPTION OF SHARES
------------------------------------------
8.1 Subject to the special rights and restrictions attached to any shares, the
Company may, by a resolution of the Directors and in compliance with the Company
Act, purchase any of its shares at the price and upon the terms specified in
such resolution or redeem any shares that have a right of redemption attached to
them in accordance with the special rights and restrictions attaching thereto.
No such purchase or redemption shall be made if the Company is insolvent at the
time of the proposed purchase or redemption or if the proposed purchase or
redemption would render the Company insolvent.
8.2 Unless shares are to be purchased by the Company through a stock exchange
or the Company is purchasing the shares from a dissenting member pursuant to the
requirements of the Company Act or the Company is purchasing the shares from a
bona fide employee or bona fide former employee of the company or of an
affiliate of the Company, the Company shall make its offer to purchase pro rata
to every member who holds shares of the class or series to be purchased.
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8.3 If the Company proposes at its option to redeem some but not all of the
shares of a particular class or series, the Directors may, subject to the
special rights and restrictions attached to the shares of such class or series,
decide the manner in which the shares to be redeemed shall be selected.
8.4 Subject to the provisions of the Company Act, the Company may reissue a
cancelled share that it has redeemed or purchased, or sell a share that it has
redeemed or purchased but not cancelled, but the Company may not vote or pay or
make any dividend or other distribution in respect of a share that it has
redeemed or purchased.
PART 9 - BORROWING POWERS
-------------------------
9.1 The Directors may from time to time in their discretion authorize the
Company to:
(a) borrow money in such amount, in such manner, on such security, from
such sources and upon such terms and conditions as they think fit;
(b) guarantee the repayment of money borrowed by any person or the
performance of any obligation of any person;
(c) issue bonds, debentures, notes and other debt obligations either
outright or as continuing security for any indebtedness or liability,
direct or indirect, or obligations of the Company or of any other
person; and
(d) mortgage, charge (whether by way of specific or floating charge) or
give other security on the undertaking or on the whole or any pan of
the property and assets of the Company, both present and future.
9.2 Any bonds, debentures, notes or other debt obligations of the Company may
be issued at a discount, premium or otherwise and with any special privileges as
to redemption, surrender, drawing, allotment of or conversion into or exchange
for shares or other securities, attending and voting at general meetings of the
Company, appointment of Directors or otherwise and may by their terms be
assignable free from any equities between the Company and the person to whom
they were issued or any subsequent holder thereof, all as the Directors may
determine.
9.3 The Company shall keep or cause to be kept within the Province of British
Columbia in accordance with the Company Act a register of its debentures and a
register of debentureholders, which registers may be combined, and, subject to
the provisions of the Company Act, may keep or cause to be kept one or more
branch registers of its debentureholders at such place or places as the
Directors may from time to time determine and
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the Directors may by resolution, regulation or otherwise make such provisions as
they think fit respecting the keeping of such branch registers.
9.4 Every bond, debenture, note or other debt obligation of the Company shall
be signed manually by at least one Director or officer of the Company or by or
on behalf of a trustee, registrar, branch registrar, transfer agent or branch
transfer agent for the bond, debenture, note or other debt obligation appointed
by the Company or under any instrument under which the bond, debenture, note or
other debt obligation is issued and any additional signatures may be printed or
otherwise mechanically reproduced thereon and, in such event, a bond, debenture,
note or other debt obligation so signed is as valid as if signed manually
notwithstanding that any person whose signature is so printed or mechanically
reproduced shall have ceased to hold the office that he is stated on such bond,
debenture, note or other debt obligation to hold at the date of the issue
thereof.
9.5 If the Company is, or becomes, a reporting company, it shall keep or cause
to be kept a register of its indebtedness to every Director or officer of the
Company or an associate of any of them in accordance with the provisions of the
Company Act.
PART 10 - GENERAL MEETINGS
--------------------------
10.1 Subject to any extensions of time permitted under the Company Act, the
first annual general meeting of the Company shall be held within 15 months from
the date of incorporation and thereafter an annual general meeting shall be held
once in every calendar year at such time (not being more than 13 months after
the date that the last annual general meeting was held or was deemed to have
been held) and place as may be determined by the Directors.
10.2 If the Company is, or becomes, a company which is not a reporting company
and all the members entitled to attend and vote at an annual general meeting
consent in writing to the business required to be transacted at such meeting,
the meeting shall be deemed to have been held on the date specified in the
consent or in the resolutions consented to in writing dealing with such business
and the meeting need not be held.
10.3 The Directors may, whenever they think fit, convene a general meeting. A
general meeting, if requisitioned in accordance with the Company Act, shall be
convened by the Directors or, if not convened by the Directors, may be convened
by the requisitionists as provided in the Company Act.
10.4 If the Company. is, or becomes, a reporting company, advance notice of any
general meeting at which Directors are to be elected shall be published in the
manner required by the Company Act.
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10.5 A notice convening a general meeting, specifying the place, date and hour
of the meeting and, in case of special business, the general nature of that
business, shall be given as provided in the Company Act and in the manner
provided in these Articles, or in such other manner (if any) as may be
prescribed by ordinary resolution, whether previous notice thereof has been
given or not, to such persons as are entitled by law or pursuant to these
Articles to receive such notice from the Company. Accidental omission to give
notice of a meeting to, or the non-receipt of notice of a meeting, by any member
shall not invalidate the proceedings at that meeting.
10.6 All the members of the Company entitled to attend and vote at a general
meeting may, by unanimous consent in writing given before, during or after the
meeting, or if they are present at the meeting by a unanimous vote, waive or
reduce the period of notice of such meeting and an entry in the minute book of
such waiver or reduction shall be sufficient evidence of the due convening of
the meeting.
10.7 Except as otherwise provided by the Company Act, where any special
business at a general meeting includes considering, approving, ratifying,
adopting or authorizing any document or the execution thereof or the giving of
effect thereto, the notice convening the meeting shall, with respect to such
document, be sufficient if it states that a copy of the document or proposed
document is or will be available for inspection by members at the registered
office or records office of the Company or at some other place in British
Columbia designated in the notice during usual business hours up to the date of
such general meeting.
PART 11 - PROCEEDINGS AT GENERAL MEETINGS
-----------------------------------------
11.1 All business shall be deemed special business which is transacted at:
(a) an annual general meeting, with the exception of the conduct of and
voting at such meeting, consideration of the financial statements and
the respective reports of the Directors and the auditor, fixing or
changing the number of directors, the election of Directors, the
appointment of an auditor, fixing of the remuneration of the auditor
and such other business as by these Articles or the Company Act may be
transacted at a general meeting without prior notice thereof being
given to the members or any business which is brought under
consideration by the report of the Directors; and
(b) any other general meeting, with the exception of the conduct of and
voting at such meeting.
11.2 No business, other than election of the chairman or the adjournment or
termination of the meeting, shall be conducted at any general meeting unless the
required quorum of members, entitled to attend and vote, is present at the
commencement of the meeting, but a quorum need not be present throughout the
meeting.
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11.3 Except as provided in the Company Act and these Articles a quorum shall be
two persons present and being, or representing by proxy, members holding not
less than 10% of the shares entitled to be voted at the meeting. If there is
only one member the quorum is one person present and being, or representing by
proxy, such member. The Directors, the senior officers of the Company, the
solicitor of the Company and the auditor of the Company, if any, shall be
entitled to attend at any general meeting but no such person shall be counted in
the quorum or be entitled to vote at any general meeting unless he shall be a
member or proxyholder entitled to vote at such meeting.
11.4 If within half an hour from the time appointed for a general meeting a
quorum is not present, the meeting, if convened upon the requisition of members,
shall be terminated. In any other case the meeting shall stand adjourned to the
same day in the next week, at the same time and place, and, if at the adjourned
meeting a quorum is not present within half an hour from the time appointed for
the meeting, the person or persons present and being, or representing by proxy,
a member or members entitled to attend and vote at the meeting shall be a
quorum.
11.5 The Chairman of the Board or in his absence, or if there is no Chairman of
the Board, the President or in his absence a Vice-President, if any, shall be
entitled to preside as chairman at every general meeting of the Company.
11.6 If at any general meeting neither the Chairman of the Board nor the
President nor a Vice-President is present within 15 minutes after the time
appointed for holding the meeting or if any of them is present and none of them
is willing to act as chairman, the Directors present shall choose one of their
number to be chairman, or if all the Directors present decline to take the chair
or shall fail to so choose or if no Director is present, the members present
shall choose one of their number or any other person to be chairman.
11.7 The chairman of a general meeting may, with the consent of the meeting if
a quorum is present, and shall, if so directed by the meeting, adjourn the
meeting from time to time and from place to place, but no business shall be
transacted at any adjourned meeting other than the business left unfinished at
the meeting from which the adjournment took place. When a meeting is adjourned
for 30 days or more, notice, but not "advance notice", of the adjourned meeting
shall be given as in the case of the original meeting. Save as aforesaid, it
shall not be necessary to give any notice of an adjourned meeting or of the
business to be transacted at an adjourned meeting.
11.8 No motion proposed at a general meeting need be seconded and the chairman
may propose or second a motion.
11.9 Subject to the provisions of the Company Act, every motion or question
submitted to a general meeting shall be decided on a show of hands, unless
(before or on the declaration of the result of the show of hands) a poll is
directed by the chairman or demanded by at least one member entitled to vote who
is present in person or by proxy. The chairman
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shall declare to the meeting the decision on every motion or question in
accordance with the result of the show of hands or the poll, and such decision
shall be entered in the record of proceedings of the Company. A declaration by
the chairman that a motion or question has been carried, or carried unanimously,
or by a particular majority, or lost, or not carried by a particular majority
and an entry to that effect in the record of the proceedings of the Company
shall be conclusive evidence of the fact without proof of the number or
proportion of the votes recorded in favour of or against that motion or
question.
11.10 The chairman of the meeting shall be entitled to vote any shares carrying
the right to vote held by him but in the case of an equality of votes, whether
on a show of hands or on a poll, the chairman shall not have a second or casting
vote in addition to the vote or votes to which he may be entitled as a member.
11.11 No poll may be demanded on the election of a chairman. A poll demanded on
a question of adjournment shall be taken forthwith. A poll demanded on any other
question shall be taken as soon as, in the opinion of the chairman, is
reasonably convenient, but in no event later than 7 days after the meeting and
at such time and place and in such manner as the chairman of the meeting
directs. The result of the poll shall be deemed to be the resolution of and
passed at the meeting at which the poll was demanded. Any business other than
that upon which the poll has been demanded may be proceeded with pending the
taking of the poll. A demand for a poll may be withdrawn. In any dispute as to
the admission or rejection of a vote the decision of the chairman made in good
faith shall be final and conclusive.
11.12 Every ballot cast upon a poll and every proxy appointing a proxyholder
who casts a ballot upon a poll shall be retained by the Secretary for such
period and be subject to such inspection as the Company Act may provide.
11.13 On a poll a person entitled to cast more than one vote need not, if he
votes, use all his votes or cast all the votes he uses in the same way.
11.14 Unless the Company Act, the Memorandum or these Articles otherwise
provide, any action to be taken by a resolution of the members may be taken by
an ordinary resolution.
PART 12 - VOTES OF MEMBERS
--------------------------
12.1 Subject to any voting rights or restrictions attached to any class of
shares and the restrictions as to voting on joint registered holders of shares,
on a show of hands every member who is present in person and entitled to vote at
a general meeting or class meeting shall have one vote and on a poll every
member entitled to vote shall have one vote for each share of which he is the
registered holder and may exercise such vote either in person or by proxyholder.
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12.2 Any person who is not registered as a member but is entitled to vote at a
general meeting or class meeting in respect of a share, may vote the share in
the same manner as if he were a member but, unless the Directors have previously
admitted his right to vote at that meeting in respect of the share, he shall
satisfy the Directors of his right to vote the share before the time for holding
the meeting, or adjourned meeting, as the case may be, at which he proposes to
vote.
12.3 Any corporation, not being a subsidiary of the Company, which is a member
of the Company may by resolution of its directors or other governing body
authorize such person as it thinks fit to act as its representative at any
general meeting or class meeting and to speak and vote at any such meeting or to
sign resolutions of members. The person so authorized shall be entitled to
exercise in respect of and at any such meeting the same powers on behalf of the
corporation which he represents as that corporation could exercise if it were an
individual member of the Company personally present, including, without
limitation, the right, unless restricted by such resolution, to appoint a
proxyholder to represent such corporation, and he shall be counted for the
purpose of forming a quorum if present at the meeting. Evidence of the
appointment of any such representative may be sent to the Company by written
instrument, telegram, telex, telecopier or any method of transmitting legibly
recorded messages. Notwithstanding the foregoing, a corporation being a member
may appoint a proxyholder.
12.4 In the case of joint registered holders of a share the vote of the senior
who exercises a vote, whether in person or by proxyholder, shall be accepted to
the exclusion of the votes of the other joint registered holders; and for this
purpose seniority shall be determined by the order in which the names stand in
the register of members. Several legal personal representatives of a deceased
member whose shares are registered in his sole name shall for the purpose of
this Article be deemed joint registered holders.
12.5 A member of unsound mind entitled to attend and vote, in respect of whom
an order has been made by any court having jurisdiction, may vote, whether on a
show of hands or on a poll, by his committee; curator bonis, or other person in
the nature of a committee or curator bonis appointed by that court, and any such
committee, curator bonis or other person may appoint a proxyholder.
12.6 A member holding more than one share in respect of which he is entitled to
vote shall be entitled to appoint one or more proxyholders to attend, act and
vote for him on the same occasion. If such a member should appoint more than one
proxyholder for the same occasion he shall Specify the number of shares each
proxyholder shall be entitled to vote. A member may also appoint one or more
alternate proxyholders to act in the place and stead of an absent proxyholder.
12.7 A form of proxy shall be in writing under the hand of the appointor or of
his attorney duly authorized in writing, or, if the appointor is a corporation,
either under the seal of the corporation or under the hand of a duly authorized
officer or attorney.
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12.8 Any person may act as proxyholder whether or not he is a member. The proxy
may authorize the proxyholder to act as such for the appointor for such period,
at such meeting or meetings and to the extent permitted by the Company Act.
12.9 A form of proxy and the power of attorney or other authority, if any,
under which it is signed or a notarially certified copy thereof shall be
deposited at the registered office of the Company or at such other place as is
specified for that purpose in the notice calling the meeting, or shall be
deposited with the chairman of the meeting. In addition to any other method of
depositing proxies provided for in these Articles, the Directors may from time
to time by resolution make regulations relating to the depositing of proxies at
any place or places and providing for particulars of such proxies to be sent to
the Company or any agent of the Company in writing or by letter, telegram,
telex, telecopier or any method of transmitting legibly recorded messages so as
to arrive before the commencement of the meeting or adjourned meeting at the
registered office of the Company or at the office of any agent of the Company
appointed for the purpose of receiving such particulars and also providing that
proxies so deposited may be acted upon as though the proxies themselves were
deposited as required by this part, and votes given in accordance with such
regulations shall be valid and shall be counted.
12.10 Unless the Company Act or any other statute or law which is applicable to
the Company or to any class or series of its shares requires any other form of
proxy, a proxy, whether for a specified meeting or otherwise, shall be in the
following form, or in such other form that the Directors or the chairman of the
meeting shall approve:
(Name of Company)
The undersigned, being a member of the above Company, hereby appoints
_________________________________ _______________________or failing him
______________________________ ___________________ as proxyholder for the
undersigned to attend, act and vote for and on behalf of the undersigned
at the general meeting of the Company to be held on the ____ day of
_________,19 __ and at any adjournment thereof.
Signed this ____ day of __________,19 __.
________________________________
(Signature of member)
12.11 A vote given in accordance with the terms of a proxy is valid
notwithstanding the previous death or incapacity of the member giving the proxy
or revocation of the proxy or of the authority under which the proxy was
executed or transfer of the share or shares in respect of which the proxy is
given unless notification in writing of such death, incapacity, revocation or
transfer shall have been received at the registered office of the Company or by
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the chairman of the meeting or adjourned meeting for which the proxy is given
before the vote is taken.
12.12 Every proxy may be revoked by an instrument in writing:
(a) executed by the member giving the same or by his attorney authorized
in writing or, where the member is a corporation, by a duly authorized
officer or attorney of the corporation; and
(b) delivered either at the registered office of the Company at any time
up to and including the last business day preceding the day of the
meeting or adjourned meeting for which the proxy is given, or to the
chairman of the meeting on the day of the meeting or any adjournment
thereof before any vote in respect of which the proxy is given shall
have been taken, or in any other manner provided by law.
PART 13 - DIRECTORS
-------------------
13.1 The subscribers to the Memorandum of the Company are the first
Directors. The Directors to succeed the first Directors may be appointed in
writing by all the subscribers or by resolution passed at a meeting of the
subscribers or, if not so appointed, they shall be elected by the members
entitled to vote on the election of Directors and the number of Directors
shall be the same as the number of Directors so appointed or elected. The
number of Directors, excluding additional Directors, may be fixed or changed
from time to time by ordinary resolution, whether previous notice thereof has
been given or not, but notwithstanding anything contained in these Articles
the number of Directors shall never be less than one or, if the Company is, or
becomes, a reporting company, less than three.
13.2 The remuneration of the Directors as such may from time to time be
determined by the Directors or, if the Directors shall so decide, by the
members. Such remuneration may be in addition to any salary or other
remuneration paid to any officer or employee of the Company as such who is also
a Director. The Directors shall be repaid such reasonable travelling,
accommodation and other expenses as they incur in and about the business of the
Company and if any Director shall perform any professional or other services for
the Company that in the opinion of the Directors are outside the ordinary duties
of a Director or shall otherwise be specially occupied in or about the Company's
business, he may be paid a remuneration to be fixed by the Board, or, at the
option of such Director, by the Company in general meeting, and such
remuneration may be either in addition to or in substitution for any other
remuneration that he may be entitled to receive. Unless otherwise determined by
ordinary resolution, the Directors on behalf of the Company may pay a gratuity,
pension or retirement allowance to any Director who has held any office or
appointment with the Company or to his spouse or dependants and may make
contributions to any fund and pay premiums for the purchase or provision of any
such gratuity, pension or allowance.
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13.3 A Director shall not be required to hold a share in the capital of the
Company as qualification for his office but shall be qualified to become or act
as a Director as required by the Company Act.
PART 14 - ELECTION AND REMOVAL OF DIRECTORS
-------------------------------------------
14.1 At each annual general meeting of the Company all the Directors shall
retire and the members entitled to vote at the meeting shall elect a Board of
Directors consisting of the number of Directors for the time being fixed
pursuant to these Articles. If the Company is, or becomes, a company that is not
a reporting company and all the members entitled to attend and vote at an annual
general meeting consent in writing to the business required to be transacted at
such meeting, the meeting shall be deemed for the purpose of this Part to have
been held on the date specified in the consent or in the resolutions consented
to in writing dealing with such business.
14.2 A retiring Director shall be eligible for re-election.
14.3 Where the Company fails to hold an annual general meeting or the members
fail to consent to the business required to be transacted at such meeting, the
Directors then in office shall be deemed to have been elected or appointed as
Directors on the last day on which the annual general meeting could have been
held pursuant to these Articles and they may continue to hold office until other
Directors are appointed or elected or until the day on which the next annual
general meeting is held.
14.4 If at any general meeting at which there should be an election of
Directors, the places of any of the retiring Directors are not filled by such
election, such of the retiring Directors who are not re-elected as may be
requested by the newly elected Directors shall, if willing to do so, continue in
office to complete the number of Directors for the time being fixed pursuant to
these Articles until further new Directors are elected at a general meeting
convened for the purpose. If any such election or continuance of Directors does
not result in the election or continuance of the number of Directors for the
time being fixed pursuant to these Articles such number shall be fixed at the
number of Directors actually elected or continued in office.
14.5 Any casual vacancy occurring in the Board of Directors may be filled by
the remaining Directors or Director.
14.6 The office of a Director shall be vacated if the Director:
(a) resigns his office by notice in writing delivered to the registered
office of the Company; or
(b) ceases to be qualified to act as a Director pursuant to the Company
Act.
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14.7 The Company may by special resolution remove any Director before the
expiration of his period of office and may by an ordinary resolution appoint
another person in his stead.
14.8 Notwithstanding anything contained in these Articles, the Company may at
any time by ordinary resolution, increase the number of Directors previously
fixed or determined and may, by ordinary resolution, elect such person or
persons to fill the vacancy or vacancies thereby created.
14.9 Between successive annual general meetings the Directors shall have power
to appoint one or more additional Directors but the number of additional
Directors shall not at any time exceed 1/3 of the number of Directors elected or
appointed at the last annual general meeting of the Company. Any additional
Director so appointed shall hold office only until the next following annual
general meeting of the Company but shall be eligible for election at such
meeting and so long as he is an additional Director the number of Directors
shall be increased accordingly.
14.10 Any Director may by instrument in writing, telegram, telex, telecopier or
any other method of transmitting legibly recorded messages delivered or sent to
the Company appoint any person to be his alternate to act in his place at
meetings of the Directors at which he is not present unless the Directors shall
have disapproved of the appointment of such person as an alternate and shall
have given notice to that effect to the Director appointing the alternate within
a reasonable time after delivery of such instrument to the Company. Every such
alternate shall be entitled to notice of meetings of the Directors and to attend
and vote as a Director at a meeting at which the person appointing him is not
personally present and, if he is a Director, to have a separate vote on behalf
of the Director by whom he was appointed in addition to his own vote. A Director
may at any time by instrument, telegram, telex, telecopier or any other method
of transmitting legibly recorded messages delivered or sent to the Company
revoke the appointment of an alternate appointed by him. The remuneration
payable to such an alternate shall be payable out of the remuneration of the
Director appointing him.
PART 15 - POWERS AND DUTIES OF DIRECTORS
----------------------------------------
15.1 The Directors shall manage, or supervise the management of, the affairs
and business of the Company and shall have authority to exercise all such powers
of the Company as are not, by the Company Act, the Memorandum of the Company or
these Articles, required to be exercised by the Company in general meeting.
15.2 The Directors may from time to time by power of attorney or other
instrument under the seal of the Company appoint any person to be the attorney
of the Company for such purposes, and with such powers, authorities and
discretions (not exceeding those vested in or exercisable by the Directors under
these Articles and excepting the powers of the Directors relating to the
constitution of the Board and of any of its committees and the appointment or
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removal of officers and the power to declare dividends) and for such period,
with such remuneration and subject to such conditions as the Directors may think
fit, and any such appointment may be made in favour of any of the Directors or
any of the members of the Company or in favour of any corporation, or of any of
the members, directors, nominees or managers of any corporation, firm or joint
venture and any such power of attorney may contain such provisions for the
protection or convenience of persons dealing with such attorney as the Directors
think fit. Any such attorney may be authorized by the Directors to sub-delegate
all or any of the powers, authorities and discretions for the time being vested
in him.
PART 16 - DISCLOSURE OF INTEREST OF DIRECTORS
---------------------------------------------
16.1 A Director who is, in any way, directly or indirectly interested in an
existing or proposed contract or transaction with the Company or who holds any
office or possesses any property whereby, directly or indirectly, a duty or
interest might be created to conflict with his duty or interest as a Director
shall declare the nature and extent of his interest in such contract or
transaction or of the conflict or potential conflict with his duty and interest
as a Director, as the case may be, in accordance with the provisions of the
Company Act.
16.2 A Director shall not vote in respect of any such contract or transaction
with the Company in which he is interested and if he shall do so his vote shall
not be counted, but he shall be counted in the quorum present at the meeting at
which such vote is taken. Subject to the provisions of the Company Act, the
foregoing prohibitions shall not apply to:
(a) any such contract or transaction relating to a loan to the Company,
which a Director or a specified corporation or a specified firm in
which he has an interest has guaranteed or joined in guaranteeing the
repayment of the loan or any part of the loan;
(b) any contract or transaction made or to be made with, or for the
benefit of a holding corporation or a subsidiary corporation of which
a Director is a director;
(c) any contract by a Director to subscribe for or underwrite shares or
debentures to be issued by the Company or a subsidiary of the Company,
or any contract, arrangement or transaction in which a Director is,
directly or indirectly, interested if all the other Directors are
also, directly or indirectly interested in the contract, arrangement
or transaction;
(d) determining the remuneration of the Directors;
(e) purchasing and maintaining insurance to cover Directors against
liability incurred by them as Directors; or
(f) the indemnification of any Director or officer by the Company.
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The foregoing exceptions may from time to time be suspended or amended to any
extent approved by the Company in general meeting and permitted by the Company
Act, either generally or in respect of any particular contract or transaction or
for any particular period.
16.3 A Director may hold any office or appointment with the Company (except as
auditor of the Company) in conjunction with his office of Director for such
period and on such terms (as to remuneration or otherwise) as the Directors may
determine and no Director or intended Director shall be disqualified by his
office from contracting with the Company either with regard to his tenure of any
such other office or appointment or as vendor, purchaser or otherwise and,
subject to compliance with the provisions of the Company Act, no contract or
transaction entered into by or on behalf of the Company in which a Director is
in any way interested shall be liable to be voided by reason thereof.
16.4 Subject to compliance with the provisions of the Company Act, a Director
or his firm may act in a professional capacity for the Company (except as
auditor of the Company) and he or his firm shall be entitled to remuneration for
professional services as if he were not a Director.
16.5 A Director may be or become a director or officer or employee of, or
otherwise interested in, any corporation or firm in which the Company may be
interested as a member or otherwise, and, subject to compliance with the
provisions of the Company Act, such Director shall not be accountable to the
Company for any remuneration or other benefits received by him as director,
officer or employee of, or from his interest in, such other corporation or firm,
unless the Company in general meeting otherwise directs.
PART 17 - PROCEEDINGS OF DIRECTORS
----------------------------------
17.1 The Chairman of the Board or, in his absence or if there is no Chairman of
the Board, the President shall preside as chairman at every meeting of the
Directors.
17.2 If at any meeting of Directors neither the Chairman of the Board nor the
President is present within 15 minutes after the time appointed for holding the
meeting or if either of them is present but is not willing to act as chairman or
if the Chairman of the Board, if any, and the President have advised the
Secretary that they will not be present at the meeting, the Directors present
shall choose one of their number to be chairman of the meeting.
17.3 The Directors may meet together for the dispatch of business, adjourn and
otherwise regulate their meetings as they think fit. Questions arising at any
meeting shall be decided by a majority of votes. In case of an equality of votes
the chairman shall not have a second or casting vote.
17.4 A Director may participate in a meeting of the Board or of any committee
of Directors by means of telephone or other communications facility by means of
which all
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Directors participating in the meeting can hear each other and provided that all
such Directors agree to such participation. A meeting so held in accordance with
this Article shall be deemed to be an actual meeting of the Board and any
resolution passed at such meeting shall be as valid and effectual as if it had
been passed at a meeting where the Directors are physically present. A Director
participating in a meeting in accordance with this Article shall be deemed to be
present at the meeting and to have so agreed and shall be counted in the quorum
therefor and be entitled to speak and vote at the meeting.
17.5 A Director may at any time, and the Secretary or an Assistant Secretary
upon request of a Director shall, call a meeting of the Board.
17.6 Notice of a meeting of the Board shall be given to each Director and
alternate Director at least 48 hours before the time fixed for the meeting and
may be given orally, personally or by telephone, or in writing, personally or by
delivery through the post or by letter, telegram, telex, telecopier or any other
method of transmitting legibly recorded messages in common use. When written
notice of a meeting is given to a Director, it shall be addressed to him at his
registered address. Where the Board has established a fixed time and place for
the holding of its meetings, no notices of meetings to be held at such fixed
time and place need be given to any Director. A Director entitled to notice of a
meeting may waive or reduce the period of notice convening the meeting and may
give such waiver before, during or after the meeting.
17.7 For the first meeting of the Board to be held immediately following the
election of a Director at an annual general meeting of the Company or for a
meeting of the Board at which a Director is appointed to fill a vacancy on the
Board, no notice of such meeting shall be necessary to such newly appointed or
elected Director in order for the meeting to be properly constituted.
17.8 Any Director who may be absent temporarily from the Province may file at
the registered office of the Company a waiver of notice, which may be by letter,
telegram, telex, telecopier or any other method of transmitting legibly recorded
messages, of meetings of the Directors and may at any time withdraw the waiver,
and until the waiver is withdrawn, no notice of meetings of Directors shall be
sent to that Director, and any and all meetings of Directors, notice of which
has not been given to that Director shall, provided a quorum of the Directors is
present, be valid and effective.
17.9 The quorum necessary for the transaction of the business of the Directors
may be fixed by the Directors and if not so fixed shall be a majority of the
Directors or, if the number of Directors is fixed at one, shall be one Director.
17.10 The continuing Directors may act notwithstanding any vacancy in their
body but, notwithstanding Article 17.9, if and so long as their number is
reduced below the number fixed pursuant to these Articles as the necessary
quorum of Directors, the continuing Directors may
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act for the purpose of increasing the number of Directors to that number or of
summoning a general meeting of the Company, but for no other purpose.
17.11 Subject to the provisions of the Company Act, all acts done by any
meeting of the Directors or of a committee of Directors, or by any person acting
as a Director, shall, notwithstanding that it be afterwards discovered that
there was some defect in the qualification, election or appointment of any such
Directors or of the members of such committee or person acting as aforesaid, or
that they or any of them were disqualified, be as valid as if every such person
had been duly elected or appointed and was qualified to be a Director.
17.12 A resolution consented to in writing, whether by document, telegram,
telex, telecopier or any method of transmitting legibly recorded messages or
other means, by all of the Directors for the time being in office without their
meeting together shall be as valid and effectual as if it had been passed at a
meeting of the Directors duly called and held, shall be deemed to relate back to
any date stated therein to be the effective date thereof and shall be filed in
the minute book of the Company accordingly. Any such resolution may consist of
one or several documents each duly signed by one or more Directors which
together shall be deemed to constitute one resolution in writing.
PART 18 - EXECUTIVE AND OTHER COMMITTEES
----------------------------------------
18.1 The Directors may by resolution appoint an Executive Committee consisting
of such member or members of the Board as they think fit, which Committee shall
have, and may exercise during the intervals between the meetings of the Board,
all the powers vested in the Board except the power to fill vacancies in the
Board, the power to change the membership of or fill vacancies in said Committee
or any other committee of the Board and such other powers, if any, as may be
specified in the resolution. The said Committee shall keep regular minutes of
its transactions and shall cause them to be recorded in books kept for that
purpose, and shall report the same to the Board of Directors at such times as
the Board of Directors may from time to time require. The Board shall have the
power at any time to revoke or override the authority given to or acts done by
the Executive Committee except as to acts done before such revocation or
overriding and to terminate the appointment or change the membership of such
Committee and to fill vacancies in it.
18.2 The Directors may by resolution appoint one or more other committees
consisting of such member or members of the Board as they think fit and may
delegate to any such committee between meetings of the Board such powers of the
Board (except the power to fill vacancies in the Board, the power to change the
membership of or fill vacancies in any committee of the Board, the power to
appoint or remove officers appointed by the Board and such other powers as may
be specified in the resolution) subject to such conditions as may be prescribed
in such resolution, and all committees so appointed shall keep regular minutes
of their transactions and shall cause them to be recorded in books kept for that
purpose, and shall report the same to the Board of Directors at such times as
the Board of Directors may from
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time to time require. The Directors shall also have power at any time to revoke
or override any authority given to or acts to be done by any such committee
except as to acts done before such revocation or overriding and to terminate the
appointment or change the membership of a committee and to fill vacancies in it.
18.3 Committees appointed under this Part may make rules for the conduct of
their business and may appoint such assistants as they may deem necessary. A
majority of the members of a committee shall constitute a quorum thereof.
18.4 Committees appointed under this Part may meet and adjourn as they think
proper. Questions arising at any meeting of a committee shall be determined by a
majority of votes of the members of the committee present, and in case of an
equality of votes the chairman shall not have a second or casting vote. The
provisions of Article 17.12 shall apply mutatis mutandis to resolutions
consented to in writing by the members of a committee appointed under this Part.
PART 19 - OFFICERS
------------------
19.1 The Directors shall from time to time appoint a President and a Secretary
and such other officers, if any, as the Directors shall determine and the
Directors may at any time terminate any such appointment. No officer shall be
appointed unless he is qualified in accordance with the provisions of the
Company Act.
19.2 One person may hold more than one of such offices except that the offices
of President and Secretary shall be held by different persons unless the
Company has only one member. Any person appointed as the Chairman of the Board,
President or Managing Director shall be a Director. The other officers need not
be Directors.
19.3 The remuneration of the officers of the Company as such and the terms and
conditions of their tenure of office or employment shall from time to time be
determined by the Directors. Such remuneration may be by way of salary, fees,
wages, commission or participation in profits or any other means or all of these
modes and an officer may in addition to such remuneration be entitled to receive
after he ceases to hold such office or leaves the employment of the Company a
gratuity, pension or retirement allowance.
19.4 The Directors may decide what functions and duties each officer shall
perform and may entrust to and confer upon him any of the powers exercisable by
them upon such terms and conditions and with such restrictions as they think fit
and may from time to time revoke, withdraw, alter or vary all or any of such
functions, duties and powers. The Secretary shall, inter alia, perform the
functions of the secretary specified in the Company Act.
19.5 Every officer of the Company who holds any office or possesses any
property whereby, whether directly or indirectly, duties or interests might be
created in conflict with his
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duties or interests as an officer of the Company shall, in writing, disclose to
the President the fact and the nature, character and extent of the conflict.
PART 20 - INDEMNITY AND PROTECTION
OF DIRECTORS, OFFICERS AND EMPLOYEES
------------------------------------
20.1 Subject to the provisions of the Company Act, the Directors may, with the
approval of the Court, cause the Company to indemnify a Director or former
Director of the Company or a director or former director of a corporation of
which the Company is or was a member, and the heirs and personal representatives
of any such person, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, actually and reasonably incurred
by him, including an amount paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a Director of the Company or a director
of such corporation, including any action or proceeding brought by the Company
or any such corporation. Each Director of the Company on being elected or
appointed shall be deemed to have contracted with the Company on the terms of
the foregoing indemnity.
20.2 Subject to the provisions of the Company Act, the Directors may cause the
Company to indemnify any officer, employee or agent of the Company or of a
corporation of which the Company is or was a member (notwithstanding that he is
also a Director) and his heirs and personal representatives against all costs,
charges and expenses whatsoever incurred by him and resulting from his acting as
an officer, employee or agent of the Company or such corporation. In addition
the Company shall indemnify the Secretary or an Assistant Secretary of the
Company (if he shall not be a full time employee of the Company and
notwithstanding that he is also a Director) and his heirs and personal
representatives against all costs, charges and expenses whatsoever incurred by
him and arising out of the functions assigned to the Secretary by the Company
Act or these Articles. Each such Secretary and Assistant Secretary on being
appointed shall be deemed to have contracted with the Company on the terms of
the foregoing indemnity.
20.3 For the purposes of Article 20.1, a civil, criminal or administrative
action or proceeding shall include a civil, criminal, administrative or other,
investigation or enquiry the subject of which concerns the acts or conduct of
the Director or former Director of the Company while a Director of the Company.
20.4 The failure of a Director or officer of the Company to comply with the
provisions of the Company Act, the Memorandum of the Company or these Articles
shall not invalidate any indemnity to which he is entitled under this Part.
20.5 The Directors may cause the Company to purchase and maintain insurance for
the benefit of any person who is or was serving as a Director, officer, employee
or agent of the Company or as a director, officer, employee or agent of any
corporation of which the Company
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is or was a member and his heirs or personal representatives against any
liability incurred by him as such Director, director, officer, employee or
agent.
PART 21 - DIVIDENDS AND RESERVE
-------------------------------
21.1 The Directors may from time to time declare and authorize payment of such
dividends, if any, as they may deem advisable and need not give notice of such
declaration to any member. No dividend shall be paid otherwise than out of funds
or assets properly available for the payment of dividends and a declaration by
the Directors as to the amount of such funds or assets available for dividends
shall be conclusive. The Company may pay any such dividend wholly or in part by
the distribution of specific assets and in particular by paid up shares, bonds,
debentures or other securities of the Company or any other corporation or in any
one or more such ways as may be authorized by the Company or the Directors and
where any difficulty arises with regard to such a distribution the Directors may
settle the same as they think expedient, and in particular may fix the value for
distribution of such specific assets or any part thereof, and may determine that
cash payments in substitution for all or any part of the specific assets to
which any members are entitled shall be made to any members on the basis of the
value so fixed in order to adjust the rights of all parties and may vest any
such specific assets in trustees for the persons entitled to the dividend as may
seem expedient to the Directors.
21.2 Any dividend declared on shares of any class may be made payable on such
date as is fixed by the Directors.
21.3 Subject to the rights of members, if any, holding shares with special
rights as to dividends, all dividends on shares of any class shall be declared
and paid according to the number of such shares held.
21.4 The Directors may, before declaring any dividend, set aside out of the
funds properly available for the payment of dividends such sums as they think
proper as a reserve or reserves, which shall, at the discretion of the
Directors, be applicable for meeting contingencies or for equalizing dividends
or for any other purpose to which such funds of the Company may be properly
applied, and pending such application may, at the like discretion, either be
employed in the business of the Company or be invested in such investments as
the Directors may from time to time think fit. The Directors may also, without
placing the same in reserve, carry forward such funds which they think prudent
not to divide.
21.5 If several persons are registered as joint holders of any share, any one
of them may give an effective receipt for any dividend, interest or other moneys
payable in respect of the share.
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21.6 No dividend shall bear interest. Where the dividend to which a member is
entitled includes a fraction of a cent, such fraction shall be disregarded in
making payment thereof and such payment shall be deemed to be payment in full.
21.7 Any dividend, interest or other moneys payable in respect of shares may be
paid by cheque or warrant sent by mail directed to the registered address of the
holder, or in the case of joint holders, to the registered address of that one
of the joint holders who is first named on the register, or to such person and
to such address as the holder, or joint holders may direct in writing. Every
such cheque or warrant shall be made payable to the order of the person to whom
it is sent. The mailing of such cheque or warrant shall, to the extent of the
sum represented thereby (plus the amount of any tax required by law to be
deducted) discharge all liability for the dividend, unless such cheque or
warrant shall not be paid on presentation or the amount of tax so deducted shall
not be paid to the appropriate taxing authority.
21.8 Notwithstanding anything contained in these Articles the Directors may
from time to time capitalize any undistributed surplus on hand of the Company
and may from time to time issue as fully paid and non-assessable any unissued
shares or any bonds, debentures or other debt obligations of the Company as a
dividend representing such undistributed surplus on hand or any part thereof.
21.9 A transfer of a share shall not pass the right to any dividend declared
thereon before the registration of the transfer in the register.
PART 22 - RECORD DATES
----------------------
22.1 The Directors may fix in advance a date, which shall not be more than the
maximum number of days permitted by the Company Act preceding the date of any
meeting of members or any class or series thereof or of the payment of any
dividend or of the proposed taking of any other proper action requiring the
determination of members, as the record date for the determination of the
members entitled to notice of, or to attend and vote at, any such meeting and
any adjournment thereof, or entitled to receive payment of any such dividend or
for any other proper purpose and, in such case, notwithstanding anything
elsewhere contained in these Articles, only members of record on the date so
fixed shall be deemed to be members for the purposes aforesaid.
22.2 Where no record date is so fixed for the determination of members as
provided in the preceding Article the date on which the notice is mailed or on
which the resolution declaring the dividend is passed, as the case may be, shall
be the record date for such determination.
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PART 23 - DOCUMENTS, RECORDS AND FINANCIAL STATEMENTS
-----------------------------------------------------
23.1 The Company shall keep at its records office or at such other place as the
Company Act may permit, the documents, copies, registers, minutes, and records
which the Company is required by the Company Act to keep at its records office
or such other place, as the case may be.
23.2 The Company shall cause to be kept proper books of account and accounting
records in respect of all financial and other transactions of the Company in
order properly to record the financial affairs and condition of the Company and
to comply with the Company Act.
23.3 Unless the Directors determine otherwise or unless otherwise determined by
an ordinary resolution, no member of the Company shall be entitled to inspect
the accounting records of the Company.
23.4 The Directors shall from time to time at the expense of the Company cause
to be prepared and laid before the Company in general meeting such financial
statements and reports as are required by the Company Act.
23.5 Every member shall be entitled to be furnished once gratis on demand with
a copy of the latest annual financial statement of the Company and, if so
required by the Company Act, a copy of each such annual financial statement and
interim financial statement shall be mailed to each member.
PART 24 - NOTICES
-----------------
24.1 A notice, statement or report may be given or delivered by the Company to
any member either by delivery to him personally or by sending it by mail to him
to his address as recorded in the register of members. Where a notice, statement
or report is sent by mail, service or delivery of the notice, statement or
report shall be deemed to be effected by properly addressing and mailing the
notice, statement or report and to have been given on the day, Saturdays,
Sundays and holidays excepted, following the date of mailing. A certificate
signed by the Secretary or other officer of the Company or of any other
corporation acting in that behalf for the Company that the letter, envelope or
wrapper containing the notice, statement or report was so addressed and mailed
shall be conclusive evidence thereof.
24.2 A notice, statement or report may be given or delivered by the Company to
the joint holders of a share by giving or delivering it to the joint holder
first named in the register of members in respect of that share.
24.3 A notice, statement or report may be given or delivered by the Company to
the persons entitled to a share in consequence of the death, bankruptcy or
incapacity of a member
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by sending it through the mail addressed to them by name or by the title of
representatives of the deceased or incapacitated person or trustee of the
bankrupt, or by any like description, at the address, if any, supplied to the
Company for the purpose by the persons claiming to be so entitled or, until such
address has been so supplied, by giving it in a manner in which the same might
have been given if the death, bankruptcy or incapacity had not occurred.
24.4 Notice of every general meeting or meeting of members holding shares of a
class or series shall be given in a manner hereinbefore authorized to every
member holding at the time of the issue of the notice or the date fixed for
determining the members entitled to such notice, whichever is the earlier,
shares which confer the right to notice of and to attend and vote at any such
meeting. No other person except the auditor of the Company and the Directors of
the Company shall be entitled to receive notices of any such meeting.
PART 25 - SEAL
--------------
25.1 The Directors may provide a seal for the Company and, if they do so, shall
provide for the safe custody and use of the seal which shall not be affixed to
any instrument except in the presence of, or attested by the signatures of, the
following persons, namely:
(a) any two Directors, or
(b) any one of the Chairman of the Board, the President, the Managing
Director, a Director and a Vice-President together with any one of the
Secretary, the Treasurer, the Secretary-Treasurer, an Assistant
Secretary, an Assistant Treasurer and an Assistant Secretary-
Treasurer, or
(c) if the Company shall have only one member, the President or the
Secretary, or
(d) such person or persons as the Directors may from time to time by
resolution appoint, and any such resolution may be general in its
nature,
and the said Directors, officers, person or persons in whose presence the seal
is so affixed to an instrument shall sign such instrument. For the purpose of
certifying under seal true copies of any document or resolution the seal may be
affixed in the presence of any one of the foregoing persons.
25.2 To enable the seal of the Company to be affixed to any bonds, debentures,
share certificates, or other securities of the Company, whether in definitive or
interim form, on which facsimiles of any of the signatures of the Directors or
officers of the Company are, in accordance with the Company Act or these
Articles, printed or otherwise mechanically reproduced there may be delivered to
the firm or company employed to engrave, lithograph or print such definitive or
interim bonds, debentures, share certificates or other securities one or more
unmounted dies reproducing the Company's seal and the Chairman of the Board, the
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<PAGE>
President, the Managing Director or a Vice-President and the Secretary,
Treasurer, Secretary-Treasurer, an Assistant Secretary, an Assistant Treasurer
or an Assistant Secretary-Treasurer may by a document authorize such firm or
company to cause the Company's seal to be affixed to such definitive or interim
bonds, debentures, share certificates or other securities by the use of such
dies. Bonds, debentures, share certificates or other securities to which the
Company's seal has been so affixed shall for all purposes be deemed to be under
and to bear the Company's seal lawfully affixed thereto.
25.3 The Company may have for use in any other province, state, territory or
country an official seal which shall have on its face the name of the province,
state, territory or country where it is to be used and all of the powers
conferred by the Company Act with respect thereto may be exercised by the
Directors or by a duly authorized agent of the Company.
PART 26 - PROHIBITIONS
----------------------
26.1 If the Company is, or becomes, a company which is not a reporting company,
the number of persons who beneficially own designated securities of the Company
(counting any two or more joint registered owners as one beneficial owner) shall
be limited to 50, excluding persons that:
(a) are employed by the Company or an affiliate of it, or
(b) beneficially owned, directly or indirectly, designated securities of
the Company while employed by it or by an affiliate of it and, at all
times since ceasing to be so employed, have continued to beneficially
own, directly or indirectly, at least one designated security of the
Company.
26.2 If the Company is, or becomes, a company which is not a reporting company,
no designated securities of the Company, and no securities that are convertible
into or exchangeable for designated securities of the Company, shall be:
(a) offered for sale to the public; or
(b) transferred without the previous consent of the Directors expressed by
a resolution of the Board and the Directors shall not be required to
give any reason for refusing to consent to any such proposed transfer.
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<PAGE>
EXHIBIT 10.1
DATAWAVE SYSTEMS INC.
STOCK OPTION PLAN
AUGUST 1, 1997
Approved by the Board of
Directors on August 1, 1997.
Approved by the
Shareholders on August 1, 1997.
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE 1 DEFINITIONS AND INTERPRETATION................................ 1
1.1 Definitions....................................................... 1
1.2 Choice of Law..................................................... 2
1.3 Headings.......................................................... 2
ARTICLE 2 PURPOSE AND PARTICIPATION..................................... 2
2.1 Purpose........................................................... 2
2.2 Participation..................................................... 3
2.3 Notification of Award............................................. 3
2.4 Copy of Plan...................................................... 3
2.5 Limitation........................................................ 3
ARTICLE 3 TERMS AND CONDITIONS OF OPTIONS............................... 3
3.1 Board to Issue Shares............................................. 3
3.2 Number of Shares.................................................. 3
3.3 Term of Option.................................................... 4
3.4 Termination of Option............................................. 4
3.5 Exercise Price.................................................... 5
3.6 Additional Terms.................................................. 6
3.7 Assignment of Options............................................. 6
3.8 Adjustments....................................................... 6
3.9 Public Announcement............................................... 7
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ARTICLE 4 EXERCISE OF OPTION...................................... 7
4.1 Exercise of Option.......................................... 7
4.2 Issue of Share Certificates................................. 7
4.3 Condition of Issue.......................................... 7
ARTICLE 5 ADMINISTRATION.......................................... 8
5.1 Administration.............................................. 8
5.2 Interpretation.............................................. 8
ARTICLE 6 AMENDMENT AND TERMINATION............................... 8
6.1 Prospective Amendment....................................... 8
6.2 Retrospective Amendment..................................... 8
6.3 Approvals................................................... 8
6.4 Termination................................................. 9
6.5 Agreement................................................... 9
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<PAGE>
STOCK OPTION PLAN
-----------------
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 Definitions
-----------
As used herein, unless there is something in the subject matter or context
inconsistent therewith, the following terms shall have the meanings set forth
below:
(a) "Administrator" means, initially, the secretary of the Company and
thereafter shall mean such director or other senior officer or
employee of the Company as may be designated as Administrator by the
Board from time to time.
(b) "Award Date" means the date on which the board awards a particular
Option.
(c) "Board" means the board of directors of the Company.
(d) "Company" means Datawave Systems Inc.
(e) "Director" means any individual holding the office of director of the
Company.
(f) "Employee" means any individual regularly employed on a full-time
basis by the Company or any of its subsidiaries and such other
individuals, such as consultants (as that term is defined under B.O.R.
#96/15 granted by the B.C. Securities Commission) of the Company and
employees of management companies providing services (other than
investor relations) to the Company as may, from time to time, be
permitted by the rules and policies of the applicable Regulatory
Authorities to be granted options as employees or as an equivalent
thereto.
(g) "Exercise Notice" means the notice respecting the exercise of an
Option, in the form set out as Schedule "B" hereto, duly executed by
the Option Holder.
(h) "Exercise Period" means the period during which a particular Option
may be exercised and is the period from and including the Award Date
through to and including the Expiry Date.
(i) "Exercise Price" means the price at which an Option may be exercised
as determined in accordance with paragraph 3.5.
(j) "Expiry Date" means the date determined in accordance with paragraph
3.3 and after which a particular Option cannot be exercised.
(k) "Market Value" means the market value of the Company's Shares as
determined in accordance with paragraph 3.5.
<PAGE>
(l) "Option" means an option to acquire Shares, awarded to a Director or
Employee pursuant to the Plan.
(m) "Option Certificate" means the certificate, in the form set out as
Schedule "A" hereto, evidencing an Option.
(n) "Option Holder" means a Director or Employee, or former Director or
Employee, who holds an unexercised and unexpired Option or, where
applicable, the Personal Representative of such person.
(o) "Plan" means this stock option plan.
(p) "Personal Representative" means:
(i) in the case of a deceased Option Holder, the executor or
administrator of the deceased duly appointed by a court or public
authority having jurisdiction to do so; and
(ii) in the case of an Option Holder who for any reason is unable to
manage his or her affairs, the person entitled by law to act on
behalf of such Option Holder.
(q) "Regulatory Authorities" means all stock exchanges and other organized
trading facilities on which the Company's Shares are listed and all
securities commissions or similar securities regulatory bodies having
jurisdiction over the Company.
(r) "Share" or "Shares" means, as the case may be, one or more common
shares without par value in the capital stock of the Company.
1.2 Choice of Law
-------------
The Plan is established under, and the provisions of the Plan shall be subject
to and interpreted and construed in accordance with, the laws of the Province of
British Columbia.
1.3 Headings
--------
The headings used herein are for convenience only and are not to affect the
interpretation of the Plan.
ARTICLE 2
PURPOSE AND PARTICIPATION
2.1 Purpose
-------
The purpose of the Plan is to provide the Company with a share-related mechanism
to attract, retain and motivate qualified Directors and Employees, to reward
such of those Directors and Employees as may be awarded Options under the Plan
by the Board from time to time for their
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<PAGE>
contributions toward the long term goals of the Company and to enable and
encourage such Directors and Employees to acquire Shares as long term
investments.
2.2 Participation
-------------
The Board shall, from time to time and in its sole discretion, determine those
Directors and Employees, if any, to whom Options are to be awarded. The Board
may, in its sole discretion, grant the majority of the Options to insiders of
the Company. The aggregate number of Options granted to any consultants of the
Company will not exceed 2% of the Company's issued and outstanding share capital
as of the Award Date. However, in no case will an Option Holder be granted an
Option where the number of Shares that may be purchased pursuant to that Option
exceed, when added to the number of Shares available for purchase pursuant to
Options previously granted to the Option Holder which remain exercisable, 5% of
the Company's issued and outstanding share capital as of the Award Date of the
Option being granted.
2.3 Notification of Award
---------------------
Following the approval by the Board of the awarding of an Option, the
Administrator shall notify the Option Holder in writing of the award and shall
enclose with such notice the Option Certificate representing the Option so
awarded.
2.4 Copy of Plan
------------
Each Option Holder, concurrently with the notice of the award of the Option,
shall be provided with a copy of the Plan. A copy of any amendment to the Plan
shall be promptly provided by the Administrator to each Option Holder.
2.5 Limitation
----------
The Plan does not give any Option Holder that is a Director the right to serve
or continue to serve as a Director of the Company nor does it give any Option
Holder that is an Employee the right to be or to continue to be employed by the
Company.
ARTICLE 3
TERMS AND CONDITIONS OF OPTIONS
3.1 Board to Issue Shares
---------------------
The Shares to be issued to Option Holders upon the exercise of Options shall be
authorized and unissued Shares the issuance of which shall have been authorized
by the Board.
3.2 Number of Shares
----------------
Subject to adjustment as provided for in paragraph 3.8 of this Plan, the number
of Shares which will be available for purchase pursuant to Options granted
pursuant to this Plan will not exceed 4,519,000 Shares. This shall include the
existing 2,188,000 Options (see Schedule "C") granted prior to the
implementation of this Plan which, by the implementation of this Plan, are
deemed to
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<PAGE>
have been re-granted under this Plan. If any Option expires or otherwise
terminates for any reason without having been exercised in full, the number of
Shares in respect of which Option expired or terminated shall again be available
for the purposes of the Plan.
3.3 Term of Option
--------------
Subject to paragraph 3.4, the Expiry Date of an Option shall be the date so
fixed by the Board at the time the particular Option is awarded, provided that
such date shall be no later than the tenth anniversary of the Award Date of such
Option (except with respect to Options issued to a consultant of the Company in
which case such date shall be no later than the fifth anniversary of the Award
Date of such Option).
3.4 Termination of Option
---------------------
Subject to such other terms or conditions that may be attached to Options
granted hereunder, an Option Holder may exercise an Option in whole or in part
at any time or from time to time during the Exercise Period. Any Option or part
thereof not exercised within the Exercise Period shall terminate and become
null, void and of no effect as of 5:00 p.m. local time in Vancouver, British
Columbia on the Expiry Date. The Expiry Date of an Option shall be the earlier
of the date so fixed by the Board at the time the Option is awarded and the date
established, if applicable, in sub-paragraphs (a) to (c) below:
(a) Death
-----
In the event that the Option Holder should die while he or she is
still a Director (if he or she holds his or her Option as Director) or
Employee (if he or she holds his or her Option as Employee), the
Expiry Date shall be the first anniversary of the Option Holder's date
of death; or
(b) Ceasing to hold Office
----------------------
In the event that the Option Holder holds his or her Option as
Director of the Company and such Option Holder ceases to be a Director
of the Company other than by reason of death, the Expiry Date of the
Option shall be, unless otherwise provided for in the Option
Certificate, the 30th day following the date the Option Holder ceases
to be a Director of the Company unless the Option Holder ceases to be
a Director of the Company as a result of:
(i) ceasing to meet the qualifications set forth in section 114 of
the Company Act, R.S.B.C. 1996, c.62; or
(ii) a special resolution having been passed by the members of the
Company pursuant to subsection 130(3) of the Company Act,
R.S.B.C. 1996, c.62; or
(iii) an order made by any Regulatory Authority having jurisdiction
to so order;
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<PAGE>
in which case the Expiry Date shall be the date the Option Holder
ceases to be a Director of the Company.
(c) Ceasing to be Employed
----------------------
In the event that the Option Holder holds his or her Option as an
Employee of the Company and such Option Holder ceases to be an
Employee of the Company other than by reason of death, the Expiry Date
of the Option shall be the 30th day following the date of the Option
Holder ceases to be an Employee of the issuer unless the Option Holder
ceases to be an Employee of the Company as a result of:
(i) termination for cause; or
(ii) an order made by any Regulatory Authority having jurisdiction to
so order;
in which case the Expiry Date shall be the date the Option Holder
ceases to be an Employee of the Company.
Notwithstanding anything else contained herein, in no case will an Option be
exercisable later than the tenth anniversary of the Award Date of the Option.
3.5 Exercise Price
--------------
The price (the "Exercise Price") at which an Option Holder may purchase a Share
upon the exercise of an Option shall be as set forth in the Option Certificate
issued in respect of such Option and in any event shall not be less than the
market price for the shares of the Company for the ten trading days immediately
preceding the day on which the Vancouver Stock Exchange ("VSE") receives the
required notice that the directors granted the Options. The trading average will
not include a closing price that occurs earlier than the trading day following
the day on which a material change was announced. If no trades occurred within
the ten trading days, the Exercise Price will not be less than the last closing
price and will be at least $0.15 per share.
The Exercise Price will be calculated according to the following further
conditions (unless the policies of the VSE outlining these conditions are
amended by the VSE in which case the conditions, as amended, will govern):
(a) subject to a minimum price of $0.15, if a stock option price is set
before ten trading days have elapsed since the day of the announcement
of a material change in the Company's affairs, then the average
closing price per share will be calculated based on the closing prices
during the period commencing on the trading day after the day on which
the material change was announced, and ending on the day preceding the
day on which the directors of the Company grant and notify the VSE of
the Options. At least five trading days will be required to establish
the price after such a material change has occurred. The average
closing
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<PAGE>
price calculated for the specific period described above will be used
in place of the ten day average market price described above; and
(b) if the Options are granted within six months of a public distribution
by the Company, then the Exercise Price of such Options will be the
greater of the price as calculated above and the per share price paid
by the public investors for shares acquired pursuant to the
distribution. The six month period will commence:
(i) on the offering day in cases of fixed price offerings;
(ii) on the effective date of the Exchange Offering Prospectus in
cases of underwritings and non-fixed open market distributions;
and
(iii) on the date of listing in the case of an initial distribution.
Notwithstanding anything else contained herein, in no case will the Exercise
Price be less than the minimum prescribed by each of the organized trading
facilities on which the Shares trade as would apply to the Award Date in
question.
3.6 Additional Terms
----------------
Subject to all applicable securities laws and regulations and the rules and
policies of all applicable Regulatory Authorities, each Option shall be subject
to a vesting schedule as is determined by the Board on the Award Date and the
Board may attach other terms and conditions to the grant of a particular Option.
Such terms and conditions will be referred to in a schedule attached to the
Option Certificate. These terms and conditions may include, but are not
necessarily limited to, the following:
(a) providing that an Option expires on a date other than as provided for
herein;
(b) providing that a portion or portions of an Option expire after certain
periods of time or upon the occurrence of certain events; and
(c) providing that an Option be exercisable immediately, in full,
notwithstanding that it has vesting provisions, upon the occurrence of
certain events, such as a friendly or hostile takeover bid for the
Company.
3.7 Assignment of Options
---------------------
Options may not be assigned or transferred, provided however that the Personal
Representative of an Option Holder may, to the extent pertained by paragraph
4.1, exercise the Option within the Exercise Period.
3.8 Adjustments
-----------
If prior to the complete exercise of any Option the Shares are consolidated,
subdivided, converted, exchanged or reclassified or in any way substituted for
(collectively, the "Event"), an
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<PAGE>
Option, to the extent that it has not been exercised, shall be adjusted by the
Board in accordance with such Event in the manner the Board deems appropriate.
No fractional shares shall be issued upon the exercise of the Options and
accordingly, if as a result of the Event, an Option Holder would become entitled
to a fractional share, such Option Holder shall have the right to purchase only
the next lowest whole number of shares and no payment or other adjustment will
be made with respect to the fractional interest so disregarded.
3.9 Public Announcement
-------------------
On each and every Award Date the Company will publicly announce, by way of news
release, the Options granted on that Award Date.
ARTICLE 4
EXERCISE OF OPTION
4.1 Exercise of Option
------------------
An Option may be exercised only by the Option Holder or the Personal
Representative of any Option Holder. An Option Holder or the Personal
Representative of any Option Holder may exercise an Option in whole or in part
at any time or from time to time during the Exercise Period up to 5:00 p.m.
local time in Vancouver, British Columbia on the Expiry Date by delivering to
the Administrator an Exercise Notice, the applicable Option Certificate and a
certified cheque or bank draft payable to "Datawave Systems Inc." in an amount
equal to the aggregate Exercise Price of the Shares to be purchased pursuant to
the exercise of the Option.
4.2 Issue of Share Certificates
---------------------------
As soon as practicable following the receipt of the Exercise Notice, the
Administrator shall cause to be delivered to the Option Holder a certificate for
the Shares so purchased. If the number of Shares so purchased is less than the
number of Shares subject to the Option Certificate surrendered, the
Administrator shall forward a new Option Certificate to the Option Holder
concurrently with delivery of the Share Certificate for the balance of Shares
available under the Option.
4.3 Condition of Issue
------------------
The Options and the issue of Shares by the Company pursuant to the exercise of
Options are subject to the terms and conditions of this Plan and compliance with
the rules and policies of all applicable Regulatory Authorities to the granting
of such Options and to the issuance and distribution of such Shares, and to all
applicable securities laws and regulations. The Option Holder agrees to comply
with all such laws, regulations, rules and policies and agrees to furnish to the
Company any information, reports or undertakings required to comply with, and to
fully cooperate with, the Company in complying with such laws, regulations,
rules and policies.
-7-
<PAGE>
ARTICLE 5 ADMINISTRATION
5.1 Administration
--------------
The Plan shall be administered by the Administrator on the instructions of the
Board. The Board may make, amend and repeal at any time and from time to time
such regulations not inconsistent with the Plan as it may deem necessary or
advisable for the proper administration and operation of the Plan and such
regulations shall form part of the Plan. The Board may delegate to the
Administrator or any Director, officer or employee of the Company such
administrative duties and powers as it may see fit.
5.2 Interpretation
--------------
The interpretation by the Board of any of the provisions of the Plan and any
determination by it pursuant thereto shall be final and conclusive and shall not
be subject to any dispute by any Option Holder. No member of the Board or any
person acting pursuant to authority delegated by it hereunder shall be liable
for any action or determination in connection with the Plan made or taken in
good faith and each member of the Board and each such person shall be entitled
to indemnification with respect to any such action or determination in the
manner provided for by the Company.
ARTICLE 6
AMENDMENT AND TERMINATION
6.1 Prospective Amendment
---------------------
The Board may from time to time amend the Plan and the terms and conditions of
any Option thereafter to be granted and, without limiting the generality of the
foregoing, may make such amendment for the purpose of meeting any changes in any
relevant law, role or regulation applicable to the Plan, any Option or the
Shares, or for any other purpose which may be permitted by all relevant laws,
regulations, rules and policies provided always that any such amendment shall
not alter the terms or conditions of any Option or impair any right of any
Option Holder pursuant to any Option awarded prior to such amendment.
6.2 Retrospective Amendment
-----------------------
The Board may from time to time retrospectively amend the Plan and, with the
consent of the affected Option Holders, retrospectively amend the terms and
conditions of any Options which have been previously granted.
6.3 Approvals
---------
This Plan and any amendments hereto are subject to all necessary approvals of
the applicable Regulatory Authorities.
-8-
<PAGE>
6.4 Termination
-----------
The Board may terminate the Plan at any time provided that such termination
shall not alter the terms or conditions of any Option or impair any right of any
Option Holder pursuant to any Option awarded prior to the date of such
termination which shall continue to be governed by the provisions of the Plan.
If not terminated by the Board, the Plan will terminate when all of the Options
have been granted.
6.5 Agreement
---------
THE COMPANY AND EVERY OPTION AWARDED HEREUNDER SHALL BE BOUND BY AND SUBJECT TO
THE TERMS AND CONDITIONS OF THIS PLAN. BY ACCEPTING AN OPTION GRANTED HEREUNDER,
THE OPTION HOLDER HAS EXPRESSLY AGREED WITH THE COMPANY TO BE BOUND BY THE TERMS
AND CONDITIONS OF THIS PLAN.
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<PAGE>
EXHIBIT 10.5
_____ COMMON SHARES VOID AFTER
WITHOUT PAR VALUE JULY 31, 1999.
SHARE PURCHASE WARRANT
----------------------
DATAWAVE SYSTEMS INC.
---------------------
(the "Company")
This is to certify that, for value received, ______________________________
(the "Warrant Holder") of ________________________ has the right to purchase
from the Company, upon and subject to the terms and conditions hereinafter
referred to, ______ common shares without par value (the "Shares") in the
capital of the Company. The Shares may be purchased at a price of $0.31
(Canadian) per Share at any time up to 5:00 p.m. local time in Vancouver, B.C.
on July 31, 1999. The right to purchase the Shares may be exercised in whole
or in part, by the Warrant Holder only, at the price set forth above (the
"Exercise Price") within the time set forth above by:
(a) completing and executing the Subscription Form attached hereto for the
number of the Shares which the Warrant Holder wishes to purchase, in the
manner therein indicated;
(b) surrendering this Warrant Certificate, together with the complete
Subscription Form, to Montreal Trust Company of Canada, (the "Transfer
Agent") at 510 Burrard Street, Vancouver, British Columbia; and
(c) paying the appropriate Exercise Price, in Canadian funds, for the number of
the Shares of the Company subscribed for, either by certified cheque or
bank draft (drawn on a Canadian Chartered Bank) or money order payable to
the Company in Vancouver, British Columbia.
Upon surrender and payment, the Company shall issue to the Warrant Holder or to
such other person or persons as the Warrant Holder may direct, the number of
the Shares subscribed for and will deliver to the Warrant Holder, at the address
set forth on the subscription form, a certificate or certificates evidencing the
number of the Shares subscribed for. If the Warrant Holder subscribes for a
number of Shares which is less than the number of Shares permitted by this
warrant, the Company shall forthwith cause to be delivered to the Warrant Holder
a further Warrant Certificate in respect of the balance of Shares referred to in
this Warrant Certificate not then being subscribed for.
In the event of any subdivision of the common shares of the Company (as such
common shares are constituted on the date hereof) into a greater number of
common shares while this warrant is outstanding, the number of Shares
represented by this warrant shall thereafter be deemed to be subdivided in like
manner and the Exercise Price adjusted accordingly, and any subscription by the
Warrant Holder for Shares hereunder shall be deemed to be a subscription for
common shares of the Company as subdivided.
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<PAGE>
In the event of any consolidation of the common shares of the Company (as such
common shares are constituted on the date hereof) into a lesser number of common
shares while this warrant is outstanding, the number of Shares represented by
this warrant shall thereafter be deemed to be consolidated in like manner and
the Exercise Price adjusted accordingly, and any subscription by the Warrant
Holder for Shares hereunder shall be deemed to be a subscription for common
shares of the Company as consolidated.
In the event of any capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation at any time while this warrant is outstanding, the Company shall
thereafter deliver at the time of purchase of the Shares hereunder the number of
common shares the Warrant Holder would have been entitled to receive in respect
of the number of the Shares so purchased had the right to purchase been
exercised before such capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation.
In each case of any adjustment or readjustment in the common shares issuable on
the exercise of this Warrant, the Company at its expense will promptly cause its
Chief Financial Officer to compute such adjustment or readjustment in
accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment or readjustment and showing in detail the fact upon which
such adjustment or readjustment is based, including a statement of the
consideration received or receivable by the Company for any additional common
shares issued or sold or deemed to have been issued or sold, the number of
common shares outstanding or deemed to be outstanding, and the Exercise Price
and the number of common shares to be received upon exercise of this Warrant, in
effect immediately prior to such adjustment or readjustment and as adjusted or
readjusted as provided in this Warrant. The Company will forthwith mail a copy
of each such certificate to the holder of the Warrant and the Transfer Agent of
the Company, and the Company will, on the written request at the time of any
holder of the Warrant, furnish to such holder a like certificate setting forth
the Exercise Price at the time in effect and showing how it was calculated.
If at any time while this, or any replacement, warrant is outstanding:
(a) the Company proposes to pay any dividend of any kind upon its common shares
or make any distribution to the holders of its common shares;
(b) the Company proposes to offer for subscription pro rata to the holders of
its common shares any additional shares of stock of any class or other
rights;
(c) the Company proposes any capital reorganization or classification of its
common shares or the merger or amalgamation of the Company with another
corporation; or
(d) there is a voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
The Company shall give to the Warrant Holder at least 21 days prior written
notice (the "Notice") of the date on which the books of the Company are to close
or a record is to be taken
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<PAGE>
for such dividend, distribution or subscription rights, or for determining
rights to vote with respect to such reorganization, reclassification,
consolidation, merger, amalgamation, dissolution, liquidation or winding-up. The
Notice shall specify, in the case of any such dividend, distribution or
subscription rights, the date on which holders of common shares of the Company
will be entitled to exchange their common shares for securities or other
property deliverable upon any reorganization, reclassification, consolidation,
merger, amalgamation, sale, dissolution, liquidation or winding-up, as the case
may be. Each Notice shall be delivered by hand, addressed to the Warrant Holder
at the address of the Warrant Holder set forth above or at such other address as
the Warrant Holder may from time to time specify to the Company in writing.
The holding of this Warrant Certificate or the Warrants represented hereby does
not constitute the Warrant Holder a member of the Company.
Nothing contained herein confers any right upon the Warrant Holder or any other
person to subscribe for or purchase any Shares of the Company at any time
subsequent to 5:00 p.m. local time in Vancouver, B.C. on July 31, 1999 and from
and after such time, this Warrant and all rights hereunder will be void.
The Warrants represented by this Warrant Certificate are non-transferable. Any
common shares issued pursuant to this Warrant will bear the following legend:
"The shares represented by this certificate are subject to a hold period
expiring at midnight on October 22, 1997 and may not be traded in British
Columbia until the expiry of the hold period except as permitted by the
Securities Act (British Columbia) and regulations made under the Act."
AND
"This Warrant and the shares of Common Stock issuable upon exercise thereof
have not been registered under the United States Securities Act of 1933, as
amended or qualified under the laws of any state, and may not be sold,
offered for sale, pledged or hypothecated unless a registration statement
is in effect with respect to such securities under such Act and laws or
unless there is provided by the holder an opinion of a counsel or other
evidence reasonably satisfactory to the Company that such registration is
not required."
If the Company proposes to register (under the laws of the United States) any of
its common shares for sale to the public, whether for its own account or for the
account of other security holders or both, each such time it will give at least
45 days' prior written notice to the holder hereof of its intention so to do.
Upon the written request of the Warrant Holder, received by the Company within
30 days after the giving of any such notice by the Company, to register any of
the common stock owned or to be owned by the holder hereof pursuant to the
exercise of this Warrant, the Company will cause such common shares to be
covered by the registration statement proposed to be filed by the Company.
Notwithstanding the foregoing, the Company may withdraw any registration
statement without thereby incurring any liability to the Warrant Holder, except
as to expenses as set forth below.
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<PAGE>
All expenses, including without limitation all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, the fees and disbursements of special counsel to
the Warrant Holder, fees and expenses incurred in connection with complying with
federal or state securities or "blue sky" laws, fees of the National Association
of Securities Dealers, Inc., fees and expenses of United States regulatory
authorities, transfer taxes, fees of transfer agents and registrars,
underwriting discounts, selling commissions and costs of insurance, will be paid
directly by the Company.
Prior to such offering, the Company and the Warrant Holder will cooperate with
each other and with accountants, counsel and underwriters to furnish and review
information, including financial information and drafts or preliminary printings
of the prospectus and related documents, and will enter into such underwriting,
cross-indemnification and contribution agreements as are usual and customary
according to the practice of the jurisdictions in which such offering is to be
effective.
Time will be of the essence hereof.
This Warrant Certificate is not valid for any purpose until it has been signed
by the Company.
IN WITNESS WHEREOF, the Company has caused its common seal to be hereto affixed
and this warrant certificate to be signed by one of its directors as of the 10th
day of October, 1997.
DATAWAVE SYSTEMS INC.
Per:
______________________________
Authorized Signatory
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<PAGE>
SUBSCRIPTION FORM
-----------------
To: Datawave Systems Inc. (the "Company")
And to: the directors thereof.
Pursuant to the Share Purchase Warrant made the _____ day of September, 1997,
the undersigned hereby subscribes for and agrees to take up ____________ common
shares without par value (the "Shares") in the capital of the Company, at a
price of $__________ (Canadian) per Share for the aggregate sum of $__________
(the "Subscription Funds"), and encloses herewith a certified cheque, bank draft
or money order payable to the Company in full payment of the Shares.
The undersigned hereby requests that:
(a) the Shares be allotted to the undersigned;
(b) the name and address of the undersigned as shown below be entered in the
registers of members and allotments of the Company;
(c) the Shares be issued to the undersigned as fully paid and non-assessable
common shares of the Company; and
(d) a share certificate representing the Shares be issued in the name of the
undersigned.
Dated this _____ day of _______________, 19___.
DIRECTION AS TO REGISTRATION:
(NAME AND ADDRESS EXACTLY AS YOU WISH THEM TO APPEAR ON YOUR SHARE CERTIFICATE
-------
AND IN THE REGISTER OF MEMBERS.)
Full Name: __________________________________________________
Full Address: __________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Signature of Subscriber: _______________________________________
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<PAGE>
EXHIBIT 10.6
LEASE
Dated as of October 22, 1996 Lease No. 322
LESSOR:
APPLIED TELECOMMUNICATIONS
TECHNOLOGIES, INC.
20 William Street Street
Wellesley, MA 02181
LESSEE:
DATAWAVE SERVICES (US) INC.
1280 Civic Drive, Suite 206
Walnut Creek, CA 94546
COUNTY: CONTRA COS FEDERAL ID NO.: EIN 880337917, Nevada
ATTENTION: PHONE NO: 510-939-4000
<PAGE>
1. DEFINITIONS AND RULES OF CONSTRUCTION. Unless the context shall
otherwise require, capitalized terms used herein, but not otherwise defined
herein, shall have the respective meanings specified in Section 20 hereof.
2. LEASE. (a) Lessee hereby agrees to lease from the Lessor, and
Lessor, by acceptance of this Lease and any applicable Rental Schedule, agrees
to lease to Lessee, the Equipment. Lessee agrees that it shall, pursuant to the
terms hereof, comply with all of the terms and conditions herein and in any such
Rental Schedule.
(b) This Lease is a Master Lease which sets forth the terms and
conditions that govern the lease by Lessor to Lessee of items of Equipment
specified on Rental Schedules executed and delivered by Lessor and Lessee from
time to time a form of which is attached hereto as Exhibit 1. Each Rental
---------
Schedule incorporates by reference this Lease and specifies the Term, the amount
of Interim Rent and Basic Rent, the Payment Dates on which such Interim Rent and
Basic Rent is due, and such other information and provisions as Lessor and
Lessee may agree. In the event of a conflict between the provisions of a Rental
Schedule and any of the provisions of this Lease, the provisions of the Rental
Schedule shall govern but only with respect to the leasing of the items of
Equipment listed on such Rental Schedule. References to "the Lease" or "this
Lease" shall mean one or more applicable Rental Schedules, as the case may be,
incorporating by reference this Master Lease. Each Rental Schedule constitutes a
separate and independent lease.
3. TERM AND RENT; OBLIGATIONS UNCONDITIONAL. (a) The Equipment is
leased for the Term, unless and until the Term of this Lease shall sooner
terminate pursuant to the terms hereof. The Term shall commence on the date of
acceptance of such Equipment as set forth on the applicable Rental Schedule and
shall expire at midnight on the date set forth on the applicable Rental Schedule
as the "Primary Term Expiration Date."
(b) Lessee shall pay to Lessor or an agent designated by Lessor or
any Transferee in writing, in lawful money of the United States of America, on
the Interim Term Commencement Date the Interim Rent and on each Basic Rent
Payment Date as fixed rent of the Equipment during the Term, the Basic Rent Per
Month, in each case by wire transfer to Lessor's account as set forth in each
Rental Schedule, or at such other address or to such other Person as Lessor,
from time to time, may designate in writing.
(c) Lessee shall also pay to Lessor or an agent designated by
Lessor or any Transferee in writing, in lawful money of the United States of
America, all Supplemental Rent. Supplemental Rent shall be paid when due or
within 30 days following Lessor's demand therefore if there is no due date
therefor. If Lessee shall fail to pay any Supplemental Rent, Lessor shall have
the right to pay the same and shall have all rights, powers and remedies for
reimbursement from Lessee with respect thereto as are provided herein
(including, without limitation, Section 14 and 15 hereof) or by Law in the case
of non-payment of Basic Rent. Lessee shall also pay to Lessor the Excess Use
Fee on all overdue Rent from the due date thereof until paid. Lessee shall
perform all of its obligations under this Lease at its sole cost and expense,
and shall pay all Rent when due, without further notice or demand.
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<PAGE>
(d) This Lease is a net lease and Lessee acknowledges and agrees that
Lessee's obligation to pay all Rent and other sums payable hereunder, and the
rights of Lessor in and to such payments, shall be absolute and unconditional
and shall not be subject to any abatement, reduction, setoff, defense,
counterclaim or recoupment due to or alleged to be due to, or by reason of, any
past, present or future claims that Lessee may have against Lessor, any
Transferee, the manufacturer or Supplier of the Equipment or any Person for any
reason whatsoever.
(e) All Rent and other amounts payable under this Lease including all
amounts payable under Section 18 hereof shall be payable notwithstanding the
fact that an item of Equipment shall have suffered a Total Loss unless, pursuant
to the provisions of Section 13 hereof, Lessor shall have received the
Stipulated Loss Value with respect to any such item of Equipment.
