<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
--------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition period from to
----------------------- ----------------------
Commission file number 0-28484
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QualMark Corporation
- --------------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Colorado 84-1232688
- ------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1329 West 121st Avenue, Denver, CO 80234
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (303) 254-8800
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant file all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of latest practicable date:
The number of shares of no par value common stock at November 12, 1999
is 3,539,015.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUALMARK CORPORATION
BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash $1,316 $668
Trade accounts receivable, net of allowance for
doubtful accounts of $164 at September 30,
1999 and December 31, 1998 3,053 3,916
Inventories 1,950 1,363
Deferred income taxes 1,443 861
Other current assets 173 132
------------------ ------------------
Total current assets 7,935 6,940
Property and equipment, net 1,557 1,315
Long-term notes receivable 104 104
Other assets 141 141
------------------ ------------------
Total assets $9,737 $8,500
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $1,853 $869
Accrued expenses 1,221 1,411
Customer deposits and deferred revenue 79 63
Current portion of long-term obligations 2,589 441
------------------ ------------------
Total current liabilities 5,742 2,784
Noncurrent portion of long-term obligations 275 975
------------------ ------------------
Total liabilities 6,017 3,759
------------------ ------------------
Shareholders' Equity:
Preferred Stock; no par value; 2,000,000 shares authorized;
cumulative dividends at 8% per annum; 465,116 and zero
shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 842 --
Common Stock; no par value;15,000,000 shares
authorized; 3,539,015 and 3,485,015 shares
issued and outstanding at September 30, 1999
and December 31, 1998, respectively 6,528 6,396
Additional paid-in capital 761 ---
Accumulated deficit (4,411) (1,655)
------------------ ------------------
Total shareholders' equity 3,720 4,741
------------------ ------------------
Total liabilities and shareholders' equity $9,737 $8,500
================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 3
QUALMARK CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue $2,449 $3,852 $8,831 $10,432
Cost of sales 1,549 2,077 5,484 5,742
---------------- -------------- -------------- --------------
Gross profit 900 1,775 3,347 4,690
Selling, general and administrative expenses 2,600 1,203 6,029 3,424
Research and development expenses 166 125 521 507
---------------- -------------- -------------- --------------
Income(loss) from operations (1,866) 447 (3,203) 759
Other income (expense):
Interest, net (51) (19) (120) (33)
Other -- -- -- 12
---------------- -------------- -------------- --------------
Income(loss) before income taxes (1,917) 428 (3,323) 738
Provision (benefit) for income taxes 3 30 (574) 48
---------------- -------------- -------------- --------------
Net income (loss) $(1,920) $398 $(2,749) $690
================ ============== ============== ==============
Basic earnings(loss) per share $(0.54) $0.11 $(0.79) $0.20
Diluted earnings(loss) per share (0.54) 0.11 (0.79) 0.18
Weighted average number of common shares - basic 3,536,015 3,484,851 3,495,510 3,438,714
Weighted average number of common shares - diluted 3,536,015 3,741,900 3,495,510 3,902,200
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
QUALMARK CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1999 September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income(loss) $(2,749) $690
Adjustments to reconcile net income(loss) to net cash from
operating activities:
Depreciation and amortization 413 427
Warrant and stock option expense 17 --
Change in deferred income taxes (582) --
Allowance for obsolete inventory 100 --
Issuance of warrants and note payable to settle litigation 1,546 --
Change in assets and liabilities:
Accounts receivable 863 (1,217)
Inventories (687) (496)
Notes receivable -- (103)
Other assets (2) (50)
Accounts payable and accrued expenses 787 244
Customer deposits and deferred revenue 16 31
------------------ ------------------
Net cash used in operating activities (278) (474)
------------------ ------------------
Cash Flows From Investing Activities:
Acquisition of property and equipment (654) (415)
Investment in patents (40) ---
------------------ ------------------
Net cash used in investing activities (694) (415)
------------------ ------------------
Cash Flows From Financing Activities:
Proceeds from borrowing 1,050 1,265
Payments on borrowings (227) (9)
Proceeds from issuance of preferred stock 982 --
Proceeds from issuance of common stock 115 121
Payment on note payable (300) --
------------------ ------------------
Net cash provided by financing activities 1,620 1,377
------------------ ------------------
Net increase in cash 648 488
Cash at beginning of period 668 459
------------------ ------------------
Cash at end of period $1,316 $947
================== ===================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
QUALMARK CORPORATION
NOTES TO FINANCIAL STATEMENTS
QualMark Corporation (the "Company") was founded in 1991 and is a manufacturer
and distributor of physical stress systems, as well as provider of physical
stress testing services. Physical stress systems rapidly and efficiently expose
product design and manufacturing related failures of customer products and
components, thereby providing manufacturers necessary information to improve
product design, quality and reliability. The Company provides physical stress
testing services through its network of test centers.
NOTE 1 - Financial Presentation
These financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1998 and notes thereto.
The interim financial data as of September 30, 1999 and for the three and nine
months ended September 30, 1999 and 1998 is unaudited; however, in the opinion
of management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods presented. Results for the
three and nine months ended September 30, 1999 are not necessarily indicative of
results for the remainder of 1999.
NOTE 2 - Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
9/30/99 12/31/98
----------- --------
(unaudited)
<S> <C> <C>
Raw materials $ 684 $ 708
Work in process 84 198
Finished goods 1,182 457
------ ------
$1,950 $1,363
====== ======
</TABLE>
NOTE 3 - Commercial Bank Borrowings
During the three months ended September 30, 1999, the Company renegotiated its
Revolving Credit and Term Loan Agreement ("Credit Agreement") with a commercial
bank. Among other changes, this amendment to the existing Credit Agreement
reduced the amount the Company may borrow on its revolving credit from
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$3,000,000 to $2,000,000. In addition, the Company will make no further
borrowings on the term loan portion of the Credit Agreement. As of September 30,
1999, the respective balances of the revolving credit and term loan are
$1,050,000 and $1,186,017.
Although the Company is not now, nor has it ever been in arrears on any payment
pursuant to the Credit Agreement, as of September 30, 1999, the Company is in
default of certain financial covenants contained in the Credit Agreement. As a
result, the Company has classified these borrowings as a current liability. The
Company attributes this default condition primarily to expenses incurred in the
three and nine months periods ended September 30, 1999 to contest and settle
litigation (See Note 6 - Litigation), and to fluctuations in customer demand
(See Management's Discussion and Analysis - Results of Operations). Litigation
expenses were $1,425,747 and $2,425,747, respectively, for the three and nine
months periods ended September 30, 1999. The bank is entitled to pursue remedies
outlined in the Credit Agreement, however, the Company is discussing
restructuring arrangements with the bank. The Credit Agreement is secured by
substantially all the assets of the Company. The Company may be required to
obtain alternate financing, which management cannot assure will be acquired, and
if acquired, on terms favorable to the Company. The Company expects to meet
liquidity requirements through cash flows generated by operations and existing
cash balances.
NOTE 4 - Sale of Convertible Preferred Stock
The Company sold, to an existing shareholder, 465,116 shares of preferred stock
and warrants to purchase 139,535 shares of common stock for $1,000,000 on
September 1, 1999. The preferred shares accrue dividends at 8% per annum, and
dividends for the first twelve months may be paid in additional preferred
shares, which would allow the holder to accumulate an additional 37,210
preferred shares. The preferred shares are convertible to common shares at $2.15
per share.
NOTE 5 - Earnings(Loss) Per Share
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of shares outstanding during the
period. Diluted earnings per share are computed using the weighted average
number of shares determined for the basic computations plus the number of shares
of common stock that would be issued assuming all contingently issuable shares
having a dilutive effect on earnings per share were outstanding for the period.
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<PAGE> 7
Due to the Company's loss from continuing operations for the three and nine
months ended September 30, 1999, a calculation of earnings per share assuming
dilution is not required. Options and warrants to purchase 1,602,769 shares were
not included in the computation of earnings per share for the three and nine
month periods assuming dilution at September 30, 1999 because including the
options would result in an antidilutive effect on earnings per share. Options
and warrants to purchase 838,733 shares are included in the computation of
earnings per share for the three and nine month periods ended September 30,
1998, assuming dilution as the options and warrants would have a dilutive effect
on earnings.
NOTE 6 - Litigation
On March 22, 1996, the Company was served with a summons and complaint in the
U.S. District Court in the Central District of California from Screening
Systems, Inc. ("SSI"), a competitor. The complaint, as amended, alleged that the
Company's vibration system infringed three patents owned by Hughes Electronics
("Hughes") and licensed to SSI, and sought injunctive relief, monetary damages
and costs of litigation. Because Hughes would not voluntarily join the action as
a plaintiff, SSI named Hughes as a defendant in the action.
Although the Company continues to maintain it engaged in no wrongful conduct, on
August 31, 1999 the Company entered into a settlement agreement with SSI. Under
terms of the settlement, the Company will pay $925,000 to SSI in three unequal
payments upon signing the agreement, July 2000, and April 2001. Interest will
accrue at 9% per annum and is payable quarterly. In addition, the Company issued
warrants to SSI for the purchase of 620,000 shares of its non-voting common
stock. The warrants have a five-year term at an exercise price of $4.85 per
share, and a fair market value of $620,992.
NOTE 7 - Segment Information
The Company operates two business segments, equipment and Accelerated
Reliability Test Centers ("ARTC"). The equipment segment ("Equipment") is
engaged in the manufacture and sale of vibration and thermal chambers for
reliability testing for various electronic devices and components. The ARTC
segment operates service centers where vibration and thermal chambers are
available to customers for daily rental.
The accounting policies for these segments are the same as those described in
Note 1 of the Company's Form 10-KSB for 1998
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and there are no inter-segment transactions. The Company evaluates the
performances of its segments and allocates resources to them based primarily on
gross profit. All operating revenues and expenses are allocated to business
segments in determining their gross profit. All other expenses are not utilized
in determining the allocation of resources on a segment basis.
The table below summarizes information about the reported segments (in
thousands) as of and for the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
EQUIPMENT ARTC TOTAL
--------- ------ ------
<S> <C> <C> <C>
THREE MONTHS ENDED 9/30/99
Sales $1,603 $ 846 $2,449
Gross profit 586 314 900
Property and equipment, net 592 965 1,557
THREE MONTHS ENDED 9/30/98
Sales $2,958 $ 894 $3,852
Gross profit 1,405 370 1,775
Property and equipment, net 326 1,090 1,416
</TABLE>
The table below summarizes information about the reported segments (in
thousands) as of and for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
EQUIPMENT ARTC TOTAL
--------- ------- -------
<S> <C> <C> <C>
NINE MONTHS ENDED 9/30/99
Sales $ 6,081 $ 2,750 $ 8,831
Gross profit 2,216 1,131 3,347
Property and equipment, net 592 965 1,557
NINE MONTHS ENDED 9/30/98
Sales $ 7,655 $ 2,777 $10,432
Gross profit 3,475 1,215 4,690
Property and equipment, net 326 1,090 1,416
</TABLE>
8
<PAGE> 9
The following is sales by geographic area (in thousands) for the three months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
United States $2,176 $3,507
International 273 345
------ ------
Total $2,449 $3,852
------ ------
</TABLE>
The following is sales by geographic area (in thousands) for the nine months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
United States $7,682 $ 9,747
International 1,149 685
------ -------
Total $8,831 $10,432
------ ------
</TABLE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The statements contained in this report which are not historical in nature are
forward-looking statements that are subject to risks and uncertainties that are
difficult or impossible to predict with accuracy. Actual results could differ
materially from those set forth or implied by forward-looking statements. Such
risks and uncertainties include, but are not limited to, variability in order
flow and operating results, the ability of the Company to find and retain
qualified personnel to staff its manufacturing and marketing operations and
existing and anticipated test centers, and the risk that the demand for the
Company's systems will not continue to grow or that the Company's systems or
products, or those of third parties on which the Company relies, will not be
year 2000 compliant.
Results of Operations
The Company's annual and quarterly operating results could be subject to
fluctuations for a variety of reasons. The Company
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operates with a small backlog relative to its revenue; thus most of its sales in
each quarter result from orders received in the current or prior quarter. In
addition, because prices for the Company's products are relatively substantial,
a significant portion of net sales for each quarter is attributable to a
relatively small number of units. The Company expects to continue to experience
such fluctuations in its results of operations in the future.
Revenue
Net revenue decreased $1,403,000 (36.4%) from $3,852,000 to $2,449,000 or for
the three months ended September 30, 1999, as compared with the three months
ended September 30, 1998 due to soft demand for the Company's OVS system. Net
revenue also decreased in the nine-month period ended September 30, 1999 as
compared with the nine months ended September 30, 1998, by $1,601,000 (15.3%),
from $10,432,000 to $8,831,000 for the same reason.
The Company attributes the decrease in demand for OVS systems to residual
effects from the weak Asian economy, and a focus of attention by potential
customers toward expenditures to comply with Year 2000 computer issues. OVS
system sales decreased $1,355,000 (45.8%) in the three-month period ended
September 30, 1999, from $2,958,000 to $1,603,000 as compared to the three month
period ended September 30, 1998. For the nine-month period ended September 30,
1999 system revenue decreased $1,574,000 (20.6%) over the same nine-month period
in 1998, from $7,655,000 to $6,081,000. Unit shipments decreased from twenty to
twelve systems in the comparable three-month periods ended September 30, 1999
and 1998 and from fifty-four to forty-two systems in the comparable nine-month
periods ended September 30, 1998 and 1999.
Test center revenue for the three months ended September 30, 1999 decreased
$48,000 (5.4%) from $894,000 to $846,000 over the three months ended September
30, 1998. For the nine months ended September 30, 1999, test center revenue
decreased $27,000 (1.0%) from $2,777,000 to $2,750,000 over the same period in
1998. The Company operated seven test centers and had three strategic
partnership test center operations in Europe during 1999 versus eight test
centers in the U.S. and one strategic partnership operation in Europe during the
same period in 1998.
Gross Margin
The gross margin for the three months ended September 30, 1999 was 36.7%. This
compares to a gross margin of 46.1% for the three months ended September 30,
1998. For the nine months ended
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September 30, 1999, the gross margin was 37.9% compared to a gross margin of
45.0% in the same nine-month period in 1998. The decrease in the gross margin
for the three and nine month periods is mostly due to decreased capacity
utilization in the OVS manufacturing segment, and price pressures created by
competition. The Company also experienced additional costs associated with the
introduction of its new operating and vibration systems during the three months
ended September 30, 1999. Costs for the new product introduction are expected to
decline in future quarters.
Operating Expense
General and administrative expenses increased from $1,203,000 to $2,600,000 for
the three months ended September 30, 1999 compared to the same three-month
period in 1998. For the nine months ended September 30, 1999, general and
administrative costs increased from $3,424,000 to $6,029,000. The increase in
general and administrative expense in the three and nine month periods is due
primarily to litigation and settlement expenses (see Note 6 - Litigation)
related to the suit filed by SSI. Litigation and settlement expenses were
$1,425,747 and $-0- in the three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999, litigation and
settlement expenses were $2,425,747 versus $-0- for the same period in 1998.
Sales and marketing expenses decreased $61,000 from $633,000 for the three
months ended September 30, 1998 to $572,000 for the three months ended September
30, 1999. For the nine months ended September 30, 1999, sales and marketing
expense increased $63,000 over the same period in 1998, from $1,818,000 to
$1,881,000. These expense fluctuations are primarily due to changes marketing
projects and associated expenses over the same three and nine month periods in
1998.
Research and development costs increased from $125,000 for the three months
ended September 30, 1998 to $166,000 for the three months ended September 30,
1999. For the nine month period ended September 30, 1999, research and
development cost increased $14,000 from $507,000 for the nine months ended
September 30, 1998 to $521,000 in the current period. The increases for these
periods are caused primarily by headcount adjustments for development projects.
The Company expects the current expenditure level to remain consistent in
foreseeable quarters.
For the three months ended September 30, 1999, interest expense was $51,000. For
the nine months ended September 30, 1999, interest expense was $120,000. This
compares with interest expense in the prior year's three-month period ending
September 30, 1998 of $30,000 and interest expense of $48,000 for the nine
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months ended September 30, 1998. The increase in interest expense is due to
increased borrowing over the prior periods in 1998.
Liquidity and Capital Resources
During the first nine months of 1999, the Company's operations used $278,000 of
cash in operating activities, invested $654,000 for equipment and invested
$40,000 for patents. The Company paid $227,000 on long term obligations and
borrowed $1,050,000 under its credit line agreement. The Company sold 465,116 of
Preferred Series A shares and common stock warrants of 139,535 for net proceeds
of $982,000 and an existing investor exercised warrants for common stock for
proceeds of $115,000. The Company also paid $300,000 toward litigation
settlement (See Note 6 - Litigation). Together, these activities resulted in a
cash increase of $648,000 to a quarter ending balance of $1,316,000.
During the three months ended September 30, 1999, the Company renegotiated its
Revolving Credit and Term Loan Agreement ("Credit Agreement") with a commercial
bank. Among other changes, this amendment to the existing Credit Agreement
reduced the amount the Company may borrow on its revolving credit from
$3,000,000 to $2,000,000. In addition, the Company will make no further
borrowings on the term loan portion of the Credit Agreement. As of September 30,
1999, the respective balances of the revolving credit and term loan are
$1,050,000 and $1,186,017.
Although the Company is not now, nor has it ever been in arrears on any payment
pursuant to the Credit Agreement, as of September 30, 1999, the Company is in
default of certain financial covenants contained in the Credit Agreement. As a
result, the Company has classified these borrowings as a current liability. The
Company attributes this default condition primarily to expenses incurred in the
three and nine months periods ended September 30, 1999 to contest and settle
litigation (See Note 6 - Litigation), and to fluctuations in customer demand
(See Management's Discussion and Analysis - Results of Operations). Litigation
expenses were $1,425,747 and $2,425,747, respectively, for the three and nine
months periods ended September 30, 1999. The bank is entitled to pursue remedies
outlined in the Credit Agreement, however, the Company is discussing
restructuring arrangements with the bank. The Credit Agreement is secured by
substantially all the assets of the Company. The Company may be required to
obtain alternate financing, which management cannot assure will be acquired, and
if acquired, on terms favorable to the Company.
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<PAGE> 13
The Company expects to meet long term liquidity requirements through cash flows
generated by operations and existing cash balances. The Company is dependent,
however, on its ability to maintain and grow its systems and test center
businesses in order to generate adequate operating cash flows but can make no
assurances that it will be successful in doing so.
