<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
( X ) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange
Act of 1934
For the transition period from to
------------------ ------------------
Commission file number: 0-21633
BRISTOL RETAIL SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-2235556
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No).
3760 KILROY AIRPORT WAY, SUITE 450, LONG BEACH, CALIFORNIA 90806
(Address of Principal Executive Offices) (Zip code)
(562) 988-3660
(Issuer's Telephone Number, Including Area Code)
5000 BIRCH STREET, SUITE 205, NEWPORT BEACH, CALIFORNIA, 92660
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Check mark whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $.001 par value - 6,968,282 shares as of April 30, 2000
Class A Redeemable Common Stock Purchase Warrants - 718,750 as of April
30, 2000
Page 1
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BRISTOL RETAIL SOLUTIONS, INC.
Index
<TABLE>
<CAPTION>
<S> <C>
Part I --- FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three months ended March
31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the three months ended March
31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II --- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</TABLE>
Page 2
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Balance Sheets
<CAPTION>
ASSETS March 31, December 31,
2000 1999
(Unaudited)
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 393,383 $ 332,959
Accounts receivable, net of allowance for doubtful accounts of $309,421
and $286,497 at March 31, 2000 and December 31, 1999 4,081,476 5,378,202
Inventories, net 3,828,026 3,853,041
Prepaid expenses and other current assets 408,568 395,767
Current portion of note receivable 67,746 82,331
-------------- --------------
Total current assets 8,779,199 10,042,300
Property and equipment, net 547,927 596,781
Intangible assets, net of accumulated amortization of $876,622 and $808,790 at
March 31, 2000 and December 31, 1999 4,204,378 4,272,210
Note receivable - noncurrent portion 109,211 116,898
Other assets 182,910 192,611
-------------- --------------
Total assets $ 13,823,625 $ 15,220,800
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 2,854,211 $ 3,351,434
Accounts payable 2,585,641 2,506,322
Accrued salaries, wages and related benefits 322,989 643,761
Accrued expenses 369,510 587,322
Deferred service revenue 1,619,121 1,327,066
Customer advances 619,081 652,348
Current portion of note payable to related party 6,297 15,577
Current portion of long-term debt 41,365 10,293
Current portion of capital lease obligations 43,233 44,205
-------------- --------------
Total current liabilities 8,461,448 9,138,328
Long term debt 31,674 66,667
Capital lease obligations - noncurrent portion 43,560 57,586
Other long-term liabilities 67,557 67,557
Commitments and contingencies
Series C Convertible Preferred Stock, 4,000,000 shares authorized; 500,000
shares issued and outstanding at March 31, 2000 1,000,000 --
Stockholders' equity
Preferred stock:
No par value; Series B Preferred Stock; $1,000,000 shares
authorized; 500,000 shares issued and 100,000 shares outstanding
at March 31, 2000 and 400,000 shares at December 31, 1999 100,000 400,000
Common stock, $.001 par value:
20,000,000 shares authorized; 6,968,282 and 6,963,282 shares
issued and outstanding at March 31, 2000 and December 31, 1999 6,968 6,968
Additional paid-in capital 13,475,972 13,259,222
Accumulated deficit (9,338,929) (7,750,903)
-------------- --------------
4,244,011 5,915,287
Less 5,000 shares of treasury stock, at cost (24,625) (24,625)
-------------- --------------
Total stockholders' equity 4,219,386 5,890,662
-------------- --------------
Total liabilities and stockholders' equity $ 13,823,625 $ 15,220,800
============== ==============
See accompanying notes to consolidated financial statements.
Page 3
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended March 31,
2000 1999
-------------- --------------
<S> <C> <C>
Revenue:
System sales and installation 4,014,187 5,183,770
Service and supplies sales 2,129,824 2,925,546
-------------- --------------
Net revenue 6,144,011 8,109,316
Cost of revenue:
System sales and installation 3,337,899 3,433,533
Service and supplies sales 1,612,921 2,139,696
-------------- --------------
Total cost of revenue 4,950,820 5,573,229
-------------- --------------
Gross margin 1,193,191 2,536,087
Operating expenses:
Selling, general and administrative expenses 2,282,411 2,673,962
Research and development costs -- 235,322
-------------- --------------
Total operating expenses 2,282,411 2,909,284
-------------- --------------
Operating loss (1,089,220) (373,197)
Other expense, net 130,772 124,618
-------------- --------------
Loss before income taxes (1,219,992) (497,815)
Provision for income tax -- --
-------------- --------------
Net loss and comprehensive net loss $ (1,219,992) $ (497,815)
============== ==============
Net loss $ (1,219,992) $ (497,815)
Preferred stock accretion and dividends:
Accretion related to Series C Convertible Preferred Stock (334,056) --
Cumulative dividends for Preferred Stock (33,978) --
-------------- --------------
Net loss applicable to common stockholders $ (1,588,026) $ (497,815)
============== ==============
Basic and diluted net loss to common stockholders per share $ (0.23) $ (0.07)
============== ==============
Basic and diluted weighted average common shares outstanding 6,963,282 6,915,519
============== ==============
See accompanying notes to consolidated financial statements.