4. PERSONAL PROPERTY; SECURITY INTEREST AND LIENS. Lessee covenants and
agrees that: (a) the Equipment is, and shall at all times be and remain,
personal or movable property. If requested by Lessor, Lessee shall obtain prior
to delivery of any item of Equipment or at any other time reasonable requested
by Lessor, a certificate in form satisfactory to lessor from all parties with a
real property interest in the premises where the Equipment may be located
waiving any claim with respect to the Equipment.
(b) During the Term of this Lease and until (i) Lessee acquires such
Equipment pursuant to Section 18 hereof or (ii) Lessee returns the Equipment to
Lessor in compliance with Section 16 hereof, Lessor shall retain title to such
Equipment; provided, however, that Lessee and Lessor acknowledge that
---------- --------
transactions documented hereunder shall not constitute a "lease" or a "true
lease," and instead shall constitute a "lease intended as security, " or
"security interest," as the case may be, under Applicable Law (including under
Section 1-201 (37) of the UCC). In furtherance thereof, in order to secure the
prompt payment and performance as and when due of all of Lessee's obligations
hereunder, Lessee hereby grants to Lessor a first priority security interest in
the Equipment leased hereunder and all replacements, substitutions, accessions
thereto, and proceeds (cash and non-cash) thereof, including the proceeds of all
insurance policies on the Equipment. Lessee agrees that, with respect to the
Equipment, Lessor shall have all of the rights and remedies of a first priority
secured party under the UCC. Lessee may not dispose of any of the Equipment
except to the extent expressly provided herein.
(c) Lessee shall not directly or indirectly create, incur, assume
or suffer to exist any Lien on or with respect to any of the Equipment, title
thereto or any interest therein, except Permitted Liens. Lessee shall notify
Lessor immediately in writing upon receipt of notice of any Lien affecting the
Equipment in whole or in part, and shall, at its own cost and expense, defend
Lessor's title therein against all Persons holding or claiming to hold such a
Lien on the Equipment; and any losses, expenses or costs suffered by Lessor as a
result thereof shall be covered by the Lessee's indemnity in Section 17 hereof.
(d) Lessee shall not move any item of Equipment leased hereunder from
the address set forth in any applicable Rental Schedule without prior written
notice to Lessor; Lessee
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<PAGE>
shall not move any item of Equipment outside of the United States of America
without the prior written consent of Lessor.
5. INSTALLATION, DEINSTALLATION, MAINTENANCE AND REPAIR. At all
times during the Term of this Lease, Lessee shall be solely responsible, at its
own expense, for the delivery, installation, maintenance, repair, use,
possession, operation, storage, deinstallation, and drayage of the Equipment by
a party reasonably acceptable to Lessor, and shall keep the Equipment in good
repair, condition and working order, and shall furnish any and all parts,
mechanisms and devices required to keep the Equipment in good repair, condition
and working order, all at the expense of Lessee. Lessee shall not make or
suffer to be made alterations to the Equipment which materially reduce its
value. All parts furnished and all additions made to and all substitutions and
replacements for the Equipment shall immediately upon the installation thereof
be deemed part of the Equipment and become the property of Lessor subject to the
terms of this Lease. At all times during the Term of this Lease, Lessee shall
maintain at its own cost and expense in effect a comprehensive maintenance and
servicing agreement with respect to each item of the Equipment with the
manufacturer or Supplier thereof or such other party as may be acceptable to
Lessor. Lessor shall be entitled to inspect the Equipment at the location
thereof during normal business hours.
6. USE. Lessee shall use the Equipment in a careful and proper manner
and shall comply with and conform to all Applicable Laws, insurance requirements
and the operating and maintenance instructions of the manufacturer or Supplier
thereof.
7. QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing hereunder and subject to Section 6 hereof, Lessor warrants peaceful
and quiet use and enjoyment of the Equipment by Lessee against acts of Lessor.
8. ACCEPTANCE, WARRANTIES, LIMITATION OF LIABILITY.
LESSEE HEREBY ACKNOWLEDGES AND AGREES THAT: THE EQUIPMENT, AND THE RIGHTS, TITLE
AND INTEREST BEING CONVEYED HEREIN WITH RESPECT THERETO, ARE BEING CONVEYED AND
DELIVERED TO LESSEE "AS IS" AND "WHERE IS" WITHOUT ANY RECOURSE TO LESSOR AND
LESSOR HAS NOT MADE, AND HEREBY DISCLAIMS, LIABILITY FOR, AND LESSEE HEREBY
WAIVES ALL RIGHTS AGAINST LESSOR RELATING TO, ANY AND ALL WARRANTIES,
GUARANTIES, REPRESENTATIONS OR OBLIGATIONS OF ANY KIND WITH RESPECT THERETO,
EITHER EXPRESS OR IMPLIED OR ARISING BY APPLICABLE LAW OR OTHERWISE, INCLUDING
(A) ANY EXPRESS OR IMPLIED WARRANTIES, GUARANTIES, REPRESENTATIONS OR
OBLIGATIONS OF, ARISING FROM OR IN (1) MERCHANTABILITY OR FITNESS FOR A
PARTICULAR USE OR PURPOSE, (2) COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE
OF TRADE, (3) QUALITY OF WORKMANSHIP OR THE PROVISIONS OF ANY SUPPLY CONTRACT
WITH SUPPLIER OR (4) TORT (WHETHER OR NOT ARISING FROM THE ACTUAL, IMPLIED OR
IMPUTED NEGLIGENCE OF LESSOR OR STRICT LIABILITY) OR UNDER THE UCC OR OTHER
APPLICABLE LAW WITH RESPECT TO THE EQUIPMENT, INCLUDING TITLE THERETO (INCLUDING
ANY WARRANTY OF GOOD OR
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<PAGE>
MARKETABLE TITLE OR FREEDOM FROM LIENS), FREEDOM FROM TRADEMARK, PATENT OR
COPYRIGHT INFRINGEMENT, LATENT DEFECTS (WHETHER OR NOT DISCOVERABLE),
CONDITIONS, MANUFACTURE, DESIGN, SERVICING OR COMPLIANCE WITH APPLICABLE LAW AND
(B) ALL OBLIGATIONS, LIABILITY, RIGHTS AND REMEDIES, HOWSOEVER ARISING UNDER ANY
APPLICABLE LAW WITH RESPECT TO THE MATTERS WAIVED AND DISCLAIMED, INCLUDING FOR
LOSS OF USE, REVENUE OR PROFIT WITH RESPECT TO THE EQUIPMENT, OR ANY LIABILITY
OF LESSEE OR LESSOR TO ANY THIRD PARTY, OR ANY OTHER DIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES (AS SUCH TERMS ARE USED IN SECTION 2-719(3) OF THE UCC, OR
OTHER APPLICABLE LAW); all such risks, as between Lessor and Lessee, are to be
borne by Lessee; Lessee acknowledges and agrees that the Equipment has been
selected by Lessee on the basis of its own judgment, and Lessee has not asked
for, been given or relied upon the skill or opinion of, or any statements,
representations, guaranties or warranties by, Lessor or its agents or
representatives in relation thereto. Lessee understands and acknowledges that
Lessor is not in the business of manufacturing, assembling or supplying
Equipment or otherwise in the business of being a vendor but is instead solely
providing financial accommodations, including lease financing. The Equipment is
not to be used, and is not being acquired hereby, for use in any respect for
Lessee's or any other Person's personal or family purposes and, as such, the
Equipment does not constitute "consumer goods" as such term is defined under
Applicable Law. Lessor's agreement to enter into this Lease is in reliance upon
the freedom from liability or responsibility for the matters waived and
disclaimed herein. THE PROVISIONS OF THIS SECTION 8 HAVE BEEN NEGOTIATED BY
LESSOR AND LESSEE AND EXCEPT FOR THE WARRANTY MADE BY LESSOR IN SECTION 7
HEREOF, ARE INTENDED TO CONSTITUTE A COMPLETE EXCLUSION AND NEGATION OF ANY
REPRESENTATIONS, GUARANTIES, OBLIGATIONS OR WARRANTIES OR LESSOR, EXPRESS OR
IMPLIED, WITH RESPECT TO THE EQUIPMENT AND THE RIGHTS, TITLE AND INTEREST BEING
CONVEYED HEREIN WITH RESPECT THERETO THAT MAY ARISE PURSUANT TO ANY APPLICABLE
LAW NOW OR HEREAFTER IN EFFECT. (LESSEE'S INITIALS /s/ ).
-------------
(b) Lessee agrees that the only representations, warranties,
guaranties or indemnities made with respect to the Equipment are those made by
the Supplier thereof. Lessor and Lessee furthermore understand and agree that
the Equipment shall at all times constitute personal property and not fixtures.
Provided that no Default or Event of Default has occurred and is continuing
hereunder, Lessor: (i) shall cooperate fully with Lessee with respect to the
resolution of any claims by Lessee against Supplier with respect to an item of
Equipment, in good faith and by appropriate proceedings at Lessee's expense,
(ii) subject to the initial proviso of this sentence, hereby assigns to Lessee,
for and during the Term of this Lease, any applicable warranties, indemnities or
other rights under any Supply Contracts (excluding any refunds or other similar
payments reflecting a decrease in the value of any such Equipment, which amount
shall be received by and paid to Lessor, and applied by Lessor to reduce
Lessee's obligations to pay Rent for such Equipment), and (iii) hereby
authorizes Lessee to obtain all services, warranties or amounts from the
Supplier of such Equipment to be used to repair such Equipment (and such amounts
shall be used by Lessee to repair such Equipment). Lessee understands,
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<PAGE>
acknowledges and agrees that neither Supplier nor its salesmen or agents is an
agent of Lessor or authorized to waive, alter or add to any provision of this
Lease.
9. REPRESENTATION AND WARRANTIES. Lessee represents and warrants for the
benefit of Lessor as of the date of acceptance of any item of Equipment for
lease under this Lease:
(a) Lessee is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and is
duly qualified to do business and is in good standing in the jurisdiction(s) and
in every jurisdiction where the failure to so qualify would materially and
adversely affect Lessee; Lessee has adequate corporate power and authority to
enter into and perform this Lease.
(b) This Lease has been duly authorized, executed and delivered by
Lessee and constitutes a valid, legal and binding agreement of Lessee
enforceable in accordance with its terms.
(c) The entering into and performance of this Lease by Lessee shall
not violate any Applicable Law or any provision of Lessee's charter or bylaws or
result in any breach of, or constitute a default under, or result in the
creation of any Lien upon any assets of Lessee leased hereunder or on the
Equipment pursuant to any instrument or Applicable Law to which Lessee is a
party or by which it or its assets may be bound.
(d) There are no pending or threatened actions or proceedings to
which Lessee is a party, or otherwise affecting Lessee, before any Government
Authority, which if determined against Lessee, either individually or in the
aggregate, would adversely affect the financial condition of Lessee, or the
ability of Lessee to perform its obligations under, or comply with the terms of,
the Lease Documents.
(e) Lessee is not in default under any obligation for the payment of
borrowed money, for the deferred purchase price of property or for the payment
of any rent under any lease agreement which, either individually or in the
aggregate, would adversely affect the financial condition of Lessee, or the
ability of Lessee to perform its obligations under, or comply with the terms of,
the Lease Documents.
(f) No consent, approval or other authorization of or by any
Governmental Authority is required in connection with the consummation by Lessee
of the transactions contemplated by, this Lease.
(g) With respect to the Equipment, under the Applicable Law of the
state(s) in which such Equipment is to be located, such Equipment consists
solely of personal property and not fixtures.
(h) The financial statements of Lessee that have been provided to
Lessor have been prepared in accordance with GAAP, and fairly present Lessee's
financial condition and the
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<PAGE>
results of its operations as of the date of and for the period covered by such
statements, and since the date of such statements there has been no material
adverse change in such conditions or operations.
(i) The address of Lessee as set forth on the cover page hereof is
the chief place of business and chief executive office (which terms shall have
the meanings ascribed therefor in Article 9 of the UCC) of Lessee; and Lessee
does not conduct business under any trade, assumed or fictitious name.
(j) With respect to the Equipment, no filing, recordation or
registration of any Financing Statement or other document or instrument was or
is necessary in order to cause Lessor to have good, valid and enforceable title
with respect thereto.
(k) For purposes of federal, state and local income tax laws; (i)
Lessee (and not Lessor or an Transferee) will be treated as the owner of the
Equipment; and (ii) all payments made by Lessee to Lessor or any Transferee will
constitute returns of capital and/or payments for the use or forbearance of
money.
(l) Lessee has obtained all Permits necessary to possess and use the
Equipment in compliance with and as contemplated by this Lease.
(m) If requested by Lessor, Lessee shall provide an opinion of
counsel and other supporting documents with respect to the matters set forth
above in this Section 9 and with respect to such other legal matters as Lessor
may reasonably request and as related to the purposes of this Lease.
10. COVENANTS OF LESSEE. Lessee covenants and agrees as follows:
(a) Lessee shall furnish Lessor (i) within one hundred twenty (120)
days after the end of each fiscal year of Lessee, a balance sheet of Lessee as
at the end of such year, and the related statements of income and retained
earnings and cash flows of Lessee for such fiscal year, prepared in accordance
with GAAP, all in reasonable detain and certified by independent certified
public accountants of recognized standing selected by Lessee; (ii) within
thirty (30) days after the end of each quarter of Lessee's fiscal year a balance
sheet of Lessee as at the end of such quarter, and the related statement of
income and retained earnings and cash flows of Lessee for such quarter, prepared
in accordance with GAAP. Lessee may discharge its obligations under this
Section 10(a) by furnishing to Lessor within thirty (30) days after the date on
which they are filed, all regular periodic reports, forms and other filings
required to be made by Lessee and including its financial statements to any
governmental agency or instrumentality under Applicable Law.
(b) Upon Lessor's request, Lessee shall promptly execute and deliver
to Lessor consents to assignment, certificates of no default and such further
documents, instruments and assurances reasonably requested by Lessor to
establish and protect its rights in the Equipment and to assure that this Lease
remains in full force and effect.
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<PAGE>
(c) Lessee shall provide written notice to Lessor: (i) within
thirty (30) days prior to any change in the name or address of Lessee; (ii)
promptly upon the occurrence of any Default or Event of Default; (iii) of the
commencement of proceedings under Federal bankruptcy laws, those of Canada or
any Province thereof, or any other insolvency laws (as now or hereafter in
effect ) involving Lessee or any Person (other than as the Lessor) holding an
interest in the Equipment or related property as the debtor; (iv) promptly upon
Lessee becoming aware of (1) any alleged material violation of Applicable Law,
or (2) any threatened or actual suspension, revocation or rescission of any
Permit necessary for Lessee to be in compliance with the terms hereof; and (v)
promptly after any of the Equipment becomes lost, stolen, destroyed, materially
damaged or worn out.
(d) Lessee shall not attach or incorporate the Equipment to or in any
other item of equipment or any realty in such a manner that the Equipment may be
deemed to have become an accession to or a part of such other item of equipment
or realty.
(e) Lessee shall cause each principal item of the Equipment to be
marked at all times, in a plain, distinct and legible manner, with the name of
Lessor or its designee followed by the words "Lessor and Secured Party," or
other appropriate words designated by Lessor on labels furnished by Lessor.
(f) Lessee will not take any action or suffer any omission that is
inconsistent with the representations and warranties of Lessee set forth in
Section 9(k), and will (i) refrain from withholding, from payments made by
Lessee to Lessor or any Transferee under any Lease Document, any Federal income
tax under any section of the Code (including, without limitation, Section 1442)
provided that Lessee receives from any Transferee that is a foreign corporation
(and from Lessor, if Lessor is a foreign corporation) the statement described in
Section 881( c ) (2)(B)(ii) of the Code, and (ii) timely file all required
information and other returns required under Federal income tax regulations
implementing and interpreting Section 881 ( c ) of the Code.
11. ASSIGNMENT AND TRANSFER. (a) WITHOUT THE PRIOR WRITTEN CONSENT OF
LESSOR, LESSEE SHALL NOT ASSIGN ANY OF ITS RIGHTS NOR DELEGATE ANY OF ITS
OBLIGATIONS HEREUNDER, SUBLEASE THE EQUIPMENT OR OTHERWISE PERMIT THE EQUIPMENT
TO BE OPERATED OR USED BY, OR TO COME INTO OR REMAIN IN THE POSSESSION OF, ANY
PERSON BUT LESSEE, provided, however, so long as no Event of Default has
-------- -------
occurred and is continuing, Lessee may assign its rights and obligations
hereunder to a corporation wholly owned by it or Guarantor. No assignment or
sublease, whether authorized in this Section 11 or in violation of the terms
hereof, shall relieve Lessee of its obligations hereunder and Lessee shall
remain primarily liable hereunder.
(b) Lessor may transfer its rights, obligations, title and/or
interest in the Equipment and this Lease to one or more Transferees as
collateral security or otherwise. Lessee hereby acknowledges and agrees that in
the event Lessor or such other Transferee has transferred its interest herein
(i) no Transferee(s) shall be obligated to perform any duty, covenant or
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<PAGE>
condition required to be performed by lessor under the terms of this Lease and
(ii) all notices or other communications shall be given to, and made by, Lessor
or its designee.
(c) Upon written notice from Lessor of a Transfer of an interest
herein, Lessee shall promptly record such Transfer in its books and records,
including the name(s) and address(es) of the Transferee (s) and Lessee agrees to
deliver all consents, certificates, opinions of counsel and other documents
Lessor may reasonably request in connection with such Transfer. Lessee
acknowledges and agrees that (i) its failure to record such Transfer within
thirty (30) days after delivery of such notice shall be an Event of Default
pursuant to Section 16 (a) (ii) hereof and (ii) Lessor's obligations to any
Transferee (s) may be secured by Lessor's interest in the Lease and the
Equipment.
(d) PROVIDED TRANSFEREE IS NOT IN VIOLATION OF ITS OBLIGATIONS UNDER
SECTION 7 HEREOF, LESSEE HEREBY WAIVES AS AGAINST ANY SUCH TRANSFEREE (S) OF
LESSOR, ITS SUCCESSORS AND ASSIGNS, ANY CLAIM OR DEFENSE THAT LESSEE MAY NOW OR
HEREAFTER HAVE AS AGAINST LESSOR, WHETHER FOR BREACH OF THIS LEASE, BREACH OF
WARRANTY OR OTHERWISE.
12. INSURANCE. At all times during the Term of this Lease, Lessee, at its
own expense, shall maintain insurance on each item of Equipment against all
risks and in such amounts as Lessor shall reasonable require (but not less than
the then Stipulated Loss Value of such item with carriers acceptable to Lessor,
and shall maintain a loss payable endorsement in favor of Lessor and its
successors and assigns affording to Lessor and its successors and assigns such
additional protection as Lessor and its successors and assignees shall
reasonably require (such as a breach of Lessee's warranty clause), and Lessee
shall maintain public liability and property damage insurance with respect to
each item of Equipment in amounts satisfactory to Lessor for both personal and
property damage. Lessee shall be liable for any deductibles contained in such
insurance policies. All such insurance policies shall name Lessor and its
successors and Transferees as insureds and shall provide that all amounts
payable by reason of loss, theft or damage to the Equipment shall be payable
only to lessor or its designees and that such policies may not be canceled or
altered without at least thirty (30) days' prior written notice to lessor or its
successors and Transferees. Lessee shall furnish Lessor with certificates or
other satisfactory evidence of the maintenance of the insurance required
hereunder not less frequently than annually on the anniversary of the Lease.
13. LOSE AND DAMAGE. Lessee hereby assumes and shall bear the entire
risk of loss, damage, theft or destruction, partial or complete, whether or not
insured against, of the Equipment from any and every cause whatsoever from the
date of delivery of the Equipment to Lessee. No loss, damage, theft or
destruction of the Equipment or any part thereof shall relieve Lessee of any
obligation under this Lease, which shall continue in full force and effect. In
the event that an item of Equipment shall become subject to Total Loss, Lessee
shall inform Lessor in writing in regard thereto within ten (10) days after such
Total Loss and Lessee shall pay to Lessor, in cash, an amount equal to the then
Stipulated Loss Value thereof; provided, however, that such amount shall be
-------- -------
reduced if and to the extent that Lessor or any Transferee has received proceeds
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from the insurance required to be maintained by Lessee pursuant to Section 12
hereof as a result of such Total Loss, and Lessor agrees that if such insurance
proceeds are paid to Lessor after Lessee has paid the Stipulated Loss Value in
full, Lessor shall within ten (10) days thereafter reimburse to Lessee the
proceeds thereof, such reimbursement not to exceed the Stipulated Loss Value
amount paid by Lessee related to such Total Loss. Where a single amount for the
payment of Basic Rent is set forth on an applicable Rental Schedule for more
than one item of Equipment, and less than all such items are subject to a Total
Loss, such Basic Rent due thereafter shall be apportioned among such items in
accordance with their portion of the Total Equipment Cost on such Rental
Schedule, and the Stipulated Loss Value payable shall be equal on a percentage
basis to such apportioned Basic Rent. Upon such payment of the Stipulated Loss
Value for any item(s) leased hereunder, this Lease shall terminate with respect
to such item(s) and Basic Rent shall thereafter abate proportionately.
14. TAXES AND FEES. (a) Lessee shall file any necessary reports and
returns for, shall pay promptly when due, shall otherwise be liable to reimburse
Lessor for, and agrees to indemnify and hold Lessor harmless from, all
impositions.
(b) If any report, return or property listing relating to any
Imposition is, by Law, required to be filed by, assessed or billed to or paid
by, Lessor, Lessee shall do all things required to be done by Lessor (to the
extent permitted by Law) in connection therewith and is hereby authorized by
Lessor to act on behalf of Lessor in all respects in relation thereto, including
the contest or protest, in good faith and by appropriate proceedings, of the
validity of any Imposition, or the amount thereof; provided, however, that
-------- -------
Lessor hereby unconditionally reserves the right to revoke such authorization
and such revocation shall not affect Lessee's indemnity or other obligations
under this Lease, including, without limitation, this Section 14 and Section 17
hereof. Lessor agrees fully to cooperate with Lessee in any such contest, and
Lessee agrees promptly to indemnify Lessor for all reasonable expenses incurred
by Lessor in the course of such cooperation. An Imposition or claim therefor
shall be paid by Lessee, subject to refund proceedings, if failure to pay would
adversely affect the title or rights of Lessor in the Equipment or otherwise
hereunder. Provided that no Default or Event of Default has occurred and is
then continuing, if Lessor obtains a refund of any Imposition that has been paid
(by Lessee, or by Lessor and for which Lessor has been fully reimbursed by
Lessee), Lessor shall promptly pay to Lessee the amount of such refund actually
received. Lessee shall cause all billings of such charges to Lessor to be made
to Lessor in care of Lessee and shall, in preparing any report or return
required by Law, show the ownership of the Equipment in Lessor, and shall send a
copy of any such report or return to Lessor. If Lessee fails to pay any such
charges when due, except any Imposition being contested in good faith and by
appropriate proceedings (as above provided) for a reasonable period of time,
Lessor at its option may do so pursuant to Section 15, in which event the amount
so paid shall be payable by Lessee as Supplemental Rent as provided in Section
15.
(c) The provisions of this Section 14 shall not apply to any
Impositions (i) that Lessee is contesting in good faith, by appropriate
proceedings and as otherwise permitted pursuant to the provisions of this Lease
until the conclusion of such contest; except that Lessee's right to contest any
Imposition is conditioned upon the existence of such Imposition during any
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such contest not causing any material danger, as determined by Lessor in its
reasonable discretion, of the sale, forfeiture or loss of the Equipment.
15. LESSEE'S FAILURE TO PAY TAXES, INSURANCE, ETC. Should Lessee fail to
make any tax, insurance or other payment or do any act required to be performed
by Lessee as herein provided, Lessor shall have the right, but not the
obligation and without releasing Lessee from any obligation hereunder, to make
or do the same, and to pay, purchase, contest or compromise any Imposition that
in the judgment of Lessor affects the Equipment, and, in exercising any such
rights, incur any liability and expend whatever amounts in its reasonable
discretion Lessor may deem necessary therefor. All sums so incurred or expended
by Lessor (including any penalty incurred as a result of Lessee's failure to
perform such obligation or make such payment) shall be due and payable by Lessee
within 30 days of Lessor's demand therefor and shall be payable as Supplemental
Rent.
16. DEFAULT AND REMEDIES. (a) The occurrences of any of the following
events shall constitute an Event of Default hereunder, and shall permit Lessor
to exercise the remedies provided in Section 16(b) below, including the
termination of Lessee's right to possession of the Equipment:
(i) The non-payment when due of any installment of Rent or any other sum
required hereunder to be paid by Lessee;
(ii) The failure by Lessee to perform any other term, obligation, covenant
or condition of this Lease that is not cured within ten (10) days
after such failure;
(iii) The subjection of a substantial part of Lessee's property or any part
of the Equipment to any Lien other than Permitted Lien;
(iv) Lessee shall be in default under the terms of any contract with any
Person requiring the payment of money by Lessee in an amount greater
than $10,000;
(v) In the event that (A) Lessee shall (1) authorize or agree to the
commencement of a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency, corporation, receivership
or other similar Law now or hereafter in effect that authorized the
reorganization or liquidation of such party or its debt or the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, (2)
make a general assignment for the benefit of its creditors, (3) fail
generally or admit in writing its inability to pay its debts as they
become due, (4) take any corporate action to authorize any of the
foregoing or (5) have an involuntary or other proceeding commenced
against it seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other
similar Law now or hereafter in effect, and such involuntary case or
other proceeding shall remain undismissed and
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unstayed for a period exceeding 60 days; or (B) an order for relief
pursuant to such applicable debtor/creditor law shall have been
entered against Lessee.
(vi) If any representation or warranty made by Lessee herein, or made by
Lessee in any statement or certificate furnished by the Lessee in
connection with the execution of this Lease or the delivery of any
items of Equipment hereunder or furnished by the Lessee pursuant
hereto, proves untrue in any material respect as of the date of the
issuance or making thereof;
(vii) The issuance of any writ or order of attachment or execution or other
legal process against any Equipment which is not discharged or
satisfied within fifteen (15) days;
(viii) The occurrence of any event or condition described in subsections
(iii), (iv), (v) or (vi) hereof with respect to any guarantor or any
other party liable, in whole or in part, for performance of any of
Lessee's obligations under this Lease.
(b) Upon the happening of any of the above Events of Default, Lessor
may declare this Lease in Default. Such declaration shall be by written notice
to Lessee and if so stated in such notice shall apply to all Equipment leased
hereunder. Lessee hereby authorizes Lessor at any time thereafter to enter with
or without legal process any premises where the Equipment may be and take
possession thereof. Lessee shall, without further demand, forthwith pay to
lessor an amount that is equal to any unpaid Rent due on or before Lessor has
declared this Lease to be in Default plus, as liquidated damages for loss of a
bargain and not as a penalty, an amount equal to the Stipulated Loss Value of
the Equipment on the date the Lessor shall declare this Lease in Default (in
each case together with any Excess Use Fee measured from the date the Lease is
declared to be in Default to the date payment is received by Lessor). After
Default, as and to the extent requested by Lessor, Lessee shall return the
Equipment to Lessor in good repair, condition and working order, ordinary wear
and tear resulting from permitted use thereof under the terms of this Lease
alone excepted, to a location within or outside of the continental United States
of America specified by Lessor. Such Equipment shall be carefully crated and
shipped, freight, drayage and re-assembly costs prepaid and properly insured, by
Lessee, and Lessee shall bear all risk of loss until the Equipment is delivered
to Lessor or its designee. Lessor shall be entitled to sell the Equipment at
private or public sale within or without the United States of America, in bulk
or in parcels with or without notice, without having the Equipment present at
the place of sale, with the privilege of becoming the purchase thereof; and
Lessor shall be entitled to lease, otherwise dispose of or keep idle all or any
part of the Equipment, and Lessor may use Lessee's premises for any or all of
the foregoing without liability for rent, costs, damages or otherwise. Lessor
shall also be entitled to draw on any letter of credit or take any deposit, in
either case theretofore provided by Lessee to secure its obligations hereunder.
The proceeds of sale, lease or other disposition of the Equipment, if any, or
the proceeds of any letter of credit or deposit, if any, shall be applied (1) to
all of Lessor's costs, charges and expenses incurred in taking, removing,
holding, repairing and selling, leasing or otherwise disposing of the Equipment
(including, without limitation, reasonable attorneys' fees, costs and
disbursements); then, (2) to the extent not previously paid by Lessee, to pay
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Lessor the Stipulated Loss Value for the Equipment as set forth above and all
other sums then payable by Lessee hereunder, including any unpaid Rent; then,
(3) any remaining amounts shall be paid to Lessee. Lessee shall pay any
deficiency for amounts described in clauses (1) and (2) above forthwith. The
exercise of any of the foregoing remedies by Lessor shall not constitute a
termination of this Lease unless Lessor so notifies Lessee in writing.
No remedy referred to in this Section 16 is intended to be exclusive, but
each shall be cumulative and in addition to any other remedy referred to above
or otherwise available to Lessor at law or in equity.
17. INDEMNITY. Lessee agrees to indemnify, defend, and hold harmless,
Lessor, and any Transferee and their respective officers, directors, partners,
agents and employees, from and against any and all Claims (other than such as
may directly and proximately result from the gross negligence or willful
misconduct of Lessor, and Transferee or their respective, agents or employees),
by paying (on an after-tax basis) or otherwise discharging same, when any such
Claims shall become due, including, without limitation, Claims arising on
account of (a) this Lease or any other Lease Documents, or (b) the Equipment, or
any item or part thereof, including, without limitation, the selection,
ordering, acquisition, delivery, installation, return, rejection, abandonment or
other disposition of any item of Equipment, the possession, maintenance,
leasing, use, condition, ownership, operation or control of any item of
Equipment by whosoever owned, used or operated during the Term of this Lease or
the existence of latent and other defects (whether or not discoverable or
discovered by Lessor or Lessee). Lessor shall give Lessee prompt notice of any
Claim or liability hereby indemnified against and Lessee shall be entitled to
control the defense thereof.
18. PURCHASE AND SALE OPTIONS. At the expiration of the Primary Term,
Lessee may, and upon written notice Lessor shall have the unqualified right to
require Lessee to purchase all of the Equipment from Lessor for a sales price
equal to 7.5% of the Total Equipment Cost set forth on the Rental Schedule in
question. Upon such payment in full in cash and payment of any other amounts
then due hereunder (including the costs and expenses of Lessor, if any, and
applicable Impositions, if any, in connection with such sale or transfer),
Lessor will transfer to Lessee, without recourse or warranty and on a "WHERE IS,
AS IS" basis, all of Lessor's right, title and interest in and to the Equipment
by delivery of a duly executed bill of sale. If Lessee fails to pay such
purchase price and such other amounts then due hereunder, Lessor may, without
prejudice to its rights under Section 16 hereof, abandon such Equipment where
such Equipment is located without liability of any kind to Lessee.
19. MISCELLANEOUS. (a) Any notice required or permitted to be given by
the provisions hereof shall be conclusively deemed to have been received by a
party hereto on the day it is delivered by hand or by facsimile transmission to
such party at the address as set forth on the cover page hereof (or at such
other address as such party shall specify to the other party in writing) or, if
sent by registered or certified mail, on the date on which mailed, addressed to
such party at the address set forth above, postage prepaid.
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(b) No delay or omission to exercise any right or remedy accruing to
Lessor upon any breach or default of Lessee shall impair any such right to
remedy or be construed to be a waiver of any such breach or default; nor shall
any waiver of any single breach or default theretofore or thereafter occurring.
Any waiver, permit, consent or approval on the part of Lessor of any breach or
default under this Lease or, of any provision or condition hereof, must be in
writing and shall be effective only to the extent in such writing specifically
set forth. All remedies, either under this Lease or by Law or otherwise
afforded to Lessor, shall be cumulative and not exclusive.
(c) Lessee agrees to reimburse Lessor on demand for any and all
costs and expenses incurred by Lessor in enforcing its rights hereunder,
including without limitation, reasonable attorneys' fees and costs of
repossession, storage, insuring , releasing and selling of all Equipment
together with the Excess Use Fee with respect to all such amounts from Lessor's
payment thereof until its receipt of reimbursement from Lessee.
(d) The obligations of Lessor hereunder shall be suspended to the
extent that it is hindered or prevented from complying therewith because of
labor disturbances, including strikes and lockouts, acts of God, fires, storms,
accidents, failure of the manufacturer or Supplier to deliver any item of
Equipment, commercial frustration, Laws or interference of any cause whatsoever
not within the sole control of Lessor.
(e) THIS AGREEMENT MAY NOT BE TERMINATED EXCEPT AS EXPRESSLY PROVIDED
HEREIN. This Lease may be modified only by a written agreement duly signed by
Persons authorized to sign agreements on behalf of Lessor and Lessee, and any
variance from the terms and conditions of this Lease in any order or other
notification form Lessee, written or oral, shall be of no effect. LESSEE
ACKNOWLEDGES THAT IT HAS READ THIS LEASE, UNDERSTANDS IT, AND AGREES TO BE BOUND
BY ITS TERMS AND CONDITIONS. FURTHER, LESSEE AGREES THAT THIS LEASE IS THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE LEASE BETWEEN THE PARTIES, WHICH
SUPERSEDES ALL PROPOSALS OR PRIOR AGREEMENTS OR UNDERSTANDINGS, ORAL OR WRITTEN,
AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER
OF THIS LEASE.
(f) This Lease and the covenants and agreements contained herein
shall be binding upon, and inure to the benefit of, Lessor and its successors
and assigns and Lessee and its successors and permitted assigns.
(g) The headings of the sections hereof are for convenience of
reference only, are not a part of this Lease and shall not be deemed to affect
the meaning or construction of any of the provisions hereof.
(h) THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, INCLUDING ALL
MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. LESSOR AND LESSEE HEREBY
IRREVOCABLY SUBMIT TO THE
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NON-EXCLUSIVE JURISDICTION OF THE MASSACHUSETTS STATE AND FEDERAL COURTS LOCATED
IN MIDDLESEX COUNTY, MASSACHUSETTS, FOR ANY ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THE OVERALL TRANSACTION EVIDENCED BY THE LEASE DOCUMENTS, LESSOR
AND LESSEE HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH
ACTION OR PROCEEDINGS MAY BE HEARD AND DETERMINED IN SUCH MASSACHUSETTS STATE
COURTS, OR TO THE EXTENT PERMITTED BY LAW, SUCH FEDERAL COURTS. LESSOR AND
LESSEE HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT THEY MAY EFFECTIVELY DO
SO, THE DEFENSE OF ANY INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR
PROCEEDING, LESSOR AND LESSEE HEREBY WAIVE ANY RIGHTS EITHER OF THEM MAY HAVE TO
A TRIAL BY JURY IN ACTIONS OR PROCEEDINGS BROUGHT IN RESPECT OF THE LEASE
DOCUMENTS.
(i) Should any Section or any part of a Section within this Lease be
rendered void, invalid or unenforceable by any court or Law for any reason, such
invalidity or unenforceability shall not void or render invalid or unenforceable
any other Section or part of a Section in this Lease.
(j) Lessee agrees to execute such documents and take such further
actions as Lessor may reasonably request in order to assure Lessor the full
benefit of the rights granted Lessor hereunder.
20. DEFINITIONS AND RULES OF CONSTRUCTION. (a) The following terms when
capitalized as below, have the following meanings:
"Amortization Expense": that portion of Basic Rent applied to the
amortization over the Term of the invoice cost to the Lessor of the Equipment as
set forth on Schedule C to each rental Schedule for each payment of Basic Rent.
----------
"Applicable Law": any Law that may apply to (i) Lessee or its properties
and operations, (ii) the operations, modification, maintenance, ownership,
leasing or use of the Equipment, or (iii) any transaction contemplated under any
Lease Document, including in each case any environmental Law, federal or state
securities Law, commercial Law (pertaining to the rights and obligations of
sellers, purchasers, debtors, secured parties, or to any other pertinent
matter), zoning, sanitation, sitting or building Law, energy, occupational
safety and health practices Law or the Employee Retirement Income Security Act
of 1974, as amended, and any regulations promulgated thereunder.
"Basic Rent": the rental installments due from Lessee pursuant to Section
3(b) hereof for the Primary Term in the amounts and on the dates as provided in
the applicable Rental Schedule.
"Basic Rent Per Day": one thirtieth (1/30/th/) of the Basic Rent Per
Month.
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"Basic Rent Payment Date: as set forth in a Rental Schedule with respect
to the items of Equipment set forth therein.
"Basic Rent Per Month": as set forth on a Rental Schedule with respect to
the items of Equipment set forth therein.
"Business Day": any day, other than a Saturday, Sunday or legal holiday
for commercial banks under the laws of the Commonwealth of Massachusetts (or
such other jurisdictions in the United States as Lessor specifies to Lessee by
at least thirty (30) days' prior written notice).
"Capitalized Lessor's Cost": the amount specified in the Rental Schedule
under the heading "Capitalized Lessor's Cost" which shall equal the Total
Equipment Cost set forth therein unless otherwise specified.
"Claims": as set forth in Section 17 of the Lease.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Commencement Date": shall mean the date of the commencement of the
Interim Term or Primary Term, as the case may be, as set forth on the Rental
Schedule.
"Default": except when inconsistent with the context of any provision
hereof, an event that, but for the lapse of time or the giving of notice or
both, would constitute an Event of Default.
"Dollars or $": United States of America dollars.
"Equipment": with respect to each Rental Schedule, the property described
therein, together with all appliances, parts, instruments, accessories and
furnishings that are from time to time incorporated in the Equipment, or having
been so incorporated, are later removed therefrom, unless title thereto is
expressly released by Lessor, and all replacements of, and additions,
improvements and accessions to any and all of the foregoing, and all books,
records, maintenance logs and general intangibles (including all patents,
copyrights and trade secrets) relating thereto; and, when used in the context of
Lessor's title to the Equipment (whether relating to the creation, grant,
perfection, release, priority, enforcement or application of proceeds thereof),
shall also include all other property in which Lessor is granted a security
interest hereunder or under the Rental Schedule.
"Event of Default": any event of default as specified in Section 16(a) of
the Lease.
"Excess Use Fee": the fee payable by Lessee for the continued use or
possession of the Equipment by the Lessee, which is payable if Lessee has not
paid Rent when due and which shall equal 1-1/2% per month, or the highest rate
permitted by law, whichever is lower, on all overdue Rent from the due date
thereof until paid.
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"Federal": shall mean the Federal government of the United States of
America.
"Financing Statement": a Uniform Commercial Code financing statement on
Form UCC-1 pursuant to the UCC.
"Fixture Filing Office": as set forth in Schedule B to each Rental
----------
Schedule.
"GAAP": generally accepted accounting principles, applied consistently.
"Guarantor": means Data Wave Vending, Inc., a British Colombian
corporation.
"Guaranty": that certain Guaranty dated as of October 22, 1996 pursuant to
which Guarantor is guaranteeing the obligations of Lessee hereunder.
"Governmental Authority": any federal, state, provincial, county,
municipal, regional or other governmental authority, agency board, body,
instrumentality or court, in each case of the United States of America, Canada
or some other country.
"Imposition": any title, recordation, documentary stamp or other fees,
taxes, assessments, charges or withholdings of any nature (together with any
penalties or fines thereon) arising at any time upon or relating to the
Equipment or to the Lease, or the delivery, acquisition, ownership, use,
operation, leasing or other disposition of such Equipment or upon the Rent
payable thereunder, whether the same be assessed to Lessor (or any Transferee)
or Lessee.
"Interim Term": the period from the Interim Term Commencement Date but not
including the Primary Term Commencement Date.
"Interim Term Rent": as set forth in a Rental Schedule.
"Interim Term Commencement Date": the date on which Lessee accepts the
Equipment as set forth in a Rental Schedule.
"Law": any law, rule, regulation, ordinance, order, code, common law,
interpretation, judgment, directive, decree, treaty, injunction, writ,
determination, Permit or similar norm or decision of any Governmental Authority.
"Lease": this Master Equipment Lease Agreement as incorporated by
reference by an applicable Rental Schedule.
"Lease Documents": collectively, the Lease, the Rental Schedule (s) and
any and all instruments, documents, certificates and agreements delivered
pursuant hereto.
"Lessee": Data Wave Services (US), Inc., a Nevada corporation, its
successors and permitted assigns.
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"Lessor": Applied Telecommunications Technologies, Inc., a Delaware
corporation, its successors and assigns.
"Lessor's Cost": with respect to each item of the Equipment set forth on a
Rental Schedule, the amount specified as such thereon.
"Lien": any mortgage, pledge, lease, sublease, security interest,
attachment, charge, encumbrance or right or claim of others whatsoever
(including any conditional sale or other retention agreement).
"Master Lease": This Lease Agreement.
"Permit": any action, approval, certificate of occupancy, consent, waiver,
exemption, variance, franchise, order, permit, authorization, right or license,
or other form of legally required permission, of or from a Governmental
Authority.
"Permitted Lien": (a) Lessor's and Lessee's respective rights, titles and
interests in the Equipment, (b) Liens for the benefit of mechanics, materialmen,
laborers, employees or suppliers and similar Liens arising by operation of Law
and incurred by Lessee in the ordinary course of business for sums that are not
yet delinquent or are being contested in good faith by negotiations or by
appropriate proceedings that suspend the collection and enforcement thereof
(provided that the existence of such Lien while such negotiations or proceedings
are pending does not involve any substantial risk (as determined by Lessor in
its discretion) of the sale, forfeiture or loss of the Equipment or any therein,
and for which adequate reserves have been provided in accordance with GAAP), and
( c ) Liens arising out of any judgments or awards against Lessee that have been
adequately bonded to protect Lessor's interest or with respect to which a stay
of execution has been granted pending an appeal or a proceeding for review.
"Person": any individual, corporation, partnership, joint venture, or
other legal entity or a Governmental Authority.
"Primary Term": as set forth in the Rental Schedule.
"Primary Term Commencement Date": as set forth in the Rental Schedule.
"Rent": collectively, the Interim Term Rent, Basic Rent and the
Supplemental Rent.
"Rental Schedule": a document in the form of Schedule A hereto evidencing
----------
the agreement by Lessor and Lessee to lease the Equipment listed thereon
pursuant to the Rent, terms and conditions set forth thereon and incorporating
this Agreement by reference.
"Stipulated Loss Value': with respect to each item of Equipment, the
product of the Capitalized Lessor's Cost of such item and the applicable
percentage set forth on the Schedule of Stipulated Loss Value attached as
Schedule B to the applicable Rental Schedule.
- ----------
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"Supplemental Rent": all amounts, liabilities and obligations (other than
Basic Rent) that Lessee assumes or agrees to pay to Lessor, including, without
limitation, Stipulated Loss Value, and payments constituting indemnities,
reimbursements, expenses, Excess Use Fee and other charges payable pursuant to
the terms of this Lease.
"Supplier": the person from whom Lessor is purchasing or has purchased the
Equipment.
"Supply Contract": any written contract from the Supplier of the Equipment
or any item thereof, pursuant to which Lessor has purchased such Equipment (or
item thereof) for lease to Lessee under a Rental Schedule.
"Term": the period for which Equipment is leased under the Lease,
including the Interim Term and the Primary Term.
"Term Commencement Date": as set forth on the applicable Rental Schedule.
"Term Expiration Date": as set forth on the applicable Rental Schedule.
"Total Equipment Cost": as set forth in the Rental Schedule.
"Total Loss": for any item of Equipment, the occurrence of any of the
following: (i) the actual or constructive total loss of such item of Equipment;
or (ii) the loss, disappearance, theft or destruction of such item of Equipment;
or (iii) damage to such item of Equipment to such extent as shall make repair
thereof uneconomical, or shall render any item of Equipment permanently unfit
for normal use, for any reason whatsoever; or (iv) the condemnation,
confiscation, requisition, seizure, forfeiture or other taking of title to or
use of such item of Equipment.
"Transfer": any transfer or other agreement pursuant to which Lessor or
Transferee has transferred or agreed to pay any Person the Rent, or a portion
thereof, received from Lessee pursuant to the Lease, which obligation may be
secured by Lessor's interest in the Lease and the Equipment.
"Transferee": any Person to whom Lessor or any subsequent transferee
thereof has assigned any or all of its rights, obligation, title and/or interest
under the Lease.
"Uniform Commercial Code" or "UCC": the Uniform Commercial Code as in
effect in the Commonwealth of Massachusetts or in any other pertinent
jurisdiction; and any reference to an article or section thereof shall mean the
corresponding article or section (however named) of any such other applicable
version of the Uniform Commercial Code.
(b) Any defined term used in the singular preceded by "any" indicates
any number of the members of the relevant class. Any Lease Document or other
agreement or instrument referred to herein means such agreement or instrument as
supplemented and amended from time to time. Any reference to Lessor or Lessee
shall include their permitted successors and assigns. Any reference to a Law or
Permit shall also mean such Law or Permit as amended,
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superseded or replaced from time to time. Unless otherwise expressly provided to
the contrary in the Lease, all actions that Lessee takes or is required to take
under this Lease or any other Lease Document shall be taken at Lessee's sole
cost and expense.
21. ADDITIONAL PROVISIONS. The schedules and exhibits attached hereto and
any riders signed by the parties hereto and attached hereto are hereby
incorporated by reference.
22. LESSOR FUNDING COMMITMENT. Lessor agrees to purchase and place under
schedules to this Lease not less than $US3,000,000 of Lessee-manufactured
equipment, provided no Lessee event of default has occurred and is continuing,
and provided that from and after the date hereof there is no material adverse
change in Lessee's business or financial condition; and on the following terms
and conditions:
(i) equipment will consist of new DTMS and Swipe Card units located
in the United States.
(ii) schedules will be funded monthly, in a minimum amount of
$US100,000 (interim fundings with a minimum of $US20,000).
(iii) lease term of each schedule will be 42 months, commencing on
the first of the calendar quarter following the funding.
(iv) monthly lease rate factor will be 3.05% of the Equipment Cost
per month, in advance.
(v) payments to Lessor will be by wire transfer on the first of each
month.
(vi) at the end of the lease term, Lessee will purchase the
Equipment for 7.5% of its Lessor's Cost.
(vii) Lessor will deduct from the first schedule due diligence and
legal expenses not to exceed $30,000 (and no expenses shall be deducted from
any other schedule).
(viii) concurrently with the first funding, Lessee will provide Lessor
with its warrant to purchase 400,000 common shares of Lessee, which shall be
immediately effective as to all shares covered thereby.
(ix) with respect to each schedule, two-thirds of the Lessor's Cost
of Equipment thereon shall be paid to Lessee as seller and one-third shall be
paid into an interest-bearing U. S. checking account maintained in Lessor's
name (being a separate account from any other account of Lessor). All amounts
in such account shall be owned by and belong to Lessor without restriction.
Lessor agrees that from its general funds or from such account, it shall pay
semiannually on the 15th of each January and June, beginning January 15, 1997,
to Lessee an amount equal to the excess of (X) the total deposits made into
such account (whether or not thereafter withdrawn by Lessor), less any prior
payments from Lessor to
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Lessee under this sentence, over (Y) one-third of the principal balance
outstanding under all Schedules to the Lease in force on the date of such
semiannual computation. In addition, a similar computation and payment shall
be made on the Expiration Date of the last schedule (i. e. the schedule which
next precedes December 31, 1997). In the event the above payments are not
made, lessee will have the right to offset any amounts due against the lease
amounts outstanding at that time.
(x) documentation will be satisfactory to Lessor in its reasonable
discretion, it being understood that the form of schedule and warrant attached
to this Lease as Attachments 1 and 2, respectively, are satisfactory to
Lessee.
This commitment expires, as to any available amount not drawn down, on December
31, 1997.
IN WITNESS WHEREOF. Lessor and Lessee have caused this Agreement to be duly
executed, all as of the date first above written.
LESSOR;
Applied Telecommunications Technologies, Inc.
By: /s/ Dennis P. Cameron
-----------------------------------------
Dennis P. Cameron
President
LESSEE:
Data Wave Services (US) Inc.
By: /s/ Peter Hough
-----------------------------------------
Title: V.P. and Director
---------------------------------------
Date: Oct 22/96
----------------------------------------
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<PAGE>
EXHIBIT 10.7
______ Common Shares Void after
Without Par Value May 16, 1999.
SHARE PURCHASE WARRANT
----------------------
DATAWAVE SYSTEMS INC.
---------------------
(the "Company")
This is to certify that, for value received, ______________ (the "Warrant
Holder") of _________________________________________________ has the right to
purchase from the Company, upon and subject to the terms and conditions
hereinafter referred to, ______ common shares without par value (the "Shares")
in the capital of the Company. The Shares may be purchased at a price of $0.20
(Canadian) per Share at any time up to 5:00 p.m. local time in Vancouver, B.C.
on May 16, 1999. The right to purchase the Shares may be exercised in whole or
in part, by the Warrant Holder only, at the price set forth above (the "Exercise
Price") within the time set forth above by:
(a) completing and executing the Subscription Form attached hereto for the
number of the Shares which the Warrant Holder wishes to purchase, in the
manner therein indicated;
(b) surrendering this Warrant Certificate, together with the complete
Subscription Form, to Montreal Trust Company of Canada, (the "Transfer
Agent") at 4th Floor, 510 Burrard Street, Vancouver, British Columbia; and
(c) paying the appropriate Exercise Price, in Canadian funds, for the number of
the Shares of the Company subscribed for, either by certified cheque or
bank draft (drawn on a Canadian Chartered Bank) or money order payable to
the Company in Vancouver, British Columbia.
Upon surrender and payment, the Company shall issue to the Warrant Holder or to
such other person or persons as the Warrant Holder may direct, the number of the
Shares subscribed for and will deliver to the Warrant Holder, at the address set
forth on the subscription form, a certificate or certificates evidencing the
number of the Shares subscribed for. If the Warrant Holder subscribes for a
number of Shares which is less than the number of Shares permitted by this
warrant, the Company shall forthwith cause to be delivered to the Warrant Holder
a further Warrant Certificate in respect of the balance of Shares referred to in
this Warrant Certificate not then being subscribed for.
In the event of any subdivision of the common shares of the Company (as such
common shares are constituted on the date hereof) into a greater number of
common shares while this warrant is outstanding, the number of Shares
represented by this warrant shall thereafter be deemed to be subdivided in like
manner and the Exercise Price adjusted accordingly, and any subscription by the
Warrant Holder for Shares hereunder shall be deemed to be a subscription for
common shares of the Company as subdivided.
<PAGE>
In the event of any consolidation of the common shares of the Company (as such
common shares are constituted on the date hereof) into a lesser number of common
shares while this warrant is outstanding, the number of Shares represented by
this warrant shall thereafter be deemed to be consolidated in like manner and
the Exercise Price adjusted accordingly, and any subscription by the Warrant
Holder for Shares hereunder shall be deemed to be a subscription for common
shares of the Company as consolidated.
In the event of any capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation (by arrangement, take over,
reorganization or otherwise) of the Company with another corporation at any time
while this warrant is outstanding, the Company shall thereafter deliver at the
time of purchase of the Shares hereunder the number of common shares the Warrant
Holder would have been entitled to receive in respect of the number of the
Shares so purchased had the right to purchase been exercised before such capital
reorganization or reclassification of the common shares of the Company or the
merger or amalgamation of the Company with another corporation.
If at any time while this, or any replacement, warrant is outstanding:
(a) the Company proposes to pay any dividend of any kind upon its common shares
or make any distribution to the holders of its common shares;
(b) the Company proposes to offer for subscription pro rata to the holders of
its common shares any additional shares of stock of any class or other
rights;
(c) the Company proposes any capital reorganization or classification of its
common shares or the merger or amalgamation of the Company with another
corporation; or
(d) there is a voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
the Company shall give to the Warrant Holder at least seven days prior written
notice (the "Notice") of the date on which the books of the Company are to close
or a record is to be taken for such dividend, distribution or subscription
rights, or for determining rights to vote with respect to such reorganization,
reclassification, consolidation, merger, amalgamation, dissolution, liquidation
or winding-up. The Notice shall specify, in the case of any such dividend,
distribution or subscription rights, the date on which holders of common shares
of the Company will be entitled to exchange their common shares for securities
or other property deliverable upon any reorganization, reclassification,
consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-
up, as the case may be. Each Notice shall be delivered by hand, addressed to the
Warrant Holder at the address of the Warrant Holder set forth above or at such
other address as the Warrant Holder may from time to time specify to the Company
in writing.
This Warrant and all fights hereunder will be void on the date 30 days after the
Warrant Holder ceases to be an employee of the Company save and except where the
Warrant Holder ceases to be an employee of the Company as a result of:
<PAGE>
(a) termination for cause (as defined by common law, unless defined in an
employment agreement between the Employee and Datawave (or a subsidiary or
affiliate) then in effect, in which case as defined therein); or
(b) by order of the Superintendent of Brokers for B.C., B.C. Securities
Commission, Vancouver Stock Exchange or any securities regulatory body
having jurisdiction to so order (other than as a result of an act or
omission of the Company not involving the Employee),
in which case this Warrant and all rights hereunder will be void on the date the
Warrant Holder ceases to be an employee of the Company.
The holding of this Warrant Certificate or the Warrants represented hereby does
not constitute the Warrant Holder a member of the Company.
Nothing contained herein confers any right upon the Warrant Holder or any other
person to subscribe for or purchase any Shares of the Company at any time
subsequent to 5:00 p.m. local time in Vancouver, B.C. on May 16, 1999 and from
and after such time, this Warrant and all rights hereunder will be void.
The Warrants represented by this Warrant Certificate are non-transferable. Any
common shares issued pursuant to this Warrant will bear the following legends:
"The shares represented by this certificate are subject to a hold period
expiring at midnight on May 16, 1998 and may not be traded in British
Columbia until the expiry of the hold period except as permitted by the
Securities Act (British Columbia) and regulations made under the Act."
"The shares represented by this certificate have been acquired for
investment and not with a view to, or in connection with, the sale or
distribution thereof. No such sale or disposition may be effected without
an effective registration statement related thereto or an opinion of
counsel satisfactory to the company that such registration is not required
under the Securities Act of 1933."
Time will be of the essence hereof.
This Warrant Certificate is not valid for any purpose until it has been signed
by the Company.
IN WITNESS WHEREOF, the Company has caused its common seal to be hereto affixed
and this warrant certificate to be signed by one of its directors as of the 16th
day of May, 1997.
DATAWAVE SYSTEMS, INC.
Per:
/s/
- -----------------------------
Authorized Signatory
<PAGE>
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND
NOT WITH A VIEW TO, OR IN CONNECTION WITH THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO, OR EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1993.
<PAGE>
SUBSCRIPTION FORM
-----------------
To: Datawave Systems Inc. (the "Company")
And to: the directors thereof.
Pursuant to the Share Purchase Warrant made the 11th day of March, 1997, the
undersigned hereby subscribes for and agrees to take up ________ common shares
without par value (the "Shares") in the capital of the Company, at a price of
$1.00 (Canadian) per Share for the aggregate sum of $_________ (the
"Subscription Funds"), and encloses herewith a certified cheque, bank draft or
money order payable to the Company in Vancouver, B.C. in full payment of the
Shares.
The undersigned hereby requests that:
(a) the Shares be allotted to the undersigned;
(b) the name and address of the undersigned as shown below be entered in the
registers of members and allotments of the Company;
(c) the Shares be issued to the undersigned as fully paid and non-assessable
common shares of the Company; and
(d) a share certificate representing the Shares be issued in the name of the
undersigned.
Dated this ______ day of ______________,19__.
DIRECTION AS TO REGISTRATION:
(NAME AND ADDRESS EXACTLY AS YOU WISH THEM TO APPEAR ON YOUR SHARE CERTIFICATE
-------
AND IN THE REGISTER OF MEMBERS.)
Full Name: _______________________________________
Full Address: _______________________________________
_______________________________________
_______________________________________
_______________________________________
Signature of Subscriber: ________________________________
<PAGE>
EXHIBIT 10.10
AGREEMENT AND PLAN OF MERGER
(Forward Triangular Merger)
THIS AGREEMENT EXECUTED THE 25TH DAY OF MARCH, 1998 (the "Execution Date").
AMONG:
AMIR HESHMATPOUR, Businessman, of Redmond,
Washington, USA; and
KATHY HESHMATPOUR, Businesswoman, of Redmond,
Washington, USA;
(individually a "Vendor" and collectively the "Vendors")
AND:
METRO PHONE TELECOMMUNICATIONS INC., a corporation incorporated under
the laws of Washington having a place of business at 13820 N.E. 65th,
Suite 538, Redmond, Washington, 98052;
(" Metro")
AND:
DATAWAVE SYSTEMS (US) INC., a company incorporated under the laws of
the Nevada having a place of business at 101 West 5th Avenue,
Vancouver, British Columbia, VSY 1H9
(the "Purchaser") Purchaser is a wholly owned subsidiary of Datawave
Canada;
AND:
DW MERGER CORPORATION, a corporation incorporated under the laws of
Washington, having a business address at 101 West 5th, Avenue,
Vancouver, British Columbia VSY 1H9
("DWM") DWM is a wholly owned subsidiary of Purchaser;
<PAGE>
AND:
DATAWAVE SYSTEMS INC., a company incorporated under the laws of
British Columbia having a place of business at 101 West 5th Avenue,
Vancouver, British Columbia, V5Y 1H9
("Datawave Canada")
WHEREAS:
A. The authorized share capital of Metro consists of 10,000,000
shares of which 755,000 shares (the "Metro Shares") with a par value of $0.01
per share are issued and outstanding;
B. The Vendors are the registered and beneficial owners of 100
percent of the Metro Shares as husband and wife:
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the
covenants and agreements herein contained, the parties hereto do covenant and
agree (the "Agreement") each with the other as follows:
1. REPRESENTATIONS AND WARRANTIES
1.1 In order to induce the Purchaser to enter into this Agreement and
complete its transactions contemplated hereunder, the Vendors jointly and
severally represent and warrant to the Purchaser and Datawave Canada that:
(a) Metro was and remains duly incorporated under the laws of Washington
and Metro:
(i) is a "private issuer" as that term is defined in the Securities
Act R.S.B.C., 1996 C.148 (the "Securities Act");
(ii) does not carry on business in any jurisdiction other than the 48
States of the continental United States of America, and is duly
qualified to do so in those States described in the letter dated
March 3, 1998 from Unisearch Inc. to Metro;
(iii) is in good standing with respect to the filing of annual
reports with the Secretary of State for Washington;
(b) the authorized and issued share capital of Metro is as set forth in
paragraphs A and B of the recitals to this Agreement;
(c) the Metro Shares are validly issued and outstanding fully paid and
non-assessable shares of Metro registered in the names of, and
beneficially owned by, the Vendors as set forth in paragraph B of the
recitals to this Agreement, free and
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<PAGE>
clear of all voting restrictions, trade restrictions, liens, charges
or encumbrances of any kind whatsoever;
(d) except for the Metro Shares and except for the Proposed Subscription
(as hereinafter defined), there are no documents, instruments or other
writings of any kind whatsoever which constitute a "security" of Metro
as that term is defined in the Securities Act and, except as is
provided for by operation of this Agreement, there are no options,
agreements or rights of any kind whatsoever to acquire all or any part
of the Metro Shares or any interest in them from the Vendors or either
of them. In this Agreement, "Proposed Subscription" means the proposed
investment in Metro by Ali Amin and Ross Baharmat (" collectively the
"Proposed Subscribers") of $350,000 cash in consideration of 245,000
shares of Metro, which Proposed Subscription will be cancelled as
described in section 2.7;
(e) except for the amendment and restatement of its Articles effective
January 27, 1998 and Bylaws effective January 1, 1998, the constating
documents of Metro have not been altered since the incorporation of
Metro;
(f) all of the material transactions of Metro have been promptly and
properly recorded or filed in or with the books or records of Metro
and the minute books of Metro contain all records of the meetings and
proceedings of Metro's shareholders and directors since its
incorporation;
(g) Metro is the registered and beneficial owner of all of the properties
and assets (collectively the "Assets") listed on Schedule "A" to this
Agreement, and such Assets represent all of the property and assets
used by Metro and which are necessary or useful in the conduct of its
business;
(h) Metro has the corporate power to own the Assets owned by it and carry
on the business carried on by it and Metro is duly qualified to carry
on business in all jurisdictions in which it carries on business;
(i) Metro has good and marketable title to the Assets free and clear of
all liens, charges and encumbrances of any kind whatsoever save and
except those specified as "Permitted Encumbrances" on Schedule "A" to
this Agreement;
(j) all machinery and equipment of any kind whatsoever comprised in the
Assets are in reasonable operating condition and in a state of
reasonable maintenance and repair taking into account their age and
use;
(k) all of the bank accounts and safety deposit boxes of Metro are listed
on Schedule "A" to this Agreement;
(1) Metro maintains insurance against loss of, or damage to, the Assets
with respect to all insurable risks on a replacement cost basis and
reasonable insurance with respect to public liability for a business
of its size (collectively the "Insurance Coverage"), and all of the
policies (the "Insurance Policies") in respect of such
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<PAGE>
Insurance Coverage are described on Schedule "D" to this Agreement and
all such Insurance Policies are in good standing in all respects and
not in default in any respects;
(m) the unaudited financial statements of Metro for its fiscal years ended
December 31, 1995, 1996 and 1997 and the unaudited financial
statements of Metro for the period ending February 28, 1998
(collectively the "Metro Financial Statements"), a copy of which
February 28, 1998 financial statements appear as Schedule "B" to this
Agreement, are true and correct in every material respect and present
fairly and accurately the financial position and results of the
operations of Metro for the periods then ended and the Metro Financial
Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis;
(n) the books and records of Metro disclose all material financial
transactions of Metro since February 28, 1998 and such transactions
have been fairly and accurately recorded;
(o) except as disclosed in the Metro Financial Statements:
(i) no dividends or other distributions of any kind whatsoever on any
shares in the capital of Metro have been made, declared or
authorized;
(ii) except as disclosed in the Metro Financial Statements, Metro is
not indebted to the Vendors or either of them;
(iii) neither of the Vendors nor any other officer, director or
employee of Metro is indebted or under obligation to Metro on any
account whatsoever; and
(iv) Metro has not guaranteed or agreed to guarantee any debt,
liability or other obligation of any kind whatsoever of any
person, firm or corporation of any kind whatsoever;
(p) there are no material liabilities of Metro, whether direct, indirect,
absolute, contingent or otherwise which are not disclosed or reflected
in the Metro Financial Statements except those incurred in the
ordinary course of business of Metro since February 28, 1998 which are
recorded in the books and records of Metro;
(q) the inventory shown on the Metro Financial Statements or recorded in
the books and records of Metro has been valued at the lesser of cost
or net realizable value and not more than 5% of the inventory is
obsolete or unsaleable in the ordinary course of the business of
Metro;
(r) the accounts receivable of Metro shown on the Metro Financial
Statements or recorded in the books and records of Metro are bona
fide, good and collectible without set-off or counterclaim;
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<PAGE>
(s) since February 28, 1998:
(i) there has not been any material adverse change of any kind
whatsoever in the financial position or condition of Metro or any
damage, loss or other change of any kind whatsoever in
circumstances materially affecting the business or Assets of
Metro or the right or capacity of Metro to carry on its business;
(ii) Metro has not waived or surrendered any right of any kind
whatsoever of material value;
(iii) except as permitted under this Agreement, Metro has not
discharged, satisfied or paid any lien, charge or encumbrance of
any kind whatsoever or obligation or liability of any kind
whatsoever other than current liabilities in the ordinary course
of its business;
(iv) the business of Metro has been carried on in the ordinary course;
and
(v) no capital expenditures exceeding in the aggregate $50,000 have
been authorized or made by Metro;
(t) the directors, officers and employees of Metro and all of their
compensation arrangements with Metro, whether as directors, officers
or employees of, or as independent contractors or consultants to,
Metro, are as listed on Schedule "C" to this Agreement;
(u) no payments of any kind whatsoever have been made or authorized by
Metro since February 28, 1998 to or on behalf of the Vendors or either
of them or to or on behalf of any of the directors, officers or
employees of Metro except in accordance with those compensation
arrangements specified on Schedule "C" to this Agreement or except as
contemplated by this Agreement;
(v) there are no pension, profit sharing, group insurance or similar plans
or other deferred compensation plans of any kind whatsoever affecting
Metro other than those specified on Schedule "C" to this Agreement;
(w) Metro is not now, and has never been, a party to any collective
agreement with any labour union or other association of employees of
any kind whatsoever;
(x) the contracts and agreements included on Schedule "E" to this
Agreement (collectively the "Material Contracts") constitute all of
the material contracts and agreements of Metro;
(y) except as is noted on Schedule "E" to this Agreement, the Material
Contracts are in good standing in all respects and neither Metro nor
any of the other parties to the Material Contracts is in default in
respect of any of the Material Contracts;
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<PAGE>
(z) except as is noted on Schedule "E" to this Agreement, all of the
Material Contracts can be terminated by Metro on not more than one
month's notice;
(aa) all tax returns and reports of Metro required by law to have been
filed have been filed and are substantially true, complete and correct
and all taxes and other government charges of any kind whatsoever of
Metro have been paid or accrued in the Metro Financial Statements;
(bb) Metro has been assessed for federal income tax for all of its full or
partial fiscal years to and including its fiscal year ended December
31, 1996. The accrued liability of Metro for federal and other income
tax for its fiscal year ending December 31, 1997 does not exceed
$20,000;
(cc) to the best of their knowledge, Metro has not acquired any property
from a person with whom Metro was not dealing with at arm's length for
proceeds greater than the fair market value thereof;
(dd) adequate provision has been made for taxes payable by Metro for the
current period for which tax returns are not yet required to be filed
and there are no agreements, waivers or other arrangements of any kind
whatsoever providing for an extension of time with respect to the
filing of any tax return by, or payment of, any tax or governmental
charge of any kind whatsoever by Metro;
(ee) they are not aware of any contingent tax liabilities of Metro of any
kind whatsoever or any grounds which would prompt a reassessment of
Metro including aggressive treatment of income and expenses in earlier
tax returns filed;
(ff) Metro has made all collections, deductions, remittances and payments
of any kind whatsoever and filed all reports and returns required by
it to be made or filed under the provisions of all applicable statutes
requiring the making of collections, deductions, remittances or
payments of any kind whatsoever in those jurisdictions in which Metro
carries on business;
(gg) to the best of their knowledge, there are no actions, suits,
judgments, investigations or proceedings of any kind whatsoever
outstanding, pending or threatened against or affecting the Vendors or
either of them or Metro at law or in equity or before or by any
federal, state, municipal or other governmental department,
commission, board, bureau or agency of any kind whatsoever and there
is no basis therefor;
(hh) to the best of their knowledge, Metro is not in breach of any law,
ordinance, statute, regulation, by-law, order or decree of any kind
whatsoever;
(ii) the Vendors and Metro have good and sufficient right and authority to
enter into this Agreement and complete their respective transactions
contemplated under this Agreement on the terms and conditions set
forth herein;
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<PAGE>
(jj) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of their respective obligations under this
Agreement and the completion of their respective transactions
contemplated under this Agreement will not:
(i) conflict with, or result in the breach of or the acceleration of
any indebtedness under, or constitute default under, the
constating documents of Metro or any indenture, mortgage,
agreement, lease, licence or other instrument of any kind
whatsoever to which Metro, the Vendors or either of them is a
party or by which any of them is bound, or any judgment or order
of any kind whatsoever of any court or administrative body of any
kind whatsoever by which any of them is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by either of the Vendors or by Metro;
(kk) the representations and warranties of the Vendors contained in this
Agreement disclose all material facts specifically relating to the
transactions involving the Vendors and Metro contemplated under this
Agreement which materially and adversely affect, or in the future may
materially and adversely affect, their respective abilities to perform
their respective obligations under this Agreement;
(ll) the Vendors have had the opportunity to ask of Datawave Canada, or
persons acting on behalf of the Vendors, any and all relevant
questions in connection with any aspect of Datawave Canada and the
Datawave Shares (as hereinafter defined), and have received answers
which the Vendors consider to be responsive to such questions;
(mm) the Vendors are able to bear the economic risk of an investment
represented by the Datawave Shares;
(nn) the Vendors are acquiring the Datawave Shares for their own account,
for the purpose of investment and not for or with the view to the
resale, distribution, subdivision or a fractionalization thereof in
violation of the-securities laws of the United States of America;
(oo) the Vendors understand that the Datawave Shares have not been
registered under the United States Securities Act of 1933, as amended
(the "US Securities Act") or qualified under the laws of any state;
because they are and will be issued in a transaction exempt from the
registration requirements of the US Securities Act pursuant to Section
4(2) and 4(6) thereof and similar provisions in applicable state law,
the Datawave Shares must be held indefinitely unless a subsequent
disposition thereof is registered under the US Securities Act or is
exempt from such registration (and accordingly, the undersigned is
prepared to bear the economic risk of an investment in the Datawave
Shares for an indefinite period), Datawave Canada will instruct its
transfer agent to make a notation on the transfer
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<PAGE>
books to such effect, and the Datawave Shares shall bear a legend
substantially as follows:
"The shares of Common Stock represented by this stock certificate
have not been registered under the United States Securities Act
of 1933, as amended, or qualified under the laws of any state,
and may not be sold, offered for sale, pledged or hypothecated
unless a registration statement is in effect with respect to such
securities under such Act and laws or unless there is provided by
the holder an opinion of counsel or other evidence reasonably
satisfactory to Datawave Canada that such registration is not
required."
(pp) the Vendors are "Accredited Investors" as such term is defined in Rule
501 of Regulation D under the US Securities Act;
(qq) the Vendors acknowledge and understand that the acquisition of the
Datawave Shares is speculative and involves a high degree of risk; and
(rr) the Vendors shall defend, indemnify and hold Datawave Canada,
including its directors and officers, harmless from and against any
and all claims, causes of actions, damages, expenses or obligation
arising out of the undersigned's breach of any covenant, agreement or
representation contained herein, including without limitation
attorney's fees.
1.2 The representations and warranties of the Vendors contained in this
Agreement shall be true at the Time of Closing as though they were made at the
Time of Closing and they shall survive the completion of the transactions
contemplated under this Agreement and remain in full force and effect thereafter
for the benefit of the Purchaser and Datawave Canada for a period of two years
after the Time of Closing.
1.3 In order to induce the Vendors to enter into this Agreement and
complete their respective transactions contemplated hereunder, the Purchaser
represents and warrants to the Vendors that:
(a) Datawave Canada was and remains duly incorporated under the laws of
British Columbia and:
(i) Datawave Canada is a "reporting issuer" as that term is defined
in the Securities Act;
(ii) Datawave Canada is in good standing with respect to the filing of
annual reports with the B.C. Registrar of Companies; and
(iii) Datawave Canada common shares are listed and posted for trading
on the Vancouver Stock Exchange;
(b) as of the date of this Agreement:
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<PAGE>
(i) the authorized share capital of Datawave Canada consisted of
50,000,000 common shares without par value of which 26,106,496
common shares were issued and outstanding;
(ii) there are no commitments, plans or arrangements of any kind
whatsoever to issue shares of Datawave Canada, nor are there any
outstanding options, warrants, convertible securities or other
rights of any kind whatsoever calling for the issuance of any of
the unissued shares of Datawave Canada save and except as
disclosed to the Vendors;
(c) each of the Purchaser and Datawave Canada has good and sufficient
right and authority to enter into this Agreement and complete its
transactions contemplated under this Agreement on the terms and
conditions set forth herein;
(d) except as disclosed to the Vendors, the constating documents of the
Purchaser or Datawave Canada have not been altered since the
incorporation of the Purchaser or Datawave Canada;
(e) all of the material transactions of the Purchase and Datawave Canada
have been promptly and properly recorded or filed in or with the books
or records of the Purchaser and Datawave Canada and the minute books
of the Purchaser and Datawave Canada contain all records of the
meetings and proceedings of the Purchaser's and Datawave Canada's
shareholders and directors since their incorporation;
(f) Datawave Canada is the registered and beneficial owner of all of the
properties and assets used by Datawave Canada which are necessary or
useful in the conduct of its business;
(g) Datawave Canada has the corporate power to own the Assets owned by it
and carry on the business carried on by it and Datawave Canada is duly
qualified to carry on business in all jurisdictions in which it
carries on business;
(h) the books and records of Datawave Canada disclose all material
financial transactions of Datawave Canada and such transactions have
been fairly and accurately recorded;
(i) since the date of its most recent financial statements:
(i) there has not been any material adverse change of any kind
whatsoever in the financial position or condition of Datawave
Canada or any damage, loss or other change of any kind whatsoever
in circumstances materially affecting the business or Assets of
Datawave Canada or the right or capacity of Datawave Canada to
carry on its business;
(ii) Datawave Canada has not waived or surrendered any right of any
kind whatsoever of material value;
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<PAGE>
(iii) except as permitted under this Agreement, Datawave Canada has
not discharged, satisfied or paid any lien, charge or encumbrance
of any kind whatsoever or obligation or liability of any kind
whatsoever other than current liabilities in the ordinary course
of its business; and
(iv) the business of Datawave Canada has been carried on in the
ordinary course;
(j) Datawave Canada is not now, and has never been, a party to any
collective agreement with any labour union or other association of
employees of any kind whatsoever;
(k) all of the material contracts and agreements of Datawave Canada
have been disclosed to the Vendors;
(l) all tax returns and reports of Datawave Canada required by law to
have been filed have been filed and are substantially true,
complete and correct and all taxes and other government charges
of any kind whatsoever of Datawave Canada have been paid or
accrued in the Datawave Canada financial statements;
(m) to the best of its knowledge, Datawave Canada is not in breach of
any law, ordinance, statute, regulation, by-law, order or decree
of any kind whatsoever;
(n) to the best of its knowledge, the execution and delivery of this
Agreement, the performance of its obligations under this
Agreement and the completion of its transactions contemplated
under this Agreement will not:
(i) conflict with, or result in the breach of or the
acceleration of any indebtedness under, or constitute
default under, the memorandum or articles of the Purchaser
or Datawave Canada or any indenture, mortgage, agreement,
lease, licence or other instrument of any kind whatsoever to
which the Purchaser or Datawave Canada is a party or by
which it is bound, or any judgment or order of any kind
whatsoever of any court or administrative body of any kind
whatsoever by which the Purchaser or Datawave Canada is
bound; and
(ii) result in the violation of any law or regulation of any kind
whatsoever by the Purchaser or Datawave Canada;
(o) the representations and warranties of the Purchaser contained in
this Agreement disclose all material facts specifically relating
to the transactions involving the Purchaser contemplated in this
Agreement which materially and adversely affect, or in the future
may materially and adversely affect, the Purchaser or the
Purchaser's ability to perform its obligations under this
Agreement.
The representations and warranties of the Purchaser contained in this Agreement
shall be true at the Time of Closing as though they were made at the Time of
Closing and they shall survive the
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<PAGE>
completion of the transactions contemplated under this Agreement and remain in
full force and effect for the benefit of the Vendors for a period of two years
after the Time of Closing.
2. THE MERGER
2.1 Upon the terms and conditions hereof, as promptly as practicable
following the satisfaction or waiver of the conditions set forth in Article 5
hereof, but in no event later than two days thereafter, unless the parties shall
otherwise agree, articles of the merger (the "Articles of Merger") providing for
the merger of Metro with and into DWM (the "Merger") shall be duly prepared,
executed and filed by DWM, as the surviving corporation (sometimes the
"Surviving Corporation"), in accordance with the relevant provisions of the
Washington Business Corporation Act (the "WBCA") and the parties hereto shall
take any other actions required by law to make the Merger effective.
Following the Merger, DWM, with all its proposes, objects, rights,
privileges, powers and franchises, shall continue, and Metro shall cease to
exist. The time the Merger becomes effective is referred to herein as the
"Effective Time".
2.2 The Merger shall have the effects set forth in the WBCA. As of the
Effective Time the Surviving Corporation shall be a wholly owned subsidiary of
Purchaser.
2.3 The Articles of Incorporation of the Surviving Corporation shall be
the Restated Articles of Incorporation of Metro and the Surviving Corporation
shall be named Metrophone Telecommunications, Inc. The Bylaws of the Surviving
Corporation shall be the Restated Bylaws of Metro.