YEAR 2000 ISSUE
During the year ended December 31, 1998, management initiated a program to
prepare the Company's financial, manufacturing, service and other critical
systems and applications for the Year 2000. The program involves the Company's
upper management as well as project leaders from each department. The focus of
the program is to identify affected software and hardware, develop a plan to
correct that software or hardware in the most effective manner and implement and
monitor that plan. The program will also include communications with the
Company's significant suppliers and customers to determine the extent to which
the Company is vulnerable to any of their Year 2000 issues.
OVS Systems
The Company's Omni-axial Vibration ("OVS") products include embedded controllers
that have been tested and have been determined to be Year 2000 compliant. The
Company expects that there will be no Year 2000 issues in regards to its
products.
The Company's proprietary OVS operating system software that controls all of the
products in the OVS product line has been upgraded this year as part of an
overall product improvement program. Part of that program ensured that the
software control system be made Year 2000 compliant. Management believes that
this has been achieved. There were no material added costs for this compliance.
Previous versions of the control system have been investigated for compliance
issues. The findings do not indicate compliance problems for operating system
version 5.0 and later. Upgrade packages for versions prior to 5.0 are now
available.
Internal Hardware and Software
Each department is currently reviewing all of the software and hardware that
could affect its operations. With the exception of the OVS operating system
software, all software products in use were purchased from Microsoft or other
major software publishing companies. Anticipated costs for Year 2000 compliance
for these software package upgrades are considered to be part of the Company's
normal ongoing business plan and are not expected to
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add materially to the plan. Management has included approximately $23,000 for
software upgrades in its 1999 plan and believes that amount to be adequate to
achieve compliance.
A vast majority of the employees of the Company utilize personal computers in
their work. One of the risks identified is that these personal computers may not
function or function properly due to the internal embedded controllers not being
Year 2000 compliant. The same problem may exist in the Company's local network
server, wide-area network server equipment and the Company's internal telephone
system. Management believes the potential for problems primarily involves older
equipment. Most of the personal computers and network server equipment have been
purchased within the last two years and are believed to be at lower risk than
the smaller population of older computer equipment in use around the Company.
The internal telephone system was purchased from and is supported by a leading
manufacturer of that type of equipment. Software to diagnose Year 2000
compliance for the personal computers and network servers has been identified
and procurement is underway. The cost for this software is less than $1,000. It
is unknown at this time how much of this equipment is subject to the Year 2000
problem, however a worst case scenario assumes the cost of replacing
non-compliant equipment to be $105,000. The most likely scenario of replacing
affected computer and telephone equipment has not been determined at this time.
However, management has included approximately $60,000 in computer and telephone
system upgrades into its 1999 operating plan.
The Company expects to incur internal staff costs as well as consulting fees and
other expenses related to the Year 2000 project. The Company has already
purchased and installed new accounting and manufacturing control software that
is Year 2000 compliant. The cost to do this was less than $10,000. This upgrade
was done in response to the Year 2000 issue, however this and many other
upgrades are part of the Company's normal business plan.
External Factors
The Company uses an outside service provider for all of its human resource
administration functions. This includes payroll and employee benefits
management. The service provider has represented to the Company that it is Year
2000 compliant in regard to the services it provides the Company.
An area that has been identified as bringing potential problems in Year 2000
compliance involves key suppliers of inventory materials. The Company utilizes
three key vendors as suppliers in the manufacture of its OVS systems. The
Company cannot
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guarantee that the systems of these suppliers, or other companies on which the
Company relies, will be Year 2000 compliant. Other than those three vendors, the
Company's inventory suppliers are commodity or off-the-shelf parts distributors
that can be replaced with little or no notice. It is believed that the three
critical key-component suppliers could be replaced in the event that one or all
were determined to be subject to critical shipment delays due to Year 2000
issues. Due to the lead times associated with bringing new suppliers on-line,
early determination of vendor Year 2000 compliance is necessary. It is believed
that the Company's vendors are Year 2000 compliant. Those identified as key
vendors have certified that they are Year 2000 compliant. Every attempt will be
made to ensure that a continuous supply of the key components is maintained.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
See Note 6.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits - See Index to Exhibits
(b) Reports on Form 8-K during the quarter ended September 30, 1999:
Report on Form 8-K dated September 8, 1999 is incorporated herein
by reference.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QualMark Corporation
Date: November 15, 1999 By: /s/ W. PRESTON WILSON
------------------- ------------------------------
W. Preston Wilson
President, Chief Executive Officer
Date: November 15, 1999 By: /s/ VERNON W. SETTLE
------------------- ------------------------------
Vernon W. Settle
VP, Finance & Administration
Principal Accounting Officer
15
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Company. (1)
3.2 Amended and Restated Bylaws of the Company. (1)
3.3 Certificate of Designation for Series A Preferred Stock
4.1 Form of Certificate for Shares of Common Stock. (1)
4.6 Form of Warrant issued to holders of 10% secured promissory
notes. (1)
10.1 QualMark Corporation 1993 Incentive Stock Option Plan. (1)
10.2 QualMark Corporation 1996 Stock Option Plan. (3)
10.3 Employment Agreement dated March 1, 1993 by and between the
Company and W. Preston Wilson. (1)
10.4 Employment Agreement dated August 15, 1994 by and between the
Company and J. Wayne Farlow. (1)
10.5 Agreement dated September 30, 1995 by and between the Company
and Gregg K. Hobbs. (1)
10.8 Addendum to Agreement dated as of December 21, 1995 by and
between the Company and Gregg K. Hobbs. (1)
10.11 Loan and Security Agreement dated April 30, 1996, by and
between QualMark Corporation and Silicon Valley Bank, as
amended by Amendment to Loan and Security Agreement dated
August 18, 1997. (2)
10.12 Loan and Security Agreement dated December 22, 1998, by and
between QualMark Corporation and U.S. Bank National
Association. (4)
10.13 Waiver and Amendment to Loan Agreement dated March 15, 1999
by and between QualMark and U.S. Bank National Association.
(4)
10.14 Second Amendment to Loan Agreement dated August 23, 1999 by
and between QualMark and U.S. Bank National Association. (4)
10.15 Settlement Agreement dated August 30, 1999 by and among
QualMark Corporation and Screening Systems, Inc.
10.16 Preferred Stock Purchase Agreement dated September 1, 1999,
including Warrant to Purchase 139,535 Shares of Common Stock.
27.1 Financial Data Schedule
</TABLE>
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<PAGE> 17
- ---------------
(1) Incorporated by reference from the Company's Registration Statement No.
333-1454-D on Form SB-2.
(2) Incorporated by reference from the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1997.
(3) Filed as an Exhibit to the Company's Proxy Statement for the 1996
Annual Meeting of Shareholders.
(4) Filed as an exhibit to the Company's Annual Report of Form 10-KSB for
the year ended December 31, 1998.
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<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
SERIES A CONVERTIBLE
PREFERRED STOCK
OF
QUALMARK CORPORATION
BY
RESOLUTION OF THE BOARD OF DIRECTORS
------------------------------------
The undersigned, being, respectively, the President and Secretary of
Qualmark Corporation, a Colorado corporation (the "Corporation"), organized and
existing under the Colorado Business Corporation Act ("CBCA"), DO HEREBY
CERTIFY:
That, pursuant to the authority conferred upon the Board of Directors
of the Corporation (the "Board") by the Articles of Incorporation of the
Corporation, said Board, at a meeting duly held and convened on August 25, 1999
in accordance with the CBCA, duly adopted the following resolution providing for
the issuance of a series of 502,326 shares of Series A Convertible Preferred
Stock, no par value per share, which resolution remains in full force and effect
on the date hereof:
RESOLVED, that, pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation in accordance with the
provisions of its Articles of Incorporation, a series of Preferred Stock of the
Corporation be and hereby is established, consisting of 502,326 shares, no par
value per share, to be designated the "Series A Convertible Preferred Stock"
(hereinafter, "Series A Preferred Stock"); that the Board of Directors be and
hereby is authorized to issue such shares of Series A Preferred Stock from time
to time and for such consideration and on such terms as the Board of Directors
shall determine; and that, subject to the limitations provided by law and by the
Articles of Incorporation, the voting powers, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions thereof shall be as follows:
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1. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the terms defined in this
Section 1 shall have, for all purposes of this resolution, the meanings herein
specified (with terms defined in the singular having comparable meanings when
used in the plural).
"Business Day" shall mean a day other than a Saturday, a Sunday or any
other day on which banking institutions in Denver, Colorado are authorized or
obligated by law to close.
"Common Equity" shall mean all shares now or hereafter authorized of
any class of common stock, including the Common Stock, and any other stock of
the Corporation, howsoever designated, authorized after the Initial Issue Date,
which has the right (subject always to prior rights of any class or series of
preferred stock) to participate in the distribution of the assets and earnings
of the Corporation without limit as to per share amount.
"Common Stock" shall mean the common stock, no par value, of the
Corporation.
"Conversion Date" shall have the meaning set forth in subparagraph 4.1
(b) below.
"Delinquent Redemption Price" shall mean, with respect to each share of
Series A Preferred Stock, the Redemption Price plus an amount thereon accruing
from the Final Redemption Date at an annual rate equal to the Prime Rate plus
2.75%.
"Final Redemption Date" shall have the meaning set forth in Section
5(a) below.
"Initial Issue Date" shall mean the date that shares of Series A
Preferred Stock are first issued by the Corporation.
"Initial Redemption Date" shall have the meaning set forth in Section
5(a) below.
"Liquidation Price" shall mean $2.15 per share of Series A Preferred
Stock (adjusted for stock splits, subdivisions, combinations and similar
transactions), plus any accrued but unpaid dividends.
"Preferred Stock" shall mean any authorized series of Preferred Stock
of the Corporation, including, without limitation the Series A Preferred Stock.
Redemption Date" shall mean all or any of the Initial Redemption Date
and the Final Redemption Date.
"Redemption Obligation" shall have the meaning set forth in Section
5(b) below.
"Redemption Price" shall mean, with respect to each share of Series A
Preferred Stock, the Series A Initial Purchase Price plus any accumulated but
unpaid dividends.
"Series A Initial Purchase Price" shall mean $2.15 per share of Series
A Preferred Stock (adjusted for stock splits, subdivisions, combinations and
similar transactions).
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<PAGE> 3
"Subordinate Stock" shall mean (i) the Common Equity and (ii) any class
or series of capital stock (each, "Capital Stock") of the Corporation, however
designated, which is junior in right to the Series A Preferred Stock, including
without limitation such Capital Stock that is not entitled to receive (i) any
dividends unless all dividends required to have been paid or declared and set
apart for payment on the Series A Preferred Stock shall have been so paid or
declared and set apart for payment or (ii) any assets upon liquidation,
dissolution or winding up of the affairs of the Corporation until the Series A
Preferred Stock shall have received the entire amount to which such stock is
entitled upon such liquidation, dissolution or winding up.
2. DIVIDENDS. Any time during which any shares of Series A Preferred
Stock remain outstanding, each share (as adjusted for any stock dividends,
combinations or splits with respect to the Series A Preferred Stock) of Series A
Preferred Stock shall accrue dividends at a rate of 8.0% per annum based on the
Series A Initial Purchase Price. All dividends shall be paid quarterly. All
dividends earned during the first year following the Initial Issue Date shall be
paid by the Corporation in kind in shares of Series A Preferred Stock at the
then Series A Conversion Rate (as defined). Thereafter, at the option of the
Corporation, dividends shall be paid in cash or in kind as specified above. In
addition, in the event the Corporation declares, pays or sets apart for payment
any dividend on any Common Equity, whether in cash, property or otherwise (a
"Common Dividend"), each holder of shares of Series A Preferred Stock shall be
entitled to receive a per share dividend (an "Equivalent Common Dividend"), when
and as declared by the Corporation, equal to: (i) the number of shares of Common
Equity on which such Common Dividend is declared into which each share of Series
A Preferred Stock is convertible on the record date, multiplied by (ii) the
amount of cash or property paid, or the number of shares of capital stock
issued, per share of Common Equity as part of such Common Dividend.
3. DISTRIBUTIONS UPON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) The Corporation shall deliver to each holder of Series A Preferred
Stock notice of any of the following: (i) any consolidation or merger of the
Corporation with or into any other corporation or other entity or person, or any
other corporate reorganization, in which the stockholders of the Corporation
immediately prior to such consolidation, merger or reorganization, own less than
50% of the Corporation's voting power immediately after such consolidation,
merger or reorganization, or any transaction or series of related transactions
in which in excess of 50% of the Corporation's voting power is transferred, (ii)
a sale, lease or other disposition of all or substantially all of the assets of
the Corporation; or (iii) any voluntary or involuntary liquidation, dissolution
or other winding up of the affairs of the Corporation (each a "Dissolution").
The notice of Dissolution shall be delivered at least thirty (30) days prior to
such event, which notice shall state all material facts and common terms
relating to such Dissolution, including without limitation: (x) the nature of
such Dissolution, including without limitation the nature, amount, terms and
conditions of payment to the holders of Series A Preferred Stock and the holders
of Common Stock in connection with such Dissolution, (y) the date on which such
Dissolution shall occur and (z) the procedures that must be followed (and the
latest date that such procedures must be completed) in order for such holder to
effect a conversion of shares of Series A Preferred Stock into shares of Common
Stock.
(b) In the event of any such Dissolution, before any payment or
distribution shall be made to the holders of Subordinate Stock, the holders of
Series A Preferred Stock shall be entitled to be paid out of the assets of the
Corporation in cash, or, if the Corporation does not
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<PAGE> 4
have sufficient cash on hand to pay such amounts, property of the Corporation at
its fair market value as determined by the Board of Directors of the
Corporation, the Liquidation Price per share of Series A Preferred Stock.
(c) If, upon any such liquidation, dissolution or other winding up of
the affairs of the Corporation, the assets of the Corporation shall be
insufficient to permit the payment in full of the Liquidation Price for each
share of the Series A Preferred Stock, then the assets of the Corporation shall
be distributed ratably among the holders of Series A Preferred Stock in
proportion to the full amounts to which they would otherwise be respectively
entitled if all amounts thereon were paid in full.
(d) If, after payment in full of the Liquidation Price for each share
of Series A Preferred Stock, there remain assets available for distribution to
the Corporation's shareholders, the remaining assets shall be distributed pro
rata among the holders of the Corporation's Common Stock and the Series A
Preferred Stock (based on the number of shares of Common Stock that would have
been issued for each share of Series A Preferred Stock immediately prior to such
Dissolution).
4. CONVERSION RIGHTS.
4.1 CONVERSION AT THE OPTION OF THE HOLDER. The holders of Series A
Preferred Stock shall have the right, at their option, to convert each share of
Series A Preferred Stock held by such holder into shares of Common Stock at any
time and from time to time on the following terms and conditions:
(a) Each share of Series A Preferred Stock shall be converted at the
option of the holder thereof, without the payment of additional consideration,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Series A Initial Purchase Price by the Series A
Conversion Rate (as defined below) in effect at the time of conversion. For
purposes of this section, the "Series A Conversion Rate" shall initially be
$2.15 and shall be subject to adjustment as provided in Section 4.2 below.
(b) To convert Series A Preferred Stock in accordance with this
paragraph 4.1, a holder must (i) surrender the certificate or certificates
evidencing the shares of Series A Preferred Stock to be converted, duly endorsed
in a form satisfactory to the Corporation, at the office of the Corporation or
transfer agent for the Series A Preferred Stock; (ii) notify the Corporation at
such office that it elects to convert Series A Preferred Stock, and the number
of shares it wishes to convert; (iii) state in writing the name or names in
which it wishes the certificate or certificates for shares of Common Stock to be
issued, and (iv) pay any transfer or similar tax with respect to the transfer of
the shares of Series A Preferred Stock converted, if required. The date on which
the holder satisfies the foregoing requirements shall be the "Conversion Date."
As soon as practical but in any event within five Business Days of the
Conversion Date, the Corporation shall deliver a certificate for the number of
shares of Common Stock issuable upon the conversion, a check for the amount
payable in respect of any fractional share pursuant to subparagraph 4.1(c) and a
new certificate representing the unconverted portion, if any, of the shares of
Series A Preferred Stock represented by the certificate or certificates
surrendered for conversion. The person in whose name the Common Stock
certificate is registered shall be treated as the stockholder of record on and
after the Conversion Date.
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<PAGE> 5
Adjustment (or cash payment, if applicable) shall be made for accrued and unpaid
dividends, as of the Conversion Date, on converted shares of Series A Preferred
Stock.
(c) The Corporation will not issue a fractional share of Common Stock
upon conversion of Series A Preferred Stock. Instead the Corporation will
deliver its check in an amount equal to the applicable fraction multiplied by
the fair market value of the Common Stock (subject to adjustment for stock
splits, subdivisions, combinations or other similar transactions).
(d) Upon conversion pursuant to this Section 4.1, the rights of the
holders of converted Series A Preferred Stock with respect to the shares of
Series A Preferred Stock so converted shall cease.
4.2. CERTAIN MATTERS WITH RESPECT TO CONVERSION.
(a) The Corporation has reserved and shall continue to reserve out of
its authorized but unissued Common Stock or its Common Stock held in treasury
enough shares of Common Stock to permit the conversion of the Series A Preferred
Stock in full. All shares of Common Stock which may be issued upon conversion of
Series A Preferred Stock shall be duly authorized, validly issued, fully paid
and nonassessable.
(b) The Series A Conversion Rate shall be subject to adjustment as
follows:
(1) In case the Corporation shall (i) pay a dividend or make a
distribution on its Common Equity in shares of Common Equity of the
Corporation, (ii) subdivide or split its outstanding Common Equity, or
(iii) combine the outstanding Common Equity into a smaller number of
shares, the Series A Conversion Rate following the effective date of
such event shall be equal to the product of the Series A Conversion
Rate in effect immediately prior to such adjustment multiplied by a
fraction, the denominator of which is the number of shares of Common
Equity outstanding immediately after such event and the numerator of
which is the number of shares outstanding immediately prior to such
event.
(2) In the event the Corporation at any time or from time to time
shall make or issue, or fix a record date for the determination of
holders of Common Equity entitled to receive a dividend or other
distribution payable in securities of the Corporation other than
shares of Common Equity, then and in each such event provision shall
be made so that the holders of Series A Preferred Stock shall receive
upon conversion thereof in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the
Corporation that they each would have received had the Series A
Preferred Stock been converted into Common Stock on the date of such
event and had they each thereafter, during the period from the date of
such event to and including the conversion date, retained such
securities receivable by them as aforesaid during such period, giving
application to all adjustments called for during such period under
this section with respect to the rights of the holders of Series A
Preferred Stock; provided, however, that no such adjustment shall be
made if the holders of Series A Preferred Stock simultaneously receive
a dividend or other distribution of such
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<PAGE> 6
securities as they would have received if all outstanding shares of
Series A Preferred Stock had been converted into Common Stock on the
date of such event.