Page 4
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<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended March 31,
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,219,992) $ (497,815)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 52,765 79,977
Amortization 105,034 145,131
Provision for doubtful accounts 23,402 --
Changes in operating assets and liabilities:
Accounts receivable 1,273,324 1,029,220
Inventories 4,900 252,595
Prepaid expenses and other assets (50,221)
Accounts payable 79,319 358,154
Other accrued expenses (546,622)
Deferred revenue 292,055 (116,653)
Customer advances (33,267) 483,413
Other long-term liabilities --
-------------- --------------
Net cash provided by (used in) operating activities (19,303) 1,119,786
Cash flows from investing activities:
Cash paid for final installment, acquisition -- (10,000)
Receivables from rescinded acquisition 15,000 56,807
Purchases of property and equipment (3,911) (22,856)
-------------- --------------
Net cash provided by investing activities 11,089 23,951
Cash flows from financing activities:
Repayment of capital lease obligations (14,998) (14,865)
Repayment of note payable to related party (9,280) (27,733)
Net borrowings (repayments) on line of credit (497,223) (677,597)
Repayment of long-term debt (3,921) (4,849)
Issuance of Series C Convertible Preferred Stock and warrants 1,000,000 --
Preferred stock issuance costs (80,000) --
Redemption of preferred stock (300,000) --
Payment of cash dividends-preferred stock (25,940) --
-------------- --------------
Net cash provided by (used in) financing activities 68,638 (725,044)
Net increase in cash and cash equivalents 60,424 418,693
Cash and cash equivalents at beginning of period 332,959 146,235
-------------- --------------
Cash and cash equivalents at end of period $ 393,383 $ 564,928
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 126,251 $ 96,105
============== ==============
Cash paid for income taxes $ -- $ 5,100
============== ==============
Supplemental disclosures of non-cash transactions:
Preferred stock accretion recorded to increase Series C
Preferred Stock to redemption value $ 334,056 $ --
============== ==============
See accompanying notes to consolidated financial statements.
Page 5
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BRISTOL RETAIL SOLUTIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Bristol Retail Solutions, Inc. (the Company) was incorporated on April
3, 1996 in the state of Delaware for the purpose of acquiring and operating a
national network of full-service retail automation solution providers. The
Company earns revenue from the sale and installation of point-of-sale (POS)
systems and turnkey retail automation (VAR) systems, the sale of supplies and
from service fees charged to customers under service maintenance agreements.
Currently, the Company has sales and service locations located in seventeen
cities and eight states, primarily located in the Western and Midwestern region
of the United States.
The accompanying consolidated March 31, 2000 and 1999 financial
statements include the accounts of the Company and its wholly-owned
subsidiaries: Cash Registers, Inc. (CRI), which includes MicroData, Inc.
(MicroData) and Electronic Business Machines, Inc. (EBM); Automated Register
Systems, Inc. (ARS); Smyth Systems, Inc. (Smyth); Pacific Cash Register and
Computer, Inc. (PCR); and Quality Business Machines (QBM).
The Company's acquisitions were accounted for in the Company's
consolidated financial statements as purchases in accordance with Accounting
Principles Board Opinion (APB) No. 16. The purchase prices were allocated to the
underlying assets and liabilities based upon their respective fair values. The
results of the acquisitions are included in the Company's consolidated financial
statements subsequent to the respective dates of acquisition. Accordingly, the
financial statements for the periods subsequent to the acquisitions are not
comparable to the financial statements for the periods prior to the
acquisitions.
The accompanying consolidated financial statements have been prepared
by the Company without audit in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The
accompanying consolidated financial statements do not include certain footnotes
and financial presentations normally required under accounting principles
generally accepted in the United States of America and, therefore, should be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
INCOME TAXES
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete year. For the three months
ended March 31, 2000 and 1999, the estimated effective income tax rate is less
than the U.S. statutory rate primarily due to a 100% valuation allowance
provided against the deferred tax assets that arose from the current operating
loss.
BASIC AND DILUTED PER SHARE INFORMATION
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods presented.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the exercise of the Company's stock options and warrants and
conversion of outstanding preferred stock and preferred stock dividends on
Series C Convertible Preferred Stock. Common equivalent shares have not been
included where inclusion would be antidilutive.
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<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1999
Loss Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC LOSS PER SHARE
Loss applicable to common stockholders $ (497,815) 6,915,519 $ (0.07)
==============
Effect of Dilutive Securities -- --
-------------- --------------
DILUTED LOSS PER SHARE
Loss applicable to common stockholders $ (497,815) 6,915,519 $ (0.07)
============== ============== ==============
FOR THE QUARTER ENDED MARCH 31, 2000
BASIC LOSS PER SHARE
Net loss $ (1,219,992)
Accretion related to Series C Convertible Preferred Stock (334,056)
Cumulative dividends for Preferred Stock (33,978)
--------------
Loss applicable to common stockholders (1,588,026) 6,963,282 $ (0.23)
==============
Effect of Dilutive Securities -- --
-------------- --------------
DILUTED LOSS PER SHARE
Loss applicable to common stockholders $ (1,588,026) 6,963,282 $ (0.23)
============== ============== ==============
</TABLE>
At March 31, 2000 and 1999, basic and diluted loss per share is based
on the weighted average number of common shares outstanding and net loss
applicable to common stockholders. Common stock equivalents, which consist of
stock options, warrants and conversion of preferred stock and preferred stock
dividends, were antidilutive for the three months ended March 31, 2000 and 1999.