2.4 The directors and officers of DWM immediately prior to the Effective
Time shall be the initial directors and officers of the Surviving Corporation
until their successors shall have been duly elected or appointed and shall have
qualified or until their earlier death, resignation or removal in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation.
2.5 At the Effective Time, by virtue of the Merger and without any action
on the part of Datawave Canada, Purchaser, Metro or DWM or the holder of any of
the following securities:
(a) the issued and outstanding share of common stock, par value $.01, of
Metro shall be converted into the right to receive the number of fully
paid and non-assessable shares of common stock, without par value, of
Datawave Canada (the "Datawave Shares") calculated as follows:
(i) by converting $600,000 into Canadian funds based on the Bank of
Canada noon spot rate of exchange on the third business day
preceding the Execution Date; and
(ii) by dividing the resulting amount by the greater of Cdn.$1.40 and
the average of the closing prices for the common shares of
Datawave Canada for the ten trading day period immediately prior
to the Execution Date;
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<PAGE>
All of such shares to be issued shall be issued to Vendors as husband
and wife;
(b) Each issued and outstanding share of the capital stock of DWM shall be
converted into and become one fully paid and non-assessable share of
common stock of the Surviving Corporation.
(c) The Purchaser shall pay to the Vendors the sum of $600,000 (and the
Vendors acknowledge the prior receipt from the Purchaser of $50,000,
reducing the amount payable to $550,000).
2.6 It is intended that the Merger shall constitute a reorganization with
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and that this Agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code.
2.7 Vendors shall procure from the Proposed Subscribers and deliver to the
Purchaser and Metro on or before the Closing Date a receipt and release (the
"Subscribers' Release") from any claims against the Vendors or Metro in respect
of the Proposed Subscription in a form acceptable to counsel for the parties, in
consideration of the payment by Metro, on or before the Closing, of $100,000 in
cash (and such other consideration payable by the Vendors to the Proposed
Shareholders as may be agreed between the Vendors and the Proposed Subscribers).
The parties acknowledge and agree that the foregoing $100,000 in cash has been
advanced by Datawave Canada to Metro and will, on the Closing Date, represent an
account payable by Metro to Datawave Canada.
2.8 The Vendors acknowledge and agree with the Purchaser that:
(a) the Datawave Shares will be issued pursuant to registration and
prospectus exemptions in British Columbia and in the United States and
the State of Washington, and will be subject to such trading
restrictions as may be imposed under British Columbia law and the laws
of the United States and the State of Washington as may be applicable
(the "Applicable Securities Laws"); and
(b) the Datawave Shares will not be transferable until all hold periods
prescribed under the Applicable Securities Laws have expired.
3. COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS
3.1 The Vendors and Metro jointly and severally covenant and agree with
the Purchaser that the Vendors and Metro shall:
(a) from and including the date of this Agreement through to and including
the Time of Closing, permit the Purchaser, through its directors,
officers, employees and authorized agents and representatives
(collectively the "Purchaser's Representatives") at its own cost, full
access to Metro's books, records and property including, without
limitation, all of the Assets, contracts and minute
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books of Metro, so as to permit the Purchaser to make such
investigation (the "Purchaser's Investigation") of Metro as the
Purchaser deems necessary;
(b) on or before the 30th day of April, 1998, provide to the Purchaser all
such further documents, instruments and materials and do all such acts
and things as may be required by the Purchaser to obtain Regulatory
Approval including, but not limited to, providing to the Purchaser a
valuation opinion of Metro in a form and by a party acceptable to the
VSE so as to permit the Purchaser's Shares to be issued as "trading
shares" as that term is defined in VSE Listings Policy Statement No.
18 (but the Purchaser will be responsible for all costs relating to
such valuation);
(c) from and including the date of this Agreement through to and including
the Time of Closing, do all such acts and things necessary to ensure
that all of the representations and warranties of the Vendors or
either of them contained in this Agreement or any certificates or
documents delivered by them or either of them pursuant to this
Agreement remain true and correct;
(d) from and including the date of this Agreement through to and including
the Time of Closing, preserve and protect the goodwill, Assets,
business and undertaking of Metro and, without limiting the generality
of the foregoing, carry on the business of Metro in a reasonable and
prudent manner; and
(e) from and including the date of this Agreement through to and including
the Time of Closing, keep confidential all discussions and
communications (including all information communicated therein) among
the parties, and all written and printed materials of any kind
whatsoever exchanged by the parties, and, if so requested by the
Purchaser, the Vendors and Metro shall arrange for any director,
officer, employee, authorized agent or representative of Metro to
enter into and the Vendors themselves shall enter into a non-
disclosure agreement with the Purchaser in a form acceptable to the
Purchaser acting reasonably.
3.2 The Vendors and Metro jointly and severally covenant and agree with
the Purchaser that, from and including the date of this Agreement through to and
including the Time of Closing, the Vendors and Metro shall:
(a) not do any such act or thing that would render any representation
or warranty of the Vendors or any one of them contained in this
Agreement or any certificates or documents delivered by them or
any one of them pursuant to this Agreement untrue or incorrect;
and
(b) not negotiate with any other person in respect of a purchase and
sale of any of the Metro Shares or any part of the Assets, other
than a sale of part of the Assets in the ordinary course of
Metro's business.
3.3 The Vendors jointly and severally acknowledge to and agree with the
Purchaser that the Purchaser's Investigation shall in no way limit or otherwise
adversely affect the rights of
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the Purchaser as provided for hereunder in respect of the representations and
warranties of the Vendors contained in this Agreement or any certificates or
documents delivered by them pursuant to this Agreement.
3.4 Datawave Canada and the Purchaser jointly and severally covenant and
agree with the Vendors and with Metro that Datawave Canada and the Purchaser
shall:
(a) from and including the date of this Agreement through to and including
the Time of Closing, permit the Vendors themselves and through their
authorized agents and representatives (collectively the "Vendors'
Representatives") at their own cost, full access to the Purchaser's
property, books and records including, without limitation, all of the
assets, contracts and minute books of the Purchaser, so as to permit
the Vendors' Representatives to make such investigation (the "Vendors'
Investigation") of the Purchaser as the Vendors deem necessary;
(b) use their best efforts to obtain Regulatory Approval for this
Agreement and the transactions contemplated hereunder on or before the
30th day of April, 1998;
(c) from and including the date of this Agreement through to and including
the Time of Closing, do all such acts and things necessary to ensure
that all of the representations and warranties of the Purchaser
contained in this Agreement or any certificates or documents delivered
by it pursuant to this Agreement remain true and correct; and
(d) from and including the date of this Agreement through to and including
the Time of Closing and subject to its obligations as a reporting
issuer listed on a stock exchange, keep confidential all discussions
and communications (including all information communicated therein)
between the parties, and all written and printed materials of any kind
whatsoever exchanged by the parties, and, if so requested by the
Vendors or by Metro, the Purchaser shall arrange for any of the
Purchaser's Representatives to enter into, and the Purchaser itself
shall enter into, a non-disclosure agreement with the Vendors and
Metro in a form acceptable to the Vendors and Metro acting reasonably.
3.5 Datawave Canada and the Purchaser jointly and severally covenant and
agree with the Vendors and with Metro that, from and including the date of this
Agreement through to and including the Time of Closing, Datawave Canada and the
Purchaser shall not do any such act or thing that would render any
representation or warranty of Datawave Canada and the Purchaser contained in
this Agreement or any certificates or documents delivered by it pursuant to this
Agreement untrue or incorrect.
3.6 Datawave Canada and the Purchaser acknowledge to and agree with the
Vendors that the Vendors' Investigation shall in no way limit or otherwise
adversely affect the rights of the Vendors as provided for hereunder in respect
of the representations and warranties of Datawave Canada and the Purchaser
contained in this Agreement or any certificates or documents delivered by them
pursuant to this Agreement.
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3.7 Datawave Canada will, promptly after the Closing Date, use reasonable
efforts to procure the release of any personal guarantees given by the Vendors
or either of them in respect of valid business debts and obligations of Metro
which have been disclosed to Datawave Canada, including the payment or
assumption by or on behalf of Metro of any such debts and obligations (but not
if any such payment or assumption would give rise to penalties or would
otherwise be impractical, in which case Datawave Canada will cause Metro to save
the Vendors harmless from any liability under such guarantee).
4. INDEMNITY
4.1 Notwithstanding the completion of the transactions contemplated under
this Agreement or the Purchaser's Investigation, the representations, warranties
and acknowledgements of the Vendors or either of them contained in this
Agreement or any certificates or documents delivered by them or either of them
pursuant to this Agreement shall survive the completion of the transactions
contemplated by this Agreement and shall continue in full force and effect
thereafter for the benefit of the Purchaser and Datawave Canada. If any of the
representations, warranties or acknowledgements given by the Vendors or either
of them in this Agreement are found to be untrue or there is a breach of any
covenant or agreement in this Agreement on the part of the Vendors or either of
them, the Vendors shall jointly and severally indemnify and save harmless the
Purchaser and Datawave Canada from and against any and all liability, claims,
debts, demands, suits, actions, penalties, fines, losses, costs (including legal
fees and disbursements as charged by a lawyer to his own client), damages and
expenses of any kind whatsoever which may be brought or made against the
Purchaser or Datawave Canada by any person, firm or corporation of any kind
whatsoever or which may be suffered or incurred by the Purchaser or Datawave
Canada, directly or indirectly, arising out of or as a consequence of any such
misrepresentation or breach of warranty, acknowledgement, covenant or agreement.
Without in any way limiting the generality of the foregoing, this shall include
any loss of any kind whatsoever which may be suffered or incurred by the
Purchaser or Datawave Canada, directly or indirectly, arising out of any
material assessment or reassessment levied upon Metro for tax, interest and/or
penalties for any period up to and including the Closing Date and all claims,
demands, costs (including legal fees and disbursements as charged by a lawyer to
his own client) and expenses of any kind whatsoever in respect of the foregoing.
The Vendors shall not be liable under the terms of this indemnity in respect of
any claim which may be made by the Purchaser or Datawave Canada which is made
more than two years after the Closing Date.
4.2 In addition to the indemnity described in section 4.1, the Vendors
shall jointly and severally indemnify and save harmless the Purchaser and
Datawave Canada from and against any and all liability, claims, debts, demands,
suits, actions, penalties, fines, losses, costs (including legal fees and
disbursements as charged by a lawyer to his own client), damages and expenses of
any kind whatsoever which may be suffered or incurred by the Purchaser or
Datawave Canada, directly or indirectly, arising out of or as a consequence of
the Proposed Subscription, its termination in pursuance of this Agreement, and
the Subscribers' Release.
4.3 Notwithstanding the completion of the transactions contemplated under
this Agreement or the Vendors' Investigation, the representations, warranties
and acknowledgements of Datawave Canada and the Purchaser or either of them
contained in this Agreement or any certificates or documents delivered by them
or either of them pursuant to this Agreement shall
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<PAGE>
survive the completion of the transactions contemplated by this Agreement and
shall continue in full force and effect thereafter for the benefit of the
Vendors. If any of the representations, warranties or acknowledgements given by
Datawave Canada and the Purchaser or either of them in this Agreement are found
to be untrue or there is a breach of any covenant or agreement in this Agreement
on the part of Datawave Canada and the Purchaser or either of them, Datawave
Canada and the Purchaser shall jointly and severally indemnify and save harmless
the Vendors from and against any and all liability, claims, debts, demands,
suits, actions, penalties, fines, losses, costs (including legal fees and
disbursements as charged by a lawyer to his own client), damages and expenses of
any kind whatsoever which may be brought or made against the Vendors by any
person, firm or corporation of any kind whatsoever or which may be suffered or
incurred by the Vendors, directly or indirectly, arising out of or as a
consequence of any such misrepresentation or breach of warranty,
acknowledgement, covenant or agreement. The Purchaser shall not be liable under
the terms of this indemnity in respect of any claim which may be made by the
Vendors or either of them which is made more than two years after the Closing
Date.
5. CONDITIONS PRECEDENT
5.1 The Purchaser's obligation to carry out the terms of this Agreement
and to complete its transactions contemplated under this Agreement is subject to
the fulfilment to the satisfaction of the Purchaser of each of the following
conditions that:
(a) on or before the Time of Closing, the Purchaser shall have been able
to complete the Purchaser's Investigation to its reasonable
satisfaction;
(b) on or before the Time of Closing, Metro shall have entered into a
written employment agreement with Amir (the "Employment Agreement"),
the form of which appears as Schedule "F" to this Agreement;
(c) at the Time of Closing, the directors of DWM shall consist of Amir and
three individuals nominated by the Purchaser;
(d) at the Time of Closing, the solicitors for the Vendors shall provide
an opinion dated as of the Closing Date, the form of which appears as
Schedule "G" to this Agreement;
(e) as of the Time of Closing, the Vendors and Metro shall have complied
with all of their respective covenants and agreements contained in
this Agreement; and
(f) as of the Time of Closing, the representations and warranties of the
Vendors or either of them referred to in paragraph 1.1 of this
Agreement, contained elsewhere in this Agreement or contained in any
certificates or documents delivered by them or either of them pursuant
to this Agreement shall be completely true as if such representations
and warranties had been made by the Vendors as of the Time of Closing.
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The conditions set forth above are for the exclusive benefit of the Purchaser
and may be waived by the Purchaser in whole or in part on or before the Time of
Closing.
5.2 The Vendors' respective obligations to carry out the terms of this
Agreement and to complete their respective transactions contemplated under this
Agreement are subject to the fulfilment to their satisfaction of each of the
following conditions that:
(a) on or before the Time of Closing, the Vendors shall have been able to
complete the Vendors' Investigation to their reasonable satisfaction;
(b) as of the Time of Closing, Datawave Canada and the Purchaser shall
have complied with all of their covenants and agreements contained in
this Agreement;
(c) at the Time of Closing, the solicitors for Datawave Canada and
Purchaser shall provide an opinion dated as of the closing date, the
form of which appears as Schedule "G" to this Agreement; and
(d) at the Time of Closing, the representations and warranties of the
Purchaser referred to in paragraph 1.3 of this Agreement, contained
elsewhere in this Agreement or contained in any certificates or
documents delivered by it pursuant to this Agreement shall be
completely true as if such representations and warranties had been
made by the Purchaser as of the Time of Closing.
The conditions set forth above are for the exclusive benefit of each of the
Vendors and may be waived by each of them in whole or in part on or before the
Time of Closing.
5.3 The parties acknowledge and agree each with the other that this
Agreement and all of the transactions contemplated under this Agreement are
subject to the approval ("Regulatory Approval") of the Vancouver Stock Exchange
("VSE"). In the event that Regulatory Approval is not obtained on or before the
30th day of April, 1998, this Agreement shall terminate and be of no further
force and effect.
6. CLOSING
6.1 The completion of the transactions contemplated under this Agreement
shall be closed at the offices of Messrs. Campney & Murphy, P.O. Box 48800,
2100-1111 West Georgia Street, Vancouver, British Columbia at 9:00 o'clock a.m.
local time in Vancouver, B.C. (the "Time of Closing"), as soon as practicable,
but in no event later than, on the tenth day (the "Closing Date") following the
date Regulatory Approval is given.
6.2 At the Time of Closing, the Vendors shall deliver to the solicitors
for the Purchaser:
(a) a certified true copy of the resolutions of the directors of Metro
evidencing that the directors of the Metro have approved this
Agreement and all of the transactions of Metro contemplated hereunder
and the resolutions shall include specific reference to the Merger as
provided for in this Agreement;
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(b) the Old Share Certificates;
(c) the Subscribers' Release;
(d) the New Share Certificate;
(e) the Employment Agreement;
(f) the solicitor's opinion referred to in subparagraph 5.1(d) of this
Agreement;
(g) a certificate of confirmation signed by the Vendors in the form
attached as Schedule "H" to this Agreement; and
(h) any other materials that are, in the opinion of the solicitors for the
Purchaser, reasonably required to complete the transactions
contemplated under this Agreement.
6.3 At the Time of Closing, the Purchaser shall deliver to the solicitors
for the Vendors:
(a) certified true copies of the resolutions of the directors of Datawave
Canada, the Purchaser, and DWM, evidencing that the directors of
Datawave Canada, the Purchaser, and DWM, have approved this Agreement
and all of the transactions of the Purchaser contemplated hereunder,
including the Merger;
(b) evidence that Regulatory Approval has been obtained;
(c) the Cash Payment as provided for in section 2.5(c) of this Agreement;
(d) share certificates representing the Datawave Shares registered in the
names of the Vendors as provided for in section 2.5 of this Agreement;
(e) a certificate of confirmation signed by two directors or officers of
the Purchaser in the form attached as Schedule "I" to this Agreement;
(f) the solicitors' opinion referred to in subparagraph 5.2(c) of this
Agreement; and
(g) a release by Datawave Canada of the Vendors' joint and several
personal guarantee of the indebtedness of Metro in favour of Datawave
Canada dated March 18, 1998.
7. GENERAL
7.1 Time shall be of the essence of this Agreement and any waiver by the
parties of this paragraph 7.1 or any failure by them to exercise any of their
rights under this Agreement shall be limited to the particular instance and
shall not extend to any other instance or matter in this Agreement or otherwise
affect any of their rights or remedies under this Agreement.
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7.2 The Schedules to this Agreement incorporated by reference and the
recitals to this Agreement constitute a part of this Agreement.
7.3 This Agreement constitutes the entire Agreement among the parties
hereto in respect of the matters referred to herein and there are no
representations, warranties, covenants or agreements, expressed or implied,
collateral hereto other than as expressly set forth or referred to herein.
Without limiting the generality of the foregoing, the Letter of Agreement is
superseded by this Agreement and is of no further force and effect.
7.4 The headings in this Agreement are for reference only and do not
constitute terms of the Agreement.
7.5 The provisions contained in this Agreement which, by their terms,
require performance by a party to this Agreement subsequent to the Closing Date
of this Agreement, shall survive the Closing Date of this Agreement.
7.6 No alteration, amendment, modification or interpretation of this
Agreement or any provision of this Agreement shall be valid and binding upon the
parties hereto unless such alteration, amendment, modification or interpretation
is in written form executed by the parties directly affected by such alteration,
amendment, modification or interpretation.
7.7 Whenever the singular or masculine is used in this Agreement the same
shall be deemed to include the plural or the feminine or the body corporate as
the context may require.
7.8 The parties hereto shall execute and deliver all such further
documents and instruments and do all such acts and things as any party may,
either before or after the Closing Date, reasonably require in order to carry
out the full intent and meaning of this Agreement.
7.9 Any notice, request, demand and other communication to be given under
this Agreement shall be in writing and shall be delivered by hand or by
telecopier to the parties at their following respective addresses:
To the Vendors or Metro:
c/o Amir Heshmatpour
13820 N.E. 65th
Suite 538
Redmond, Washington 98052
Telecopier: (425) 869-7710
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To the Purchaser:
Datawave Systems Inc.
101 West 5th Avenue
Vancouver, British Columbia
V5Y 1H9
Attention: Clive Barwin
Telecopier: (604) 874-1503
or to such other addresses as may be given in writing by the parties hereto in
the manner provided for in this paragraph, and shall be deemed to have been
received, if delivered by hand, on the date of delivery, or if delivered by
telecopier, on the date that it is sent.
7.10 Unless otherwise specified in this Agreement, all references in this
Agreement to dollar amounts refer to lawful currency of the United States of
America.
7.11 This Agreement may not be assigned by any party hereto without the
prior written consent of all of the parties hereto.
7.12 This Agreement shall be subject to, governed by, and construed in
accordance with the laws of the Province of British Columbia.
7.13 This Agreement may be signed by the parties in as many counterparts
as may be deemed necessary, each of which so signed shall be deemed to be an
original, and all such counterparts together shall constitute one and the same
instrument.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals as of the
Execution Date.
<TABLE>
<CAPTION>
<S> <C>
SIGNED, SEALED AND DELIVERED )
by AMIR HESHMATPOUR )
in the presence of: )
)
- ---------------------------------- )
Signature of Witness ) --------------------------------
) AMIR HESHMATPOUR
Name: )
---------------------------- )
Address: )
------------------------- )
)
------------------------- )
Occupation: )
---------------------- )
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SIGNED, SEALED AND DELIVERED )
by KATHY HESMATPOUR )
in the presence of: )
)
)
)
- ---------------------------------- ) --------------------------------
) KATHY HESHMATPOUR
Signature of Witness )
)
Name: )
--------------------------- )
Address: )
------------------------- )
)
------------------------- )
)
------------------------- )
)
------------------------- )
Occupation: )
---------------------- )
)
The CORPORATE SEAL of METRO )
PHONE TELECOMMUNICATIONS INC. was )
hereunto affixed in the presence of: )
)
)
) c/s
)
- ------------------------------------- )
)
)
- -------------------------------------
The CORPORATE SEAL of DW MERGER )
CORPORATION was hereunto )
affixed in the presence of: )
)
) c/s
)
- ------------------------------------- )
)
)
- -------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
The SEAL of DATAWAVE SYSTEMS (US) )
INC. was hereunto affixed )
in the presence of: )
)
) c/s
)
- ------------------------------------- )
)
)
- -------------------------------------
</TABLE>
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EXHIBIT 10.11
Loan #: 1058-1-50131
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of April 14, 1997,
is between TELECAPITAL, L.P. ("TeleCapital"), a Delaware limited partnership,
with offices at 2530 S. Parker Road, Suite 500, Aurora, Colorado 80014 and
METROPHONE TELECOMMUNICATIONS, INC. ("Borrower"), a Washington corporation,
having its principal place of business at 13820 NE 65th Street, #538, Redmond,
WA 98052.
INTRODUCTION. TeleCapital has agreed to provide loans ("Loans") to
------------
Borrower to finance certain telephone equipment, and Borrower has agreed, in
part, to grant to TeleCapital certain collateral including first security
interests in and an option to purchase that equipment and certain pledges and
assignments of revenue and location rights relating to that equipment.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, TeleCapital and Borrower agree as follows:
SECTION 1. LOANS
----------------
Subject to the terms and conditions of this Agreement, TeleCapital agrees
to make loans ("Loans") to the Borrower up to the aggregate amount of Fifty-five
Thousand and 00/100 Dollars ($55,000.00) (the "Commitment") as follows:
1.1 Interest Rate. The interest rate shall be Fourteen and Ninety
-------------
Hundredths percent (14.90%) per annum calculated on the basis of a 360 day year
of 12 30-day months.
1.2 Repayment. Each Loan shall be repaid in Sixty (60) equal monthly
---------
payments of principal plus accrued interest beginning on the 15th day of the
first full month after that Loan is made. If any Loan is made on any day other
than the 15th day of any month, Borrower shall, on the day that Loan is made,
pay interest for that month in advance. Payments shall be applied first to
accrued interest and then principal.
1.3 Commitment Period. TeleCapital's Commitment to make Loans under
-----------------
this Agreement shall expire automatically on ____________, 19__, unless extended
in writing by TeleCapital, in its absolute discretion.
1.4 The Notes. Each Loan shall be evidenced by a note ("Note") in the
---------
form annexed as Exhibit A, which contains other terms and conditions of each
Loan and is hereby incorporated into this Agreement.
1.5 Limitation on Each Loan. Each Loan shall be in amount not to
-----------------------
exceed the loan value ("Loan Value") of each item of Equipment (as defined in
Section 3.1) being financed by that Loan as indicated on Schedule 1. Loans shall
be minimum amounts of $50,000.00.
1.6 Payment. Borrower shall make payments to TeleCapital at the
-------
address set forth in the caption of this Agreement or at such other location as
TeleCapital shall designate in writing.
1.7 Use of Proceeds; Direct Payment to Vendor. Except as may
-----------------------------------------
otherwise be agreed by TeleCapital in its absolute discretion, all Loans shall
be advanced by TeleCapital directly (x) to the vendor of the Equipment, in the
case of purchase money financing or (y) to holders of liens on the Equipment, in
the case of a refinancing; and the balance, if any, shall be remitted to
Borrower.
1.8 Not a Revolving Loan. This is not a facility for a revolving
--------------------
loan. The Commitment represents the aggregate amount of Loans that TeleCapital
is obligated to make.
1.9 Interest Limits. If the fulfillment of any provision in this
---------------
Agreement, any Note or any other Operative Document (as defined in Section 3.2
below) relating to the rate of interest is prohibited by, or in violation of,
any applicable law in effect at the time payment is due, the interest rate shall
be automatically reduced to the maximum rate then permitted by law. If for any
reason TeleCapital should receive as interest an amount that would exceed the
highest applicable lawful rate of interest, that amount in excess of the lawful
rate shall be deemed to have been credited against principal and not against
interest. This provision shall control every other provision in any Operative
Document that is applicable to the calculation of interest.
SECTION 2 - CONDITIONS PRECEDENT
--------------------------------
TeleCapital will have no duty to make any Loan unless all conditions in
this Agreement have been, and continue to be, met including each of the
following:
2.1 Loans. TeleCapital shall have received each of the following to
-----
TeleCapital's satisfaction:
(i) All times that TeleCapital has required in its letter to
Borrower ("Approval Letter") dated ____________, 19__,
approving the Loans;
(ii) Duly executed copies of all Operative Documents including, as
to each Loan, a duly completed and executed Note;
(iii) A true copy of all documents relating to the purchase of the
Equipment from the vendor including any purchase agreement,
purchase order or invoice (the "Equipment Purchase Documents");
(iv) UCC-1 financing statements and any other documents that may be
required to give TeleCapital a duly perfected first priority
security interest in all Collateral (as defined in Section 3.1
below));
<PAGE>
(v) A true copy of Borrower's agreements (the "Revenue
Agreements") with the provider of operator assisted long
distance telephone, dial around and any other revenue
producing service for all of the Equipment, in form acceptable
to TeleCapital;
(vi) An Acceptance and Delivery Certificate from Borrower
acknowledging receipt of the Equipment, unless determined by
TeleCapital to be inapplicable;
(vii) All executed originals of each location, license, lease or
other agreement ("Location Agreement") for each actual and
proposed Equipment location; and
(viii) Any other documents that may be reasonably required by
TeleCapital.
2.2 No Default or Event of Default (as defined below) has occurred
and is continuing.
2.3 All representations and warranties in this Agreement and any
other Operative Document are, and continue to be, true and complete, as to
conditions and circumstances as of the date of each Loan.
2.4 There has been no material adverse change in the financial
condition of the Borrower or any guarantor in the value of any Collateral.
SECTION 3 - COLLATERAL; SECURED OBLIGATIONS
-------------------------------------------
3.1 Granting Clause. To secure the payment, observance and
---------------
performance of all Obligations (as defined in Section 3.2), Borrower hereby
grants to TeleCapital a security interest in, and assigns to TeleCapital all of
Borrower's present or future interest in the following (collectively, the
"Collateral"): (A) All phones and other items listed on Schedule 1 to this
Agreement [and, in the case of purchase money financing, any other equipment
purchased (or to be purchased) by Borrower pursuant to any Equipment Purchase
Documents], together with all pedestals, enclosures, accessories, parts,
components, additions, improvements, substitutions or replacements thereto and
thereof (collectively, "Equipment", and all records, warranties, maintenance
agreements, licenses and permits relating to the foregoing, and all proceeds and
products of an substitutions for, the foregoing (collectively, the "Equipment
Collateral"); (B) all existing and future Revenue Agreements (including all
commissions for all phones payable thereunder) and Location Agreements, all
existing and future accounts, general intangibles, chattel paper, cash and other
revenues from the use of Equipment, all books, data bases and other records
relating to the foregoing and all proceeds of, and substitutions for, the
foregoing (collectively, the "Intangible Collateral"); (C) the Deposit (as
defined below); (D) all Borrower's other existing and future "accounts",
"general intangibles", "chattel paper", "equipment", "inventory" and "goods" (as
those terms are defined in the Uniform Commercial Code) and all other property
of any kind; and all proceeds and products of, and substitutions for, all of the
foregoing.
3.2 Secured Obligations. The term "Obligations" means all existing
-------------------
and future indebtedness, obligations, liabilities and duties of all kinds
(including principal, interest and expenses) owing from Borrower to TeleCapital,
whether direct or indirect, contingent or non-contingent, secured or unsecured,
liquidated or unliquidated, matured or unmatured or due or to become due,
including those arising under this Agreement, any Note, Revenue Assignment (as
defined below), Location Assignment (as defined below) or any other agreement,
note guaranty or other document executed in connection with this Agreement
(collectively, the "Operative Documents" and any other existing or future loan
from TeleCapital to Borrower.
3.3 Location of Equipment Collateral. All of the Equipment
--------------------------------
Collateral shall be kept at Borrower's premises identified in the caption of
this Agreement ("Borrower's Premises"), or at the locations listed on Schedule 1
to this Agreement, provided that the Equipment at each such location is the
subject of a Location Agreement in accordance with the requirements of the
Location Assignment. Borrower shall advise TeleCapital in writing of the
specific location of each item of the Equipment Collateral at least ten days
before the date such items are to be moved from Borrower's Premises to the
address for that Equipment Collateral specified on Schedule 1. No item of
Equipment Collateral shall thereafter be relocated unless TeleCapital shall have
received at least ten days prior written notice from Borrower of the new
location, duly executed USS financing statements for that location, executed
originals of a LA in accordance with the requirements of the Location
Assignment, and, if required by TeleCapital, and, if required by TeleCapital,
lien searches for that location. Notwithstanding the foregoing, Borrower may not
move any Equipment Collateral if, in the judgment of TeleCapital, that move will
materially effect its liens, rights or interests in that Equipment Collateral.
3.4 Perfection of Liens. Borrower shall (i) execute such financing
-------------------
statements (including amendments, continuation statements and other documents,
in form reasonably satisfactory to TeleCapital as TeleCapital may specify; (ii)
pay or reimburse TeleCapital for all UCC-1 filing fees or other recording fees
and search fees and search fees; and (iii) take those other steps as TeleCapital
may reasonably direct from time to time, including the noting of TeleCapital's
lien on the Collateral and delivering all originals of each Location Agreement
to TeleCapital, all to perfect TeleCapital's security interest in the
Collateral. Borrower hereby irrevocably authorizes TeleCapital to execute on
behalf of Borrower and to file those financing and continuation statements and
to take those other actions as TeleCapital deems appropriate from time to time
at Borrower's expense to perfect and continue TeleCapital's security interest in
the Collateral, and if an Event of Default shall occur and be continuing to
notify Borrower's creditors and others of TeleCapital's security interest and
the exercise of its rights and remedies.
3.5 Assignment of Location. Pursuant to TeleCapital's form of
----------------------
Assignment of Location Agreement ("Location Assignment"), Borrower shall assign
to TeleCapital, and grant a security interest to TeleCapital in, each Location
Agreement.
3.6 Assignment of Revenue Agreement. (a) Pursuant to TeleCapital's
-------------------------------
form of Assignment of Revenue Commissions ("Revenue Assignment"), Borrower shall
assign to TeleCapital and grant a security interest to TeleCapital in all
Borrower's right, title and interest in and to existing and future agreements
("Revenue Agreements") with operator service, dial around and other revenue
service providers pursuant to which commissions, fees, surcharges and other
revenue is to be paid to Borrower relating to any Equipment including any
-2-
<PAGE>
Revenue Agreement referenced in any Revenue Assignment, and provide irrevocable
instructions to the provider or other payor under the Revenue Agreement to make
payments to TeleCapital in the amount, and at the times, that payments are due
under each Note, prior to making payments to the Borrower, and the provider or
payor shall execute and deliver to TeleCapital the consent to assignment and
payment instructions annexed thereto, and (b) as provided in the Revenue
Assignment, Borrower shall not change the service provided for any phones that
is subject to an Revenue Agreement or remove any phone from the coverage of an
Revenue Agreement, whether or not that phone is part of the Equipment, unless
Borrower has complied with the requirements of the Revenue Assignment in
connection therewith, to TeleCapital's reasonable satisfaction.
3.7 Labeling and Legending. Borrower shall affix a sticker or other
----------------------
form of notice as may be acceptable to TeleCapital, noting Borrower's ownership
and, if requested by TeleCapital, TeleCapital's security interest, on prominent
place on each pay telephone cabinet which is part of the Equipment Collateral.
If requested by TeleCapital, Borrower shall also mark any other Collateral and
its books and records in a manner satisfactory to TeleCapital to show
TeleCapital's security interest.
SECTION 4 - WARRANTIES; COVENANTS
---------------------------------
Borrower represents and warrants as follows:
4.1 Organization and Authority. It is a corporation duly organized,
--------------------------
validly existing, and in good standing, under the laws of the State of
Washington, has the authority and power necessary to own its assets and to
transact the business in which it is engaged, and is duly qualified and in good
standing to do business, in each jurisdiction in which the conduct of its
business or the ownership of its assets so requires.
4.2 Authority. It has the absolute and unrestricted right, power,
---------
authority and capacity to execute and deliver this Agreement and each of the
other Operative Document, and to perform its obligations hereunder and
thereunder. The signatory below is duly authorized to execute and deliver this
Agreement.
4.3 No Conflict. Its execution and delivery of this Agreement and of
-----------
the other Operative Documents, and the consummation and performance of any of
the transactions contemplated hereby or thereby, do not and will not (a)(i)
violate any applicable law or any judgment, order, or decree of any court or
other governmental authority, or (ii) violate any provision of its charter or
bylaws; (b) violate any provision of, or cause a default under, any mortgage,
indenture, agreement or other undertaking to which it is a party or by which it
is bound; or (c) result in the creation or imposition of any lien on any of its
assets.
4.4 Enforceability. It has duly authorized, executed, and delivered
--------------
this Agreement and the other Operative Documents. This Agreement and the other
Operative Documents constitute the legal, valid, and binding obligations of
Borrower, enforceable against it in accordance with their respective terms.
4.5 Consents and Permits. No consent of any other person (including
--------------------
such person's shareholders) and no consent, license, approval, or exemption by,
or authorization of, or registration or declaration with, any governmental
authority, is necessary to (a) its execution, delivery or performance of this
Agreement or of any other Operative Document, or (b) the validity or
enforceability of this Agreement or of any other Operative Document.
4.6 No Defaults. It is not in default, and no event or condition
-----------
exists that after the giving of notice or lapse of time or both, would
constitute an event of default under any mortgage, indenture, agreement,
judgement, or other undertaking, to which it is a party or by which it is bound.
4.7 No Litigation. There is no action, suit, investigation, or
-------------
proceeding pending, or the best of its knowledge threatened, against or
affecting it or any of its assets that, if adversely determined, is reasonably
likely to result in a material adverse effect on Borrower.
4.8 Title; Liens. Borrower holds good title to the Collateral, free
------------
of all liens, restrictions, taxes and encumbrances (collectively "Liens"). Upon
the filing of the UCC-1 financing statements executed by Borrower describing the
Collateral in the UCC-1 filing offices described therein, TeleCapital will have
a duly perfected first priority security interest in all Collateral, free of all
other Liens. Borrower hereby warrants and will forever defend that title and the
enforceability and priority of liens created by this Agreement or any other
Operative Document at Borrower's expense.
4.9 Name and History. Borrower has not (a) had, used or operated
----------------
under any other name or trade name, (b) acquired no other organization or
entity or a substantial portion of the assets of any individual or other
organization or entity, or (c) merged, or been merged into, no other
organization or entity, except as has been disclosed in writing to TeleCapital.
If Borrower is purchasing, or has purchased, any Equipment from anyone other
than the manufacturer or a dealer of that Equipment in the ordinary course of
that dealer's business, or if Borrower is purchasing or has purchased any
Location Agreements, the full name and address of any such seller of any
Equipment or Location Agreement, and any other names used by that seller in the
five years prior to the Borrower's acquisition, are set forth on the annexed
Schedule 4.9.
4.10 Financial Disclosures. All financial information of Borrower
---------------------
which Borrower has disclosed to TeleCapital has been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and fully
and fairly represent the financial condition and results of operations of
Borrower and there have been no material adverse changes in the financial
condition and results of operations of Borrower.
4.11 Solvency. Borrower is solvent and shall so remain during the
--------
term hereof; no receiver, liquidator or trustee has been appointed for Borrower
or any of its properties; Borrower has not been adjudged bankrupt or insolvent;
Borrower is not affected by any voluntary or involuntary bankruptcy petitions or
arrangement of reorganization or by any assignment for the benefit of creditors
or by any proceeding of dissolution or liquidation, and none of such actions are
contemplated or threatened by or against Borrower.
-3-
<PAGE>
4.12 Survival. All representations, warranties and agreements
--------
contained in this Agreement or in any other Operative Documents shall survive
the consummation of the transactions contemplated by this Agreement
notwithstanding any investigation conducted, or knowledge acquired, with respect
thereto.
SECTION 5 - AFFIRMATIVE COVENANTS
---------------------------------
Borrower shall do each of the following:
5.1 Obligations. Pay all indebtedness, and abide by all terms and
-----------
conditions, under each Note, this Agreement, all other Operative Documents and
all other Obligations when due.
5.2 Financial Reporting. Deliver to TeleCapital financial information
-------------------
and documents as follows:
(a) within ninety days after the close of each fiscal year end
financial statements as of the close of such fiscal period including a balance
sheet and with the related statements of operations, retained earnings and
changes in cash flows for such fiscal period, prepared on a reviewed basis in
accordance with generally accepted accounting principles by a CPA; and
(b) simultaneously with the submission of each financial
statement described above, a personal certification of an offer of Borrower (i)
that each such financial statement is true and complete, and (ii) that there
exists no condition or event that constitutes, or with notice or lapse of time
or both would constitute a default under this Agreement or any other
Obligations, and if any such condition or event existed or exists, specifying
the nature and period of existence and what action, if any, is being taken to
remedy each such condition or event; and
(c) such other information including books, records, expense
ledgers, tax filings, phone bills, canceled checks and all other reports and
statements respecting the business and properties or the condition or
operations, financial or otherwise, of Borrower and the Collateral in form, and
at intervals, as TeleCapital may from time to time reasonably request.
5.3 Condition of Property. Keep the Equipment Collateral in good and
---------------------
clean condition and make all repairs that are required in the ordinary course of
business to operate the Equipment Collateral.
5.4 Inspections. At any time during the regular business hours after
-----------
at least one business day's notice and as often as requested, permit TeleCapital
and its agents and employees to inspect the Collateral and examine, audit and
make copies and abstracts from any and all of Borrower's books and records
relating to the Collateral or Borrower's financial condition as TeleCapital may
reasonably request, including OSP, dial around and other commission or revenue
statements, phone bills and canceled checks for payments on Location Agreements.
5.5 Compliance With Laws. Comply with all laws, ordinances,
--------------------
regulations and restrictions affecting the Equipment Collateral, and pay all
taxes on the Equipment Collateral when due.
5.6 Preservation of Existence. Preserve and maintain its existence,
-------------------------
licenses, qualifications and good standing in its jurisdiction of formation and
all authorizations, consents, licenses, permits, registrations and
qualifications that are necessary for the transaction of business and the
operation of the Equipment Collateral.
5.7 Indemnity. Indemnify, defend (with counsel reasonably acceptable
---------
to TeleCapital) and hold harmless TeleCapital (including TeleCapital's agents,
employees, officers and directors) against all losses, claims, suits, fines,
damages and expenses, including reasonable attorney's fees and disbursements,
incurred by reason of, or in connection with, this Agreement, any other
Operative Document or any Collateral, any loan or accommodation to Borrower or
in connection with maintaining TeleCapital's interest in any of the foregoing,
except to the extent caused by TeleCapital's willful misconduct or gross
negligence.
5.8 Insurance Coverage. Borrower shall keep the Equipment Collateral
------------------
insured as follows:
(a) Physical Damage Insurance. Maintain extended coverage
physical damage insurance written in the name of Borrower covering all Equipment
Collateral that is in Borrower's possession or control, reasonably satisfactory
to TeleCapital.
(b) Liability Insurance. Maintain broad form comprehensive
general liability insurance, reasonably satisfactory to TeleCapital.
(c) Policy Terms. All policies shall meet the requirements that
TeleCapital in its reasonably discretion establishes from time to time for its
customers in Borrower's industry including the following (i) all policies shall
name TeleCapital "and its successors and assigns" as "additional insured" as to
all liability insurance and "'loss payee" as to all physical loss insurance; and
(ii) if requested by TeleCapital, Borrower shall provide to TeleCapital current
certificates of insurance confirming all of the above coverage and, thereafter,
at least ten days prior to the expiration date of any insurance listed on any
insurance certificate previously given to TeleCapital certificates evidencing
that the insurance has been renewed.
(d) Insurance Proceeds. TeleCapital shall have the exclusive
authority to receive directly all insurance proceeds relating to any Equipment
Collateral, settle or compromise all claims relating to such proceeds and
determine whether to apply such proceeds to reduce any Note or any other
Obligations or to repair or replace any Equipment Collateral, provided that so
long as no Event of Default has occurred and is continuing, TeleCapital shall
settle or compromise any claim only with the consent of Borrower and TeleCapital
shall release such proceeds for the purchase of Equipment of like or greater
value that will serve as replacement Collateral, to TeleCapital's reasonable
satisfaction.
5.9 Use of Equipment. Borrower may, in any lawful manner not
----------------
inconsistent with this Agreement, use the Collateral to the extent that is
ordinary and necessary in the carrying on of Borrower's primary
-4-
<PAGE>
business, provided that Borrower shall not sell, exchange, lease or otherwise
dispose of any Collateral or any of Borrower's rights therein without the prior
written consent of TeleCapital.
5.10 Title; Liens. Borrower shall maintain exclusive ownership of all
------------
Collateral, free of all Liens, except in favor of TeleCapital.
5.11 Maintenance of Records. Borrower shall maintain accurate,
----------------------
complete and detailed books and records pertaining to the Collateral, including
itemized records as to all collections from each item of Equipment Collateral
subject to the Revenue Agreement or any Location Agreements.
5.12 Notices to TeleCapital. Borrower shall notify TeleCapital
----------------------
immediately in writing if any of the following shall occur. (a) Borrower becomes
aware of the occurrence of any Event of Default or of any fact, condition or
event that with the giving of notice or passage of time or both, could become an
Event of Default ("Default"); (b) any change in the location of any of
Borrower's places of business or of establishment of any new, or the
discontinuance of any existing place of business or location of any of
Borrower's books and records, and with respect to those new places of business
and locations, comply with Section 3.3 and (c) (i) the institution of any
litigation in which Borrower is a party if an adverse decision there would
require Borrower to pay more than $100,000 or deliver assets the value of which
exceeds that sum; (ii) the institution of any other suit or any administrative
proceeding involving Borrower that might materially and adversely affect
Borrower's operations, financial condition, property or business; (iii) any
material adverse change in Borrower's business or financial condition or in the
value of any of the Collateral.
SECTION 6 - EVENTS OF DEFAULT
-----------------------------
Any of the following events or conditions shall constitute an "Event
of Default" under this Agreement and the other Operative Document and
Obligations if not cured within the applicable cure period, if any, set forth
below:
6.1 Payments. Any failure to make any payment required in any Note,
--------
this Agreement, any other Operative Document or any other Obligation when due
provided, however, that the Borrower shall have the right to cure that default
within three days of notice of default, which cure right may not be exercised
more than one time in any consecutive six month period; or
6.2 Other Terms. Any failure to perform or observe any term or
-----------
condition contained in this Agreement, any Note or any other Operative Document
when due provided, however, that Borrower may effect a complete cure of any non-
monetary covenant in this Agreement, except for any Event of Default referred to
in any other subsection of this Section 6, within 30 days of notice of default;
or
6.3 Representations. Any representation, statement or warranty made
---------------
by or on behalf of Borrower (or any guarantor) in this Agreement, any other
Operative Document, or certificate or otherwise made or given to Agreement at
any time shall be incorrect, incomplete or misleading when made in any material
respect; or
6.4 Financial Information and Inspections. Any failure to furnish
--------------------------------------
financial information or to permit inspection of the Collateral in any records
as required under this Agreement or any other loan Document, provided that
Borrower shall have ten days after notices to cure any default of Section 5.2;
or
6.5 Lien Defaults or Foreclosures. Proceedings shall have been
-----------------------------
instituted or actions take for the foreclosure or enforcement of any security
interest, judgement, assignment or other lien or encumbrance affecting the
Collateral; or
6.6 Judgments. Any judgment shall be entered against Borrower or any
---------
guarantor (collectively "Obligor") in excess of $25,000.00, that is not within
30 days of entry, discharged, or stayed and bonded, to the reasonably
satisfaction of TeleCapital; or
6.7 Insolvency. Any filing of a petition by or against any Obligor
----------
under any bankruptcy or insolvency law or an assignment by any Obligor of any
property or assets for the benefit of creditors, provided, however, that any
Obligor shall have 30 days to obtain a court order dismissing any bankruptcy or
insolvency proceeding that is filed without consent of the Obligor; or
6.8 Liens. Any Lien shall encumber any Collateral other than
-----
TeleCapital's liens; or
6.9 Good Standing. The failure of Borrower or any corporate guarantor
-------------
to remain in good standing in its state of incorporation.
6.10 Changes of Locations or Providers. Any violation of Section 3.3
---------------------------------
or 3.6(b).
6.11 Change in Control. Any change in the ownership, capitalization
-----------------
or organizational structure of Borrower that, in Lender's judgment, results in a
change in control of Borrower.
SECTION 7 - TELECAPITAL'S REMEDIES UPON DEFAULT
-----------------------------------------------
On the occurrence of any Event of Default (after the expiration of any
applicable cure period), and at any later time, TeleCapital may in its
discretion, do any of the following in any order and in any combination:
a. Declare all Obligations to be due and payable immediately and
proceed to enforce payment and exercise any and all of the rights and remedies
provided by the Uniform Commercial Code as well as other rights and remedies
provided to TeleCapital either at law or in equity; and
b. Require Borrower to assemble the Collateral and make it available
to TeleCapital at any place to be designated by TeleCapital that is reasonably
convenient to TeleCapital. TeleCapital will give borrower
-5-
<PAGE>
reasonable notice of the time and place of any public sale or of the time after
which any private sale or any other intended disposition of the Collateral is to
be made. The requirements of reasonable notice shall be met if such notice is
mailed, postage prepaid, to the address of Borrower shown at the beginning of
this Agreement at least ten (10) days before the time of the sale or
disposition. Expenses of retaking, holding, preparing for sale, selling, or the
like, including TeleCapital's reasonable attorneys' fees and legal expenses,
auctioneer's, storage and other charges, shall be satisfied from the proceeds of
any such sale; and
c. As to any Collateral that involves obligations of third parties to
Borrower, including the Intangible Collateral, notify those obligors of the
interest granted to TeleCapital under this Agreement and direct those obligors
to make payments directly to TeleCapital or to any designee; and
d. Exercise all other rights and remedies under any Operative
Documents, or any other agreement to which Borrower is bound; and
e. Apply proceeds of any sale or other disposition of Collateral first
to costs and expenses of sale or collection or any other expense to which it is
entitled under any Operative Documents, and then to payment of any Obligation in
whatever order Bank may elect; and
f. Institute suit directly against Borrower or any other Obligor
without first foreclosing or liquidating any Collateral or without suing any
other Obligor.
SECTION 8 - TELECAPITAL'S EXPENSES
----------------------------------
Should TeleCapital employ counsel for advice or representation
relating to the collection or enforcement of this Agreement after an event of
default (whether or not suit is actually instituted), TeleCapital may collect
from any Obligor all TeleCapital's reasonable expenses and fees including (a)
all reasonable fees and disbursements of TeleCapital's counsel and (b) all
reasonable expenses of, or in anticipation of, litigation. All of those
collection fees and expenses shall be due and payable upon demand, shall bear
interest at the default rate in effect from time to time under this Agreement
and shall deemed to be Obligations secured by all Collateral.
SECTION 9 - PERFORMANCE OF BORROWER'S DUTIES
--------------------------------------------
Should Borrower fail to perform any duty or obligation imposed upon
Borrower under this Agreement or any other Operative Document when due (and any
applicable cure period shall have expired), TeleCapital may, at its option,
perform any such duty or obligation. The expenses incurred by TeleCapital in
performing any of TeleCapital's duties or obligations shall be with interest at
the default rate in effect from time to time under the Agreement, and shall be
secured by this Agreement and by all other Collateral given to secure any
Obligations. Any action take by TeleCapital pursuant to this Section shall not
constitute a waiver of any Event of Default or an undertaking to perform, or
complete, any of Borrower's duties, nor shall it impose any responsibility on
TeleCapital to perform any of Borrower's duties in the future.
SECTION 10 PURCHASE OPTION; BORROWER'S OPTION
---------------------------------------------
10.1 TeleCapital's Purchase Option. TeleCapital shall have the option
-----------------------------
("TeleCapital's Option") to acquire all of Equipment financed, in whole or in
part, by a Loan and all initial Location Agreements relating to that Equipment,
(collectively, "Option property" on the maturity date or the date of any earlier
satisfaction of the Note evidencing that Loan, at an option price of One Dollar
($1.00) if, but only if, Borrower does not exercise the Borrower's option
(defined in Section 10.2). TeleCapital may exercise TeleCapital's Option by
giving Borrower notice of its exercise not later than ten days after the
maturity date or any earlier date of satisfaction of that Note. If TeleCapital's
Option is exercised, on the notice date or the date of maturity or satisfaction,
whichever is later, TeleCapital shall pay Borrower the option price and Borrower
shall assign to TeleCapital good title to, and all of its right, title and
interest in and to, that "Option Property" free and clear of all Liens. In that
event, Borrower shall execute a warranty bill of sale and those other documents
that TeleCapital may require to obtain good and clear title to the "Option
Property" as described above.
10.2 Borrower's Option. So long as no Event of Default has occurred
-----------------
and is continuing, Borrower shall have the option ("Borrower's Option") to
cancel TeleCapital's option at an option price equal to ten percent (10%) of the
Note evidencing the Loan. Borrower may exercise this option at any time on or
prior to the maturity date or the date of any earlier satisfaction of the Note
evidencing that Loan by paying that option price to TeleCapital. Borrower's
payment of that option price shall be in addition to, and not in lieu of, any
interest, principal or other payments due under any Note, this Agreement or any
other Operative Document.
SECTION 11 - DEPOSIT
--------------------
Borrower shall deliver to TeleCapital ______________________________
and 00/100 ($_________.00) (the "Deposit"), representing an amount equal to the
scheduled monthly installments on the Loan that are due on June 15, 2002, and
July 15, 2002, (the "Due Dates"). The Deposit shall be deemed to be part of the
Collateral for the Obligations. So long as no Event of Default has occurred and
is continuing, TeleCapital shall apply the Deposit t the monthly installments on
their respective due dates; otherwise, TeleCapital shall apply the Deposit in
accordance with Section 7(e). TeleCapital shall not be required to segregate the
Deposit from TeleCapital's funds or to pay interest on the deposit.
SECTION 12 - MISCELLANEOUS
--------------------------
12.1 Construction. In this Agreement, unless specified otherwise:
------------
"any" means "any one or more"; "including" means "including without limitation";
"day" means "calendar day," singular words include plural, and vice versa.
Headings are for convenience only, and do not affect the meaning of any
provision; reference to an agreement includes reference to its permitted
supplements, amendments and other modifications; and reference to a person
includes reference to an individual or an entity and to its or their permitted
successors and assigns in the
-6-
<PAGE>
applicable capacity; and titles, headings and subheadings are for organizational
purposes only and neither to add to, nor limit, the meaning of any provision.
12.2 Term. This agreement shall remain in full force and effect until
----
Borrower shall have indefeasibly paid and performed all of the Obligations.
12.3 Notices. All notices, consents, requests, and other
-------
communications under this Agreement shall be in writing and shall be effective:
(a) upon delivery by hand; (b) one day after being deposited with a recognized
overnight delivery service; or (c) three days after being deposited in the
United States mail, first-class, postage prepaid, registered or certified,
return receipt requested, in each case addressed to such party at its address
set forth in the caption of this Agreement (or to such other address as
hereafter may be designated in writing by such party to the other party).
12.4 No Waiver, Remedies Cumulative. No failure or delay by
------------------------------
TeleCapital in exercising any right or remedy hereunder operates as a waiver
thereof. No single or partial exercise of any right or remedy hereunder by
TeleCapital precludes any other or further exercise of any right or remedy
hereunder. Except as expressly provided herein, the exercise of any right or
remedy hereunder does not preclude the simultaneous or later exercise of any
other rights or remedies available at law or in equity.
12.5 Governing Law; Jurisdiction; Service of Process. THE PARTIES
-----------------------------------------------
HEREBY IRREVOCABLY DECLARE AND AGREE AS FOLLOWS: This Agreement shall be
governed by and construed in accordance with the laws of the State of Colorado,
regardless of the conflict of laws principles thereof. Any legal action, suit or
other proceeding arising out of or in any way connected with, this Agreement may
be brought in the courts of the State of Colorado, or in the United States
courts for the District of Colorado. With respect to any such proceeding in any
such court: (a) Each party generally and unconditionally submits itself and its
property to the nonexclusive jurisdiction of such court, (b) Each party waives,
to the fullest extent permitted by law, any objection it has or hereafter may
have to the venue of such proceeding, as well as any claim it has or may have
that such proceeding is in an inconvenient forum, (c) process may be served on a
party anywhere in the world, by the same methods as are required for notice
under this Agreement.
12.6 Successors or assigns; No Third Party Rights. This Agreement is
--------------------------------------------
binding upon and inures to the benefit of the parties and their permitted
successors and assigns. Borrower may not assign any of its rights or obligations
under this Agreement without the prior written consent of TeleCapital, in its
absolute discretion. If TeleCapital (or any assignee of TeleCapital) shall
assign its rights under the Operative Documents, all terms and conditions of the
Operative Documents shall remain in full force and effect and any such assignees
shall succeed to the rights and remedies of TeleCapital. Nothing in this
Agreement confers, or is intended to confer, expressly or by implication, any
rights or remedies upon any person, other than Borrower or TeleCapital (and its
assignees).
12.7 Complete Agreement; Modifications. This Agreement, together with
---------------------------------
the other Operative Documents, constitutes the entire agreement between the
parties with respect to the transaction contemplated hereby and supersedes all
prior agreements and understandings with respect to the subject matter hereof
and thereof. This Agreement may not be amended or modified in any way, nor may
noncompliance with is terms be waived, except pursuant to a written instrument
signed by the party to be charged.
12.8 Severability. Any provision of this Agreement that is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof; any such prohibition or
unenforceability shall not invalidate or render unenforceable such provision in
any other jurisdiction.
12.9 Counterparts. This Agreement may be executed by the parties in
------------
separate counterparts, each of which when so executed and delivered is deemed an
original. All such counterparts together constitute but one and the same
instrument.
SECTION 13 - NO JURY TRIAL
--------------------------
EACH OF BORROWER AND TELECAPITAL HEREBY WAIVES ANY RIGHT TO REQUEST A TRIAL
BY JURY IN ANY LITIGATION WITH RESPECT TO ANY ASPECT OF THIS AGREEMENT OR ANY
OTHER OPERATIVE DOCUMENT AND REPRESENTS THAT IT HAS CONSULTED WITH COUNSEL
SPECIFICALLY WITH RESPECT TO THIS WAIVER.
IN WITNESS WHEREOF, Borrower and TeleCapital have executed this
Agreement as of the date first above written.
BORROWER:
METROPHONE TELECOMMUNICATIONS, INC.
By: /s/
-----------------------------
Name: Amir F. Heshmatpour
Title: President
TELECAPITAL, L.P.
By:
----------------------------
Name: Lawrence Jaeger
Title: Managing Director
-7-
<PAGE>
Loan #: 1058-1-50131
NOTE
$55,000.00
Date: April 14, 1997
Place: Redmond, Washington
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to
the order of TeleCapital, L.P. ("TeleCapital"), a Delaware limited partnership,
at its offices at 2530 S. Parker Road, Suite 500, Aurora, Colorado 80014, or
such other address as TeleCapital shall advise Borrower in writing, on or before
July 15, 2002, ("Maturity Date"), the principal sum of Fifty-five Thousand and
00/100 dollars ($55,000.00 U.S.) together with interest from the date hereof at
the rate of Fourteen and Ninety Hundredths percent (14.90%) per annum, on the
outstanding principal balance, due and payable in Sixty (60) equal consecutive
monthly installments, as described each month thereafter until July 15, 2002,
when all outstanding principal and accrued interest are due and payable in full.
Payments shall be applied first to interest due and the balance shall be applied
to principal. In addition, if any monthly installment is not paid within ten
days of its due date, Borrower agrees to pay a late charge equal to five percent
(5%) of any such overdue monthly installment.
This Note is executed and delivered pursuant to a certain Loan and
Security Agreement dated April 14, 1997, as may be amended ("Loan Agreement")
between TeleCapital and Borrower, is subject to all the terms and provisions
thereof, including, provisions for the prepayment and the acceleration of the
maturity hereof. Capitalized terms in this Note that are defined in the Loan
Agreement and not otherwise defined in this Note shall be defined as in this
Note. This Note is secured by all Collateral including, without limitation, a
security interest in the Equipment Collateral and the security provided for in
the Assignment of Location Agreements and Assignment of OSP Commissions. In
addition, this Note is secured by all other "Collateral" and other security
under any other existing or future loan and security agreement, assignment,
mortgage or other security agreement, assignment, mortgage or other security
agreement given by Borrower [or any guarantor] to secure any indebtedness owing
by Borrower to TeleCapital.
At the option of TeleCapital or any holder of this Note, the whole
unpaid balance of the principal indebtedness, together with all interest thereon
and all other sums due hereunder or otherwise owing by the Borrower to
TeleCapital, shall become immediately due and payable upon the occurrence of any
"Event of Default" (as defined in the Loan Agreement) including, without
limitation, any failure to make any payment under this Note within 10 days of
notice of default or (ii) any breach by Borrower of its obligations under, or
failure to perform any provision of, this Note, the Loan, Agreement, or any
other Operative Document, Commissions or any other existing or future agreement
between the Borrower and TeleCapital or any other holder of this Note, subject
to any cure period in any such agreement.
No delay on the part of TeleCapital in exercising any right or remedy
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any power or right hereunder preclude other or further exercise
thereof or the exercise of any other power or right. All rights and remedies of
TeleCapital whether evidenced hereby or by any other instrument or papers, shall
be cumulative and may be exercised singly or concurrently.
If any term, condition or provision of this Note is determined to be
invalid or unenforceable, such determination shall not affect the validity or
enforceability of any other term, condition or provision of this Note.
Except as provided herein, Borrower hereby waives demand, grace,
presentment, protest, notice of dishonor or nonpayment and notice of the
exercise of any option hereunder, notice of the acceleration of maturity or due
date, and any and all other notices and demands whatsoever.
This Note may be prepaid in whole or in part, without penalty or
premium, from time to time at the option of Borrower, provided that any partial
prepayment shall not relieve Borrower or the obligation to continue making its
regularly scheduled payments or principal and interest hereunder. All
prepayments including payment of the last month's installment required
hereunder, shall be applied first to the payment of interest due and any
remainder shall be applied to the principal balance.
The obligations of Borrower hereunder are absolute and unconditional
and are not subject to setoff or delay for any reason or for any cause
whatsoever.
The obligations of Borrower hereunder shall bind Borrower and its
successors and assigns, and shall accrue to the benefit of TeleCapital or any
holder of this Note and their respective successors and assigns.
Borrower agrees to pay in addition to all other sums due and payable
hereunder all costs and expenses, including attorneys fees, incurred by
TeleCapital in enforcing this Note and the collection of all amounts due
hereunder.
This Note shall be construed and enforced in accordance with the laws
of the State of Colorado without regard to principles of conflicts of laws.
Borrower consents to the jurisdiction of the federal and state courts located in
Colorado, and consents to service of process by regular mail at borrower's
address specified below.
BORROWER HEREBY WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
PROCEEDING RELATING TO THIS NOTE AND REPRESENTS THAT IT HAS HAD THE OPPORTUNITY
TO CONSULT WITH COUNSEL AS TO, AND TO CAREFULLY CONSIDER, THIS WAIVER. BY
ACCEPTING THIS NOTE, TELECAPITAL ALSO WAIVES ITS RIGHT TO REQUEST A TRIAL BY
JURY.
<PAGE>
IN WITNESS WHEREOF, Borrower has duly executed this Note as of the
date first above written.
BORROWER:
METROPHONE TELECOMMUNICATIONS, INC.
By:
----------------------------
Name: Amir F. Heshmatpour
Title: President
BORROWER'S ACKNOWLEDGEMENT
STATE OF
COUNTY OF
On this ___ day of __________, 19__, the undersigned officer, Amir F.
Heshmatpour, personally appeared before me, who acknowledged himself to be the
President of METROPHONE TELECOMMUNICATIONS, INC., the Borrower named in this
Agreement and that he, as such officer, being duly authorized to do so, executed
the foregoing instrument for the purposes therein contained by signing the name
of said Corporation as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal
--------------------------------
Notary Public
MY COMMISSION EXPIRES:
-2-
<PAGE>
EXHIBIT 10.12
TELECAPITAL
Over 500 million ways to help grow your business
November 11, 1997
Mr. Amir Heshmatpour
Metophone Telecommunications, Inc.
13820 NE 65th St. Suite 538
Redmond, WA 98052
Dear Mr. Heshmatpour,
TeleCapital has been reviewing your request to finance the installation of
payphones for the RV park project. We have an interest in financing this
project. Based on our preliminary review we could provide a conditional
commitment up to $1,500,000. As you are aware there are several variables in
financing the payphone industry and therefore, firm commitments are
impossible.
The general terms and conditions of the conditional commitment are as follows:
Line of Credit: Up to $1,500,000
Term: Up to five years but not to exceed term of
the site location contract.
Advance Rate: The per phone advance rate will be equal to
actual cost of the equipment including installation.
Interest Rate: Fixed rated set at the time of each funding.
Security Deposit: In the amount of two (2) loan payments. This
deposit will be applied to the two last loan payments
due on each loan/note.
Guaranty: Personal guaranty of Amir Heshmatpour
Other Conditions: 1. Review of each site location contract.
2. Per phone revenues equal to or exceeding
the amount projected
3. Operating expenses equal to or less than
the amount projected.
4. First security interest in and an assignment of
all contracts and revenues. First security
interest in all equipment.
3010 LBJ Freeway (972) 247 7139 phone
Suite 930 (972) 247-7901 facsimile
Dallas, Texas 75234 (800) 695-3195 toll-free
<PAGE>
It is my understanding that you will enter into separate contracts with each
RV park. Therefore, each contract would be subject to our review and approval.
We have some concerns regarding the seasonality in certain locations. With each
contract we would need to consider the seasonality as it may relate to the
repayment schedule on your loan.
With the additional equity capital, this should allow you to install phones
and provide us some revenue history on locations prior to funding. We will need
to review this revenue information and our funding would be conditioned upon
actual revenue equaling the per phone revenue you forecast in your projections.
(As stated above.)
We appreciate the opportunity to be a part of this project. Once you have the
equity capital committed please provide us copies of that transaction and the
shareholder breakdown. With that information we can go forward with a final
credit approval up to $1,500,000 as conditioned herein.
Sincerely,
/s/ David R. Harvey
-------------------
David R. Harvey
President
<PAGE>
EXHIBIT 10.13
AT&T INDEPENDENT PRIVATE PAYPHONE
OWNER COMMISSION AGREEMENT
This Agreement is entered into between AT&T Corporation. (hereinafter
"AT&T") and Metro Phone Telecommunications, Inc. an independent private payphone
owner (hereinafter "IPP Provider"), with offices at 2020-124 Ave. NE Suite C-103
Bellevue WA 98005.
WHEREAS, AT&T desires to promote public telephone calling convenience for
its customers who wish to make telephone calling card calls and other types of
operator assisted calls while they are away from their homes and offices; and
WHEREAS, IPP Provider operates pay telephone stations which enable end user
customers to place telephone calls while they are away from their homes and
offices and is desirous of making the AT&T network accessible to those
customers.
NOW, THEREFORE, in consideration of the mutual benefits accruing to each
party, the parties hereby covenant and agree as follows:
1.0 DEFINITIONS
-----------
1.1 "Sent Paid Calls" - means coin, Smart Card and prepaid debit card calls
made from IPP Provider Telephones.
1.2 "Non-Sent Paid Calls" - means collect calls, calls billed to a third
telephone number and calls billed to telephone calling cards or major credit
cards.
1.3 "AT&T Undesignated Non-Sent Paid Calls" - means Non-Sent Paid Calls
(excluding all 700, 800, 888, 900 and any derivative thereof, and Directory
Assistance calls), handled through AT&T's Operator Services Positioning Systems
("OSPS") and carried on the AT&T network without using an 800 access code such
as 800 OPERATOR, 800 CALL ATT and 800 321-0288.
1.4 "AT&T Revenues" - means billed revenues for AT&T Undesignated Non-Sent Paid
Calls originated from IPP Provider Telephones. AT&T Revenues for IPP Provider
Telephones located in areas where tracking of AT&T Undesignated Non-Sent Paid
Calls is not available shall be calculated pursuant to the Commission Payment
Plus set forth in Attachment B hereto.
1.5 "Telephone(s)" - means IPP Provider coin or coinless pay telephone stations
at the National Association of R.V. Parks and Campgrounds ("ARVC") locations
listed in Attachment A/C that meet all of the requirements set forth in Section
3 hereto.
1.6 Attachment A/C - provides payee information, address(es) at which the
Telephone(s) are located ("Location"), and the line numbers for Telephones which
are routing all undesignated interLATA and/or intraLATA Non-Sent Paid Calls to
the AT&T network.
1.7 Attachment B - states the commission payment plan and rate schedule for IPP
Provider Telephone(s).
1.8 LEC - means any company that is tariffed to provide local exchange service.
1.9 Access Line - means any approved public Telephone tariffed access line.
2.0 IPP PROVIDER
------------
2.1 IPP Provider represents and warrants that it is authorized to operate each
of the Telephones listed on Attachment A/C, that it owns more than a 50% asset
or equity interest in the Telephones that are included on Attachment A/C, and
that such Telephones are not owned or controlled by others. IPP Provider
further represents and warrant that it complies and will continue to comply with
all state and federal regulatory requirements relating to the operation of such
Telephones.
2.2 IPP Provider represents and warrants that it is authorized to choose the
operator services provider for each Telephone.
<PAGE>
2.3 IPP Provider represents and warrants that it shall be responsible for the
acquisition, installation, maintenance and coin collection for the Telephones
listed in Attachment A/C; for the payment of all Local Exchange Company (LEC)
access line and usage charges; and for the handling of the refunds of Sent Paid
Calls associated with the operation of such Telephones.
2.4 Each Telephone shall be connected to an Access Line as provisioned under
tariff by the serving Local Exchange Company.
2.5 All Undesignated Non-Sent Paid interLATA calls from the Telephones shall be
handled through AT&T's ("OSPS") and carried on the AT&T network. Nothing in this
Agreement shall affect IPP Provider's right to arrange for the provision of
Sent-Paid calls from the Telephones, however, IPP Provider shall not utilize any
manual or mechanical procedure to (a) divert undesignated Non-Sent Paid calls to
any other carrier; (b) convert such calls into Sent-Paid ("1+) calls; or (c)
convert AT&T designated Non-Sent Paid Calls to any other call type.
2.6 Each Telephone shall have call screening capability (where available from
the LEC) to identify the Telephone to operators as a privately owned public
telephone.
2.7 IPP provider shall make all necessary arrangements so that each Telephone
allows access to the 800, 950, and 10XXX access code numbers of other providers
of operator services, as required by the Telephone Operator Consumer Services
Improvement Act of 1990, the Federal Communications Commission, or any
applicable state law or regulation.
2.8 IPP Provider shall provide dialing instructions at or near each Telephone
which will inform callers how to make AT&T Undesignated Non-Sent Paid Calls from
such Telephones.
2.9 In jurisdictions where AT&T is certified to provide intraLATA and/or local
service for Non-Sent Paid Calls, each Telephone will permit access to the
"10288" dialing code to enable end users to place intraLATA AT&T calls.
2.10 At such time as AT&T has regulatory authority to handle undesignated
intraLATA and/or local Non-Sent Paid Calls through AT&T's OSPS and to carry such
calls on the AT&T network, IPP Provider shall send traffic to AT&T. IPP Provider
shall cause all undesignated intraLATA and/or local Non-Sent Paid Calls to be
routed to AT&T's OSPS for carriage on the AT&T Network. IPP Provider shall
notify AT&T by completing an Attachment A/C to indicate those Telephones that
are routing all undesignated intraLATA and/or local Non-Sent Paid Calls so the
AT&T network. This provision shall not apply to Telephones: (i) covered by a
binding contractual commitment requiring such undesignated intraLATA and/or
local Non-Sent Paid Calls to be delivered to another carrier until such
commitment expires or can be terminate without a breach of contract or payment
of termination charges; or (ii) if such routing of calls to AT&T violates a
state or federal law or regulation.
2.11 IPP Provider shall be the customer of record for all Telephones covered by
this Agreement. AT&T shall not be required to pay commissions relating to any
Telephone unless IPP Provider, upon request from AT&T, has provided AT&T with
the appropriate LEC bill or LEC Letter of Verification indicating that IPP
Provider is the customer of record for such pay telephone station ("verification
information") within thirty (30) days of AT&T's request.
2.12 IPP Provider will provide AT&T or its designee with reasonable access to
the Telephones for the purpose of observing and making test calls from such
Telephones.
2.13 IPP Provider may, in its sole discretion, disconnect any Telephone line
covered by this Agreement. IPP Provider shall provide AT&T with thirty (30)
days' notice of a disconnected Telephone line.
2.14 Attachment A/C may be modified pursuant to the mutual consent of the
parties during the term of this Agreement, except that, AT&T, in its sole
discretion, reserves the right to refuse a Location and/or Telephone by not
accepting a modification to Attachment A/C.
3.0 AT&T
----
3.1 AT&T will pay IPP Provider a commission on revenues from AT&T Undesignated
Non-Sent Paid Calls generated by Telephones which meet all of the requirements
set forth herein. Commissions shall be calculated and paid as set forth in
Attachment B. No commission shall be due from AT&T for AT&T Undesignated Non-
Sent Paid Calls on any Telephone for any period that the Telephone fails to meet
all of the requirements set forth herein, including (but not limited to) the
access
<PAGE>
requirements of the Telephone Operator Consumer Services improvement Act of
1990. No commissions shall be paid on revenues from AT&T undesignated Non-Sent
Paid interLATA and/or intraLATA calls placed by user dialing as AT&T access code
number (e.g., 10288) unless all undesignated Non-Sent Paid interLATA and/or
intraLATA calls from the Telephone are being routed to the AT&T network and such
Telephone appears on Attachment A/C together with a complete full address of the
physical location of each telephone.
3.2 AT&T, in its sole discretion, reserves the right to: (i) refuse to add (ii)
remove a Location and/or Telephone from this Agreement, (iii) delete any
Telephone which does not generate any "0+" AT&T Revenue for a period of ninety
(90) days, or fails to meet all of the requirements set forth herein. AT&T shall
pay applicable commissions through the date of removal.
3.3 AT&T shall have the right to randomly sample and conduct physical
compliance audits of the Telephones subject to this Agreement. To be "in-
compliance", a Telephone must meet all the requirements set forth in Section 3.0
above in addition to all other provisions contained in this Agreement. AT&T may,
in its sole discretion, suspend and cease paying commissions on any non-
compliant Telephone(s) and remove such Telephones from this Agreement. At the
time of suspension. AT&T shall provide the IPP Provider with a written summary
of the reasons for each Telephone's non-compliance. IPP Provider may bring a
non-complying telephone into compliance and request AT&T to re-instate the
telephone under the terms of this Agreement. AT&T may, in its sole discretion,
re-instate the Telephone; however, AT&T will not begin paying commissions for
that Telephone until the next full commission cycle, even if a Telephone is
reinstated during a commission cycle.
4.0 TERM AND TERMINATION
--------------------
4.1 This Agreement will begin as of the 16th day of the month after it is
signed by both parties and shall continue for a period of three (3) years
("Initial Term").
4.2 Notwithstanding Section 4.1 above, AT&T reserves the right to terminate
this Agreement immediately, by written notice to IPP Provider, if AT&T
determines, in its sole discretion, that AT&T's tariffed services may be
adversely affected under this Agreement. Both parties reserve the right to
terminate this Agreement if either determines that this Agreement may adversely
affect its public image or damage its reputation or goodwill.
4.3 Either party may terminate this Agreement with respect to any or all
Telephones or Locations listed in Attachment A/C by sending written notice to
the other party if the Federal Communications Commission, a State Public
Utilities Commission or a court of competent jurisdiction issues an order or
ruling which contains terms or conditions which materially and adversely affect
this Agreement, its profitability to either party, or either party's ability to
perform its responsibilities as set forth herein. Such termination shall not
give rise to any claims for damages; provided, however, that each party shall
comply with its obligations hereunder up to the date of termination.
5.0 SIGNAGE AND TRADEMARKS
----------------------
5.1 IPP Provider shall post on or near each Telephone, in plain view of
consumers, a notice identifying AT&T as the provider of operator services for
such Telephone, together with all other information required to be provided
under any applicable federal or state law or regulation and the Telephone
Operator Consumer Services Improvement Act of 1990.
5.1.1 IPP Provider agrees that AT&T is the only "0+" InterLATA company
whose name and/or logo shall appear on the Telephones and enclosures;
5.1.2 IPP Provider agrees that if AT&T provides signage, such signage
shall remain the property of AT&T and IPP Provider will remove and return such
signage to AT&T upon the deletion of any Telephone(s) from this Agreement during
its Term or upon termination of this Agreement; and
5.1.3 IPP Provider shall not have the right to use any trademark, name,
trade name, service mark or logo which AT&T may use or have the right to use, or
any marks, names or logos confusingly similar thereto in its promotional,
advertising or other efforts in reference to activities undertaking under this
Agreement without review and written approval by AT&T prior to publication and
use thereof. Such review process shall take no longer than thirty (30) days, at
which time AT&T will notify IPP Provider whether or not approval will be given.
<PAGE>
6.0 INDEMNIFICATION
---------------
6.1 Both parties shall indemnify and hold the other harmless against any loss,
cost, claim, injury, expense or liability, including reasonable attorney's fees
resulting from any breach of the warranties set forth in this Agreement.
6.2 IPP Provider shall indemnify and hold AT&T harmless against any loss, cost,
claim, injury, expense or liability, including reasonable attorney's fees
resulting from any claim by any third party for injury to person or property
arising out of IPP Provider's ownership or operation of the Telephones and
associated equipment, except insofar as such injury is exclusively the result of
the negligence of AT&T or its agents and any claim against AT&T by any third
party for commissions reletting to the Telephones.
7.0 LIMITATION OF LIABILITY
-----------------------
7.1 Except in cases involving willful and/or wanton conduct, AT&T's liability
to IPP Provider under this Agreement shall be limited to its obligations to pay
commissions as set forth in Section 3.0 above and its obligations pursuant to
applicable tariffs.
7.2 NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS OR DAMAGE OF ANY KIND, INCLUDING LOST
PROFITS (WHETHER OR NOT EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
LOSS OR DAMAGE), BY REASON OF ANY ACT OR OMISSION IN ITS PERFORMANCE UNDER THIS
AGREEMENT.
8.0 ASSIGNMENT
----------
8.1 Any assignment by IPP Provider of any right, obligation or duty, in whole
or in part, or of any other interest hereunder, shall be void. All obligations
and duties of either party under this Agreement shall be binding on all
successors in interest or assigns of such party.
9.0 INSOLVENCY
----------
9.1 AT&T shall have the right immediately to terminate this Agreement if IPP
Provider commences any proceeding under Chapters 7 or 11 of the United States
Bankruptcy Code or any other proceeding seeking relief from creditors or the
reorganization of composition of debts or the liquidation and distribution of
assets, including by not limited to, any assignment for the benefit of creditors
or the making of a proposal for the composition of debts. AT&T shall also have
the right immediately to terminate this Agreement if any third party commences a
proceeding against IPP Provider of the nature described above, and such
proceeding shall not have been dismissed within sixty (60) days of the
commencement of such proceeding.
10.0 PROPRIETARY INFORMATION
-----------------------
10.1 The parties expressly agree that all information, including, without
limitation, lists of customer names, addresses and usage data, relating to AT&T
Undesignated Non-Sent Paid Calls remains the property of AT&T and must be kept
confidential by the IPP Provider.