(3) It Common Stock issuable upon the conversion of Series A
Preferred Stock shall be changed into the same or a different number
of shares of any class or classes of stock, whether by capital
reorganization, reclassification, or otherwise (other than a
subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets
provided for below), then and in each such event the holder of each
such share of Series A Preferred Stock shall have the right thereafter
to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such reorganization,
reclassification, or other change, by holders of the number of shares
of Common Stock into which such share of Series A Preferred Stock
might have been converted immediately prior to such reorganization,
reclassification, or change, all subject to further adjustment as
provided herein.
(c) Whenever the number of shares of Common Stock into which each share
of Series A Preferred Stock is convertible is adjusted, the Corporation shall
promptly mail to holders of the Series A Preferred Stock, first class, postage
prepaid, a notice of the adjustment. The Corporation shall file with the
transfer agent, if any, for the Series A Preferred Stock a certificate from the
Corporation's independent public accountants briefly stating the facts requiring
the adjustment and the manner of computing it. The certificate shall be
conclusive evidence that the adjustment is correct.
(d) The adjustments herein provided for shall be made successively when
the event giving rise to such adjustment occurs and shall become effective
immediately following the record date for any event for which a record date is
designated and on the effective date for any other event.
(e) Shares of Series A Preferred Stock that have been converted as
provided herein shall revert to the status of authorized but unissued shares of
Preferred Stock.
(f) For purposes of any computation of the number of shares of Common
Stock outstanding, such computation shall be made assuming conversion of all
then outstanding shares of Preferred Stock and all outstanding currently
exercisable warrants and vested options.
(g) No adjustment in the number of shares of Common Stock into which
each share of Series A Preferred Stock is convertible need be made unless the
adjustment would require an increase of at least one-half of one percent (.5%)
in the number of shares of Common Stock into which each share of Series A
Preferred Stock is convertible. Any adjustments that are not made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 4.2 shall be made to the nearest cent or to the
nearest 1/100th of a share, as the case may be.
(h) In any case in which this Section 4.2 shall require that an
adjustment as a result of any event become effective from and after a record
date, the Corporation may elect to defer until after the occurrence of such
event (a) the issuance to the holder of any shares of
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<PAGE> 7
Preferred Stock converted after such record date and before the occurrence of
such event of the additional shares of Common Stock issuable upon such
conversion over and above the shares issuable immediately prior to adjustment;
and (b) the delivery of a check for any remaining fractional shares as provided
in Section 4.1(c) above.
(i) Any determination that the Corporation or its Board of Directors
must make pursuant to this Section 4.2 shall be conclusive (unless there is a
mistake brought to the attention of the Board of Directors, in which case such
mistake shall be corrected). Whenever the Corporation or its Board of Directors
shall be required to make a determination under this Section 4.2, such
determination shall be made in good faith.
5. REDEMPTION BY THE CORPORATION.
(a) To the extent the Corporation shall have funds legally available
for such payment, the Corporation shall redeem, at the option of each holder of
shares of Series A Preferred Stock, on any date after September 1, 2004 (the
"Initial Redemption Date"), the then outstanding shares of Series A Preferred
Stock of each holder at the Redemption Price. If the Corporation is unable to
redeem all shares of Series A Preferred Stock presented for redemption by the
holders thereof at the Initial Redemption Date, the Corporation may redeem
one-half of the total number of shares of Series A Preferred Stock requested to
be redeemed at such date by the holders thereof at the Redemption Price and
redeem the remaining one-half of the total number of shares of Series A
Preferred Stock at the Redemption Price on the six month anniversary of the
Initial Redemption Date (the "Final Redemption Date").
(b) If on the Final Redemption Date the Corporation is unable to redeem
all outstanding shares of Series A Preferred Stock required to be redeemed on
such date pursuant to Section 5(a) (the "Redemption Obligation"), the
Corporation shall redeem on such Final Redemption Date the number of shares of
Series A Preferred Stock that it is able to redeem, ratably among the holders of
Series A Preferred Stock in proportion to the full amounts to which they would
otherwise be respectively entitled if all shares of Series A Preferred Stock
required to be redeemed on such date were redeemed. In such a case, the
remainder of the Redemption Price payable but not paid at such Final Redemption
Date shall, at the option of the holders of the Series A Preferred Stock, be
converted into a debt obligation of the Corporation, evidenced by a promissory
note in a form acceptable to the holders of Series A Preferred Stock to pay the
Delinquent Redemption Price and shall be discharged as soon as the Corporation
is able to discharge such Delinquent Redemption Price out of funds legally
available therefor. If and so long as any Redemption Obligation (or any
obligation in respect of the Delinquent Redemption Price) with respect to the
Series A Preferred Stock shall not be fully discharged and paid, the Corporation
shall not declare or pay any dividend or make any distribution on, or, directly
or indirectly, purchase, redeem or satisfy any mandatory redemption, sinking
fund or other similar obligation in respect of the Subordinate Stock (other than
repurchases of shares of Subordinate Stock in accordance with the terms of
restricted stock vesting agreements with employees of the Corporation approved
by the Board of Directors prior to such Final Redemption Date).
(c) Shares of Series A Preferred Stock that have been reacquired in any
manner, including as a result of redemption, shall revert to the status of
authorized and unissued shares of Preferred Stock.
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<PAGE> 8
(d) Notice of any redemption shall be sent by the holders of the Series
A Preferred Stock requesting redemption not more than 60 days nor less than 20
days prior to the date upon which such redemption is requested, by first class
mail, postage prepaid, to the Secretary of the Corporation.
6. VOTING RIGHTS. Except as otherwise required by law, each share of
Series A Preferred Stock issued and outstanding shall have the right to vote on
all matters presented to the holders of the Common Stock for vote, in the number
of votes equal at any time to the number of shares of Common Stock into which
each share of Series A Preferred Stock would then be convertible, and the
holders of the Series A Preferred Stock shall vote with the holders of the
Common Stock as a single class.
7. EXCLUSION OF OTHER RIGHTS.
Except as may otherwise be required by law, the shares of Series A
Preferred Stock shall not have any voting powers, preferences and relative,
participating, optional or other special rights, other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) and in the Articles of Incorporation of the Corporation.
8. HEADINGS OF SUBDIVISIONS.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
9. SEVERABILITY OF PROVISIONS.
If any voting powers, preferences and relative, participating, optional
and other special rights of the Series A Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as such
resolution may be amended from time to time) is invalid, unlawful or incapable
of being enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional and other
special rights of Series A Preferred Stock and qualifications, limitations and
restrictions thereof set forth in this resolution (as so amended) which can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional and other special rights of
Series A Preferred Stock and qualifications, limitations and restrictions
thereof shall, nevertheless, remain in full force and effect, and no voting
powers, preferences and relative, participating, optional or other special
rights of Series A Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of Series A Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
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<PAGE> 9
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
duly executed by an authorized officer and attested by its Secretary, this 1st
day of September, 1999.
QUALMARK CORPORATION
By: /s/ W. PRESTON WILSON
-------------------------------------
Name: W. Preston Wilson
Title: President
Attest:
/s/ PHILIP A. GORDON
- -----------------------------------
Philip A. Gordon, Secretary
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EXHIBIT 10.15
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT ("Agreement") is made and entered into this
__th day of August 1999 (the "Effective Date"), by and among QUALMARK
CORPORATION ("QualMark"), and SCREENING SYSTEMS, INC. ("SSI") (each, a "Party,"
collectively, the "Parties").
RECITALS
WHEREAS, three actions are currently pending between or among the
Parties: (1) Screening Systems, Inc. v. QualMark Corporation and Hughes
Electronics, Case No. CV99-2386-R (BQRx), United States District Court, Central
District, filed March 22, 1996 in which SSI has asserted claims of infringement
of U.S. Patent Nos. 4,181,025 ("'025 Patent"), 4,181,026 ("'026 Patent") and
4,181,028 ("'028 Patent"); (2) QualMark Corporation v. Screening Systems, Inc.,
Case No. 96-Z-2859, United States District Court for the District of Colorado,
filed December 11, 1996 in which QualMark has asserted claims for abuse of
process, violations of the Lanham Act and unfair competition, and including all
Federal Circuit proceeding arising therefrom; and (3) Screening Systems, Inc. v.
QualMark Corporation, Case No. CV99-2387-R (BQRx), United States District Court,
Central District, filed March 16, 1998 in which SSI has asserted claims for
declaratory judgment, violations of the Lanham Act and unfair competition
(collectively referred to as the "Actions"); and
WHEREAS, each Party denies any wrongdoing or liability by it regarding
any of the claims asserted in the Actions; and
WHEREAS, the Parties desire to resolve the foregoing Actions according
to the terms and conditions set forth below.
NOW THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, and for other good and valuable
consideration described herein, the receipt and sufficiency of which is hereby
acknowledged, the Parties hereby agree as follows:
AGREEMENT
1. SETTLEMENT AMOUNT: QualMark shall pay to SSI the sum of $925,000 as
follows:
a) the sum of $300,000 shall be paid upon execution of this
Agreement by all the Parties;
b) the sum of $350,000 shall be paid on or before July 1, 2000, as
reflected in the Promissory Note ("Note") attached as Exhibit 1 hereto;
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<PAGE> 2
c) the sum of $275,000 shall be paid on or before April 1, 2001,
as reflected in the Note.
Interest will accrue on any unpaid balance at the rate of 9% per annum.
Such interest shall accrue monthly and shall be payable quarterly via electronic
transfer to an account specified by SSI, or in readily available funds should
SSI not provide such account information to QualMark.
QualMark does not object to SSI making a request to US Bank to be
permitted to obtain a subordinated perfected security interest in any and all of
its assets and, in the event US Bank consents, will execute documents reasonably
necessary to effect the consented-to security interest. SSI agrees that any such
security interest would be subordinated on such terms acceptable to US Bank and
that subordination will apply to any similar future lenders. It is expressly
understood and agreed that in the event that US Bank does not consent to SSI
obtaining a security interest, QualMark shall not have any liability to SSI with
respect to its request for a security interest.
2. WARRANTS: Upon execution of this Agreement by all the Parties,
QualMark shall issue to SSI certain warrants to purchase QualMark common stock.
The warrants are attached hereto as Exhibit 2, and set forth the terms and
conditions which govern them.
3. MUTUAL RELEASE OF CLAIMS:
3.1 RELEASE BY SSI. Except as provided herein and with respect
to the obligations created by or arising out of this Agreement, SSI, on behalf
of itself and each and all of its present officers, directors, affiliated
entities or corporations, subsidiaries, divisions, attorneys, successors, and
assigns, on the one hand, hereby fully, forever and irrevocably releases,
acquits and discharges QualMark, and each and all of its present officers,
directors, shareholders, employees, agents, attorneys, insurers, QualMark's
affiliated entities or corporations, subsidiaries, or divisions, and customers
who use or sell QualMark OVS Systems or use said systems to sell their own
services (collectively, the "Released QualMark Parties") from any and all
"Claims" (as hereinafter defined) that SSI or its present officers, directors,
affiliated entities or corporations, subsidiaries, divisions, attorneys,
successors, and assigns, now own or hold, may own or hold, or have at any time
owned or held, against the Released QualMark Parties as of the Effective Date of
this Agreement. As for any third parties who utilize parts or components
purchased from QualMark in a product which is found to infringe any patents that
are owned by, exclusively licensed to, or as to which SSI has authority to
enforce, SSI agrees not to enforce any portion of any judgment obtained against
said third parties to the extent QualMark has an obligation to indemnify said
third parties. SSI acknowledges that Charles O. Bates and Frank D. Loftin,
former SSI employees who are currently employed by QualMark, are included in the
release set forth herein in consideration for the release of SSI contained in
the confidential Declaration of Charles O. Bates and the confidential
Declaration of Frank D. Loftin executed as of the date hereof. This release
shall only become effective as to
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<PAGE> 3
these persons upon expiration of the rescission period required by law. Nothing
in the foregoing is intended to or shall operate to modify any duties of
confidentiality owed to SSI by any former employee of SSI, which duties shall
remain in place regardless of that former employee's subsequent employment with
the Released QualMark Parties.
3.2. RELEASE BY QUALMARK. Except as provided herein and with
respect to the obligations created by or arising out of this Agreement,
QualMark, on behalf of itself and each and all of its present officers,
directors, affiliated entities or corporations, subsidiaries, divisions,
attorneys, successors, and assigns, on the one hand, hereby fully, forever and
irrevocably releases, acquits and discharges SSI, and each and all of its
present officers, directors, shareholders, employees, agents, attorneys,
insurers, SSI's affiliated entities or corporations, subsidiaries, or divisions,
and customers (collectively, the "Released SSI Parties") from any and all
"Claims" (as hereinafter defined) that QualMark or its present or officers,
directors, affiliated entities or corporations, subsidiaries, divisions,
attorneys, successors, and assigns, now own or hold, may own or hold, or have at
any time owned or held, against the Released SSI Parties as of the Effective
Date of this Agreement. Nothing in the foregoing is intended to or shall operate
to modify any duties of confidentiality owed to QualMark by any former employee
of QualMark, which duties shall remain in place regardless of that former
employee's subsequent employment with the Released SSI Parties.
3.3. WAIVER OF SECTION 1542. Each Party agrees that this
Agreement extends to all Claims of every nature and kind whatsoever, and hereby
expressly waives all rights under California Code of Civil Procedure Section
1542, which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
Each Party, being aware and familiar with the terms of California Civil
Code Section 1542, hereby expressly waives and relinquishes any and all rights
or benefits it may have under this section, as well as any other statutes or
common law principles of similar effect, with respect to any and all matters
included in Paragraphs 3.1 - 3.4 of this Agreement, and expressly includes
within the scope of the waivers and releases set forth in Paragraphs 3.1 - 3.4
of this Agreement any claims which are unknown to it or are not ascertainable at
the time this Agreement is executed.
In connection with this waiver and relinquishment, each Party
acknowledges that it fully understands that it may hereafter discover facts in
addition to or different from those now known or believed to be true with
respect to the subject matter of this Agreement, but that its intention hereby
is to fully, finally, and forever release all claims, obligations, and matters
released herein, known or unknown, suspected or unsuspected, which now exist,
may exist in the future and heretofore have existed, and that in furtherance of
such intention, the release given herein shall be and remain in effect as a full
and complete release of the matters released herein,
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<PAGE> 4
notwithstanding the discovery or existence of any such additional or different
facts.
3.4. DEFINITION OF "CLAIMS." The term "Claims" shall include
any and all claims, liabilities, suits, demands, agreements, contracts,
covenants, reckonings, representations, warranties, promises, undertakings,
actions, causes of action, obligations, controversies, debts, costs, expenses,
accounts, acts, obligations, liens, sanctions, attorneys' fees, damages, any and
all losses, injuries and liabilities, of whatever kind or nature, in law, equity
or otherwise, whether known or unknown, suspected or unsuspected, liquidated or
unliquidated, matured or unmatured, even those claims that if known as of the
Effective Date might have materially affected this Agreement, arising out of,
based upon or relating to, any and all claims asserted in the Actions and any
other claims either party may have for infringement or alleged infringement of
any patent, trademark or service mark, false advertising, unfair competition, or
any other claim as of August 1, 1999.
4.0 MUTUAL COVENANTS NOT TO SUE
4.1. SSI'S COVENANT NOT TO SUE. SSI covenants not to sue any
Released QualMark Party at any time in the future for any claim of patent
infringement or alleged patent infringement with regard to the making, having
made, selling, offering for sale, importing or using any products or services
that QualMark has sold in the ordinary course of business at any time up to
August 1, 1999, or any later sold products which are insubstantially different
from products sold in the ordinary course of business prior to August 1, 1999.
As for any third parties who utilize parts or components purchased from QualMark
in a product which is found to infringe any patents that are owned by,
exclusively licensed to, or as to which SSI has authority to enforce, SSI agrees
not to enforce any portion of any judgment obtained against said third parties
to the extent QualMark has an obligation to indemnify said third parties based
on agreements or other legal duties created in the normal course of QualMark's
business on terms consistent with the indemnities, if any, provided by QualMark
prior to August 1, 1999. SSI's covenant not to sue is expressly conditioned upon
the accuracy of the representations of QualMark concerning the structure and
operation of its OVS Systems, and components thereof, as of August 1, 1999, that
are set forth in Exhibit 3 hereto, and shall be ineffective only upon entry of a
final judgment of a court of competent jurisdiction finding that said
representations were not accurate in a material respect.
4.2. QUALMARK'S COVENANT NOT TO SUE. QualMark covenants not to
sue any Released SSI Party at any time in the future for any claim of patent
infringement or alleged patent infringement with regard to the making, having
made, selling, offering for sale, importing or using any products or services
that SSI has sold in the ordinary course of business at any time up to August 1,
1999, or any later developed products which are insubstantially different from
products sold by SSI in the ordinary course of business prior to August 1, 1999.
QualMark's covenant not to sue is expressly conditioned upon SSI's compliance
with its covenant not to sue, provided, however, that QualMark's covenant not to
sue shall not be affected by any release of SSI from its covenant not to sue
pursuant to sections 4.1 or 4.3 hereof.
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<PAGE> 5
4.3 MONETARY CONSIDERATION FOR SSI'S COVENANT NOT TO SUE.
SSI's duties under its covenant not to sue are expressly conditioned upon
QualMark's timely satisfaction of each of the payments required by the Note.
5. DISMISSAL WITH PREJUDICE: Upon execution of the Agreement by each of
the Parties, the Parties authorize their respective counsel to execute and file
the Stipulations of Dismissal with Prejudice attached hereto as Exhibits 4A, 4B,
4C, and 4D.
6. PRESS RELEASE: Upon execution of this Agreement by each of the
Parties, the Parties agree that the following press release will be issued:
"QualMark Corporation and Screening Systems, Inc. are pleased to
announce that they have resolved all the litigation pending between them.
QualMark denies that it engaged in any wrongful conduct. QualMark acknowledges
that Screening Systems and its founder, Richard Baker, have been leaders in the
field of environmental stress screening, and QualMark expresses its regret for
any acts which SSI may have considered an infringement."
Nothing in this Paragraph shall restrict either Party from making
additional statements regarding the settlement or this Agreement.