COMPREHENSIVE OPERATIONS
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
the reporting of comprehensive income and its components. Comprehensive income,
as defined, includes all changes in equity (net assets) during a period from
transactions and other events and circumstances from nonowner sources. As of
March 31, 2000 and 1999, there is no difference between net loss and
comprehensive loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for fiscal year 2001. SFAS No. 133, amended by SFAS. No. 137,
will require the Company to record all derivatives on the balance sheet at fair
value. For derivatives that are hedges, changes in the fair value of derivatives
will be offset by the changes in the fair value of hedged assets, liabilities or
firm commitments. The Company is currently evaluating the impact of adopting
this standard will have on its results of operations or equity.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year information to
conform with the current year presentation.
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CONTINGENCIES
The Company's subsidiaries have been, from time to time, parties to
various lawsuits and other matters involving ordinary and routine claims arising
in the normal course of business. In the opinion of management of the Company,
although the outcomes of these claims and suits are not presently determinable,
in the aggregate, the outcome of any of these matters will not have a material
adverse affect on the Company's business, financial position or results of
operations or cash flows.
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering were also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged claims under the federal securities
laws for alleged misrepresentations and omissions in connection with sales of
the Company's securities. On December 23, 1997, the Company filed a motion to
dismiss the complaint, and on May 14, 1998, the court denied the Company's
request. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court). The
Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and has made an accrual of $100,000 in the accompanying
consolidated balance sheet at December 31, 1999. Currently, the settlement money
from the insurance company is in a trust fund. Final disposition of funds to the
plaintiffs will occur when the Company pays the money owed as agreed to per the
settlement. No amounts have been paid as of March 31, 2000.
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following:
December 31,
March 31, 2000 1999
-------------- --------------
<S> <C> <C>
Furniture and equipment $ 720,615 $ 742,599
Automobiles 234,788 234,788
Leasehold improvements 107,066 107,066
-------------- --------------
1,062,469 1,084,453
Less accumulated depreciation and amortization (514,542) (487,672)
-------------- --------------
Property and equipment, net $ 547,927 $ 596,781
============== ==============
</TABLE>
STOCKHOLDERS' EQUITY
PREFERRED STOCK
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock (the Series B) for $500,000 to an accredited investor. The
holder of shares of Series B shall be entitled to receive semi-annually,
commencing January 15, 2000 and each July 15 and January 15, thereafter,
cumulative dividends, at the rate of twelve (12%) per annum of the original
issue price of the Series B. The Series B is not convertible, has no voting
rights, has a liquidation preference of $1.00 per share plus unpaid dividends
and is redeemable at the option of the Company at any time. The purchaser of the
Series B received warrants to purchase 150,000 shares of the Company's common
stock concurrently with the $500,000 investment. These warrants were valued by
the Company at $52,500 using a Black-Scholes option pricing model and are
exercisable at $1.00 per share and were charged against the carrying value of
the Series B. In the event the Company's Series B has not been redeemed by the
Company by December 31, 1999, the exercise price of the warrant shall be reduced
by an amount equal to $0.05 per month for each month that any of the Series B
remains outstanding. The Company recorded accretion of $52,500 to increase the
carrying value to the liquidation value of $1.00 per share. As of March 31,
2000, the Company has redeemed $400,000 of the Series B shares. The Company
recorded cumulative preferred dividends of $3,978 as of March 31, 2000.
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On January 12, 2000, the Company and Berthel SBIC, LLC (Berthel)
entered into an Investment Agreement whereby the Company issued 500,000 shares
of its Series C Convertible Preferred Stock (the Series C) and a warrant to
purchase 425,000 shares of its common stock for $920,000, net of offering costs.
The warrant has an exercise price per share of $0.01 and is exercisable until
January 12, 2005. In connection with the purchase price by Berthel, the Company
and the Chairman of the Board, Larry Cohen agreed that either: (i) not later
than the close of business on June 1, 2000, Larry Cohen will surrender, without
exercise, options held by him for the acquisition of 1,330,000 shares of common
stock of the Company, at which time the Company will cancel the options, or (ii)
such options shall expire by their terms not later than the close of business on
June 1, 2000, unexercised.
Upon certain circumstances, Berthel may put the Company the warrant or
shares underlying the warrant and shares of common stock resulting from the
conversion of all or part of the Series C Preferred Stock. The Company will pay
Berthel a put price equal to the "Fair Market Value" of the Company, multiplied
by a fraction,
the numerator of which is the total of (i) the number of Warrant
Shares tendered by the Investor, (ii) the number of shares of Common
Stock for which the portion of the Warrant tendered by the Investor
remains exercisable, (iii) the number of Conversion Shares tendered by
the Investor and (iv) the number of shares of Common Stock for which
the Series C Preferred Stock tendered by the Investor remain
convertible;
and the denominator of which is the total of (x) the total shares of
outstanding Common Stock of the Company, (y) the number of shares of
Common Stock for which the Warrant remains exercisable, and (z) the
number of Conversion Shares for which all shares of Series C Preferred
Stock held by the Investor remain convertible.