10.2 Other information deemed to be proprietary which is provided by one party
to the other in connection with this Agreement shall be marked in a manner to
indicate that it is considered proprietary or otherwise subject to limited
distribution. If such information is provided orally, the disclosing party shall
clearly identify it as proprietary at the time of disclosure and reduce such
information to tangible form within ten (10) business days in which case such
information shall be subject to the restrictions set forth in Section 10 herein.
10.3 With respect to the proprietary information defined in Sections 10.1 and
10.2 above, the party receiving such information shall hold the information in
confidence and protect it with at least the same degree of care it normally
exercises to protect its own proprietary information of a similar nature;
restrict disclosure of such information to its employees or agents with a need
to know and not disclose it to any other parties; advise those employees and
agents of their obligations with respect to such information; and use such
information only for the purposes of this Agreement.
<PAGE>
10.4 The party receiving such information shall have no obligation to preserve
the proprietary nature of any information which: was previously known to it free
of any obligation to keep it confidential; is disclosed to third parties by the
other party without any restriction; is or becomes available to the public other
than by unauthorized disclosure; or is independently developed by it.
10.5 This Section 10 and the confidentiality obligations imposed hereunder
shall survive and remain in effect notwithstanding the termination of this
Agreement.
11.0 NOTICES
-------
11.1 All notices which may be given by any party to the other party shall be in
writing and shall be deemed to have been duly given on the date delivered in
person or deposited, postage prepaid, in the United States mail via Certified
Mail or overnight courier, return receipt requested. If personal delivery is
selection as the method of giving notice under this Section, a receipt of such
delivery shall be obtained.
11.2 The address to which notices are to be given by either party are as
follows, which may be changed by written notice given by such party to the other
party pursuant to this Section.
IPP Provider: Metrophone Telecommunication, Inc. To AT&T:
2020-124 Ave NE Suite C-103 ______________________
Bellevue WA 98005 ______________________
Attention: Amir Heshmatpour Attention: ___________
12.0 FORCE MAJEURE
-------------
12.1 Either party's delay in, or failure of, performance under this Agreement
shall be excused where such delay or failure is caused by an act of God, fire
or other catastrophe, work stoppage, delays or failure to act of any carrier or
great or any other cause beyond a party's direct control.
13.0 NO WAIVER
---------
13.1 The failure of either at any time to enforce any right or remedy available
to it under this Agreement with respect to any breach or failure by the other
party shall not be construed to be a waiver of such right or remedy with respect
to any other breach or failure by the other party.
14.0 NO THIRD PARTY BENEFICIARIES
----------------------------
14.1 This Agreement shall not provide any person not a party to this Agreement
with any remedy, claim, liability, reimbursement, commission, cause of action or
other right in excess of those existing without reference to this Agreement.
15.0 INDEPENDENT CONTRACTOR
----------------------
15.1 It is expressly understood and acknowledged that the parties are entering
into this Agreement as independent contractors and that this Agreement is not
intended to create, nor shall it be construed as creating, any type of
partnership, joint venture or franchise relationship between AT&T and IPP
Provider.
16.0 GOVERNING LAW
-------------
16.1 This Agreement shall be governed by and interpreted in accordance with the
domestic laws of the State of New York. The parties agree to be subject to the
jurisdiction of the Courts of the State of Washington.
17.0 SEVERABILITY
------------
17.1 If any provision of this Agreement is held invalid, unenforceable or void,
the remainder of the Agreement shall not be affected thereby and shall continue
in full force and effect.
<PAGE>
18.0 ENTIRE AGREEMENT: AMENDMENTS
----------------------------
18.1 This Agreement and any Attachments appended hereto constitute the entire
understanding between the parties and supersedes all prior understandings, oral
or written representations, statements, negotiations, proposals and undertakings
with respect to the subject matter hereof.
18.2 No amendment to this Agreement shall be valid except as it is in writing,
refers specifically to this Agreement, recites that it is an amendment thereto,
and is subscribed to by authorized representatives of the parties. Attachment
A/C may be modified by Agent requesting and AT&T agreeing to and acknowledging
such modification.
19.0 HEADINGS
--------
19.1 The headings in this Agreement are included for convenience only and shall
not be construed to define or limit any of the provisions contained herein.
IN WITNESS WHEREOF, the parties have set their hands as of the day and year
first above written, acting through their authorized representatives.
METRO-PHONE TELECOMMUNICATIONS, INC. AT&T COMMUNICATIONS, INC.
/s/ Amir Heshmatpour /s/ Ronald B. White
___________________________________ _________________________________________
Authorized Signature Authorized Signature
Amir Heshmatpour Ronald B. White
___________________________________ _________________________________________
Typed or Printed Name Typed or Printed Name
Pres & CEO Sales Manager
___________________________________ _________________________________________
Title Title
3-4-1998 3/16/98
___________________________________ _________________________________________
Date Date
91-1647294
_______________________________________
Federal Tax ID#
<PAGE>
EXHIBIT 10.14
ARVC
CONTRACT FOR TELEPHONE SERVICES
This Contract ("Contract") dated as of November 1, 1997, sets forth the
understanding of METROPHONE TELECOMMUNICATIONS INCORPORATED ("Metrophone") and
NATIONAL ASSOCIATION OF RV PARKS AND CAMPGROUNDS ("ARVC") for telephone
services as described in this Contract to be delivered by Metrophone to ARVC
and its Members. Together Metrophone and ARVC are sometimes referred to as the
"Parties."
1. EXCLUSIVE CONTRACT. ARVC agrees that Metrophone Telecommunications, Inc.
------------------
("Metrophone") shall have the exclusive right to provide "Telephone
Services" (as defined below) to ARVC and have the exclusive marketing
support of ARVC to enter into Telephone Service Contracts with its Members
("Members") for a period of five years. The form of Member Telephone
Service Contracts to be offered by Metrophone and supported by ARVC is
attached and incorporated as Exhibit A to this Contract (the "Members
Contract"). Provision of Telephone Services shall begin on the effective
date of this Contract, except as otherwise specified. ARVC shall use its
best efforts (as defined in paragraph 4(d) below) to market Telephone
Services from Metrophone to its Members at all of their approximately
3,500 sites, including new sites. ARVC shall not contract with, or
promote, any other provider of Telephone Services to its Members during
the term of this Contract, or allow any other provider of Telephone
Services to use the ARVC name, membership lists, logos, etc.
For purposes of this Contract, Telephone Services shall mean:
(a) Pay telephones, including coin operated, coinless, table top, and
cordless, as applicable and appropriate to the particular sites.
(b) Business exchange access lines for voice, fax, and data, when
competitive local exchange service is available and offered by
Metrophone in the Members' geographic locations;
(c) Presubscribed (1+) and toll free "800" long distance telephone
service and international service to Canada, Mexico, and other
countries where technically and economically feasible; and
(d) Presubscribed operator services, calling cards, and credit cards,
except for such services provided under the contract between ARVC and
AT&T Communications, Inc., dated August 1994 as amended August 25,
1997 ("AT&T Contract") for the initial term of such contract as it
existed on August 25, 1997.
-1-
<PAGE>
2. BONUS PAYMENTS. Metrophone shall make bonus payments to ARVC as follows:
---------------
(a) Upon the expiration of the AT&T Contract and provided there shall be no
new contract signed by ARVC with any party which will impinge on
Metrophone's exclusive rights described in paragraph 3(a), Metrophone shall
pay to ARVC a $140,000 signing bonus in two equal installments of $70,000
each. The second $70,000 installment shall be paid six months from the
date of the first payment. This is strictly a signing bonus and is in
addition to any commissions earned through the operation of the program.
3. METROPHONE RESPONSIBILITIES.
----------------------------
(a) Metrophone shall provide appropriate pay telephone equipment and enclosures
and directories ("Installed Telephones") at all locations for Members who
execute the Members Contract where they are reasonably cost justified. For
purposes of this Contract a location is "reasonably cost justified" if the
rolling 12 month average for at least one telephone is $200 per month.
(This minimum revenue shall be adjusted from time to time according to the
U. S. Department of Labor all cities cost of living index). If the rolling
12 month average for at least one telephone is $100 per month, Metrophone
will install the payphone, but no commissions shall be payable to ARVC or
the Member. If the rolling 12 month average is less than $100 per month,
Metrophone agrees to negotiate in good faith with the Member for an
appropriate subsidy for the Member to make some payment to support the
economics of maintaining the payphone. Installation of payphones under
this Contract shall take place on dates mutually agreed between Metrophone
and the Member, as the case may be.
Metrophone shall use Protel or equivalent equipment for Installed
Telephones. The initial long distance carriers for non-sent paid 0+ and 0-
calls (i.e., calls for which the callers do not dial an access code) for
the Payphones will be AT&T or USLD, LCI, LDDS. Rates for such calls will be
at the carriers' applicable operator-assisted rates plus a surcharge ("PIF"
or property imposed fee) of up to $1.00 per call. Metrophone has no control
over rates when callers dial an access code to reach their preferred
carrier (e.g. 1-800, 950-xxxx, or 10xxx calls). Metrophone may use its
reasonable discretion in consultation with ARVC to select alternative long
distance carriers depending on market conditions from time to time.
(b) Metrophone shall be responsible for providing or contracting at its expense
for installation and service of the Installed Telephones, providing or
contracting for local, long distance, and operator service, and repairing
or replacing Installed Telephones as reasonably required. Metrophone will
continue to monitor changes in the telecommunications industry and provide
appropriate state of the art equipment and service through the term of this
Contract.
-2-
<PAGE>
(c) Metrophone shall pay all local exchange and long distance charges and all
related taxes and charges on the lines serving the Installed Telephones
(this applies only to payphones). Operator-assisted charges will be the
responsibility of the billed party.
(d) Metrophone shall pay commissions on payphone revenues for Installed
Telephones under Member Contracts (calculated as set forth below) as
follows:
20% to the ARVC Member operating the location of each Installed Telephone.
5% to ARVC.
On the fifth anniversary of this Contract, the commission rates set forth above
shall be adjusted to reflect the then current rate. If the parties fail to
agree, either one may institute binding arbitration to determine the appropriate
rate.
The foregoing commission percentages shall be calculated based on the gross
revenue received from each telephone from coins collected for sent paid local
and toll calls, commission, payments received from the presubscribed operator
service provider, dial-around compensation payments received from non-
presubscribed carriers and operator service providers, less all federal, state,
and local taxes on Telephone Services and local exchange and long distance
charges and the local access line charge and all related taxes and charges
incurred on the payphone lines.
(e) Metrophone shall be responsible for marketing Telephone Services under the
Contract.
(f) Metrophone shall pay to ARVC (in addition to five percent of the payphone
revenues as defined above) a five percent commission on the 1+ and 800
revenues earned by Metrophone from 1+ and 800 carriers.
(g) At the end of the term of the Contract, in the event Metrophone is
continuing to earn revenues from Telephone Services provided to ARVC
Members, Metrophone shall continue to make commission payments on payphone
revenues and 1+ and 800 revenues at the same rates, and on the same terms
and conditions, as the Contract, for so long as Metrophone shall continue
to receive such revenues.
(h) Metrophone shall offer Members uniform Members Contract terms for
comparable facilities, except that Metrophone may exercise reasonable
judgment to make modifications necessary to meet competition.
(i) Metrophone represents and warrants that it is capable of installing
Installed Telephones anywhere in the continental United States, including
Alaska.
-3-
<PAGE>
4. ARVC AND ARVC MEMBERS' RESPONSIBILITIES.
---------------------------------------
(a) ARVC Members' responsibilities shall be as set forth in the Members
Contract.
(b) ARVC shall be responsible to pay to Metrophone or the carrier
selected by Metrophone any local exchange, operator-assisted, and
long distance charges and all related taxes and charges incurred by
the ARVC on its lines. Any charges incurred under this section may be
offset against sums due to ARVC.
(c) ARVC shall use its best efforts to promote and market Metrophone's
Telephone Services to its Members. Advertising in ARVC publications
or elsewhere is the responsibility of Metrophone. ARVC will provide
endorsements, letters of recommendation, complimentary membership,
permission to use the ARVC logo and name (upon approval of specific
uses), inclusion of Metrophone in all ARVC membership benefit
literature, referrals, opportunities to provide seminars and workshops
on communication programs and techniques, opportunities to author
articles, and preferential ad placement in publications under ARVC
control.
Metrophone will pay for advertising, exhibit booth space and related
travel and promotional expenses, and all other commercial
promotional and advertising opportunities.
Metrophone understands that ARVC cannot exclude other commercial
companies from purchasing advertising, show exhibit space or other
opportunities made available to vendors marketing goods and services
to the RV park and campground industry.
5. RATES. Rates for domestic long distance service provided by Metrophone to
-----
ARVC Members shall be $.08 to $.11 per minute. Rates for local exchange
service, when provided by Metrophone to ARVC or an ARVC Member, are to
be determined, but shall be below the rates charged by the incumbent
local exchange company for the like kind of service. International rates
and operator service rates shall be equal to or lower than AT&T's basic
rates for comparable services.
6. TERM. This Contract shall become effective for a primary term of five
----
years, beginning November 20, 1997, and shall continue in effect
thereafter for an additional five years unless canceled by either Party
hereto having given at least one hundred and eighty (180) days advance
written notice of its intention to cancel or terminate this Contract at
the conclusion of the primary term.
7. TERMS AND CONDITIONS.
--------------------
7.1 NOTICES. Notices under this Contract shall be sent to:
-------
-4-
<PAGE>
(a) ARVC
Address: 8605 Westwood Center Drive, Suite 201
Vienna, VA 22182-2231
Telephone: (703) 734-3000
Facsimile: (703) 734-3004
(b) Metrophone
Address: 13820 NE 65th, Suite 538
Redmond, WA 98052
Telephone: (425) 869-7551
Facsimile: (425) 869-7710
7.2 BILLS. ARVC's monthly bills for Telephone Services shall be rendered by
-----
the applicable carrier on such carrier's normal billing cycle. All bills
for Telephone Services delivered hereunder are due and payable in
accordance with the applicable carrier's tariff or established practices.
Payphone and 1+ commissions earned by ARVC starting from November 20,
1997, will be paid on a monthly basis, except that the first payment for
each payphone shall be made approximately 90 days following installation
due to cash flow issues in connection with the installation. Metrophone
will remit compensation on dial-around revenues when it receives payment
from the carrier.
7.3 PAYPHONE COINS. Amounts received by an Installed Telephone shall be
--------------
deemed to be the amount shown by the computer records for such payphone.
Risk of loss or shrinkage of actual coins collected on Payphones located
on ARVC premises shall be on ARVC.
7.4 STATEMENT OF COMMISSIONS. Metrophone shall render commission statements
------------------------
on a quarterly basis. ARVC shall have ninety (90) days from the date of
the commission statement to seek correction, or otherwise challenge the
commission statement. After expiration of this period, the parties
expressly agree that any challenges to the statement are waived.
7.5 TARIFFS. The parties recognize that Metrophone is providing telephone
-------
services subject to regulation by state and federal authorities depending
on the jurisdiction of ARVC's phones. To the extent that any provisions
of this contract are inconsistent with the terms of any current or future
applicable tariff, price list, or other regulatory requirement, the
parties agree that the provisions of the applicable tariff, price list,
or other regulatory requirement shall control.
-5-
<PAGE>
8. INDEPENDENT CONTRACTORS. Nothing herein shall be construed as creating or
-----------------------
having created a partnership or joint venture between the Parties hereto
and neither Party shall have the power to bind or obligate the other to
an agreement with a third party.
9. SUCCESSORS AND ASSIGNS. Any company which shall succeed by purchase,
----------------------
merger, consolidation, or otherwise to the business, substantially as an
entirety, of either Metrophone or ARVC, as the case may be, shall be
entitled to the rights and shall be subject to the obligations of its
predecessor under this Contract. Otherwise no assignment of this Contract
or any of the rights or obligations hereunder shall be made unless there
first shall have been obtained the written consent thereto of ARVC in the
event of an assignment by Metrophone, or the written consent thereto of
Metrophone in the event of an assignment by ARVC, which consents will not
be unreasonably withheld.
10. MODIFICATION. No modification of the terms and provisions of this
------------
Contract shall be made except by the execution of written amendments
executed by authorized representatives of ARVC and Metrophone.
11. SEVERABILITY. If any provision hereof shall be found to be inoperative or
------------
in violation of any applicable law, regulation, tariff or price list,
only that provision shall be deleted from this Contract, and the
remainder of this Contract shall not be affected.
12. LAW GOVERNING VENUE. Except for federal, state, and local laws and rules
-------------------
regulating telecommunications services, the laws of the Commonwealth of
Virginia shall govern this Contract and the rights and the obligations of
the Parties hereunder, and in the event of any action brought hereunder,
venue shall be proper in the County of Fairfax, Commonwealth of Virginia.
13. ATTORNEY'S FEES. In the event it becomes necessary for either Party to
---------------
obtain the services of an attorney for the purposes of collection,
interpretation, or enforcement of any of the provisions of this Contract,
the prevailing Party shall be entitled to reimbursement of all reasonable
attorney's fees and collection costs as the arbitrator, the trial judge
or the appellate court may judge reasonable in the arbitration, the action
and the appeal, if any, along with statutory costs, disbursements, and
applicable interest.
14. CONFIDENTIALITY. The Parties agree that the terms of this Contract and
---------------
any resulting transaction shall be kept strictly confidential, except to
the extent required by applicable law, and except to the extent either
Party is required to disclose pertinent information concerning this
Contract to regulatory agencies, lenders or underwriters within the
normal course of business. If either Party makes such disclosure, it
shall advise the lenders or underwriters that the information disclosed
is strictly confidential.
15. FORCE MAJEURE
-------------
15.1 Provided that notice is given to the other Party, a Party shall not
be considered to be in default under this Contract, and its
obligations hereunder shall be
-6-
<PAGE>
suspended (except for any obligation to pay a money obligation to
the other) in the event and for as long as such Party is prevented
from fulfilling its obligations by reason of Force Majeure.
15.2 The term "Force Majeure" shall be deemed for the purposes of this
Contract to mean any cause or condition beyond a Party's reasonable
diligence, including but not limited, to storm, tornado, landslide,
washout, flood, lightning, earthquake, volcano, fire, explosion, act
of God, civil disturbance, strike, lockout, national emergency,
restraint by court or public authority, failure to act or delay in
acting of civil, military or governmental or regulatory authority,
or a change in law or regulation with which either Party subject to
such change cannot reasonably comply. No Party shall be required to
accede or agree to any provisions not satisfactory to it in order to
settle or terminate a strike or other labor disturbance.
15.3 The Party claiming Force Majeure shall exercise reasonable diligence
to remove any disability to its performance cause by such Force
Majeure with reasonable promptness and dispatch. In the event that
the Party claiming Force Majeure may partially carry out such
obligations, then such obligations of the Party claiming Force
Majeure shall be partially suspended, such partial suspension to be
commensurate with the reduction in the ability of the Party claiming
Force Majeure to carry out its obligations hereunder.
16. ARBITRATION. Any dispute or claim arising out of this Contract shall be
-----------
settled by arbitration. Arbitration proceedings shall be commenced by the
delivery by either Party to the other of written notice demanding
arbitration. The matter shall be submitted to such disinterested
arbitrator as shall be agreed upon by the Parties. The arbitrator shall
determine the rules to govern the arbitration proceeding. In the event
the Parties are unable to agree upon an arbitrator within ten (10)
calendar days of the date a notice requesting arbitration is delivered,
then binding non-appealable arbitration shall be conducted by Judicial
Arbitration Mediation & Services, Inc. ("JAMS"), Washington, D.C., for a
reasoned award with provision for filing the award under applicable state
law. The controversy or claim shall be decided by a single arbitrator.
The Parties may agree on an arbitrator from the JAMS panel. If they are
unable to agree within 10 days, JAMS shall provide a list of three
available panelists to the Parties, and each Party shall within 10 days
of receipt of such list be entitled to strike one arbitrator from the
list. The remaining person on the list shall serve as arbitrator.
Any arbitration hearing shall be held in Fairfax County, Virginia, unless
the Parties agree otherwise. Any award rendered by arbitration shall be
final and binding on the Parties and judgment thereon may be entered in
any court of competent jurisdiction. Notwithstanding any arbitration
rules to the contrary, the award of the arbitrator must be made no later
than six (6) months following the date on which the arbitrator is
appointed. The arbitrator shall have authority and discretion to award
costs and reasonable attorney's fees to the prevailing Party.
-7-
<PAGE>
17. INDEMNIFICATION. Each Party will indemnify, defend and hold harmless the
---------------
other Party and its officers, employees and agents from any and all
claims, suits, actions, damages, costs (including, without limitation,
reasonable attorneys fees) or liabilities to the extent arising from the
indemnifying Party's failure to perform its obligations hereunder.
Metrophone shall indemnify and hold harmless ARVC from any claims arising
out of performance or nonperformance by Metrophone subcontractors.
18. RENEWAL NEGOTIATIONS. The Parties agree to negotiate in good faith for
--------------------
the renewal of this Contract at the end of its term, based on economics
of the industry at the time of the negotiation.
19. NO THIRD PARTY BENEFICIARIES; PRIORITY OF MEMBER AGREEMENT. This Contract
----------------------------------------------------------
is between the Parties and is not intended to confer rights upon Members
or any other non-party. In the event the terms of any other agreement
between a Member and a Party conflict with this Contract, as between the
Member and the Party such other agreement shall prevail.
20. AUDIT. ARVC shall have the right to audit the records of Metrophone
-----
related to this Contract during regular business hours at its expense,
upon reasonable notice.
21. DEFAULT. The occurrence of any one or more of the following events shall
-------
constitute a default under this Contract:
(a) A Party becomes insolvent or voluntarily or involuntarily bankrupt
or if a receiver, assignee or other liquidating officer is appointed
for the business of such Party and if the receivership, assignment
or other liquidating action is not terminated within 60 days of such
appointment.
(b) Failure of a Party or a Party's subcontractor to perform any
material obligation under this Contract.
(c) Conduct detrimental to the reputation of ARVC and its Members, such
as conviction of crimes involving moral turpitude by Metrophone.
(d) Failure of Metrophone to install at least 500 Installed Telephones
by the second anniversary of this Contract or at least 1,000
Installed Telephones by the fourth anniversary of this Contract.
The nondefaulting Party may terminate this Contract if the defaulting
Party shall be in default as defined above and shall fail to cure such
default within 30 days after written notice thereof by the nondefaulting
Party. Provided, however, that if the nature of the default is such that
more than 30 days are reasonably required for its cure, then the
nondefaulting Party shall not be entitled to terminate this Contract if
the defaulting Party commences reasonable cure of the default within the
30 day period and thereafter
-8-
<PAGE>
diligently prosecutes such cure to completion. The foregoing cure
opportunity shall not apply to default under subsection (d) above.
IN WITNESS WHEREOF, the Parties hereto have caused this Contract to be duly
executed by their proper officers thereunto duly authorized as of the date
first herein above written.
METROPHONE TELECOMMUNICATIONS
INCORPORATED
By /s/
-------------------------------
Title Pres & CEO
----------------------------
NATIONAL ASSOCIATION OF RV PARKS AND
CAMPGROUNDS
By /s/
----------------------------------
Title President
-------------------------------
-9-
<PAGE>
EXHIBIT 10.15
SHARE PURCHASE AGREEMENT
THIS AGREEMENT MADE EFFECTIVE AS OF THE 10th DAY OF JUNE, 1997 (the "Effective
Date").
BETWEEN:
PAUL CROOKS
149 Pretoria Avenue,
Ottawa, Ontario,
K1S 1X1
("Crooks")
AND:
BRETT LLOYD
#583, 101 - 1001 West Broadway
Vancouver, British Columbia
V6H 4E4
("Lloyd")
AND:
PHONE LINE INTERNATIONAL (PLI) INC., a corporation incorporated under
the laws of Canada having a place of business at 149 Pretoria Avenue,
Ottawa, Ontario, K1S 1X1;
("Phone Line")
AND:
DATAWAVE SYSTEMS INC., a company incorporated under the laws of
British Columbia having a place of business at 101 West 5th Avenue,
Vancouver, B.C., V5Y 1H9;
(the "Purchaser")
WHEREAS:
A. The authorized share capital of Phone Line consists of an unlimited number
of common shares without par value of which 1,000 common shares (the "Phone Line
Shares") are issued and outstanding;
B. Crooks and Lloyd (the "Vendors") are the registered and beneficial owners of
the Phone Line Shares as follows:
Crooks as to 750 Phone Line Shares
Lloyd as to 250 Phone Line Shares
---
Total: 1,000 Phone Line Shares
-----
C. The Vendors and the Purchaser entered into a letter of intent dated April
16, 1997, amended by letter dated May 7, 1997, (collectively the "Letter of
Intent"), pursuant to which the parties expressed their mutual interest in the
Purchaser acquiring Phone Line from the Vendors;
<PAGE>
D. The Vendors have agreed to sell the Phone Line Shares to the Purchaser and
the Purchaser has agreed to purchase the Phone Line Shares from the Vendors on
the terms and conditions set forth in this Agreement;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants
and agreements herein contained, the parties hereto do covenant and agree (the
"Agreement") each with the other as follows:
1. REPRESENTATIONS AND WARRANTIES
1.1 In order to induce the Purchaser to enter into this Agreement and complete
its transactions contemplated hereunder, Crooks represents and warrants to the
Purchaser that:
(a) Phone Line was and remains duly incorporated under the laws of Canada
and Phone Line:
(i) is a "private issuer" as that term is defined in the Securities
Act, S.B.C. 1996 c.418 as amended (the "Securities Act"); and
(ii) is in good standing with respect to the filing of annual returns
with the Director of Corporations;
(b) the authorized and issued share capital of Phone Line is as set forth
in paragraphs A and B of the recitals to this Agreement;
(c) the Phone Line Shares are validly issued and outstanding fully paid
and non-assessable common shares of Phone Line and Crooks' Phone Line
Shares are registered in the name of, and beneficially owned by,
Crooks as set forth in paragraph B of the recitals to this Agreement
free and clear of all voting restrictions, trade restrictions, liens,
charges or encumbrances of any kind whatsoever;
(d) except for the Phone Line Shares, there are no documents, instruments
or other writings of any kind whatsoever which constitute a "security"
of Phone Line as that term is defined in the Securities Act and,
except as is provided for by operation of this Agreement, there are no
options, agreements or rights of any kind whatsoever to acquire all or
any part of Crooks' Phone Line Shares or any interest in them from
him;
(e) the Articles and By-laws of Phone Line have not been altered since the
incorporation of Phone Line;
(f) all of the material transactions of Phone Line have been promptly and
properly recorded or filed in or with the books or records of Phone
Line and the minute books of Phone Line contain all records of the
meetings and proceedings of Phone Line's shareholders and directors
since its incorporation;
(g) Phone Line holds all licences and permits that are required for
carrying on its business in the manner in which such business has been
carried on;
(h) Phone Line is the registered and beneficial owner of all of the
properties and assets (collectively the "Assets") listed on Schedule
"A" to this Agreement, except as noted therein, and such Assets
represent all of the property and assets used by Phone Line and which
are necessary or useful in the conduct of its business;
-2-
<PAGE>
(i) Phone Line has the corporate power to own the Assets owned by it and
carry on the business carried on by it and Phone Line is duly
qualified to carry on business in all jurisdictions in which it
carries on business;
(j) Phone Line has good and marketable title to the Assets free and clear
of all liens, charges and encumbrances of any kind whatsoever save and
except those specified as "Permitted Encumbrances" on Schedule "A" to
this Agreement;
(k) all machinery and equipment of any kind whatsoever comprised in the
Assets are in reasonable operating condition and in a state of
reasonable maintenance and repair taking into account their age and
use;
(l) Phone Line maintains insurance against loss of, or damage to, the
Assets (with the exception of its vending machines) by all insurable
risks on a replacement cost basis and reasonable insurance with
respect to public liability for a business of its size, and all of the
policies in respect of such coverage are in good standing in all
respects and not in default in any respects;
(m) the unaudited financial statements of Phone Line for its fiscal years
ended October 31, 1995 and 1996 and the unaudited financial statements
of Phone Line for the interim five month period ended March 31, 1997
of its current fiscal year (collectively the "Phone Line Financial
Statements"), a copy of which appear as Schedule "B" to this
Agreement, are true and correct in every material respect and present
fairly and accurately the financial position and results of the
operations of Phone Line for the periods then ended and the Phone Line
Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis;
(n) the books and records of Phone Line disclose all material financial
transactions of Phone Line since March 31, 1997 and such transactions
have been fairly and accurately recorded;
(o) except as disclosed in the Phone Line Financial Statements:
(i) no dividends or other distributions of any kind whatsoever on any
shares in the capital of Phone Line have been made, declared or
authorized;
(ii) Phone Line is not indebted to Crooks, except as set forth on
Schedule "C", such amount (the "Crooks Phone Line Payment") to be
paid as provided for therein;
(iii) none of the Vendors or any other officer, director or employee
of Phone Line is indebted or under obligation to Phone Line on
any account whatsoever; and
(iv) Phone Line has not guaranteed or agreed to guarantee any debt,
liability or other obligation of any kind whatsoever of any
person, firm or corporation of any kind whatsoever;
(p) to the best of his knowledge, there are no material liabilities of
Phone Line, whether direct, indirect, absolute, contingent or
otherwise which are not disclosed or reflected in the Phone Line
Financial Statements except those incurred in the ordinary course of
business of Phone Line since March 31, 1997 which are recorded in the
books and records of Phone Line;
-3-
<PAGE>
(q) the inventory shown on the Phone Line Financial Statements or recorded
in the books and records of Phone Line has been valued at the lesser
of cost or net realizable value and not more than 10% of the
inventory is obsolete or unsaleable in the ordinary course of the
business of Phone Line;
(r) to the best of his knowledge, the accounts receivable of Phone Line
shown on the Phone Line Financial Statements or recorded in the books
and records of Phone Line are bona fide, good and collectible without
set-off or counterclaim;
(s) since March 31, 1997:
(i) there has not been any material adverse change of any kind
whatsoever in the financial position or condition of Phone Line
or any damage, loss or other change of any kind whatsoever in
circumstances materially affecting the business or Assets of
Phone Line or the right or capacity of Phone Line to carry on its
business;
(ii) Phone Line has not waived or surrendered any right of any kind
whatsoever of material value;
(iii) except as permitted under this Agreement, Phone Line has not
discharged, satisfied or paid any lien, charge or encumbrance of
any kind whatsoever or obligation or liability of any kind
whatsoever other than current liabilities in the ordinary course
of its business;
(iv) the business of Phone Line has been carried on in the ordinary
course;
(v) other than the three new vending machines acquired since March
31, 1997, no new machinery or equipment of any kind whatsoever
has been ordered by, or installed or assembled on the premises
of, Phone Line; and
(vi) no capital expenditures exceeding in the aggregate $20,000 have
been authorized or made by Phone Line;
(t) the directors, officers and key employees of Phone Line and all of
their compensation arrangements with Phone Line, whether as directors,
officers or employees of, or as independent contractors or consultants
to, Phone Line, are as listed on Schedule "C" to this Agreement;
(u) except as may be approved by the Purchaser, no payments of any kind
whatsoever have been made or authorized by Phone Line since March 31,
1997, or will be made or authorized, to or on behalf of the Vendors or
any one of them or to or on behalf of any of the directors, officers
or key employees of Phone Line except in accordance with those
compensation arrangements specified on Schedule "C" to this Agreement
or except as contemplated by this Agreement;
(v) there are no pensions, profit sharing, group insurance or similar
plans or other deferred compensation plans of any kind whatsoever
affecting Phone Line other than those specified on Schedule "C" to
this Agreement;
(w) Phone Line is not now, and has never been, a party to any collective
agreement with any labour union or other association of employees of
any kind whatsoever;
(x) the contracts and agreements included on Schedules "A" and "C" to this
Agreement and those additional contracts and agreements specified on
Schedule "D" to this Agreement (collectively the "Material Contracts")
constitute all of the material contracts and agreements of Phone Line;
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<PAGE>
(y) to the best of his knowledge, except as is noted on the appropriate
Schedule to this Agreement, the Material Contracts are in good
standing in all respects and not in default in any respect;
(z) except as is noted on the appropriate Schedule to this Agreement, all
of the Supply Material Contracts can be terminated by Phone Line on
not more than one month's notice;
(aa) all tax returns and reports of Phone Line required by law to have been
filed have been filed and are substantially true, complete and correct
and all taxes and other government charges of any kind whatsoever of
Phone Line have been paid or accrued in the Phone Line Financial
Statements;
(bb) Phone Line has been assessed for federal income tax for all of its
full or partial fiscal years to and including its fiscal year ended
October 31, 1996;
(cc) Phone Line has been and will be until the completion of this Agreement
a Canadian-controlled private corporation within the meaning of the
Tax Act;
(dd) to the best of his knowledge, Phone Line has not:
(i) made any election under Section 85 of the Income Tax Act, R.S.C.
1952 C-148 as amended (the "Tax Act") with respect to the
acquisition or disposition of any property;
(ii) acquired any property from a person with whom Phone Line was not
dealing with at arm's length for proceeds greater than the fair
market value thereof; or
(iii) disposed of anything to a person with whom Phone Line was not
dealing with at arm's length for proceeds less than the fair
market value thereof;
(iv) other than an election made by Crooks pursuant to Section 85 of
the Tax Act, an unsigned and dated copy of which has been
provided to the Purchaser by Crooks;
(ee) to the best of his knowledge, Phone Line has made all elections
required to have been made under the Tax Act in connection with any
distributions made by it and all such elections were true and correct
and made in the prescribed form and within the prescribed time period;
(ff) adequate provision has been made for taxes payable by Phone Line for
the current period for which tax returns are not yet required to be
filed and there are no agreements, waivers or other arrangements of
any kind whatsoever providing for an extension of time with respect to
the filing of any tax return by, or payment of, any tax or
governmental charge of any kind whatsoever by Phone Line;
(gg) he is not aware of any contingent tax liabilities of Phone Line of any
kind whatsoever or any grounds which would prompt a reassessment of
Phone Line including aggressive treatment of income and expenses in
earlier tax returns filed;
(hh) there are no amounts outstanding and unpaid for which Phone Line has
previously claimed a deduction under the Tax Act;
(ii) Crooks is not a non-resident of Canada within the meaning of the Tax
Act;
(jj) Phone Line has made all collections, deductions, remittances and
payments of any kind whatsoever and filed all reports and returns
required by it to be made or filed under the provisions
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of all applicable statutes requiring the making of collections,
deductions, remittances or payments of any kind whatsoever in those
jurisdictions in which Phone Line carries on business;
(kk) Phone Line is a "Canadian" within the meaning of the Investment Canada
Act, R.S.C. 1985 C-28, as amended (the "Investment Canada Act");
(ll) to the best of his knowledge, there are no actions, suits, judgments,
investigations or proceedings of any kind whatsoever outstanding,
pending or threatened against or affecting him or Phone Line at law or
in equity or before or by any Federal, Provincial, State, Municipal or
other governmental department, commission, board, bureau or agency of
any kind whatsoever and there is no basis therefor;
(mm) to the best of his knowledge, Phone Line is not in breach of any law,
ordinance, statute, regulation, by-law, order or decree of any kind
whatsoever;
(nn) Crooks and Phone Line have good and sufficient right and authority to
enter into this Agreement and complete their respective transactions
contemplated under this Agreement on the terms and conditions set
forth herein;
(oo) to the best of his knowledge, the execution and delivery of this
Agreement, the performance of his and Phone Line's obligations under
this Agreement and the completion of their respective transactions
contemplated under this Agreement will not:
(i) conflict with, or result in the breach of or the acceleration of
any indebtedness under, or constitute default under, the Articles
or By-laws of Phone Line or any indenture, mortgage, agreement,
lease, licence or other instrument of any kind whatsoever to
which Phone Line or Crooks is a party or by which either of them
is bound, or any judgment or order of any kind whatsoever of any
Court or administrative body of any kind whatsoever by which
either of them is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by Crooks or by Phone Line;
(pp) neither Phone Line nor Crooks or either of them has incurred any
liability for brokers' or finder's fees of any kind whatsoever with
respect to this Agreement or any transaction contemplated under this
Agreement; and
(qq) the representations and warranties of Crooks contained in this
Agreement disclose all material facts specifically relating to the
transactions involving Crooks and Phone Line contemplated under this
Agreement which materially and adversely affect, or in the future may
materially and adversely affect, their respective abilities to perform
their respective obligations under this Agreement.
1.2 In order to induce the Purchaser to enter into this Agreement and complete
its transactions contemplated hereunder, Lloyd represents and warrants to the
Purchaser that:
(a) Phone Line was and remains duly incorporated under the laws of Canada
and Phone Line:
(i) is a "private issuer" as that term is defined in the Securities
Act, S.B.C. 1996 c.418 as amended (the "Securities Act"'); and
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<PAGE>
(ii) is in good standing with respect to the filing of annual returns
with the Director of Corporations;
(b) the authorized and issued share capital of Phone Line is as set forth
in paragraphs A and B of the recitals to this Agreement;
(c) Lloyd's Phone Line Shares are validly issued and outstanding fully
paid and non-assessable common shares of Phone Line registered in the
name of, and beneficially owned by, Lloyd as set forth in paragraph B
of the recitals to this Agreement free and clear of all voting
restrictions, trade restrictions, liens, charges or encumbrances of
any kind whatsoever;
(d) except as is provided for by operation of this Agreement, there are no
options, agreements or rights of any kind whatsoever to acquire all or
any part of Lloyd's Phone Line Shares or any interest in them from
him;
(e) except as disclosed in the Phone Line Financial Statements:
(i) no dividends or other distributions of any kind whatsoever on
Lloyd's Phone Line Shares have been made, declared or authorized;
(ii) Phone Line is not indebted to Lloyd, except as set forth on
Schedule "C", such amount (the "Lloyd Phone Line Payments") to be
paid as provided for therein;
(iii) Lloyd is not indebted or under obligation to Phone Line on any
account whatsoever; and
(iv) Phone Line has not guaranteed or agreed to guarantee any debt,
liability or other obligation of any kind whatsoever on behalf of
Lloyd;
(f) no payments of any kind whatsoever have been made or authorized by
Phone Line since March 31, 1997, or will be made or authorized, to or
on behalf of Lloyd except in accordance with those compensation
arrangements specified on Schedule "C" to this Agreement or except as
contemplated by this Agreement;
(g) Lloyd is not a non-resident of Canada within the meaning of the Tax
Act;
(h) to the best of his knowledge, there are no actions, suits, judgments,
investigations or proceedings of any kind whatsoever outstanding,
pending or threatened against or affecting Lloyd or Phone Line at law
or in equity or before or by any Federal, Provincial, State, Municipal
or other governmental department, commission, board, bureau or agency
of any kind whatsoever and there is no basis therefor;
(i) to the best of his knowledge, Phone Line is not in breach of any law,
ordinance, statute, regulation, by-law, order or decree of any kind
whatsoever;
(j) he has good and sufficient right and authority to enter into this
Agreement and complete his transactions contemplated under this
Agreement on the terms and conditions set forth herein;
(k) to the best of his knowledge, the execution and delivery of this
Agreement, the performance of his obligations under this Agreement and
the completion of his transactions contemplated under this Agreement
will not:
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<PAGE>
(i) conflict with, or result in the breach of or the acceleration of
any indebtedness under, or constitute default under, the Articles
or By-laws of Phone Line or any indenture, mortgage, agreement,
lease, licence or other instrument of any kind whatsoever to
which Phone Line or Lloyd is a party or by which either of them
is bound, or any judgment or order of any kind whatsoever of any
Court or administrative body of any kind whatsoever by which
either of them is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by either Lloyd or by Phone Line;
(l) Lloyd has not incurred any liability for brokers' or finder's fees of
any kind whatsoever with respect to this Agreement or any transaction
contemplated under this Agreement; and
(m) the representations and warranties of Lloyd contained in this
Agreement disclose all material facts specifically relating to the
transactions involving Lloyd contemplated under this Agreement which
materially and adversely affect, or in the future may materially and
adversely affect, his ability to perform his obligations under this
Agreement.
1.3 The representations and warranties of the Vendors contained in this
Agreement shall be true at the Time of Closing as though they were made at the
Time of Closing and the Vendors' liability in respect thereof shall survive the
completion of the transactions contemplated under this Agreement and remain in
effect for the benefit of the Purchaser for a period of two years thereafter.
1.4 In order to induce the Vendors to enter into this Agreement and complete
their respective transactions contemplated hereunder, the Purchaser represents
and warrants to the Vendors that:
(a) the Purchaser was and remains duly incorporated under the laws of
British Columbia and:
(i) the Purchaser is a "reporting issuer" as that term is defined in
the Securities Act;
(ii) the Purchaser is in good standing with respect to the filing of
annual reports with the B.C. Registrar of Companies; and
(iii) the Purchaser's common shares are listed and, as of the
Effective Date, posted for trading on the Vancouver Stock
Exchange;
(b) as of the Effective Date:
(i) the authorized share capital of the Purchaser consisted of
100,000,000 common shares without par value of which 22,386,526
common shares were issued and outstanding;
(ii) there are no commitments, plans or arrangements of any kind
whatsoever to issue shares of the Purchaser, nor are there any
outstanding options, warrants, convertible securities or other
rights of any kind whatsoever calling for the issuance of any of
the unissued shares of the Purchaser, save and except as
disclosed in the notes to the Purchaser's Financial Statements;
(c) the Purchaser holds all licences and permits that are required for
carrying on its business in the manner in which such business has been
carried on;
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<PAGE>
(d) the audited financial statements of the Purchaser for its fiscal years
ended March 31, 1996 and March 31, 1997 (collectively the "Purchaser's
Financial Statements"), a copy of which appear as Schedule "E" to this
Agreement, are true and correct in every material respect and present
fairly and accurately the financial position and results of the
operations of the Purchaser for the periods then ended and the
Purchaser's Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis;
(e) the books and records of the Purchaser disclose all material financial
transactions of the Purchaser since March 31, 1997 and such
transactions have been fairly and accurately recorded;
(f) except as disclosed in the Purchaser's Financial Statements, the
Purchaser has not guaranteed or agreed to guarantee any debt,
liability or other obligation of any kind whatsoever of any person,
firm or corporation of any kind whatsoever;
(g) since March 31, 1997 there has not been any material adverse change of
any kind whatsoever in the financial position or condition of the
Purchaser or any damage, loss or other change of any kind whatsoever
in circumstances materially affecting the business or assets of the
Purchaser or the right or capacity of the Purchaser to carry on its
business;
(h) there are no liabilities of the Purchaser, whether direct, indirect,
absolute, contingent or otherwise which are not disclosed or reflected
in the Purchaser's Financial Statements except those incurred in the
ordinary course of business of the Purchaser since March 31, 1997
which are recorded in the books and records of the Purchaser;
(i) all tax returns and reports of the Purchaser required by law to have
been filed have been filed and are substantially true, complete and
correct and all taxes and other government charges of any kind
whatsoever have been paid or accrued in the Purchaser's Financial
Statements;
(j) the Purchaser has been assessed for federal and provincial income tax
for all full or partial fiscal years to and including its fiscal year
ended March 31, 1996;
(k) adequate provision has been made for taxes payable by the Purchaser
for the current period for which tax returns are not yet required to
be filed and there are no agreements, waivers or other arrangements of
any kind whatsoever providing for an extension of time with respect to
the filing of any tax return by, or payment of, any tax or
governmental charge of any kind whatsoever by the Purchaser;
(l) it is not aware of any contingent tax liabilities of any kind
whatsoever or any grounds which would prompt a reassessment including
aggressive treatment of income and expenses in earlier tax returns
filed;
(m) there are no amounts outstanding and unpaid for which the Purchaser
has previously claimed a deduction under the Tax Act;
(n) the Purchaser has made all collections, deductions, remittances and
payments of any kind whatsoever and filed all reports and returns
required by it to be made or filed under the provisions of all
applicable statutes requiring the making of collections, deductions,
remittances or payments of any kind whatsoever in those jurisdictions
in which it carries on business;
(o) the Purchaser is a "Canadian" within the meaning of the Investment
Canada Act;
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<PAGE>
(p) to the best of its knowledge, there are no actions, suits, judgments,
investigations or proceedings of any kind whatsoever outstanding,
pending or threatened against or affecting the Purchaser at law or in
equity or before or by any Federal, Provincial, State, Municipal or
other governmental department, commission, board, bureau or agency of
any kind whatsoever and there is no basis therefor;
(q) to the best of its knowledge, the Purchaser is not in breach of any
law, ordinance, statute, regulation, by-law, order or decree of any
kind whatsoever;
(r) the Purchaser has good and sufficient right and authority to enter
into this Agreement and complete its transactions contemplated under
this Agreement on the terms and conditions set forth herein;
(s) to the best of its knowledge, the execution and delivery of this
Agreement, the performance of its obligations under this Agreement and
the completion of its transactions contemplated under this Agreement
will not:
(i) conflict with, or result in the breach of or the acceleration of
any indebtedness under, or constitute default under, the
Memorandum or Articles of the Purchaser or any indenture,
mortgage, agreement, lease, licence or other instrument of any
kind whatsoever to which the Purchaser is a party or by which it
is bound, or any judgment or order of any kind whatsoever of any
Court or administrative body of any kind whatsoever by which the
Purchaser is bound;
(ii) result in the violation of any law or regulation of any kind
whatsoever by the Purchaser;
(t) the Purchaser has not incurred any liability for broker's or finder's
fees of any kind whatsoever with respect to this Agreement or any
transaction contemplated under this Agreement; and
(u) the representations and warranties of the Purchaser contained in this
Agreement disclose all material facts specifically relating to the
transactions involving the Purchaser contemplated in this Agreement
which materially and adversely affect, or in the future may materially
and adversely affect, the Purchaser or the Purchaser's ability to
perform its obligations under this Agreement.
1.5 The representations and warranties of the Purchaser contained in this
Agreement shall be true at the Time of Closing as though they were made at the
Time of Closing and the Purchaser's liability in respect thereof shall survive
the completion of the transactions contemplated under this Agreement and remain
in effect for the benefit of the Vendors for a period of two years thereafter.
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, the Vendors each
agree to sell their Phone Line Shares to the Purchaser, and the Purchaser agrees
with each of the Vendors to purchase their Phone Line Shares, on the Closing
Date, but effective as of the Effective Date, for the following purchase price
(the "Purchase Price"):
(a) $543,750 payable to Crooks for his 750 Phone Line Shares ("Crooks'
Phone Line Shares");
(b) $48,500 payable to Lloyd for 100 of his Phone Line Shares represented
by share certificate no. C- 3 (''Lloyd's Qualifying Phone Line
Shares"); and
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<PAGE>
(c) $72,750 payable to Lloyd for 150 of his Phone Line Shares represented
by share certificates nos. C-5 and C-7 ("Lloyd's Non-Qualifying Phone
Line Shares").
2.2 The Purchase Price shall be paid by the Purchaser to the Vendors as
follows:
(a) by the payment of $290,000 (the "Cash Payment"), of which $10,000 has
already been paid to Crooks by way of deposit, in exchange for 419 of
the Phone Line Shares (362 of Crooks' Phone Line Shares and 57 of
Lloyd's Qualifying Phone Line Shares) as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Paul Crooks as to $262,500 (less $10,000 deposit)
Brett Lloyd as to $ 27,500
--------
Total Cash Payment: $290,000
========
</TABLE>
(b) by the issuance (the "Share Payment") to each of the Purchasers, pro
rata in accordance with their respective Purchase Price balances
(being $281,250 in respect of Crooks and $93,750 in respect of Lloyd)
and in exchange for the remaining 581 Phone Line Shares (388 of
Crooks' Phone Line Shares and 193 of Lloyd's Phone Line Shares) (the
"Remaining Phone Line Shares") on December 10, 1997, of that number of
common shares of the Purchaser (the "Purchaser's Shares") as is
determined by dividing the remainder of the Purchase Price (the
"Remainder of the Purchase Price"), being $375,000, by the Market
Price of the Purchaser's common shares. Market Price will be
determined in accordance with the following formula:
(i) first, the weighted average trading price (the "WATP") of the
Purchaser's common shares will be determined for each of the last
20 trading days in the month of November, 1997 (the "Trading
Period");
(ii) second, a simple average (the "Average") of the WATPs will be
determined by adding up the 20 WATPs determined for the 20
trading days of the Trading Period and by dividing the resultant
sum by 20; and
(iii) third, the Average will be discounted by 20% to
obtain the Market Price.
In the event that the Purchaser's common shares do not trade on one or
more of the trading days during the Trading Period, the Trading Period
will be extended backwards until it consists of 20 trading days on
which the Purchaser's common shares did trade. Notwithstanding the
foregoing formula, in no case will the Purchaser be obliged to issued
more than a total of 1,750,000 Purchaser's Shares. In the event of a
subdivision, consolidation or other reorganization of the Purchaser's
share capital prior to the Share Payment, the Share Payment will be
adjusted on the same basis as the other common shares of the Company.
2.3 The parties acknowledge and agree that the Purchaser's Shares will be
issued pursuant to the exemptions provided by operation of ss. 45(2)(28) and ss.
74(2)(25) of the B.C. Securities Act and ss. 35(1)(16) and ss. 72(1)(j) of the
Ontario Securities Act. The parties further acknowledge and agree that the
Purchaser's Shares will be subject to the trade restrictions imposed by
operation of ss. 142(2)(b) of the Rules to the B.C. Securities Act and ss. 72(5)
of the Ontario Securities Act and that the certificates issued for the
Purchaser's Shares will bear a legend to that effect.
2.4 Notwithstanding subparagraph 2.2(b), the Purchaser shall have the right to
pay the Remainder of the Purchase Price in cash instead of issuing the
Purchaser's Shares. In such case, however, the Purchaser will be required to pay
a premium of 10%, being $37,500, in addition to the amount of the Remainder of
the Purchaser Price. The payment will be made on December 10, 1997 ($309,375 to
Crooks and $23,100 to Lloyd in respect of
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<PAGE>
the remaining 43 of Lloyd's Qualifying Phone Line Shares) except in respect of
Lloyd's 150 Non-Qualifying Phone Line Shares for which payment of $80,025 will
be delivered on December 10, 1997 to Campney & Murphy together with an
irrevocable direction to pay it to Lloyd on January 2, 1998 at which time it
will be due and owing and paid to Lloyd.
2.5 On or before the Time of Closing, the Purchaser and the Vendors shall have
entered into an escrow agreement (the "Escrow Agreement") in a form and with an
escrow agent acceptable to all three parties which will provide that the
Remaining Phone Line Shares will be held by the escrow agent in escrow to be
released to the Purchaser upon the Remainder of the Purchase Price being paid to
the Vendors. The Escrow Agreement will also provide that the expenses of the
escrow agent will be borne by the Vendors.
3. COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS
3.1 The Vendors and Phone Line jointly and severally covenant and agree with
the Purchaser that the Vendors and Phone Line shall:
(a) from and including the Effective Date through to and including the
Time of Closing, permit the Purchaser, through its directors,
officers, employees and authorized agents and representatives
(collectively the "Purchaser's Representatives") at its own cost, full
access to Phone Line's books, records and property including, without
limitation, all of the Assets, contracts and minute books of Phone
Line, so as to permit the Purchaser to make such investigation (the
"Purchaser's Investigation") of Phone Line as the Purchaser deems
necessary;
(b) on or before the 31st day of August, 1997, provide to the Purchaser
all such further documents, instruments and materials and do all such
acts and things as may be reasonably required by the Purchaser to
obtain Regulatory Approval including, but not limited to, providing to
the Purchaser (at the Purchaser's expense provided the Purchaser
agrees to the choice of valuator and the valuator's quoted cost of the
valuation) a valuation opinion of Phone Line in a form and by a party
acceptable to the VSE so as to permit the Purchaser's Shares to be
issued as "trading shares" as that term is defined in VSE Policy No.
19;
(c) from and including the Effective Date through to and including the
Time of Closing, do all such acts and things necessary to ensure that
all of the representations and warranties of the Vendors or any one of
them contained in this Agreement or any certificates or documents
delivered by them or any one of them pursuant to this Agreement remain
true and correct;
(d) from and including the Effective Date through to and including the
Time of Closing, preserve and protect the goodwill, Assets, business
and undertaking of Phone Line and, without limiting the generality of
the foregoing, carry on the business of Phone Line in a reasonable and
prudent manner; and
(e) from and including the Effective Date through to and including the
Time of Closing, keep confidential all discussions and communications
(including all information communicated therein) between the parties,
and all written and printed materials of any kind whatsoever exchanged
by the parties, and, if so requested by the Purchaser, the Vendors and
Phone Line shall arrange for any director, officer, employee,
authorized agent or representative of Phone Line to enter into and the
Vendors themselves shall enter into a non-disclosure agreement with
the Purchaser in a form acceptable to the Purchaser acting reasonably.
3.2 The Vendors and Phone Line jointly and severally covenant and agree with
the Purchaser that, from and including the Effective Date through to and
including the Time of Closing, the Vendors and Phone Line shall :
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<PAGE>
(a) not do any such act or thing that would render any representation or
warranty of the Vendors or any one of them contained in this Agreement
or any certificates or documents delivered by them or any one of them
pursuant to this Agreement untrue or incorrect; and
(b) not negotiate with any other person in respect of a purchase and sale
of any of the Phone Line Shares or any part of the Assets, other than
a sale of part of the Assets in the ordinary course of Phone Line's
business.
3.3 The Vendors jointly and severally acknowledge to and agree with the
Purchaser that the Purchaser's Investigation shall in no way limit or otherwise
adversely affect the rights of the Purchaser as provided for hereunder in
respect of the representations and warranties of the Vendors contained in this
Agreement or any certificates or documents delivered by them pursuant to this
Agreement.
3.4 The Purchaser covenants and agrees with the Vendors and with Phone Line
that the Purchaser shall:
(a) from and including the Effective Date through to and including the
Time of Closing, permit the Vendors themselves and through their
authorized agents and representatives (collectively the "Vendors'
Representatives") at their own cost, full access to the Purchaser's
property, books and records including, without limitation, all of the
assets, contracts and minute books of the Purchaser, so as to permit
the Vendors' Representatives to make such investigation (the "Vendors'
Investigation") of the Purchaser as the Vendors deem necessary;
(b) use its best efforts to obtain Regulatory Approval for this Agreement
and the transactions contemplated hereunder on or before the 30th day
of September, 1997;
(c) from and including the Effective Date through to and including the
Time of Closing, do all such acts and things necessary to ensure that
all of the representations and warranties of the Purchaser contained
in this Agreement or any certificates or documents delivered by it
pursuant to this Agreement remain true and correct; and
(d) from and including the Effective Date through to and including the
Time of Closing and subject to its obligations as a reporting issuer
listed on a stock exchange, keep confidential all discussions and
communications (including all information communicated therein)
between the parties, and all written and printed materials of any kind
whatsoever exchanged by the parties, and, if so requested by the
Vendors or by Phone Line, the Purchaser shall arrange for any of the
Purchaser's Representatives to enter into, and the Purchaser itself
shall enter into, a non-disclosure agreement with the Vendors and
Phone Line in a form acceptable to the Vendors and Phone Line acting
reasonably.
3.5 The Purchaser covenants and agrees with the Vendors and with Phone Line
that, from and including the Effective Date through to and including the Time of
Closing, the Purchaser shall not do any such act or thing that would render any
representation or warranty of the Purchaser contained in this Agreement or any
certificates or documents delivered by it pursuant to this Agreement untrue or
incorrect.
3.6 The Purchaser acknowledges to and agrees with the Vendors that the Vendors'
Investigation shall in no way limit or otherwise adversely affect the rights of
the Vendors as provided for hereunder in respect of the representations and
warranties of the Purchaser contained in this Agreement or any certificates or
documents delivered by it pursuant to this Agreement.
3.7 At the request of any or all of the Vendors, the Purchaser covenants to
execute and deliver to each Vendor, for filing, the form of election specified
in section 85 of the Tax Act and in so electing will elect as "proceeds of
disposition" of that Vendor an amount specified by that Vendor that is equal to
or less than the fair market value of
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that number of the Purchaser's Shares issuable to that Vendor under this
Agreement and that is equal to or greater than the "cost amount" to that Vendor
of the Phone Line Shares sold by that Vendor as that amount is calculated and
determined for the purposes of the Tax Act.
4. EMPLOYMENT, CONSULTING AND NON-COMPETITION
4.1 The Employment/Consulting Agreement and Non-Competition Agreement will each
provide that each of the Vendors will not, without the prior written consent of
the Purchaser (given by a director or officer of the Purchaser other than one of
the Vendors), during the term of this Agreement and during the two year period
immediately following the closing of this Agreement, within Canada (the
"Prohibited Area"):
(a) directly or indirectly engage in or become financially interested in,
either individually or as a partner, shareholder, agent, manager,
owner, advisor or financial backer of any person, persons, firm,
association, venture, entity or corporation of any kind whatsoever
that carries on a business the same as, or is similar to, the business
carried on by the Purchaser or any of its subsidiaries as such
business was during the term of this Agreement (collectively the
"Prohibited Businesses" );
(b) directly or indirectly engage in or become financially interested in
any business that will compete with the Prohibited Businesses of the
Purchaser or of its subsidiaries, or of their respective successors or
assigns; or
(c) divert or attempt to divert any business of, or any customers of the
Purchaser or of any of its subsidiaries, to any other competitive
establishment, by direct or indirect inducement or otherwise.
This obligation shall survive the closing of this Agreement.
4.2 The Purchaser will, prior to the Closing Date, extend offers to the
following employees and consultants of Phone Line on the following terms:
(a) to Tracie Royal, an offer of employment at an annual salary of
$29,000, such employment to be in Vancouver and to be for a period of
at least six months from the Closing Date, and, if she accepts the
offer, the Purchaser will pay her reasonable moving expenses;
(b) to Lorrie Vidalin, an offer of employment at an annual salary of
$40,000, such employment to be in Ottawa and to be for a period of at
least six months from the Closing Date; and
(c) to Lorraine Demers, an offer to continue her current contract of
employment with additional compensation to be in the form of stock
options of the Purchaser.
5. CONDITIONS PRECEDENT
5.1 The Purchaser's obligation to carry out the terms of this Agreement and to
complete its transactions contemplated under this Agreement is subject to the
fulfillment to the satisfaction of the Purchaser of each of the following
conditions that:
(a) on or before July 31, 1997, the Purchaser shall have been able to
complete the Purchaser's Investigation to its reasonable satisfaction
and the Purchaser shall be satisfied that:
(i) the revenues being generated by Phone Line from its major
contracts is as has been represented;
-14-
<PAGE>
(ii) the cost of telephone time to Phone Line is as has been
represented;
(b) on or before the Time of Closing, the Purchaser shall have, either
directly or indirectly through Phone Line or another subsidiary,
entered into:
(i) with Lloyd, a written employment or consulting agreement (the
"Employment/Consulting Agreement");
(ii) with Crooks, a written non-competition agreement (the "Non-
Competition Agreement"); and
(iii) with the Vendors, the Escrow Agreement;
(c) at the Time of Closing, the directors of Phone Line shall consist of
the Purchaser's nominees;
(d) at the Time of Closing, the solicitors for Phone Line shall provide an
opinion dated as of the Closing Date, the form of which appears as
Schedule "F" to this Agreement;
(e) as of the Time of Closing, the Vendors and Phone Line shall have
complied with all of their respective covenants and agreements
contained in this Agreement; and
(f) as of the Time of Closing, the representations and warranties of the
Vendors or any one of them referred to in this Agreement or contained
in any certificates or documents delivered by them or any one of them
pursuant to this Agreement shall be completely true as if such
representations and warranties had been made by the Vendors as of the
Time of Closing.
The conditions set forth above are for the exclusive benefit of the Purchaser
and may be waived by the Purchaser in whole or in part on or before the Time of
Closing.
5.2 The Vendor's respective obligations to carry out the terms of this
Agreement and to complete their respective transactions contemplated under this
Agreement are subject to the fulfillment to their satisfaction of each of the
following conditions (except that the condition precedent in subpara. (b)(i) is
for the benefit of Lloyd only) that:
(a) on or before the Time of Closing, the Vendors shall have been able to
complete the Vendors' Investigation to their reasonable satisfaction;
(b) on or before the Time of Closing:
(i) Lloyd shall have entered into an Employment/Consulting Agreement
with the Purchaser; and
(ii) the Vendors shall have entered into the Escrow Agreement with the
Purchaser;
(c) at the Time of Closing, the solicitors for the Purchaser shall provide
an opinion dated as of the Closing Date, the form of which appears as
Schedule "G" to this Agreement;
(d) as of the Time of Closing, the Purchaser shall have complied with all
of its covenants and agreements contained in this Agreement; and
-15-
<PAGE>
(e) at the Time of Closing, the representations and warranties of the
Purchaser referred to in this Agreement or contained in any
certificates or documents delivered by it pursuant to this Agreement
shall be completely true as if such representations and warranties had
been made by the Purchaser as of the Time of Closing.
The conditions set forth above are for the exclusive benefit of each of the
Vendors (except that the condition precedent in (b)(i) is only for the benefit
of Lloyd) and may be waived by each of them in whole or in part on or before the
Time of Closing.
5.3 The parties acknowledge and agree each with the other that this Agreement
and all of the transactions contemplated under this Agreement are subject to the
approval ("Regulatory Approval") of the Vancouver Stock Exchange ("VSE"). In the
event that Regulatory Approval is not obtained for this Agreement on the terms
contained herein on or before the 30th day of September, 1997, this Agreement
shall terminate and be of no further force and effect.
6. CLOSING
6.1 The completion of the transactions contemplated under this Agreement shall
be closed at the offices of Messrs. Campney & Murphy, P.O. Box 48800, 2100-1111
West Georgia Street, Vancouver, British Columbia at 9:00 o'clock a.m. local time
in Vancouver, B.C. (the "Time of Closing") on the tenth business day (the
"Closing Date") following the date Regulatory Approval is given.
6.2 At the Time of Closing, Crooks shall deliver to the solicitors for the
Purchaser:
(a) a certified true copy of the resolutions of the directors of Phone
Line evidencing that the directors of Phone Line have approved this
Agreement and all of the transactions of Phone Line contemplated
hereunder and the resolutions shall include specific reference to:
(i) the sale and transfer of the Phone Line Shares from the Vendors
to the Purchaser as provided for in this Agreement;
(ii) the cancellation of the share certificates (the "Old Share
Certificates") representing the Phone Line Shares held as set
forth in paragraph B of the recitals to this Agreement; and
(iii) the issuance of new share certificates (the "New
Share Certificates") representing the Phone Line Shares
registered in the name of the Purchaser or its nominee;
(b) the Old Share Certificates representing his Phone Line Shares;
(c) the New Share Certificates representing his and Lloyd's Phone Line
Shares;
(d) a signed copy of the Escrow Agreement referred to in paragraph 2.5 of
this Agreement;
(e) his Non-Competition Agreement referred to in subparagraph 5.1(b)(ii)
of this Agreement;
(f) the solicitor's opinion referred to in subparagraph 5.1 (d) of this
Agreement;
(g) a certificate of confirmation signed by Crooks in the form attached as
Schedule "H" to this Agreement; and
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<PAGE>
(h) any other materials that are, in the opinion of the solicitors for the
Purchaser, reasonably required to complete the transactions
contemplated under this Agreement.
6.3 At the Time of Closing, Lloyd shall deliver to the solicitors for the
Purchaser:
(a) the Old Share Certificates representing his Phone Line Shares;
(b) a signed copy of the Escrow Agreement referred to in paragraph 2.5 of
this Agreement;
(c) his Employment/Consulting Agreement referred to in subparagraph
5.1(b)(i) of this Agreement;
(d) a certificate of confirmation signed by Lloyd in the form attached as
Schedule "I" to this Agreement; and
(e) any other materials that are, in the opinion of the solicitors for the
Purchaser, reasonably required to complete the transactions
contemplated under this Agreement.
6.4 At the Time of Closing, the Purchaser shall deliver to the solicitors for
each of the Vendors (except in respect of (e)which is delivered only to Lloyd's
solicitor):
(a) certified true copies of the resolutions of the directors evidencing
that the directors have approved this Agreement and all of the
transactions of the Purchaser contemplated hereunder;
(b) evidence that Regulatory Approval has been obtained;
(c) the Cash Payment (in the form of a bank draft, certified cheque or
solicitor's trust cheque) as provided for in subparagraph 2.2(a) of
this Agreement;
(d) a signed Escrow Agreement and, immediately following the Closing, the
Purchaser shall deliver the Remaining Phone Line Shares to the escrow
agent to be held in accordance with the terms of the Escrow Agreement;
(e) Lloyd's Employment/Consulting Agreement referred to subparagraph
5.1(b)(i) of this Agreement;
(f) the solicitor's opinion referred to in subparagraph 5.2(c) of this
Agreement; and
(g) a certificate of confirmation signed by two directors or officers of
the Purchaser in the form attached as Schedule "J" to this Agreement.
6.5 At the Time of Closing, the Purchaser shall cause Phone Line to make the
Crooks Phone Line Payment to Crooks and the Lloyd Phone Line Payments then due
to Lloyd in form of a bank draft, certified cheque or solicitors' trust cheque.
7. GENERAL
7.1 Time and each of the terms and conditions of this Agreement shall be of the
essence of this Agreement and any waiver by the parties of this paragraph 7.1 or
any failure by them to exercise any of their rights under this Agreement shall
be limited to the particular instance and shall not extend to any other instance
or matter in this Agreement or otherwise affect any of their rights or remedies
under this Agreement.
-17-
<PAGE>
7.2 The Schedules to this Agreement incorporated by reference and the recitals
to this Agreement constitute a part of this Agreement.
7.3 This Agreement constitutes the entire Agreement between the parties hereto
in respect of the matters referred to herein and there are no representations,
warranties, covenants or agreements, expressed or implied, collateral hereto
other than as expressly set forth or referred to herein. This Agreement replaces
the Letter of Intent.
7.4 The headings in this Agreement are for reference only and do not constitute
terms of the Agreement.
7.5 The provisions contained in this Agreement which, by their terms, require
performance by a party to this Agreement subsequent to the Closing Date of this
Agreement, shall survive the Closing Date of this Agreement.
7.6 No alteration, amendment, modification or interpretation of this Agreement
or any provision of this Agreement shall be valid and binding upon the parties
hereto unless such alteration, amendment, modification or interpretation is in
written form executed by the parties directly affected by such alteration,
amendment, modification or interpretation.
7.7 Whenever the singular or masculine is used in this Agreement the same shall
be deemed to include the plural or the feminine or the body corporate as the
context may require.
7.8 The parties hereto shall execute and deliver all such further documents and
instruments and do all such acts and things as any party may, either before or
after the Closing Date, reasonably require in order to carry out the full intent
and meaning of this Agreement.
7.9 Any notice, request, demand and other communication to be given under this
Agreement shall be in writing and shall be delivered by hand or by telecopier to
the parties at their following respective addresses:
<TABLE>
<CAPTION>
<S> <C>
To: Crooks or Phone Line: And to: Scott & Aylen
149 Pretoria Avenue 1000 - 60 Queen Street
Ottawa, Ontario Ottawa, Ontario
K1S 1X1 Canada KIP 5Y3
Attention: Paul Crooks Attention: Bernard G. Roach
Telecopier: (613) 237-9923 Telecopier: (613) 230-8842
To: Lloyd: And to: Davis & Company
#583, 101 - 1001 West Broadway 2800 Park Place
Vancouver, B.C. 666 Burrard Street
V6H 4E4 Vancouver, B.C.
Canada, V6C 2Z7
Attention: Brett Lloyd
Telecopier: (604) 879-6320 Attention: Douglas G. Shields
Telecopier: (604) 605-3545
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
To: The Purchaser: And to: Campney & Murphy
101 West 5th Avenue 2100 - 1111 West Georgia Street
Vancouver, B.C. Vancouver, B.C.
V5Y 1H9 Canada V7X 1K9
Attention: Peter Hough Attention: David J. Raffa
Telecopier: (604) 874-1302 Telecopier: (604) 661-7521
</TABLE>
or to such other addresses as may be given in writing by the parties hereto in
the manner provided for in this paragraph, and shall be deemed to have been
received, if delivered by hand, on the date of delivery, or if delivered by
telecopier, on the date that it is sent.
7.10 This Agreement may not be assigned by any part)' hereto without the prior
written consent of all of the parties hereto, except that the Purchaser may
direct that the Phone Line Shares be acquired on its behalf by a wholly-owned
subsidiary.
7.11 This Agreement shall be subject to, governed by, and construed in
accordance with the laws of the Province of British Columbia.
This Agreement may be signed by the parties in as many counterparts as may be
deemed necessary, each of which so signed shall be deemed to be an original, and
all such counterparts together shall constitute one and the same instrument.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals as of the
Effective Date first above written.
<TABLE>
<CAPTION>
<S> <C>
SIGNED, SEALED AND DELIVERED )
by PAUL CROOKS in the presence of: )
)
/s/ Bernard Roach )
- ---------------------------------- ) /s/ Paul Crooks
Signature of Witness ) --------------------------------
) PAUL CROOKS
Name: BERNARD ROACH )
---------------------------- )
Address: 1000-60 Queen St )
------------------------- )
Ottawa, Ontario )
------------------------- )
Occupation: Solicitor )
---------------------- )
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SIGNED, SEALED AND DELIVERED )
by BRETT LLOYD in the presence of: )
)
)
/s/ Douglas G. Shields ) /s/ Brett Lloyd
- ---------------------------------- ) --------------------------------
)
Signature of Witness ) BRETT LLOYD
)
Name: DOUGLAS G. SHIELDS )
Barrister & Solicitor )
--------------------------- )
Address: Davis & Company )
------------------------- )
2800-666 Burrard Street )
------------------------- )
Vancouver, B.C. V6C 2Z7 )
687-9444 )
------------------------- )
Occupation: )
---------------------- )
)
The CORPORATE SEAL of PHONE LINE )
INTERNATIONAL (PLI) INC. was hereunto )
affixed in the presence of: )
)
) c/s
)
- ------------------------------------- )
)
)
- -------------------------------------
The CORPORATE SEAL of DATAWAVE )
SYSTEMS INC. was hereunto )
affixed in the presence of: )
)
) c/s
)
- ------------------------------------- )
)
)
- -------------------------------------
</TABLE>
-20-
<PAGE>
EXHIBIT 10.16
HEADS OF AGREEMENT
------------------
THIS AGREEMENT MADE AS OF THE 1st DAY OF MARCH, 1998 (the "Effective Date").
BETWEEN:
DATAWAVE SYSTEMS INC., a corporation incorporated under the laws of
---------------------
British Columbia having a place of business at 101 West 5th Avenue,
Vancouver, British Columbia, V5Y 1H9;
("DTV")
AND:
PHONE LINE INTERNATIONAL (PLI) INC., a corporation incorporated under
-----------------------------------
the laws of Canada having a place of business at 101 West 5th Avenue,
Vancouver, British Columbia, V5Y 1H9;
("PLI")
(DTV and PLI being referred to collectively as the "Datawave Group")
AND:
DCI TELECOMMUNICATIONS, INC., a company incorporated under the laws
----------------------------
of Colorado having a place of business at 611 Access Road, Stratford,
Connecticut, USA, 06497;
("DCI")
AND:
CARDCALLER CANADA INC., a company incorporated under the laws of
----------------------
Ontario having a place of business at Suite 302, 5075 Yonge Street,
Toronto, Ontario, M2N 6C6;
("CCC")
(DCI and CCC being referred to collectively as the "Cardcaller
Group")
WHEREAS:
A. PLI is a wholly-owned subsidiary of DTV, a public company listed on
the VSE, through which DTV carries out business in Canada;
B. CCC is a wholly-owned subsidiary of Cardcall International Holdings,
Inc., it in turn being a wholly-owned subsidiary of DCI, a public company listed
on the OTC Bulletin Board, through which DCI carries out business in Canada;
<PAGE>
C. By a letter of intent (the "Letter of Intent") dated December 31,
1997, DCI and DTV agreed to sell the assets of CCC and PLI to a new corporate
entity for the purpose of carrying on their respective businesses in Canada in
the future;
D. DCI and DTV would like, to the extent reasonably possible, have this
new entity conducting their respective Canadian businesses from March 1, 1998 or
as close thereto as possible;
E. The parties would like to replace the Letter of Intent with a more
formal agreement and are entering into this agreement for that purpose;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants
and agreements herein contained, the parties hereto do covenant and agree (the
"Agreement") each with the other as follows:
1. REPRESENTATIONS AND WARRANTIES
- -- ------------------------------
1.1 In order to induce the Cardcaller Group to enter into this Agreement
and complete its transactions contemplated hereunder, the members of the
Datawave Group jointly and severally represent and warrant to the Cardcaller
Group that:
(a) PLI was and remains duly incorporated under the laws of Canada and
PLI:
(i) is a private company; and
(ii) is in good standing with respect to the filing of annual
returns with the Director of Corporations;
(b) PLI is a wholly-owned subsidiary of DTV;
(c) PLI is the registered and beneficial owner of all of the properties
and assets (collectively the "PLI Assets") listed on Schedule "A" to
this Agreement, and such PLI Assets represent all of the property and
assets used by PLI and which are necessary or useful in the conduct of
its business;
(d) PLI has the corporate power to own the PLI Assets owned by it and
carry on the business carried on by it;
(e) PLI has good and marketable title to the PLI Assets free and clear of
all liens, charges and encumbrances of any kind whatsoever save and
except those specified as "Permitted PLI Encumbrances" on Schedule "A"
to this Agreement;
(f) all machinery and equipment of any kind whatsoever comprised in the
PLI Assets are in reasonable operating condition and in a state of
reasonable maintenance and repair taking into account their age and
use;
(g) the unaudited financial statements of PLI for its fiscal years ended
October 31, 1996 and 1997 and the unaudited financial statements of
PLI for the two month period ended December 31, 1997 (collectively the
"PLI Financial Statements"), a copy of which appear as Schedule "B" to
this Agreement, are true and correct in every material respect and
present fairly and accurately the financial position and results of
the operations of
-2-
<PAGE>
PLI for the periods then ended and the PLI Financial Statements have
been prepared in accordance with generally accepted accounting
principles applied on a consistent basis;
(h) there are no material liabilities of PLI, whether direct, indirect,
absolute, contingent or otherwise which are not disclosed or reflected
in the PLI Financial Statements except those incurred in the ordinary
course of business of PLI;
(i) since December 31, 1997 there has not been any material adverse change
of any kind whatsoever in the financial position or condition of PLI
or any damage, loss or other change of any kind whatsoever in
circumstances materially affecting the business or PLI Assets or the
right or capacity of PLI to carry on its business and the business of
PLI has been carried on in the ordinary course;
(j) the contracts and agreements included on Schedule "A" to this
Agreement (collectively the "Material PLI Contracts") constitute all
of the material contracts and agreements of PLI;
(k) except as is noted on Schedule "A", the Material PLI Contracts are in
good standing in all respects and not in default in any respect;
(l) all tax returns and reports of PLI required by law to have been filed
have been filed and are substantially true, complete and correct and
all taxes and other government charges of any kind whatsoever of PLI
have been paid or accrued in the PLI Financial Statements;
(m) PLI has made all collections, deductions, remittances and payments of
any kind whatsoever and filed all reports and returns required by it
to be made or filed under the provisions of all applicable statutes
requiring the making of all collections, deductions, remittances or
payments of any kind whatsover in those jurisdictions in which PLI
carries on business;
(n) to the best of their knowledge, there are no actions, suits,
judgments, investigations or proceedings of any kind whatsoever
outstanding, pending or threatened against or affecting PLI at law or
in equity or before or by any Federal, Provincial, State, Municipal or
other governmental department, commission, board, bureau or agency of
any kind whatsoever and there is no basis therefor;
(o) to the best of their knowledge, PLI is not in breach of any law,
ordinance, statute, regulation, by-law, order or decree of any kind
whatsoever;
(p) PLI has good and sufficient right and authority to enter into this
Agreement and complete its transactions contemplated under this
Agreement on the terms and conditions set forth herein; and
(q) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of PLI's obligations under this Agreement
and the completion of PLI's transactions contemplated under this
Agreement will not:
(i) conflict with, or result in the breach of or the
acceleration of any indebtedness under, or constitute
default under, the constating documents of PLI or any
-3-
<PAGE>
indenture, mortgage, agreement, lease, licence or other
instrument of any kind whatsoever to which PLI is a party or
by which it is bound, or any judgment or order of any kind
whatsoever of any Court or administrative body of any kind
whatsoever by which it is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by PLI.