7. REPRESENTATIONS AND WARRANTIES OF QUALMARK: QualMark hereby
represents and warrants to SSI as follows, and acknowledges that the same shall
be deemed to have been relied upon by SSI in entering into this Agreement:
(a) Authority. QualMark has the unrestricted right and
authority to execute and deliver this Agreement and to perform its obligations
under this Agreement, and has obtained all approvals necessary to do so.
Specifically, QualMark has the authority to execute the release and covenant not
to sue, to issue the warrants provided herein, and to take all other acts and
measures to fully implement, comply with, or otherwise effectuate this
Agreement, including executing all associated documents.
(b) SSI Confidential Information. QualMark has neither
received nor tried to obtain SSI confidential information from former SSI
employees who are currently employed by QualMark.
(c) Disclosure. Without limitation or qualification of the
foregoing representations and warranties, no representation or warranty by
QualMark in this Agreement and, to the best of QualMark's knowledge, no
information disclosed in materials supplied by QualMark, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading. QualMark expressly
represents that the statements concerning the construction and operation of its
OVS products summarized in Exhibit 3 are accurate.
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<PAGE> 6
8. REPRESENTATIONS AND WARRANTIES OF SSI: SSI hereby represents and
warrants to QualMark as follows, and acknowledges that the same shall be deemed
to have been relied upon by QualMark in entering into this Agreement:
(a) Authority. SSI is the exclusive licensee of certain
Patents, including but not limited to the '025, '026 and '028 Patents, and other
patents as defined in that certain License Agreement between Hughes Aircraft Co.
and SSI, dated July 15, 1979, as amended (the "Hughes License"). SSI has the
unrestricted right and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement, and has obtained all approvals
necessary to do so. Specifically, SSI has the authority to execute the release
and covenant not to sue, and to take all other acts and measures to fully
implement, comply with, or otherwise effectuate this Agreement, including
executing all associated documents.
(b) Bates Contact Information. Other than the information
contained in the 31 pages produced by QualMark marked QMCAL II 029970 through
and including QMCAL II 030000 regarding certain customer contacts by Charles O.
Bates after he became employed by QualMark ("Bates Contacts"), SSI has no other
evidence or information that indicates a violation of confidentiality
obligations to SSI by former SSI employees who are currently employed by
QualMark. Moreover, SSI will not use or rely on any information contained in the
Bates Contacts in the future for any purpose.
(c) Disclosure. Without limitation or qualification of the
foregoing representations and warranties, no representation or warranty by SSI
in this Agreement and, to the best of SSI's knowledge, no information disclosed
in materials supplied by SSI to QualMark, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained herein or therein not misleading.
(d) SSI warrants that it will not request that Raytheon
Company (or its successors with respect to the Hughes License) bring any action
against QualMark that would be barred by the covenant not to sue set forth in
section 4.1 of this Agreement, will not provide information relating to any such
action or any alleged grounds therefor, will not voluntarily cooperate in any
such action, will not contribute to the expense of such action, and will not
share in any way in the proceeds of such action. SSI further agrees not to
assert the attorney client privilege, work product protection, joint defense
privilege or similar privilege with respect to any communication between
Raytheon and SSI relating to any communications or conduct prohibited by this
subsection (d). SSI has no liability, nor shall it be a breach of this Agreement
by SSI or a failure of consideration under this Agreement should Raytheon (or
its successors with respect to the Hughes License) undertake an action against
QualMark provided SSI is in compliance with this subsection (d).
9. NON-LIABILITY: The Parties agree that this Agreement is a compromise
of potential claims, and that this Agreement does not constitute an admission of
liability or an admission against interest of any of the Parties.
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<PAGE> 7
10. SEVERABILITY: If any provision of this Agreement is declared by
any court of competent jurisdiction to be invalid for any reason, such
invalidity shall not affect the remaining provisions of this Agreement, which
shall be fully severable, and given full force and effect.
11. CHOICE OF LAW: The parties agree that this Agreement shall be
governed by the laws of the State of California except as otherwise specifically
provided.
12. HEADINGS: The headings of paragraphs herein are intended solely
for the convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this agreement.
13. ACKNOWLEDGMENT: The Parties acknowledge and state that they have
thoroughly reviewed this Agreement in its entirety, fully understand its meaning
and effect, and agree with its terms. The Parties have executed this Agreement
voluntarily and without any threat, intimidation, coercion, force or other type
of pressure by one another or any other person. Each Party agrees that no other
party has made any promise or offered any other agreement, except those
expressed in this document, to induce or persuade it to enter into this
Agreement. Each Party declares that this Agreement constitutes the entire and
final agreement between itself and the other Parties, superseding any and all
prior agreements.
14. COUNTERPARTS: The Parties agree that this Agreement may be signed
in counterparts.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives on the date(s) written below.
SCREENING SYSTEMS, INC.
By: /s/ BETTY BAKER
------------------------------------------
Betty Baker
Its President and Chief Executive Officer
Date: 08/30/99
----------------------------------------
QUALMARK CORPORATION
By: /s/ W. PRESTON WILSON
------------------------------------------
W. Preston Wilson, Ph.D.
Its President and Chief Executive Officer
Date: August 30, 1999
----------------------------------------
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<PAGE> 8
EXHIBIT 1 - PROMISSORY NOTE
8
<PAGE> 9
EXHIBIT 2 - WARRANTS
9
<PAGE> 10
EXHIBIT 3 - REPRESENTATIONS RE QUALMARK DISCLOSURES
10
<PAGE> 11
EXHIBITS 4A, 4B, 4C, AND 4D
STIPULATIONS OF DISMISSAL WITH PREJUDICE OF ACTIONS
11
<PAGE> 12
PROMISSORY NOTE
(Non-negotiable and non-assignable)
$625,000.00 August 30, 1999
FOR VALUE RECEIVED, QualMark Corporation., a Colorado corporation (the
"Company"), hereby promises to pay to the order of Screening Systems, Inc., a
California corporation ("Holder"), the principal sum of Six Hundred Twenty-Five
Thousand Dollars ($625,000.00) (the "Original Principal Amount") in lawful money
of the United States of America, together with interest at the rate of 9% per
annum on any unpaid balance. This Note has been issued pursuant to the terms of
the Settlement Agreement dated August 30, 1999, by and between the Company and
Holder.
1. Payments. Subject to the terms and conditions of this Note, the
principal amount of this Note shall be due and payable, in two installments as
follows: (i) the sum of Three Hundred and Fifty Thousand Dollars ($350,000.00)
on or before July 1, 2000; and (ii) the sum of Two Hundred and Seventy-Five
Thousand Dollars ($275,000.00) on or before April 1, 2001.
2. Manner of Payment. All payments of amounts due under this Note shall
be made in lawful currency of the United States of America at Holder's corporate
offices or at such other place as Holder shall designate in writing, and shall
be payable by the Company by immediately available funds via electronic transfer
or check as SSI may direct in writing.
3. Interest. Interest shall accrue monthly and shall be payable
quarterly via electronic transfer to an account specified by SSI or by check
should SSI not provide such account information to QualMark.
4. Restrictions on Transferability. This Note shall not be transferable
or assignable.
5. Default by the Company.
(a) Event of Default. An "Event of Default" under this Note shall
mean the occurrence of any of the following:
(i) Without the application or consent of the Company, (A) a
receiver, trustee, custodian or similar officer is appointed for the Company, or
for any substantial part of its property, or (B) any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution, liquidation or
similar proceedings under the laws of any jurisdiction is instituted by
petition, application or otherwise) against the Company and, in either case,
such appointment or proceedings remain unstayed or undismissed for a period of
60 days;
(ii) The Company (A) admits in writing its inability to pay its
debts
<PAGE> 13
when due, (B) makes an assignment for the benefit of creditors, (C) applies for
or consents to the appointment of any receiver, trustee, custodian or similar
officer for the Company or for any substantial part of its property, (D)
institutes (by petition, application or otherwise) or consents to any
bankruptcy, insolvency, reorganization, arrangement, readjustment of debt,
dissolution, liquidation or similar proceedings under the laws of any
jurisdiction against the Company, or (E) approves or adopts any resolution or
otherwise authorizes action to approve any of the foregoing; and
(iii) The Company fails, for a period of two (2) business days
after notice thereof has been given by the Holder, to make any installment
payment when due.
(b) Acceleration. Upon the occurrence of an Event of Default under
this Note, at the option of the Holder, exercisable by written notice from
Holder to the Company, the entire unpaid portion of the principal amount shall
automatically become due and payable.
6. Miscellaneous.
(a) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
(b) Entire Agreement; Amendment. This Note, together with all of the
other documents executed in connection herewith, constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
(c) Amendments. No term of this Note may be amended, waived,
discharged or terminated except by a written instrument signed by the Company
and Holder.
(d) Notices; etc. All notices, requests, demands and other
communications made under this Note shall be in writing, correctly addressed to
the recipient at the addresses set forth under such recipient's signature on the
signature page hereto and shall be deemed to have been duly given (a) upon
delivery, if served personally on the party to whom notice is to be given, (b)
on the date or receipt, refusal or non-delivery indicated on the receipt if
mailed to the party to whom notice is to be given by first class mail,
registered or certified, postage prepaid, or by air courier, or (c) upon
confirmation of transmission, if sent by telecopier. Any party may give written
notice of a change of address in accordance with the provisions herein and after
such notice of change has been received, any subsequent notice shall be given
to such party in the manner described at such new address.
(e) Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to Holder upon any breach or default of the Company
under this Note shall impair any such right, power or remedy of Holder nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
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<PAGE> 14
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of Holder of any breach
or default under this Note, or any waiver on the part of Holder of any provision
or condition of this Note must be made in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies either under
this Note or by law or otherwise afforded to Holder, shall be cumulative and not
alternative.
(f) Severability. In case any provision of this Note shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
(g) Titles. The titles of the Sections and subsections of this Note
are for convenience or reference only and are not to be considered in construing
this Note.
IN WITNESS WHEREOF, this Note is executed as of the date first above
written.
QUALMARK CORPORATION,
a Colorado corporation
By: /s/ W. PRESTON WILSON
-------------------------------------
Title: President & CEO
Address: 1329 West 121st Avenue
Denver, CO 80234
Telephone: (303) 254-8800
Telecopier: (303) 254-8343
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<PAGE> 15
THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH HEREIN.
THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF MAY BE SUBJECT TO
VOTING RESTRICTIONS CONTAINED HEREIN AND IN THE IRREVOCABLE PROXY AGREEMENT
ATTACHED HERETO.
No. One (1). 620,000 WARRANTS
WARRANTS TO PURCHASE
SHARES OF COMMON STOCK OF
QUALMARK CORPORATION
VOID AFTER AUGUST 30, 2004
THIS CERTIFIES THAT, for good and valuable consideration received,
Screening Systems, Inc., a California corporation, ("SSI"), is entitled to
subscribe for and purchase from QualMark Corporation, a Colorado corporation
(the "Company"), at any time after August 30, 1999 up to and including August
30, 2004, six hundred twenty thousand (620,000) fully paid and nonassessable
shares of the Common Stock of the Company at the price of $4.85 per share,
subject to certain adjustments as provided below. Reference is made to this
Warrant in the Settlement Agreement dated August 30, 1999 (the "Settlement
Agreement"), by and between the Company and SSI.
As used herein, the terms below have the following meanings:
"Affiliate" means a person or entity that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, another person.
"Business Combination" means a merger, consolidation or acquisition,
share exchange, or sale of all or substantially all of the assets or voting
common stock of SSI or of the Company in a transaction between the Company and
SSI.
<PAGE> 16
"Common Stock" means and includes the Company's presently authorized
common stock, no par value, and shall also include any capital stock of any
class of the Company hereafter authorized which shall not be limited to a fixed
sum or percentage in respect of the rights of the holders thereof to participate
in dividends or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution, or winding up of the Company.
"Convertible Securities" means any stock or other securities
convertible into, or exchangeable for, Common Stock.
"Fair Market Value" of a share of Common Stock as of a particular date
means:
(i) If the Company's Common Stock is traded on an exchange or
quoted on the NASDAQ Stock Market or SmallCap Market, then the average
last sale prices, reported for the ten (10) business days immediately
preceding the determination date,
(ii) If the Company's Common Stock is not traded on an
exchange or quoted on NASDAQ but is traded on NASDAQ's bulletin board,
then the average of the average of the closing bid and asked prices
reported for the ten (10) business days immediately preceding the
determination date, and
(iii) If the Company's Common Stock is not traded or quoted as
provided in clause (i) or clause (ii) above, then the fair market value
of a share of Common Stock shall be the value assigned by the Company's
Board of Directors in good faith.
"Holder" means SSI, any party who acquires all or part of this Warrant
as a registered transferee of SSI, or any record holder or holders of the
Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant.
"Warrant Exercise Price" means $4.85 per share, or in the event the
Company and SSI consummate and close a Business Combination with each other on
or before December 31, 2000, $4.00 per share, each as may be adjusted under
Section 5 of this Warrant.
"Warrant Shares" means the shares of the Company's securities which may
be acquired upon exercise of this Warrant.
This Warrant is subject to the following provisions, terms and
conditions:
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<PAGE> 17
1. Exercise; Transferability.
a. Subject to the provisions of Section 3 and Section 10 of this
Warrant, the rights represented by this Warrant may be exercised by the Holder
hereof, in whole or in part (but not as to a fractional share of Common Stock or
in amounts of fewer than 1,000 shares of Common Stock, unless the Holder is
exercising with respect to all of the Warrant Shares then purchasable
hereunder), by written notice of exercise (in the form attached hereto)
delivered to the Company at the principal office of the Company prior to the
expiration of this Warrant and accompanied or preceded by the surrender of this
Warrant, along with a certified or bank cashier's check or wire transfer in
payment of the Warrant Exercise Price for such shares. If voting restrictions
apply to the Warrant Shares at the time of exercise, the delivery of the written
notice of exercise shall be accompanied by an executed copy of the Irrevocable
Proxy Agreement attached to this Warrant as Exhibit A.
b. This Warrant shall be nontransferable except by will, pursuant to
the laws of descent and distribution, or as otherwise provided by law, except
that the Warrant may be transferred to any or all of the shareholders of SSI as
of the date hereof (each, an "SSI Shareholder"), or to a parent, spouse,
sibling, son or daughter or other lineal descendant of any SSI Shareholder, or
to a trust or partnership formed exclusively for the benefit of any of the above
persons (each such SSI Shareholder or related person or entity, a "Permitted
Transferee"). Any transferees of this Warrant pursuant to this Section 1, as
Holders thereof, shall be subject to this transfer restrictions and to the other
provisions of this Warrant. Further, except as permitted by this Section, this
Warrant may not be sold, transferred, assigned, hypothecated or divided into two
or more Warrants of smaller denominations, nor may any Warrant Shares issued
pursuant to exercise of this Warrant be transferred, except in accordance with
Section 7 hereof. Prior to any transfer permitted by this Section, the Holder
shall certify in writing as to the qualification of the transferee as a
Permitted Transferee and provide evidence reasonably satisfactory to the Company
as to the qualification of the transferee as a Permitted Transferee, including,
but not limited to, complete copies of any trust indentures or partnership
agreements necessary to make such determination; provided, however, that SSI
may declare a dividend of this Warrant to its shareholders of record as of the
date hereof, or to their heirs or legatees, without any action or consent by the
Company on the condition that SSI certify, in connection with any such dividend,
that the transferees are SSI Shareholders or their heirs and legatees, and that
such certification be accompanied by the names of such SSI Shareholders, heirs
and legatees. Any transfer not in strict compliance with this Section shall be
void. For purposes of this Section, any change in the beneficial ownership of a
trust or partnership holder of any part of the Warrant shall constitute a
transfer and shall be subject to the transfer restrictions of this Section, and
in the event any beneficial owner or beneficiary thereof is not a Permitted
Transferee and within thirty (30) days of written notice from the Company either
(i) such transferee is not removed as a beneficial owner or beneficiary thereof
or (ii) the Warrant is not transferred to a Permitted Transferee, the part of
the Warrant held by such trust or partnership, as the case may be, shall be
deemed immediately terminated.
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<PAGE> 18
2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant. This
Warrant shall be promptly canceled by the Company upon the surrender hereof in
connection with any exchange or replacement. The Company shall pay all expenses,
taxes (other than stock transfer taxes), and other charges payable in connection
with the preparation, execution, and delivery of Warrants pursuant to this
Section 2.
3. Issuance of the Warrant Shares.
a. The Company agrees that the shares of Common Stock purchased
hereby shall be and are deemed to be issued to the Holder as of the close of
business on the date on which this Warrant shall have been surrendered and the
payment made for such Warrant Shares as herein provided. Subject to the
provisions of Section 3(b), certificates for the Warrant Shares so purchased
shall be delivered to the Holder within a reasonable time, not exceeding five
(5) business days after the rights represented by this Warrant shall have been
so exercised, and, unless this Warrant has expired, a new Warrant representing
the right to purchase the number of Warrant Shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be delivered to
the Holder within such time.
b. Notwithstanding the foregoing, however, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with (i) an exemption from the applicable
securities registration requirements (which exemption shall, upon reasonable
request of counsel to the Company, be confirmed by an opinion of counsel
reasonably acceptable to the Company) or (ii) an effective registration under
applicable securities laws. Nothing herein, however, shall obligate the Company
to effect registrations under federal or state securities laws, except as
provided in Section 9. The Holder agrees to execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company, or the registrations made, for
the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issue thereof. The Company further
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<PAGE> 19
covenants and agrees that during the period within which the rights represented
by this Warrant may be exercised, the Company will at all times have authorized
and reserved for the purpose of issue upon exercise of the subscription rights
evidenced by this Warrant a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
5. Anti-dilution Adjustments. The provisions of this Warrant are
subject to adjustment as provided in this Section 5.
a. The Warrant Exercise Price shall be adjusted from time to time
such that in case the Company shall hereafter:
i. pay any dividends on any class of stock of the Company payable
in Common Stock or securities convertible into Common Stock;
ii. subdivide its then outstanding shares of Common Stock into a
greater number of shares; or
iii. combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (a) the total number of shares of Common Stock
outstanding immediately prior to such event (including the maximum number of
shares of Common Stock issuable in respect of any securities convertible into
Common Stock, other than such shares of Common Stock that are issuable at a
conversion price in excess of the Fair Market Value of the Common Stock at the
time of such calculation), multiplied by the then existing Warrant Exercise
Price, by (b) the total number of shares of Common Stock outstanding immediately
after such event (including the maximum number of shares of Common Stock
issuable in respect of any securities convertible into Common Stock, other than
such shares of Common Stock that are issuable at a conversion price in excess of
the Fair Market Value of the Common Stock at the time of such calculation), and
the resulting quotient shall be the adjusted Warrant Exercise Price per share.