Berthel may exercise it rights to this put at any time after the fifth
anniversary of the closing date and prior to the close of business on the
seventh anniversary of the closing date unless certain events as defined occur
earlier. In addition, at any time after the closing date, the investor may
demand registration of its shares of common stock on Form S-2 or S-3 or any
similar short form registration. In accordance with Emerging Issues Task Force
(EITF) Issue No. 00-7, unless the underlying preferred stock agreement is
modified by December 31, 2000, the fair value of the Series C Preferred Stock
will be recorded as a liability with changes in its fair value recognized in
earnings.
The holder of the Series C Preferred Shares are entitled to receive
cumulative cash dividends at the rate of $0.24 per year per share, payable
quarterly no later than the last business day of each March, June, September and
December. The Company recorded cumulative dividends of $30,000 as of March 31,
2000. The purchaser received warrants to purchase 425,000 shares of common
stock. This warrant was valued by the Company at $216,750 using a Black-Scholes
option pricing model. The Series C Preferred Stock was recorded at fair value on
the date of issuance less issuance costs. The Company recorded accretion of
$334,056 to increase the carrying value to the redemption value of $1,000,000.
Page 9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 2000
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q, as well as the Company's audited consolidated
financial statements for the year ended December 31, 1999.
The Company's financial condition and results of operations have
changed considerably since the Company's inception in April 1996, as a result of
the Company's acquisition strategy. The Company has completed seven acquisitions
since its inception through the end of December 31, 1998, all of which were
accounted for under the purchase method of accounting. No acquisitions were
completed by the Company during the year ended December 31, 1999 and quarter
ended March 31, 2000.
This Quarterly Report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Additional Factors That May Affect Future
Results."
REVENUE
The Company's consolidated total revenue is comprised of two
components: (i) revenue derived from the sale and installation of hardware and
software (Systems Revenue) and (ii) revenue derived from the sale of services
and supplies (Service Revenue).
Total revenue for the quarter ended March 31, 2000 was $6,144,000 and
represents a decrease of 24% from the Company's total revenue of $8,109,000 for
the quarter ended March 31, 1999. The decrease in revenue from the quarter ended
March 31, 2000 to the quarter ended March 31, 1999 was attributable to the
previously announced sale of the Smyth Imager division that sold software and
hardware to golf courses and resorts accounting for $1,521,000 of the decrease.
The remaining difference in revenue is attributable to a slowdown in systems
revenue in the Southern California grocery market. The Company has experienced a
reduction in the number of sales this year when compared to 1999, now that the
urgency for buying new systems generated by Y2K has passed.
Total revenue for the quarter ended March 31, 2000 was comprised of 65%
Systems Revenue and 35% Service Revenue, as compared to a revenue composition of
64% Systems Revenue and 36% Service Revenue for the quarter ended March 31,
1999.
No customer accounted for more than 10% of total revenue for the
quarter ended March 31, 2000 and 1999. Sales of products from the Company's
three principal hardware vendors, Panasonic, ERC Parts, Inc. (ERC), a
distributor of Panasonic products, and NCR Corporation (NCR), accounted for
approximately 20% of total revenue for the quarter ended March 31, 2000, and
approximately 32% of total revenue for the quarter ended March 31, 1999. The
Company has supply agreements with these manufacturers. The agreements are
non-exclusive, have geographic limitations and may have renewable one-year terms
depending upon the Company's achievement of a previously-agreed-to procurement
quota. Geographical limitations are the assignment of sales territories that
define the municipalities and states where the Company's subsidiaries can sell a
manufacture's hardware or software. The actual sales territories for each
manufacturer are subsidiary-specific and some subsidiaries may not have
permission to sell hardware or software of certain manufacturers in certain
regions or territories of the country. A change in the Company's or its
Page 10
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subsidiaries relationships with these principal vendors could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
GROSS MARGIN
Gross margin decreased to $1,193,000 for the three months ended March
31, 2000, from $2,536,000 for the three months ended March 31, 1999. As a
percentage of sales, gross margin for the quarter ended March 31, 2000 was 19%
and was comprised of gross margin for Systems Revenue of 17% and gross margin
for Service Revenue of 24%. Gross margin for the quarter ended March 31, 1999
was 31% and was comprised of gross margin for Systems Revenue of 33% and gross
margin for Service Revenue of 27%. The decrease in systems and service gross
margin is primarily attributable to the sale of the Smyth Imager division that
had a higher gross margin on its software sales. In addition, decrease in
systems and service gross margin is attributable to decreased revenue available
to cover fixed labor and overhead which are components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses in the first quarter
of 2000 of $2,282,000 decreased by $392,000 from the comparable prior-year
period and represented 37% of total revenue, versus 33% of total revenue in the
comparable prior year period. The decrease in expenses between years was
primarily attributable to the sale of the Imager division. The increase in
selling, general and administrative expenses as a percentage of revenue during
the quarter ended March 31, 2000, compared to the comparable prior year quarter
is primarily due to lower revenues in the first quarter of 2000.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were zero and $235,000 during the
three-month periods ended March 31, 2000 and 1999, respectively. The decrease is
due to the sale of the Imager division which costs in 1999 were attributable to
software development costs to develop and design point-of-sale licensed software
to run on the latest operating systems specifically targeted for the golf course
and resort markets. The Company's policy is to expense such costs until
technological feasibility is established. During the quarter ended March 31,
1999, the Company recorded $34,000 of amortization of capitalized software
costs.