1.2 In order to induce the Cardcaller Group to enter into this Agreement
and complete its transactions contemplated hereunder, the members of the
Datawave Group jointly and severally represent and warrant to the Cardcaller
Group that:
(a) DTV was and remains duly incorporated under the laws of British
Columbia and:
(i) DTV is a public company;
(ii) DTV is in good standing with respect to the filing of annual
reports with the B.C. Registrar of Companies; and
(iii) DTV's common shares are listed and posted for trading on the
Vancouver Stock Exchange;
(b) DTV has good and sufficient right and authority to enter into this
Agreement and complete its transactions contemplated under this
Agreement on the terms and conditions set forth herein; and
(c) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of DTV's obligations under this Agreement
and the completion of DTV's transactions contemplated under this
Agreement will not:
(i) conflict with, or result in the breach of or the
acceleration of any indebtedness under, or constitute
default under, the Memorandum or Articles of DTV or any
indenture, mortgage, agreement, lease, licence or other
instrument of any kind whatsoever to which DTV is a party or
by which it is bound, or any judgment or order of any kind
whatsoever of any Court or administrative body of any kind
whatsoever by which DTV is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by DTV.
1.3 The representations and warranties of the Datawave Group contained in
this Agreement shall be materially true at the Time of Closing as though they
were made at the Time of Closing and they shall survive the completion of the
transactions contemplated under this Agreement and remain in full force and
effect thereafter for a period of one year for the benefit of the Cardcaller
Group.
1.4 In order to induce the Datawave Group to enter into this Agreement and
complete its transactions contemplated hereunder, the members of the Cardcaller
Group jointly and severally represent and warrant to the Datawave Group that:
(a) CCC was and remains duly incorporated under the laws of Ontario and
CCC:
(i) is a private company; and
-4-
<PAGE>
(ii) is in good standing with respect to the filing of annual
returns with the Ontario Director of Corporations;
(b) CCC is a wholly-owned subsidiary of Cardcall International Holdings,
Inc., it in turn being a wholly-owned subsidiary of DCI;
(c) CCC is the registered and beneficial owner of all of the properties
and assets (collectively the "CCC Assets") listed on Schedule "C" to
this Agreement, and such CCC Assets represent all of the property and
assets used by CCC and which are necessary or useful in the conduct of
its business;
(d) CCC has the corporate power to own the CCC Assets owned by it and
carry on the business carried on by it;
(e) CCC has good and marketable title to the CCC Assets free and clear of
all liens, charges and encumbrances of any kind whatsoever save and
except those specified as "Permitted CCC Encumbrances" on Schedule "C"
to this Agreement;
(f) all machinery and equipment of any kind whatsoever comprised in the
CCC Assets are in reasonable operating condition and in a state of
reasonable maintenance and repair taking into account their age and
use;
(g) the unaudited financial statements of CCC for its fiscal years ended
December 31, 1996 and 1997 (collectively the "CCC Financial
Statements"), a copy of which appear as Schedule "D" to this
Agreement, are true and correct in every material respect and present
fairly and accurately the financial position and results of the
operations of CCC for the periods then ended and the CCC Financial
Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis;
(h) there are no material liabilities of CCC whether direct, indirect,
absolute, contingent or otherwise which are not disclosed or reflected
in the CCC Financial Statements except those incurred in the ordinary
course of business of CCC;
(i) since December 31, 1997 there has not been any material adverse change
of any kind whatsoever in the financial position or condition of CCC
or any damage, loss or other change of any kind whatsoever in
circumstances materially affecting the business or CCC Assets or the
right or capacity of CCC to carry on its business and the business of
CCC has been carried on in the ordinary course;
(j) the contracts and agreements included on Schedule "C" to this
Agreement (collectively the "Material CCC Contracts") constitute all
of the material contracts and agreements of CCC;
(k) except as is noted on Schedule "C", the Material CCC Contracts are in
good standing in all respects and not in default in any respect;
(l) all tax returns and reports of CCC required by law to have been filed
have been filed and are substantially true, complete and correct and
all taxes and other government charges of any kind whatsoever of CCC
have been paid or accrued in the CCC Financial Statements;
-5-
<PAGE>
(m) CCC has made all collections, deductions, remittances and payments of
any kind whatsoever and filed all reports and returns required by it
to be made or filed under the provisions of all applicable statutes
requiring the making of all collections, deductions, remittances or
payments of any kind whatsover in those jurisdictions in which CCC
carries on business;
(n) to the best of their knowledge, there are no actions, suits,
judgments, investigations or proceedings of any kind whatsoever
outstanding, pending or threatened against or affecting CCC at law or
in equity or before or by any Federal, Provincial, State, Municipal or
other governmental department, commission, board, bureau or agency of
any kind whatsoever and there is no basis therefor;
(o) to the best of their knowledge, CCC is not in breach of any law,
ordinance, statute, regulation, by-law, order or decree of any kind
whatsoever;
(p) CCC has good and sufficient right and authority to enter into this
Agreement and complete its transactions contemplated under this
Agreement on the terms and conditions set forth herein; and
(q) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of CCC's obligations under this Agreement
and the completion of CCC's transactions contemplated under this
Agreement will not:
(i) conflict with, or result in the breach of or the
acceleration of any indebtedness under, or constitute
default under, the constating documents of CCC or any
indenture, mortgage, agreement, lease, licence or other
instrument of any kind whatsoever to which CCC is a party or
by which it is bound, or any judgment or order of any kind
whatsoever of any Court or administrative body of any kind
whatsoever by which it is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by CCC.
1.5 In order to induce the Datawave Group to enter into this Agreement and
complete its transactions contemplated hereunder, the members of the Cardcaller
Group jointly and severally represent and warrant to the Datawave Group that:
(a) DCI was and remains duly incorporated under the laws of Colorado and:
(i) DCI is a public company;
(ii) DCI is in good standing with respect to the filing of annual
reports with the State of Colorado; and
(iii) DCI's common shares are listed and posted for trading on the
OTC Bulletin Board;
(b) DCI has good and sufficient right and authority to enter into this
Agreement and complete its transactions contemplated under this
Agreement on the terms and conditions set forth herein; and
-6-
<PAGE>
(c) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of its obligations under this Agreement and
the completion of its transactions contemplated under this Agreement
will not:
(i) conflict with, or result in the breach of or the
acceleration of any indebtedness under, or constitute
default under, the constating documents of DCI or any
indenture, mortgage, agreement, lease, licence or other
instrument of any kind whatsoever to which DCI is a party or
by which it is bound, or any judgment or order of any kind
whatsoever of any Court or administrative body of any kind
whatsoever by which DCI is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever by DCI.
1.6 The representations and warranties of the Cardcaller Group contained
in this Agreement shall be materially true at the Time of Closing as though they
were made at the Time of Closing and they shall survive the completion of the
transactions contemplated under this Agreement and remain in full force and
effect thereafter for a period of one year for the benefit of the Datawave
Group.
2. THE JOINT VENTURE
- -- -----------------
2.1 In order to complete this transaction, DTV and DCI shall cause a CBCA
company ("JVCo") to be incorporated prior to the Closing Date. JVCo shall be
given such name as DTV and DCI agree upon. JVCo shall, effective as of March 1,
1998, be constituted as follows:
(a) JVCo shall have an authorized share capital consisting of an unlimited
number of common shares without par value of which 60,000 common
shares (the "DCI JVCo Shares") will be issued to DCI, or its nominee,
as fully paid and non-assessable shares, and of which 40,000 common
shares (the "DTV JVCo Shares") will be issued to DTV, or its nominee,
as fully paid and non-assessable shares;
(b) JVCo shall have a board of six directors (the "JVCo Board"), three of
whom shall be nominees of DCI (at least one of whom shall be a
Canadian resident) and three of whom shall be nominees of DTV (at
least one of whom shall be a Canadian resident);
(c) JVCo will have a Chairman, to be chosen by the JVCo Board from its
members, and the Chairman shall be approved by all of the members of
the JVCo Board, and the Chairman will have a casting or deciding vote
in the event of a deadlock in the JVCo Board;
(d) Clive Barwin will be appointed as the Chief Executive Officer, Charles
Zwebner as the Chief Operating Officer and President of JVCo, and JVCo
will have such other officers as the JVCo Board may appoint; and
(e) the registered and records office of JVCo shall be care of the
solicitors for DTV and JVCo shall be extra-provincially registered in
British Columbia and Ontario and such other Canadian provinces as the
parties may agree upon.
In addition to the foregoing, DTV (and its nominee JVCo shareholder, if any),
DCI (and its nominee JVCo shareholder, if any) and JVCo shall enter into a
unanimous shareholders agreement (the "USA") in substantially the form attached
as Schedule "E" to this Agreement. The USA shall have been entered
-7-
<PAGE>
into by DCI, DTV and JVCo on or before 12:00 noon E.S.T. on Tuesday, February
10, 1998. All of the other foregoing items will have been completed on or before
the Closing Date.
2.2 As its initial contribution to the capital of JVCo, the Cardcaller
Group shall provide to JVCo, on the Closing Date, a total of $400,000 (the
"Cardcaller Group Funds"), of which:
(a) $60,000 will be in payment of the DCI JVCo Shares which will be issued
at a price of $1.00 per DCI JVCo Share; and
(b) $340,000 will represent a loan to JVCo (the "DCI Loan").
2.3 CCC will sell to JVCo, and JVCo will purchase from CCC, the Cardcaller
Assets free and clear of all liens, charges and encumbrances of any kind
whatsoever other than as expressly permitted on Schedule "C". The purchase
price for the Cardcaller Assets (the "CCC Asset Purchase Price") will be
$340,000, attributed to each of the Cardcaller Assets as set forth on Schedule
"C". The purchase and sale of the Cardcaller Assets will complete on the
Closing Date immediately following the delivery of the Cardcaller Group Funds to
JVCo.
2.4 In addition to the foregoing, CCC will sell to JVCo, and JVCo will
purchase from CCC, the specified Cardcaller goodwill (the "Cardcaller Goodwill")
described on Schedule "C", free and clear of all liens, charges and encumbrances
of any kind whatsoever other than as expressly permitted on Schedule "C". The
purchase price for the Cardcaller Goodwill will be $1,000,000 and will be
credited as a loan (the "DCI Goodwill Loan") made by DCI to JVCo repayable by
JVCo to DCI as provided for in the USA.
2.5 As its initial contribution to the capital of JVCo, on the Closing
Date, a total of $640,000 (the "Datawave Group Funds"), of which:
(a) $40,000 will be in payment of the DTV JVCo Shares which will be issued
at a price of $1.00 per DCI JVCo Share; and
(b) $600,000 will represent a loan to JVCo (the "DTV Loan").
2.6 PLI will sell to JVCo, and JVCo will purchase from PLI, the PLI Assets
free and clear of all liens, charges and encumbrances of any kind whatsoever
other than as expressly permitted on Schedule "A". The purchase price for the
PLI Assets (the "PLI Asset Purchase Price") will be $600,000 attributed to each
of the PLI Assets as set forth on Schedule "A". The purchase and sale of the
PLI Assets will complete on the Closing Date immediately following the delivery
of the Datawave Group Funds to JVCo.
2.7 In addition to the foregoing, PLI will sell to JVCo, and JVCo will
purchase from PLI, the specified PLI goodwill (the "PLI Goodwill") described on
Schedule "A", free and clear of all liens, charges and encumbrances of any kind
whatsoever other than as expressly permitted on Schedule "A". The purchase
price for the PLI Goodwill will be $1,000,000 and will be credited as a loan
(the "DTV Goodwill Loan") made by DTV to JVCo repayable by JVCo to DTV as
provided for in the USA.
2.8 CCC will provide to JVCo, on a sub-tenancy arrangement satisfactory to
the JVCo Board, the use of its existing premises in Toronto, Ontario for the
purposes of the sales, marketing, customer service and switching system
operations of JVCo. DTV will provide to JVCo, on a sub-tenancy arrangement
satisfactory to the JVCo Board, the use of its existing premises in Vancouver,
-8-
<PAGE>
British Columbia for the purposes of the head office, administration, billing
and card production operations of JVCo.
2.9 The DTV Loan and the DCI Loan shall rank parri passu and shall have
the same terms and conditions attached to each of them. The parties acknowledge
and agree that it is their intention to secure such loans and to determine the
terms and conditions, including interest and repayment terms, forthwith
following the Closing Date. In the event the parties do not determine any
additional terms and conditions, the DTV Loan and the DCI Loan shall be
unsecured loans, shall not bear interest, and shall not be callable by the
lender without the consent of JVCo.
3. OPTION
- -- ------
3.1 For a period of two years from the Closing Date, DTV (either directly
or through a nominee) shall have the right to purchase (the "DTV Option") from
DCI, or its nominee shareholder, 9,000 of the DCI JVCo Shares at a price of
$27.77 per DCI JVCo Share for consideration totalling $249,930 (the "Option
Price").
3.2 In the event that the DTV Option is exercised, DCI shall deliver to
DTV, or its nominee, a share certificate representing the 9,000 DCI JVCo Shares,
duly endorsed for transfer, against payment of the Option Price. The 9,000 DCI
JVCo Shares will be free and clear of all liens, charges or encumbrances of any
kind whatsoever.
3.3 In the event of any subdivision, consolidation or other change in the
share capital of JVCo while any portion of the DTV Option is outstanding, the
number of shares under option and the exercise price thereof shall be adjusted
in accordance with such subdivision, consolidation or other change in the share
capital of JVCo. In the event that JVCo undertakes an amalgamation, merger,
reorganization or other arrangement while any portion of the DTV Option is
outstanding, the number of shares under option and the exercise price thereof
shall be adjusted in accordance with such amalgamation, merger, reorganization
or other arrangement.
4. COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS
- -- ------------------------------------------
4.1 The Cardcaller Group covenants and agrees with the Datawave Group
that:
(a) from and including the Effective Date through to and including the
Closing Date, the Datawave Group, through its directors, officers,
employees and authorized agents and representatives (collectively the
"DTV Representatives") shall be entitled, at its own cost, full access
to CCC's books, records and property including, without limitation,
all of CCC's Assets so as to permit the Datawave Group to make such
investigation (the "DTV Investigation") of CCC as the Datawave Group
deems necessary;
(b) on or before the 13th day of February, 1998, provide to the Datawave
Group all such further documents, instruments and materials and do all
such acts and things as may be required in respect of CCC by the
Datawave Group to obtain Regulatory Approval for this Agreement;
(c) from and including the Effective Date through to and including the
Time of Closing do all such acts and things necessary to ensure that
all of the representations and warranties of the Cardcaller Group
contained in this Agreement or any certificates or documents delivered
by it pursuant to this Agreement remain true and correct; and
-9-
<PAGE>
(d) from and including the Effective Date through to and including the
Time of Closing, preserve and protect the goodwill, CCC Assets,
business and undertaking of CCC and, without limiting the generality
of the foregoing, carry on the business of CCC in a reasonable and
prudent manner.
4.2 The Cardcaller Group acknowledges to and agrees with the Datawave
Group that the DTV Investigation shall in no way limit or otherwise adversely
affect the rights of the Datawave Group as provided for hereunder in respect of
the representations and warranties of the Cardcaller Group contained in this
Agreement or any certificates or documents delivered by it pursuant to this
Agreement.
4.3 The Datawave Group covenants and agrees with the Cardcaller Group
that:
(a) from and including the Effective Date through to and including the
Closing Date, the Cardcaller Group, through its directors, officers,
employees and authorized agents and representatives (collectively the
"DCI Representatives") shall be entitled, at its own cost, full access
to PLI's books, records and property including, without limitation,
all of PLI's Assets so as to permit the Cardcaller Group to make such
investigation (the "DCI Investigation") of PLI as the Cardcaller Group
deems necessary;
(b) submit application for and use its best efforts to obtain Regulatory
Approval for this Agreement within the time period required under this
Agreement;
(c) from and including the Effective Date through to and including the
Time of Closing do all such acts and things necessary to ensure that
all of the representations and warranties of Datawave Group contained
in this Agreement or any certificates or documents delivered by it
pursuant to this Agreement remain true and correct; and
(d) from and including the Effective Date through to and including the
Time of Closing, preserve and protect the goodwill, PLI Assets,
business and undertaking of PLI and, without limiting the generality
of the foregoing, carry on the business of PLI in a reasonable and
prudent manner.
4.4 The Datawave Group acknowledges to and agrees with the Cardcaller
Group that the DCI Investigation shall in no way limit or otherwise adversely
affect the rights of the Cardcaller Group as provided for hereunder in respect
of the representations and warranties of the Datawave Group contained in this
Agreement or any certificates or documents delivered by it pursuant to this
Agreement.
5. CONDITIONS PRECEDENT
- -- --------------------
5.1 The Datawave Group's obligation to carry out the terms of this
Agreement and to complete its transactions contemplated under this Agreement is
subject to the fulfillment to its satisfaction of each of the following
conditions that:
(a) on or before the Time of Closing, the Datawave Group shall have been
able to complete the DTV Investigation to its reasonable satisfaction;
(b) on or before the Time of Closing, JVCo shall have entered into a
written employment agreement with Charles Zwebner (the "Employment
Agreement"), the form of which shall be approved by both DTV and CCC;
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<PAGE>
(c) on or before the Time of Closing, each member of the Cardcaller Group
shall have entered into a written non-competition agreement with JVCo
and with DTV (the "DCI Non-Competition Agreement"), the form of which
appears as Schedule "F" to this Agreement;
(d) at the Time of Closing, JVCo shall have been constituted as provided
for in paragraph 2.1 and the USA shall have been executed within the
time required under paragraph 2.1;
(e) as of the Time of Closing, the Cardcaller Group shall have complied
with all of its covenants and agreements contained in this Agreement;
and
(f) as of the Time of Closing, the representations and warranties of the
Cardcaller Group referred to in paragraphs 1.4 and 1.5 of this
Agreement, contained elsewhere in this Agreement or contained in any
certificates or documents delivered by it pursuant to this Agreement
shall be completely true as if such representations and warranties had
been made by the Cardcaller Group as of the Time of Closing.
The conditions set forth above are for the exclusive benefit of the Datawave
Group and may be waived by the Datawave Group in whole or in part on or before
the Time of Closing.
5.2 The Cardcaller Group's obligation to carry out the terms of this
Agreement and to complete its transactions contemplated under this Agreement is
subject to the fulfillment to its satisfaction of each of the following
conditions that:
(a) on or before the Time of Closing, the Cardcaller Group shall have been
able to complete the DCI Investigation to its reasonable satisfaction;
(b) on or before the Time of Closing, JVCo shall have entered into the
Employment Agreement;
(c) on or before the Time of Closing, each member of the Datawave Group
shall have entered into a written non-competition agreement with JVCo
and with DCI (the "DTV Non-Competition Agreement"), the form of which
appears as Schedule "F" to this Agreement;
(d) at the Time of Closing, JVCo shall have been constituted as provided
for in paragraph 2.1 and the USA shall have been executed within the
time required under paragraph 2.1;
(e) as of the Time of Closing, the Datawave Group shall have complied with
all of its covenants and agreements contained in this Agreement; and
(f) at the Time of Closing, the representations and warranties of the
Datawave Group referred to in paragraphs 1.1 and 1.2 of this
Agreement, contained elsewhere in this Agreement or contained in any
certificates or documents delivered by it pursuant to this Agreement
shall be completely true as if such representations and warranties had
been made by the Datawave Group as of the Time of Closing.
The conditions set forth above are for the exclusive benefit of the Cardcaller
Group and may be waived by it in whole or in part on or before the Time of
Closing.
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<PAGE>
5.3 The parties acknowledge and agree each with the other that this
transaction is subject to the approval ("Regulatory Approval") of the Vancouver
Stock Exchange ("VSE"). In the event that Regulatory Approval is not obtained
on or before the 31st day of March, 1998, this Agreement and the Letter of
Intent shall terminate and be of no further force and effect.
6. CLOSING
- -- -------
6.1 The completion of the transactions contemplated under this Agreement
shall be closed at the offices of Messrs. Campney & Murphy, P.O. Box 48800,
2100-1111 West Georgia Street, Vancouver, British Columbia at 9:00 o'clock a.m.
local time in Vancouver, B.C. (the "Time of Closing") on the fifth business day
following the date Regulatory Approval is obtained.
6.2 At the Time of Closing (or in the case of the USA, on or before 12:00
noon E.S.T. on February 10, 1998), the Cardcaller Group shall deliver to:
(a) the Datawave Group, a certified true copy of the resolutions of the
directors of DCI, CCC and of the sole shareholder of CCC approving
this Agreement and all of the transactions of DTV and CCC, as
applicable, contemplated hereunder and the resolutions shall include
specific reference to the payment of the Cardcaller Group Funds to
JVCo and to the sale and transfer of the CCC Assets and Cardcaller
Goodwill from CCC to JVCo as provided for in this Agreement;
(b) the Datawave Group and to JVCo, each an originally signed copy of the
USA, against delivery to the Cardcaller Group of an originally signed
copy by JVCo;
(c) JVCo, the Cardcaller Group Funds, with evidence of same to the
Datawave Group;
(d) JVCo, the Employment Agreement, with a copy of same to the Datawave
Group, against delivery to the Cardcaller Group of an originally
signed copy by JVCo;
(e) the Datawave Group and to JVCo, each an originally signed copy of the
DCI Non-Competition Agreement, against delivery to the Cardcaller
Group of an originally signed copy by JVCo and by the Datawave Group;
(f) JVCo, with evidence of same to the Datawave Group, such materials as
may be necessary to confirm the transfer of the CCC Assets and CCC
Goodwill to JVCo including, without limitation, any third party
consents, against payment by JVCo to the Cardcaller Group of the CCC
Asset Purchase Price; and
(g) any other materials that are, in the opinion of the Datawave Group
reasonably required to complete the transactions contemplated under
this Agreement.
6.3 At the Time of Closing (or in the case of the USA, on or before 12:00
noon E.S.T. on February 10, 1998), the Datawave Group shall deliver to:
(a) the Cardcaller Group, a certified true copy of the resolutions of the
directors of DTV, PLI and of the sole shareholder of PLI approving
this Agreement and all of the transactions of DTV and PLI, as
applicable, contemplated hereunder and the resolutions shall include
specific reference to the payment of the Datawave Group Funds to JVCo
-12-
<PAGE>
and to the sale and transfer of the PLI Assets and PLI Goodwill from
PLI to JVCo as provided for in this Agreement;
(b) the Cardcaller Group and to JVCo, each an originally signed copy of
the USA, against delivery to the Datawave Group of an originally
signed copy by JVCo;
(c) JVCo, the Datawave Group Funds, with evidence of same to the
Cardcaller Group;
(d) JVCo, the Employment Agreement, with a copy of same to the Cardcaller
Group, against delivery to the Datawave Group of an originally signed
copy by JVCo;
(e) the Cardcaller Group and to JVCo, each an originally signed copy of
the DTV Non-Competition Agreement, against delivery to the Datawave
Group of an originally signed copy by JVCo and by the Cardcaller
Group;
(f) JVCo, with evidence of same to the Cardcaller Group, such materials as
may be necessary to confirm the transfer of the PLI Assets and PLI
Goodwill to JVCo including, without limitation, any third party
consents, against payment by JVCo to the Datawave Group of the DTV
Asset Purchase Price;
(g) evidence that Regulatory Approval has been obtained; and
(h) any other materials that are, in the opinion of the Cardcaller Group
reasonably required to complete the transactions contemplated under
this Agreement.
6.4 Each of the parties shall take all steps necessary to cause JVCo to
complete its obligations under this Agreement, including, without limitation,
JVCo's obligations under paragraphs 2.1, 2.3, 2.4, 2.6, 2.7, 5.1, 5.2, 6.2 and
6.3 of this Agreement on or before the Closing Date.
7. ARBITRATION
-----------
7.1 The parties hereto agree that all questions or matters in dispute with
respect to this Agreement shall be submitted to arbitration pursuant to the
terms hereof. In this Part 7, the Cardcaller Group is one party and the
Datawave Group is one party.
7.2 It shall be a condition precedent to the right of any party hereto to
submit any matter to arbitration pursuant to the provisions hereof that any
party intending to refer any matter to arbitration shall have given prior
written notice of its intention to do so to the other party together with
written particulars of the matter in dispute. On the expiration of 10 days from
the date such notice is deemed delivered, the party who gave such notice may
proceed to refer the dispute to arbitration as provided in paragraph 7.3 hereof.
7.3 The party desiring arbitration shall appoint one arbitrator, and shall
notify the other party of such appointment, and the other party shall, within 15
days after such notice is deemed delivered, appoint an arbitrator, and the two
arbitrators so named, before proceeding to act, shall, within 15 days of the
appointment of the last appointed arbitrator, unanimously agree on the
appointment of a third arbitrator to act with them and be chairman of the
arbitration herein provided for. If the other party shall fail to appoint an
arbitrator within 15 days after notice of the appointment of the first
arbitrator is deemed delivered, the first arbitrator shall be the only
arbitrator. If the two arbitrators appointed by the parties shall be unable to
agree on the appointment of the chairman, the chairman shall be appointed under
the
-13-
<PAGE>
provisions of the Arbitration Act (Ontario). Except as specifically otherwise
provided in this paragraph, the arbitration herein provided for shall be
conducted in accordance with such Act. The chairman, or in the case where only
one arbitrator is appointed, the single arbitrator, shall fix a time and place
in Toronto, Ontario for the purpose of hearing the evidence and representations
of the parties, and he shall preside over the arbitration and determine all
questions of procedure not provided for under such Act or this paragraph. After
hearing any evidence and representations that the parties may submit, the single
arbitrator, or the arbitrators, as the case may be, shall make an award and
reduce the same to writing, and deliver one copy thereof to each of the parties.
The expense of the arbitration shall be paid as specified in the award.
7.4 The parties agree that the award of a majority of the arbitrators, or
in the case of a single arbitrator, of such arbitrator, shall be final and
binding upon each of them.
8. GENERAL
- -- -------
8.1 Time and each of the terms and conditions of this Agreement shall be
of the essence of this Agreement and any waiver by the parties of this paragraph
8.1 or any failure by them to exercise any of their rights under this Agreement
shall be limited to the particular instance and shall not extend to any other
instance or matter in this Agreement or otherwise affect any of their rights or
remedies under this Agreement.
8.2 The Schedules to this Agreement incorporated by reference and the
recitals to this Agreement constitute a part of this Agreement.
8.3 This Agreement constitutes the entire Agreement between the parties
hereto in respect of the matters referred to herein and there are no
representations, warranties, covenants or agreements, expressed or implied,
collateral hereto other than as expressly set forth or referred to herein. On
the Closing Date, the Letter of Intent will be deemed to have been terminated
and it will be of no further force and effect.
8.4 The headings in this Agreement are for reference only and do not
constitute terms of the Agreement.
8.5 The provisions contained in this Agreement which, by their terms,
require performance by a party to this Agreement subsequent to the Closing Date
of this Agreement, shall survive the Closing Date of this Agreement.
8.6 No alteration, amendment, modification or interpretation of this
Agreement or any provision of this Agreement shall be valid and binding upon the
parties hereto unless such alteration, amendment, modification or interpretation
is in written form executed by the parties directly affected by such alteration,
amendment, modification or interpretation.
8.7 Whenever the singular or masculine is used in this Agreement the same
shall be deemed to include the plural or the feminine or the body corporate as
the context may require.
8.8 The parties hereto shall execute and deliver all such further
documents and instruments and do all such acts and things as any party may,
either before or after the Closing Date, reasonably require in order to carry
out the full intent and meaning of this Agreement.
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<PAGE>
8.9 Any notice, request, demand and other communication to be given under
this Agreement shall be in writing and shall be delivered by hand or by
telecopier to the parties at their following respective addresses:
To either member of the Datawave Group:
Datawave Systems Inc.
101 West 5th Avenue
Vancouver, BC V5Y 1H9
Attention: Peter Hough
Telecopier: (604) 874-1503
To either member of the Cardcaller Group:
Cardcaller Canada Inc.
Suite 302, 5075 Yonge Street
Toronto, Ont. M2N 6C6
Attention: Charles Zwebner
Telecopier: (416) 398-4936
or to such other addresses as may be given in writing by the parties hereto in
the manner provided for in this paragraph, and shall be deemed to have been
received, if delivered by hand, on the date of delivery, or if delivered by
telecopier, on the date that it is sent.
8.10 This Agreement may not be assigned by any party hereto without the prior
written consent of all of the parties hereto.
8.11 This Agreement shall be subject to, governed by, and construed in
accordance with the laws of the Province of Ontario.
8.12 This Agreement may be signed by the parties in as many counterparts as
may be deemed necessary, each of which so signed shall be deemed to be an
original, and all such counterparts together shall constitute one and the same
instrument.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals as of the
Effective Date first above written.
THE CORPORATE SEAL of DATAWAVE SYSTEMS INC. )
was hereunto affixed in the presence of: )
)
/s/ Peter Hough )
- ---------------------------------------------- ) c/s
)
/s/ Clive Barwin )
- ----------------------------------------------
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<PAGE>
THE CORPORATE SEAL of PHONE LINE )
INTERNATIONAL (PLI) INC. )
was hereunto affixed in the presence of: )
) c/s
/s/ Peter Hough )
- ---------------------------------------------- )
)
/s/ Clive Barwin
- ----------------------------------------------
THE CORPORATE SEAL of DCI TELECOMMUNICATIONS, )
INC. was hereunto affixed in the presence of: )
)
/s/ )
- ---------------------------------------------- ) c/s
)
President & CEO )
- ----------------------------------------------
THE CORPORATE SEAL of CARDCALLER CANADA INC. )
was hereunto affixed in the presence of: )
)
)
- ---------------------------------------------- ) c/s
)
/s/ )
- ----------------------------------------------
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<PAGE>
EXHIBIT 10.17
UNANIMOUS SHAREHOLDERS' AGREEMENT
AMONG
DATAWAVE SYSTEMS INC.
DCI TELECOMMUNICATIONS INC.
3423221 CANADA INC.
MARCH 1, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ARTICLE 1 INTERPRETATION............................................................. 2
1.1 DEFINITIONS.................................................................. 2
1.2 INTERPRETATION............................................................... 3
ARTICLE 2 IMPLEMENTATION OF AGREEMENT................................................ 4
2.1 UNANIMOUS SHAREHOLDERS' AGREEMENT............................................ 4
2.2 DEEMED CONSENTS.............................................................. 4
2.3 EFFECT OF AGREEMENT.......................................................... 4
2.4 CONFLICT..................................................................... 4
2.5 NOTICE BY COMPANY OF SHAREHOLDERS' AGREEMENT................................. 5
2.6 ENDORSEMENT UPON SHARE CERTIFICATES.......................................... 5
2.7 SUBSEQUENT MEMBERS TO BE BOUND............................................... 5
2.8 SHARES....................................................................... 5
2.9 ACKNOWLEDGEMENT OF THE DIRECTORS............................................. 5
ARTICLE 3 ORGANIZATION............................................................... 6
3.1 OWNERSHIP OF SHARES.......................................................... 6
3.2 QUORUM AT SHAREHOLDERS' MEETING.............................................. 6
3.3 BOARD OF DIRECTORS........................................................... 6
3.4 QUORUM AT BOARD MEETINGS..................................................... 6
3.5 PROCEEDINGS OF DIRECTORS..................................................... 6
3.6 NOMINEES..................................................................... 6
3.7 EXPENSES..................................................................... 6
3.8 OFFICERS..................................................................... 6
ARTICLE 4 MAJOR DECISIONS............................................................ 7
4.1 MAJOR DECISIONS.............................................................. 7
ARTICLE 5 FINANCING.................................................................. 8
5.1 INITIAL LOANS................................................................ 8
5.2 GOODWILL LOANS............................................................... 8
5.3 FURTHER ADVANCES............................................................. 8
5.4 REMITTANCE OF FURTHER ADVANCES............................................... 8
5.5 ADJUSTMENT OF INTERESTS...................................................... 8
5.6 TERMS OF ADVANCES............................................................ 9
5.7 WAIVER OF PRE-EMPTIVE RIGHTS................................................. 10
5.8 GUARANTEES................................................................... 11
ARTICLE 6 RESTRICTIONS UPON TRANSFERS................................................ 11
6.1 RIGHT OF TRANSFER RESTRICTED................................................. 11
6.2 TRANSFER TO AFFILIATE........................................................ 11
</TABLE>
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<TABLE>
<S> <C>
ARTICLE 7 RIGHT OF FIRST REFUSAL..................................................... 11
7.1 RIGHT OF FIRST REFUSAL....................................................... 11
7.2 DEEMED OFFER................................................................. 12
7.3 SECRETARY TO BE AGENT OF TRANSFEROR.......................................... 12
7.4 NOTICE....................................................................... 12
7.5 FAILURE TO TAKE UP SHARES.................................................... 12
7.6 FAILURE TO SELL TO A THIRD PARTY............................................. 12
7.7 OFFERS BY TRANSFERORS MUST CONFORM TO NOTICE TERMS........................... 13
7.8 MEANING OF BONA FIDE ARM'S LENGTH OFFER...................................... 13
7.9 THIRD PARTY TO BE BOUND...................................................... 13
7.10 WAIVER....................................................................... 13
7.11 PRIORITY..................................................................... 13
ARTICLE 8 COMPULSORY BUY-SELL........................................................ 14
8.1 BUY-SELL..................................................................... 14
8.2 OFFER TO SELL................................................................ 14
8.3 OFFER TO PURCHASE............................................................ 14
8.4 TERMS........................................................................ 14
8.5 PRIORITY..................................................................... 14
ARTICLE 9 OPTION TO PURCHASE ON DEFAULT.............................................. 15
9.1 EVENT OF DEFAULT............................................................. 15
9.2 DETERMINATION OF DEFAULTS.................................................... 15
9.3 REMEDIES UPON DEFAULT........................................................ 15
9.4 OPTION TO PURCHASE........................................................... 16
9.5 EXERCISE OF OPTION........................................................... 16
9.6 AGREEMENT.................................................................... 17
9.7 DETERMINATION OF NET VALUE................................................... 17
9.8 CLOSING OF OPTION SALE....................................................... 17
9.9 PRIORITY..................................................................... 17
ARTICLE 10 COMPLETION OF CONTRACTS................................................... 18
10.1 TIME AND PLACE OF CLOSING.................................................... 18
10.2 PARTIES TO THE CONTRACT...................................................... 18
10.3 PAYMENT FOR TRANSFER SHARES.................................................. 18
10.4 PAYMENT OF VENDOR'S ADVANCES AND RELEASE OF VENDOR'S RESPONSIBILITIES........ 18
10.5 CLOSING DOCUMENTS AND ESCROW BY THE COMPANY.................................. 19
10.6 TIME TO BE OF THE ESSENCE.................................................... 20
10.7 FAILURE TO COMPLETE.......................................................... 20
ARTICLE 11 GENERAL................................................................... 20
11.1 INDEMNITY.................................................................... 20
11.2 WAIVER....................................................................... 20
11.3 FURTHER ASSURANCES........................................................... 21
11.4 ARBITRATION.................................................................. 21
11.5 ENTIRE AGREEMENT............................................................. 21
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
11.6 PAYMENT OF MONIES............................................................ 21
11.7 SEVERABILITY................................................................. 21
11.8 REMEDIES..................................................................... 21
11.9 NOTICES...................................................................... 21
11.10 CONFIDENTIALITY.............................................................. 22
11.11 GOVERNING LAW................................................................ 23
11.12 AMENDMENTS................................................................... 23
11.13 ASSIGNMENT................................................................... 23
11.14 ENUREMENT.................................................................... 23
11.15 TIME OF THE ESSENCE.......................................................... 23
11.16 COUNTERPARTS AND FACSIMILE................................................... 23
</TABLE>
-iii-
<PAGE>
UNANIMOUS SHAREHOLDERS' AGREEMENT
---------------------------------
THIS AGREEMENT dated for reference the 1st day of March, 1998.
BETWEEN:
DATAWAVE SYSTEMS INC., a British Columbia company with a place of
---------------------
business at 101 West 5th Avenue, Vancouver, BC, Canada, V5Y 1H9;
("DTV")
AND:
DCI TELECOMMUNICATIONS INC., a Colorado company with a place of
---------------------------
business at 611 Access Road, Statford, Connecticut, USA, 06497;;
("DCI")
AND:
3423221 CANADA INC., a company incorporated under the laws of
-------------------
Canada with a place of business at 101 West 5th Avenue, Vancouver,
BC, Canada, V5Y 1H9;
(the "Company")
AND:
THOSE PERSONS LISTED ON SCHEDULE "A" TO THIS AGREEMENT
------------------------------------------------------
(collectively the "Directors" and individually a "Director")
WHEREAS:
A. The Company is a company incorporated under the Canada Business
Corporations Act;
B. DTV and DCI are the beneficial and registered owners of all the
issued and outstanding shares of the Company;
C. The Directors are the directors of the Company;
D. The parties wish to enter into this Agreement for the purpose of
defining certain rights and obligations between each of them and each other
person who becomes a shareholder in the Company and between each of them and the
Company;
WITNESSES that in consideration of the premises and of the mutual
covenants, agreements and condition herein contained, the parties hereby agree
and declare as follows:
<PAGE>
ARTICLE 1
---------
INTERPRETATION
--------------
1.1 DEFINITIONS
-----------
In this Agreement, unless otherwise expressly stated:
"Act" means the Canada Business Corporations Act, as amended from time to
time;
"Advances" means all outstanding loans made by a Shareholder to the Company
and includes the Goodwill Loans and the Initial Loans;
"Affiliate" has the meaning which that term has in the Act;
"arm's length", "acting at arm's length", "non-arm's length", "not acting
at arm's length" and similar expressions have the same meaning which those
expressions have in the Income Tax Act (Canada);
"Articles" means the Articles of the Incorporation of the Company, a copy
of which is annexed as Schedule "B";
"associate", where used to indicate a relationship with any person or
corporation, means:
(a) any corporation of which such person or corporation beneficially owns,
directly or indirectly, 10% or more of the shares of such corporation
carrying the right to vote for the election of directors;
(b) any trust or estate in which such person or corporation has a
substantial beneficial interest or as to which such person or
corporation serves as a trustee or in a similar capacity;
(c) any immediate relative of such person;
(d) any person to whom such person is married or with whom such person is
living in a conjugal relationship outside marriage; and
(e) any immediate relative of a person mentioned in (d) above;
"Board" means the Board of Directors of the Company and, where the context
permits, the Board of Directors of any subsidiary of the Company;
"Bylaws" means the bylaws of the Company, a copy of which is annexed as
Schedule "C";
"control", in respect of any corporation, means:
(a) the right to exercise a majority of the votes which may be put at any
general meeting of that corporation, together with
(b) the right to appoint, directly or indirectly, a majority of the
directors of that corporation or other persons who have the right to
manage or supervise the management of the affairs and business of that
corporation;
-2-
<PAGE>
"Directors" means the persons described in Schedule "A" and any other
parties who are from time to time, in accordance with the terms of this
Agreement, duly appointed directors of the Company;
"Excess DTV Loan" means the amount by which the Initial DTV Loan exceeds
the Initial DCI Loan, as described in section 5.1;
"Goodwill Loans" means the loans made by DTV and DCI to the Company as
described in section 5.2;
"Heads of Agreement" means the agreement dated as of the 1st day of March,
1998 among DTV, Phone Lines International (PLI) Inc., DCI and Cardcaller
Canada Inc.;
"Independent Accountants" means the Toronto office of Price Waterhouse, or
if such firm is unable or unwilling to act, such other nationally
recognized firm of chartered accountants as may be proposed by the person
who is selling Shares pursuant to a contract in respect of which a
determination of Net Value is required, such alternate firm to be approved
by the person who is purchasing Shares pursuant to such contract (which
approval is not to be unreasonably withheld);
"Initial Loans" means the Initial DTV Loan and the Initial DCI Loan, as
described in section 5.1;
"Net Value", as at any date, means the aggregate of the following amounts
which would appear on a consolidated balance sheet of the Company prepared
as at such date in accordance with generally accepted accounting
principles, namely:
(a) capital stock and paid-up capital;
(b) retained earnings (or as a negative amount, deficit) including any
current profit and loss not transferred to retained earnings or
deficit; and
(c) contributed or other capital surplus;
"Officer" means any officer of the Company;
"parties" means the parties to this Agreement and each person who hereafter
subscribes to this Agreement;
"person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision of any government;
"Secretary" means the secretary for the time being of the Company;
"Shareholder" means any person who is the holder of one or more Shares; and
"Share" means an issued share in the capital of the Company.
1.2 INTERPRETATION
--------------
In this Agreement, unless otherwise expressly stated:
-3-
<PAGE>
(a) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Article, section or other subdivision;
(b) the headings are for convenience only and do not form a part of this
Agreement and are not intended to interpret, define or limit the
scope, extent or intent of this Agreement or any provision hereof;
(c) the singular of any term includes the plural, and vice versa; use of
any term is generally applicable to any gender and, where applicable,
a corporation; the word "or" is not exclusive and the word "including"
is not limiting, whether or not non-limiting language (such as
"without limitation" or "but not limited to" or words of similar
import) is used with reference thereto; and all covenants herein
contained shall be construed to be joint and several when applicable
to more than one party;
(d) any reference to a statute includes the regulations made pursuant
thereto, all amendments made to such statute or regulations and in
force from time to time, and any statute or regulations that may be
passed which has the effect of supplementing or superseding such
statute or regulations; and
(e) any financial determination required to be made hereunder shall be
performed in accordance with generally accepted accounting principles
applied on a consistent basis and complying with the recommendations
within the handbook of the Canadian Institute of Chartered
Accountants.
ARTICLE 2
---------
IMPLEMENTATION OF AGREEMENT
---------------------------
2.1 UNANIMOUS SHAREHOLDERS' AGREEMENT
---------------------------------
This Agreement constitutes a unanimous shareholders' agreement for the purposes
of the Act.
2.2 DEEMED CONSENTS
---------------
Each Shareholder shall be deemed to have consented to any transfer of Shares
made in accordance with this Agreement and each Shareholder covenants and agrees
to waive any restriction on the transfer of shares contained in the Articles or
Bylaws of the Company in order to give effect to such transfers.
2.3 EFFECT OF AGREEMENT
-------------------
Each Shareholder shall vote or cause to be voted the Shares owned by it in such
a way as to fully implement the terms and conditions of this Agreement and
shall, if any Director acts contrary to the terms of this Agreement, forthwith
take such steps as are necessary to remove such Director.
2.4 CONFLICT
--------
In the event of any conflict between the provisions of this Agreement and the
Articles or Bylaws of the Company on the other, the provisions of this Agreement
shall govern. Each Shareholder agrees to vote or cause to be voted the Shares
owned by it as necessary so as to cause the Articles or Bylaws, or both, as the
case may be, of the Company to be amended to resolve any such conflict in favour
of the provisions of this Agreement.
-4-
<PAGE>
2.5 NOTICE BY COMPANY OF SHAREHOLDERS' AGREEMENT
--------------------------------------------
The Company by its execution hereof hereby acknowledges that it has actual
notice of the terms of this Agreement, consents thereto and hereby covenants
with each of the Shareholders or other parties hereto that it will at all times
during the continuance hereof be governed by this Agreement in carrying out its
business and affairs and accordingly shall give or cause to be given such
notice, execute or cause to be executed such deeds, transfers and documents and
do or cause to be done all such acts, matters and things as may from time to
time be necessary or conducive to the carrying out of the terms and intent
hereof.
2.6 ENDORSEMENT UPON SHARE CERTIFICATES
-----------------------------------
Any share certificate issued or to be issued by the Company shall be endorsed
with the following memorandum:
"The rights of the holder and successors to the holder to sell,
encumber, alienate or realize the Shares represented hereby are
restricted by the terms of an Agreement between the Shareholders of
the Company and the Company dated the 1st day of March, 1998, a
copy of which Agreement is on record with the Secretary of the
Company."
2.7 SUBSEQUENT MEMBERS TO BE BOUND
------------------------------
Each person who becomes a Shareholder of the Company hereafter shall subscribe
to and be bound by the terms of this Agreement and shall signify its assent to
the terms hereof by signing this Agreement or by delivering an instrument in
writing duly executed under seal to the Secretary of the Company and to the
existing Shareholders indicating an intention to be bound by the terms hereof
and setting out an address in British Columbia for delivery hereunder, and each
of the parties covenants and agrees that upon the subsequent assent to this
Agreement by any such person, each of them shall be bound to each and every such
person and, in like manner, each and every such person shall be bound to each
party and to each and every subsequent subscriber thereafter.
2.8 SHARES
------
The provisions of this Agreement relating to Shares shall apply mutatis mutandis
to any shares or securities into which such Shares may be converted, changed,
re-classified, re-divided, re-designated, redeemed, subdivided or consolidated;
to any shares or securities that are received by the Shareholders as a stock
dividend or distribution payable in shares or securities of the Company; and to
any shares or securities of the Company or of any successor or continuing
company to the Company that may be received by the Shareholders on a
reorganization, amalgamation, consolidation, or merger, statutory or otherwise.
2.9 ACKNOWLEDGEMENT OF THE DIRECTORS
--------------------------------
By their execution hereof, the Directors acknowledge that they shall have the
power and obligation to manage the business and affairs of the Company, subject
to the restrictions contained herein including, without limitation, the
restrictions on the conduct of business at meetings of the Directors and such
persons hereby covenant that they shall not manage the business and affairs of
the Company or conduct business at any meeting of the Directors in any manner
which contravenes the terms, conditions, provisions or intent of this Agreement.
In addition, the Shareholders covenant with each other that they
-5-
<PAGE>
shall require any person nominated to be a Director to execute a counterpart of
this Agreement in order to acknowledge, and become bound by, the terms and
conditions hereof.
ARTICLE 3
---------
ORGANIZATION
------------
3.1 OWNERSHIP OF SHARES
-------------------
The parties acknowledge that each Shareholder has subscribed for and is the
owner, beneficially and of record, of the number of Shares in the Company set
forth opposite the name of such Shareholder below:
<TABLE>
<CAPTION>
Subscription Number, Kind and
Shareholder Amount Class of Shares
- ----------- ----------------------- --------------------------------
<S> <C> <C>
DTV $40,000.00 40,000 Common (40%)
DCI $60,000.00 60,000 Common (60%)
</TABLE>
3.2 QUORUM AT SHAREHOLDERS' MEETING
-------------------------------
The quorum for all meetings of the Shareholders shall be all of the
Shareholders.
3.3 BOARD OF DIRECTORS
------------------
The number of Directors on the Board of the Company shall be six, of whom three
shall be nominated by DTV and three shall be nominated by DCI.
3.4 QUORUM AT BOARD MEETINGS
------------------------
The quorum for all meetings of the Board of the Company shall be six.
3.5 PROCEEDINGS OF DIRECTORS
------------------------
Decisions of the Board of the Company shall be by majority vote, but the
Chairman of the Board shall have a second or casting vote in the event of a
deadlock on the Board.
3.6 NOMINEES
--------
Each Shareholder shall vote, or cause its shares in the Company to be voted, so
that the nominees of the Shareholders are appointed to the Board in accordance
with the terms of section 3.3 and any vacancies on the Board are filled by the
appointment of a nominee of the Shareholder whose nominee formerly occupied such
vacant position.
3.7 EXPENSES
--------
The Company will pay reasonable expenses with respect to one actual meeting of
the Board in each year. If any other Board meetings are required, they may be
conducted by teleconference.
3.8 OFFICERS
--------
The Board shall appoint the following officers:
-6-
<PAGE>
(a) a Chairman, to be chosen from the Board and approved by all of the
members of the Board;
(b) a Chief Executive Officer, who shall be Clive Barwin unless and until
otherwise determined by the Board;
(c) a Chief Operating Officer and President who shall be Charles Zwebner
unless and until otherwise determined by the Board; and
(d) such other officers as the Board may determine.
ARTICLE 4
---------
MAJOR DECISIONS
---------------
4.1 MAJOR DECISIONS
---------------
The authority given to the Directors in respect of the Company under this
Agreement shall not extend to any of the following actions which shall require
the prior unanimous written consent of the Shareholders:
(a) the reduction of the capital of the Company or making any distribution
of assets upon, or the redemption, reduction or other retirement or
purchase of, any of the Shares of the Company (except as otherwise
contemplated herein);
(b) the increase, alteration, modification or amendment of the authorized
capital of the Company, whether issued or unissued, in any manner
whatsoever;
(c) the splitting or consolidation of any of the authorized capital of the
Company, whether issued or unissued;
(d) the issuance or allotment or grant of any right to subscribe for or
acquire any Shares in the capital of the Company (including securities
convertible or exchangeable into Shares of the Company), except where
provided for in this Agreement;
(e) the sale, assignment, lease, exchange or transfer of all or
substantially all of the assets or undertaking of the Company;
(f) any increase or decrease in the number of Directors;
(g) any change in the quorum requirements for meetings of the Shareholders
or for meetings of the Directors of the Company;
(h) the amendment, repeal or variation of any provision contained in the
Articles of the Company;
(i) any consolidation, amalgamation, merger or combination of the Company
with any other company; and
(j) any consent to the filing of a bankruptcy petition in respect of, or
to the appointment of a trustee in bankruptcy, receiver or liquidator
of, or other person supervising or conducting the winding-up,
liquidation, dissolution or re-organization of, or other similar
proceeding or occurrence relating to the Company; passing any
resolution for the winding-up of the
-7-
<PAGE>
Company; making any assignment for the benefit of, or any other
similar arrangement with, the creditors of the Company; or committing
or threatening to commit an act of bankruptcy.
ARTICLE 5
---------
FINANCING
---------
5.1 INITIAL LOANS
-------------
The Shareholders have advanced or have agreed to advance to the Company the
following amounts by way of loans (the "Initial Loans"):
<TABLE>
<CAPTION>
Shareholder Amount
- ----------- ------
<S> <C>
DTV $600,000.00
DCI $340,000.00
</TABLE>
The Initial Loan by DTV is hereinafter called the "Initial DTV Loan"; and the
Initial Loan by DCI is hereinafter called the "Initial DCI Loan". The amount by
which the Initial DTV Loan exceeds the Initial DCI Loan ($260,000) is
hereinafter called the "Excess DTV Loan". The provisions of section 5.6 shall
apply to the Initial Loans.
5.2 GOODWILL LOANS
--------------
In addition to the Initial Loans, the Company is indebted to each of the
Shareholders in the sum of $1,000,000 (collectively the "Goodwill Loans") in
pursuance of sections 2.4 and 2.7 of the Heads of Agreement. The provisions of
section 5.6 shall apply to the Goodwill Loans.
5.3 FURTHER ADVANCES
----------------
Except as provided in this Agreement, no Shareholder shall be obliged to make
any Advances to the Company. If the Directors determine by resolution that
additional funds are required from the Shareholders, the Company shall raise
such additional funds by giving written notice to the Shareholders requiring
them to make advances (the "Further Advances") totalling the additional funds
required in proportion to their respective holdings of Shares. If within 30
days of receiving written notice of such offer any Shareholder (in this Article,
a "Non-Contributing Shareholder") fails to remit the Further Advances as
requested, then the other Shareholder (in this Article, the "Contributing
Shareholders") shall be entitled (but shall not be obliged) within 60 days
thereafter to remit the Further Advances not so remitted.
5.4 REMITTANCE OF FURTHER ADVANCES
------------------------------
In the event of a failure of a Non-Contributing Shareholder to remit Further
Advances to the Company pursuant to section 5.3, the provisions of section 5.5
shall apply.
5.5 ADJUSTMENT OF INTERESTS
-----------------------
For the purposes of this section 5.5 only, DTV shall be deemed to have made
Advances to the Company in the sum of $40,000; and DCI shall be deemed to have
made Advances to the Company in the sum of $60,000 (such Advances hereinafter
called the "Deemed Advances"). If a Shareholder fails to remit a
-8-
<PAGE>
Further Advance in pursuance of section 5.3, the number of Shares to which the
Shareholders are entitled shall be adjusted on the basis that the number of
Shares to which a particular Shareholder is from time to time entitled is
100,000 multiplied by a fraction of which:
(a) the numerator is the sum of the particular Shareholder's Deemed
Advances and Further Advances; and
(b) the denominator is the sum of both Shareholders' Deemed Advances and
Further Advances,
and the Non-Contributing Shareholder shall forthwith execute and deliver to the
Contributing Shareholder one or more share certificates representing the Shares
of the Non-Contributing Shareholder, endorsed for transfer in favour of the
Contributing Shareholder, as well as a resolution of the Directors of the
Company authorizing the transfer of Shares by the Non-Contributing Shareholder
to the Contributing Shareholder and any other documents which may reasonably be
required to effect the foregoing resulting transfer of Shares by the Non-
Contributing Shareholder to the Contributing Shareholder.
5.6 TERMS OF ADVANCES
-----------------
The terms of each Advance shall, unless all of the Shareholders otherwise agree
and except as provided in section 5.4, be as follows:
(a) the Goodwill Loans shall not bear interest, and shall be payable on
the seventh anniversary of this Agreement;
(b) Advances other than the Goodwill Loans shall bear interest on the
unpaid balance thereof at the rate of 12% per annum, computed from the
dates such Advances arise, calculated daily and compounded semi-
annually, not in advance, both before and after maturity or default,
and such interest shall (subject to the remaining provisions of this
section) be due and payable 30 days following the end of each fiscal
year of the Company;
(c) the principal amount of each Advance other than the Goodwill Loans
shall (subject to the remaining provisions of this section) be repaid
in such installments and at such times as the Directors of the Company
may by resolution determine. Any repayments of principal shall be
directed as follows:
(i) firstly, towards payment of that portion of any
Shareholder's Advances which are in excess of its
proportionate holdings of Shares in the Company; and
(ii) secondly, towards payment of the remaining Advances pro rata
amongst the Shareholders according to their respective
holdings of Shares in the Company;
(d) the Excess DTV Loan shall be repayable on the earlier of:
(i) the sale by one or both of the Shareholders of all of their
Shares of the Company to a third party; or
(ii) the exercise by DTV of its option to purchase 9,000 Shares
of the Company from DCI for $249,930 as contemplated in
section 3.1 of the Heads of Agreement, but
-9-
<PAGE>
only if the Company then has sufficient funds available to repay
the Excess DTV Loan;
(e) after default, whether of principal or interest or both, interest at
the rate aforesaid shall accrue and be payable on the first day of
each and every month and upon default of payment of any installment of
interest, such interest shall at once become principal and bear
interest at the rate aforesaid, which interest shall be payable on the
first day of each and every month, and shall bear interest at the rate
aforesaid if not paid prior to the next day for the payment of
interest, to the intent that all interest, whether upon principal or
upon interest, shall be compounded at each day mentioned for the
payment of interest;
(f) the Company may at any time and from time to time prepay all or any
portion of the principal amount outstanding under the Advances,
together with interest thereon at the rate aforesaid to the date or
dates of such prepayment, without notice, penalty or bonus. Each such
prepayment shall be made in accordance with the order of distribution
set forth in subsection (c) above;
(g) the principal amount outstanding under each Advance, together with all
accrued interest thereon, shall forthwith become due and payable at
the option of the Shareholder to whom such Advance is owed upon the
occurrence of any of the following events:
(i) the Company becoming bankrupt or filing a proposal or making
an assignment for the benefit of creditors;
(ii) a receiver, interim-receiver, trustee, liquidator, or a
receiver/manager being appointed for substantially all of
the property or business of the Company; or
(iii) the Company defaulting in payment of any instalment of
principal or interest and such default continuing for
fifteen (15) days after the Company and the other
Shareholder receives written notice thereof from the
Shareholder whose Advances are so in default;
(h) the Shareholders shall subordinate and postpone their Advances (and
shall, without limitation, postpone the date for payment of principal
and interest thereon) as may be required from time to time in order to
facilitate other borrowing by the Company or to keep the Company in
compliance with the terms of any credit facilities from time to time
being used by the Company; and
(i) the Company will at any time upon request by any Shareholder execute
and deliver to such Shareholder promissory notes evidencing the
obligations of the Company to such Shareholder in connection with the
Advances, as well as such security as the Board may determine to grant
to any Shareholder in respect of the Advances.
5.7 WAIVER OF PRE-EMPTIVE RIGHTS
----------------------------
The Shareholders hereby waive and agree to waive any pre-emptive right or other
right provided for in the Act or Articles or Bylaws of the Company which might
otherwise interfere or conflict with the operation of this Article.
-10-
<PAGE>
5.8 GUARANTEES
----------
Except upon the unanimous determination of the Shareholders, no Shareholder
shall be obligated to enter into any guarantee with respect to the indebtedness
or obligations of the Company, or to pledge its credit on behalf of the Company.
ARTICLE 6
---------
RESTRICTIONS UPON TRANSFERS
---------------------------
6.1 RIGHT OF TRANSFER RESTRICTED
----------------------------
Except as permitted by this Agreement, no Shareholder (in this section, the
"Transferor") shall sell, assign, transfer, mortgage, pledge, charge or
otherwise dispose of or encumber, or agree absolutely or contingently to dispose
of or encumber, any interest in or the control over any Shares or Advances
except with the prior written consent of each other Shareholder and then only if
the person to whom the Transferor desires to dispose of or encumber such
interest or control agrees with the other parties to this Agreement to become
bound by the terms of this Agreement.
6.2 TRANSFER TO AFFILIATE
---------------------
A Shareholder may sell, transfer or otherwise dispose of the whole or any part
of its Shares or Advances to any of its Affiliates if the Shareholder and the
Affiliate enter into an agreement with the other parties that:
(a) the Affiliate will remain an affiliate so long as it holds the said
Shares or Advances or any part thereof;
(b) prior to the Affiliate ceasing to be an affiliate, it will transfer
the Shares or Advances back to the Shareholder of which it was an
Affiliate or to another Affiliate of such Shareholder, provided that
such other Affiliate enters into a similar agreement with the other
parties;
(c) the Affiliate will otherwise be bound by the provisions of this
Agreement; and
(d) the Shareholder will remain jointly and severally liable with the
Affiliate for any obligations arising out of this Agreement.
ARTICLE 7
---------
RIGHT OF FIRST REFUSAL
----------------------
7.1 RIGHT OF FIRST REFUSAL
----------------------
A Shareholder (in this Article, the "Transferor") may sell, assign or transfer
all (but not less than all) of its Shares and Advances to any person if the
Transferor shall, before offering to sell such Shares or Advances to any person
or accepting any offer from any person to purchase such Shares or Advances,
deliver to the Secretary written notice (in this Article, the "Notice")
specifying:
(a) the number of Shares which the Transferor desires or proposes to sell,
assign or transfer;
(b) the price per share (expressed in Canadian currency) at which the
Transferor proposes to sell, assign or transfer such Shares;
-11-
<PAGE>
(c) the principal amount of Advances which the Transferor proposes to
sell, assign or transfer and the price to be paid for such Advances;
(d) any other terms and conditions of the proposed sale, assignment or
transfer (which shall not be inconsistent with the terms of this
Agreement); and
(e) whether or not the Transferor has received a bona fide arm's length
offer to purchase such Shares or Advances from, or proposes to sell
such Shares or Advances to, any particular person and, if so, the
information with respect to such person specified in section 7.10.
7.2 DEEMED OFFER
------------
The Notice shall be deemed to constitute an offer by the Transferor to sell the
Shares and Advances referred to in the Notice to the other Shareholder, at the
price per Share, on the other terms specified in the Notice and otherwise in
accordance with this Agreement, and the Transferor shall not be permitted to
withdraw such offer until after the expiration of the period referred to in
section 7.4.
7.3 SECRETARY TO BE AGENT OF TRANSFEROR
-----------------------------------
Delivery of the Notice to the Secretary shall be deemed to constitute the
Secretary the agent of the Transferor for the sale of the Shares or Advances
referred in the Notice to the other Shareholder at the price per Share, on the
other terms specified in the Notice and otherwise in accordance with this
Agreement.
7.4 NOTICE
------
As soon as the Notice has been received by the Secretary, the Secretary shall
provide a copy of such Notice to the other Shareholder and shall invite it to
advise the Secretary in writing, prior to the expiration of a period of 30 days
following receipt by the Shareholder of a copy of the Notice, whether it is
willing to purchase all of the Shares and Advances referred to in the Notice.
A binding contract of purchase and sale shall be formed between the Shareholder
which has indicated its willingness to purchase the Shares referred to in the
Notice and the Transferor, respectively, at the price per share, on the other
terms specified in the Notice and otherwise in accordance with this Agreement
for the Shares and Advances referred to in the Notice.
7.5 FAILURE TO TAKE UP SHARES
-------------------------
If the other Shareholder does not advise the Secretary pursuant to section 7.4
that it is willing to purchase all of the Shares referred to in the Notice, then
the Transferor may, within a period of 30 days following the expiration of the
30-day period referred to in section 7.4, sell all (but not less than all) of
such Shares and Advances that the other Shareholder is not willing to purchase
to any person (a "Third Party") who makes a bona fide arm's length offer to the
Transferor to purchase such Shares at the price per Share and on the other terms
specified in the Notice.
7.6 FAILURE TO SELL TO A THIRD PARTY
--------------------------------
If a sale of Shares and Advances referred to in the Notice as permitted by this
Agreement is not completed within the 30-day period referred to in section 7.5,
then the Transferor may only sell such
-12-
<PAGE>
Shares and Advances if all of the requirements of this Article 7 are again
complied with and the right of first refusal granted by this Article 7 shall
continue in full force and effect with respect to all Shares and Advances then
held by the Transferor.
7.7 OFFERS BY TRANSFERORS MUST CONFORM TO NOTICE TERMS
--------------------------------------------------
The Transferor shall not sell or offer to sell to any person, or accept any
offer from any person to purchase, any Shares or Advances pursuant to this
Article 7 at a price per share lower, or upon terms significantly different
than, the price per share and the other terms specified in the Notice.
7.8 MEANING OF BONA FIDE ARM'S LENGTH OFFER
---------------------------------------
In order to be a bona fide arm's length offer within the meaning of this Article
7, an offer must be in writing signed by the offeror (who must be a person
dealing at arm's length with the Transferor and a person financially capable of
carrying out the terms of such offer), in a form legally enforceable against the
offeror.
7.9 THIRD PARTY TO BE BOUND
-----------------------
No disposition of Shares or Advances to a Third Party as permitted by this
Agreement shall be made unless prior to such disposition:
(a) the Transferor shall have provided the other Shareholder with:
(i) a copy of all agreements between the Transferor and the
Third Party pertaining to such disposition; and
(ii) such information pertaining to the ownership and control of
the Third Party as is reasonably necessary to confirm that
the Third Party is acting at arm's length from the
Transferor; and
(b) the Third Party shall have entered into an agreement with the
remaining Shareholder under which the Third Party becomes bound by and
entitled to the benefit of the provisions of this Agreement, and the
other Shareholder hereby agrees to enter into such an agreement with
the Third Party.
7.10 WAIVER
------
Any Shareholder may at any time by written notice to the Company waive the
benefits of this Article 7, either generally or for a specified period of time
or with reference to a specified transaction.
7.11 PRIORITY
--------
Notwithstanding anything to the contrary elsewhere contained in this Article 7,
a Shareholder shall not deliver a Notice under this Article, and shall not be
entitled to purchase any Shares offered by a Notice delivered under this
Article, if immediately prior thereto such Shareholder is bound, or may by
operation of this Agreement become bound within 30 days, to sell all of its
Shares.
-13-
<PAGE>
ARTICLE 8
---------
COMPULSORY BUY-SELL
-------------------
8.1 BUY-SELL
--------
Any Shareholder (in this Article, the "Instigator") may by written notice (in
this Article, the "Notice") delivered to the other Shareholder (the recipient of
such notice being referred to in this Article as the "Offeree") specify a price
for each Share and for each $1.00 of Advance and require the Offeree to elect
either:
(a) to purchase all of the Instigator's Shares and Advances at the
applicable prices specified in the Notice; or
(b) to sell all of the Offeree's Shares and Advances to the Instigator at
the said prices.
8.2 OFFER TO SELL
-------------
The delivery of the Notice shall constitute an offer by the Instigator either to
sell the Instigator's Shares and Advances to the Offeree at the applicable
prices specified in the Notice, or to purchase the Offeree's Shares and Advances
at the said prices. The offer to sell the Instigator's Shares and Advances to
the Offeree may be accepted by the Offeree delivering to the Instigator, within
30 days of receiving the Notice, written notice that the Offeree elects to
purchase the Instigator's Shares and Advances, whereupon a binding contract of
purchase and sale for the Instigator's Shares and Advances between the Offeree
and the Instigator shall be created upon the terms set forth herein.
8.3 OFFER TO PURCHASE
-----------------
If the Offeree does not within the period referred to in section 8.2 deliver to
the Instigator written notice that the Offeree elects to purchase the
Instigator's Shares and Advances, the Offeree shall be conclusively deemed to
have accepted the offer of the Instigator to purchase the Offeree's Shares and
Advances, whereupon a binding contract of purchase and sale for the Offeree's
Shares and Advances shall be created upon the terms set forth herein.
8.4 TERMS
-----
The provisions of Article 10 shall apply to any contract of purchase and sale
created pursuant to this Article 8.
8.5 PRIORITY
--------
Notwithstanding anything to the contrary elsewhere contained in this Article 8,
a Shareholder shall not deliver a Notice under this Article if immediately prior
to such delivery:
(a) such Shareholder, or the Offeree under such Notice, is bound, or will
by operation of this Agreement become bound within 30 days, to sell
all of its Shares; or
(b) such Shareholder, or the Offeree under such Notice, may become bound
to sell all of its Shares as a result of the acceptance or deemed
acceptance of a Notice previously delivered under this Article.
-14-
<PAGE>
ARTICLE 9
---------
OPTION TO PURCHASE ON DEFAULT
-----------------------------
9.1 EVENT OF DEFAULT
- --- ----------------
The occurrence of any of the following events shall constitute an event of
default (in this Article, an "Event of Default") by or in respect of a
Shareholder if:
(a) such Shareholder sells, assigns, transfers, mortgages, pledges or
otherwise disposes of or encumbers, or agrees, absolutely or
contingently, to dispose of or encumber, any interest in or control
over any interest in its Shares or Advances to any person except as
permitted by this Agreement;
(b) such Shareholder becomes bankrupt or commits an act of bankruptcy, or
if a receiver or receiver-manager of substantially all of such
Shareholder's assets is appointed, or such Shareholder make an
assignment for the benefit of creditors or otherwise; or
(c) such Shareholder defaults in the performance or observance of any
other covenant, agreement or obligation of such Shareholder contained
or provided for in this Agreement and such default continues for a
period of thirty (30) days following receipt by such Shareholder from
the other Shareholder of written notice specifying such default,
unless such default is of a nature that reasonably requires more than
thirty (30) days to cure, is capable of being fully cured within a
reasonable time, and such Shareholder is diligently proceeding to cure
such default and cures such default within a reasonable time.
9.2 DETERMINATION OF DEFAULTS
-------------------------
In the event that a Shareholder believes that an Event of Default referred to in
subsection 9.1(c) has occurred in respect of the other Shareholder (in this
section, the "Defaulting Shareholder"), such Shareholder may deliver to the
Defaulting Shareholder written notice specifying such Event of Default.
Thereupon, commencing within 48 hours following receipt by the Defaulting
Shareholder of such written notice and continuing thereafter for a period of ten
(10) days, the Defaulting Shareholder and the other Shareholder shall consult
with respect to such Event of Default. At the conclusion of such consultation
period, unless the other Shareholder agrees that such Event of Default has not
occurred, such Event of Default shall be deemed to have occurred unless, within
five (5) days after the conclusion of such consultation period, the Defaulting
Shareholder submits the issue as to whether such Event of Default has occurred
to an arbitrator pursuant to section 11.4, in which event the Defaulting
Shareholder shall forthwith notify the other Shareholder of such submission and
the decision of the arbitrator in respect thereof shall be conclusive and
binding on the Defaulting Shareholder and the other Shareholder.
9.3 REMEDIES UPON DEFAULT
---------------------
If an Event of Default referred to in subsection 9.1(a) or (b) has occurred, or
an Event of Default referred to in subsection 9.1(c) has been determined
pursuant to section 9.2 to have occurred, by or in respect of a Shareholder (in
this Article, the "Optionor"), the other Shareholder (in this Article, the
"Optionee") may do one or more of the following:
(a) pursue any remedy available to it in law or equity for the enforcement
of its rights under this Agreement;
-15-
<PAGE>
(b) remedy or attempt to remedy such Event of Default, in which case all
costs incurred by such Shareholder in remedying or attempting to
remedy such Event of Default, together with a sum equal to 15% of such
costs, shall be payable by the Optionor to such Shareholder within 15
days after receipt of an invoice from such Shareholder setting out
reasonable particulars of the said charges;
(c) waive the Event of Default, but any waiver of a particular Event of
Default shall not operate as a waiver of any subsequent or continuing
Event of Default; or
(d) exercise the Option referred to in section 9.4.
9.4 OPTION TO PURCHASE
------------------
Upon an Event of Default occurring, or in the case of an Event of Default
referred to in subsection 9.1(c) has been determined to occur, the Optionee
shall (in accordance with the apportionment specified in section 9.5) have the
first right and option (in this Article, the "Option") to purchase all of the
Optionor's Shares at a price (in this Article, the "Option Price") equal to the
Net Value of the Optionor's Shares as at the date of exercise of the Option.
The Option may be exercised, in the case of an Event of Default referred to in
subsection 9.1(a) or (b), or in the case of an Event of Default referred to in
section 9.1(c) which has been determined pursuant to section 9.2 to have
occurred, at any time after such determination, but not later than:
(a) in the case of an Event of Default referred to in subsection 9.1(a),
30 days following the receipt by the other Shareholder of actual
notice of the occurrence of such Event of Default;
(b) in the case of an event of Default referred to in subsection 9.1(b),
the earliest of:
(i) 30 days following the receipt by the other Shareholder of
actual notice of the occurrence of such Event of Default;
(ii) 365 days following the occurrence of such Event of Default;
or
(iii) the date upon which such Event of Default is cured; and
(c) in the case of an Event of Default referred to in subsection 9.1(c),
30 days following such determination.
To the extent the Option is not exercised by the other Shareholder within the
time limited aforesaid, the Option shall be null and void in respect of such
Event of Default but this Article shall otherwise continue in full force and
effect.
9.5 EXERCISE OF OPTION
------------------
The Option may be exercised within the time limited in section 9.4 by a
Shareholder delivering to the Optionor and to the Secretary written notice to
the effect that the other Shareholder (in this Article, the "Optionee") is
willing to purchase all of the Optionor's Shares. The Optionor shall upon
receipt of such written notice deliver to the Company share certificates
representing the Optionor's Shares in respect of which the Option has been
exercised, such certificates being duly endorsed in blank for transfer to be
dealt with in the manner provided in Article 10.
-16-
<PAGE>
9.6 AGREEMENT
---------
When the Option has been exercised in writing by the Optionee a binding contract
of purchase and sale shall be formed between the Optionee and the Optionor in
accordance with this Agreement (including Article 10), for the Optionor's
Shares.
9.7 DETERMINATION OF NET VALUE
--------------------------
The Optionor and the Optionee will in good faith attempt to agree upon the Net
Value of the Shares to be purchased and sold pursuant to a contract of purchase
and sale created pursuant to this Article determined as of the date the option
was exercised. If the Optionor and the Optionee do not reach agreement upon the
Net Value of such Shares determined as of such date within fifteen (15) days
after such contract is created, then:
(a) the Optionor and the Optionee will promptly submit the matter to the
Independent Accountants for determination and, absent manifest error,
the determination of the Independent Accountants will be conclusive
and binding upon the Optionor and Optionee;
(b) the Optionor and the Optionee will share equally all fees and expenses
charged by the Independent Accountants for making such determination.
(c) the Optionor, the Optionee and the Company will give the Independent
Accountants full and complete access to the premises and the books and
records of the Company and cause the Directors and Officers of the
Company, and request the principal bankers, auditors and professional
advisors of the Company, to furnish the Independent Accountants with
such financial and other information in their possession as the
Independent Accountants may request concerning the property, assets,
business, financial condition and prospects of the Company for the
purposes of making the determination; and
(d) the closing date of the purchase and sale of such Shares provided for
in section 10.1 will be extended to the day which is ten (10) business
days after the date on which the determination of the Independent
Accountants is delivered to the Optionor and Optionee, or on such
earlier or later day as the Optionor and the Optionee may agree.
9.8 CLOSING OF OPTION SALE
----------------------
The provisions of Article 10 shall apply to the completion of any agreement of
purchase and sale arising under this Article.
9.9 PRIORITY
--------
Notwithstanding anything to the contrary elsewhere contained in this Article 9,
an Optionee shall not be entitled to purchase any of the Optionor's Shares if
immediately prior thereto:
(a) the Optionee or the Optionor is bound, or will by operation of this
Agreement become bound within 30 days, to sell all of its Shares; or
(b) the Optionee or the Optionor may become bound to sell all of its
Shares as a result of the
-17-
<PAGE>
acceptance or deemed acceptance of any offer previously delivered
under Article 8.
ARTICLE 10
----------
COMPLETION OF CONTRACTS
-----------------------
10.1 TIME AND PLACE OF CLOSING
-------------------------
Except as otherwise provided in this Agreement, each contract of purchase and
sale (in this Article, a "Contract") arising under Articles 8 or 9 shall be
completed at a closing (in this Article, the "Closing") to be held at 2:00
o'clock p.m. (Vancouver time) at the registered office of the Company or at such
other place as the parties to such Contract may agree, on the day (in this
Article, the "Closing Date") which is ten (10) business days following the date
on which such contract is formed, or such earlier or later day as the parties to
such contract may agree.
10.2 PARTIES TO THE CONTRACT
-----------------------
In this Article, a Shareholder required to sell Shares in the Company pursuant
to a Contract is called a "Vendor", a Shareholder required to purchase Shares
pursuant to a Contract is called a "Purchaser" and the Shares to be sold and
purchased pursuant to a Contract are called the "Transfer Shares".
10.3 PAYMENT FOR TRANSFER SHARES
---------------------------
Unless the Purchaser and Vendor otherwise agree, the purchase price for the
Transfer Shares shall be paid in full at the Closing. If, on the Closing Date,
the Vendor is indebted to the Company, the Vendor hereby assigns and sets over
to the Company and directs the Purchaser to pay to the Company out of the
purchase price for the Transfer Shares and any amount payable to the Vendor in
respect of Advances pursuant to subsection 10.4(a), the amount of such
indebtedness and agrees that such payment by the Purchaser will reduce the
amount payable by the Purchaser to the Vendor for the Transfer Shares or
Vendor's Advances by the amount of such payment provided that the Purchaser
delivers to the Vendor at the Closing a receipt from the Company for such
payment.
10.4 PAYMENT OF VENDOR'S ADVANCES AND RELEASE OF VENDOR'S RESPONSIBILITIES
---------------------------------------------------------------------
Unless otherwise provided in this Agreement or the Vendor otherwise agrees:
(a) the Purchaser shall either cause the Company to repay at or before
the Closing the Vendor's Advances, or the Purchaser shall purchase the
Vendor's Advances in full for cash at par at the Closing. If there is
more than one Purchaser they shall fulfil this obligation pro rata
according to the number of Transfer Shares being purchased by them;
and
(b) if, on the Closing Date, the Vendor is liable or responsible as
guarantor or otherwise for any debts, liabilities or obligations of
the Company, the Purchaser will use its best efforts to obtain a
release or releases thereof (the cost of obtaining such release or
releases to be borne by the Vendor) and to the extent that such
release or releases have not been obtained, the Purchaser will agree
to indemnify the Vendor against, and save and hold the Vendor harmless
from, any and all claims arising out of such liability or
responsibility; and if there is more than one Purchaser, their
liability on such indemnity shall be limited pro rata according to the
number of Transfer Shares being purchased by them.