An adjustment made pursuant to this subsection shall become effective
immediately after the record date in the case of a dividend or distribution and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this subsection, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive shares of two or more
classes of capital stock or shares of Common Stock and other capital stock of
the Company, the Board of Directors (whose determination shall be conclusive)
shall determine the allocation of the adjusted Warrant Exercise Price between or
among shares of such classes of capital stock or shares of Common Stock and
other capital stock. All calculations under this subsection shall be made to the
nearest cent or to the nearest 1/100 of a share as the case may be.
5
<PAGE> 20
In the event that at any time as a result of an adjustment made pursuant to this
subsection, the holder of any Warrant thereafter surrendered for exercise shall
become entitled to receive any shares of the Company other than shares of Common
Stock, thereafter the Warrant Exercise Price of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Section.
b. Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price
the number of shares, calculated to the nearest full share, obtained by
multiplying the number of shares specified in such Warrant (as adjusted as a
result of all adjustments in the Warrant Exercise Price in effect prior to such
adjustment) by the Warrant Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the adjusted Warrant Exercise Price.
c. In the following cases, there shall be no adjustment under
subsection (a) of this Section above, but the Holder of each Warrant then
outstanding shall have the right, before the consummation of the transaction in
question, to exercise such Warrant in order to purchase the kind and amount of
shares of stock and other securities and property which such Holder would have
owned or have been entitled to receive immediately after such consolidation,
merger, statutory exchange, sale, or conveyance had such Warrant been exercised
immediately prior to the effective date of such consolidation, merger, statutory
exchange, sale, or conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set forth in this
Section with respect to the rights and interests thereafter of any Holders of
the Warrant, to the end that the provisions set forth in this Section shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock and other securities and property thereafter
deliverable on the exercise of the Warrant:
(i) any consolidation or merger to which the Company is a party
and is not the surviving corporation;
(ii) any sale or conveyance to another corporation of the property
of the Company as an entirety or substantially as an entirety;
or
(iii) any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger
of a third corporation into the Company).
The provisions of this subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
6
<PAGE> 21
d. Upon any adjustment of the Warrant Exercise Price, then and in
each such case, the Company shall give written notice thereof, by first-class
mail, postage prepaid, addressed to the Holder as shown on the books of the
Company, which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares of
Common Stock purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
6. Restrictions on Voting Rights. As a condition of exercise of this
Warrant and holding Warrant Shares, and for so long as SSI or any Permitted
Transferee beneficially owns five percent (5%) or more of the outstanding shares
of Common Stock, the Warrant Shares held by such person shall be subject to the
voting restrictions contained in the Irrevocable Proxy Agreement attached to
this Warrant as Exhibit A, whether or not the holder of this Warrant or the
Warrant Shares executes a separate copy of such Agreement. When two or more
persons act as a partnership, limited partnership, syndicate, or other group for
the purpose of acquiring, holding, or disposing of securities of the Company,
such syndicate or group shall be deemed a "person" for all purposes of this
Warrant. In addition, the following rules of attribution shall apply for
purposes of determining whether a person beneficially owns five percent (5%) or
more of the outstanding shares of Common Stock: (i) with respect to natural
persons, Warrant Shares held by the spouse, parent, sibling, son, daughter or
other lineal descendent of such person (or held by a trust, partnership, company
or other entity in which such person has a beneficial interest or in which such
person serves as a director, executive officer or trustee) shall be deemed to be
held by such person; (ii) with respect to SSI, Warrant Shares held by SSI's
directors, executive officers or shareholders who beneficially own ten percent
(10%) or more of outstanding capital stock of SSI (taking into account the
attribution rules in each case for natural persons under (i) above) shall be
deemed to be held by SSI. The restrictions of this Section shall be removed, and
the Irrevocable Proxy Agreement terminated, as to any Warrant Shares as to which
evidence reasonably satisfactory to the Company is presented that the
restrictions are no longer applicable as the result of an arms' length,
non-collusive ownership or transfer arrangement. Such evidence shall include,
but not be limited to, identity of the holder or transferee and documentation of
the method of disposition of the Warrant Shares.
The Company's stock transfer agent shall be instructed to prohibit the transfer
of any Warrant Shares to any such person prior to the execution by such person
of an Irrevocable Proxy Agreement. Warrant Shares shall bear restrictive legends
in substantially the following form:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED,
ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THOSE
7
<PAGE> 22
CERTAIN WARRANTS ISSUED BY THE COMPANY, DATED AUGUST 30, 1999 (THE
"WARRANTS").
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY BE
SUBJECT TO VOTING RESTRICTIONS CONTAINED IN THE WARRANTS AND IN AN
IRREVOCABLE PROXY AGREEMENT ATTACHED THERETO, WHICH ARE ON FILE AT THE
OFFICES OF THE COMPANY, AND COPIES OF WHICH ARE AVAILABLE UPON REQUEST
FROM THE SECRETARY OF THE COMPANY.
The terms of this Paragraph shall survive the term of this Warrant. The exercise
of this Warrant in whole or in part shall not serve to terminate or diminish the
restrictions set forth in this Paragraph.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
a. Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer; provided, however, that the
distribution of the Warrant by SSI to the SSI Shareholders and their heirs and
legatees in accordance with the proviso to the fourth sentence of Section l(b)
shall not require the giving of such notice. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel. If in the opinion of such counsel the proposed transfer may be effected
without registration or qualification (under any federal or state securities
laws), the Company, as promptly as practicable and in any event within ten (10)
business days, shall notify the Holder of such opinion, whereupon the Holder
shall be entitled to transfer this Warrant or to dispose of Warrant Shares
received upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by the Holder to the Company; provided that an
appropriate legend may be endorsed on this Warrant or the certificates for such
Warrant Shares respecting restrictions upon transfer thereof necessary or
advisable in the opinion of counsel and satisfactory to the Company to prevent
further transfers which would be in violation of Section 5 of the Securities Act
of 1933, as amended (the "1933 Act") and applicable state securities laws; and
provided further that the Holder and prospective transferee or purchaser shall
execute such documents and make such representations, warranties, and agreements
as may be required solely to comply with the exemptions relied upon by the
Company for the transfer or disposition of the Warrant or Warrant Shares.
b. If in the opinion of the counsel referred to in this Section 7,
the proposed transfer or disposition of this Warrant or such Warrant Shares
described in the written notice given pursuant to this Section 7 may not be
effected without registration or qualification of this Warrant or such Warrant
Shares, the Company shall promptly give written notice thereof to the
8
<PAGE> 23
Holder, and the Holder will limit its activities in respect to such as, in the
opinion of such counsel, are permitted by law.
8. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the Holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the Fair Market Value (as defined in Section
10(d)) of such fractional share over the proportional part of the Warrant
Exercise Price represented by such fractional share, plus (b) the proportional
part of the Warrant Exercise Price represented by such fractional share.
9. Piggyback Registration Rights.
a. If at any time after the date hereof and prior to August 30,
2007, the Company proposes to register under the 1933 Act (except by a Form S-4
or Form S-8 Registration Statement or any successor forms thereto) or qualify
for a public distribution under Section 3(b) of the 1933 Act, any of its equity
securities or debt with equity features, it will give written notice to all
Holders of this Warrant, any Warrants issued pursuant to Section 2 and/or
Section 3(a) hereof, and any Warrant Shares of its intention to do so and, on
the written request of any such Holder given within twenty (20) days after
receipt of any such notice (which request shall specify the Warrant Shares (then
issued or issuable upon exercise of this Warrant) intended to be sold or
disposed of by such Holder and describe the nature of any proposed sale or other
disposition thereof), the Company will use its best efforts to cause all such
Warrant Shares, the Holders of which shall have requested the registration or
qualification thereof, to be included in such registration statement proposed to
be filed by the Company; provided, however, that if a greater number of Warrant
Shares is offered for participation in the proposed offering than in the
reasonable opinion of the managing underwriter of the proposed offering can be
accommodated without adversely affecting the proposed offering, then the amount
of Warrant Shares proposed to be offered by such Holders for registration, as
well as the number of securities of any other selling shareholders participating
in the registration, shall be proportionately reduced to a number deemed
satisfactory by the managing underwriter.
b. With respect to each inclusion of securities in a registration
statement pursuant to Section 9(a), the Company shall bear the following fees,
costs, and expenses: all registration, filing and NASD fees, NASDAQ fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the offering is underwritten and the Company is required
to bear such fees and disbursements), all internal expenses, the premiums and
other costs of policies of insurance against liability arising out of the public
offering, and legal fees and disbursements and other expenses of complying with
state securities laws of any jurisdictions in which the securities to be offered
are to be registered or qualified. Fees and disbursements of special
9
<PAGE> 24
counsel and accountants for the selling Holders, underwriting discounts and
commissions, and transfer taxes for selling Holders and any other expenses
relating to the sale of securities by the selling Holders not expressly included
above shall be borne by the selling Holders.
c. The Company hereby indemnifies each of the Holders of this
Warrant and of any Warrant Shares, and the persons, if any, who control such
Holders, within the meaning of Section 15 of the 1933 Act, against all losses,
claims, damages, and liabilities caused by (1) any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement or
Prospectus (and as amended or supplemented if the Company shall have furnished
any amendments thereof or supplements thereto), any Preliminary Prospectus or
any state securities law filings; (2) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, or liabilities are caused by any untrue statement or omission contained
in information furnished in writing to the Company by such Holder expressly for
use therein; and each such Holder by its acceptance hereof severally agrees that
it will indemnify and hold harmless the Company, each of its officers who signs
such Registration Statement, and each person, if any, who controls the Company,
within the meaning of Section 15 of the 1933 Act, with respect to losses,
claims, damages, or liabilities which are caused by any untrue statement or
omission contained in information furnished in writing to the Company by such
Holder expressly for use therein.
10. Cashless Exercise.
a. Payment of the Warrant Exercise Price may be made, at the option
of the Holder, by instructing the Company to cancel such portion of this Warrant
as may be exercised to purchase a number of Warrant Shares then issuable upon
exercise of this Warrant with respect to which the excess of the Fair Market
Value of the Warrant Shares at the close of business on the day immediately
preceding the date on which the Cashless Exercise Notice (as defined below) is
given over the Warrant Exercise Price for such canceled Warrant Shares is at
least equal to the Warrant Exercise Price for the shares being purchased (such
method of exercise hereinafter referred to as "Cashless Exercise"). The Warrants
may be exercised by a combination of a Cashless Exercise and an exercise for
cash, as provided in Section l(a).
b. Cashless Exercise may be exercised by the Holder, at any time or
from time to time, prior to the expiration of the Warrants, on any business day
by delivering a written notice in the form attached hereto (the "Cashless
Exercise Notice") to the Company at the offices of the Company requesting full
or partial Cashless Exercise and specifying the total number of Warrant Shares
the Holder will purchase pursuant to such exercise. The Cashless Exercise Notice
shall be accompanied or preceded by delivery of such portion of the Warrant as
is being exchanged in consideration for the Warrant Exercise Price for the
shares being purchased.
10
<PAGE> 25
11. Notices. All notices, requests, demands and other communications
which are required or may be given under this Warrant shall be in writing and
shall be deemed to have been duly given upon transmittal by telecopier with
receipt acknowledged, or upon delivery, if delivered personally or by recognized
commercial courier with receipt acknowledged, or upon the expiration of 72 hours
after mailing, if mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Holder, at the address set forth in the Company's
warrant register.
(b) If to the Company, at:
QualMark Corporation
1329 W. 121st Avenue
Denver, Colorado 80234
Attention: President
Telephone: (303) 254-8800
Facsimile: (303) 254-8343
or at such other address or addresses as the Holders, or the Company, as the
case may be, may specify by written notice given in accordance with this Section
11.
IN WITNESS WHEREOF, QualMark Corporation has caused this Warrant to be
signed by its duly authorized officer this 30th day of August, 1999.
QUALMARK CORPORATION
By: /s/ W. PRESTON WILSON
--------------------------------
W. Preston Wilson, President
11
<PAGE> 26
QUALMARK CORPORATION
WARRANT EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned, the holder of that certain Warrant of QualMark
Corporation dated August 30, 1999 (the "Warrant"), hereby irrevocably elects to
exercise the purchase right represented by the Warrant for, and to purchase
thereunder,__________________________ shares of the Common Stock of QualMark
Corporation to which the Warrant relates and herewith makes payment of $______
therefor in cash or by certified or cashier's check or by wire transfer and
requests that the certificates for such shares be issued in the name of, and be
delivered to ____________ whose address is set forth below the signature of the
undersigned. If said number of shares shall not be all the shares purchasable
under the Warrant, a new Warrant is to be issued in the name of the undersigned
for the balance remaining of the shares purchasable thereunder.
Name of Warrant Holder:
---------------------------------------------
(Please print)
Address of Warrant Holder:
---------------------------------------------
---------------------------------------------
Tax Identification No. or
Social Security No. of Warrant Holder:
---------------------------------------------
Signature:
-----------------------------------
Note: The above signature should correspond
exactly with the name of the Warrant Holder
as it appears on the first page of the
Warrant or on a daily executed Warrant
Assignment.
Dated:
---------------------------------------
<PAGE> 27
QUALMARK CORPORATION
WARRANT ASSIGNMENT
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT
IN ACCORDANCE WITH SECTIONS 1 AND 7 OF THE WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto, the assignee, whose address is _________________________________________
and whose tax identification or social security number is ___________________
the right represented by that certain Warrant of QualMark Corporation dated
August 30, 1999, to purchase shares of the Common Stock of QualMark Corporation
to which such foregoing Warrant relates and appoints attorney to transfer said
right on the books of QualMark Corporation with full power of substitution in
the premises. If said number of shares shall not be all the shares purchasable
under such Warrant, a new Warrant is to be issued in the name of the undersigned
for the balance remaining of the shares purchasable thereunder.
Name of Warrant Holder/Assignor:
---------------------------------------------
(Please print)
Address of Warrant Holder/Assignor:
---------------------------------------------
---------------------------------------------
Tax Identification No. or Social Security No.
of Warrant Holder:
---------------------------------------------
Signature:
-----------------------------------
Note: The above signature should correspond
exactly with the name of the Warrant Holder
as it appears on the first page of the
Warrant or on a daily executed Warrant
Assignment.
Dated:
---------------------------------------
<PAGE> 28
QUALMARK CORPORATION
CASHLESS EXERCISE NOTICE
(TO BE EXECUTED ONLY UPON CASHLESS EXERCISE OF WARRANT PURSUANT TO SECTION 10)
The undersigned hereby irrevocably elects to exercise the right
provided for in Section 10 of that certain Warrant of QualMark Corporation dated
August 30, 1999 (the "Warrant") and to purchase thereunder ________________
shares of Common Stock of QualMark Corporation (the "Company") to which such
Warrant relates. The undersigned herewith (i) delivers to the Company for
surrender and cancellation such portion of the Warrant as is exercisable to
acquire the Warrant Shares to be purchased pursuant to this exercise and (ii)
further delivers to the Company, and instructs the Company to cancel, such
portion of the Warrant as represents the right to acquire ____________ shares of
Common Stock of the Company currently issuable upon exercise of the Warrant in
payment of $ ___________ of the exercise price as provided for in Section 10 of
the Warrant. If the Warrant or portion thereof delivered pursuant to clause (ii)
of the preceding sentence represents the right to acquire a number of Warrant
Shares exceeding the number of Warrant Shares subject to the Warrant as to which
cancellation instructions are given pursuant to said clause (ii), a new Warrant
is to be issued in the name of the undersigned for the balance remaining of the
shares purchasable thereunder.
Please issue a certificate or certificates for the Common Stock
purchased hereunder in the name of, and pay any cash for any fractional share,
to:
Name of Warrant Holder:
---------------------------------------------
(Please print)
Address of Warrant Holder:
---------------------------------------------
---------------------------------------------
Tax Identification No. or
Social Security No. of Warrant Holder:
---------------------------------------------
Signature:
-----------------------------------
Note: The above signature should correspond
exactly with the name of the Warrant Holder
as it appears on the first page of the
Warrant or on a daily executed Warrant
Assignment.
Dated:
---------------------------------------
<PAGE> 29
EXHIBIT A
IRREVOCABLE PROXY AGREEMENT
The undersigned,__________________________________________, being the
holder of shares of common stock (the "Warrant Shares") of QualMark Corporation,
a Colorado corporation (the "Company") issued pursuant to Warrants dated August
30, 1999 (the "Warrant Agreement"), hereby appoints the Secretary of the
Company, and his or her successors, with full power of substitution, as proxy
(i) to vote all Warrant Shares which the undersigned would be able to vote at
any meeting of shareholders of the Company; provided, however, that such
voting right shall be exercised only in the same proportion as the vote of all
other shares of capital stock of the Company shall be voted on each matter
submitted for shareholder approval at any such meeting; (ii) to waive notice of
any meeting; and (iii) to consent to actions of shareholders pursuant to the
laws of the State of Colorado, subject to the voting restrictions set forth in
(i), above.
The undersigned acknowledges that this proxy has been granted for good
and valuable consideration, receipt of which is hereby acknowledged by the
undersigned as evidenced by a certain Settlement Agreement, dated August 30,
1999 and, accordingly, is coupled with an interest and may not be revoked by the
undersigned except with the written consent of the Board of Directors of the
Company as provided in Section 6 of the Warrant Agreement. This proxy shall be
binding upon transferees of any Warrant Shares and the successors, assigns,
heirs, personal representatives, and other legal representatives of the holder
of Warrant Shares.
Certificates evidencing the Warrant Shares shall bear a restrictive
legend in substantially the following form:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY
BE SUBJECT TO VOTING RESTRICTIONS CONTAINED IN WARRANTS ISSUED
BY THE COMPANY, DATED AUGUST 30, 1999, AND AN IRREVOCABLE
PROXY AGREEMENT ATTACHED THERETO, WHICH ARE ON FILE AT THE
OFFICES OF THE COMPANY, AND COPIES OF WHICH ARE AVAILABLE UPON
REQUEST FROM THE SECRETARY OF THE COMPANY.
The requirement that the above legend be placed upon certificates evidencing the
Warrant Shares shall cease and terminate as to such Warrant Shares no longer
subject to this Irrevocable Proxy Agreement as provided in the foregoing
paragraph. Upon the occurrence of such event, the Company, upon surrender of
certificates containing such legend, shall at its own expense deliver to the
holder of such Warrant Shares as to which the requirement for such legend shall
have
<PAGE> 30
terminated, one or more new certificates evidencing such Warrant Shares not
bearing such legend.