OTHER EXPENSE (INCOME)
The Company earned interest income of $11,000 for the three-month
period ended March 31, 2000 compared to $10,000 for the quarter ended March 31,
1999. Interest income primarily related to finance charges earned on delinquent
accounts. The Company recognized interest expense of $139,000 for the
three-month period ended March 31, 2000 compared to $135,000 for the quarter
ended March 31, 1999. Interest expense in both years consisted primarily of
interest on outstanding balances on the Company's lines of credit and
amortization of debt issue costs. The increase was a direct result of increased
average borrowings under the existing credit facilities and an increase in the
prime rate over the prior year.
INCOME TAX PROVISION
The Company recorded no income tax provision for the three-month
periods ended March 31, 2000 and March 31, 1999 as the Company had a taxable
loss for state and federal income tax purposes.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
The Company's loss applicable to common stockholders for the quarter
ended March 31, 2000, was $1,588,000, consisting of the Company's net loss for
the quarter of $1,220,000, accretion of $334,000 to increase the Series C
Convertible Preferred Stock issued on January 12, 2000 to its redemption value
of $100 per share and cumulative preferred dividends of $34,000. The Company's
Page 11
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loss applicable to common stockholders for the quarter ended March 31, 1999
consisted of the Company's net loss for the quarter of $498,000.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company had cash and cash equivalents of $393,000 at March 31,
2000. During the three months ended March 31, 2000, the Company utilized $19,000
of cash in operations; generated $11,000 from investing activities; and
generated $69,000 from financing activities, which consisted of the net impact
of borrowings and repayments under the Company's various debt agreements,
redemption of $300,000 of its Series B Preferred Stock, the issuance of 500,000
shares of Series C Convertible Preferred Stock for $920,000, net of issuance
costs and payment of dividends of $26,000. During the three months ended March
31, 1999, the Company generated $1,120,000 of cash from operations; used $10,000
for the final installment for the acquisition of QBM and generated $34,000 from
other investing activities; and used $725,000 from financing activities, which
primarily related to net repayments under the Company's line of credit
facilities and various debt agreements.
On December 17, 1997, the Company obtained a line of credit which
provides for aggregate borrowings up to $5,000,000 computed based on eligible
accounts receivable and inventories; bears interest at the bank's prime rate
plus 1.75%; matures on December 31, 2000; and is collateralized by the Company's
eligible accounts receivable and inventories. Ineligible accounts receivable
includes any customer invoice that is ninety-days past due or any customer
account where 25% or more of the amount due is ninety-days delinquent. Pursuant
to the terms of the line of credit, the Company is subject to covenants which,
among other things, impose certain financial reporting obligations on the
Company and prohibit the Company from engaging in certain transactions prior to
obtaining the written consent of the lender. The Company had outstanding
borrowings of $2,854,000 and $2,553,000 bearing interest at 10.75% and 9.50% at
March 31, 2000 and 1999, respectively. As of March 31, 2000, the Company was in
compliance with the covenants under the credit facility.
On April 15, 1999, the Company issued 500,000 shares of Series B
Preferred Stock (the Series B) for $500,000 to an accredited investor. The
holder of shares of Series B shall be entitled to receive semi-annually,
commencing January 15, 2000 and each July 15 and January 15, thereafter,
cumulative dividends, at the rate of twelve (12%) per annum of the original
issue price of the Series B. The Series B is not convertible, has no voting
rights, has a liquidation preference of $1.00 per share plus unpaid dividends
and is redeemable at the option of the Company at any time. The purchaser of the
Series B received warrants to purchase 150,000 shares of the Company's common
stock concurrently with the $500,000 investment. These warrants were valued by
the Company at $53,000 using a Black-Scholes option pricing model and are
exercisable at $1.00 per share and were charged against the carrying value of
the Series B. In the event the Company's Series B has not been redeemed by the
Company by December 31, 1999, the exercise price of the warrant shall be reduced
by an amount equal to $0.05 per month for each month that any of the Series B
remains outstanding. The Company recorded accretion of $53,000 to increase the
carrying value to the liquidation value of $1.00 per share. As of March 31,
2000, the Company has redeemed $400,000 of the Series B shares. The Company
recorded cumulative preferred dividends of $4,000 as of March 31, 2000.
On January 12, 2000, the Company and Berthel SBIC, LLC (Berthel)
entered into an Investment Agreement whereby the Company issued 500,000 shares
of its Series C Convertible Preferred Stock (the Series C) and a warrant to
purchase 425,000 shares of its common stock for $920,000, net of offering costs.