-18-
<PAGE>
10.5 CLOSING DOCUMENTS AND ESCROW BY THE COMPANY
-------------------------------------------
(1) In addition to any other documents required by this Agreement or the terms
of the Contract, the Vendor shall deliver to the Company at the Closing,
duly executed where appropriate:
(a) an instrument of transfer and such other documents as may be necessary
to assign and transfer the Transfer Shares to the Purchaser;
(b) the resignation of the Vendor and any of its nominees from any offices
or directorships in the Company, effective on the Closing Date;
(c) if, on the Closing Date, the Vendor is indebted to the Company in an
amount in excess of the amount payable to the Vendor for the Transfer
Shares and Vendor's Advances, the amount of such excess (provided that
the Company delivers to the Vendor at the Closing a receipt for such
payment);
(d) a release of each claim which the Vendor may then have against the
Company, including claims in respect of the Vendor's Advances (except
to the extent the Purchaser is purchasing the Vendor's Advances);
(e) if the Purchaser is purchasing all of the Vendor's Advances, an
assignment to the Purchaser of the Vendor's Advances and all security
for the repayment thereof, if any, held by the Vendor or, if the
Purchaser is purchasing only a portion of the Vendor's Advances, an
assignment to the Purchaser of such portion of the Vendor's Advances
and such security; and
(f) all such other documents and assurances as the Purchaser's solicitor
may reasonably request in order to comply with and to fulfil the
intent of this Agreement and the terms of the Contract.
(2) In addition to any other documents and things required by this Agreement or
the terms of the Contract, the Purchaser shall deliver to the Vendor at the
Closing, duly executed where appropriate, against delivery by the Company
to the Purchaser of the documents referred to in subsection 10.5(1):
(a) the purchase price for the Transfer Shares and (if applicable) the
Vendor's Advances (less the amount paid by the Purchaser to the
Company pursuant to section 10.3) in cash or by certified cheque drawn
on a Canadian chartered bank;
(b) a receipt of the Company for any amount paid by the Purchaser to the
Company pursuant to section 10.3;
(c) such releases and indemnification agreements as may be required
pursuant to subsection 10.4(b); and
(d) all such documents and assurances as the Vendor's solicitor may
reasonably request in order to comply with and to fulfil the intent of
this Agreement and the terms of the Contract.
-19-
<PAGE>
(3) All documents delivered by the Vendor to the Company at or before the
Closing shall be held by the Company in escrow until the Purchaser has
delivered all documents and paid or deposited all money required to be
delivered, paid or deposited to or to the credit of the Vendor by the
Purchaser at the Closing, at which time the Company shall deliver to the
Purchaser the documents delivered by the Vendor pursuant to subsection
10.5(1) and the transfer of the Transfer Shares to the Purchaser shall be
completed by the Company and new share certificates issued therefor.
10.6 TIME TO BE OF THE ESSENCE
-------------------------
Time shall be of the essence of each Contract and each Contract shall be binding
upon the parties thereto and upon the respective heirs, personal
representatives, executors, administrators, successors and assigns of the
parties thereto.
10.7 FAILURE TO COMPLETE
-------------------
If any Purchaser defaults at the Closing in paying the purchase price for the
Transfer Shares or any other amounts payable to or to the credit of the Vendor
at the Closing, or in delivering to the Vendor the documents, if any, required
to be delivered by such Purchaser to the Vendor at the Closing, the other
Purchasers (if any) shall be promptly advised of such default and may by written
notice delivered to the Vendor within one business day of being advised of such
default, elect to postpone the Closing for two business days. At such postponed
Closing, the other Purchasers who have so elected may perform the obligations of
such Purchaser in default and thereby become entitled to receive (pro rata, if
more than one) the Transfer Shares which would otherwise be transferred to such
Purchaser in default. If the other Purchasers fail to perform such obligations,
or if there is no Purchaser other than the Purchaser in default, the Vendor may,
by delivering written notice to all Purchasers and the Company that the Vendor
is terminating the Contract, terminate the Contract and retake possession of the
Transfer Shares as the absolute owner thereof, in which event the rights of all
Purchasers in respect of the Transfer Shares shall revert to the Vendor and the
Vendor shall be entitled, upon delivering to the Company and each Shareholder
its duly executed subscription to this Agreement (if it is not then a
shareholder), to the return from the Company of the documents delivered by the
Vendor to the Company in escrow in connection with the Contract. Nothing in
this section shall be construed as reducing or mitigating the availability of
the remedy of specific performance in respect of the Contract.
ARTICLE 11
----------
GENERAL
-------
11.1 INDEMNITY
---------
Except as otherwise specifically provided for this Agreement, each Shareholder
will indemnify and save the other Shareholders harmless from all losses,
damages, costs (including legal fees and disbursements on a solicitor and own
client basis), actions, suits and liability arising out of or in any way
connected with any breach by such first Shareholder of any representation,
warranty, covenant or agreement made by it and contained in this Agreement. The
obligations of a Shareholder under this section shall survive such Shareholder
ceasing to be a party to this Agreement.
11.2 WAIVER
------
No waiver by or on behalf of any party of any breach of any of the covenants,
warranties, conditions, restrictions or stipulations herein contained shall take
effect or be binding upon such party unless the
-20-
<PAGE>
same is expressed in writing under the authority of such party, and any waivers
so given shall extend only to the particular breach so waived and shall not
limit or affect any rights with respect to any other or future breach.
11.3 FURTHER ASSURANCES
------------------
The parties agree to execute such further documents and do all such things and
perform all such acts as are necessary to carry out the full intent of this
Agreement.
11.4 ARBITRATION
-----------
All unresolved disputes between the parties arising out or in connection with or
resulting from this Agreement or the breach hereof (but excluding any stalemate
arising from a Shareholder reasonably withholding its consent to one of the
actions described in section 4.1) shall be finally determined by arbitration
before a single arbitrator conducted under the Arbitration Act of Ontario. The
determination of such arbitrator shall be final and binding upon the parties.
11.5 ENTIRE AGREEMENT
----------------
This Agreement constitutes the entire agreement between the parties relating to
the subject matter hereof and supersedes all prior and contemporaneous
agreements, understanding, negotiations and discussions, whether oral or
written, of the parties. The parties acknowledge that there are no warranties,
representations or other agreements among the parties in connection with the
subject matter hereof.
11.6 PAYMENT OF MONIES
-----------------
The parties acknowledge and agree that any payment of monies required to be made
under this Agreement shall be made in Canadian funds and any tender of monies or
documents hereunder may be made upon the solicitors acting for the party upon
whom the tender is desired and it shall be sufficient that a negotiable bank
draft or certified cheque is tendered instead of cash.
11.7 SEVERABILITY
------------
If any term, covenant or condition of this Agreement or the application thereof
to any party or circumstance shall be invalid or unenforceable to any extent,
the remainder of this Agreement or application of such term, covenant or
condition to a party or circumstances other than those to which it is held
invalid or unenforceable shall not be affected thereby and each remaining term,
covenant or condition of this Agreement shall be valid and shall be enforceable
to the fullest extent permitted by law.
11.8 REMEDIES
--------
No remedy herein conferred upon any party is intended to be exclusive of any
other remedy available to that party, but each remedy shall be cumulative and
shall be in addition to every other remedy given herein or now or hereafter
existing by law or in equity or by statute.
11.9 NOTICES
-------
Any notice required or permitted to be given hereunder by any party shall be
deemed to have been well and sufficiently given if personally delivered or
telecopied to the party for whom it is intended at the address set forth below:
-21-
<PAGE>
(a) if to DTV, then:
101 West 5th Avenue
Vancouver, BC , V5Y 1H9
Facsimile No. (604) 874-1503
(b) if to DCI, then:
611 Access Road
Stratford, Connecticut, USA, 06497
Facsimile No. (203) 380-0915
(c) if to the Company, then:
to both DTV and DCI at the address and fax numbers described above
(d) if to the Directors, then:
in the case of Clive Barwin, Peter Hough and Garth Braun
c/o DTV
at the address and fax number described above;
in the case of Charles Zwebner, John Adams and Larry Shatsoff,
c/o DCI
at the address and fax number described above;
or to such other addresses as a party may from time to time designate to the
other parties by notice delivered in accordance with this section. Any notice
delivered as aforesaid shall be deemed to have been given to the party to whom
it is addressed when delivered or, if telecopied, then on the next business day
following the date of transmission.
11.10 CONFIDENTIALITY
---------------
All information and data concerning or derived from the business of the Company
which have not been publicly reported shall be kept confidential by the parties
and their representatives and, except to the extent required by law or by
regulation of any securities commission or stock exchange, or in connection with
the filing of a prospectus or statement of material facts or preparation of
financial statements by any party or any of its Affiliates, shall not be
disclosed to any other person without the prior consent of the other parties.
Consent to disclosure of information shall not be unreasonably withheld where a
party wishes to disclose any such information to a third party for the purpose
of arranging financing for its contributions hereunder or for the purpose of
selling its interest in the Company, provided that such third party gives its
undertaking to the parties that any such information not theretofore publicly
disclosed shall be kept confidential and not disclosed to others. Before making
a disclosure of confidential information as permitted above, the disclosing
party shall take all reasonable steps by prior consultation with the other
parties to avoid causing any difficulty or inconvenience to those other parties.
No party shall be liable to the other parties for a breach of this section
resulting from any disclosure of confidential information by any of such party's
representatives provided that such party has taken reasonable steps to ensure
the preservation of the confidential nature of such information.
-22-
<PAGE>
11.11 GOVERNING LAW
-------------
This Agreement shall be governed by and interpreted in accordance with the laws
of the Province of Ontario.
11.12 AMENDMENTS
----------
This Agreement may be altered or amended in any of its provisions when any such
changes are reduced to writing and signed by the parties, but not otherwise.
11.13 ASSIGNMENT
----------
This Agreement may not be assigned in whole or in part by any party except with
the prior unanimous written consent of all other persons then parties to this
Agreement.
11.14 ENUREMENT
---------
This Agreement shall be binding upon and shall enure to the benefit of the
parties hereto and their respective heirs, personal representatives, executors,
administrators, successors and permitted assigns.
11.15 TIME OF THE ESSENCE
-------------------
Time shall be of the essence in complying with the terms of this Agreement.
11.16 COUNTERPARTS AND FACSIMILE
--------------------------
This Agreement may be executed in several counterparts, each of which when so
executed shall be deemed to be an original and such counterparts shall
constitute one and the same instrument and notwithstanding the date of execution
shall be deemed to bear date as of the date of this Agreement. A facsimile
transcribed copy of this Agreement signed by a party in counterpart or
otherwise, shall be deemed to be and to constitute a properly executed,
delivered and binding document of the party so signing, notwithstanding any
variation in the dates of execution.
IN WITNESS WHEREOF the parties have executed this Agreement.
THE SEAL of DATAWAVE SYSTEMS INC. was hereunto )
affixed this 10th day of February, 1998 in )
the presence of: )
) c/s
/s/ Peter Hough )
- -------------------------------------------------- )
)
/s/ Clive Barwin )
- -------------------------------------------------- )
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<PAGE>
THE SEAL of DCI TELECOMMUNICATIONS INC. was )
hereunto affixed this 10th day of February, 1998 )
in the presence of: )
) c/s
/s/ )
- -------------------------------------------------- )
)
PRESIDENT & CEO )
- --------------------------------------------------- )
)
THE SEAL of 3423221CANADA INC. was hereunto )
affixed this 10th day of February, 1998 in )
the presence of: )
) c/s
/s/ )
- -------------------------------------------------- )
/s/ )
- -------------------------------------------------- )
SIGNED, SEALED & DELIVERED )
by CLIVE BARWIN )
in the presence of: )
)
/s/ Sarah Sandusky ) /s/ Clive Barwin
- -------------------------------------------------- ) -----------------------
Signature of Witness ) CLIVE BARWIN
)
Name: SARAH SANDUSKY )
_____________________________________________ )
Address: 3-668 W. 17th Ave. )
------------------------------------------ )
Vancouver, BC V5Z1T8 )
- -------------------------------------------------- )
Occupation: RECEPTIONIST )
--------------------------------------- )
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<PAGE>
SIGNED, SEALED & DELIVERED )
by PETER HOUGH )
in the presence of: )
)
/s/ Sarah Sandusky ) /s/ Peter Hough
- -------------------------------------------------- ) -----------------------
Signature of Witness ) PETER HOUGH
)
Name: SARAH SANDUSKY )
--------------------------------------------- )
Address: 3-668 W. 17th Ave )
------------------------------------------ )
Vancouver, BC V5Z1T8 )
- -------------------------------------------------- )
Occupation: RECEPTIONIST )
--------------------------------------- )
SIGNED, SEALED & DELIVERED )
by GARTH BRAUN )
in the presence of: )
)
/s/ Diane Rees ) /s/ Garth Braun
- -------------------------------------------------- ) -----------------------
Signature of Witness ) GARTH BRAUN
)
Name: Diane Rees )
--------------------------------------------- )
Address: 3094 Spencer Drive )
------------------------------------------ )
West Vancouver, BC )
- -------------------------------------------------- )
Occupation: Project Coordinator )
--------------------------------------- )
)
SIGNED, SEALED & DELIVERED )
by CHARLES ZWEBNER )
in the presence of: )
/s/ Sarah Sandusky ) /s/ Charles Zwebner
- -------------------------------------------------- ) ______________________
Signature of Witness ) CHARLES ZWEBNER
)
Name: SARAH SANDUSKY )
--------------------------------------------- )
Address: 3-668 W. 17th Ave. )
------------------------------------------ )
Vancouver, BC V5Z1T8 )
- -------------------------------------------------- )
Occupation: RECEPTIONIST )
--------------------------------------- )
)
-25-
<PAGE>
SIGNED, SEALED & DELIVERED )
by JOHN ADAMS )
in the presence of: )
)
/s/ Larry Shatsoff ) /s/ John Adams
- -------------------------------------------------- ) ----------------------
Signature of Witness ) JOHN ADAMS
)
Name: Larry Shatsoff )
-------------------------------------------- )
Address: 39 Haven Farm Rd )
------------------------------------------ )
North Haven, CT 06473 )
- -------------------------------------------------- )
Occupation: V.P. - CEO )
--------------------------------------- )
)
SIGNED, SEALED & DELIVERED )
by LARRY SHATSOFF )
in the presence of: )
)
/s/ Grace P. Murphy ) /s/ Larry Shatsoff
- ------------------------------------------------- ) ----------------------
Signature of Witness ) LARRY SHATSOFF
)
Name: Grace P. Murphy )
-------------------------------------------- )
Address: 41 Riders Lane )
----------------------------------------- )
Feld, CT 06430 )
- ------------------------------------------------- )
Occupation: Office Manager )
-------------------------------------- )
-26-
<PAGE>
SCHEDULE "A"
------------
DIRECTORS OF THE COMPANY
------------------------
1. Clive Barwin
2. Peter Hough
3. Garth Braun
4. Charles Zwebner
5. John Adams
6. Larry Shatsoff
<PAGE>
EXHIBIT 10.18
THIS LICENSE AGREEMENT dated for reference the 31 day of March, 1998.
--
BETWEEN:
DATAWAVE SYSTEMS INC., a corporation incorporated under the laws of British
---------------------
Columbia having a place of business at 101 West 5th Avenue, Vancouver,
British Columbia, V5Y 1H9
(the "Licensor")
AND:
PHONELINE CARDCALL INTERNATIONAL INC., a corporation incorporated under the
-------------------------------------
laws of Canada having its registered and records offices at P.O. Box 48800,
2100 -1111 West Georgia Street, Vancouver, British Columbia, V7X 1K9
(the "Licensee")
WHEREAS:
A. The Licensor uses a software product called Administrative Billing &
Tracking System (the "Product").
B. The Licensee wishes to use the object code of the Product for the purposes
hereinafter specified.
C. The Licensor is willing to so license the Product to the Licensee on the
terms and conditions specified in this Agreement.
THEREFORE in consideration of the premises and of the mutual covenants herein
set forth, the parties agree as follows:
1. THE PRODUCT
-----------
1.01 The Product: The Product, which the Licensor uses under the name
-----------
"Administrative Billing & Tracking System", means the current version of the
computer program, as modified by any modifications contemplated by this
Agreement or hereafter effected by or for the Licensee, and includes any
subsequent releases or updates of the program which may be supplied from time to
time to the Licensee by the Licensor.
2. LICENSE
-------
2.01 License: The Licensor hereby grants to the Licensee a perpetual, non-
--------
exclusive license for use in Canada only, subject to the terms of this Agreement
to use the object code of the Product.
<PAGE>
The Product shall only be used on pre-paid long distance calling card equipment
located in Canada, and only for related Canadian operations. The Product shall
be used only for the processing of the Licensee's own business. The Licensee
shall not permit any third party to use the Product, shall not use the Product
in the operation of a service bureau and shall not allow access to the Product
through terminals located outside the Licensee's business premises, without the
prior consent in writing of the Licensor.
2.02 No Sublicenses: The Licensee acknowledges that the license granted in
---------------
Article 2.01 does not permit the Licensee to sublicense or otherwise permit the
use of all or any part of the Product by any third-party.
2.03 No Reverse Engineering: The Licensee agrees not to cause or permit
-----------------------
the reverse engineering, disassembly or decompilation of the Product.
3. DELIVERY
--------
3.01 Time of Delivery: The Licensor shall deliver the Product to the
-----------------
Licensee forthwith.
3.02 Method of Delivery: Unless otherwise specifically provided in this
-------------------
Agreement, the Licensor shall deliver the Product to the Licensee without
charge, by such means as the Licensor may reasonably select. If the Licensee
requests special delivery terms, the cost of such special delivery shall be paid
by the Licensee. If the Product is lost or damaged during delivery, the
Licensor shall replace the Product at no additional cost.
4. PRICE AND PAYMENT
-----------------
4.01 Price: The Licensee shall pay to the Licensor the sum of $177,500.
------
4.02 Government Charges: The amount specified in Article 4.01 is exclusive
-------------------
of any federal, provincial or state tariffs, duties or sales or use taxes, which
shall be paid by the Licensee.
5. NO WARRANTY
-----------
5.01 No Warranty: The Product is licensed to the Licensee "as is" without
------------
any representations or warranties.
5.02 NO IMPLIED OR STATUTORY WARRANTIES: THE LICENSOR MAKES NO WARRANTY OR
----------------------------------
CONDITION, EXPRESS OR IMPLIED, AND THERE ARE EXPRESSLY EXCLUDED ALL IMPLIED OR
STATUTORY WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE AND THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A
COURSE OF DEALING OR USAGE OF TRADE. THERE ARE NO LIABILITIES OR OBLIGATIONS OF
THE LICENSOR FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE DELIVERY, USE,
PERFORMANCE OR LICENSING OF THE PRODUCT. IN NO EVENT WHATSOEVER SHALL THE
LICENSOR BE LIABLE FOR INDIRECT, CONSEQUENTIAL, EXEMPLARY, INCIDENTAL, SPECIAL,
INDIRECT OR OTHER SIMILAR DAMAGES INCLUDING BUT NOT LIMITED TO LOST PROFITS,
LOST BUSINESS REVENUE, FAILURE TO REALIZE EXPECTED SAVINGS, OTHER COMMERCIAL OR
ECONOMIC LOSS OF ANY KIND OR
-2-
<PAGE>
ANY CLAIM AGAINST THE LICENSEE BY ANY OTHER PARTY (EXCEPT AS PROVIDED IN ARTICLE
7.02) ARISING OUT OF OR IN CONNECTION WITH THE DELIVERY, USE, PERFORMANCE OR
LICENSING OF THE PRODUCT OR ANY BREACH OF THIS AGREEMENT, EVEN IF THE LICENSOR
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
5.03 Further Exclusions: Without limiting the generality of the foregoing,
-------------------
there are no liabilities or obligations of the Licensor for damages if the
Product has been subjected to malfunctioning computer hardware or abnormal
operating conditions, or has been damaged accidentally (electrically or
otherwise) or if any problem in respect of the performance of the Product is
caused in whole or in part by modifications to the Product made by the Licensee
or any third party.
5.04 Operation of Product: The Licensee agrees that the Licensor does not
---------------------
represent or warrant that the operation of the Product will be error free or
that the operation of the Product will not be interrupted by reason of any
defect therein.
5.05 Limit on Licensor Liability: The Licensee agrees that the liability
----------------------------
of the Licensor and its directors, officers, agents and employees, arising out
of contract, negligence, strict liability or tort, or for breach or default
entitling the Licensee to rescind or for breach of condition or fundamental term
or fundamental breach or otherwise shall not exceed in total the amount paid by
the Licensee to the Licensor under this Agreement.
5.06 Limitation Period: No action, regardless of form, arising out of this
------------------
Agreement may be brought by the Licensee against the Licensor more than two
years after the cause of action has arisen.
5.07 Limitation of Liability Benefits Employees and Agents: Every
------------------------------------------------------
exemption from liability, limitation and condition contained in this Agreement
for the benefit of the Licensor and every defence and immunity of whatsoever
nature applicable to the Licensor or to which the Licensor is entitled under
this Agreement shall also be available and shall extend to protect every
director, officer, employee, agent or independent contractor from time to time
of the Licensor and, for the purpose of all such provisions and this section, is
and shall be deemed to be acting as agent and trustee on behalf of and for the
benefit of all such employees, agents and independent contractors.
6. NAME AND TRADEMARKS
-------------------
6.01 Licensor Trademark: The Licensee shall not be entitled to use any of
-------------------
the Licensor's trademarks.
7. TITLE, PROPERTY RIGHTS, AND INDEMNIFICATION
-------------------------------------------
7.01 Licensor Rights to License: The Licensor warrants that the Licensor
---------------------------
has obtained from the owner thereof and shall at all relevant times retain all
such rights and interests in and to the Product (including without limitation,
source code, object code, routines, sub-routines, formulas and know-how related
thereto) as are necessary and sufficient to grant to the Licensee the license
specified in this Agreement.
7.02 Intellectual Property Claims: The Licensor shall indemnify and hold
-----------------------------
harmless the Licensee and shall defend, at its own expense, any threatened or
actual suit against the Licensee based
-3-
<PAGE>
upon a claim that the Product or its use infringes upon a copyright or trade
secret of any third-party anywhere in Canada, and shall pay any settlement,
costs and damages awarded, subject to Article 5.05, provided that:
(a) such infringement has not resulted from a modification of the Product
which has been effected by or for the Licensee or from the Licensee
combining the Product or a portion thereof with any other program or
data and such infringement does not result from the use of a
particular release of the Product where such infringement would not
have resulted from the use of a later release of the Product;
(b) the Licensor is notified in writing promptly of any notice received by
the Licensee of any claim or of any threatened or actual suit;
(c) the Licensor shall have the right to control the defence of any
claims, suits or proceedings and the Licensee shall not settle any
claims, suits or proceedings without the consent of the Licensor; and
(d) at the Licensor's request and expense, the Licensor is given
sufficient information and other assistance by the Licensee for the
defence of the same.
Following receipt of a notice of any such claim or of any such threatened or
actual suit, the Licensor may, at its option, either procure such rights as may
be required or modify the Product in a manner sufficient to assure the Licensee
the right to continue to use the Product in the manner contemplated by this
Agreement. This Article 7.02 states the entire liability of the Licensor in
respect of intellectual property rights wherever and whenever subsisting.
7.03 Licensor Ownership: The Licensee acknowledges that the Product and
--------------------
all products developed by the Licensee from the Product (including translations,
compilations, partial copies, derivations, modifications and updated works and
whether of object code or otherwise) and all copyright, patent and other
intellectual property rights in respect thereof remain the sole and exclusive
property of the Licensor (or where applicable, the person from whom the Licensor
may have licensed the same) and save as expressly provided herein no rights in
respect thereof shall vest in the Licensee or its associates.
8. CONFIDENTIALITY
---------------
8.01 Confidentiality: The Licensee agrees that the Product (including
----------------
object code) are trade secrets and proprietary information of the Licensor. The
Licensee shall retain in confidence the Product and all information and know-how
transmitted to it by the Licensor and shall not make use of the Product or such
information or knowledge except in accordance with the terms of this Agreement.
The Licensor shall retain in confidence all information and know-how transmitted
to it by the Licensee and described as confidential. The obligations in this
Article shall not apply to any information which is in the public domain through
no act or omission of the party bound by the obligation of confidentiality or to
information and know-how which is subsequently, lawfully and in good faith
obtained from a third party without breach of this Agreement.
-4-
<PAGE>
8.02 No Disclosure: The Licensee shall not disclose or allow to be
--------------
disclosed the Product or any data or other information concerning the Product,
other than to its own employees for its own business purposes.
8.03 Protection of Confidentiality: The Licensee shall take the steps
------------------------------
necessary to protect the confidentiality of the Product. The Licensee shall
take appropriate action by instruction or agreement with its employees to
protect the confidentiality of the Product. The Licensee shall provide at least
the same level of protection as the Licensee affords its own proprietary
information. The Licensee shall not make or allow copies of the Product to be
made other than one copy for archival or backup purposes, unless otherwise
expressly authorized by this Agreement. All copies of the Product made by the
Licensee and all products developed by the Licensee (including translations,
compilations, partial copies, derivations, modifications and updated works and
whether of object code or otherwise) shall include all copyright notices and any
other proprietary notices contained in the Product, and shall display such
notices not less prominently than such notices are displayed in the Product.
The Licensee shall not remove or permit to be removed such notices.
8.04 Terms of Agreement: The Licensee shall not disclose the terms,
-------------------
content, or nature of this Agreement to any third party without the prior
written consent of the Licensor.
8.05 Injunctive Relief: The Licensor and the Licensee acknowledge that
-------------------
irreparable harm shall result to the other if it breaches its obligations under
this Article 8. The Licensor and the Licensee acknowledge that such a breach
would not be properly compensable by an award of damages. Accordingly, each of
the Licensor and the Licensee agree that the remedies for any such breach may
include, in addition to other available remedies and damages, injunctive relief
or other equitable relief enjoining such breach at the earliest possible date.
9. TERM AND DEFAULT
----------------
9.01 Term: This Agreement shall be effective from the reference date
-----
specified above. The License granted hereunder shall be perpetual unless
terminated earlier as provided herein. The license granted to the Licensee by
the Licensor shall terminate immediately three months from the date on which the
Licensor ceases to be a shareholder of the Licensee.
9.02 Termination by Licensor: This Agreement may be terminated by the
------------------------
Licensor if the Licensee fails to perform or comply with any provision of this
Agreement or any other Agreement between the Licensor and the Licensee related
to the Product, provided that, if the Licensor intends to terminate this
Agreement under the provisions of this Article, it shall provide written notice
of the applicable default to the Licensee and termination based thereon shall
only be effected if the Licensee fails to rectify the specified default within
30 days after receipt of such notice. This Agreement shall terminate
automatically and without further notice to the Licensee if:
(a) an order is made or a resolution passed for the winding-up or the
liquidation of the Licensee or the termination of its corporate
existence;
(b) the Licensee becomes insolvent, admits in writing inability to pay its
debts as they mature, makes an assignment for the benefit of its
creditors, is declared or adjudged to be a bankrupt, files a petition
or makes a proposal under any bankruptcy statute or
-5-
<PAGE>
takes advantage of any legislation for the relief of bankrupt or
insolvent debtors in respect of its own debts;
(c) a receiver, receiver-manager or any official having similar powers is
appointed for the Licensee or its business or affairs;
(d) the Licensee attempts or purports to assign this Agreement without the
prior written consent of the Licensor; or
(e) any attachment, execution or similar process shall be issued against
the interest of the Licensee under this Agreement or any secured
creditor of the Licensee shall enforce any security interest against
the interest of the Licensee under this Agreement.
The rights provided in this Article shall be in addition to any other rights and
remedies provided by law or by this Agreement.
9.03 Survival of License: The rights of the Licensee under this Agreement
--------------------
shall not terminate upon but shall survive any winding-up, liquidation,
insolvency, bankruptcy or receivership of the Licensor. No liquidator, trustee,
receiver or receiver-manager of the Licensor shall have any power or right to
prevent the Licensee from using the Product in the manner authorized by and
subject to the terms of this Agreement.
9.04 Obligations on Termination: If this Agreement is terminated the
---------------------------
obligations of the Licensee to make the payment under Article 4, the obligations
of the Licensee under Article 8, and Articles 5.02 to 5.06 inclusive shall
survive. The Licensee shall deliver to the Licensor all copies of the Product
(including object code) then in the possession of the Licensee or under its
control within thirty days following the termination date, and any such object
code (and any translation, compilation, partial copy, derivation, modification
and updated work) shall be deleted from any program or equipment of the
Licensee. The Licensee shall forthwith provide to the Licensor an affidavit or
statutory declaration sworn by a senior officer of the Licensee confirming its
compliance with the terms of this Article. Upon termination, the Licensee shall
be deemed to have assigned and transferred back to the Licensor its licensed
rights to the Product. Upon termination, the Licensee agrees not to employ, for
any purpose whatsoever, the object code as it was delivered to the Licensee or
any translation, compilation, partial copy, derivation, modification or updated
work thereof. In particular, but without limiting the generality of the
foregoing, the Licensee shall not employ the object code as it was delivered to
the Licensee or any translation, compilation, partial copy, derivation,
modification or updated work thereof, as part of any product or equipment which
the Licensee may sell, assign, lease, license, or transfer to any third-party.
10. GENERAL TERMS
-------------
10.01 Force Majeure: Neither party shall be responsible for any failure to
--------------
perform hereunder due to unforeseen circumstances or due to causes beyond the
non-performing party's reasonable control, including without limiting the
generality of the foregoing, acts of God, war, riot, embargoes, acts of
government, civil or military authorities, catastrophe, fire, floods, accidents,
strikes, shortages of transportation, facilities, fuel, energy, labour or
material acts of a public enemy. This Article does not apply to excuse a
failure to make payment when due.
-6-
<PAGE>
10.02 Notices: All notices required by this Agreement shall be delivered as
--------
follows:
(a) if to the Licensor:
101 West 5th Avenue
Vancouver, British Columbia, V5Y 1H9
Attention: Peter Hough
(b) if to the Licensee:
101 West 5th Avenue
Vancouver, British Columbia, V5Y 1H9
Attention: Charles Zwebner
or to such other address as the party to receive such notice or request so
designates by written notice to the other. Such notices shall be deemed given
on the date of delivery as provided above.
10.03 Construction: This Agreement sets forth the entire understanding
-------------
between the parties and supersedes all prior agreements, proposals,
representations, warranties and all other communications between the Licensor
and the Licensee relating to the subject matter hereof. Other than as
specifically provided in this Agreement, there are no oral or written
conditions, representations, warranties, undertakings or agreements between the
Licensor and the Licensee. No modification to this Agreement and no waiver of
any provision of this Agreement shall be binding unless executed in writing by
the parties. No waiver of any provision of this Agreement shall be construed as
a waiver of any other provision hereof nor shall such a waiver be construed as a
continuing waiver. Each of the rights and remedies of the Licensor hereunder
are separate, non-exclusive, cumulative and without limitation of each other and
the rights or remedies available under the law. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an original, but all
of which together constitute one and the same instrument. This Agreement shall
be governed by the laws of British Columbia. If any clause or provision of this
Agreement is declared invalid or unenforceable, the remainder of this Agreement
shall remain in full force and effect. Headings used in this Agreement are for
reference purposes only and shall not be deemed to be a part of this Agreement.
This Agreement shall not be construed as creating a partnership, joint venture
or agency relationship between the parties or any other form of legal
association which would impose liability upon one party for any act or failure
to act by the other party.
10.04 Assignment: This Agreement, and any or all rights, duties, or
-----------
obligations under this Agreement may not be assigned, charged or delegated by
the Licensee without the prior consent in writing of the Licensor. Any attempt
at such assignment or delegation shall be void. If the Licensor consents to
such assignment or delegation, the Licensee shall remain jointly and severally
liable with the assignee or delegatee for the obligations of the Licensee under
this Agreement. Any change in the persons having effective control of the
Licensee shall be deemed an assignment within the meaning of this Article. In
addition to all other remedies the Licensor may have at law or in equity, if
there is an
-7-
<PAGE>
assignment (including a change in the effective control of the Licensee) to
which the Licensor has not consented, the Licensor may terminate this Agreement
pursuant to Article 9.02.
10.05 Licensor's Employees: The Licensee recognizes that the employees of
---------------------
the Licensor, and such employees' loyalty and service to the Licensor,
constitute a valuable asset of the Licensor. Accordingly, the Licensee agrees
not to make any offer of employment to, nor enter into a consulting relation
with, any person who was employed by the Licensor within two years of such
person's employment by the Licensor. If the Licensee does employ such a person,
the Licensee shall pay to the Licensor $100,000 (U.S.) as liquidated damages and
not as a penalty.
10.06 Enurement: Subject to the limitations hereinbefore expressed, this
----------
Agreement shall enure to the benefit of and be binding upon the parties and
their respective successors and assigns.
IN WITNESS WHEREOF the parties have executed this License Agreement as at the
date first set out above.
PHONELINE CARDCALL DATAWAVE SYSTMES INC.
INTERNATIONAL INC.
/s/ Clive Barwin /s/ Clive Barwin
Per: ____________________ Per: ____________________
Director Director
____________________ ____________________
Title Title
March 31, 1998 March 31, 1998
____________________ ____________________
Date Date
-8-
<PAGE>
EXHIBIT 10.19
ASSET PURCHASE AGREEMENT
------------------------
THIS AGREEMENT MADE EFFECTIVE AS OF THE 1ST DAY OF JANUARY, 1997 (the "Effective
Date"), EXECUTED THIS 16TH DAY OF JANUARY, 1997 (the "Execution Date").
BETWEEN:
INTERURBAIN COMMUNICATIONS, INC., a corporation incorporated under the
laws of New Jersey, U.S.A. having a place of business at 230 West
Parkway, Unit 10, Pompton Plains, New Jersey, U.S.A. 07444;
("Interurbain")
AND:
JOSHUA EMANUEL,
DAVID EMANUEL,
ARTHUR FREEDBERG
LAWRENCE FREEDBERG,
all c/o 230 West Parkway, Unit 10,
Pompton Plains, New Jersey, U.S.A. 07444;
(individually a "Principal" and collectively the "Principals")
AND:
DATAWAVE SYSTEMS INC, a company incorporated under the laws of British
Columbia having a place of business at 101 West 5th Avenue, Vancouver,
British Columbia, Canada
V5Y 1H9;
("Datawave")
AND:
DTV TELECOMMUNICATIONS (US) INC., a corporation incorporated under the
laws of Nevada having a place of business at 1280 Pacific Drive, Suite
206, Walnut Creek, California, U.S.A. 94596;
("DTV")
<PAGE>
WHEREAS:
A. Interurbain operates the business (the "Business") of placing, maintaining
and servicing vending machines selling pre-paid phone cards;
B. The Principals are the recorded and beneficial owners of all of the shares
of Interurbain, the only directors and officers of Interurbain, and the key
employees of Interurbain;
C. DTV is a wholly-owned subsidiary of Datawave Systems (US) Inc. (a Nevada
corporation) which in turn is a wholly owned subsidiary of Datawave;
D. Interurbain has agreed to sell the assets (the "Assets") constituting the
Business of Interurbain, more particularly described on Schedule "A" to this
Agreement, to DTV and DTV has agreed to purchase the Assets on the terms and
conditions set forth in this Agreement.
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants
and agreements herein contained, the parties hereto do covenant and agree (the
"Agreement") each with the other as follows:
1. REPRESENTATIONS AND WARRANTIES
1.1 In order to induce Datawave and DTV (collectively, the "Purchasers") to
enter into this Agreement and complete their respective transactions
contemplated hereunder, Interurbain and the Principals jointly and severally
represent and warrant to the Purchasers that:
(a) Interurbain:
(i) was and remains duly incorporated under the laws of the State of
New Jersey; and
(ii) is in good standing with respect to the fling of annual reports
with the appropriate regulatory body in the State of New Jersey;
(b) Interurbain holds all material licences and permits that are required
for carrying on its Business in the manner in which such Business has
been carried on immediately prior to the Time of Closing (as
hereinafter defined);
(c) the Assets represent all of the assets necessary for the conduct of
the Business for which such Business has been carried on immediately
prior to the Time of Closing;
-2-
<PAGE>
(d) Interurbain is the beneficial owner of the Assets and, in those cases
where title to the Assets can be registered, the registered owner of
those Assets, and such Assets represent all of the property and assets
used in all material respects by Interurbain to carry on the Business
in all jurisdictions in the manner in which it carries on the Business
immediately prior to the Time of Closing;
(e) Interurbain has the corporate power to own the Assets and to carry on
the Business and Interurbain is duly qualified to carry on the
Business in the State of New Jersey and will be immediately prior to
the Time of Closing;
(f) Interurbain has good and marketable title to the Assets free and clear
of all liens, charges and encumbrances of any kind whatsoever save and
except those specified as "Permitted Encumbrances" on Schedule "A" to
this Agreement;
(g) all machinery and equipment of any kind whatsoever comprised in the
Assets are, and will be at the Time of Closing, in reasonable
operating condition and in a state of reasonable maintenance and
repair taking into account their age and use, wear and tear in the
ordinary course of business excluded;
(h) Interurbain maintains insurance against loss of, or damage to, the
Assets by all insurable risks on a replacement cost basis and
reasonable insurance with respect to public liability for a business
of its size and nature;
(i) the contracts and agreements included on Schedule "A" to this
Agreement (collectively the "Material Contracts") constitute all of
the material contracts and agreements necessary to conduct the
Business in the manner in which Interurbain conducts the Business
immediately prior to the Time of Closing;
(j) except as is noted on Schedule "A" to this Agreement, the Material
Contracts are in good standing in all material respects and not in
default in any material respect;
(k) except as is noted on Schedule "A" to this Agreement, all of the
Material Contracts can be terminated by Interurbain on not more than
one month's notice except as may be required by principles of equity;
(l) all of the Material Contracts are assignable without the consent of
the parties thereto other than Interurbain or, in the alternative,
with their consent and Interurbain will use its best efforts to obtain
such consent prior to the Time of Closing;
(m) the Principals are the only shareholders, directors and officers of
Interurbain and attached as Schedule "J" is a true and complete list
of all employees of
-3-
<PAGE>
Interurbain and their respective titles of employment as of the Time
of Closing;
(n) to the best of their knowledge, there are no actions, suits,
judgments, investigations or proceedings of any kind whatsoever of a
material nature outstanding, pending or threatened against or
affecting Interurbain, the Principals (or any one of them) or any part
of the Assets at law or in equity or before or by any Federal, State,
Municipal or other governmental department, commission, board, bureau
or agency of any kind whatsoever and there is no basis therefor and
there are no prior felony convictions or other similar criminal
convictions of any of the Principals;
(o) to the best of their knowledge, neither Interurbain nor any of the
Principals is in breach of any law, ordinance, statute, regulation,
by-law, order or decree of any material nature that would have a
material adverse impact on the Assets;
(p) in connection with the acquisition of the Datawave Securities (as
defined below) by Interurbain (or, if so directed by Interurbain, the
Principals), Interurbain or each of the Principals, as the case may
be:
(i) is acquiring the Datawave Securities for investment purposes
only and not with a view to, or for resale in connection with,
any distribution thereof;
(ii) is aware of the business affairs and financial condition of
Datawave and has acquired sufficient information about Datawave
to reach an informed and knowledgeable decision to acquire the
Datawave Securities; and
(iii) understands that none of the Datawave Securities have been
registered under the Securities Act of 1933 and that they will
be issued in reliance upon a specific exemption therefrom, or
under the Securities Act of 1933, which exemption depends upon,
among other things, the bona fide nature of the investment
intent expressed herein, and each of Interurbain further
represents and covenants that they will not offer, sell or
otherwise dispose of any of the Datawave Securities except in
compliance with all applicable federal and state securities laws
of the United States and New Jersey and of all applicable
securities laws of the Provinces of Canada;
(q) Interurbain and each of the Principals has good and sufficient right
and authority to enter into this Agreement and complete their
respective transactions contemplated under this Agreement on the terms
and conditions set forth herein;
-4-
<PAGE>
(r) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of their respective obligations under this
Agreement and the completion of their respective transactions
contemplated under this Agreement will not:
(i) conflict with, or result in the breach of, in any material
respect, or the acceleration of any indebtedness under, or
constitute default under, the Certificate of Incorporation, as it
shall have been amended from time to time and the By-laws of
Interurbain or any indenture, mortgage, agreement, lease, licence
or other instrument of any kind whatsoever of a material nature
to which Interurbain or any of the Principals is a party or by
which any one of them is bound, or any judgment or order of any
kind whatsoever of any Court or administrative body of any kind
whatsoever by which any one of them is bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever a material nature by Interurbain or by any of the
Principals;
(s) neither Interurbain nor any of the Principals has incurred any
liability for brokers' or finder's fees of any kind whatsoever with
respect to this Agreement or any transaction contemplated under this
Agreement; and
(t) the representations and warranties of Interurbain and the Principals
contained in this Agreement disclose all material facts specifically
relating to the transactions involving Interurbain, the Principals and
the Assets contemplated under this Agreement which at the Time of
Closing may materially and adversely affect the ability of Interurbain
and the Principals to perform their respective obligations under this
Agreement.
1.2 The representations and warranties of Interurbain and the Principals
contained in this Agreement shall be true at the Time of Closing as though they
were made at the Time of Closing and they shall survive the completion of the
transactions contemplated under this Agreement and remain in full force and
effect for a period of two years for the benefit of the Purchasers.
1.3 In order to induce Interurbain and the Principals to enter into this
Agreement and complete their respective transactions contemplated hereunder, the
Purchasers jointly and severally represent and warrant to Interurbain and to
the Principals that:
(a) Datawave was and remains duly incorporated under the laws of British
Columbia and:
(i) Datawave is a "reporting issuer" as that term is defined in the
Securities Act, S.B.C. 1985 c.83 as amended (the "Securities
Act");
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(ii) Datawave is in good standing with respect to the filing of
annual reports with the British Columbia Registrar of Companies;
and
(iii) Datawave's common shares are listed and, as of the Time of
Closing, posted for trading on the Vancouver Stock Exchange;
(b) DTV:
(i) was and remains duly incorporated under the laws of the State of
Nevada; and
(ii) is in good standing with respect to the filing of annual reports
with the appropriate regulatory body in the State of Nevada;
(c) as of the Effective Date, the authorized share capital of Datawave
consisted of 50,000,000 common shares without par value of which
20,886,526 common shares were issued and outstanding;
(d) the Datawave Shares will be, when issued in accordance with this
Agreement, validly issued as fully paid and non-assessable common
shares of Datawave registered in the name of Interurbain (or as it may
direct) and free and clear of all liens, charges, encumbrances and
voting restrictions other than trade restrictions as may apply by
operation of Applicable Securities Laws (as defined below);
(e) the Purchasers hold all material licences and permits that are
required for carrying on their respective businesses in the manner in
which such businesses have been carried on;
(f) the Purchasers have the corporate power and authority to acquire the
Assets and good and sufficient right and authority to enter into this
Agreement and complete their respective transactions contemplated
under this Agreement on the terms and conditions set forth herein;
(g) to the best of their knowledge, the execution and delivery of this
Agreement, the performance of their respective obligations under this
Agreement and the completion of their respective transactions
contemplated under this Agreement will not:
(i) conflict with, or result in the breach of, in any material
respect, or the acceleration of any indebtedness under, or
constitute default under, the constating documents of either of
the Purchasers, or any indenture, mortgage, agreement, lease,
licence or other instrument of any kind whatsoever of a material
nature to which either of the Purchasers is a party or by which
either of the Purchasers is bound, or any judgment
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or order of any kind whatsoever of any Court or administrative
body of any kind whatsoever by which either of the Purchasers is
bound; or
(ii) result in the violation of any law or regulation of any kind
whatsoever of a material nature by either of the Purchasers;
(h) the audited financial statements of Datawave for its fiscal year ended
March 31, 1996 and the unaudited financial statements of Datawave for
the interim six month period ended September 30, 1996 of its current
fiscal year (collectively "Datawave's Financial Statements") are true
and correct in every material respect and present fairly and
accurately the financial position and results of the operations of
Datawave for the periods then ended and Datawave's Financial
Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis;
(i) since September 30, 1996 there has not been any material adverse
change of any kind whatsoever in the financial position or condition
of Datawave or any damage, loss or other change of any kind whatsoever
in circumstances materially affecting the business or assets of
Datawave or the right or capacity of Datawave to carry on its
business;
(j) there are no material liabilities of Datawave, whether direct,
indirect, absolute, contingent or otherwise which are not disclosed or
reflected in Datawave's Financial Statements except those incurred in
the ordinary course of business of Datawave since September 30, 1996
which are recorded in the books and records of Datawave;
(k) to the best of its knowledge, there are no actions, suits, judgments,
investigations or proceedings of any kind whatsoever of a material
nature outstanding, pending or threatened against or affecting either
of the Purchasers at law or in equity or before or by any Federal,
Provincial, State, Municipal or other governmental department,
commission, board, bureau or agency of any kind whatsoever and them is
no basis therefor;
(l) to the best of their knowledge, the Purchasers are not in material
breach of any law, ordinance, statute, regulation, by-law, order or
decree of any kind whatsoever;
(m) the Purchasers have not incurred, and Interurbain and the Principals
will not incur, any liability for broker's or finder's fees of any
kind whatsoever on behalf of the Purchasers with respect to this
Agreement or any transaction contemplated under this Agreement; and
(n) the representations and warranties of the Purchasers contained in this
Agreement disclose all material facts specifically relating to the
transactions
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involving the Purchasers contemplated under this Agreement which at
the Time of Closing may materially and adversely affect the ability of
the Purchasers to perform their respective obligations under this
Agreement.
1.4 The representations and warranties of the Purchasers contained in this
Agreement shall be true at the Time of Closing as though they were made at the
Time of Closing and they shall survive the completion of the transactions
contemplated under this Agreement and remain in full force and effect for a
period of two years for the benefit of Interurbain and the Principals.
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, Interurbain agrees
to sell the Assets to Datawave, and Datawave agrees with Interurbain to purchase
the Assets, on the Closing Date for the sum of $880,000 in Canadian funds (the
"Purchase Price"). Datawave shall cause the Assets to be acquired by DTV at the
Time of Closing.
2.2 The Purchase Price shall be paid by Datawave to Interurbain by the
issuance of a total of up to 1,600,000 common shares without par value in the
capital stock of Datawave (the "Datawave Shares") at a price of Cdn. $0.55 per
Datawave Share. Subject to adjustment as provided for herein, the Datawave
Shares will be issued as follows:
(a) 210,000 Datawave Shares (the "First Tranche on the date which is
three months following the Effective Date;
(b) 210,000 Datawave Shares (the "Second Tranche") on the date which is
six months following the Effective Date;
(c) 590,000 Datawave Shares (the "Third Tranche") on the date which is
nine months following the Effective Date; and
(d) 590,000 Datawave Shares (the "Fourth Tranche") on the date which is
one year following the Effective Date.
Provided that none of the Principals is in material default of his obligations
under this Agreement (or any agreement entered into him pursuant hereto), then
the four tranches of Datawave Shares to be issued over time as provided for
above shall become immediately issuable in the event that one or more of the
following events occurs:
(a) the Company proposes to undertake a merger or amalgamation (by
arrangement, take over, reorganization or otherwise) with another
corporation which has the result of causing the issuance of that
number of common shares of the Company as is equal to 40% or more of
its issued and outstanding share capital after taking into account
such issuance; or
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(b) the Company proposes to undertake the sale of all or substantially all
of its assets; or
(c) the proposed sale of 40% or more of the issued and outstanding shares
of the Company from a group of vendors acting jointly or in concert
(other than to an associate or affiliate of the vendors or any one of
them);
and such Datawave Shares will be issuable no later then the day preceding the
closing of such transaction or, if applicable, the record date set for
shareholder approval of such transaction.
2.3 In the event that:
(a) the Pathmark Agreement (as defined on Schedule "A") is cancelled or
terminated (other than as the result of any act or omission of the
Purchasers after the Time of Closing) or materially breached or
altered by Pathmark in the first six months following the Effective
Date, then the number of Datawave Shares to be issued to Interurbain
shall be reduced by 180,000 Datawave Shares, such reduction to be
effected by reducing the Third Tranche and Fourth Tranche share
issuances by 90,000 Datawave Shares each;
(b) the Price Choppers Agreement (as defined on Schedule "A") is cancelled
or terminated (other than as the result of any act or omission of the
Purchasers after the Time of Closing) or materially breached or
altered by Price Choppers in the first six months following the
Effective Date, then the number of Datawave Shares to be issued to
Interurbain shall be reduced by 180,000 Datawave Shares, such
reduction to be effected by reducing the Third Tranche and Fourth
Tranche share issuances by 90,000 Datawave Shares each;
(c) the weighted average trading price of the Company's common shares
exceeds, on each of five consecutive trading days at any time during
the period beginning on the Effective Date and ending on the date
which is six months following the Effective Date, the sum of Cdn.
$1.00, then the number of Datawave Shares to be issued to Interurbain
shall be reduced by 400,000 Datawave Shares, such reduction to be
effected by reducing the Third Tranche and Fourth Tranche share
issuances by 200,000 Datawave Shares each; and
(d) any one of the Principals is removed for cause (as defined by common
law, unless defined in an employment agreement between the Principal
and Datawave (or a subsidiary or affiliate) then in effect, in which
case as defined therein) or the Principal voluntarily ceases to be an
employee of the Datawave organization for any reason during the one
year period following the Effective Date, then the number of the
Datawave Shares that have not yet
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25% for each Principal whose employment terminates notwithstanding any
entitlement to such shares set out in paragraph 2.2.
2.4 In addition to the Datawave Shares, Datawave shall, at the Time of
Closing, grant to each of the Principals, the following:
(a) a non-transferrable share purchase warrant (the "Warrant") such
Warrant to entitle the holder to purchase up to 50,000 common shares
of Datawave at a price of Cdn. $1.00 per share for a period of two
years following the Closing Date, and such Warrant to be in the form
(the "Warrant Certificate") appearing at Schedule "B" to this
Agreement and such Warrant to have the additional terms and conditions
set forth in the Warrant Certificate; and
(b) an employee stock option (the "Stock Option") such Stock Option to
entitle the holder to purchase up to 50,000 common shares of Datawave
at a price of Cdn. $1.00 per share for a period of five years
following the Closing Date, such Stock Option to vest as follows:
(i) as to 12,500 shares six months following the Closing Date;
(ii) as to 12,500 shares one year following the Closing Date;
(iii) as to 12,500 shares 18 months following the Closing Date; and
(iv) as to 12,500 shares two years following the Closing Date;
and such Stock Option to be in the form (the "Stock Option Agreement")
appearing at Schedule "C" to this Agreement and such Stock Option to
have the additional terms and conditions set forth in the Stock Option
Agreement.
2.5 Interurbain and the Principals jointly and severally acknowledge to and
agree with the Purchasers that:
(a) the Datawave Shares, Warrants and Stock Options (and the common shares
that may be acquired upon the exercise thereof) (collectively the
"Datawave Securities") will be issued pursuant to registration and
prospectus exemptions in British Columbia and in the United States and
New Jersey (including applicable federal exemptions) and will be
subject to such trading restrictions as may be imposed under British
Columbia law and the laws of the United States and New Jersey which
may apply (the "Applicable Securities Laws"); and
(b) the Datawave Securities will not be transferable before all applicable
hold periods have expired; and
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(c) the certificate or certificates issued for the Datawave Securities
will bear such legends concerning the applicable hold periods as
described in the Warrant Certificate appearing at Schedule "B" to this
Agreement or as may otherwise be required by the Applicable Securities
Laws.
3. COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS
3.1 Interurbain and the Principals jointly and severally covenant and agree
with the Purchasers that they shall:
(a) from and including the Execution Date through to and including the
Time of Closing at all reasonable times during normal business hours,
permit the Purchasers, through their respective directors, officers,
employees and authorized agents and representatives (collectively the
"Purchasers' Representatives") at their own cost, full access to the
books, records and property of Interurbain including, without
limitation, all of the Assets, contracts and minute books of
Interurbain, so as to permit the Purchasers to make such investigation
(the "Purchasers' Investigation") of Interurban as the Purchasers deem
necessary;
(b) on or before the 20th day of January, 1997, provide to the Purchasers
all such further documents, instruments and materials and, at the cost
of the Purchasers, do all such acts and things as may be reasonably
required or reasonably requested by the Purchasers to obtain
Regulatory Approval including, but not limited to, providing to the
Purchasers a valuation opinion of the Assets in a form and by a party
acceptable to the VSE so as to permit the Datawave Shares to be issued
as "trading shares" as that term is defined in VSE Listings Policy
Statement No. 18;
(c) pay all United States taxes (including State taxes) arising from or
related to the transactions contemplated by this Agreement and
including, without limitation, all sales taxes, excise or transfer
taxes, and any income taxes of Interurbain or any of the Principals
arising from this transaction;
(d) from and including the Execution Date through to and including the
Time of Closing, to the extent reasonably possible, do all such acts
and things necessary to ensure that all of the representations and
warranties of Interurbain and the Principals contained in this
Agreement or any certificates or documents delivered by them pursuant
to this Agreement remain true and correct;
(e) from and including the Execution Date through to and including the
Time of Closing, preserve and protect the Business and Assets of
Interurbain (except for changes in the ordinary course of business)
and, without limiting the
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generality of the foregoing, carry on the Business of Interurbain in a
reasonable and prudent manner;
(f) from and including the Execution Date through to and including the
Time of Closing, keep confidential all discussions and communications
(including all information communicated therein) between the parties,
and all written and printed materials of any kind whatsoever exchanged
by the parties, and, if so requested by the Purchasers, Interurbain
shall arrange for any director, officer, employee, authorized agent or
representative of Interurbain to enter into a non-disclosure agreement
with the Purchasers in a form acceptable to the Purchasers acting
reasonably;
(g) pay all severance, termination or other benefits payable to employees
of Interurbain due to the transfer of the Assets to DTV or due to any
employees not continuing in the employment of DTV after the Time of
Closing;
(h) cooperate with the Purchasers to effect a smooth transition of
Business in accordance with the terms of this Agreement; and
(i) use their best efforts to obtain all necessary consents from third
parties as may be required for the transactions contemplated hereunder
on or before the Time of Closing.
3.2 Interurbain and the Principals jointly and severally covenant and agree
with the Purchasers that, from and including the Execution Date through to and
including the Time of Closing, they shall:
(a) not do any such act or thing that would render any representation or
warranty of Interurbain or of the Principals contained in this
Agreement or any certificates or documents delivered by them pursuant
to this Agreement untrue or incorrect; and
(b) not negotiate with any other person in respect of a purchase and sale
of any of the Assets or any part of the Assets, other than a sale of
part of the Assets in the ordinary course of Interurbain's business.
3.3 Interurbain and the Principals jointly and severally acknowledge to and
agree with the Purchasers that the Purchasers' Investigation shall in no way
limit or otherwise adversely affect the rights of the Purchasers as provided for
hereunder in respect of the representations and warranties of Interurbain and of
the Principals contained in this Agreement or any certificates or documents
delivered by them pursuant to this Agreement.
3.4 Datawave covenants and agrees with Interurbain and with the Principals
that Datawave shall:
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(a) from and including the Execution Date through to and including the
Time of Closing, permit the Principals and Interurbain, through their
respective directors, officers, employees and authorized agents and
representatives, as the case may be, (collectively the "Vendors'
Representatives") at their own cost, full access to the books, records
and property of Datawave including, without limitation, all of the
assets, contracts and minute books of Datawave, so as to permit them
to make such investigation (the "Vendors' Investigation") of Datawave
as they deem necessary;
(b) use its best efforts to obtain Regulatory Approval for this Agreement
and the transactions contemplated hereunder on or before the 21st day
of February, 1997;
(c) from and including the Execution Date through to and including the
Time of Closing, to the extent reasonably possible, do all such acts
and things necessary to ensure that all of the representations and
warranties of the Purchasers contained in this Agreement or any
certificates or documents delivered by them pursuant to this Agreement
remain true and correct;
(d) be responsible for the payment of any Canadian tax arising from or
related to the transactions contemplated by this Agreement; and
(e) from and including the Execution Date through to and including the
Time of Closing and subject to its obligations as a reporting issuer
listed on a stock exchange, keep confidential all discussions and
communications (including all information communicated therein)
between the parties, and all written and printed materials of any kind
whatsoever exchanged by the parties, and, if so requested by
Interurbain, Datawave shall arrange for any of the Purchasers'
Representatives to enter into a non-disclosure agreement with
Interurbain in a form acceptable to Interurbain acting reasonably.
3.5 The Purchasers covenant and agree with Interurbain and with the
Principals that, from and including the Effective Date through to and including
the Time of Closing, the Purchasers shall not knowingly do any such act or thing
that would render any representation or warranty of the Purchasers contained in
this Agreement or any certificates or documents delivered by them pursuant to
this Agreement untrue or incorrect.
3.6 The Purchasers jointly and severally acknowledge to and agree with the
Interurbain and with the Principals that the Vendors' Investigation shall in no
way limit or otherwise adversely affect the rights of Interurbain and the
Principals as provided for hereunder in respect of the representations and
warranties of the Purchasers contained in this Agreement or any certificates or
documents delivered by them pursuant to this Agreement.
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4. INDEMNITY
4.1 Notwithstanding the completion of the transactions contemplated under
this Agreement or the Purchasers' Investigation, the representations, warranties
and acknowledgements of Interurbain and the Principals contained in this
Agreement or any certificates or documents delivered by them pursuant to this
Agreement shall survive the completion of the transactions contemplated by this
Agreement and shall continue in full force and effect for a period of two years
for the benefit of the Purchasers. If any of the representations, warranties or
acknowledgements given by Interurbain or the Principals in this Agreement are
found to be untrue or there is a breach of any covenant or agreement in this
Agreement on the part of Interurbain or the Principals, Interurbain and the
Principals shall jointly and severally indemnify and save harmless the
Purchasers from and against any and all liability, claims, debts, demands,
suits, actions, penalties, fines, losses, costs (including legal fees and
disbursements as charged by a lawyer to his own client), damages and expenses of
any kind whatsoever which may be brought or made against the Purchasers by any
person, firm or corporation of any kind whatsoever or which may be suffered or
incurred by the Purchasers, directly or indirectly, arising out of or as a
consequence of any such misrepresentation or breach of warranty,
acknowledgement, covenant or agreement. Without in any way limiting the
generality of the foregoing, this shall include any loss of any kind whatsoever
which may be suffered or incurred by the Purchasers, directly or indirectly,
arising out of any material assessment or reassessment levied upon Interurbain
or the Principals for tax, interest and/or penalties for any period up to and
including the Closing Date and all claims, demands, costs (including legal fees
and disbursements as charged by a lawyer to his own client) and expenses of any
kind whatsoever in respect of the foregoing.
5. CONDITIONS PRECEDENT
5.1 The obligation of the Purchasers, or either of them, to carry out the
terms of this Agreement and to complete their respective transactions
contemplated under this Agreement is subject to the fulfilment to the
satisfaction of the Purchasers of each of the following conditions that:
(a) on or before the Time of Closing, the Purchasers shall have been able
to complete the Purchasers' Investigation to their reasonable
satisfaction;
(b) on or before the Time of Closing, subject to Section 5.4, Datawave,
DTV or another member of the Datawave organization shall have entered
into satisfactory written employment agreements (collectively, the
"Employment Agreements") with each of the Principals in substantially
the respective forms which appear on Schedule "D" to this Agreement.
(c) at the Time of Closing, Interurbain shall have delivered to the
Purchasers, in form and content reasonably satisfactory to the
Purchasers, all consents and approvals from, and assumption agreements
with, such third parties as may be necessary, or as the Purchasers
shall reasonably request, for the
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consummation of the transactions contemplated under this Agreement
(collectively, the "Third Party Agreements") including, without
limitation, consents from any software suppliers or vendors, lessors
or parties to any Material Contracts;
(d) at the Time of Closing, Interurbain and the Principals shall have
entered into an escrow agreement (the "Escrow Agreement") between
Interurbain, each of the Principals, Pitney, Hardin, Kipp & Szuch,
Attorneys, (the "Escrow Agent") and each of the Purchasers, on
substantially the same terms and conditions stated in the form of
escrow agreement attached as Schedule "E" hereto;
(e) prior to the Time of Closing, there shall not have occurred any
material adverse change in the condition, financial or otherwise, of
the Assets or of the Business operations or prospects represented by
the Assets;
(f) at the Time of Closing, the solicitors for Interurbain shall provide
an opinion dated as of the Closing Date, the form of which appears as
Schedule "F" to this Agreement;
(g) as of the Time of Closing, Interurbain and the Principals shall have
complied with all of their respective covenants and agreements
contained in this Agreement; and
(h) as of the Time of Closing, the representations and warranties of
Interurbain and of the Principals referred to in paragraph 1.1 of this
Agreement, contained elsewhere in this Agreement or contained in any
certificates or documents delivered by Interurbain and by the
Principals pursuant to this Agreement shall be true in all material
respects as if such representations and warranties had been made by
Interurbain and the Principals as of the Time of Closing.
The conditions set forth above are for the exclusive benefit of the Purchasers
and may be waived by the Purchasers in whole or in part on or before the Time of
Closing.
5.2 Interurbain's and the Principals' obligations to carry out the terms of
this Agreement and to complete their respective transactions contemplated under
this Agreement are subject to the fulfilment to their satisfaction of each of
the following conditions that:
(a) on or before the Time of Closing, each of the Principals shall have
entered into their respective Employment Agreement;
(b) at the Time of Closing, DTV shall have entered into either an
assignment of each of the Third Party Agreement referred to in
subparagraph 5.1(c), or a
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new agreement directly with such third party to replace the Third
Party Agreement in question;
(c) at the Time of Closing, the Purchasers shall have entered into the
Escrow Agreement and shall have delivered to the Escrow Agent signed
irrevocable treasury orders (collectively, the "Treasury Orders")
providing for the issuance of the Datawave Shares bearing the
appropriate legends as provided for in Section 2;
(d) at the Time of Closing, the Purchasers shall have delivered to the
Principals duly executed Warrant Certificates;
(e) at the Time of Closing, the Purchasers shall have delivered to the
Principals duly executed Stock Option Agreements;
(f) at the Time of Closing, the solicitors for the Purchasers shall
provide an opinion dated as of the Closing Date, the form of which
appears as Schedule "G" to this Agreement;
(g) as of the Time of Closing, the Purchasers shall have complied with all
of their respective covenants and agreements contained in this
Agreement; and
(h) at the Time of Closing, the representations and warranties of the
Purchasers referred to in paragraph 1.3 of this Agreement, contained
elsewhere in this Agreement or contained in any certificates or
documents delivered by them pursuant to this Agreement shall be true
in all material respects as if such representations and warranties had
been made by the Purchasers as of the Time of Closing.
The conditions set forth above are for the exclusive benefit of Interurbain and
the Principals and may be waived by them in whole or in part on or before the
Time of Closing.
5.3 The parties acknowledge and agree each with the other that this Agreement
and all of the transactions contemplated under this Agreement are subject to the
approval ("Regulatory Approval") of the Vancouver Stock Exchange ("VSE"). In
the event that Regulatory Approval is not obtained on or before the 21st day of
February, 1997, this Agreement shall terminate and be of no further force and
effect. The Purchasers agree to use all reasonable efforts to obtain the
Regulatory Approvals on or before February 21, 1997.
5.4 Datawave shall cause DTV to assume the position of Interurbain under the
agreement made between MCI and Freemont Quality Products, Inc. ("Freemont")
dated June 7, 1996 (the "MCI Agreement") so long as it is on terms no less
favourable to DTV than apply to Freemont as of the Execution Date of this
Agreement, subject to those conditions set forth on Schedule "A".
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6. CLOSING
6.1 The completion of the transactions contemplated under this Agreement
shall be closed at the offices of Campney & Murphy, P.O. Box 48800, 2100-1111
West Georgia Street, Vancouver, British Columbia at 9:00 o'clock a.m. local time
in Vancouver, B.C. (the "Time of Closing") on the fifth business day (the
"Closing Date") following the date Regulatory Approval is given or at such other
time and date as the parties may agree to.
6.2 At the Time of Closing, Interurbain and the Principals shall deliver to
the solicitors for Datawave:
(a) certified true copies of the resolutions of the directors and
shareholders of Interurbain evidencing that the directors and
shareholders of Interurbain have approved this Agreement and all of
the transactions contemplated hereunder and the resolutions shall
include specific reference to the sale and transfer of the Assets from
Interurbain to Datawave (or if so directed by Datawave, DTV) as
provided for in this Agreement;
(b) such documentation as the Purchasers consider necessary to effect the
valid sale and transfer of the Assets to DTV including, without
limitation, a Bill of Sale in a form provided by the Purchasers and
any documents necessary to effect the registration or assignment of
any of the Assets into the name of DTV;
(c) the Employment Agreements referred to in subparagraph 5.1 (b) of this
Agreement;
(d) the Third Party Agreements referred to in subparagraph 5.1(c) of this
Agreement;
(e) the Escrow Agreement referred to in subparagraph 5.1(d) of this
Agreement;
(f) the solicitor's opinion referred to in subparagraph 5.1(f) of this
Agreement;
(g) a certificate of confirmation signed by Interurbain and by the
Principals in the form attached as Schedule "H" to this Agreement;
(h) a certificate of good standing for Interurbain issued by the
appropriate administrative body in the jurisdiction of incorporation
of Interurbain; and
(i) any other materials that are, in the opinion of the solicitors for
Datawave, reasonably required to complete the transactions
contemplated under this Agreement.
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6.3 At the Time of Closing, the Purchasers shall deliver to the solicitors
for Interurbain:
(a) certified true copies of the resolutions of the directors of each of
the Purchasers evidencing that the respective boards have approved
this Agreement and all of the respective transactions of the
Purchasers contemplated hereunder;
(b) evidence that Regulatory Approval has been obtained;
(c) the Employment Agreements referred to in subparagraph 5.2(a) of this
Agreement;
(d) the Third Party Agreements referred to in subparagraph 5.2(b) of this
Agreement;
(e) the Escrow Agreement referred to in subparagraph 5.2(c) of this
Agreement and evidence that the Treasury Orders have been delivered to
the Escrow Agent as provided for in subparagraph 5.2(c) of this
Agreement;
(f) the Warrant Certificates referred to in subparagraph 5.2(d) of this
Agreement;
(g) the Stock Option Agreements referred to in subparagraph 5.2(e) of this
Agreement;
(h) the solicitor's opinion referred to in subparagraph 5.2(f) of this
Agreement;
(i) a certificate of confirmation signed by each of the Purchasers in the
form attached as Schedule "I" to this Agreement; and
(j) any other materials that are, in the opinion of the solicitors for
Interurbain, reasonably required to complete the transactions
contemplated under this Agreement.
7. ARBITRATION
7.1 The parties hereto agree that all questions or matters in dispute with
respect to this Agreement shall be submitted to arbitration pursuant to the
terms hereof. For the purpose of this Part 7 of the Agreement, Interurbain and
the Principals shall be one party and Datawave and DTV shall be one party.
7.2 It shall be a condition precedent to the right of any party hereto to
submit any matter to arbitration pursuant to the provisions hereof that any
party intending to refer any matter to arbitration shall have given prior
written notice of its intention to do so to the other party together with
written particulars of the matter in dispute. On the expiration of 10 days
-18-
<PAGE>
from the date such notice is deemed delivered, the party who gave such notice
may proceed to refer the dispute to arbitration as provided in paragraph 7.3
hereof.
7.3 The party desiring arbitration shall appoint one arbitrator, and shall
notify the other party of such appointment, and the other party shall, within 15
days after such notice is deemed delivered, appoint an arbitrator, and the two
arbitrators so named, before proceeding to act, shall, within 30 days of the
appointment of the last appointed arbitrator, unanimously agree on the
appointment of a third arbitrator to act with them and be chairman of the
arbitration herein provided for. If the other party shall fail to appoint an
arbitrator within 15 days after notice of the appointment of the first
arbitrator is deemed delivered, the first arbitrator shall be the only
arbitrator. If the two arbitrators appointed by the parties shall be unable to
agree on the appointment of the chairman, the chairman shall be appointed under
the rules of the American Arbitration Association. Except as specifically
otherwise provided in this paragraph, the arbitration herein provided for shall
be conducted in accordance with such Act. The chairman, or in the case where
only one arbitrator is appointed, the single arbitrator, shall fix a time and
place in Morris County, New Jersey, U.S.A. for the purpose of hearing the
evidence and representations of the parties, and he shall preside over the
arbitration and determine all questions of procedure not provided for under such
Act or this paragraph. After hearing any evidence and representations that the
parties may submit, the single arbitrator, or the arbitrators, as the case may
be, shall make an award and reduce the same to writing, and deliver one copy
thereof to each of the parries. The expense of the arbitration shall be paid as
specified in the award.
7.4 The parties agree that the award of a majority of the arbitrators, or in
the case of a single arbitrator, of such arbitrator, shall be final and binding
upon each of them.
8. GENERAL
8.1 Time and each of the terms and conditions of this Agreement shall be of
the essence of this Agreement and any waiver by the parties of this paragraph
8.1 or any failure by them to exercise any of their rights under this Agreement
shall be limited to the particular instance and shall not extend to any other
instance or matter in this Agreement or otherwise affect any of their rights or
remedies under this Agreement.
8.2 The Schedules to this Agreement incorporated by reference and the
recitals to this Agreement constitute a part of this Agreement.
8.3 This Agreement constitutes the entire Agreement between the parties
hereto in respect of the matters referred to herein and there are no
representations, warranties, covenants or agreements, expressed or implied,
collateral hereto other than as expressly set forth or referred to herein.
8.4 The headings in this Agreement are for reference only and do not
constitute terms of the Agreement.
-19-
<PAGE>
8.5 The provisions contained in this Agreement which, by their terms, require
performance by a party to this Agreement subsequent to the Closing Date of this
Agreement, shall survive the Closing Date of this Agreement.
8.6 No alteration, amendment, modification or interpretation of this
Agreement or any provision of this Agreement shall be valid and binding upon the
parties hereto unless such alteration, amendment, modification or interpretation
is in written form executed by the parties directly affected by such alteration,
amendment, modification or interpretation.
8.7 Whenever the singular or masculine is used in this Agreement the same
shall be deemed to include the plural or the feminine or the body corporate as
the context may require.
8.8 The parties hereto shall execute and deliver all such further documents
and instruments and do all such acts and things as any party may, either before
or after the Closing Date, reasonably require in order to carry out the full
intent and meaning of this Agreement.
8.9 Any notice, request, demand and other communication to be given under this
Agreement shall be in writing and shall be delivered by hand or by telecopier to
the parties at their following respective addresses:
To Interurbain and the Principals:
c/o Interurbain Communications, Inc.
230 West Parkway, Unit 10
Pompton Plains, New Jersey, U.S.A.
07444
Attention: Joshua Emanuel
Telecopier: (201) 616-0022
with a copy to:
<TABLE>
<CAPTION>
<S> <C>
if mailed: if hand delivered or by overnight
courier:
Pitney, Hardin, Kipp & Szuch Pitney, Hardin, Kipp & Szuch
P.O. Box 1945 200 Campus Drive
Morristown, New Jersey, U.S.A. Florsham Park, New Jersey, U.S.A.
07962-1945 07932
Attention: Lori J. Braender
</TABLE>
-20-
<PAGE>
Telecopier (201) 966-1550
To Datawave and DTV:
c/o Datawave Systems Inc.
101 West 5th Avenue
Vancouver, British Columbia, Canada
V5Y 1H9
Attention: Peter Hough
Telecopier: (604) 874-1503
with a copy to:
Campney & Murphy
Barristers and Solicitors
P.O. Box 48800
2100 - 1111 West Georgia St.
Vancouver, B.C. V7X 1K9
Attention: David J. Raffa/Michael R. Axford
Telecopier: (604) 688-0829
or to such other addresses as may be given in writing by the parties hereto in
the manner provided for in this paragraph, and shall be deemed to have been
received, if delivered by hand, on the date of delivery, or if delivered by
telecopier, on the date that it is sent.
8.10 This Agreement may not be assigned by any party hereto without the prior
written consent of all of the parties hereto.
8.11 This Agreement shall be subject to, governed by, and construed in
accordance with the laws of the State of New Jersey.
8.12 Interurbain and each of the Principals hereby appoints Joshua Emanuel as
his or its attorney for the purposes of receiving all payments and notices to be
delivered to them hereunder, and for the purpose of altering, mending, modifying
or interpreting this Agreement on behalf of them, or executing and delivering
documents and instruments and doing all such acts and things as may be required
of them to carry out the full intent of this Agreement.
8.13 This Agreement may be signed by the parties in as many counterparts as
may be deemed necessary, each of which so signed shall be deemed to be an
original, and all such counterparts together shall constitute one and the same
instrument.
-21-
<PAGE>
8.14 This Agreement may be terminated at any time prior to the Time of
Closing by any one of the following methods:
(a) by mutual consent of the parties in writing;
(b) by Purchasers in writing if any of the conditions in Section 5.1 have
not been fulfilled, or waived by the Purchasers in writing, on or
before February 21, 1997; or if any petition in bankruptcy shall have
been filed by or against Interurbain or a receiver has been appointed
for Interurbain or any of its assets or Interurbain admits in writing
its inability to pay its debts as they mature (an "Event of
Bankruptcy"); or
(c) by Interurbain and Principals in writing if there shall have occurred
an Event of Bankruptcy with respect to either of the Purchasers; or if
any of the conditions in Section 5.2 have not been fulfilled or waived
by them on or before February 21, 1997.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals as of the
Effective Date first above written.