The undersigned hereby ratifies and confirms any and all acts of its
proxy performed by it pursuant to this proxy.
Dated this day of , .
------------- ------------- --------
By:
--------------------------------
Its:
-------------------------------
<PAGE> 1
EXHIBIT 10.16
PREFERRED STOCK
PURCHASE AGREEMENT
This Preferred Stock Purchase Agreement (the "Agreement") is made and
entered into as of the 1st day of September, 1999, by and among QUALMARK
CORPORATION, a Colorado corporation (the "Company"), and THE ROSER PARTNERSHIP
III, SBIC, LP, a Colorado Limited Partnership and its affiliates ("Purchasers").
RECITALS
A. The Company has authorized the issuance and sale of a total of
465,116 shares (the "Preferred Shares") of Series A Preferred Stock of the
Company, par value $0.001 per share, and warrants to purchase 139,535 Common
Shares, in the form attached as Exhibit A hereto (the "Warrants"), and reserved
for issuance 604,651 shares (the "Common Shares") of Common Stock of the
Company, no par value (collectively, the Preferred Shares and the Common Shares
are referred to as the "Shares")
B. The Company desires to sell the Preferred Shares and Warrants to
Purchasers, and Purchasers desire to purchase the Preferred Shares and Warrants,
pursuant to the terms and conditions contained herein.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants, agreements,
conditions, representations, and warranties contained in this Agreement, the
Company and Purchasers hereby each agree as follows:
SECTION 1. PURCHASE AND SALE.
1.1 AUTHORIZATION OF SHARES. On or prior to the First Closing (as
defined in Section 2.1 below), the Company shall have authorized (i) the sale
and issuance to Purchasers of the Preferred Shares and the Warrants; and (ii)
such shares of Common Stock issuable upon conversion of the Preferred Shares or
exercise of the Warrants (the "Conversion Shares"). The Preferred Shares and the
Conversion Shares shall have the rights, preferences, privileges and
restrictions set forth in the Certificate of Designation to the Certificate of
Incorporation of the Company, in the form attached hereto as Exhibit B (the
"Certificate").
1.2 SALE AND PURCHASE. Subject to the terms and conditions hereof, at
the Closings (as described in Section 2 hereof) the Company hereby agrees to
issue and sell to each Purchaser, severally and not jointly, and each Purchaser
agrees to purchase from the Company, severally and not jointly, the number of
Preferred Shares and Warrants set forth opposite such Purchaser's name on the
signature pages hereto, at the purchase price of $2.15 per share for the
Preferred Shares.
SECTION 2. CLOSING. The closing of the sale and purchase of the
Preferred Shares and Warrants under this Agreement (the "Closing") shall take
place at 11 a.m. on the date hereof, at the offices of Hogan and Hartson,
L.L.P., One Tabor Center, Suite 1500, 1200 Seventeenth
1
<PAGE> 2
Street, Denver, Colorado 80202, or at such other time or place as the Company,
and Purchasers may mutually agree (such date is hereinafter referred to as the
"Closing Date"). At the Closing, subject to the terms and conditions hereof, the
Company will deliver to the Purchasers certificates representing the number of
Preferred Shares and Warrants to be purchased at the Closing by each Purchaser
as set forth opposite such Purchaser's name on the signature pages against
payment of the purchase price therefor by check or wire transfer made payable to
the order of the Company.
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth on the Disclosure Schedule attached hereto
as Exhibit C, the Company hereby represents and warrants to each Purchaser that
is purchasing the Shares as follows:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Colorado. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and the Investor Rights Agreement in the form attached hereto as
Exhibit D (the "Investor Rights Agreement") (collectively with this Agreement
and the Certificate, the "Financing Documents"), to issue and sell the Preferred
Shares and Warrants and to carry out the provisions of the Financing Documents,
and to carry on its business as presently conducted and as presently proposed to
be conducted. The Company is duly qualified and is authorized to do business and
is in good standing in each jurisdiction in which the nature of its activities
and of its properties (both owned and leased) makes such qualification
necessary, except for those jurisdictions in which failure to do so would not
have a material adverse effect on the Company or its business. The Company does
not own, directly or indirectly, equity securities of any other corporation,
limited partnership, limited liability company or other similar entity. The
Company is not a participant in any joint venture, partnership or similar
arrangement. The Company meets the eligibility requirements to use Form S-3
under the Securities Act of 1933, as amended (the "Securities Act"), and is
otherwise in compliance with all applicable provisions of the Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
3.2 CAPITALIZATION. The authorized capital stock of the Company,
immediately prior to the First Closing, will consist of (a) 15,000,000 shares of
Common Stock, 3,539,015 shares of which are issued and outstanding, 938,714
shares of which are reserved for future issuance to employees and consultants
pursuant to the Company's option plan, 755,899 shares of which are reserved for
exercise of existing warrants, and 604,651 shares of which are reserved for
issuance upon conversion of the Series A Preferred Stock and exercise of the
Warrants; and (b) 2,000,000 shares of Preferred Stock, 502,326 of which are
designated Series A Preferred Stock. All issued and outstanding shares of the
Company's Common Stock (i) have been duly authorized and validly issued, (ii)
are fully paid and nonassessable, and (iii) were issued in compliance with all
applicable state and federal laws concerning the issuance of securities. The
rights, preferences, privileges and restrictions of the Shares are as stated in
the Certificate. The Conversion Shares have been duly and validly reserved for
issuance. Except as may be granted pursuant to the Financing Documents, there
are no outstanding options, warrants, rights (including conversion or preemptive
rights and rights of first refusal), proxy or shareholders agreements, or
agreements of
2
<PAGE> 3
any kind for the purchase or acquisition from the Company of any of its
securities. When issued in compliance with the provisions of this Agreement and
the Certificate, the Preferred Shares and the Conversion Shares will be validly
issued, fully paid and nonassessable, and will be free of any liens or
encumbrances. A schedule describing the capitalization of the Company as of the
First and Final Closings is attached as Exhibit E hereto.
3.3 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization of this
Agreement and the Financing Documents, the performance of all obligations of the
Company hereunder and thereunder at the Closings and the authorization, sale,
issuance and delivery of the Shares pursuant hereto and the Conversion Shares
pursuant to the Certificate has been taken or will be taken prior to the First
Closing. The Agreement and the Financing Documents, when executed and delivered,
will be valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights; (ii) general principles
of equity that restrict the availability of equitable remedies; and (iii) to the
extent that the enforceability of the indemnification provisions in the Investor
Rights Agreement may be limited by applicable laws. The sale of the Preferred
Shares and the subsequent conversion of the Preferred Shares into Conversion
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with.
3.4 FINANCIAL STATEMENTS. Purchasers have reviewed (i) the Form 10-KSB
of the Company for its most recent fiscal year filed under the Exchange Act, and
all subsequently filed Form 10-Qs and (ii) the unaudited balance sheet of the
Company as of June 30, 1999, (the "Balance Sheet Date") together with the
unaudited consolidated statements of operations, unaudited consolidated
statements of shareholders' equity, and unaudited consolidated statements of
cash flows of the Company for the six months then-ended, (the "Financial
Statements"). The Financial Statements have been prepared in accordance with
GAAP and fairly present the financial condition and operating results of the
Company as of the dates, and for the periods indicated therein, subject in the
case of the unaudited Financial Statements to normal year-end audit adjustments.
Except as set forth in the Financial Statements, the Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business after the Balance Sheet Date and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under GAAP to be reflected in the Financial Statements, which, in
both cases, individually or in the aggregate, are not material to the financial
condition or operating results of the Company. Except as disclosed in the
Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation. The Company knows of no
information or fact which has or would have a material adverse effect on the
financial condition, business or business prospects of the Company which has not
been disclosed to the Purchasers. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with GAAP. The accountants that have audited the Financial Statements
are independent certified public accountants as required by the Securities Act.
3.5 LIABILITIES. The Company has no material liabilities and, to the
best of its knowledge, the Company knows of no material contingent liabilities
not disclosed in the Financial Statements, except current liabilities incurred
in the ordinary course of business
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subsequent to the Balance Sheet Date which have not been, either in any
individual case or in the aggregate, materially adverse.
3.6 CHANGES. Since the Balance Sheet Date, and excluding the
transactions contemplated by the Financing Documents, there has not been:
(a) Any change in the assets, liabilities, financial
condition or operations of the Company or any Subsidiary from that reflected in
the Financial Statements, other than changes in the ordinary course of business,
none of which individually or in the aggregate has had or is expected to have a
material adverse effect on such assets, liabilities, financial condition or
operations of the Company.
(b) Any resignation or termination of any key officers
of the Company; and the Company, to the best of its knowledge, does not know of
the impending resignation or termination of employment of any such officer;
(c) Any material change, except in the ordinary course
of business, in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise;
(d) Any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties,
business or prospects or financial condition of the Company;
(e) Any waiver by the Company of a valuable right or
of a material debt owed to it;
(f) Any direct or indirect loans made by the Company
to any stockholder, employee, officer or director of the Company, other than
advances made in the ordinary course of business;
(g) Any material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder of
the Company;
(h) Any declaration or payment of any dividend or
other distribution of the assets of the Company;
(i) Any labor organization activity;
(j) Any debt, obligation or liability incurred,
assumed or guaranteed by the Company, except those for immaterial amounts and
for current liabilities incurred in the ordinary course of business;
(k) Any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets of the Company;
(l) Any change in any material agreement to which the
Company is a party or by which it is bound which materially and adversely
affects the business, assets,
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liabilities, financial condition, operations or prospects of the Company,
including compensation agreements with the Company's employees; or
(m) Any other event or condition of any character
that, either individually or cumulatively, has materially and adversely affected
the business, assets, liabilities, financial condition, operations or prospects
of the Company.
3.7 MATERIAL CONTRACTS.
(a) Except as set forth on Item 3.7 of the Disclosure Schedule,
the Company has no, and is not bound by, any contract, agreement, lease,
commitment, or proposed transaction, judgment, order, writ or decree, written or
oral, absolute or contingent, other than (i) contracts for the purchase of
supplies and services that were entered into in the ordinary course of business
and that do not involve more than $10,000, and do not extend for more than one
year beyond the date hereof; (ii) sales contracts entered into in the ordinary
course of business; and (iii) contracts terminable at will by the Company on no
more than 30 days' notice without cost or liability to the Company and that do
not involve any employment or consulting arrangement and are not material to the
conduct of the Company's business. For the purpose of this paragraph, employment
and consulting contracts and contracts with labor unions, and license agreements
and any other agreements relating to the Company's acquisition or disposition of
patent, copyright, trade secret or other proprietary rights or technology (other
than standard end-user license agreements) shall not be considered to be
contracts entered into in the ordinary course of business. Every contract
disclosed on Item 3.7 of the Disclosure Schedule (collectively, the "Material
Contracts") is a legal, valid and binding obligation, enforceable in accordance
with its terms with respect to the Company and any other parties bound thereby,
and true and complete copies of all Material Contracts have been provided to
Purchasers. The Company has not been given notice that any other party is
currently in breach of any of the terms of any Material Contract. There is no
default or event that, with notice or lapse of time, or both, would conflict
with or constitute a breach of any Material Contract or would result in the
creation or imposition of any lien or encumbrance on the Company, or any of the
Company's property. The Company has not received notice that any party to any
Material Contract intends to cancel, amend or terminate any such agreement.
(b) The Company has not engaged in the past three months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations; (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company, or a
transaction or series of related transactions in which more than 50% of the
voting power of the Company is or was to be disposed; or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
3.8 OBLIGATIONS TO RELATED PARTIES. There are no obligations of the
Company to officers, directors, stockholders, or employees of the Company other
than (i) for payment of salary for services rendered since the commencement of
the Company's most recent payroll period; (ii) reimbursement for reasonable
expenses incurred on behalf of the Company; and (iii) for other standard
employee benefits made generally available to all employees (including stock
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option agreements outstanding under any stock option plan approved by the Board
of Directors of the Company). Except as disclosed on the Disclosure Schedule
hereto, none of the officers, directors or stockholders of the Company, or any
members of their immediate families, are indebted to the Company or have any
direct or indirect ownership interest in any firm or corporation with which the
Company is affiliated or with which the Company has a business relationship, or
any firm or corporation which competes with the Company, except that officers,
directors and/or stockholders of the Company may own stock in publicly traded
companies which may compete with the Company. No officer, director or
stockholder, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with the Company (other than
such contracts as relate to any such person's ownership of capital stock or
other securities of the Company). Except as may be disclosed in the Financial
Statements, the Company is not a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.
3.9 ASSETS. The Company has good and, with respect to real property,
marketable, title to all of its real and personal property, including all assets
reflected on the balance sheets included in the Financial Statements or acquired
by the Company since the Balance Sheet Date, all of which are in good operating
condition and free and clear of material restrictions on or conditions to
transfer or assignment, and free and clear of all liens, claims, mortgages,
pledges, charges, equities, easements, rights of way, covenants, conditions,
security interests, encumbrances, or restrictions, except for liens for current
taxes or materialmen not yet due and payable or being contested in good faith.
Set forth on Item 3.9 of the Disclosure Schedule is a correct and complete list
of all real property owned by the Company, and a list (including the amount of
annual rents called for and a summary description of the leased property) of all
leases under which the Company is a lessee. The properties and leases listed on
Item 3.9 of the Disclosure Schedule are sufficient for the conduct of the
Company's business as now being and presently planned to be conducted. The
Company holds a valid leasehold interest in all leases listed on Item 3.9 of the
Disclosure Schedule, free of any liens, claims, or encumbrances granted by the
Company, except for those described in the first sentence of this Section 3.9,
and is not in default under any such lease. The Company enjoys peaceful and
undisturbed possession of all premises owned by them, or leased to them from
others, and does not occupy any real property in material violation of any
law, regulations, or decree.
3.10 INTELLECTUAL PROPERTY.
(a) The Company owns exclusive right to all intellectual property
necessary to conduct its business as now being conducted and as planned to be
conducted, including all such rights relating to patents, trademarks, service
marks, copyrights, applications therefor, trade names, trade secrets, export of
technology and other information (collectively "Proprietary Information").
(b) The Company possess the exclusive commercial rights to all
Proprietary Information and the Proprietary Information is not subject to any
kind of lien, judgment or other encumbrance.
(c) True and complete copies of all papers relating to the
Proprietary Information have been provided to Purchasers, including all patent
application file histories,
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trademark and service mark application file histories, copyright registration
file histories, license and option negotiation papers, purchase negotiation
papers, and all licenses and agreements relating to the Proprietary Information.
(d) There is no pending or, to the knowledge of the Company,
threatened claim or litigation against the Company relating to the Proprietary
Information.
(e) There is no pending or, to the knowledge of the Company,
threatened claim or litigation against the Company or the Proprietary
Information asserting the infringement or other violation of any intellectual
property rights of a third party.
(f) To the best of the Company's knowledge and belief, there is no
claim that can be asserted against a third party for infringement,
misappropriation, breach or otherwise relating to the Proprietary Information.
(g) The Company has entered into the confidentiality agreements
with all employees and consultants, and with other third parties who have or are
likely to have as part of their association with the Company knowledge of the
present Proprietary Information and any future information that would be
considered Proprietary Information hereunder, in the form attached hereto as
Exhibit F.
(h) The Company, after reasonable investigation, is not aware of
any violation of the agreements identified in Paragraph (g).
(i) No shareholder, director, officer or employee of the Company
has any right, title or interest in or to any of the Proprietary Information.
3.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation
or default of any term of its Certificate or Bylaws, or of any provision of any
mortgage, indenture, contract, agreement, instrument or contract to which it is
party or by which it is bound or of any judgment, decree, order, writ or, to its
knowledge, any statute, rule or regulation applicable to the Company which would
materially and adversely affect the business, assets, liabilities, financial
condition, operations or prospects of the Company. The execution, delivery, and
performance of and compliance with this Agreement, and the Financing Documents,
and the issuance and sale of the Preferred Shares pursuant hereto and of the
Conversion Shares pursuant to the Certificate, will not, with or without the
passage of time or giving of notice, result in any such material violation, or
be in conflict with or constitute a default under any such term, or result in
the creation of any mortgage, pledge, lien, encumbrance or charge upon any of
the properties or assets of the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any permit license, authorization or
approval applicable to the Company, their business or operations or any of their
assets or properties.
3.12 LITIGATION. There are no actions, suits, or legal, administrative,
or other proceedings or investigations pending or, to the best of the Company's
knowledge, threatened before any court, agency, or other tribunal to which the
Company is a party or against or affecting any of the property, assets,
businesses, or financial condition of the Company. The Company is
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not in default with respect to any order, writ, injunction, or decree of any
federal, state, local or foreign court, department, agency, or instrumentality
to which it is a party.
3.13 TAXES. The Company has timely filed all federal, state, county,
local and foreign tax returns and reports within the times and in the manner
prescribed by law and has paid (or made adequate provision in the Financial
Statements for) all taxes shown due on such returns, as well as all other
assessments and penalties which have become due and payable. The Company's
federal income and other tax returns have not been audited by the Internal
Revenue Service or any other taxing authority and no notice of audit has been
received. The Company has received no notice of any disputes, deficiency
assessments, or proposed adjustments to taxes payable by the Company.
3.14 EMPLOYEES AND CONSULTANTS. Except as set forth on Item 3.14 of the
Disclosure Schedule, the Company has not entered into any arrangement with any
present or former employee that will result in any obligation of the Company to
make any payment to such employee upon termination. True and complete copies of
all written employment agreements with the key executive officers of the Company
listed on Item 3.14 of the Disclosure Schedule have been delivered to Purchasers
prior to the Closing Date. To the Company's knowledge, no employee of or
consultant to the Company is in material violation of any term of any employment
contract or any other contract or agreement relating to the relationship of any
such employee or consultant with the Company. The Company has not received
notice that any executive officer intends to terminate his employment with the
Company, nor does the Company have any present intention to terminate the
employment of any executive officer. To the Company's knowledge, none of its
employees are obligated under any contract (including licenses, covenants, or
commitments of any nature) or other agreement, or subject to any judgment,
decree, or order of any court or administrative agency, that would interfere
with the use of his/her reasonable diligence to promote the interests of the
Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant, or instrument under which
any of such employees is obligated, which conflict, breach, or default would be
materially adverse to the Company.
3.15 EMPLOYEE BENEFITS MATTERS. The Company does not maintain or
contribute to any plan or arrangement that constitutes an "employee pension
benefit plan" as defined in Section 3(2) of ERISA, and is not obligated to
contribute to or accrue or pay benefits under any deferred compensation or
retirement funding arrangement.