The warrant has an exercise price per share of $0.01 and is exercisable until
January 12, 2005. In connection with the purchase price by Berthel, the Company
and the Chairman of the Board, Larry Cohen agreed that either: (i) not later
than the close of business on June 1, 2000, Larry Cohen will surrender, without
exercise, options held by him for the acquisition of 1,330,000 shares of common
stock of the Company, at which time the Company will cancel the options, or (ii)
such options shall expire by their terms not later than the close of business on
June 1, 2000, unexercised.
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Upon certain circumstances, Berthel may put the Company the warrant or
shares underlying the warrant and shares of common stock resulting from the
conversion of all or part of the Series C Preferred Stock. The Company will pay
Berthel a put price equal to the "Fair Market Value" of the Company, multiplied
by a fraction,
the numerator of which is the total of (i) the number of Warrant
Shares tendered by the Investor, (ii) the number of shares of Common
Stock for which the portion of the Warrant tendered by the Investor
remains exercisable, (iii) the number of Conversion Shares tendered by
the Investor and (iv) the number of shares of Common Stock for which
the Series C Preferred Stock tendered by the Investor remain
convertible;
and the denominator of which is the total of (x) the total shares of
outstanding Common Stock of the Company, (y) the number of shares of
Common Stock for which the Warrant remains exercisable, and (z) the
number of Conversion Shares for which all shares of Series C Preferred
Stock held by the Investor remain convertible.
Berthel may exercise it rights to this put at any time after the fifth
anniversary of the closing date and prior to the close of business on the
seventh anniversary of the closing date unless certain events as defined occur
earlier. In addition, at any time after the closing date, the investor may
demand registration of its shares of common stock on Form S-2 or S-3 or any
similar short form registration. In accordance with Emerging Issues Task Force
(EITF) Issue No. 00-7, unless the underlying preferred stock agreement is
modified by December 31, 2000, the fair value of the Series C Preferred Stock
will be recorded as a liability with changes in its fair value recognized in
earnings.
The holder of the Series C Preferred Shares are entitled to receive
cumulative cash dividends at the rate of $0.24 per year per share, payable
quarterly no later than the last business day of each March, June, September and
December. The Company recorded cumulative dividends of $30,000 as of March 31,
2000. The purchaser received warrants to purchase 425,000 shares of common
stock. These warrants were valued by the Company at $217,000 using a
Black-Scholes option pricing model. The Series C Preferred Stock was recorded at
fair value on the date of issuance less issuance costs. The Company recorded
accretion of $334,000 to increase the carrying value to the redemption value of
$1,000,000.
The Company believes that the additional capital infusion along with
its availability on the Company's current asset based line of credit will be
sufficient to meet its working capital requirements until December 31, 2000. At
March 31, 2000, approximately $500,000 of eligible collateral was available for
the Company to borrow under the credit facilities. However, the Company will
require additional financing in order to grow the business in the regions that
it operates and may incur additional costs and expenditures to expand
operational and financial systems and corporate management and administration.
Moreover, the Company may be limited in its ability to grow internally without
additional working capital. The Company has obtained financing with its latest
offering of the Series C Preferred Stock. However, there can be no assurance
that the Company will be able to successfully obtain financing or that such
financing will be available on terms the Company deems acceptable. The Company's
long-term success is dependent upon its ability to obtain necessary financing,
the successful execution of management's growth strategy and the achievement of
sustained profitable operations.
LEGAL PROCEEDINGS
The Company's exposure to litigation claims is discussed in Item 1.
Legal Proceedings and Commitments and Contingencies, Notes to the consolidated
financial statements.
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering were also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged claims under the federal securities
laws for alleged misrepresentations and omissions in connection with sales of
the Company's securities. On December 23, 1997, the Company filed a motion to
dismiss the complaint, and on May 14, 1998, the court denied the Company's
request. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court). The
Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and has made an accrual of $100,000 in the accompanying
consolidated balance sheet at December 31, 1999. Currently, the settlement money
from the insurance company is in a trust fund. Final disposition of funds to the
plaintiffs will occur when the Company pays the money owed as agreed to per the
settlement. No amounts have been paid as of March 31, 2000.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's business can be subject to seasonal influences. The POS
dealers and systems integrators which the Company has acquired to date have
typically had lower revenues in the quarters ending March 31 and December 31;
however, the Company's quarterly operating results are affected by a number of
other factors, many of which are beyond the Company's control. A substantial
portion of the Company's backlog is typically scheduled for delivery within 90
days. Delivery dates for products sold by the Company are subject to change due
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to customers changing the required installation date of a retail automation
solution system. The changing of such delivery dates is beyond the Company's
control primarily due to lower level of new store openings by customers caused
by inclement weather, contractor delays, financing concerns and/or holidays.
Quarterly sales and operating results, therefore, depend in large part on
customer-driven delivery dates, which are subject to change. In addition, a
significant portion of the Company's operating expenses are relatively fixed in
nature and planned expenditures are based in part on anticipated orders. Any
inability to adjust spending quickly enough to compensate for any revenue
shortfall may magnify the adverse impact of such revenue shortfall on the
Company's business, results of operations, financial condition and cash flows.
The Company believes that due to these factors, quarterly results may fluctuate
accordingly; therefore, there can be no assurance that results in a specific
quarter are indicative of future results.