The CORPORATE SEAL of )
INTERURBAIN COMMUNICATIONS, )
INC. was hereunto affixed )
in the presence of: ) c/s
)
/s/ )
________________________ )
)
/s/ )
________________________ )
-22-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SIGNED, SEALED AND DELIVERED )
by JOSHUA EMANUEL in the presence of: )
)
)
/s/ David Emanuel ) /s/ Joshua Emanuel
- ---------------------------------- ) --------------------------------
) JOSHUA EMANUEL
Signature of Witness )
)
Name of Witness: David Emanual )
------------------ )
)
Address of Witness: )
Interurbain Communications, Inc)
------------------------- )
230 West Parkway, Unit 10 )
------------------------- )
Pompton Plains, NJ 07444 )
------------------------- )
)
------------------------- )
Occupation of Witness: Vice President )
----------- )
)
SIGNED, SEALED AND DELIVERED )
by DAVID EMANUAL )
in the presence of: )
)
)
)
/s/ Joshua Emanuel ) /s/ David Emanuel
- ------------------------------------- ) -----------------------------------
) DAVID EMANUEL
Name of Witness: Joshua Emanual )
------------------ )
Address of Witness: )
Interurbain Communications, Inc)
------------------------- )
230 West Parkway, Unit 10 )
------------------------- )
Pompton Plains, NJ 07444 )
------------------------- )
)
------------------------- )
Occupation of Witness: Vice President )
----------- )
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SIGNED, SEALED AND DELIVERED )
by ARTHUR FREEDBERG )
in the presence of: )
)
)
/s/ Lawrence Freedberg ) /s/ Arthur Freedberg
- ---------------------------------- ) --------------------------------
) ARTHUR FREEDBERG
Signature of Witness )
)
Name of Witness: )
Lawrence Freedberg )
--------------------------- )
Address of Witness: )
Interurbain Communications, Inc)
------------------------- )
230 West Parkway, Unit 10 )
------------------------- )
Pompton Plains, NJ 07444 )
------------------------- )
)
------------------------- )
Occupation of Witness: Vice President )
----------- )
SIGNED, SEALED AND DELIVERED )
by LAWRENCE FREEDBERG )
in the presence of: )
)
)
/s/ Arthur Freedberg ) /s/ Lawrence Freedberg
- ---------------------------------- ) --------------------------------
) LAWRENCE FREEDBERG
Signature of Witness )
)
Name of Witness:
Arthur Freedberg )
--------------------------- )
Address of Witness:
Interurbain Communications, Inc)
------------------------- )
230 West Parkway, Unit 10 )
------------------------- )
Pompton Plains, NJ 07444 )
------------------------- )
)
------------------------- )
Occupation of Witness: President )
----------- )
The CORPORATE SEAL OF )
DATAWAVE SYSTEMS INC. was )
hereunto affixed in the presence of: ) c/s
)
/s/ )
- ------------------------------------- )
)
/s/ )
- ------------------------------------- )
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
The CORPORATE SEAL of DTV )
TELECOMMUNICATIONS (US) INC. )
was hereunto affixed in the presence of:) c/s
)
/s/ )
- ------------------------------------- )
/s/ )
- ------------------------------------- )
</TABLE>
-25-
<PAGE>
EXHIBIT 10.20
ESCROW AGREEMENT
----------------
THIS AGREEMENT dated for reference the 16th day of November, 1993, is made
BETWEEN:
MONTREAL TRUST COMPANY OF CANADA, of 2nd Floor,
510 Burrard Street, Vancouver, B.C. V6C 3B9
(the "Escrow Agent")
AND:
C.R. PROVINI FINANCIAL SERVICES CORP., a company duly incorporated under
the laws of the Province of British Columbia having its registered office
at Suite 2200 - 885 West Georgia Street, Vancouver, British Columbia, V6C
3E8;
(the "Issuer")
AND:
EACH SHAREHOLDER, as defined in this Agreement;
WHEREAS the Shareholder has acquired or is about to acquire shares of the
Issuer;
AND WHEREAS the Escrow Agent has agreed to act as escrow agent in respect of the
shares upon the acquisition of the shares by the Shareholder;
NOW THEREFORE in consideration of the covenants contained in this Agreement and
other good and valuable consideration (the receipt and sufficiency of which is
acknowledged), the Parties agree as follows:
1. INTERPRETATION
In this Agreement:
(a) "Acknowledgement" means the acknowledgement and agreement to be bound
in the form attached as Schedule "A" to this Agreement;
(b) "Act" means the Securities Act, S.B.C. 1985, c. 83;
(c) "Exchange" means the Vancouver Stock Exchange;
(d) "Earn-out Formula" means the formula by which the Shares shall be
released from the escrow restrictions provided for in this Agreement,
which release formula is attached hereto as Schedule "B";
<PAGE>
-2-
(e) "IPO" means the initial public offering of common shares of the Issuer
under a prospectus which has been filed with, and for which a receipt
has been obtained from, the Superintendent under section 42 of the
Act;
(f) "Local Policy Statement 3-07" means the Local Policy Statement 3-07 in
effect as of the date of reference of this Agreement, a copy of which
is available for review at the Issuer's registered office;
(g) "Shareholder" means a holder of shares of the Issuer who executes this
Agreement or an Acknowledgement;
(g) "Shares" means the shares of the Shareholder described in Schedule "C"
to this Agreement, as amended from time to time in accordance with
section 9;
(h) "Superintendent" means the Superintendent of Brokers appointed under
the Act; and
(i) "Superintendent or the Exchange" means the Superintendent, if the
shares of the Issuer are not listed on the Exchange, or the Exchange,
if the shares of the Issuer are listed on the Exchange.
2. PLACEMENT OF SHARES IN ESCROW
The Shareholder places the Shares in escrow with the Escrow Agent and shall
deliver the certificates representing the Shares to the Escrow Agent as soon as
practicable.
3. VOTING OF SHARES IN ESCROW
Except as provided by section 4(a), the Shareholder may exercise all voting
rights attached to the Shares.
4. WAIVER OF SHAREHOLDER'S RIGHTS
The Shareholder waives the rights attached to the Shares
(a) to vote the Shares on a resolution to cancel any of the Shares,
(b) to receive dividends, and
(c) to participate in the assets and property of the Issuer on a winding
up or dissolution of the Issuer.
until such time as such Shares are released from Escrow in accordance with
Section 7(2) hereof
5. ABSTENTION FROM VOTING AS A DIRECTOR
A Shareholder that is or becomes a director of the Issuer shall abstain from
voting on a directors' resolution to cancel any of the Shares.
<PAGE>
-3-
6. TRANSFER WITHIN ESCROW
(1) The Shareholder shall not transfer any of the Shares except in accordance
with Local Policy Statement 3-07 and with the consent of the Superintendent
or the Exchange.
(2) The Escrow Agent shall not effect a transfer of the Shares within escrow
unless the Escrow Agent has received:
(a) a copy of an Acknowledgement executed by the person to whom the Shares
are to be transferred, and
(b) a letter from the Superintendent or the Exchange consenting to the
transfer.
(3) Upon the death or bankruptcy of a Shareholder, the Escrow Agent shall hold
the Shares subject to this Agreement for the person that is legally
entitled to become the registered owner of the Shares, subject to such
person effecting any transfer within escrow of the Shares to a principal of
the Company in accordance with this Agreement and the rules and policies of
the Exchange.
(4) Subject to section 8 hereof a Shareholder who ceases to be a principal of
the Company, as that term is defined in Local Policy Statement 3-07, dies,
or becomes bankrupt, may retain the Shares held hereunder by the
Shareholder.
7. RELEASE FROM ESCROW
(1) The Shareholder irrevocably directs the Escrow Agent to retain the Shares
until the Shares are released from escrow pursuant to subsection (2) or
surrendered for cancellation pursuant to section 8.
(2) The Escrow Agent shall not release the Shares from escrow unless the Escrow
Agent has received a letter from the Superintendent or the Exchange
consenting to the release which release shall be based on the Earn-out
Formula provided for in Schedule "B" attached hereto and which release
shall be in accordance with and governed by the provisions contained in
Local Policy Statement 3-07 and the rules of the Exchange.
(3) The approval of the Superintendent or the Exchange to a release from escrow
of any of the Shares shall terminate this Agreement only in respect of the
Shares so released.
8. SURRENDER FOR CANCELLATION
The Shareholder shall surrender the Shares for cancellation and the Escrow Agent
shall deliver the certificates representing the Shares to the Issuer:
(a) at the time of a major reorganization of the Issuer, if required as a
condition of the consent to the reorganization by the Superintendent
or the Exchange,
(b) where the Issuer's shares have been subject to a cease trade order
issued under the Act for a period of 2 consecutive years,
<PAGE>
-4-
(c) 10 years from the later of the date of issue of the Shares and the
date of the receipt for the Issuer's prospectus on its IPO.
(d) if, within 10 days of a Shareholder (designated in Schedule "C"
hereto) ceasing to be an employee of the Company or any of its
subsidiaries (for any reason whatsoever other than death), that
designated Shareholder has not entered into an agreement to transfer
his shares to a principal of the Company, in accordance with section 6
hereof.
9. AMENDMENT OF AGREEMENT
(1) Subject to subsection (2), this Agreement may be amended only by a written
agreement among the Parties and with the written consent of the
Superintendent or the Exchange.
(2) Schedule "C" to this Agreement shall be amended upon:
(a) a transfer of Shares pursuant to section 6,
(b) a release of Shares from escrow pursuant to section 7, or
(c) a surrender of Shares for cancellation pursuant to section 8,
and the Escrow Agent shall note the amendment on the Schedule "C" in its
possession.
10. INDEMNIFICATION OF ESCROW AGENT
The Issuer and the Shareholders, jointly and severally, release, indemnify and
save harmless the Escrow Agent from all costs, charges, claims, demands,
damages, losses and expenses resulting from the Escrow Agent's compliance in
good faith with this Agreement.
11. RESIGNATION OF ESCROW AGENT
(1) If the Escrow Agent wishes to resign as escrow agent in respect of the
Shares, the Escrow Agent shall give notice to the Issuer.
(2) If the Issuer wishes the Escrow Agent to resign as escrow agent in respect
of the Shares, the Issuer shall give notice to the Escrow Agent.
(3) A notice referred to in subsection (1) or (2) shall be in writing and
delivered to:
(a) the Issuer at Suite 1600, 750 West Pender Street, Vancouver, British
Columbia, V6C 2T8, or
(b) the Escrow Agent at 2nd Floor, 510 Burrard Street, Vancouver, British
Columbia, V6C 3B9,
and the notice shall be deemed to have been received on the date of delivery.
The Issuer or the Escrow Agent may change its address for notice by giving
notice to the other party in accordance with this subsection.
<PAGE>
-5-
(4) A copy of a notice referred to in subsection (1) or shall concurrently be
delivered to the Superintendent or the Exchange.
(5) The resignation of the Escrow Agent shall be effective and the Escrow Agent
shall cease to be bound by this Agreement on that date that is 180 days
after the date of receipt of the notice referred to in subsection (1) or
(2) or on such other date as the Escrow Agent and the Issuer may agree upon
(the "resignation date").
(6) The Issuer shall, before the resignation date and with the written consent
of the Superintendent or the Exchange, appoint another escrow agent and
that appointment shall be binding on the Issuer and the Shareholders.
12. FURTHER ASSURANCES
The Parties shall execute and deliver any documents and perform any acts
necessary to carry out the intent of this Agreement.
13. TIME
Time is of the essence of this Agreement.
14. GOVERNING LAWS
This Agreement shall be construed in accordance with and governed by the laws of
British Columbia and the laws of Canada applicable in British Columbia.
15. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which shall
be deemed to be an original and all of which shall constitute one agreement.
16. LANGUAGE
Wherever a singular expression is used in this Agreement, that expression is
deemed to include the plural or the body corporate where required by the
context.
<PAGE>
-6-
17. ENUREMENT
This Agreement enures to the benefit of and is binding on the Parties and their
heirs, executors, administrators, successors and permitted assigns,
IN WITNESS WHEREOF the parties hereto have hereunto executed this Agreement as
of the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
THE CORPORATE SEAL of MONTREAL )
TRUST COMPANY OF CANADA was )
hereunto affixed in the presence of )
)
)
Per: /s/ )
_______________________________ ) c/s
Authorized Signatory )
)
Per: /s/ )
_______________________________ )
Authorized Signatory )
THE CORPORATE SEAL of C.R. PROVINI )
FINANCIAL SERVICE CORP. was )
hereunto affixed in the presence of )
)
)
Per: /s/ )
_______________________________ ) c/s
Authorized Signatory )
)
Per: _______________________________ )
Authorized Signatory )
SIGNED, SEALED AND DELIVERED by )
CLIVE BARWIN in the presence of: )
)
/s/ P. Hough )
__________________________________ ) /s/ Clive Barwin
Signature of Witness ) ________________________________
)
Vancouver )
__________________________________ ) CLIVE BARWIN
Address of Witness )
)
__________________________________ )
Occupation of Witness )
</TABLE>
<PAGE>
-7-
SIGNED, SEALED AND DELIVERED by )
PETER HOUGH in the presence of: )
)
/s/ )
__________________________________ ) /s/ Peter Hough
Signature of Witness ) ________________________________
) PETER HOUGH
Vancouver )
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
)
SIGNED, SEALED AND DELIVERED by )
BRUCE McCLEAN in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ Bruce McClean
Signature of Witness ) ________________________________
) BRUCE McLEAN
Vancouver )
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
SIGNED, SEALED AND DELIVERED by )
WILLIAM TURNER in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ William Turner
Signature of Witness ) ________________________________
) WILLIAM TURNER
Vancouver )
__________________________________ )
Address of Witness )
)
)
__________________________________ )
Occupation of Witness )
SIGNED, SEALED AND DELIVERED by )
RUSS ISAAC in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ Russ Isaac
Signature of Witness ) ________________________________
RUSS ISAAC
Vancouver )
__________________________________ )
Address of Witness )
)
CA )
__________________________________ )
Occupation of Witness )
<PAGE>
-8-
SIGNED, SEALED AND DELIVERED by )
KEN LEITMAYR in the presence of: )
)
)
__________________________________ )
Signature of Witness ) ________________________________
) KEN LEITMAYR
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
)
SIGNED, SEALED AND DELIVERED by )
RICHARD BRUNETTE in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ Richard Brunette
Signature of Witness ) ________________________________
) RICHARD BRUNETTE
437 W. 15th Ave. Van )
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
SIGNED, SEALED AND DELIVERED by )
TODD PEEVER in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ Todd Peever
Signature of Witness ) ________________________________
) TODD PEEVER
Vancouver )
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
SIGNED, SEALED AND DELIVERED by )
MICHAEL G. THOMSON in the presence of: )
)
__________________________________ ) /s/ Michael G. Thomson
Signature of Witness ) ________________________________
) MICHAEL G. THOMSON
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
<PAGE>
-9-
SIGNED, SEALED AND DELIVERED by )
ALLAN LEE in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ Allan Lee
Signature of Witness ) ________________________________
) ALLAN LEE
Vancouver )
__________________________________ )
Address of Witness )
)
CA )
__________________________________ )
Occupation of Witness )
<PAGE>
EXHIBIT 10.21
ESCROW AGREEMENT
----------------
THIS AGREEMENT dated for reference the 16th day of November, 1993, is made
BETWEEN:
MONTREAL TRUST COMPANY OF CANADA, of 2nd Floor,
510 Burrard Street, Vancouver, B.C. V6C 3B9
(the "Escrow Agent")
AND:
C.R. PROVINI FINANCIAL SERVICES CORP., a company duly incorporated under
the laws of the Province of British Columbia having its registered office
at Suite 2200 - 885 West Georgia Street, Vancouver, British Columbia, V6C
3E8;
(the "Issuer")
AND:
EACH SHAREHOLDER, as defined in this Agreement:,
WHEREAS the Shareholder has acquired or is about to acquire shares of the
Issuer;
AND WHEREAS the Escrow Agent has agreed to act as escrow agent in respect of the
shares upon the acquisition of the shares by the Shareholder;
NOW THEREFORE in consideration of the covenants contained in this Agreement and
other good and valuable consideration (the receipt and sufficiency of which is
acknowledged), the Parties agree as follows:
1. INTERPRETATION
In this Agreement:
(a) "Acknowledgement" means the acknowledgement and agreement to be bound
in the form attached as Schedule "A" to this Agreement;
(b) "Act" means the Securities Act, S.B.C. 1985, c. 83;
(c) "Exchange" means the Vancouver Stock Exchange;
(d) "Earn-out Formula" means the formula by which the Shares shall be
released from the escrow restrictions provided for in this Agreement,
which release formula is attached hereto as Schedule "B";
<PAGE>
-2-
(e) "IPO" means the initial public offering of common shares of the Issuer
under a prospectus which has been filed with, and for which a receipt
has been obtained from, the Superintendent under section 42 of the
Act;
(f) "Local Policy Statement 3-07" means the Local Policy Statement 3-07 in
effect as of the date of reference of this Agreement, a copy of which
is available for review at the Issuer's registered office;
(g) "Shareholder" means a holder of shares of the Issuer who executes this
Agreement or an Acknowledgement;
(g) "Shares" means the shares of the Shareholder described in Schedule "C"
to this Agreement, as amended from time to time in accordance with
section 9;
(h) "Superintendent" means the Superintendent of Brokers appointed under
the Act; and
(i) "Superintendent or the Exchange" means the Superintendent, if the
shares of the Issuer are not listed on the Exchange, or the Exchange,
if the shares of the Issuer are listed on the Exchange.
2. PLACEMENT OF SHARES IN ESCROW
The Shareholder places the Shares in escrow with the Escrow Agent and shall
deliver the certificates representing the Shares to the Escrow Agent as soon as
practicable.
3. VOTING OF SHARES IN ESCROW
Except as provided by section 4(a), the Shareholder may exercise all voting
rights attached to the Shares.
4. WAIVER OF SHAREHOLDER'S RIGHTS
The Shareholder waives the rights attached to the Shares
(a) to vote the Shares on a resolution to cancel any of the Shares,
(b) to receive dividends, and
(c) to participate in the assets and property of the Issuer on a winding
up or dissolution of the Issuer.
until such time as such Shares are released from Escrow in accordance with
Section 7(2) hereof
5. ABSTENTION FROM VOTING AS A DIRECTOR
A Shareholder that is or becomes a director of the Issuer shall abstain from
voting on a directors' resolution to cancel any of the Shares.
<PAGE>
-3-
6. TRANSFER WITHIN ESCROW
(1) The Shareholder shall not transfer any of the Shares except in accordance
with Local Policy Statement 3-07 and with the consent of the Superintendent
or the Exchange.
(2) The Escrow Agent shall not effect a transfer of the Shares within escrow
unless the Escrow Agent has received:
(a) a copy of an Acknowledgement executed by the person to whom the Shares
are to be transferred, and
(b) a letter from the Superintendent or the Exchange consenting to the
transfer.
(3) Upon the death or bankruptcy of a Shareholder, the Escrow Agent shall hold
the Shares subject to this Agreement for the person that is legally
entitled to become the registered owner of the Shares, subject to such
person effecting any transfer within escrow of the Shares to a principal of
the Company in accordance with this Agreement and the rules and policies of
the Exchange.
(4) Subject to section 8 hereof a Shareholder who ceases to be a principal of
the Company, as that term is defined in Local Policy Statement 3-07, dies,
or becomes bankrupt, may retain the Shares held hereunder by the
Shareholder.
7. RELEASE FROM ESCROW
(1) The Shareholder irrevocably directs the Escrow Agent to retain the Shares
until the Shares are released from escrow pursuant to subsection (2) or
surrendered for cancellation pursuant to section 8.
(2) The Escrow Agent shall not release the Shares from escrow unless the Escrow
Agent has received a letter from the Superintendent or the Exchange
consenting to the release which release shall be based on the Earn-out
Formula provided for in Schedule "B" attached hereto and which release
shall be in accordance with and governed by the provisions contained in
Local Policy Statement 3- 07 and the rules of the Exchange.
(3) The approval of the Superintendent or the Exchange to a release from escrow
of any of the Shares shall terminate this Agreement only in respect of the
Shares so released.
8. SURRENDER FOR CANCELLATION
The Shareholder shall surrender the Shares for cancellation and the Escrow Agent
shall deliver the certificates representing the Shares to the Issuer:
(a) at the time of a major reorganization of the Issuer, if required as a
condition of the consent to the reorganization by the Superintendent
or the Exchange,
(b) where the Issuer's shares have been subject to a cease trade order
issued under the Act for a period of 2 consecutive years,
<PAGE>
-4-
(c) 10 years from the later of the date of issue of the Shares and the
date of the receipt for the Issuer's prospectus on its IPO.
9. AMENDMENT OF AGREEMENT
(1) Subject to subsection (2), this Agreement may be amended only by a written
agreement among the Parties and with the written consent of the
Superintendent or the Exchange.
(2) Schedule "C" to this Agreement shall be amended upon:
(a) a transfer of Shares pursuant to section 6,
(b) a release of Shares from escrow pursuant to section 7, or
(c) a surrender of Shares for cancellation pursuant to section 8,
and the Escrow Agent shall note the amendment on the Schedule "C" in its
possession.
10. INDEMNIFICATION OF ESCROW AGENT
The Issuer and the Shareholders, jointly and severally, release, indemnify and
save harmless the Escrow Agent from all costs, charges, claims, demands,
damages, losses and expenses resulting from the Escrow Agent's compliance in
good faith with this Agreement.
11. RESIGNATION OF ESCROW AGENT
(1) If the Escrow Agent wishes to resign as escrow agent in respect of the
Shares, the Escrow Agent shall give notice to the Issuer.
(2) If the Issuer wishes the Escrow Agent to resign as escrow agent in respect
of the Shares, the Issuer shall give notice to the Escrow Agent.
(3) A notice referred to in subsection (1) or (2) shall be in writing and
delivered to:
(a) the Issuer at Suite 1600, 750 West Pender Street, Vancouver, British
Columbia, V6C 2T8, or
(b) the Escrow Agent at 2nd Floor, 510 Burrard Street, Vancouver, British
Columbia, V6C 3B9,
and the notice shall be deemed to have been received on the date of delivery.
The Issuer or the Escrow Agent may change its address for notice by giving
notice to the other party in accordance with this subsection.
(4) A copy of a notice referred to in subsection (1) or shall concurrently be
delivered to the Superintendent or the Exchange.
<PAGE>
-5-
(5) The resignation of the Escrow Agent shall be effective and the Escrow Agent
shall cease to be bound by this Agreement on that date that is 180 days
after the date of receipt of the notice referred to in subsection (1) or
(2) or on such other date as the Escrow Agent and the Issuer may agree upon
(the "resignation date").
(6) The Issuer shall, before the resignation date and with the written consent
of the Superintendent or the Exchange, appoint another escrow agent and
that appointment shall be binding on the Issuer and the Shareholders.
12. FURTHER ASSURANCES
The Parties shall execute and deliver any documents and perform any acts
necessary to carry out the intent of this Agreement.
13. TIME
Time is of the essence of this Agreement.
14. GOVERNING LAWS
This Agreement shall be construed in accordance with and governed by the laws of
British Columbia and the laws of Canada applicable in British Columbia.
15. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which shall
be deemed to be an original and all of which shall constitute one agreement.
16. LANGUAGE
Wherever a singular expression is used in this Agreement, that expression is
deemed to include the plural or the body corporate where required by the
context.
<PAGE>
-6-
17. ENUREMENT
This Agreement enures to the benefit of and is binding on the Parties and their
heirs, executors, administrators, successors and permitted assigns.
IN WITNESS WHEREOF the parties hereto have hereunto executed this Agreement as
of the day and year first above written.
THE CORPORATE SEAL of MONTREAL )
)
TRUST COMPANY OF CANADA was )
hereunto affixed in the presence of )
)
/s/ )
Per: _______________________________ ) c/s
Authorized Signatory )
)
/s/ )
Per: _______________________________ )
Authorized Signatory )
THE CORPORATE SEAL of C.R. PROVINI )
FINANCIAL SERVICE CORP. was )
hereunto affixed in the presence of )
)
/s/ )
Per: _______________________________ ) c/s
Authorized Signatory )
)
Per: _______________________________ )
Authorized Signatory )
SIGNED, SEALED AND DELIVERED by )
CLIVE BARWIN in the presence of: )
)
/s/ Peter Hough )
__________________________________ ) /s/ Clive Barwin
Signature of Witness ) ________________________________
) CLIVE BARWIN
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
SIGNED, SEALED AND DELIVERED by )
PETER HOUGH in the presence of: )
)
/s/ Clive Barwin )
__________________________________ ) /s/ Peter Hough
Signature of Witness ) ________________________________
) PETER HOUGH
Vancouver )
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
)
<PAGE>
-7-
SIGNED, SEALED AND DELIVERED by )
MICHAEL G. THOMSON in the presence of: )
)
/s/ )
__________________________________ ) /s/ Michael G. Thomson
Signature of Witness ) ________________________________
) MICHAEL G. THOMSON
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
SIGNED, SEALED AND DELIVERED by )
WILLIAM TURNER in the presence of: )
)
/s/
__________________________________ ) /s/ Gregg Sedun
Signature of Witness ) ________________________________
) GREGG SEDUN
__________________________________ )
Address of Witness )
)
__________________________________ )
Occupation of Witness )
<PAGE>
EXHIBIT 10.22
VOLUNTARY POOLING AGREEMENT
---------------------------
THIS AGREEMENT is made effective as of the ___ day of , .
BETWEEN:
, of ;
---------------
(hereinafter referred to as the "Undersigned")
OF THE FIRST PART
AND:
MONTREAL TRUST COMPANY OF CANADA, 2nd Floor, 510 Burrard Street, Vancouver,
--------------------------------
B.C., V6C 3B9
(hereinafter referred to as the "Trustee")
OF THE SECOND PART
AND:
DATAWAVE SYSTEMS INC. (FORMERLY DATAWAVE VENDING INC.), a company
------------------------------------------------------
incorporated under the laws of the Province of British Columbia, with a
registered and records office situate at Suite 2100, 1111 West Georgia
Street, Vancouver, B.C., V7X 1K9
(hereinafter referred to as the "Issuer")
OF THE THIRD PART
WHEREAS:
A. The Undersigned owns common shares of the Issuer as set out in
Schedule "A" hereto, all of which are subject to an escrow agreement dated for
reference November 16, 1993 (the "Escrow Agreement"), a copy of which is
attached hereto as Schedule "B";
B. The Undersigned authorizes and directs the Trustee to place % of the
shares released from escrow pursuant to the Escrow Agreement into pool according
to this Voluntary Pooling Agreement.
<PAGE>
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises and
in consideration of the sum of One Dollar ($1.00) now paid by the parties
hereto, each to the other (the receipt of which is hereby acknowledged), and in
further consideration of the mutual covenants and conditions hereinafter
contained, the parties hereto agree as follows:
1. The parties hereto hereby agree with each other and with the Trustee that
the Trustee will retain in pool certificates representing 50% of all shares
authorized for release from escrow to the Undersigned immediately upon
their release from escrow pursuant to the Escrow Agreement (the "Shares").
2. The Shares which will be retained in pool shall be held by the Trustee and
released from the terms of this Agreement to the Undersigned on the
following basis:
(a) 33 1/3% of the Shares placed in pool will be released one year from
the date of the initial release of the Shares from the terms of the
Escrow Agreement (the "Initial Release Date");
(b) a further 33 1/3% of the Shares placed into pool will be released two
years from the Initial Release Date (the "Second Release Date"); and
(c) a further 33 1/3% of the Shares placed into pool will be release three
years from the Initial Release Date (the "Third Release Date").
In the event any of the release dates indicated above falls on a day other
than a business day, then the release date will, in each such case, be
deemed to be the next business day following such date.
3. The Undersigned shall be entitled from time to time to a letter or receipt
from the Trustee stating the number of Shares represented by certificates
held for him by the Trustee subject to the terms of this Agreement, but
such letter or receipt shall not be assignable.
4. With regard to the Shares not yet released from pool, the Undersigned shall
not sell, deal in, assign, transfer in any manner whatsoever or agree to
sell, deal in, assign or transfer in any manner whatsoever any of the
Shares or beneficial ownership of or any interest in them and the Trustee
shall not accept or acknowledge any transfer, assignment, declaration of
trust or any other document evidencing a change in legal and beneficial
ownership of or interest in such Shares, except as may be required by
reason of the death or bankruptcy of the Undersigned, in which case the
Trustee shall hold the certificates for such Shares subject to this
Agreement for whatever person or persons, firm or corporation that may thus
become legally entitled thereto, subject to compliance with the terms of
the Escrow Agreement.
5. If the Undersigned ceases to be employed by the Issuer or any of its
subsidiaries (for any reason whatsoever other than death), prior to the
Third Release Date, the Undersigned shall not be entitled to any Shares
still held in pool at that time pursuant to section two hereof. The
Undersigned agrees that in such event he shall execute and deliver within
10 days of ceasing to be employed by the Issuer or any of its subsidiaries,
any and all documentation requested by the Issuer to enable the Issuer to
transfer the Shares held in
-2-
<PAGE>
pool to or to the order of the Issuer including, but not limited to, a
stock power of attorney form. The Undersigned agrees that he shall not be
entitled to receive any compensation for the Shares so transferred.
6. If, during the period in which any of the Shares are retained in pool
pursuant hereto, any dividend other than a dividend paid in shares of the
Issuer, is received by the Trustee in respect of such Shares, such dividend
shall be paid or transferred forthwith to the Undersigned entitled thereto.
Any shares received by way of dividend in respect of such Shares shall be
dealt with as if they were shares hereunder.
7. The Issuer and the Undersigned jointly and severally release, indemnify and
save harmless the Trustee from all costs, charges, claims, demands,
damages, losses and expenses resulting from the Trustee's compliance in
good faith with this Agreement:
(a) if the Trustee wishes to resign as trustee in respect of the Shares,
the Trustee will give notice to the Issuer;
(b) if the Issuer wishes the Trustee to resign as trustee in respect of
the Shares, the Issuer will given notice to the Trustee;
(c) any notice referred to in subsection (a) or (b) shall be in writing
and delivered to:
(i) the Issuer at 101 West 5th Avenue, Vancouver, B.C., V5Y 1H9;
and
(ii) the Trustee at 2nd Floor, 510 Burrard Street, Vancouver,
B.C., V6C 3B9;
and the notice shall be deemed to have been received on the date of
actual delivery. The Issuer or the Trustee may change its address for
notice by giving notice to the other party in accordance with this
subsection;
(d) the resignation of the Trustee shall be effective and the Trustee
shall cease to be bound by this Agreement on the date which is 90 days
after the date of receipt by the Issuer of the notice referred to in
subsection (a) or (b) or on such date as the Trustee and the Issuer
may agree upon in writing (the "Resignation Date");
(e) the Issuer, before the Resignation Date, shall appoint another trustee
and that appointment will be binding upon the Issuer and the
Undersigned.
8. The Trustee hereby accepts the trusts hereunder and agrees to carry out and
discharge the same in accordance with the terms hereof unless and until
discharged therefrom by termination of this Agreement or in some other
lawful way.
9. Wherever the singular or masculine are used throughout this Agreement, the
same shall be construed as being the plural or feminine or neuter where the
context so requires.
10. This Agreement shall extend to and enure to the benefit of, and shall be
binding upon, the parties hereto, their respective heirs, executors,
administrators, successors and permitted assigns.
-3-
<PAGE>
11. This Agreement may be executed in several counterparts, each of which when
so executed shall be deemed to be an original, and such counterparts
together shall constitute one and the same instrument. Any and all such
counterparts shall, notwithstanding the actual date of execution, be deemed
to be dated the day and year written at the top of page one hereof.
12. All schedules attached to this Agreement are incorporated herein and form a
part hereof.
IN WITNESS WHEREOF the parties hereto have executed these presents the day and
year first above written.
SIGNED, SEALED AND DELIVERED )
by in the presence of: )
)
)
___________________________________ )
Witness )
)
)
)
___________________________________ ) __________________________________
Address )
)
)
___________________________________ )
Occupation )
)
THE COMMON SEAL of MONTREAL )
TRUST COMPANY OF CANADA was )
hereunto affixed in the presence of: )
)
) c/s
___________________________________ ) ---
Authorized Signatory )
)
)
___________________________________ )
Authorized Signatory )
)
THE COMMON SEAL of DATAWAVE )
SYSTEMS INC. was hereunto affixed in )
the presence of: )
)
) c/s
___________________________________ ) ---
Authorized Signatory )
)
)
___________________________________ )
Authorized Signatory )
)
-4-
<PAGE>
EXHIBIT 10.23
ACKNOWLEDGEMENT AND AGREEMENT TO BE BOUND
TO: Vancouver Stock Exchange
609 Granville Street
Vancouver, British Columbia V7Y 1H1
I acknowledge that:
(a) (" ") has entered into an agreement
with under which escrow shares of DataWave Vending
Inc. (the "Shares") will be transferred to upon receipt of
regulatory approval, and
(b) the Shares are held in escrow subject to escrow agreements dated for
reference November 16, 1993 (the "Escrow Agreements"), copies of which are
attached as Schedule "A" to this acknowledgement.
In consideration of $1.00 and other good and valuable consideration (the receipt
and sufficiency of which is acknowledged) agrees, effective upon
receipt of regulatory approval of the transfer to it of the Shares, to be bound
by the Escrow Agreements in respect of the Shares as if it were an original
signatory to the Escrow Agreements.
DATED at Vancouver, British Columbia, this day of , 1995.
The Common Seal of )
was hereunto )
affixed in the presence of: )
)
)
_________________________________ )
Authorized Signatory ) (C/S)
)
_________________________________ )
Authorized Signatory
<PAGE>
EXHIBIT 10.24
AT&T PREPAID CARD CO-MARKETING FUND AGREEMENT
This Agreement is made this 16th day of January , 1998 ("Effective Date"),
by and between AT&T CORP., a corporation organized under the laws of New York
with a place of business at 295 North Maple Avenue, Basking Ridge, New Jersey
07920 ("AT&T") and DATAWAVE SYSTEMS INC. ("Company"), a corporation organized
under the laws of the province of British Columbia, with a principal place of
business at 101 West 5th Avenue, Vancouver, BC, Canada V5Y 1H9.
RECITALS
WHEREAS, AT&T sells a tariffed prepaid card service pursuant to tariffs and/or
agreements which is available for purchase and resell; and
WHEREAS, Company separately agreed to purchase AT&T's branded prepaid card
service (the "AT&T Branded Prepaid Card" or "Cards"); and
WHEREAS, Company hereby agrees to provide certain promotional opportunities for
the Cards, including, but not limited to, displaying them in Company-authorized
locations and displaying promotional materials related to the Cards in Company-
authorized locations;
NOW, THEREFORE, in consideration of the foregoing, the covenants hereinafter set
forth, and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties agree as follows:
1. PURPOSE OF THIS AGREEMENT
1.1 AT&T and Company agree that there is a mutual benefit in creating and
implementing a joint program of marketing, publicity and customer education
within the 48 continental states of the United States of America and Hawaii (the
"Territory"). Each party, shall make and mintage its own resources to meet its
obligations set forth in this Agreement.
1.2 Each party agrees that except as provided in Sections 2 and 3 below
and as otherwise expressly provided in this Agreement, the obligations of each
party under this Agreement are nonexclusive and the other party may enter into
arrangements similar to this Agreement with third parties.
1.3 As provided in Attachment A and B to this Agreement, Company shall
provide certain marketing/promotional opportunities, for example; shelf space in
Company's authorized retail outlets and/or vending machines and counter space
for point-of-sale materials, for the Card and AT&T shall provide certain
marketing support, for example; vending machine graphics; point-of-sale material
and co-marketing dollars to help offset the cost of certain Company
advertisements, as described below to Company. Company agrees to use such
marketing support to promote the AT&T Branded Prepaid Card. The extent of AT&T's
commitment to provide
<PAGE>
marketing support shall be measured in Co-Marketing Fund dollars. Company shall
be provided support as described in Attachments A and B to this Agreement.
1.4 Company understands that the prepaid card service offered to Company
is not governed by this Agreement, but instead is governed by separate tariffed
terms. This Co-Marketing Agreement is subject to Company maintaining the
provisions of the tariff subscribed to in good standing with AT&T.
2. COMPANY OBLIGATIONS
-------------------
2.1 Company will promote AT&T Branded Prepaid Card to consumers. The
nature and extent of Company promotion efforts will be mutually agreed between
the parties, but at a minimum, shall include, but not be limited to the
prominent display of the AT&T Branded Prepaid Card vending machine graphics and
point-of-purchase material where appropriate, at Company's sole discretion.
2.2 Except as specifically provided in this Agreement, Company shall be
responsible for the expenses and obligations it incurs in promoting AT&T Branded
Prepaid Card.
2.3 Company will obtain AT&T's prior written approval for any materials it
intends to use to promote AT&T Branded Prepaid Card such approval shall not be
unreasonably withheld.
2.4 Company will not make any representations or warranties relating to
AT&T Branded Prepaid Card, except as expressly permitted by AT&T in writing, or
as stated in the Tariff(s) or in current AT&T literature provided to Company by
AT&T.
2.5 Company shall refrain from using AT&T's name or holding itself out as
an authorized distributor, dealer, wholesaler or similar concept for AT&T.
2.6 For the Term of this Agreement, Company agrees that it will not sell,
promote or endorse any non-AT&T prepaid calling card in its vending machines
that include the AT&T Branded Prepaid Card graphics.
3. AT&T'S RESPONSIBILITIES:
3.1 AT&T agrees to provide to Company, for joint marketing purposes and
subject to the terms and conditions of this Agreement and the Tariffs, the
Redemption Options listed in Attachment B to this Agreement, to be paid for
using Co-Marketing Fund dollars earned by Company under the Contract Tariff.
3.2 AT&T will provide at least one toll free number for Company members to
call to request information and/or order Service.
2
<PAGE>
3. INDEPENDENT CONTRACTOR
The parties to this Agreement are independent contractors. Neither party will
have the authority to act for and or bind the other in any way, or to represent
that either is responsible for the acts of the other. Nothing in this Agreement
shall be construed as forming a partnership, joint venture, agency, employment,
franchise, distributorship or dealership relationship between the parties.
4. CONFIDENTIALITY
Company shall not disclose the terms or conditions of this Agreement to any
third party other than a Company member, nor issue any public statements
relating to this Agreement, without the written consent of AT&T, unless such
disclosure or statement is reasonably believed by Company to be compelled by
governmental authority. Company shall furnish reasonable prior notice to AT&T
before making the statement or disclosure. In addition, Company agrees (i) to
hold in confidence all information consisting of names and any long distance
usage information of Company members who subscribe to the Service in connection
with this Agreement ("AT&T/Company Information"), which information is
confidential or proprietary to AT&T, (ii) to use AT&T / Company Information
solely for the purpose of performing Company's obligations under this Agreement,
(iii) to reproduce AT&T / Company Information only to the extent necessary for
such purpose, (iv) to restrict disclosure of AT&T / Company Information to its
officers and employees with a need to know and to inform such officers and
employees of Company's obligations under this Agreement, and (v) not to disclose
AT&T / Company Information to any third party (including other Company
Retailers) without the prior written approval of AT&T.
5. TRADE NAMES, TRADEMARKS, SERVICE MARKS AND REGISTERED MARKS
No party shall use another party's trade names, trademarks or service marks
("Marks") without the prior written approval of the party owning the Marks. No
party shall display or use another's Marks, nor permit the same to be displayed
or used by third parties, except in connection with the performance of this
Agreement or as otherwise expressly permitted in writing. Nothing in this
Agreement creates in a party rights in the Marks of another party. Upon
termination of this Agreement, each party shall discontinue the use of the
others Marks.
Nothing in this Agreement shall give Company the right to offer any promotional
materials provided pursuant to this Agreement to any third parties.
3
<PAGE>
6. TERM; AUTOMATIC RENEWAL; TERMINATION
6.1 The term of this Agreement shall be for 2 years (24 months) commencing
on the Customer's Initial Order Date (CIOD) which shall be the date of the
Customer's first bill, unless otherwise modified or terminated as provided for
in this Agreement.
6.2 This Agreement may be terminated as follows:
6.2.1 AT&T may immediately terminate this Agreement as to itself and
the Company by written notice without liability if Company is not eligible
under the Tariff(s).
6.2.2 Any party may immediately terminate this Agreement by written
notice, if the other party breaches a material provision of this Agreement
or the Tariff(s).
6.3 The term of this Agreement may otherwise be modified only in writing
signed by all affected parties.
6.4 Upon expiration or termination of this Agreement, each party shall,
within sixty (60) days, return to the other party, or, if agreed to by the other
party, destroy all promotional materials and all Information supplied by the
other party hereunder, and shall immediately cease holding itself out, in any
manner, as a participant in the program contemplated by this Agreement.
Termination or expiration of this Agreement shall not relieve the parties of any
obligations due at the time of such termination or expiration, nor shall such
termination or expiration prejudice any claim of either party accrued on account
of any default or breach by the other.
7. INDEMNIFICATION
Each party shall indemnify, defend, and hold harmless the other and its
directors, officers, employees, agents, parent, subsidiaries, successors, and
assigns from and against any and all liabilities, claims, suits, actions,
demands, settlements, losses, judgments, costs, damages and expenses (including
reasonable attorneys' fees) arising out of or resulting from, in whole or in
pan, the acts or omissions of the indemnifying party, its employees, agents or
contractors and the indemnifying party's Company companies and their employees,
agents or contractors.
8. LIMITATION OF LIABILITY
8.1 EXCEPT FOR VIOLATIONS OF MARKS (SECTION 5), VIOLATIONS OF
CONFIDENTIALITY (SECTION 4), OR UNAUTHORIZED REPRESENTATIONS OR WARRANTIES,
NEITHER PARTY NOR ITS SUPPLIERS, SUBCONTRACTORS,
4
<PAGE>
AFFILIATES, SUBSIDIARIES, OR PARENT CORPORATION SHALL BE LIABLE FOR: ANY
INDIRECT, INCIDENTAL, RELIANCE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST
PROFITS) SUSTAINED OR INCURRED IN CONNECTION WITH THIS AGREEMENT; OR DAMAGES
DUE TO CAUSES BEYOND THE REASONABLE CONTROL OF THE PARTY TO BE CHARGED, OR
ATTRIBUTABLE TO ANY ACTS OR OMISSIONS OF ANY PERSON OTHER THAN THE PARTY TO BE
CHARGED.
8.2 AT&T SHALL HAVE NO LIABILITY UNDER THIS AGREEMENT TO COMPANY ARISING
OUT OF AT&T'S REFUSAL, INABILITY OR FAILURE TO PROVIDE PREPAID CARD SERVICE TO
COMPANY OR THE DISCONTINUATION OF SUCH SERVICE. AT&T'S OBLIGATIONS AND
LIABILITIES RELATING TO PROVISION OF SERVICE ARE GOVERNED BY AT&T'S F.C.C.
TARIFFS.
8.3 THE LIMITATIONS OF LIABILITY SET FORTH 1N THIS SECTION 8 SHALL APPLY
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT; WHETHER OR NOT THE PARTY
TO BE CHARGED HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; REGARDLESS OF
THE FORM OF ACTION, WHETHER IN CONTRACT, WARRANTY, STRICT LIABILITY, TORT
(INCLUDING WITHOUT LIMITATION NEGLIGENCE OF ANY KIND) OR OTHERWISE; AND WHETHER
OR NOT SUCH DAMAGES WERE FORESEEABLE.
8.4 THIS AGREEMENT DOES NOT PROVIDE THIRD PARTIES (INCLUDING WITHOUT
LIMITATION, COMPANY MEMBERS) WITH ANY REMEDY, CLAIM LIABILITY, REIMBURSEMENT,
CAUSE OF ACTION OR OTHER RIGHT OR PRIVILEGE.
9. ASSIGNMENT
No party may assign any of its rights or obligations under this Agreement
without the prior written consent of the other party, except that AT&T may
assign this Agreement to its parent, any subsidiary or any affiliate.
10. SEVERABILITY, MODIFICATION
If any portion of this Agreement shall be found to be invalid or unenforceable,
such portion shall be void and of no effect, but the remainder of the Agreement
shall continue in full force and effect unless the Agreement fails of its
essential purpose without the voided portion. This Agreement may be modified
only by a writing signed by all parties.
11. CHOICE OF LAW
5
<PAGE>
THE CONSTRUCTION, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND ALL
TRANSACTIONS HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, EXCLUDING ITS CHOICE OF LAW RULES.
12. LIMITATIONS OF ACTIONS; WAIVER
Any legal action arising from or in connection with this Agreement must be
brought within two years after the cause of action arises. Otherwise, the
failure of a party to enforce any right under this Agreement shall not
constitute a continuing waiver of any such right.
13. DISPUTE RESOLUTION
If a dispute arises out of or relates to this Agreement or its breach and the
dispute cannot be settled through negotiation, the parties agree to submit the
dispute to a sole mediator selected by the parties or, at any time at the option
of a party, to mediation by the American Arbitration Association ("AAA"). If not
thus resolved, it shall be referred to a sole arbitrator selected by the parties
within thirty (30) days of the mediation or, in the absence of such selection,
to AA arbitration Which shall be governed by the United States Arbitration Act.
The award shall be made within six (6) months of selection of the arbitrator and
may be entered in any court having jurisdiction. The mediation and arbitration
shall be held in New York City. The arbitrator shall determine issues of
arbitrability but may not limit, expand or otherwise modify the terms of the
Agreement nor have authority to award punitive or other damages in excess of
compensatory damages and each party irrevocably waives any claim thereto. Each
party shall bear its own expenses but those related to the compensation of the
mediator and arbitrator shall be borne equally. The parties, their
representatives, other participants and the mediator and arbitrator shall hold
the existence, content and result of mediation and arbitration in confidence.
Invalidity or unenforceability of any part of this Agreement shall not affect
the remainder thereof.
14. FORCE MAJEURE
Neither party shall be liable for any failure to perform due to unforeseen
circumstances or causes beyond the party's reasonable control, including, but
not limited to, acts of God, war, riot, embargoes, acts of civil or military
authorities, fire, flood, accident, strikes, inability to secure transportation,
facilities, fuel, energy, labor or materials, or communication line failure not
the fault of the affected party. Time for performance shall be extended by the
amount of any such delay.
6
<PAGE>
15. SURVIVAL
The obligations of the parties under this Agreement that by their nature would
continue beyond expiration, termination or cancellation of this Agreement
(including without limitation Sections 4, 7 and 8) shall survive any such
expiration, termination or cancellation, for whatever reason.
16. NOTICES
All notices under this Agreement shall be in writing addressed as follows:
To AT&T: To Company:
Division Manager Vice President
AT&T PrePaid Card Services DataWave Services (US) Inc.
412 Mt. Kemble Ave. 231 West Parkway
Room G171 Pompton Plains, NJ
Morristown, NJ 07962 USA 07444
with a copy to:
AT&T Law Division Clive Barwin
General Attorney-CSB Datawave Systems Inc.
295 North Maple Avenue 101 West 5/th /Avenue
Basking Ridge, NJ 07920 Vancouver, BC, Canada V5Y 1H9
Each party may, by written notice, change the address to which its notices are
to be sent.
17. SECTION HEADINGS
The Section headings are inserted for convenience only and are not intended to
affect the meaning or interpretation of this Agreement.
18. REPRESENTATIONS, WARRANTIES, AND UNDERTAKINGS
18.1 AT&T hereby warrants and represents that, during the Contract
Period:
7
<PAGE>
18.1.1 AT&T possesses the necessary, corporate authority to enter
into this Agreement and to execute its obligations hereunder, and, to AT&T's
knowledge, no governmental, judicial or third-party approvals, consents or
waivers are required for the performance by AT&T of its obligations hereunder,
except for any filings with the Federal Communications Commission that may be
required in connection with AT&T's provision of AT&T Prepaid Calling Card
Service.
18.1.2 The execution of this Agreement, the consummation of the
transactions contemplated hereunder and the performance by AT&T of this
Agreement in accordance with its terms and conditions will not conflict with or
result in the breach or violation of any terms or conditions of, or constitute
(and with notice or lapse of time or both would not constitute) a default under:
(A) the Certificate of Incorporation, by-laws or other constituent documents of
AT&T, (B) any instrument, contract or other agreement to which AT&T is a party
or by or to which it or its assets or properties are bound or subject, or (C)
any statute or any regulation, order, judgment or decree of any court or
governmental or regulatory body.
18.1.3 AT&T has the power and is authorized to grant the rights and
licenses granted to Company hereunder.
18.1.4 The use of the AT&T Marks in the United States pursuant to the
terms of this Agreement does not infringe any United States trademark of any
third party.
18.2 Company hereby warrants and represents that, during the Contract
Period:
18.2.1 Company possesses the necessary corporate authority to enter
into this Agreement and to execute its obligations hereunder, and, to Company's
knowledge, no governmental, judicial or third-party approvals, consents or
waivers are required for the performance by Company of its obligations
hereunder.
18.2.2 The execution of this Agreement, the consummation of the
transactions contemplated hereunder and the performance by Company of this
Agreement in accordance with its terms and conditions will not (1) conflict with
or result in the breach or violation of any terms or conditions of, or
constitute (and with notice or lapse of time or both would not constitute) a
default under: (A) the Certificate of Incorporation, by-laws or other
constituent documents of Company, 03) any instrument, contract or other
agreement to which Company is a party or by or to which it or its assets or
properties are bound or subject, or (C) any statute or any regulation, order,
judgment or decree of any court or governmental or regulatory body, or (2)
violate, infringe or misappropriate any other right of any third party.
18.2.3 Company has the power and is authorized to grant the rights
and licenses granted to AT&T hereunder.
18.3 The parties recognize that AT&T Prepaid Card Service may be subject
to
8
<PAGE>
regulation by the Federal Communications Commission and/or state regulatory
agencies. If any applicable regulation, whether now existing or hereafter
enacted, requires a modification of this Agreement or the waiver of any right
hereunder in order to market and offer the Cards as contemplated hereunder, the
parties agree to take such reasonable actions as are required under the
circumstances in order to accomplish the purposes of this Agreement. Each parry
shall comply with all requirements of applicable laws, ordinances,
administrative rules and regulations in the performance of this Agreement, and
shall take prompt action to remove or remedy any violation that occurs or is
discovered during the Contract Period.
19. ENTIRE AGREEMENT
The preamble to this Agreement is hereby incorporated and by this reference
shall hereby become part of this Agreement as if set forth herein word for word.
To the extent not inconsistent with any AT&T state or federal tariff, this
Agreement constitutes the entire agreement of the parties with respect to the
subject matter hereof and supersedes all prior written or oral agreements,
proposals or understandings.
AT&T and Company, acting through their duly authorized representatives, hereby
agree to the terms set forth in this Agreement as of the date first above
written.
DATAWAVE SYSTEMS INC AT&T CORP.
By: /s/ Clive Barwin By: /s/ Mark P. Evans
_________________________ ___________________________
Clive Barwin Mark P. Evans
_______________________________ _________________________________
Printed or Typed Name Printed or Typed Name
President Director of PrePaid Card
_______________________________ _________________________________
Title Title
29 January 1999 January 30, 1998
_______________________________ _________________________________
Date Date
9
<PAGE>
EXHIBIT 10.25
PROFESSIONAL SERVICES AGREEMENT
This Professional Services Agreement (this "Agreement"), dated as of
-----------
,1998, is by and between AT&T CORP., a New York corporation, ("Company"), having
an office at 295 North Maple Avenue, Basking Ridge, New Jersey, 07920 and
DATAWAVE SYSTEMS INC, an electronic merchandising company organized under the
laws of the province of British Columbia, with a principal place of business at
101 West 5th Avenue, Vancouver, BC, Canada VSY 1H9.
RECITALS
WHEREAS, Company desires to retain Contractor to produce Graphics
associated with prepaid card vending machines as well as a limited quantity of
prepaid cards branded with Company's name only which are produced solely with
PINS purchased by Contractor from Company pursuant to a separate tariff or
agreement; and
NOW, THEREFORE, in consideration of the foregoing and the covenants and
undertakings contained in this Agreement, the parties agree as follows:
ARTICLE 1. STATEMENT OF WORK
Contractor shall provide for Company prepaid card printing and production ("Card
Production Services" or "Services"), as well as the production and distribution
of vending machine Graphic art. The Printing services shall consist of the
production of Company branded prepaid cards and vending machine Graphics which
shall be produced strictly in accordance with the directions of Company;
performed by Contractor in a manner consistent with the scope of work set forth
in Exhibit A hereto, as the same may be amended from time to time in accordance
---------
with the terms hereof. The Services shall be performed by Contractor in
accordance with (i) the direct measures of quality ("DMOQs") set forth in
Exhibit C, as the same may be amended from time to time in accordance with the
- ---------
terms hereof and (ii) such additional requirements or restrictions as may be
lawfully imposed by applicable governmental authorities.
ARTICLE 2. TERM
(a) Initial Term: Renewals. The term of this Agreement (the "Agreement Term")
----------------------
shall be for 2 years (24 months) commencing on the Customer's Initial Order Date
(CIOD) which shall be the date of the Customer's first bill, unless otherwise
modified or terminated as provided for in this Agreement.
ARTICLE 3. FEES,
In consideration for the Services rendered hereunder by Contractor, Company
shall pay Contractor the fees described in Exhibit B hereto.
ARTICLE 4. MAXIMUM AGREEMENT PRICE
(a) Maximum Agreement Price. Notwithstanding the provisions of Exhibit B, in no
-----------------------
event shall Company be liable to pay Contractor during the Agreement Term
any amount in excess of three million dollars ($3,000,000) as amended from
time to time, the "Maximum Agreement Price" for Services rendered hereunder
during the Agreement Term. In the event that the Maximum Agreement Price,
as
<PAGE>
in effect from time to time, is reached during the Agreement Term,
Contractor may immediately cease to render Services hereunder without
notice or liability to Company.
ARTICLE 5. INVOICING
(a) Invoicing and Payment. On or prior to the 25th calendar day of each month,
---------------------
(but not prior to the 20th calendar day of the preceding month), during the
Agreement Term, Contractor shall deliver to Company an invoice setting
forth the actual amounts that will be due and payable by Company pursuant
to Exhibit B hereof for Services to be rendered by Contractor under this
Agreement during that month. Each undisputed charge submitted on an invoice
pursuant to this clause (a) shall be paid by Company within 15 calendar
days of receipt (unless such date is not a business day, in which case,
payment shall be made on the next succeeding business day). Any disputed
amount submitted on any such invoice shall be paid within 15 calendar days
after the dispute is settled.
Example:
September invoice is received on August 25. Company has 15 calendar days to pay
the undisputed charges, or September 9 (unless such date is not a business day,
in which case, payment shall be made on the next succeeding business day).
(b) Form. Each invoice submitted pursuant to this Agreement shall be in such
----
form as Company and Contractor shall agree and shall be accompanied by such
supporting information as shall be reasonably requested by Company.
(c) Miscellaneous. The following further procedures shall apply to invoices
-------------
issued hereunder.
(i) Each invoice shall reflect this Agreement Number and all
invoices shall be submitted to:
--------------------------------
AT&T
--------------------------------
--------------------------------
Voice:
--------------------------------
Fax:
--------------------------------
(ii) Any payment to Contractor from Company of $100,000 or more shall be
transmitted by Company to a designated bank account of Contractor by
electronic funds transfer. Any payment to Contractor from Company of
less than $100,000 may be paid by check or draft to the payee's
address or by electronic funds transfer to a designated bank account
of Contractor. Payment must result in immediately available funds on
or before the due date. If available by the type of electronic funds
transfer, Company will use reasonable efforts to identify the invoice
number of the invoice being paid.
(iii) Except as otherwise provided below, any payment received by
Contractor after the due date, or any payment received in funds which
are not immediately available to Contractor on or before the due date
shall be subject to a late payment charge. The late payment
<PAGE>
charge shall be the portion of the amount due Contractor received after
the due date, or in funds which were not immediately available to
Contractor on the due date, times the Late Factor. The Late Factor
shall be a 0.033% daily charge, not compounded, or as otherwise
mandated by regulatory or governmental authorities; but in no event
shall the applicable late factor exceed the maximum rate permitted
under applicable usury laws. Any late payment charge shall be
separately itemized by Contractor in its next invoice and shall be
payable by Company to Contractor by the due date for that invoice.
ARTICLE 6. REPRESENTATIVES
Company's Technical Representative shall be Gary Smith or such other person or
----------
persons as may be designated in writing by Company from time to time.
Contractor's Representative for all purposes of this Agreement shall be Clive
-----
Barwin, or such other person or persons as may be designated in writing by
- ------
Contractor from time to time.
ARTICLE 7. NOTICES
Any notice, demand or other communication which under the terms of this
Agreement or under any statute must or may be given or made by Contractor or
Company shall be in writing and shall be given or made by hand delivery,
telegram, tested telex, confirmed facsimile, or similar communication or by
certified or registered mail addressed to the respective parties as follows:
If to Contractor to:
DATAWAVE SYSTEMS INC
101 WEST 5TH AVENUE
VANCOUVER, BC
CANADA V5Y 1H9
ATTENTION: CLIVE BARWIN
PHONE NO.: 604.874.1302
FAX NO.: 604.874.1503
With a copy (which shall not constitute notice nor affect the validity of
the notice if delivered to Contractor and is not intended to create any
right as a third party beneficiary under this Agreement) to:
DATAWAVE SERVICES (US) INC.
231 WEST PARKWAY
POMPTON PLAINS, NJ
USA 07444
Attention: Josh Emanuel
PHONE: 973.839.9100
FAX: 973.616.0022
<PAGE>
If to Company to:
Company Contract Administrator (Agreement Representative):
AT&T CORP.
412 MT. KEMBLE AVENUE, ROOM G167
MORRISTOWN, NJ 07962
ATTENTION: LES BENNETT
PHONE: 973.644.1253
FAX: 973.644.1955
Such notice or demand shall be deemed to have been given or made when delivered
in person or when sent by confirmed telegram, facsimile, or other similar
communication or 5 business days after having been deposited, postage prepaid
certified or registered mail in the US mail. Any notice or demand to a person
other than the persons set forth in this Article shall be null and void and
shall not be considered sufficient notice to bind the receiving party. The above
addresses may be changed at any time by giving prior written notice as above
provided.
ARTICLE 8. TITLE TO WORK PRODUCT
Contractor owns title to all work produced through this agreement.
ARTICLE 9. USE OF INFORMATION
(a) Identification of Information. Contractor and Company recognize and
-----------------------------
acknowledge that, in connection with Services to be provided hereunder,
Contractor and Company will have in their possession and control,
information in the form of data, records, reports, processes, models,
computer programs and other documentation which is proprietary to
Contractor or to Company (hereinafter "Proprietary Information"). any
Proprietary Information that is furnished, made available or otherwise
disclosed by one party to the other party pursuant to this Agreement, or
pursuant to performance under this Agreement or by reason of the shared use
of any fights by the parties, or through the provision of any service by
one party to the other party shall be deemed the property of the party
disclosing such information (the "Disclosing party"). Further, it is
understood that Proprietary Information of a party may include proprietary
information of third parties and/or information which is considered
confidential with respect to Company customers.
(b) Disclosure of Information Between the Parties. Contractor may, but is not
---------------------------------------------
required to, disclose Contractor Proprietary Information to Company.
Additionally, Contractor hereby agrees to disclose Company Proprietary
Information to Company upon request. Company at its discretion may disclose
its Proprietary Information to Contractor.
(c) Handling of Proprietary Information.
-----------------------------------
(i) Except as set forth in subsection (c)(iv) and (v) hereof, Proprietary
Information of a Disclosing party that is possessed by the other
party ("Receiving party"), shall be:
(A) held in confidence by the Receiving party and its employees,
contractors or agents;
(B) treated with the same degree of care as the Receiving party would
treat its own confidential information;
<PAGE>
(C) not be disclosed to third parties, but may be disclosed to
employees, contractors, and agents who have a need to know such
Proprietary Information in connection with the performance of the
Services hereunder;
(D) be used by the Receiving party only for the purpose of performing
its obligations under this Agreement; and
(E) be used or disclosed for other purposes only upon such terms and
conditions as may be mutually agreed upon by the parties in
writing.
(ii) The Receiving party shall put in place and strictly enforce procedures
to ensure that its employees, contractors and agents are aware of and
fulfill the obligations of the Receiving party under this Article 9 to
hold the Disclosing party's Proprietary Information in confidence.
(iii) Each party acknowledges that its Proprietary Information may be
commingled with Proprietary Information of the other and that each
party must have access to and use of its own Proprietary Information
in order to conduct its business. Accordingly, each party shall to the
extent practicable, use good faith efforts to ensure that its
Proprietary Information shall be masked or rendered mechanically
inaccessible, to the other party. In the event that masking is not
accomplished despite such efforts, access shall be provided hereunder
to the commingled unmasked Proprietary Information and the Receiving
party:
(A) shall use its best efforts to destroy or otherwise render
unusable such information;
(B) will be bound by this Article 9 as to such information; and
(C) will not use such information for any purpose, except as required
to fulfill its obligations under this Agreement.
(iv) Each party agrees to give notice to the other party of any demand to
disclose or provide Proprietary Information of said other party to
other persons, under lawful process, prior to disclosing or furnishing
such information. The Receiving party further agrees to reasonably
cooperate if the Disclosing party deems it necessary to seek
protective arrangements. The Receiving party may disclose or provide
Proprietary Information of the Disclosing party to a third party only
as necessary:
(A) to implement, effect and enforce the Receiving party's tariffs;
and
(B) to meet the requirements of a court, regulatory body or
government agency having jurisdiction over the Receiving party;
provided that, the Receiving party will notify the Disclosing
party so as to give the Disclosing party a reasonable opportunity
to object to such disclosure.
(v) Notwithstanding any other provision of this Agreement to the contrary,
the Proprietary Information described herein shall not be deemed
confidential or proprietary and the Receiving party shall have no
obligation to prevent disclosure of such Proprietary Information if
such Proprietary Information:
<PAGE>
(A) was already lawfully known to the Receiving party at the time of
receipt thereof by the Receiving party;
(B) is or becomes publicly known, through publication, or otherwise,
through no wrongful act of the Receiving party;
(C) is received from a third party who is not bound by similar
confidentiality restrictions with the Disclosing party and
without breach of this Article 9;
(D) is independently developed, produced, or generated by the
Receiving party;
(E) is furnished to a third party by the Disclosing party without a
similar restriction on the third party's rights; or
(F) is approved for release by written authorization of the
Disclosing party but only to the extent of such authorization.
Contractor's possession of Company Proprietary Information through
recording, analyzing, copying, collecting, compiling, tabulating or
performing similar functions with such Company Proprietary Information
does not mean that such Proprietary Information is "already lawfully
known" to Contractor, or "independently developed, produced, or
generated" by Contractor within the meaning of this subsection.
(vi) This Agreement, including each and every Exhibit and Attachment or
Appendix thereto, shall constitute Company and Contractor Proprietary
Information subject to disclosure only in accordance with the
restrictions herein. It is specifically understood and agreed by the
parties that, except as expressly permitted by this Article 9, no
provision or part of this Agreement, including each and every Exhibit,
Attachment or Appendix thereto, may be shown or provided to a third
party other than the party's employees, contractors or agents, without
the express written permission of Company or Contractor; or
(vii) All Proprietary Information shall be deemed to be and shall remain
the Disclosing party's property. Upon the written request of the
Disclosing party, upon the determination of the Receiving party that
it no longer has a need for such Proprietary Information or upon
termination of this Agreement, all physical records or other
documentation containing Proprietary Information shall be returned to
the Disclosing party, together with all copies thereof. All
electronic, magnetic, or computer records of the Proprietary
Information shall be deleted from any medium on which Proprietary
Information may have been recorded or stored by the Receiving party,
including tapes and computer discs, if such medium is not returned to
the Disclosing party upon request
(d) Applicability of Statutes, Decisions and Rules. Notwithstanding any other
----------------------------------------------
provision in this Agreement, a party's ability to disclose information or
use disclosed information is subject to all applicable statutes, decisions,
and regulatory rules concerning the disclosure and use of such information
which, by their express terms, mandate a different handling of such
information. Neither Contractor nor Company shall disclose any information
to the other unless it has the legal right to disclose such information.
<PAGE>
ARTICLE 10. INDEMNIFICATION/INFRINGEMENT
Contractor agrees to indemnify and save harmless Company, its subsidiaries,
other affiliates, its and their direct and indirect customers, and the officers,
directors, employees, successors and assigns of any of them (all hereinafter
referred to in this clause as "Company") from and against claims, losses,
damages, expenses, liabilities, suits, demands, or liens that arise out of or
result from:
(i) Injures or death to persons or damage to property, including theft, in
any way arising out of or occasioned by, caused or alleged to have
been caused by or on account of the performance of the Services
performed by Contractor or persons furnished by Contractor;
(ii) Assertions under Workers' Compensation or similar acts made by persons
furnished by Contractor or by any subcontractor, or by reason of any
injuries to such persons for which Company would be responsible under
Workers' Compensation or similar acts if the persons were employed by
Company;
(iii) Any failure on the part of Contractor to satisfy all claims for
labor, equipment, data, and materials purchased or contracted by
Contractor in connection with its performance of the Services
hereunder;
(iv) Any failure by Contractor to perform Contractor's obligations under
this clause or the Insurance clause; and
(v) Any alleged act of infringement of any patent, trademark, copyright or
other right or any misappropriation (including misuse) of any trade
secret or other proprietary interest, except where such infringement
or misappropriation arises solely from Contractor's adherence to
Company's written instructions which are so specific as to directly
cause such infringement or misappropriation, in which case Company
shall so indemnify Contractor, provided, however, if such instructions
specify (a) products or services available on the open market or the
same as such products or services or (b) products or services of
Contractor or of its designated origin or design or selection, and the
adherence to such instructions results in such infringement or
misappropriation, then Contractor shall indemnify Company for any such
infringement or misappropriation.
Each party shall defend or settle, at its own expense, any action or suit
against the other for which it is responsible as an indemnitor hereunder and
shall reimburse the other for reasonable attorneys' fees, interest, costs of
suit and all other expenses incurred by the other in connection therewith. Each
party shall notify the other promptly of any claim for which the other is
responsible hereunder, and shall cooperate with the other in every reasonable
way to facilitate the defense of any such claim.
ARTICLE 11. MEDIATION
If a dispute between the parties arises out of or relates to this Agreement, or
its breach, and the parties have not been successful in resolving such dispute
through negotiation, the parties agree to attempt to resolve the dispute through
mediation by submitting the dispute to a sole mediator selected by the parties
or, at the option of either party, to mediation under the rules from time to
time in effect of the American Arbitration Association ("AAA"), but not under
the jurisdiction or authority of the AAA. Each party shall bear its own expenses
and an equal share of the expenses of the mediator. Mediation shall
<PAGE>
take place in New York City or as otherwise agreed by the parties. The parties,
their representatives, other participants and the mediator shall hold the
existence, content and result of the mediation in confidence. If such dispute is
not resolved by such mediation within the earlier of (i) six months or (ii)
three months after the selection of a mediator, the parties shall have the fight
to resort to any remedies permitted by law. All defenses based on passage of
time shall be tolled pending the termination of the mediation. Nothing in this
clause, or elsewhere in this Agreement, shall be construed to preclude any party
from seeking injunctive relief in any court located in the state of New York in
order to protect its rights pending mediation. A request by a party to a court
for such injunctive relief shall not be deemed a waiver of the obligation to
mediate.
ARTICLE. 12. INSURANCE
Contractor shall maintain and cause Contractor's subcontractors to maintain
during the term of this Agreement: (a) Workers' Compensation insurance as
prescribed by the law of the states or nation in which the Services are
performed; (b) employers' liability insurance with limits of at least $300,000
for each occurrence; (c) comprehensive automobile liability insurance if the use
of motor vehicles is required, with limits of at least $1,000,000 combined
single limit for bodily injury and property damage for each occurrence; and (d)
Comprehensive General Liability ("CGL") insurance, including Blanket Contractual
Liability and Broad Form Property damage, with limits of at least $1,000,000
combined single limit for personal injury and property damage for each
occurrence. All CGL and automobile liability insurance shall designate Company
as an additional insured. All such insurance must be primary and required to
respond and pay prior to any other available coverage. All such insurance shall
provide coverage for any claims which arise during the Agreement Term,
regardless of when those claims are asserted.
Contractor agrees that Contractor, Contractor's insurer(s) and anyone claiming
by, through, under or in Contractors behalf shall have no claim, right of action
or right of subrogation against Company and its customers based on any loss or
liability insured under the foregoing insurance. Contractor shall furnish
promptly following the execution hereof certificates or adequate proof of the
foregoing insurance. Company shall be notified in writing at least thirty (30)
days prior to cancellation of or any change in the policy.
ARTICLE 13. RELATIONSHIP
Contractor is an independent contractor and has and hereby retains the right to
exercise full control of and supervision over its own performance of the
Services under this Agreement and retains full control over the employment,
direction, compensation and discharge of all employees assisting in the
performance of such obligations. Notwithstanding the foregoing, any changes in
personnel of Contractor that may be requested by Company through its authorized
representative shall be implemented by Contractor if Contractor determines in
good faith that Company is reasonably justified in making such request. Nothing
herein shall give Company the fight to direct that an individual be terminated
as an employee of Contractor.
Neither Contractor nor its employees or agents shall be deemed to be Company's
employees or agents. It is understood that Contractor is an independent
contractor for all purposes and at all times. Contractor is wholly responsible
for withholding and payment of all applicable federal, state and local income
and other payroll taxes with respect to its employees, including contributions
from them as required by law.
<PAGE>
ARTICLE 14. AUDIT
Contractor shall maintain accurate and complete records for the Audit Period (as
defined herein) which contain such information as is required to permit the
Company to audit and verify amounts payable and other matters provided for under
this Agreement. Company shall maintain accurate and complete records for the
Audit Period to audit and verify the number of cards produced and other matters
as provided for under this Agreement. The Audit Period shall mean as of any date
during the Agreement Term and for a period of two (2) years after the expiration
of this Agreement, the shorter of (i) the period which this Agreement has been
in effect or (ii) the most recent 24 months under this Agreement. Each party
shall permit the other party or its representatives upon reasonable written
notice to examine, audit and verify such information during normal business
hours in a manner that will not disrupt the operations of the party being
audited.
ARTICLE 15. TERMINATION
(a) Termination for Default. If either party (the "Defaulting party") at any
-----------------------
time during the period of this Agreement shall: (a) fail to make any
payment of any sum of money herein specified to be made (a "Payment
Breach"), or (b) materially breaches this Agreement (a "Material Breach")
(other than the failure to make a payment of money), the non-defaulting
party has the right to immediately terminate this Agreement as follows: (a)
in the event of a Payment Breach, if such payment of money is not made
within thirty (30) days after the defaulting party has received written
notice of such failure to make payment, or (b) if such Material Breach is
not satisfactorily cured (to the reasonable satisfaction of the non-
defaulting party) within sixty (60) days after the defaulting party shall
have received written notice specifying in reasonable detail the nature of
such Material Breach. Any termination under this Article 16 shall be
----------
effective on the date specified in the notice of breach, subject to the
expiration of the cure periods provided herein.
(b) Termination upon Certain Other Events. Without prejudice to any other
-------------------------------------
rights, either party shall have the right to terminate this Agreement, by
written notice if:. (A) the other party shall (1) apply for or consent to
the appointment of, or the taking or possession by a receiver, custodian,
trustee, or liquidator of it or of all or a substantial portion of its
property; (2) regularly fail to pay its debts as such debts become due; (3)
make a general assignment for the benefit of creditors or an assignment in
violation of Article 19; (4) commence a voluntary case under the federal
Bankruptcy Code (as now or hereafter in effect) or an assignment in
violation of Article 19; (5) file a petition seeking to take advantage of
any other law relating to bankruptcy, insolvency, reorganization, winding
up or composition of adjustment of debts; (6) fail to controvert in a
timely or appropriate manner, or acquiesce to, any petition filed against
it in an involuntary case under the federal Bankruptcy Code, or (7) take
any action for the purpose of affecting any of the foregoing, or (B) a
proceeding or case shall be commenced against the other party, without the
application or consent of Company or Contractor, as the case may be, in any
court of competent jurisdiction, seeking the (1) liquidation,
reorganization, dissolution, winding up or composition or readjustment of
its debts; (2) appointment of a trustee, receiver, custodian, liquidator,
or the like of it or of all or any substantial part of its assets, or (3)
similar relief under any law relating to bankruptcy, insolvency,
reorganization, winding up or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of sixty (60) days from
commencement of such proceeding or case, or an order for relief against it
shall be entered in an involuntary case under the federal Bankruptcy Code.
In such event, the party exercising the foregoing right to terminate shall
promptly notify the other party in writing of its intent to terminate this
Agreement, and such termination shall be effective upon receipt of such
notice.
<PAGE>
Each party agrees to notify the other party immediately if any of the events
described in the preceding paragraph occur. Each party further agrees that
should any of the said events occur, or if this Agreement is otherwise
terminated pursuant to this Article 16, the non-defaulting party may take other
----------
reasonable actions, including but not limited to maintaining a reserve from
payments otherwise payable to the other party under this Agreement, or any other
agreement the non-defaulting party may have with the defaulting party, to
protect its rights hereunder.
(c) Return of Company Property. Upon expiration or termination of this
--------------------------
Agreement, all Company property in possession of Contractor shall be
returned promptly to Company.
(d) No Waiver. Failure to terminate this Agreement pursuant to this Article 16
---------
shall not effect or constitute a waiver of any remedies the non-defaulting
party would have otherwise been entitled to demand in the absence of this
Article, whether by way of damages, termination or otherwise.
ARTICLE 16. INSPECTION, REJECTION OF WORK
Contractor shall provide Company with free access upon twenty-four (24) hour
advance notice, and subject to such other terms as may be agreed upon by the
parties with respect to the performance of this Agreement. Such access may be
used, among other things, for purposes of inspecting Services performed and the
equipment and materials, if any, furnished by Contractor under this Agreement.
At any time during the Agreement Term, Company may notify Contractor that
equipment data, or material used by Contractor in performing the Services do not
comply with the specifications to which the parties have agreed and if the same
are not in accordance with such specifications, Contractor shall take such
action as may be necessary to bring such equipment, data, or materials into
compliance with such specifications.
ARTICLE 17. FORCE MAJEURE
Neither party shall be held responsible for any delay or failure in performance
of any part of this Agreement to the extent such delay or failure is caused by
fire, flood, explosion, war, strike, embargo, government requirement, civil or
military authority, act of God, act or omission of carriers or other similar
causes beyond its control and without the fault or negligence of the delayed or
non-performing party or its subcontractors ("force majeure conditions").
Notwithstanding the foregoing, Contractor's liability for loss or damage to
Company's material in Contractor's possession or control shall not be modified
by this clause.
If any force majeure condition occurs, the party delayed or unable to perform
shall give immediate notice to the other party, stating the nature of the force
majeure condition and any action being taken to avoid or minimize its effect In
the event of a force majeure condition which causes Contractor to either delay
or fail to perform as specified in the preceding paragraph, Company may elect
to: (1) suspend this Agreement for the duration of the force majeure condition
and once the force majeure condition ceases, resume performance under this
Agreement with an option by the affected party to extend the period of this
Agreement up to the length of time the force majeure condition endured; or (2)
if the force majeure condition continues for a period of at least thirty (30)
days, terminate this Agreement; provided, however, that if a force majeure
-------- -------
condition effects one or more, but not all, of Contractor's Call Centers then
Company and Contractor shall negotiate in good faith an amendment to this
Agreement which would allow Contractor to continue to provide Services to
Company from those Calls Centers which are unaffected by the force majeure
condition and adjust the minimum call volumes and other affected provision of
this Agreement in a manner which is fair and reasonable under the circumstances.
<PAGE>
ARTICLE 18. ASSIGNMENT
(a) Assignment. Neither party shall assign, delegate or subcontract any right,
----------
interest or obligation under this Agreement without the prior written
consent of the other party, which consent may be granted or withheld at its
sole discretion; provided, however, that the foregoing restriction shall
-------- -------
not restrict Company from transferring its rights and obligations to a
subsidiary or affiliate, but such transfer shall in no way amend the volume
commitments applicable to Company hereunder and, thereafter, Company shall
continue to remain liable to Contractor for all payments due and payable to
Contractor hereunder. Any attempted assignment or delegation in
contravention of the above provisions shall be void and ineffective.
Notwithstanding the foregoing, the parties agree that if this Agreement is
modified to provide for Company to pay Contractor monthly in arrears rather
than monthly in advance as currently provided under Article 5(a),
---------
Contractor may assign monies due and to become due under this Agreement,
provided, that Company shall be entitled to assert against the assignee
thereof all rights, claims and defenses of every type (including without
limitation, rights of setoff, recoupment and counterclaim), which Company
could assert against Contractor, whether acquired prior or subsequent to
such assignment. Any such assignment of monies due or to become due
hereunder shall be void and ineffective to the extent that Contractor shall
not have given Company at least thirty (30) days prior written notice of
such assignment or such assignment attempts to impose upon Company
obligations to the assignee additional to the payment of such monies, or to
preclude Company from dealing solely and directly with Contractor in all
matters pertaining to this Agreement including the negotiation of
amendments or settlement of charges due. All work performed by Contractor's
subcontractor(s) at any time shall be deemed work performed by Contractor.
(b) Change of Control. A merger, stock exchange, acquisition or any similar
-----------------
event (collectively an "Ownership Transaction") which results in a change
in beneficial ownership of more than 50% of the outstanding ownership
interest in Contractor, shall be deemed to be an assignment for purposes of
this Article 19 which would require the consent of Company.
----------
(c) If any consent to assignment is required under clause (b) of this
Article 18, such consent shall not be unreasonably withheld or be
conditioned upon the payment of money.
(d) Restriction on Ownership of Contractor. Notwithstanding anything in
--------------------------------------
this Article 18 to the contrary, at any time during the Agreement Term,
without the written consent of Company, which consent may be granted or
denied in the sole and absolute discretion of Company, no person or entity
(other than an existing owner of Contractor or members of his immediate
family) which is a competitor of Company or person or entity which,
directly or indirectly, controls, is controlled by, or is under common
control with a person or entity which is a competitor of Company shall own,
directly or indirectly, more than a 15% equity ownership interest in
Contractor and no member of the board of directors, board of managers or
other similar governing body of Contractor shall be an officer, director or
employee of a competitor of Company. For purposes of this Article 18, a
person or entity shall be deemed to be a competitor of Company if such
person or entity generates annual revenues in excess of $500 million (which
amount shall increase annually by 3%) from the business as a
telecommunications carrier (as defined in the Telecommunications Act of
1996).