3.16 REGISTRATION RIGHTS. Except as required pursuant to the Investor
Rights Agreement, the Company is presently not under any obligation, and has not
granted any rights, to register any of the Company's presently outstanding
securities or any of its securities that may hereafter be issued.
3.17 GOVERNMENTAL APPROVALS/THIRD PARTY CONSENTS. All consents,
approvals, or authorizations of, or registrations, qualifications, designations,
declarations, or filings with any
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federal or state governmental authority, and all consents, approvals or
authorizations of any third party required in connection with the execution of
the Financing Documents and the performance of the transactions contemplated
hereby (including the issuance and sale of the Shares) have been obtained by the
Company. The Company has, or has rights to acquire, all licenses, permits, and
other similar authority necessary for the conduct of its business as now being
conducted by it and as planned to be conducted, the lack of which could
materially and adversely affect the operations or condition, financial or
otherwise, of the Company, and it is not in default in any material respect
under any of such licenses, permits or other similar authority.
3.18 COMPLIANCE WITH LAWS. (a) The Company has complied with and is in
compliance in all material respects with all foreign, federal, state and local
statutes, laws, ordinances, regulations, rules, judgments, orders and decrees
applicable to it and its assets, business and operations, and (b) the Company
has received no written notice of any claim of default under or violation of any
statute, law, ordinance, regulation, rule, judgment, order or decree except for
any such noncompliance or claim of default or violation, if any, which in the
aggregate do not and will not have a material adverse effect the property,
operations, financial condition or prospects of the Company.
3.19 ENVIRONMENTAL MATTERS. The Company is in compliance in all
material respects with all environmental and occupational health and safety laws
and, to its knowledge, no material expenditures are or will be required in order
to comply with any such laws.
3.20 OFFERING VALID. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, sale and
issuance of the Shares and the Conversion Shares will be exempt from the
registration requirements of the Securities Act and will have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.
3.21 ACCURACY OF INFORMATION FURNISHED. The Financing Documents, as
well as any exhibit, certificate, written statement, material or information
furnished by or on behalf of the Company pursuant thereto or in connection with
the transactions contemplated thereby to the Purchasers, do not contain any
untrue statement of a material fact or omit to state any material fact that is
necessary to make the statements contained herein or therein not misleading.
3.22 INSURANCE. The Company has fire and casualty insurance policies
with coverage customary for companies similarly situated to the Company.
3.23 SMALL BUSINESS CONCERN. The Company, together with its affiliates
(as that term is defined in Section 121.103 of Title 13 of the Code of Federal
Regulations (the "Federal Regulations") is a "small business concern" or a
"smaller business" within the meaning of the Small Business Investment Act or
1958 (as amended, the "Small Business Act"), and the regulations thereunder,
including Section 121.301 of Title 13 of the Federal Regulations (a "Small
Business Concern") or including Section 107.710 of Title 13 of the Federal
Regulations (a "Smaller Business"). The information delivered by the Company to
each Purchaser that is, or has applied to be, a licensed Small Business
Investment Company (an "SBIC Purchaser") on SBA Forms 480, 652 and 1031
delivered in connection herewith is true and correct. The Company is not
ineligible for financing by any SBIC Purchaser pursuant to Section 107.720 of
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Title 13 of the Federal Regulations. The Company acknowledges that each SBIC
Purchaser is, or has applied to be, a Federal licensee under the Small Business
Act.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
Each Purchaser makes the following representations and warranties
to the Company as to itself that:
4.1. REQUISITE POWER AND AUTHORITY. Purchaser is a corporation, limited
liability company, or limited partnership duly organized, validly existing and
in good standing under the laws of the jurisdiction of its formation, and has
all requisite partnership or corporate power and authority to own its assets and
operate its business. Purchaser has all necessary corporate or partnership power
and authority under all applicable provisions of law to execute and deliver this
Agreement and the Financing Documents and to carry out their provisions. All
action on Purchaser's part required for the lawful execution and delivery of
this Agreement and the Financing Documents have been or will be effectively
taken prior to each Closing Date. Upon their execution and delivery, this
Agreement and the Financing Documents will be valid and binding obligations of
Purchaser, enforceable in accordance with their terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights; (ii) general
principles of equity that restrict the availability of equitable remedies; and
(iii) to the extent that the enforceability of the indemnification provisions of
the Investor Rights Agreement may be limited by applicable laws.
4.2. INVESTMENT REPRESENTATIONS. Purchaser understands that the Shares
have not been registered under the Securities Act. Purchaser also understands
that the Shares are being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon Purchaser's
representations contained in this Agreement. Purchaser hereby represents and
warrants as follows:
(a) PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. Purchaser must bear the economic risk of
this investment indefinitely unless the Shares are registered pursuant to the
Securities Act, or an exemption from registration is available. Purchaser
understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the Shares
under the circumstances, in the amounts or at the times Purchaser might propose.
(b) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Shares
for Purchaser's own account for investment only, and not with a view towards
their distribution.
(c) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that
by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement and the Financing Documents.
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(d) ACCREDITED INVESTOR. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(e) COMPANY INFORMATION. Purchaser has received and read the
Financial Statements and has had an opportunity to discuss the Company's
business, management and financial affairs with directors, officers and
management of the Company and has had the opportunity to review the Company's
operations and facilities. Purchaser also has had the opportunity to ask
questions of and receive answers from, the Company and its management regarding
the terms and conditions of this investment.
(f) RULE 144. Purchaser acknowledges and agrees that the Shares
must be held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser
has been advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things: the availability of certain current public information about the
Company, the resale occurring not less than one year after a party has purchased
and paid for the security to be sold, the sale being through an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Exchange Act) and the number of shares being sold
during any three-month period not exceeding specified limitations.
(g) RESIDENCE. The office or offices of the Purchaser in which its
investment decision was made is located at the address or addresses of the
Purchaser as stated on the signature pages of this Agreement.
4.3 RESTRICTIVE LEGENDS. Purchaser agrees to the imprinting, so long as
required by law, of a legend on certificates representing all of the Shares or
the Conversion Stock to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
SECTION 5. CONDITIONS TO CLOSING.
5.1 CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSINGS. Purchasers'
obligations to purchase the Shares at the Closing are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made as of the Closing Date,
and the Company shall have performed all
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obligations and conditions herein required to be performed or observed by it on
or prior to such Closing.
(b) LEGAL INVESTMENT. On the Closing Date, the sale and issuance
of the Shares, and the proposed issuance of the Conversion Shares, shall be
legally permitted by all laws and regulations to which Purchasers and the
Company are subject.
(c) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Financing
Documents (except for such as may be properly obtained subsequent to the
Closings).
(d) APPROVAL OF CERTIFICATE. The Certificate shall have been
approved by the Company's Board of Directors at, or prior to the Closing.
(e) CORPORATE DOCUMENTS. The Company shall have delivered to
Purchasers or their counsel, copies of all corporate documents of the Company as
Purchasers shall reasonably request.
(f) RESERVATION OF CONVERSION SHARES. The Conversion Shares
issuable upon conversion of the Shares shall have been duly authorized and
reserved for issuance upon such conversion.
(g) CERTIFICATES. The Company shall have delivered to Purchasers:
(1) a certificate, as of the most recent practical date prior
to each Closing, of the Secretary of State of Colorado as to the Company's good
standing;
(2) a certificate of the Secretary of the Company dated as of
the Closing Date, certifying as to (i) the incumbency of officers of the Company
executing the Financing Agreements and all other documents executed and
delivered in connection therewith; (ii) a copy of the Certificate, in effect as
of the Closing; (iii) a copy of the Articles of Incorporation and Bylaws of the
Company, in effect on the Closing Date; and (iv) a copy of the resolutions or
consents of the Board of Directors of the Company authorizing and approving the
Company's execution, delivery and performance of the Financing Agreements; and
(3) a certificate, executed by the President of the Company as
of the Closing Date, certifying to the fulfillment of all of the conditions of
the Purchasers' obligations under this Agreement, as set forth in this Section
5, and to the use of proceeds for this financing, identified in Section 6.1.
(h) INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement
substantially in the form attached hereto as Exhibit D shall have been executed
and delivered by the parties thereto.
(i) LEGAL OPINION. The Purchasers shall have received from legal
counsel to the Company an opinion addressed to them, dated as of the Closing
Date, in substantially the form attached hereto as Exhibit G.
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(j) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at Closing and all documents
and instruments incident to such transactions shall be reasonably satisfactory
in substance and form to the Purchasers and their special counsel, and the
Purchasers and their special counsel shall have received all such counterpart
originals or certified or other copies of such documents as they may reasonably
request.
(k) DELIVERY OF SBA FORMS. The Company shall, as applicable, have
completed and executed, or have provided the necessary information for SBA Forms
480, 652 and 1031 on or prior to the Closing, in form and substance satisfactory
to Purchasers.
(l) CONCLUSION OF LITIGATION. A final, binding settlement and
judgment in the litigations between the Company and Screening Systems, Inc.
shall have been entered, to the Purchasers satisfaction.
5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY AT THE CLOSINGS. The
Company's obligation to issue and sell the Shares at the Closing is subject to
the satisfaction, at or prior to each Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties made by Purchasers in Section 4 hereof shall be true and correct in
all material respects at the Closing Date, with the same force and effect as if
they had been made on and as of said date.
(b) PERFORMANCE OF OBLIGATIONS. Purchasers shall have performed
and complied with all agreements and conditions herein required to be performed
or complied with by Purchasers on or before the Closing.
(c) INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement
substantially in the form attached hereto as Exhibit D shall have been executed
and delivered by the parties thereto.
(d) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the Financing
Documents (except for such as may be properly obtained subsequent to the
Closing).
SECTION 6. COVENANTS OF THE COMPANY FOR THE PERIOD FOLLOWING CLOSING.
Until the date upon which all Preferred Shares held by Purchasers
(including any capital stock of the Company issued upon conversion of the Series
A Preferred Stock) are no longer outstanding, the Company covenants to each
Purchaser and agrees as follows:
6.1 USE OF PROCEEDS. Any proceeds from the sale of the Preferred Shares
to Purchasers pursuant to this Agreement shall be used to open approximately
twelve additional
13
<PAGE> 14
ARTC centers in the United States, Europe and Asia, within approximately six
months of the Closing.
6.2 MAINTENANCE OF CORPORATE STATUS. The Company shall maintain, and
shall cause each affiliate to maintain, its corporate or partnership existence
in good standing or effective under the laws of its jurisdiction of organization
and any other states or jurisdictions in which its failure to qualify as a
foreign corporation or entity would have a material adverse effect on its
operations or financial condition.
6.3 COMPLIANCE WITH GOVERNING DOCUMENTS. The Company shall comply, and
shall cause each affiliate to comply, in all material respects with its
Certificate, Articles of Incorporation, Bylaws or other governing documents.
6.4 COMPLIANCE WITH LAWS, LICENSES AND PERMITS; NO INFRINGEMENT. The
Company shall comply with all applicable federal, state, local, foreign and
other laws, regulations and ordinances, and with all applicable federal, state,
local and foreign governmental licenses and permits necessary for conducting its
business, except to the extent that any noncompliance would not have a material
adverse effect upon the Company. The Company shall not knowingly engage in any
activities that infringe upon the intellectual property rights of any other
person, corporation, partnership or other entity which could have a material
adverse effect upon the Company.
6.5 DISCHARGE OF OBLIGATIONS. The Company shall pay and discharge all
taxes, assessments, and governmental charges lawfully levied or imposed upon it
(in each case before they become delinquent and before penalties accrue), all
lawful claims for labor, materials, supplies and rents, and all other debts and
liabilities that if unpaid would by law be a lien or charge upon any of the
asserts or properties of the Company or lead to suspension of the business of
the Company (except to the extent contested in good faith by the Company and for
which adequate reserves are established).
6.6 MAINTENANCE OF PROPERTIES. The Company shall maintain all real and
personal property used in the business of the Company in good operating
condition, and shall make all repairs, renewals, replacements, additions and
improvements to those properties as are necessary or appropriate in the ordinary
course of business.
6.7 MAINTENANCE OF PROPRIETARY INFORMATION. The Company shall maintain
all proprietary information, and all applications and registrations therefor
owned or held by the Company, in full force and effect, except as otherwise
determined in the ordinary course of business. The Company shall not encumber or
license others to use its proprietary information owned by it except in the
ordinary course of the Company's business, and shall maintain the
confidentiality and trade secret status of all proprietary information that is
confidential except where disclosure is necessary to obtain copyright
registrations or patents, or is necessary or desirable in the ordinary course of
the Company's business. The Company shall enter into and maintain a
Confidentiality Agreement, substantially in the form attached at Exhibit F with
each employee and, as appropriately modified, each consultant to the Company,
and shall enter into and maintain a Noncompete Agreement, substantially in the
form attached at Exhibit H with each key management employee of the Company.
14
<PAGE> 15
6.8 BOOKS AND RECORDS. The Company shall, and shall cause each
affiliate to, keep proper books of records and account, in which full and
correct entries shall be made of all financial transactions and the assets and
business of the Company and each affiliate, in accordance with generally
accepted accounting principles in effect from time to time. The Company shall
provide Purchasers with access to all such books and records and allow
Purchasers to make copies and abstracts thereof at reasonable times.
6.9 REPURCHASE OPTION; CONVERSION. The Company shall have a one-time
option to repurchase the Preferred Shares, or require the Purchasers to convert
their Preferred Shares to Common Stock in the Company, under the following
terms. At any time following a 45 consecutive day trading period on the exchange
on which the Company's Common Stock is traded, during which the average closing
price per share of the Company's Common Stock is at least $5.00 per share, the
Company may give notice of its intention to repurchase all of the Preferred
Shares (the "Repurchase Notice"). The Purchasers shall have 30 days from receipt
of the Repurchase Notice to elect to convert their Preferred Shares to Common
Stock, by notice to the Company, in which case they shall be permitted to
convert some or all of their Preferred Shares pursuant to Section 4.1 of the
Certificate. In the event that the Purchasers do not elect to convert all of
their Preferred Shares, the Company may repurchase all, but not less than all,
of the remaining Preferred Shares at the price of (i) $4.00 per share, or (ii)
90% of the fair market value of the Shares, whichever is greater, plus any
accumulated dividends, by notice to the Purchasers and tendering of immediately
available funds within five business days of the expiration of Purchasers'
conversion option. The fair market value of the Shares shall be determined, for
the purpose of this Section, by the average closing price of the Common Stock
for the five trading days prior to the date on which Purchaser's option to
convert expires.
SECTION 7 MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Colorado as such laws are applied to agreements between Colorado
residents entered into and performed entirely in Colorado.
7.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
7.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares from time to time.
7.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto, the Financing Documents and the other documents delivered pursuant
hereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and no
15
<PAGE> 16
party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically set
forth herein and therein.
7.5 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
7.6 AMENDMENT AND WAIVER. This Agreement may be amended or modified
only upon the written consent of the Company and the holders of at least
sixty-six percent (66%) of the Preferred Shares (treated as if converted and
including any Conversion Shares into which the Preferred Shares have been
converted that have not been sold).
7.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement, the Financing
Documents or the Certificate, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent or approval of any kind or character on any Purchaser's
part of any breach, default or noncompliance under this Agreement, the Financing
Documents or under the Certificate or any waiver on such party's part of any
provisions or conditions of the Agreement, the Financing Documents, or the
Certificate must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, the Financing Documents, the Certificate, by law, or otherwise
afforded to any party, shall be cumulative and not alternative.
7.8 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (I) upon personal delivery to the
party to be notified; (ii) when sent by confirmed facsimile if sent during
normal business hours of the recipient, if not, then on the next business day;
(iii) three (3) business days after having been sent by registered or certified
mail, return receipt requested, postage prepaid; or (iv) one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the Company and to Purchasers at the addresses set forth on the signature
pages attached hereto or at such other address as the Company or Purchaser may
designate by ten (10) days advance written notice to the other parties hereto.
7.9 EXPENSES. The Company hereby agrees to reimburse each Purchaser for
its out-of-pocket expenses incurred in connection with the transactions
contemplated hereby, including all expenses incurred in connection with its due
diligence examination of the Company, the preparation and negotiation of the
Financing Documents, including the reasonable fees (not to exceed $10,000) and
expenses of special counsel to the Purchasers, and in connection with the
enforcement of rights and remedies of the Purchasers hereunder and all other
documents evidencing the transactions contemplated herein.
7.10 INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify
and hold each Purchaser harmless against any loss, liability, damage or expense
(including reasonable legal fees and costs) which such Purchasers may suffer,
sustain or become subject to as a result
16
<PAGE> 17
of or in connection with the breach by the Company of any representation,
warranty, covenant or agreement of the Company contained in this Agreement or
the Financing Documents.
7.11 INDEMNIFICATION BY THE PURCHASERS. Each Purchaser, severally and
not jointly, agrees to indemnify and hold the Company harmless against any loss,
liability, damage or expense (including reasonable legal fees and costs) which
the Company may suffer, sustain or become subject to as a result of or in
connection with the breach by such Purchaser of any representation, warranty,
covenant or agreement of such Purchaser contained in this Agreement or the
Financing Documents.
7.12 TITLES AND SUBTITLES. The titles of the sections and subsections
of the Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.13 COUNTERPARTS. This Agreement may be delivered via facsimile and
may be executed in any number of counterparts, each of which shall be an
original, but all of which together shall constitute one instrument.
7.14 BROKER'S FEES. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 7.14 being untrue.
7.15 ARBITRATION. The parties hereby covenant and agree that any legal
suit, dispute, claim, demand, controversy or cause of action of every kind and
nature whatsoever, known or unknown, fixed or contingent, that any party may now
have or at any time in the future claim to have based in whole or in part, or
arising from or out of or that in any way is related to the negotiations,
execution, interpretation or enforcement of this Agreement (collectively, the
"Disputes") shall be completely and finally settled by submission of any such
Disputes to arbitration under the rules of the American Arbitration Association
("AAA") then in effect. There shall be one arbitrator, and such arbitrator
shall be chosen by mutual agreement of the parties in accordance with AAA rules.
Unless the parties agree otherwise, the arbitration proceedings shall take place
in Boulder, Colorado. The arbitrator shall apply Colorado law to all issues in
dispute, in accordance with Section 8.1 above. Notice of demand for arbitration
shall be filed in writing with the other party to this Agreement and with the
AAA. In no event shall the demand for arbitration be made after the date when
institution of legal or equitable proceedings based on such Dispute would be
barred by the applicable statute of limitations. The findings of the arbitrator
shall be final and binding on the parties. Judgment on such award may be entered
in any court of competent jurisdiction, or application may be made to that court
for a judicial acceptance of the award and an order or enforcement, as the party
seeking to enforce that award may elect. The prevailing party in any such action
shall be entitled to receive from the losing party all reasonable costs and
expenses, including the reasonable fees of attorneys, accountants, and other
experts, incurred by the prevailing party in investigating and prosecuting (or
defending) such action, together with any such fees which may be incurred in
enforcing any award of judgment.