In addition, quarterly results in the future may be materially affected
by the timing and magnitude of acquisitions and costs related to such
acquisitions, the timing and extent of staffing additions at corporate
headquarters necessary to integrate acquired companies and support future growth
and general economic conditions. Therefore, due to these factors and the factors
stated above, results for any quarter are not necessarily indicative of the
results that the Company may achieve for any subsequent quarter or for a full
year.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT ARE BASED
ON CURRENT EXPECTATIONS AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. IN
ADDITION, THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY MATERIALLY AFFECT REVENUES, EXPENSES AND OPERATING
RESULTS INCLUDE, WITHOUT LIMITATION, THE SUCCESS OF THE COMPANY'S OPERATING
SUBSIDIARIES; THE IMPACT OF THE COMPANY'S ACQUISITION STRATEGY AND THE COMPANY'S
ABILITY TO SUCCESSFULLY INTEGRATE AND MANAGE THE ACQUIRED SUBSIDIARIES; THE
ABILITY OF THE COMPANY TO OBTAIN FUTURE FINANCING ON ACCEPTABLE TERMS; AND
SUBSEQUENT CHANGES IN BUSINESS STRATEGY OR PLAN.
LIMITED OPERATING HISTORY. The Company was founded in April 1996. In
the three full years that the Company has operated, the Company has incurred
losses. The ability of the Company to become profitable will be dependent on the
Company's ability to grow faster than the historical performance and to improve
on the historical pretax profits of the acquired dealers. There can be no
assurance that the Company will be able to implement successfully its strategic
plan, to generate sufficient revenue to meet its expenses or to achieve or
sustain profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. Since inception,
the Company acquired seven dealers. The Company's results of operations in
quarters immediately following these acquisitions have been materially adversely
effected as the Company integrated the acquired business into its existing
operations. In addition, historically, the acquired businesses have had
inconsistent profitability. If the Company is unable to integrate these
acquisitions successfully or to improve the profitability of these businesses,
this inability may have a material adverse effect on the Company's business,
results of operations, financial condition and cash flows.
CONSIDERATION FOR ACQUIRED COMPANIES EXCEEDS ASSET VALUE. Valuations of
the companies acquired by the Company have not been undertaken based on
independent appraisals, but have been determined through arm's-length
negotiations between the Company and representatives of such companies. The
consideration for each such company has been based primarily on the judgment of
management as to the value of such company as a going concern and not on the
book value of the acquired assets. Valuations of these companies determined
solely by appraisals of the acquired assets may have been less than the
consideration paid for the companies. No assurance can be given that the future
performance of such companies will be commensurate with the consideration paid.
Specifically, during the fourth quarter of 1997, the Company recorded a goodwill
write-down for approximately $1,871,000, which consisted of $1,442,000 related
to Smyth Systems, $419,000 related to CRI and $10,000 related to its other
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subsidiaries. See "GOODWILL WRITE-DOWN IN MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." No assurance can be given that
the facts and circumstances surrounding the write-down will not occur in the
future. Moreover, the Company has incurred and expects to incur significant
amortization charges resulting from consideration paid in excess of the book
value of the assets of the companies acquired and companies which may be
acquired in the future.
SUBSTANTIAL COMPETITION. The POS industry is highly fragmented and
competitive. Competitive factors within the industry include product prices,
quality of products, service levels, and reputation and geographical location of
dealers. The Company primarily competes with independent POS dealers and some of
these dealers may have greater financial resources available to them than does
the Company. In addition, there are original equipment manufacturers of POS
equipment that compete in certain product areas. The Company's ability to make
acquisitions will also be subject to competition. The Company believes that,
during the next few years, POS dealers may seek growth through consolidation
with entities other than the Company. In addition, no assurance can be given
that the major manufacturers will not choose to effect or expand the
distribution of their products through their own wholesale organizations or
effect distribution directly to many of the retail accounts of the Company in
the markets served by the Company or to open territories permitting free
accessibility for any dealer who may have greater financial resources than the
Company. Any of these developments could have a material adverse effect on the
Company's business, results of operations, financial condition and cash flows.
SUBSTANTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS. The Company may
experience substantial fluctuations in its annual and quarterly operating
results in future periods. The Company's operating results are affected by a
number of factors, many of which are beyond the Company's control. A substantial
portion of the Company's backlog is typically scheduled for delivery within 90
days. Delivery dates for products sold by the Company are subject to change due
to customers changing the required installation date of an automation retail
solution system. The changing of such delivery dates is beyond the Company's
control. Quarterly sales and operating results therefore depend in large part on
customer-driven delivery dates, which are subject to change. In addition, a
significant portion of the Company's operating expenses are relatively fixed in
nature and planned expenditures are based in part on anticipated orders. Any
inability to adjust spending quickly enough to compensate for any revenue
shortfall may magnify the adverse impact of such revenue shortfall on the
Company's results of operations.