(e) Right to Terminate based on Ownership of Contractor. In the event that
---------------------------------------------------
person(s) or entity(ies) (other than an existing owner of Contractor or
members of his immediate family) which is a competitor of Company (as
defined in Section 19(e)) or person(s) or entity(ies) which, directly, or
indirectly, controls, is controlled by, or is under common control with a
person or entity which is a competitor of Company shall own, individually
or collectively, more than 15% in Contractor, without the prior written
<PAGE>
consent of Company, Company may at its option terminate this Agreement at
any time upon giving thirty (30) calendar days' notice in writing to
Contractor.
ARTICLE 19. TAXES
If taxes apply for the specific work under this agreement, Contractor and
Company will amend the agreement as necessary to describe resolution of tax
payment.
ARTICLE 20. COMPLIANCE WITH LAWS
Contractor and all persons furnished by Contractor shall comply at their own
expense with all applicable federal, state, local and foreign laws, ordinances,
regulations and codes, including identification and procurement of required
permits, certificates, licenses, insurance, approvals and inspections in
performance under this Agreement. Contractor agrees to indemnify Company and its
customers for any loss or damage that may be sustained by reason of any failure
to do so.
Without limiting the foregoing obligations, any obligations under this Agreement
shall be performed in compliance with all applicable legislation and government
agency orders and regulations prohibiting discrimination against any employee or
applicant for employment because of race, color, religion, sex, national origin,
age or handicap. Where required by law, certificates of compliance shall be
provided.
Each party shall comply with the provisions of the Fair Labor Standards Act of
1938, as amended, and all other applicable Federal, state and local law
governing employment
In the event of any conflict between provisions contained in this Agreement and
the provisions of an effective tariff, the provisions of the tariff shall
control. However, it is the intention of the parties that this Agreement, to the
extent not in conflict with the provisions of an effective tariff, supplement
such tariff, supply necessary operational practices, and is to be construed to
the extent possible in harmony with the tariff.
ARTICLE 21. PUBLICITY/IDENTIFICATION
Contractor shall not, except to the extent permitted by Article 9 or with
Company's written consent, engage in promotion or publicity about either party's
participation in this Agreement or, in any circumstance connected herewith, make
public use of any AT&T identification. As used herein, "AT&T identification",
means any copy or semblance of any trade name, trademark, service mark,
insignia, symbol, logo, designation or other product or service identification
of AT&T Corp. or any of its subsidiaries or other affiliates (all "AT&T
entities"), or any evidence of inspection by or for any AT&T entity.
ARTICLE 22. RIGHT OF ACCESS
Company shall have the right to enter the premises of Contractor with
appropriate prior notice and proper identification to inspect, maintain or
repair Company equipment located on such premises. Contractor agrees that access
to its facilities under this Article shall be available seven (7) days a week,
twenty-four (24) hours a day. In the event of an emergency, Contractor will make
best efforts to give Company access to such premises within an hour after first
requested.
<PAGE>
ARTICLE 23. WAIVER
The failure of either party at any time to enforce any right or remedy available
to it under this Agreement or otherwise with respect to any breach or failure by
the other party shall not be construed to be a waiver of such right or remedy
with respect to any other breach or failure by the other party.
ARTICLE 24. SEVERABILITY
If any of the provisions of this Agreement shall be invalid or unenforceable,
such invalidity or unenforceability shall not invalidate or render unenforceable
this entire Agreement, but rather such provision shall be modified so as to
maintain to the maximum extent possible the benefits of the parties hereunder
and the remaining provisions of this Agreement shall be unaffected thereby.
ARTICLE 25. SURVIVAL OF OBLIGATION
The obligations of the parties under this Agreement that by their nature would
continue beyond the termination, cancellation or expiration of this Agreement,
including, by way of illustration only and not limitation, those in the Articles
entitled TERMINATION, COMPLIANCE WITH LAWS, INDEMNIFICATION/INFRINGEMENT,
PUBLICITY/IDENTIFICATION, TITLE TO WORK PRODUCT, USE OF INFORMATION, shall
survive termination, cancellation or expiration of this Agreement.
ARTICLE 26. CHOICE OF LAW/ CHOICE OF FORUM
The construction, interpretation and performance of this Agreement and all
transactions under it shall be governed by the laws of the State of New York
excluding its choice of laws rules. Contractor agrees not to file any action,
claim, suit or demand, including any claim for injunctive, legal or other
equitable relief against Company, in any court of any jurisdiction apart from
the state or federal court, located in New York. For the purposes of enforcement
of this Agreement, Contractor agrees to submit to the jurisdiction of any state
or federal court located in New York. Contractor further agrees to submit to the
jurisdiction of any court wherein an action is commenced against Company based
on a claim for which Contractor has agreed to indemnify Company under this
Agreement.
ARTICLE 27. IMPLEADER
Contractor shall not implead or bring an action against Company or its customers
or the employees of either based on any claim by any person for personal injury
or death to an employee of Company or its customers occurring in the course or
scope of employment and that arises out of material or services furnished under
this Agreement
ARTICLE 28. RELEASES VOID
Neither party shall require (1) waivers or releases of any personal rights or
(2) execution of documents, which conflict with the terms of this Agreement from
employees, representatives or customers of the other in connection with visits
to its premises and both parties agree that no such releases, waivers or
documents shall be pleaded by them or third persons in any action or proceeding.
ARTICLE 29. NONEXCLUSIVE MARKET RIGHTS
It is expressly understood and agreed that this Agreement does not grant to
Contractor an exclusive right or privilege to sell or provide to Company any of
the Services, data or materials of the types described in this Agreement which
Company may require. It is. therefore, understood that Company
<PAGE>
may contract with third parties, including, but not limited to, Contractor's
suppliers, or provide on its own for the procurement of comparable services,
data or materials.
ARTICLE 30. CHANGES
Company may, at any time, by written notice to Contractor, advise Contractor of
its desire to change the manner or scope of the Services performed by Contractor
hereunder. If such intended changes would cause an increase or decrease in the
amount or character of the Services to be performed under this Agreement, or the
cost thereof, or in the time required for its performance, or otherwise alter in
any material respect the obligations of Contractor under this Agreement,
Contractor shall promptly so advise Company and the parties shall negotiate in
good faith an amendment to this Agreement which implements the proposed changes
to the manner of performance or scope of the Services. The procedures set forth
in Exhibit D shall apply with respect to any proposed changes to this Agreement
---------
requested by Company or Contractor hereunder.
ARTICLE 31. THIRD PARTY BENEFICIARIES
This Agreement shall not provide any person not a named party to this Agreement
with any remedy, claim, liability, reimbursement, claim of action or fight under
this Agreement.
ARTICLE 32. INTELLECTUAL PROPERTY LICENSES
Except as provided in this Article 33, by agreeing to have Contractor provide
the Services described in this Agreement, Company shall not be deemed to have
granted, explicitly or by implication or by estoppel, any license under any
trademark, patent, copyright, mask services protection right, or any other
intellectual property right.
Subject to all of the terms and conditions of this Agreement, AT&T hereby grants
to Contractor, during the Term, the non-exclusive right and license throughout
the Territory to use the Marks (as defined below) solely 'in connection with the
production of the Cards. It is expressly understood and agreed by Contractor
that Contractor may use the Marks only in connection with the Cards and only as
specifically permitted by the terms hereof.
For purposes of this Agreement, "Marks" means the name "AT&T" and the words,
initials, logos, designs, emblems, and other forms of identification and all
registrations, applications, and renewals thereof in the United States and
worldwide.
ARTICLE 33. COPYRIGHT NOTICE AND REGISTRATIONS
As a condition to the grant of rights hereunder, each shall bear a properly
located permanently affixed copyright notice (e.g., "Copyright /C/AT&T 1997. All
rights reserved."), or such other notice as AT&T may notify to Contractor in
writing. Contractor will comply with such instructions as to form, location and
content of the notice as AT&T may give from time to time. Contractor will not,
without AT&T's prior written consent, affix to any Card or any other matter
containing the Marks a copyright notice in any other name. If by inadvertence a
proper copyright notice is omitted from any Card or other matter containing the
Marks, Contractor agrees at its expense to use all reasonable efforts to correct
the omission on all such items in the process of manufacturing or in
distribution. Contractor agrees to advise AT&T promptly and in writing of the
steps being taken to correct any such omission and to make the corrections on
existing Cards which can be located.
<PAGE>
Except with AT&T's written consent, neither Agent nor any of its affiliates
will register or attempt in any country to register copyrights in, or to
register as a trademark, service mark, design patent or industrial design, or
business designation, any of the PrePaid Cards, Marks, trademarks or derivations
or adaptations thereof, or any word, symbol or design which is so similar
thereto as to suggest association with or sponsorship by AT&T. In the event of
breach of the foregoing, Agent agrees, at its expense and at AT&T's request, to
immediately terminate the unauthorized registration activity and to promptly
execute and deliver, or cause to be delivered, to AT&T such assignments and
other documents as AT&T may require to transfer to it all rights to the
registrations, patents or applications involved.
ARTICLE 34. REPRESENTATIONS
(a) Contractor Representations. In order to induce Company to enter into this
--------------------------
Agreement, Contractor hereby represents and warrants to Company as of the
date hereof, that:
(v) The execution, delivery and performance by Contractor of this
Agreement and other documents to which it. is a signatory in
connection herewith do not require the approval or consent of any
other person, entity or government agency and do not result in any
breach of any agreement to which Contractor is a party or by which it
is bound;
(vi) The execution, delivery and performance by Contractor of this
Agreement and other documents to which it is a signatory in connection
herewith have been duly authorized by a all necessary action, and
constitute legal, valid and binding obligations of Contractor,
enforceable against Contractor in accordance with their respective
terms;
(vii) The Services performed by Contractor under this Agreement, and the
use of such Services by Company, will not infringe any patents,
copyrights, trade secrets or other rights of any other person or
entity;
(viii) No action, suit, or proceeding to which Contractor is a party is
pending or threatened that may restrain or question this Agreement, or
any other document to which it is a signatory in connection herewith,
or the enjoyment by Company of the rights and benefits contemplated
herein; and
(ix) Contractor is duly organized, validly existing and !n good standing
under Arizona law.
(b) Company Representations. In order to induce Contractor to enter into this
-----------------------
Agreement, Company hereby represents and warrants to Contractor as of the
date hereof, that:
(i) The execution, delivery and performance by Company of this Agreement
and other documents to which it is a signatory in connection herewith
do not require the approval or consent of any other person and do not
result in any breach of any agreement to which Company is a party or
by which it is bound;
(ii) The execution, delivery and performance by Company of this Agreement
and other documents to which it is a signatory in connection herewith
have been duly authorized by all necessary action, and constitute
legal, valid and binding obligations of Company, enforceable against
Company in accordance with their respective terms;
<PAGE>
(iii) No action, suit, or proceeding to which Company is a party is
pending or threatened that may restrain or question this Agreement, or
any other document to which it is a signatory in connection herewith,
or the enjoyment by Contractor of the rights and benefits contemplated
herein.
(c) Survival. The respective representations and warranties of the parties set
--------
forth herein shall survive the termination or expiration of this Agreement.
ARTICLE 35. FINANCIAL STATEMENTS
Within 60 days after the end of each fiscal year and within 45 days after the
end of each fiscal quarter, Contractor shall deliver to Company financial
statements of Contractor including a balance sheet as of the end of the
applicable period and an income statement for the period then ending. Contractor
shall further notify Company of the occurrence of any event which is reasonably
likely to materially adversely affect the financial condition or results of
operation of Contractor within 10 business days of the occurrence of such event.
All information made available to Company under this Article 35 shall be held in
----------
strict confidence in accordance with Article 9 and shall be distributed
---------
internally at Company only among those individuals who have a need to know such
information.
ARTICLE 36. ENTIRE AGREEMENT
(a) Entire Agreement. This Agreement, including Exhibits A, B, C, and D
---------------- -------- - - - -
attached hereto, as the same are in effect from time to time, constitutes
the entire agreement between Contractor and Company with respect to the
subject matter hereof. This Agreement may not be modified or rescinded in
any manner except by a written instrument executed by both parties. Other
than as expressly provided herein, both Contractor and Company agree that
no prior or contemporaneous oral representations form any part of this
Agreement. Additional or different terms inserted in this Agreement by a
party, or deletions thereto, whether by alterations, addenda, or otherwise,
shall be of no force and effect, unless expressly consented to by the other
party in writing. No changes, additions or deletions to this Agreement
shall be binding upon a party unless signed by an authorized representative
of such party. The provisions of this Agreement supersede all
contemporaneous oral agreements and all prior oral and written quotations,
communications, agreements and understandings of the parties with respect
to the subject matter of this Agreement including, without limitation, the
Original Contract.
IN WITNESS WHEREOF, Contractor and Company have executed this Agreement in
duplicate effective as of the day and year first written above.
DATAWAVE SYSTEMS INC AT&T CORP.
By: /s/ Clive Barwin By: /s/ Mark P. Evans
________________________ __________________________
Signature Signature
Name: Clive Barwin Name: Mark P. Evans
_________________________ _________________________
Title: President Title: Director, AT&T PrePaid Card
_________________________ _________________________
Date 29 January 1998 Date January 30, 1998
_________________________ _________________________
<PAGE>
EXHIBIT 10.26
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Customer Name:
Datawave Systems , Inc. AT&T Corp.
("Customer") ("AT&T")
- ----------------------------------------------------------------------------------------------------------------------------
Customer Address: AT&T Address: 412 Mt. Kemble Ave. AT&T Contract Name
101 West Fifth Avenue Morristown, NJ 07962 Mark Evans
Vancouver, British Columbia
Canada V5Y 1H9
- ----------------------------------------------------------------------------------------------------------------------------
Datawave Contact Name AT&T Contact Telephone Number:
Clive Barwin 201-644-8170
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Customer hereby places an order for:
<S> <C>
X New AT&T Contract Tariff (attachment required) [ ] Existing AT&T Contract Tariff No. ______ (attachment
required)
</TABLE>
================================================================================
EXISTING PRICING PLAN REPLACEMENT/DISCONTINUANCE:
[ ] Check here and identify below any AT&T CT or other AT&T pricing plan being
discontinued in conjunction with this order. Also specify the CT No., Plan ID
No. or Main Billed Account No. (Note: Charges may apply as specified in the plan
being discontinued.)
================================================================================
1. Services will be provided under the Contract Tariff ("CT") ordered
hereunder, subject to the rates, terms and conditions in the CT as well as the
AT&T tariffs (if any) referenced in the CT ("Applicable Tariffs"), as those
Applicable Tariffs may be modified from time to time.
2. This Form (including its addenda, if any), the CT and the Applicable
Tariffs constitute the entire agreement (collectively the "Agreement") between
Customer and AT&T with respect to the services provided under the CT and
supersede any and all prior agreements, proposals, representations, statements,
or understandings, whether written or oral, concerning such services or the
rights and obligations relating to such services, in the event of any
inconsistency between the terms of this Form (including its addenda, if any) and
the CT or Applicable Tariffs, the terms of the Applicable Tariffs and CT shall
prevail. In the event of any inconsistency between the terms of the CT and the
Applicable Tariffs, the terms of the CT shall prevail. Except for changes to
rates ( to the extent permitted under the CT ) and changes to the Applicable
Tariffs, no change, modification or waiver of any of the terms of this Agreement
shall be binding Unless reduced to writing and signed by authorized
representatives of both parties and, to the extent required by law, filed with
the FCC.
3. Except to the extent that federal law applies, the construction,
interpretation and performance of this Agreement shall be governed by the
substantive law of the State of New York, excluding its choice of law rules.
4. EXCEPT FOR ANY WARRANTIES EXPRESSLY MADE IN THIS AGREEMENT, AT&T EXCLUDES
ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. AT&T DOES
NOT AUTHORIZE ANYONE TO MAKE A WARRANTY OF ANY KIND ON ITS BEHALF AND CUSTOMER
SHOULD NOT RELY ON ANYONE MAKING SUCH STATEMENTS.
5. As to new CTs, Customer may, as its sole remedy, cancel this order for the
CT without liability before the CT becomes effective if, without Customer's
consent: (a) AT&T fails to file the CT with the FCC within 30 days after the
date this Form is signed by both parties; (b).the CT as filed is not consistent
with the attached illustrative copy; or (c) the CT does not go into effect
within 30 days after filing.
6. Orders for existing CTs will be accepted and implemented by AT&T only if
the specified CT is available when ordered and Customer is eligible for the CT.
7. Customer shall provide installation instructions and other information as
required by AT&T.
8. AT&T will ship to 10,000 locations, additional locations will be shipped at
standard shipping rates at the Customers expense.
================================================================================
YOUR SIGNATURE ACKNOWLEDGES THAT YOU HAVE READ, UNDERSTAND AND AGREE TO THE
PROVISIONS OF THIS AGREEMENT AND THAT YOU ARE DULY AUTHORIZED TO SIGN THIS
AGREEMENT.
================================================================================
CUSTOMER AT&T Corp.
Full Legal Name: DATAWAVE SYSTEMS INC. By: /s/ Mark P. Evans
----------------------- ---------------------------------
Mark P. Evans
By: /s/ Clive Barwin
------------------------------------
CLIVE BARWIN - PRESIDENT Mark P. Evans
- --------------------------------------- ------------------------------------
(Typed or Printed Name and Title) (Typed or Printed Name and Title)
Date: 29 January 1998 Date: January 30, 1998
---------------------------------- -------------------------------
<PAGE>
Datawave v11
wmpresent
AT&T COMMUNICATIONS CONTRACT TARIFF NO. XXX
Adm. Rates and Tariffs Original Title Page
Bridgewater, NJ 08807
Issued: Iii Effective: Eee
** All material on this page is new. **
CONTRACT TARIFF NO. XXXX
TITLE PAGE
This Contract Tariff applies to AT&T Commercial Prepaid Card Service - Unit
Option for interstate communications in accordance with the Communications Act
of 1934, as amended.
Telecommunication services provided under this Contract Tariff are furnished by
means of wire, radio, satellite, fiber optics or any suitable technology or
combination of technologies.
<PAGE>
Datawave v11
wmpresent
AT&T COMMUNICATIONS CONTRACT TARIFF NO. XXXX
Adm. Rates and Tariffs Original Page 1
Bridgewater, NJ 08807
Issued: Iiii Effective: Eeee
CONTRACT TARIFF NO. XXXX
CHECK SHEET
The Title Page and Pages 1 through 5 inclusive of this tariff are effective as
of the date shown.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Check Sheet...................................................... 1
List of Concurring, Connecting and Other Participating Carriers.. 1
Explanation of Symbols - Coding of Tariff Revisions.............. 1
Trademarks and Service Marks..................................... 2
Explanation of Abbreviations..................................... 2
Contract Summary................................................. 3
</TABLE>
LIST OF CONCURRING, CONNECTING AND OTHER, PARTICIPATING CARRIERS
CONCURRING CARRIERS - NONE
CONNECTING CARRIERS - NONE
OTHER PARTICIPATING CARRIERS - NONE
EXPLANATION OF SYMBOLS - Coding of Tariff Revisions
Revisions to this tariff are coded through the use of symbols. These symbols
appear in the right margin of the page. The symbols and their meanings are:
R - to signify reduction.
I - to signify increase.
C - to signify changed regulation
T - to signify a change in text but no change in rate or regulation.
S - to signify reissued matter.
M - to signify matter relocated without change.
N- to signify new rate or regulation.
D - to signify discontinued rate or regulation.
Z - to signify a correction.
Other marginal codes are used to direct the tariff reader to a footnote for
specific information. Codes used for this purpose are lower case letters of the
alphabet, e.g., x, y and z. These codes may appear beside the page revision
number in the page header or in the right margin opposite specific text.
<PAGE>
Datawave v11
wmpresent
AT&T COMMUNICATIONS CONTRACT TARIFF NO. XXXX
Adm. Rates and Tariffs Original Page 2
Bridgewater, NJ 08807
Issued: Iiii Effective: Eeee
** All material on this page is new. **
CONTRACT TARIFF NO. XXXX
1. SERVICES PROVIDED - AT&T Commercial Prepaid Card Service - Unit Option (AT&T
Tariff F.C.C No. 1).
2. TERM OF CONTRACT; RENEWAL OPTIONS - The Initial Term of this Contract is two
(2) years from the Customer's Initial Order Date ("CIOD") which shall be the
date of the Customer's first bill; For purposes of this Contract Tariff,
Contract Year One shall be the initial twelve months beginning on the CIOD If
the Customer satisfies its MAPC, as defined in Section 3, following, during the
Initial Term; no renewal option.
3. MINIMUM PURCHASE REQUIREMENT - The Minimum Purchase Requirement ("MPR") of
Service for the Term of this Contract Tariff is sixty million (60,000,000)
units. The MPR will be satisfied with the same qualified usage as specified for
the Service in AT&T Tariff F.C.C. No. 1 as amended from time to time.
A. MINIMUM ANNUAL PURCHASE COMMITMENT- The Minimum Annual Purchase (MAPC") of
Service in Contract Year One is thirty million (30,000,000) units. The MAPC of
Service in Contract Year Two is thirty million (30,000,000) units. The MAPC will
be satisfied with the same qualified usage as specified for the Service in AT&T
Tariff F.C.C. No. 1, as amended from time to time.
B. SHORTFALL CHARGE - If, at the end of a Contract Year, the Customer has
failed to satisfy the MAPC for that Contract Year, the Customer will be billed a
Shortfall Charge. The customer will be billed as a Shortfall Charge the
following amount: (( the difference between MAPC (30,000,000) for that Contract
Year and the units purchased during that Contract Year)* $0.048 per unit). This
Shortfall Charge is in addition to the rates per unit as listed in Section 7.,
following, that the Customer must pay. The Shortfall Charge will be as follows:
For example: the Customer purchased twenty-five million (25,000,000) units in
Contract Year One. AT&T will subtract the twenty-five million (25,000,000) units
from the MAPC (30,000,000) for a difference of five million (5,000,000) units.
The Shortfall Charge will then be 5,000,000 * $0.048 = $240,000.
4. CONTRACT PRICE - The Contract Price for AT&T Commercial Prepaid Card Service
is the same as specified in AT&T Tariff F.C.C. No. 1, amended from time to time,
except as specified in Section 7.A. following. AT&T reserves the right to
increase from time to time the rates for the Services Provided under this
Contract Tariff, regardless of any provisions in this Contract Tariff that
would otherwise stabilize rates or limit rate increases, relating to charges
imposed on AT&T stemming from an order, rule or regulation of the Federal
Communications Commission or a court of competent jurisdiction. AT&T will make
rate adjustments under this provision as-necessary. For example: AT&T may
impose additional charges or decrement additional units AT&T Commercial Prepaid
Card Service - Unit Option Cards.
<PAGE>
Datawave v11
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AT&T COMMUNICATIONS CONTRACT TARIFF NO. XXXX
Adm. Rates and Tariffs Original Page 3
Bridgewater, NJ 08807
Issued: Iiii Effective: Eeee
** All material on this page is new. **
5. DISCOUNTS - None.
6. CLASSIFICATIONS, PRACTICES AND REGULATIONS
A. Except as otherwise provided in this Contract Tariff, the rates and
regulations that apply to the Services Provided specified in Section 1.,
preceding, are as set forth in the AT&T tariffs that are referenced in Section
I., preceding, as such tariffs are amended from time to time.
1. PURCHASE ORDERS
All references in the Applicable AT&T Tariffs to "tariffs", "tariffed services",
or other variations thereof shall also mean this Contract Tariff and the
services provided under this Contract Tariff.
Except as otherwise provided in this Contract Tariff and the Associated AT&T
Contract Tariff, the terms, rates, regulations and conditions apply as set forth
in AT&T Tariff F.C.C: No. I, pertaining to AT&T Commercial Prepaid Card Service,
as amended from time to time.
(a) To fulfill the MAPC described in Section 3., preceding, Customers may
place one or more purchase orders for AT&T Commercial Prepaid Card Service-Unit
Option Cards under this Contract Tariff. The Customer may select any of the
following unit denominations 15-, 30-, 60-, 100-, 200- or 300-Unit card. At
AT&T's discretion, other unit denominations may be offered to the Customer under
this Contract Tariff.
2. BILLING - AT&T will bill at only one (l) customer location for all AT&T
Commercial Prepaid Card Service-Unit Option Cards ordered by the Customer.
B. MONITORING CONDITIONS - None
C. PROMOTIONS, CREDITS AND WAIVERS. The Customer is ineligible for any
promotions, credits or waivers for the Services Provided under this Contract
Tariff, which are filed or which may be filed in the AT&T tariffs specified in
Section 1.
D. DISCONTINUANCE - The Customer may discontinue this Contract Tariff at any
time during the Initial Term, provided the Customer (1) has not discontinued
another AT&T Contract Tariff Term Plan, AT&T Flex Plan or AT&T Service with a
revenue, volume or term commitment without liability in conjunction with its
order for this Contract Tariff, and (2) the Customer this Contract Tariff with
another AT&T Contract Tariff for AT&T Commercial Prepaid Card Service, - Unit
Option Cards as specified in AT&T Tariff F.C.C. No. 1, with equal or greater
volume or revenue commitments and with a term equal to or greater than the
remaining term of this Contract Tariff and (3) Notifies AT&T in writing, at
least 30 days prior to the requested date of disconnect, of its intent to
discontinue.
<PAGE>
Datawave v11
wmpresent
AT&T COMMUNICATIONS CONTRACT TARIFF NO. XXXX
Adm. Rates and Tariffs Original Page 1
Bridgewater, NJ 08807
Issued: Iiii Effective: Eeee
** All material on this page is new. **
6. CLASSIFICATIONS, PRACTICES AND REGULATIONS (CONTINUED)
If the Customer discontinues this Contract Tariff for any reason other than
specified above, prior to the expiration of the Initial Term and without having
satisfied the MPR during the Initial Term of this Contract Tariff, the Customer
will be assessed a Termination Charge. The Termination Charge shall be
calculated as follows. First, determine the total number of units purchased by
the Customer during the Initial Term of this Contract Tariff prior to
discontinuance. Second, AT&T will calculate the combined total number of units
purchased in 15, 30 and 60 unit denominations and the combined total number of
units purchased in 100, 200, and 300 unit denominations. Third, based on the
total number of units purchased by the Customer during the Initial Term of this
Contract Tariff, AT&T will use the Rate Schedule set forth below to determine
the additional amount owed by Customer per unit of service purchased under this
Contract Tariff. If the Customer purchased any unit denominations other than
15, 30, 60, 100, 200, or 300 units under this Contract Tariff any such
denominations that were less than 100 units shall be assessed the be assessed
the additional per unit cost for the 100, 200, and 300 unit denominations.
Finally, AT&T will multiply the units purchased by the appropriate amount
indicated on the Rate Schedule below to calculate the additional amount owed by
Customer as Termination Charges. The Customer shall then be billed by AT&T for
that amount. Customer shall pay such bill within (30) days of receipt.
<TABLE>
<CAPTION>
TERMINATION CHARGE SCHEDULE
TOTAL NUMBER OF UNITS TERMINATION
- --------------------- CARD UNIT PRICE
PURCHASED DENOMINATION PER UNIT
--------- ------------ -----------
<S> <C> <C>
0-1,100,000 15,30,60 $0.06
100,200,300 $0.05
1,100,001 - 25,000,000 15,30,60 $0.05
100,200,300 $0.04
25,000,001 - 40,000,000 15,30,60 $0.03
100,200,300 $0.02
40,000,001 - 59,999,999 15,30,60 $0.02
100,200,300 $0.02
</TABLE>
For example, assume that the Customer purchased 15,000,000 units, of AT&T
Prepaid Card Service (10,000 units in 30 unit cards and 5,000,000 units in 100
unit cards), prior to discontinuing this Contract Tariff, The Termination Charge
would be $0.05 on all 15-, 30-, 60- AT&T Commercial Prepaid Card Units obtained,
not having paid a Shortfall Charge on, pursuant to this Contract Tariffs
termination. In this example, the Termination Charge would be $700,000.
(10,000,000 * $0.05) * (5,000,000 $0.04) = $700,000.
Any AT&T Commercial Prepaid Card Service - Unit Option Cards purchased by the
Customer after the Customer notifies AT&T of discontinuance of this Contract
Tariff, must be paid for prior to shipment.
E. OTHER REQUIREMENTS - AT&T reserves the right to establish, change or
eliminate expiration dates or periods for the units of Service sold pursuant to
this Contract Tariff.
<PAGE>
Datawave v11
wmpresent
AT&T COMMUNICATIONS CONTRACT TARIFF NO. XXXX
Adm. Rates and Tariffs Original Page 5
15 Bridgewater, NJ 08807
Issued: Iiii Effective: Eeee
** All material on this page is new. **
F. AVAILABILITY - This Contract Tariff has been developed for Customers who: (1)
will order this Contract Tariff only once, either by the Customer or any
Affiliate of the Customer, which is any entity that owns a controlling interest
in either the Customer or an Affiliate of the Customer, or any entity in which a
controlling interest is owned by either the Customer or an Affiliate of the
Customer; (2) are current in payment to AT&T for its existing tariffed
telecommunications services. This Contract Tariff is available to any similarly
situated Customer who orders service within 30 days after the effective date of
this Contract Tariff for initial installation of the Services provided under
this Contract Tariff within 30 days after the date ordered.
7. Rates
A. AT&T PREPAID CARD SERVICE
ITEM DESCRIPTION PRICE PER
UNIT
AT&T Commercial PrePaid Card Service-Units $0.175
<PAGE>
EXHIBIT 10.27
INDENTURE OF LEASE MADE AS OF THE 1st DAY OF APRIL, 1996.
BETWEEN
HAYMUR ENTERPRISES LTD.
AND
ALEXANDER DAVID MACAULAY
AS LESSORS
AND
DATAWAVE VENDING (CANADA) INC.
AS LESSEE
LEASE AGREEMENT FOR:
101 WEST 5TH AVENUE, VANCOUVER, B.C.
<PAGE>
THIS INDENTURE made as of the 1st day of April, 1996
BETWEEN: HAYMUR ENTERPRISES LTD. and ALEXANDER DAVID MACAULAY Businessmen, both
----------------------------------------------------
care of Turner, Meakin Management Company Ltd., #200-1682 West 7th
Avenue, Vancouver, British Columbia, V6J 4S6
(hereinafter collectively called the
Lessor")
OF THE FIRST PART
AND: DATAWAVE VENDING (CANADA) INC, a company having an office at #208 -950
-----------------------------
Powell St., Vancouver, B.C. V6A 1H9, and duly incorporated under the
laws of the Province of British Columbia,
(hereinafter called the "Lessee")
OF THE SECOND PART
1.00 DEMISE AND LEASE
WITNESSETH that in consideration of the rents, covenants, conditions and
agreements hereinafter reserved and contained on the part of the Lessee to be
paid, observed and performed, the Lessor does demise and lease unto the Lessee
all and singular those certain lands and premises that are described in Schedule
"A" attached hereto (hereinafter called the "Leased Premises") and comprising
all of the lands and buildings with a total floor area of approximately 8,916
square feet which figure includes the office and warehouse premises occupied by
the Lessee and all of the common building area, all situate at 101 West 5th
Avenue, Vancouver, B.C., and being part of those lands and premises legally
described as:
PARCEL IDENTIFIER 014-903-849
Lots A, B and C
Block 21
District Lot 200A
Plan 1191
2.00 TERM
The term of this lease is for a period of Five (5) years and shall commence on
the 1st day of April, 1996 and expire on the 31 st day of March, 2001 subject
to earlier termination as herein provided.
3.00 RENT
As rent for the leased premises, the Lessee covenants and agrees to pay to the
Lessor in advance in
lawful money of Canada:
(a) (i) For the first year of the Lease, the annual sum of $64,641.00 which is
the equivalent of approximately $7.25 per square foot of Leased
Premises without deduction, set-off or abatement and being the sum of
$5,386.75 per month; and
(ii) For the second year of the Lease, the annual sum of $66,870.00 which
is the equivalent of approximately $7.50 per square foot of Leased
Premises without deduction, set-off or abatement and being the sum of
$5,572.50 per month; and
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<PAGE>
(iii) For the third year of the Lease, the annual sum of $69,099.00 which
is the equivalent of approximately $7.75 per square foot of Leased
Premises without deduction, set-off or abatement and being the sum
of $5,758.25 per month; and
(iv) For the fourth year of the Lease, the annual sum of $73,557.00 which
is the equivalent of approximately $8.25 per square foot of Leased
Premises without deduction, set-off or abatement and being the sum
of $6,129.75 per month; and
(v) For the fifth year of the Lease, the annual sum of $75,786.00 which
is the equivalent of approximately $8.50 per square foot of Leased
Premises without deduction, set-off or abatement and being the sum
of $6,315.50 per month; and
(vi) The Lessor agrees to abate the rent above which applies to the month
of April, 1996.
(b) Together with, in month by month installments beginning April 1, 1996 a
pro-rata share of Operating Expenses (hereinafter called "Additional Rent"). For
purposes of this Lease "Pro-rata Share" shall mean the the gross leaseable area
of the Leased Premises (8,916 square feet) divided by the total gross leaseable
building area of 8,916 square feet. The pro-rata factor to be applied to
operating costs for the calculation of Additional Rent applicable to the Leased
Premises is therefore 100.00%
The amount of the Additional Rent which the Lessee is to pay monthly shall be
reasonably estimated by the Lessor in advance and the Lessor shall furnish to
the Lessee an estimate of the Additional Rent.
At least annually the Lessor shall furnish the Lessee with a statement showing
the actual amount of the Additional Rent and the Lessor and the Lessee covenant
and agree each with the other that if an overpayment of the Additional Rent has
been made by the Lessee, the Lessor shall credit the account of the Lessee, and
if there is no ensuing period, such amount shall be paid by the Lessor to the
Lessee, and if an amount remains owing to the Lessor in respect of Additional
Rent, the Lessee shall forthwith pay such amount to the Lessor.
For the purposes of this lease, "Operating Expenses" shall mean the total,
without duplication, of all costs and expenses incurred by the Lessor in the
operation and management of the leased premises and the improvements, sprinkler,
fire alarm, heating and air conditioning systems thereon, and for repairing,
maintaining and replacements of said systems, or any of them, such as are in
keeping with maintaining the standard of a first class industrial complex,
including, without limitation, all repairs and replacements required for such
maintenance, the costs of providing electricity, gas, fuel and other services
and utilities not otherwise paid, payable or to be provided by the Lessee as
hereinafter mentioned, the costs of maintaining roadways and parking areas,
loading and unloading areas, snow removal, landscape maintenance, refuse removal
and other costs in connection with the maintenance of outside areas and
facilities, awnings, sprinkler protection, security protection, service
contracts with independent contractors and all other expenses paid or payable by
the Lessor in connection with the operation of the Lands and the Leased
Premises, but shall not include interest on debt, capital retirement of debt,
costs allocated to capital account according to generally accepted accounting
principles as determined by the Lessor's accountants, any amounts directly
chargeable by the Lessor to or payable by the Lessee as in this Lease
hereinafter otherwise provided herein, or any repairs, replacements, maintenance
amounts, costs, expenses or outgoings attributable to the Leased Premises for
which the Lessee is responsible as in this lease hereinafter otherwise provided,
and shall include a reasonable management fee not to exceed Five (5%) of the
aggregate annual rent payable by all of the lessees of the Lands of the Lessor.
(c) The total amortization of capital costs and major repairs (on a straight
line basis over the useful life or such other period as reasonably determined by
the Lessor), and the interest on the unamortized capital at a rate equivalent to
the lending rate actually charged or chargeable by the Lessor's bankers from
time to time on commercial demand loans made to the Lessor (and if different
loans are at a different rates of interest, then the lowest of same), of the
cost of all furniture, machinery, equipment, replacements, modifications,
additions and improvements to the Building which, in the Lessor's reasonable
opinion, have
Page 3
<PAGE>
an estimated useful life longer than one (1) fiscal year and the cost whereof
has not previously been charged to the Lessee.
If requested by the Lessee, the Lessor shall provide a statement of Operating
Costs certified by the Lessor's accountants but the cost of such certification
shall be to the account of the Lessee. At the request of the Lessee, the Lessor
will make available its records of Operating Costs for inspection by the Lessee
during normal business hours of the Lessor.
4.00 USE OF PREMISES
The Leased Premises are to be used for development and assembly in connection
with manufacturing of electronic equipment. The Lessee shall not use the Leased
Premises for any other purpose without the Lessor's approval in writing first
obtained. All personal property and leasehold improvements on or at the Leased
Premises shall be at the risk of the Lessee.
5.00 TAXES AND ASSESSMENTS
(a) The Lessee agrees that it will, from and including the commencement date pay
to the Lessor a pro-rata share of all taxes, imposts, rates, duties and
assessments whatsoever, whether municipal, parliamentary or otherwise, and
whether general, school, local improvement or other purpose charged, rated
assessed or levied by the City of Vancouver or other lawful government authority
upon or against the Leased Premises, including without limiting the generality
of the foregoing, the building thereon and the improvements thereto: PROVIDED,
however, that where any such charges are extraordinary local improvement or
impost charges, the Lessee shall only be liable for the payment therefore during
the term of this lease and any over holding thereof that is attributable to the
duration of the said term or overholding.
(b) The Lessee further agrees that it will pay all business and other taxes,
licences, rates, duties and assessments imposed or levied by lawful authority
during the term of this Lease and relating to or in respect of the business of
the Lessee, or relating to or in respect of improvements fixtures, machinery,
chattels or equipment presently upon or hereafter brought upon the Leased
Premises by the Lessee, or relating to or in respect of improvements to the
Leased Premises built, made or installed by the Lessee or at the Lessee's
request, where such taxes, licences, rates and assessments are payable by law by
the Lessee or the Lessor and whether such taxes, licences, rates, duties and
assessments are included by the taxing authority in the taxes, licences, rates
duties and assessments imposed or levied on or with respect to the building
which forms part of the Leased Premises.
(c) The amount payable by the Lessee pursuant to Clause 5(a) of this lease shall
be based upon a statement from the applicable taxing authority, and shall be
paid by the Lessee to the Lessor not later than Five (5) business days before
the date the same are due to the applicable taxing authority.
(d) The Lessee shall pay to the Lessor any applicable Goods and Services Taxes
or other value added tax, sales tax, rental tax or other tax which may be
imposed from time to time by any lawful municipal, provincial federal or other
taxing authority on rents, additional rents taxes, charges, costs and expenses
and which would otherwise be paid by the Lessor or the Lessee. If the Lessor is
required to collect such a tax on rent, additional rent, taxes, costs, charges,
and expenses, then the Lessee will pay these taxes, when due, to the Lessor over
and above the rent, additional rent, taxes, charges, costs and expenses payable
to the Lessor and the Lessor will have all remedies for recovery of same as with
rent in arrears.
6.00 INSURANCE
During the term of this lease, the Lessee shall pay on demand all premiums with
respect to insurance which may be placed by the Lessor in its sole discretion
and generally described as follows:
Page 4
<PAGE>
(a) All risk insurance for the full replacement value of the premises and
improvements and equipment thereof, including and without limiting the
generality of the foregoing, fire, impact by aircraft or vehicles, lightning,
riot, smoke, leakage, malicious damage, explosion, windstorm or hail,
earthquake, boiler, rental income and plate glass; and
(b) Public liability insurance in the amount of TWO MILLION ($2,000,000.00)
dollars or such greater amount as the Landlord may require in respect of bodily
injury, including death to one or more persons and property damage; and
(c) The amount of any increase in insurance premiums on the building if such
increase is caused by the Lessee's operation in or occupation of the Premises.
(d) The Lessee agrees to indemnify the Lessor from all liabilities, fines,
suits, claims, demands and actions of any kind and nature for which the Lessor
shall or may become liable or suffer by reason of any breach, violation or non-
performance by the Lessee or any covenant or proviso hereof, or by reason of any
injury or death occasioned to or suffered by any person or persons or any
property through any willful act, or the negligence of the Lessee or any of its
agents or employees; such indemnification in respect of any such breach,
violation or non-performance, damage to property, injury or death occurring
during the term shall survive any termination of this lease, anything in this
lease to the contrary notwithstanding, provided that the Lessee's obligations to
indemnify the Lessor under this clause shall exclude anything for which the
Lessor is insured.
(e) During the term of this Lease, the Lessee shall procure and maintain, at its
own expense, a public liability insurance policy naming the Lessor as an
additional insured thereunder, which policy shall be in amounts reasonable and
satisfactory to the Lessor but in no case less than TWO MILLION ($2,000,000.00),
and shall insure against claims for personal or bodily injury and against claims
for damage to property arising from single accidents or occurrences involving
injury to persons or property owned by third persons occurring on or about the
Leased Premises. A certificate evidencing such insurance shall be deposited by
the Lessee with the Lessor if requested. Such policy shall contain a provision
that the same shall not be cancelled or terminated except upon thirty (30) days
written notice to the Lessor.
7.00 WASTE, DAMAGE, COMPLIANCE WITH LAWS
(a) The Lessee covenants that no waste or damage shall be committed upon or to
the Leased Premises and that the Leased Premises shall be used for the purposes
herinabove stated. The Lessee shall observe and comply, at its expense, with all
future applicable laws, ordinances and regulations of public authorities, now or
hereafter in any manner affecting the Leased Premises, or the sidewalks,
boulevards or other municipally owned lands adjacent thereto, and any building,
structure, fixture and improvement thereon or thereto or the use thereof
including, without limiting the generality of the foregoing, any regulation or
order of the Canadian Fire Underwriters Association or any body having similar
functions or any insurance company by which the Lessor and Lessee or either of
them, may be insured. The Lessee will not permit any unlawful occupation,
business or trade to be conducted at the Leased Premises or any use to be made
thereof contrary to any law, ordinance or regulation. The Lessee will hold the
Lessor financially indemnified and saved harmless from the consequence of any
default or violation by the Lessee of any such laws, ordinances and regulations.
(b) The Lessee, at its sole cost and expense, shall comply or cause its tenants,
agents and invitees, at their sole cost and expense, to comply with all federal,
provincial and municipal laws, rules and regulations and orders with respect to
the discharge of contaminants into the natural environments, pay immediately
when due the cost of removal of such waste and the costs of improvements
necessary to deal with such contaminants and keep the Leased Premises free and
clear of any lien imposed pursuant to such laws, rules and regulations. In the
event the Lessee fails to do so, after notice to the Lessee and the expiration
Page 5
<PAGE>
of the cure period under the applicable law, rule, regulation or order, the
Lessor, at its sole option, may declare the Lease to be in default.
(c) The Lessee shall indemnify and hold the Lessor harmless from and against all
loss, costs, damage or expense (including without limitation, legal fees and
costs, incurred in the investigation, defence and settlement of any claim)
relating to the presence of any hazardous waste or contaminant referred to
herein.
8.00 NUISANCE
The Lessee agrees that it will not at any time use, exercise or carry on or
permit or suffer to be used, exercised or carded on in or upon the Leased
Premises, or any part thereof, any noxious, noisome or offensive art, trade,
business, occupation or calling, or any act, matter or thing whatsoever which
shall or may be or become any annoyance, nuisance, grievance, damage or
disturbance to the owners or occupiers of adjoining and neighboring lands and
premises, or which may in any manner, directly or indirectly, cause injury to
the Leased Premises or to any appurtenances or fixtures thereof, and not to
bring or keep anything upon or in the Leased Premises or any part thereof which
is illegal or is, in the Lessor's opinion acting in good faith, dangerous, or
which will increase the premiums for, or make void or voidable, any insurance on
the Leased Premises, the Building or on any property or contents placed or kept
thereon or herein, or which will conflict with any laws relating to coverage or
of any of the terms or conditions of any policy of such insurance.
Notwithstanding the rights of the Lessor for the failure or neglect of the
Lessee to perform and observe as in this Clause 8 set forth, it is agreed by the
Lessee that in the event the Lessee brings upon the Leased Premises, or carries
on any business on the Leased Premises which result in an increase in the
insurance rates or premiums charged by the Lessor's insurer or any other cost of
operating the Lands and Building, such increase shall be for the account of the
Lessee, and upon the receipt by the Lessee of the Lessor's statement setting out
the amount thereof, the Lessee shall pay to the Lessor such amount.
9.00 REPAIRS AND MAINTENANCE
(a) The Lessee, at its expense, shall be solely responsible for maintaining and
keeping the Leased Premises and all appurtenances and fixtures thereto in the
reasonable opinion of the Lessor, in good and sufficient repair and in good
working order when, where and so often as may be necessary, including such
repairs as may be necessary by reason of ordinary wear and tear, painting the
interior and also including, without limit, all machinery, facilities, fixtures,
doors, including sliding and overhead, plumbing apparatus, plate glass, windows,
pipes, wiring, heating apparatus, air conditioning apparatus, floors, drains,
electric tight fixtures, wiring and equipment, whether interior or exterior, it
is also agreed and hereby acknowledged by the Lessee that the said maintenance
and repairs shall, whenever and wherever necessary, including replacements and
renewals, and that the same shall be done with due diligence and dispatch.
PROVIDED, that the said obligations of the Lessee to repair, maintain, replace
and renew as aforesaid shall not include and extend to damage by fire,
lightning, tempest, explosion, acts of the Queen's enemies, act of God, or other
event covered by the insurance referred to in Clause 6(a) of this Lease, and are
subject to Clause 13 of this Lease. The Lessee further covenants that if the
Lessee shall at any time fail to so maintain and make such repairs, renewals or
replacements, the Lessor may do so or may cause another to do so in a good and
workmanlike manner, and the cost thereof shall be for the account of the Lessee,
and upon receipt by the Lessee of the Lessor's statement setting out the amount
thereof, the Lessee shall pay to the Lessor such amount. For the purposes
aforesaid, the Lessee shall permit the Lessor, its servants, agents,
contractors, licensees and workmen, at all reasonable times, to enter upon the
Leased Premises without liability to the Lessor for any loss or damage that may
accrue to the Lessee by reason thereof, including without limiting, the business
of the Lessee.
(b) The Lessee shall permit the Lessor, its agents, servants, contractors,
licensees and workmen to enter from time to time upon the Leased Premises, or a
any part thereof, at all reasonable times for the purpose of viewing and
examining the condition and state of repair of the Leased Premises.
Page 6
<PAGE>
(c) At the expiration or sooner termination of this Lease, the Lessee shall
deliver upon and surrender the Leased Premises in good and sufficient repair, in
the reasonable opinion of the Lessor, and the Lessee shall surrender to the
Lessor all the keys for the Leased Premises. The Lessee's obligations to observe
serve and perform as aforesaid shall survive the expiration or sooner
termination of the terms of this Lease.
10.00 OVERLOADING
The Lessee covenants with the Lessor not to bring into or upon the leased
premises, or any part thereof, any equipment, article or thing that by reason of
its weight and size may cause damage to the leased premises, and not at any time
to overload the floors of the Leased Premises, and in the event any damage is
caused to the Leased Premises or any part thereof by overloading, to forthwith
repair, replace or renew such damage.
11.00 ALTERATIONS, ADDITIONS AND IMPROVEMENTS
(a) Except as otherwise expressly provided herein, no changes, alterations,
erections, additions or improvements shall be made to the leased premises
without the prior written consent of the Lessor, or Lessor's agent, which
consent may not be unreasonably withheld. All of such changes, alterations,
additions or improvements shall be made solely at the expense of the Lessee, and
the Lessee agrees to protect, indemnify and save harmless the Lessor on account
of any injury to third persons or property by reason of any such changes,
alterations, erections, additions or improvements, and to protect, indemnify and
save harmless the Lessor from the payment of any claims of any kind or character
on account of bills for labour or material in connection therewith. Any changes,
alterations, additions or improvements placed upon the Leased Premises by the
Lessee during the term hereof, with the consent of the Lessor, shall be the sole
property of the Lessor, except as provided in Clause 12 herein.
(b) In the event that the Lessor should give its consent pursuant to Clause
1l(a) herein, the Lessee shall not erect any structure upon the Leased Premises
or make any changes, alterations, erections, additions or improvements which
might affect the structural integrity or the soundness of the Leased Premises
without first submitting to the Lessor drawings and specifications therefore
prepared by qualified architects or engineers and conforming to good
architectural or engineering practice. The Lessor shall have the right, from
time to time, to enter and to inspect all such changes, alterations or
improvements. The Lessee shall post the premises with a notice in the form
attached as Schedule "C" to protect the Lessor against liens.
(c) In every instance of changes, alterations, erections, additions or
improvements the Lessee must secure all necessary Building Permits and Approvals
from the City of Vancouver. All such Building Permits must be secured before any
work commences on the said changes, alterations, erections, additions or
improvements. This clause extends to include a Certificate of Occupancy, as
applicable.
12.00 FIXTURES
All machinery, fixtures and equipment installed on the Leased Premises at the
Lessee's expense, regardless of the manner of attachment to the realty, shall be
and remain the personal property of the Lessee, removable by it at its option at
the expiration or sooner termination of this Lease. The Lessee shall, however,
repair any damage caused directly or indirectly by said removal, or the means
thereof, by the manner in which said property is affixed to the realty. It is
understood that masonry partitions, heating ducts, stairways, balconies and
similar structures attached to the realty and floor coverings glued or cemented
to the floor shall not be removable, but shall become the property of the Lessor
on the expiration or termination of this lease. If the Lessee fails to remove
all or part of its machinery, fixtures and equipment on or before the expiration
or sooner termination of this lease, such property may, at the option of the
Lessor, conclusively be considered to have been abandoned by the Lessee, and
without
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<PAGE>
liability to the Lessee, the Lessor may elect to dispose of the same and
thereafter charge the Lessee with the costs of removal and disposition and the
restoration of the Leased Premises, which said costs shall become payable by the
Lessee upon the demand for the payment thereof by the Lessor.
13.00 FIRE AND OTHER CASUALTY
In the event the Leased Premises are damaged or destroyed by fire or other
unavoidable casualty to such an extent as to render in excess of twenty-five
(25%) percent of the Leased Premises untenantable, the Lessor shall have the
option to rebuild or repair the Leased Premises. The Lessor shall have sixty
(60) days after the date of written notification by the Lessee of the happening
of such event in which to notify the Lessee of the Lessor's intention to rebuild
or repair the Leased Premises or the parts thereof so damaged or destroyed. If
the Lessor elects to rebuild or repair the Leased Premises, the Lessor shall
prosecute the work of such rebuilding or repairing without unreasonable delay,
and during the period from the damage until the Leased Premises are made
tenantable, the rent payable under this Lease shall be abated in the same ratio
that the of the portion of the Leased Premises rendered unfit for occupancy
shall bear to the area of the Leased Premises as at the commencement of this
Lease. If the Lessor fails to give such notice before the expiration of the
sixty (60) days, this Lease shall terminate and be of no further force or effect
after the date of such event in the event the Leased Premises are damaged by
fire or other casualty to an extent so as to render them untenantable, the
Lessor shall rebuild or repair the same without unnecessary delay, and during
such period the rent shall be abated at the same ratio that the area of the
portion of the Leased Premises rendered, for the time being, unfit for occupancy
shall bear to the area of the Leased Premises as at the commencement of the
Lease.
14.00 UTILITIES AND SERVICES
The Lessor shall not be obligated to furnish heat light, water, electricity,
telephone or any public service or utility to the Lessee or to the Leased
Premises. The Lessee agrees to make its own agreements or arrangements under
which it will pay, when due, for heat, light water, electricity, telephone,
scavenging or garbage collection or any public service or utility and further,
covenants to save the Lessor harmless from any Liens or claims that may be filed
against the Leased Premises on account of said agreements or arrangements.
15.00 ABANDONMENT OR VACATION OF PREMISES
If the Lessee shall abandon or vacate the Leased Premises before the end of the
term of this Lease, or upon the happening of any event entitling the Lessor to
take possession thereof, the Lessor may, at its option, take possession of the
Leased Premises and relet the same without such action being deemed an
acceptance of a surrender of this Lease, or in any way terminating the Lessee's
liability hereunder, and the Lessee shall remain liable to pay the Rent and the
Additional Rent herein reserved, less the net amount realized from such
reletting, after deduction of any expenses incident to such repossession and
reletting.
16.00 DEFAULT
(a) If the Lessee shall have failed to pay an installment of Rent or Additional
Rent or any other amount payable hereunder when due, or if the Lessee shall
neglect or fail to perform or observe any of the other Covenants or agreements
contained herein on its part to be observed and performed and shall continue to
be in default for a period of five (5) working days after written notice by the
Lessor of such breach, then the Lessor may, at its option, correct or remedy
such neglect or failure for the Lessee and upon completion of the correction or
remedy thereof, bill the Lessee for the cost of said correction or remedy, which
billing the Lessee will pay upon demand. At its option, the Lessor may, upon
notice of such breach in writing, declare this Lease terminated, null and void
and enter into and upon the Leased Premises, or any part thereof, and repossess
the same.
Page 8
<PAGE>
(b) Upon any termination of this Lease, whether by lapse of time or otherwise,
or upon any termination of the Lessee's right to possession without termination
of this Lease, the Lessee shall surrender possession and vacate the Leased
Premises immediately and deliver possession thereof to the Lessor. The Lessee
hereby grants to the Lessor full and free licence to enter into and upon the
Leased Premises in such event with or without process of law and to repossess
unto the Lessor the Leased Premises as of the Lessor's former estate and to
expel or remove the Lessee and any others who may be occupying or within the
Leased Premises and to remove any and all property therefrom using as much force
as may be necessary. The Lessee hereby grants the said licence to enter as
aforesaid to the Lessor who, in the exercise of which, shall not be deemed in
any manner guilty of trespass, eviction or forcible entry or detainer, and
without relinquishing the Lessor's rights to rent or any other right available
to the Lessor hereunder or by operation of law. The Lessee expressly waives the
service of any demand of rent or for possession and, except for notice provided
herein, the Lessee expressly waives service of any notice of the Lessor's
election to terminate this Lease or to re-enter the Leased Premises, including
any and every form of demand and notice prescribed by any stature or other law,
and agrees that the simple breach of any covenant or provision of this Lease by
the Lessee shall, of itself without the service of any notice or demand
whatsoever, constitute a forcible detainer by the Lessee of the Leased Premises.
(c) The Lessee waives and renounces the benefit of any present or future law
taking away or limiting the Lessor's rights against the property of the Lessor
and notwithstanding any such law, the Lessor may seize and sell all of the
Lessee's goods and property which at any time have been located within the
Leased Premises whether within the Leased Premises or not and apply the proceeds
of such sale upon Rent, Additional Rent or other sums outstanding and upon the
costs of the seizure and sale in the same manner as might have been done if such
law had not passed. The Lessor further agrees that if it vacates the Leased
Premises leaving any Rent, Additional Rent or other sum unpaid, the Lessor, in
addition to any remedy otherwise provided by law, may seize and sell the said
goods and property of the Lessor at any place to which the Lessee or any other
person may have removed them, in the same manner as if such goods and property
had remained upon the Leased Premises.
(d) No condoning, excusing or overlooking by the Lessor or Lessee of any
default, breach or non-observance by the Lessee or the Lessor at any time or
times in respect of any covenant, proviso or condition herein contained shall
operate as a waiver of the Lessor's or the Lessee's rights hereunder in respect
of any continuing or subsequent default, breach or non-observance, or so as to
defeat or affect in any way the rights of the Lessor or the Lessee herein in
respect of any continuing or subsequent default or breach, and no waiver shall
be inferred from or implied by anything done or omitted by the Lessor or the
Lessee save only express waiver in writing.
(e) All rights and remedies of the Lessor in this Lease contained shall be
cumulative and not alternative.
(f) For the purpose of making a distress or for the purpose of re-entry for any
reason under this Lease, the Lessor by itself, its agents or Bailiffs may break
open any door or window and enter upon the Leased Premises, and the Lessor, its
agents and Bailiffs, shall not be liable for any action in respect thereof or
for any loss or damage occasioned thereby. The Lessee hereby expressly releases
the Lessor from all actions, proceedings, claims or demands whatsoever for or on
account of or in respect of any such forcible entry or any loss or damage
sustained by the Lessee in connection therewith.
17.00 COSTS AND EXPENSES OF ENFORCEMENT
The Lessee covenants and agrees to pay all costs and expenses, including the
Lessor's solicitor's fees scale as between solicitor and client, incurred in
enforcing any of the obligations of the Lessee under this Lease or in any
litigation or negotiation in which the Lessor, without its fault, becomes
involved through or on account of this Lease, and the Lessor reserves the right
to select and employ its own counsel in any such litigation or negotiation.
Page 9
<PAGE>
18.00 BANKRUPTCY OR RECEIVERSHIP
If the term hereby granted shall be at any time seized or taken in execution or
in attachment by any creditor of the Lessee or if the Lessee shall make any
assignment for the benefit of creditors, or becoming bankrupt or insolvent,
shall take the benefit of any Act that may be in force for bankrupt or insolvent
debtors, or if the Lessee should abandon the Leased Premises, then in any such
case the said term shall, at the option of the Lessor, immediately become
forfeited and void and the then current month's Rent (including Additional
Rent)and the Rent (including Additional Rent) for the three (3) months following
shall immediately become due and payable and in such case it shall be lawful for
the Lessor at any time thereafter enter into and upon the Leased Premises or any
part thereof, in the name of the whole to reenter and the same to have again,
repossess and enjoy as of its former estate, anything herein contained to the
contrary notwithstanding.
19.00 ACCELERATION ON TERMINATION
If the Lessor terminates this Lease, Rent, Additional Rent and all other amounts
payable by the Lessee to the Lessor under the provisions of this Lease shall be
computed, apportioned and paid in full to the date of such termination forthwith
(such payments hereinafter being called "Accelerated Rent").
20.00 HOLDING OVER
Any holding over and continued occupancy by the Lessee after the expiration of
the term of this Lease or any renewal term as evidenced firstly, by the
continued occupation of the tenant and, secondly, by the Lessor's acceptance of
Rent shall be on a tenancy from month to month and either party hereto shall
have the right to terminate the same by giving one clear calendar month's
written notice of its intention to terminate said tenancy. Such tenancy shall be
subject to the covenants, agreements and conditions in this Lease contained
insofar as the same are applicable to a tenancy from month to month.
21.00 QUIET ENJOYMENT
The Lessor covenants with the Lessee that upon payment of the rent hereby
reserved at the times and in the manner herein provided and upon the observance
and performance of each and every one of the covenants, conditions, restrictions
and stipulations by the tenant to be observed or performed, the Lessee shall and
may peaceably and quietly possess and enjoy the Leased Premises during the term
of this Lease without any interruption from or by the Lessor or any persons
lawfully claiming by, through or under it save and except as expressly provided
in this Lease; Provided and it is hereby agreed that in no event will the
conduct of repairs, alterations, additions or renovations by the Lessor to the
exterior or interior of the Leased Premises or the Building (nor construction
work in or upon the Building or the Leased Premises) constitute a breach of this
covenant for quiet enjoyment.
22.00 ASSIGNMENT AND SUBLETTING
The Lessee shall not assign or sublet the Leased Premises or any part thereof
without the prior consent in writing by the Lessor.
23.00 SIGNS
The Lessee may, from time to time during the term, erect, paint, display,
maintain, alter, change or remove signs on the exterior and interior walls of
the building or in the windows of the Leased Premises, all such signs to be
dignified in appearance, approved in writing by the Lessor as to dimensions,
style and
Page 10
<PAGE>
location and to comply with the requirements of municipal and governmental
authorities; and the Lessor, in approving such signs shall have regard to:
The aesthetic appeal of the signs or identification on the building; and
The need, as a primary purpose, to identify and not advertise the Tenant;
and
Such signs shall remain the property of the Lessee and shall be removed by it on
the termination of the Term. Upon removal of any such signs, the premises shall
be restored to their original condition including repairs, patching and painting
except for reasonable wear and tear. The Lessee shall indemnify the Lessor
against any loss or damage caused to any person or property as a result of the
placing, use or removal of any sign on the Leased Premises.
24.00 EXPROPRIATION AND CONDEMNATION
If the whole or any part of the Leased Premises shall be acquired or condemned
by any authority having the power for such acquisition or condemnation, then in
that event, the term of this Lease shall cease from the date of entry of such
authority insofar as the Premises so acquired or condemned comprise part of the
Leased Premises and Rent shall be pro-rated as of the said date. If only a
portion of the Leased Premises shall be so acquired or condemned, this Lease
shall, as from such a date, cease and terminate as to the remainder of the
Leased Premises at the Lessor's option, exercisable by notice in writing to the
Lessee to be given by the Lessor at any time during the period of thirty days as
from such date PROVIDED, however, that if the Lessor does not exercise the said
option, then the Lessee shall remain in possession of the remainder of the
Leased Premises and the rent thereof shall be reduced accordingly. In the event
any expropriation or condemnation is exercised, the Lessee shall have no
recourse against the Lessor for damages or any other loss suffered by the
Lessee. All compensation or damages awarded in respect of taking of the Leased
Premises and any diminution in value of the remainder thereof shall be the
property of the Lessor.
25.00 OTHER MONIES PAYABLE
(a) The Lessee agrees that any money payable by the Lessee to the Lessor under
this Lease other than Rent shall be deemed to be Rent and shall be collectible
as such and shall be paid by the Lessee to the Lessor with the next ensuing
monthly installment of Rent and in the event there shall be no such installment
ensuing by reason of the expiration or other termination of this Lease, shall be
paid within ten (10) days after the Lessor shall request the payment thereof and
in default of payment, the Lessor will have all remedies for recovery as with
Rent in arrears.
(b) The Lessee agrees that all rent in arrears, all amounts due and owing by the
Lessee to the Lessor under the provisions of this Lease, all amounts for costs
or expenses that have been paid by the Lessor and which, by reason of the
provisions of this Lease, ought to have been incurred and paid by the Lessee,
including accelerated rent, shall bear interest at the rate per annum equal to
two (2) percent above the prime rate charged from time to time by the Canadian
Imperial Bank of Commerce (being the rate from time to time published by the
Main Branch of such bank in Vancouver, British Columbia, as its reference rate
of interest to determine the rate of interest to be charged on Canadian dollar
demand loans), as from the date the same became payable by the Lessee to the
Lessor or as from the date of the payment of such costs or expenses by the
Lessor, as the case may be, and such interest shall be calculated on a daily
basis and be computed and compounded monthly and shall accrue until the date of
the payment of reimbursement thereof by the Lessee to the Lessor and, until
paid, all such interest shall be deemed to be Rent and shall be collectible by
the Lessor as such.
26.00 INTENT
Page 11
<PAGE>
The Lessee acknowledges and agrees that it is intended that this Lease shall be
a completely carefree net lease for the Lessor and that the Lessor shall not be
responsible during the term herof for any costs, charges, expenses and outlays
of any nature whatsoever arising from or relating to the Leased Premises, or the
contents or occupancy thereof and without limiting the generality of the
foregoing, the Lessee shall be liable for payment of all charges, impositions
and expenses of every nature and kind relating to the Leased Premises and the
contents thereof and its proportionate share of all charges, impositions and
expenses of even nature and kind relating to those parts of the Leased Premises
not intended for leasing and the Lessee covenants with the Lessor accordingly.
27.00 INDEMNIFICATION
Notwithstanding any of the provisions of this Lease, the Lessee covenants and
agrees to indemnify and save harmless the Lessor from and against any and all
liabilities, damages, costs, expenses, claims, suits or other actions arising
out of the following:
(a) any breach, violation or non-performance of any covenant, condition or
agreement in the Lease set forth and contained on the part of the Lessee to
be observed and performed; and
(b) any act or omission of the Lessee; and
(c) any damage to property occasioned by the Lessees use or occupation of
the Leased
Premises or any part thereof; and
(d) any injury to any person or persons, including death, resulting at any
time, occurring upon, in or about the Leased Premises or any part thereof;
Except if caused by the negligence of the Lessor, its servants, agents or
contractors or by default of the Lessor under the terms of this Lease, the
obligations of the Lessee to indemnify and save harmless the Lessor as aforesaid
shall survive any termination of this Lease, anything in this Lease to the
contrary notwithstanding.
28.00 SUBORDINATION
This Lease is subject and subordinate to all mortgages or other encumbrances
which may now or hereafter be registered in the appropriate British Columbia
Land Title Office against the Leased Premises. The Lessee agrees that it shall
from time to time execute promptly any assurance the Lessor may properly require
to confirm the said subordination to any such mortgage or other encumbrance
registered as aforesaid; PROVIDED that, notwithstanding any such subordination,
the Lessee's rights and obligations under and pursuant to this Lease shall
remain in full force and effect, notwithstanding any action at any time taken to
enforce the security of any such mortgage or other encumbrance.
29.00 LESSOR COVENANTS
(a) The Lessor covenants that the Leased Premises constituting part of the
Budding Premises is structurally sound and otherwise on an "as is"
condition on the occupancy date.
(b) The Lessor warrants that all plumbing, heating, air conditioning,
electrical and mechanical systems and loading doors are in working
condition as at the commencement date of this Lease.
(c) In the event the roof top mounted air conditioning system(s) should fail
during the first year of the Term, requiring either replacement of the
unit, motor or a compressor, then the Lessor will pay the cost of such
replacement This obligation does not apply to any such failure after March
31, 1997.
Page 12
<PAGE>
30.00 REPRESENTATION AND WARRANTIES
The Lessee hereby acknowledges that the Leased Premises are taken by the Lessee
without representations or warranties of any kind on the part of the Lessor or
its agents, excepting only as contained in Clause 29 above, and further
acknowledges that no representative or agent of the Lessor is or shall be
authorized or permitted to make any representation or warranty with reference
thereto unless evidenced in writing.
31.00 RIGHT TO RENEW
If the Lessee duly and regularly pays the Rent and Additional Rent and performs
each and every of the covenants herein to be performed and observed by the
Lessee, the Lessor shall grant to the Lessee, upon the Lessees giving at least
six (6) months' written notice prior to the expiration of the term of the Lease,
a renewal lease for a further term of Five (5) years from the expiration of the
initial term hereby granted upon the same terms and conditions contained herein,
except for the covenant for renewal and except for Rent. Rent for the said
renewal term shall be agreed upon between the parties and shall be based on the
fair market rental for premises of similar size, quality and location and for
the highest and best use at the time of renewal, but shall not be less than the
rent payable during the last year of the term of this lease. The Lessor and
Lessee shall attempt to agree on the fair market rental for the renewal term
during the three months immediately preceding the expiration of the initial
Term. If, at the point in time one (1) month immediately preceding the expiry of
the initial term, the Lessor and Lessee have failed to reach agreement as to the
rental rate to be paid during the term of the renewal lease, the rate shall be
determined by arbitration under the Arbitration Act of British Columbia.
32.00 SPECIFIC CONDITIONS AND AMENDMENTS
The stipulations of this Lease have been read by both parties hereto. There are
no agreements or understandings, either oral, written or otherwise, which in any
manner alter, enlarge, abridge or conflict with the terms of this Lease. No
departure from the terms of the Lease shall obligate the Lessor to permit any of
the terms hereof to be a waiver thereafter of any such terms or of any
succeeding breach. This Lease cannot be altered, enlarged or abridged except by
a writing duly signed by the Lessee and the Lessor, and as specified therein to
be an amendment hereof and attached hereto. No addition to any portion of this
Lease shall be binding upon either party unless initialled by the parties
signing the Lease.
33.00 CERTIFICATES
The Lessee shall promptly, whenever requested by the Lessor from time to time,
execute and deliver to the Lessor and, if required from the Lessor, to any
mortgagee (including any trustee under a trust deed or trust indenture)
designated by the Lessor, a confirmation in writing as to the status of this
Lease, including as to whether it is in full force and effect, is unmodified,
confirming the rental payable hereunder and the state of the accounts between
the Lessor and the Lessee, the existence or non-existance of defaults, or any
other matters pertaining to this Lease to which the Lessor shall request
confirmation.
34.00 SUBDIVISION
The Lessee hereby covenants and agrees that he will, at the written request of
the Lessor, make, do, execute or cause to be made, done or executed, all such
lawful acts, deeds, things, devices and assurances whatsoever to enable the
Lessor to subdivide the Lands, including without limiting the generality of the
foregoing, to execute a plan of subdivision and such release, discharge or
surrender or similar document ms may be required to remove this lease as a
registered charge from that portion of the Lands; PROVIDED that the said portion
to be subdivided out does not include the building.
Page 13
<PAGE>
35.00 USE OF COMMON AREAS
During the term of this Lease, the Lessee, in common with the Lessor and all
other Lessees or users of the Lands (if any), will have the right to use and
enjoy the common areas of the Lands in such manner and subject to such
reasonable rules and regulations and restrictions as the Lessor may from time to
time designate, and the Lessor may change or diminish the common areas from time
to time.
36.00 ASSIGNMENT BY LESSOR
The term "Lessor" as used in this lease so far as covenants or obligations on
the part of the Lessor are concerned shall be limited to mean the Lessor as
hereinbefore set out, while it retains its interest in the Lands, Building and
Leased Premises but upon a transfer of that interest, the Lessor shall be
automatically relieved, after the date of transfer, of all liability arising out
of the requirement for performance of any obligations on the part of the Lessor
herein contained, it being intended hereby that the obligations contained in the
Lease on the part of the Lessor shall be binding upon the Lessor, its successors
and assigns, only during and in respect of the respective successive periods of
their interest in the Lands and the Leased Premises.
37.00 SECURITY DEPOSIT
The Lessee shall place with the Lessor a security deposit equal to the last
months rent payable hereunder. The Lessor hereby acknowledges receipt of the sum
of $12,521.41 from the Lessee, which sum shall be held by the Lessor, without
liability for interest, as security for the faithful performance by the Lessee
of the terms of this Lease. The Lessor will apply the sum of $5,765.83 on
account of the rent (not additional rent) first accruing due pursuant to this
Lease. If at any time, rent is overdue, then the Lessor may apply any portion of
the remaining deposit toward payment of such rent and any money not so applied
will be applied toward payment of rent for the last month of the term. If the
sum held by the Lessor shall at any time be less than the last month's basic
Rent then, upon demand made by the Lessor, the Lessee will increase the deposit
to an amount equal to the last month's basic Rent payable under this Lease.
38.00 APPLICABLE LAW
This Lease shall be deemed made and shall be construed in accordance with and be
governed by the laws of the Province of British Columbia.
39.00 REMEDIES CUMULATIVE
The Lessor may resort to any or all of the rights and remedies available to it
in the event of any default hereunder by the Lessee, either by the provisions of
this Lease or by statute of the general law, all of which rights and remedies
are intended to be cumulative and not alternative, and the express provisions
hereunder as to certain rights and remedies are not to be interpreted as
excluding any other or additional rights and remedies available to the Less or
by state or general law.
40.00 NOTICES
All notices, elections, demands and requests which may or are required to be
given or made hereunder shall be in writing and either served personally or sent
by postage prepaid registered mail, addressed if to the Lessor to:
Page 14
<PAGE>
Murray G. Hay and Alexander D. Macaulay
c/o TURNER, MEAKIN MANAGEMENT COMPANY LTD.
200 - 1682 WEST 7TH AVENUE,
VANCOUVER, B.C.
V6J 4S6
Attn: Mr. Brian Meakin
and if to the Lessee, to:
Datawave Vending (Canada) Inc.
101 West 5th Avenue
Vancouver, B.C.
V5Y 1H9
and any notice, election, demand or request, if mailed as aforesaid, if during
periods of normal postal service, shall be conclusively deemed to have been
received by the addressee thereof on the day received or on the day notice is
delivered by the Lessor or his agents to the Leased Premises.
41.00 HEADINGS
The headings in this Lease are inserted only as a matter of convenience and for
reference and none of them shall define, limit or enlarge the scope, intent or
meaning of the provisions of this Lease, or in any way affect the same.
42.00 SUCCESSORS AND ASSIGNS
The covenants and agreements contained in this Lease shall be binding upon and
enure to the benefit of the Lessor and its heirs, executors, administrators and
assigns and shall be binding upon and enure to the benefit of the Lessee and its
successors and permitted assigns.
Page 15
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Lease as of the day and
year first above written
SIGNED SEALED AND DELIVERED by HAYMUR ENTERPRISES LTD.
The Lessor in the presence of: Haymur Enterprises Ltd.
/s/ /s/ Murray G. Hay
- ------------------------- --------------------------
Witness Murray G. Hay President
Date: March 20/96
--------------------
SIGNED SEALED AND DELIVERED by
the Lessor in the presence of:
- ------------------------- --------------------------
Witness Alexander D. Macaulay
Date: -------------------
SIGNED SEALED AND DELIVERED by DATAWAVE VENDING (CANADA) INC.
the Lessee in the presence of:
/s/ per: /s/
- ------------------------- -----------------------
Witness Authorized Signatory
Date: 3/11/96
-------------------
Page 16
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Lease as of the day and
year first above written
SIGNED SEALED AND DELIVERED by HAYMUR ENTERPRISES LTD.
The Lessor in the presence of:
/s/ /s/ Murray G. Hay
- ------------------------- --------------------------
Witness Murray G. Hay President
Date: Sept 12/96
--------------------
SIGNED SEALED AND DELIVERED by
the Lessor in the presence of:
/s/ J. Schroeder /s/ Alexander D. Macaulay
- ------------------------- --------------------------
Witness Alexander D. Macaulay
Date:
--------------------
SIGNED SEALED AND DELIVERED by DATAWAVE VENDING (CANADA) INC.
the Lessee in the presence of:
/s/ per: /s/
- ------------------------- -----------------------
Witness Authorized Signatory
Date: 4/1/97
--------------------
Page 17
<PAGE>
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Details of the calculation are as follows:
Year ended March 31,
1996 1997 1998
--------- --------- ---------
Weighted average shares each year
prior to application of provisions
of SAB 98: 3,862,373 4,865,319 5,896,139
Less escrow shares: (781,875) (781,875) (781,875)
Reduce weighted average shares
in 1998 for effect of shares
issued in the 12 months prior
to June 4, 1998: -- -- (296,773)
--------- --------- ---------
3,080,498 4,083,444 4,817,491
Add shares issued in the year ended
March 31, 1998 deemed issued under
SAB 98 for all periods (using
treasury stock method): 757,074 757,074 757,074
Add options and warrants to acquire
shares at March 31, 1998 deemed
exercised for all periods (using
treasury stock method): 1,173,240 1,173,240 1,173,240
--------- --------- ---------
5,010,812 6,013,758 6,747,805
========= ========= =========
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended March 31,
1996 1997 1998
---- ---- ----
Net (loss) income: $ (2,328,186) $ (3,626,411) $ 65,099
============ ============ ============
Weighted average number of
Common Shares outstanding: 5,010,812 6,013,758 6,747,805
Weighted average shares are derived according to SAB 98 whereby certain options
and warrants to purchase common shares and warrants issued within a one year
period prior to the initial filing of a registration statement relating to an
initial public offering are treated as outstanding for all reported periods in
the same manner as shares issued in a stock split.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
DataWave Vending (Canada) Inc., a Canadian corporation
DataWave Systems (US) Inc., a Nevada corporation
DataWave Vending (US) Inc., a Nevada corporation
DataWave Electronics (US) Inc., a Nevada corporation
DTV Telecommunications (US) Inc., a Nevada corporation
DataWave Services (US) Inc., a Nevada corporation
DataWave Communications (US) Inc., a Nevada corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of (i) our report relating to DataWave Systems Inc. dated June 4,
1998, and (ii) our report relating to Metrophone Telecommunications Inc. dated
June 4, 1998, each in the Registration Statement on Form S-1 and related
Prospectus of DataWave Systems Inc.
/s/ Deloitte & Touche
_____________________________
Chartered Accountants
Vancouver, British Columbia, Canada
June 4, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 860,247
<SECURITIES> 0
<RECEIVABLES> 557,800
<ALLOWANCES> 0
<INVENTORY> 769,338
<CURRENT-ASSETS> 2,415,803
<PP&E> 2,737,165
<DEPRECIATION> 1,360,699
<TOTAL-ASSETS> 5,093,807
<CURRENT-LIABILITIES> 2,458,367
<BONDS> 0
0
0
<COMMON> 9,711,122
<OTHER-SE> (8,097,015)
<TOTAL-LIABILITY-AND-EQUITY> 5,093,807
<SALES> 9,676,434
<TOTAL-REVENUES> 0
<CGS> 6,211,310
<TOTAL-COSTS> 3,034,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365,576
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,099
<EPS-PRIMARY> $0.01
<EPS-DILUTED> $0.01
</TABLE>