17
<PAGE> 18
7.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it
is not relying upon any person, firm, or corporation, other than the Company and
its officers and directors, in making its investment or decision to invest in
the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable for any action heretofore or hereafter taken or
omitted to be taken by any of them in connection with the Preferred Shares and
Conversion Shares.
7.17 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as the identity of the parties hereto may require.
[SIGNATURE PAGES FOLLOW]
18
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed the
PREFERRED STOCK PURCHASE AGREEMENT as of the date set forth in the first
paragraph hereof.
COMPANY:
QUALMARK CORPORATION, a Delaware corporation
1329 West 121st Street
Denver, Colorado 80234
By: /s/ W. PRESTON WILSON
-------------------------------
W. Preston Wilson
President & Chief Executive Officer
<TABLE>
<CAPTION>
PURCHASERS: Number of Warrants
Shares Purchased Purchased
---------------- ---------
<S> <C> <C>
THE ROSER PARTNERSHIP III, SBIC, LP
1105 Spruce Street
Boulder, Colorado 80302
By: Roser Ventures, SBIC, LLC 456,116 139,535
Its: General Partner
</TABLE>
By: /s/ CHRISTOPHER W. ROSER
---------------------------------
Christopher W. Roser, Member
19
<PAGE> 20
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES
UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO AN EXEMPTION TO SUCH
ACT.
QUALMARK CORPORATION
WARRANT TO PURCHASE 139,535
SHARES OF COMMON STOCK
Void after August 31, 2004
THIS CERTIFIES THAT, for value received, The Roser Partnership III,
SBIC, LP, a Delaware limited partnership (the "Holder") is entitled to purchase,
on the terms and subject to the conditions hereof, up to 139,535 shares of
Common Stock, no par value (the "Common Stock"), of Qualmark Corporation., a
Colorado corporation (the "Company"), at a per share purchase price of $2.50
(the "Exercise Price"), subject to adjustment as provided herein.
The following terms shall apply to this Warrant:
1. Exercise of Warrant. The terms and conditions upon which this
Warrant may be exercised, and the Common Stock covered hereby (the "Warrant
Shares"), may be purchased, are as follows:
1.1 Number of Shares. This Warrant is being delivered to
Holder as consideration for Holder's contemporaneous financing of the Company.
The number of Warrant Shares for which this Warrant is initially exercisable is
139,535 shares, which number is subject to adjustment pursuant to Section 2 of
this Warrant.
1.2 Exercise. This Warrant may be exercised in whole or in
part at any time or from time to time up until 5:00 p.m. Mountain Standard Time,
August 31, 2004, and shall be void thereafter. The exercise of the purchase
rights hereunder, in whole or in part shall be effected by (a) the surrender of
this Warrant, together with a duly executed copy of the form of the subscription
attached as Exhibit A hereto, to the Company at its principal offices, and (b)
the delivery of the Exercise Price by (i) cashier's or certified check or bank
draft payable to the Company's order, or (ii) by wire transfer to the Company's
account for the number of Warrant Shares for which the purchase rights hereunder
are being exercised.
1.3 Automatic Exercise. Notwithstanding the provisions of
Section 1.1 above, this Warrant shall automatically be deemed to be exercised in
full in the manner set forth in Section 1.4 hereof, without any further action
on behalf of the Holder (other than the payment of the exercise price) on the
earliest of a date: (a) immediately prior to the time this Warrant would
<PAGE> 21
otherwise expire, or (b) ten (10) days prior to a "Sale of the Company" (as
defined). A "Sale of the Company" shall mean either of the following (i) the
acquisition of all or substantially all of the capital stock of the Company by
another entity by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation but,
excluding any merger effected exclusively for the purpose of changing the
domicile of the Company); or (ii) a sale of all or substantially all of the
assets of the Company; unless the Company's shareholders of record as
constituted immediately prior to such acquisition or sale will, immediately
after such acquisition or sale (by virtue of securities issued as consideration
for the corporation's acquisition or sale or otherwise) hold at least 50% of the
voting power of the surviving or acquiring entity. In connection with the
exercise of this Warrant pursuant to clause (b) of this Section 1.3, such
exercise shall be conditioned upon the closing of such Sale of the Company and
the Warrant shall not be deemed to have been exercised until the closing of such
Sale of the Company.
1.4 Net Issue Election.
(a) Upon automatic exercise of this Warrant as
provided in Section 1.3 above or at any time or from time to time as the Holder
may elect, the Holder shall be entitled to receive, without the payment by the
Holder of any additional consideration, shares of Common Stock equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant or
such portion to the Company, with the net issue election notice attached hereto
as Exhibit B duly executed, at the principal office of the Company. Thereupon,
the Company shall issue to the Holder such number of fully paid and
nonassessable shares of Common Stock as is computed using 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 shares of
Common Stock covered by this Warrant in respect
of which the net issue election is made.
A= the fair market value of
one share of Common Stock, as determined
pursuant to subsection (b) below, as at the time
the net issue election is made.
B= the Exercise Price in effect
under this Warrant at the time the net issue
election is made.
(b) Determination of Fair Market Value. For purposes
of this Section, fair market value of one share of Common Stock (or, to the
extent all such Common Stock has been converted into the Company's Common Stock,
one share of Common Stock) as of a particular date (the "Determination Date")
shall mean:
2
<PAGE> 22
(i) In the case of a Sale of the Company, the
effective per share consideration to be received in a Sale of the Company by
holders of the Common Stock, or if no such price is set forth in the agreement
concerning the Sale of the Company, then as determined in good faith by the
Company's Board of Directors;
(ii) If the Company's Common Stock is listed on
the Nasdaq National Market or other security exchange, the closing price of the
Company's Common Stock on such exchange or the Nasdaq National Market on the day
notice of exercise is provided to the Company under Section 1.4(b) hereof; or
(iii) If Sections 1.4(b)(i) or (ii) do not
apply, then as determined by the Board of Directors in good faith, which
determination shall be conclusive and binding on the holder hereof.
1.5 Issuance of Shares. Upon the exercise of the purchase
rights, in whole or in part, evidenced by this Warrant, a certificate or
certificates for the purchased Warrant Shares shall be issued by the Company to
the Holder as soon as practicable. Upon the partial exercise of this Warrant,
the Company shall, as soon as practicable, deliver to the Holder a warrant in
like tenor as this Warrant to purchase the number of shares in respect of which
this Warrant shall not have been exercised.
2. Certain Adjustments.
2.1 Common Stock Dividends. If the Company at any time prior
to the expiration of this Warrant shall pay a dividend with respect to the
Company's Common Stock payable in shares of Common Stock, or make any
distribution with respect to the Company's Common Stock, then the purchase price
per share shall be appropriately decreased, and the number of Warrant Shares
shall be appropriately increased in proportion to such dividend.
2.2 Splits and Subdivisions. In the event the Company should
at any time or from time to time fix a record date for a split or subdivision of
the outstanding shares of Common Stock of the Company, or the determination of
the holders of Common Stock of the Company entitled to receive a dividend or
other distribution payable in additional shares of Common Stock of the Company
or other securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly, additional shares of the Company's Common
Stock (hereinafter referred to as the "Common Stock Equivalents") without
payment of any consideration by such holder for the additional shares of Common
Stock or Common Stock Equivalents (including the additional shares of Common
Stock issuable upon conversion or exercise thereof), then, and as of such record
date (or the date of such distribution, split or subdivision if no record date
is fixed), the per share purchase price shall be appropriately decreased, and
the number of Warrant Shares shall be appropriately increased in proportion to
such increase of outstanding shares.
2.3 Combination of Shares. If the number of shares of Common Stock
outstanding at any time after the date hereof is decreased by a combination of
the outstanding shares of Common Stock of the Company, the per share purchase
price shall be appropriately
3
<PAGE> 23
increased and the number of Warrant Shares shall be appropriately decreased in
proportion to such decrease in outstanding shares.
2.4 Adjustments for Other Distributions. In the event the
Company shall declare a distribution with respect to the Common Stock payable in
securities of other persons, evidences of indebtedness issued by the Company or
other persons, assets, or options, or rights not referred to above, then, in
each such case for the purpose of this Section 2, upon exercise of this Warrant
the holder hereof shall be entitled to a proportionate share of any such
distribution as though such holder was the holder of the number of shares of
Common Stock of the Company into which this Warrant may be exercised as of the
record date fixed for the determination of the holders of Common Stock of the
Company entitled to receive such distribution.
2.5 Certificate as to Adjustments. In the case of each
adjustment or readjustment of the purchase price pursuant to this Section 2, the
Company will promptly compute such adjustment or readjustment in accordance with
the terms hereof and cause a certificate setting forth such adjustment or
readjustment, and showing in detail the fact upon which such adjustment or
readjustment is based to be delivered to the holder of this Warrant. The Company
will, upon the written request at any time of the holder of this Warrant,
furnish or cause to be furnished to such holder a certificate setting forth:
(a) such adjustments and readjustments;
(b) the purchase price at the time in effect; and
(c) the number of Warrant Shares receivable upon the
exercise of the Warrant.
2.6 Notice of Record Date, etc. In the event of any taking by
the Company of a record of the holders of any class of securities of the Company
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend), or other distribution, or any right
to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, or any
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company, the Company will mail to the holder of this
Warrant at least twenty (20) days prior to the earliest date specified therein,
a notice specifying:
(a) The date on which such record is to be taken for
the purpose of such dividend, distribution, or right, and the amount and
character of such dividend, distribution, or right; or
(b) The date on which any such reorganization, or
reclassification is expected to become effective, and the record date for
determining shareholders entitled to vote thereon.
4
<PAGE> 24
3. Representations of Holder.
3.1 Investment Intent. Holder hereby warrants and represents
that Holder is acquiring this Warrant, and any Warrant Shares issued upon
exercise of this Warrant, for Holder's own account and not with a view to their
resale or distribution.
3.2 Exempt from Registration. Holder acknowledges that this
Warrant has not been registered under the Securities Act of 1933, as amended
(the "1933 Act"), on the ground that the issuance of this Warrant is exempt
from registration pursuant to Section 4(2) of the 1933 Act, and that the
Company's reliance on such exemption is predicated on the representations of
Holder set forth herein.
3.3 Investment Experience. In connection with the investment
representations made herein, Holder represents that it is able to fend for
itself in the transactions contemplated by this Warrant, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of his investment, has the ability to bear the economic risks
of its investment and has been furnished with and has had access to such
information as it has requested and deemed appropriate to its investment
decision.
3.4 Restricted Securities. Holder hereby confirms that Holder
has been informed that this Warrant, and the Warrant Shares issued upon exercise
of this Warrant, are restricted securities under the 1933 Act and may not be
resold or transferred unless this Warrant, and the Warrant Shares issued upon
exercise of this Warrant, are first registered under the federal securities laws
or unless an exemption from such registration is available. Holder acknowledges
that the Company has no obligation to register the Warrant Shares. Accordingly,
Holder hereby acknowledges that Holder is prepared to hold this Warrant, and the
Warrant Shares issued upon exercise of this Warrant, for an indefinite period.
(a) Disposition of Shares. Holder hereby agrees that
Holder shall make no disposition of this Warrant, and the Warrant Shares issued
upon exercise of this Warrant, unless and until Holder shall have (i) provided
the Company with assurances that (A) the proposed disposition does not require
registration of the Warrant Shares under the 1933 Act, or (B) all appropriate
action necessary for compliance with the registration requirements of the 1933
Act or of any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.
3.5 Restrictive Legend. In order to reflect the restrictions
on disposition of the Warrant Shares, the stock certificates for the Warrant
Shares will be endorsed with restrictive legends to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF
SUCH ACT OR SUCH LAWS.
5
<PAGE> 25
4. Representations, Warranties and Covenants. This Warrant is issued
and delivered by the Company and accepted by each Holder on the basis of the
following representations, warranties and covenants made by the Company:
4.1 The Company covenants that it will at all times from and
after the date hereof reserve and keep available such number of its authorized
shares of Common Stock of the Company as will be sufficient to permit the
exercise of this Warrant in full. The Company covenants further that such shares
as may be issued pursuant to such exercise will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof
4.2 The Company has all necessary authority to issue, execute
and deliver this Warrant and to perform its obligations hereunder. This Warrant
has been duly authorized issued, executed and delivered by the Company and is
the valid and binding obligation of the Company, enforceable in accordance with
its terms.
4.3 The shares of Common Stock issuable upon the exercise of
this Warrant have been duly authorized and reserved for issuance by the Company
and, when issued in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable.
4.4 The issuance, execution and delivery of this Warrant do
not, and the issuance of the shares of Common Stock upon the exercise of this
Warrant in accordance with the terms hereof will not, (i) violate or contravene
the Company's articles of incorporation or bylaws, or any law, statute,
regulation, rule, judgment or order applicable to the Company, (ii) violate,
contravene or result in a breach or default under any contract, agreement or
instrument to which the Company is a party or by which the Company or any of its
assets are bound or (iii) require the consent or approval of or the filing of
any notice or registration with any person or entity.
5. Fractional Shares. No fractional shares shall be issued in
connection with any exercise of this Warrant. In lieu of the issuance of such
fractional shares, the Company shall make a cash payment equal to the then fair
market value of such fractional share as determined in good faith by the
Company's Board of Directors pursuant to Section 1.4(b) above.
6. No Privilege of Stock Ownership. Prior to the exercise of this
Warrant, the Holder shall not be entitled, by virtue of holding this Warrant, to
any rights of a stockholder of the Company, including (without limitation) the
right to vote, receive dividends or other distributions, or exercise preemptive
rights, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of the Company. Nothing in this
Section 6, however, shall limit the right of the Holder to be provided the
notices required herein, or to participate in distributions described in Section
2 hereof if the Holder ultimately exercises this Warrant.
6
<PAGE> 26
7. Transfers or Exchanges.
7.1 Subject to compliance with applicable federal and state
securities laws, this Warrant and all rights hereunder are transferable in whole
or in part by the Holder to any person or entity reasonably acceptable to the
Company. The Holder will provide written notice of such transfer to the Company,
and if no written objection from the Company is received by the Holder within
five business days after the date of notice, then such transfer shall be deemed
accepted. The transfer shall be recorded on the books of the Company upon the
surrender of this Warrant, properly endorsed, to the Company at its principal
offices, and the payment to the Company of all transfer taxes and other
governmental charges imposed on such transfer. In the event of a partial
transfer, the Company shall issue to the holders one or more appropriate new
warrants.
7.2 All new warrants issued in connection with transfers,
exchanges or partial exercises shall be identical in form and provision to this
Warrant, except as to the number of shares.
8. Successors and Assigns. The terms and provisions of this Warrant
shall be binding upon the Company, the Holder, and their respective successors
and assigns, subject at all times to the restrictions set forth in the Agreement
and in this Warrant.
9. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt of
notice by the Company of the loss, theft, destruction, or mutilation of this
Warrant, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and, if mutilated upon surrender and cancellation of this
Warrant, the Company will make and deliver a new warrant, in identical form, and
dated as of such cancellation, in lieu of this Warrant.
10. 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, or Sunday, or shall be a legal holiday, then such
action may be taken or such right may be exercised, except as to the purchase
price, on the next succeeding day not a legal holiday.
11. Amendments and Waivers. Any term of this Warrant may be amended,
and the observance of any term of this Warrant may be waived (either generally
or in a particular instance, and either retroactively or prospectively), with
the written consent of the Company and the Holder, such consent not to be
unreasonably withheld. Any such amendment or waiver shall be binding on the
Holder.
12. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Colorado.
13. Notices. Any notice, demand or delivery pursuant to the provisions
hereof shall be sufficiently delivered or made if sent by first class mail,
postage prepaid, addressed to any holder of a Warrant at its last known address
appearing on the books of the Company, or, except as herein otherwise expressly
provided, to the Company at its principal executive office at 1329
7
<PAGE> 27
West 121st Street, Denver, Colorado 80234, or such other address as shall
have been furnished to the party giving or making such notice, demand or
delivery.
DATED: September 1, 1999
QUALMARK CORPORATION
/s/ W. PRESTON WILSON
-------------------------------------
W. Preston Wilson
President and Chief Executive Officer
8
<PAGE> 28
EXHIBIT A
Subscription
Qualmark Corporation
1329 West 121st Street
Denver, Colorado 80234
Ladies and Gentlemen:
The undersigned hereby elects to purchase, pursuant to the provisions
of the Warrant dated September 1, 1999, 139,535 shares of the Common Stock of
Qualmark Corporation, a Colorado corporation.
Dated:
--------------------, ----------
THE ROSER PARTNERSHIP III, SBIC, LP
By: Roser Ventures, SBIC, LLC
Its: General Partner
By:
----------------------------------
Christopher W. Roser, Member
9
<PAGE> 29
EXHIBIT B
Net Issue Election
Qualmark Corporation
1329 West 121st Street
Denver, Colorado 80234
Ladies and Gentlemen:
The undersigned hereby elects under Section 1.4 of the Warrant dated
September 1, 1999 (the "Warrant"), to exercise its right to receive 139,535
shares of Common Stock of Qualmark Corporation, a Colorado corporation, pursuant
to the Warrant. The certificate(s) for such shares issuable upon such net issue
election shall be issued in the name of the undersigned or as otherwise
indicated below:
Name for Registration:
Mailing Address:
THE ROSER PARTNERSHIP III, SBIC, LP
By: Roser Ventures, SBIC, LLC
Its: General Partner
By:
------------------------------------
Christopher W. Roser, Member
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,316
<SECURITIES> 0
<RECEIVABLES> 3,217
<ALLOWANCES> 164
<INVENTORY> 1,950
<CURRENT-ASSETS> 7,935
<PP&E> 3,371
<DEPRECIATION> 1,814
<TOTAL-ASSETS> 9,737
<CURRENT-LIABILITIES> 5,742
<BONDS> 0
0
842
<COMMON> 6,528
<OTHER-SE> 761
<TOTAL-LIABILITY-AND-EQUITY> 9,737
<SALES> 8,831
<TOTAL-REVENUES> 8,831
<CGS> 5,484
<TOTAL-COSTS> 6,550
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> (3,323)
<INCOME-TAX> (574)
<INCOME-CONTINUING> (2,749)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,749)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