DEPENDENCE ON MANUFACTURERS. A substantial portion of the Company's
total revenue is and will be derived from the sale of POS systems, ECRs and
related equipment, none of which are manufactured by the Company. The Company's
business is dependent upon close relationships with manufacturers of POS
equipment and the Company's ability to purchase equipment in the quantities
necessary and upon competitive terms so that it will be able to meet the needs
of its end user customers. For the quarter ended March 31, 2000, the Company
purchased its hardware principally from three main vendors, Panasonic, ERC, a
distributor of Panasonic products, and NCR. Sales of Panasonic, ERC and NCR
products accounted for approximately 20% of net revenue for the quarter ended
March 31, 2000. During 1999, the Company experienced some delivery delays from
manufacturers due to cash flows. In particular, the Company had its credit line
with several manufacturers reduced or suspended until such time the Company
became current. The Company believes it is current with its suppliers and has
had some credit lines increased or reinstated; however, there can be no
assurances that these credit lines will not be suspended or cancelled in the
future should the Company fail to meet its payment commitments. There can be no
assurance that the relationships with these manufacturers will continue or that
the Company's supply requirements can be met in the future. The Company's
inability to obtain equipment, parts or supplies on competitive terms from its
major manufacturers could have a material adverse effect on the Company's
business, results of operations, financial condition and cash flows.
FIXED FEE CONTRACTS. Many of the Company's service contracts are fixed
fee contracts pursuant to which the customer pays a specified fee for the
Company's performance of all necessary maintenance and remedial services during
the contract's term. Under these agreements, the Company is responsible for all
costs incurred in maintaining and repairing the equipment, including the cost of
replacement parts, regardless of actual costs incurred. The Company may also be
required to carry an inventory of backup equipment and replacement parts and the
Company's inability sustain sufficient inventory due to cash flows may impact
the Company's future revenue. Accordingly, the Company can incur losses from
fixed fee contracts if the actual cost of maintaining or repairing the equipment
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exceeds the costs estimated by the Company or the loss of maintenance revenue
due to the Company's inability to maintain backup and replacement parts
inventory.
POTENTIAL INABILITY TO MARKET NEWLY DEVELOPED PRODUCTS. The technology
of POS systems, ECRs, VARs and related equipment is subject to technological
changes mainly related to software. There can be no assurance that the Company's
existing manufacturers will be able to supply competitive new products or
achieve technological advances necessary to remain competitive in the industry.
Further, there can be no assurance that the Company will be able to obtain the
necessary authorizations from manufacturers to market any newly developed
equipment or software.
RELIANCE ON KEY PERSONNEL. The Company has, in the past relied on the
expertise of the senior management of the dealers acquired. Some of this
management is no longer actively involved with the Company. The Company has
promoted the former President of ARS as its Chief Operating Officer. In
addition, the Company has restructured its operations and has made appointments
accordingly. The Company is highly dependent on the expertise of these few
individuals to execute the Company's strategy. In addition, competition for
highly qualified, computer and systems personnel is intense, and the loss of any
executive officer or other key employee, or the failure to attract and retain
other skilled employees, could have a material adverse effect upon the Company's
business, results of operations or financial condition.
VOLATILITY OF STOCK PRICE. The stock market from time to time
experiences significant price and volume fluctuations that are unrelated to the
operating performance of the particular companies. These broad market
fluctuations may materially adversely affect the market price of the Company's
common stock. In addition, the market price of the Company's common stock has
been and may continue to be highly volatile. Factors such as possible
fluctuations in the Company's business, results of operations or financial
condition, failure of the Company to meet expectations of security analysts and
investors, announcements of new acquisitions, the timing and size of
acquisitions, the loss of suppliers or customers, the announcement of new or
terminated supply agreements by the Company or its competitors, changes in
regulations governing the Company's operations or its suppliers, the loss of the
services of a member of senior management, litigation and changes in general
market conditions all could have a material adverse affect on the market price
of the Company's common stock.
RISKS OF LOW-PRICED SECURITIES. The Company was delisted from Nasdaq
SmallCap Market on August 3, 1999. The Company's stock currently trades in the
over-the-counter market on the OTC Bulletin Board. As a result, unless the
Company has average revenues of $6,000,000 for the last three years or net
tangible assets of at least $2,000,000 at the end of the fiscal year, the
Company's common stock would be covered by a Securities and Exchange Commission
rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5 million or
individuals with net worth in excess of $1 million or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
to the sale. Consequently, since quoted price fell below $5.00 per share, the
rule affects the ability of broker-dealers to sell the Company's securities and
also affects the ability of shareholders to sell their shares in the secondary
market. As of February 29, 2000, the closing price of the common stock was
$0.625.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Company's Certificate
of Incorporation (the "Certificate') and Bylaws include provisions that
eliminate the directors' personal liability for monetary damages to the fullest
extent possible under Delaware Law or other applicable law (the "Director
Liability Provision"). The Director Liability Provision eliminates the liability
of directors to the Company and its stockholders for monetary damages arising
out of any violation by a director of his fiduciary duty of due care. Under
Delaware Law, however, the Director Liability Provision does not eliminate the
personal liability of a director for (i) breach of the director's duty of
loyalty, (ii) acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law, (iii) payment of dividends or
repurchases or redemptions of stock other than from lawfully available funds, or
(iv) any transaction from which the director derived an improper benefit. The
Director Liability Provision also does not affect a director's liability under
the federal securities laws or the recovery of damages by third parties.
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RESTRICTIONS ON THE COMPANY'S ABILITY TO ENTER INTO CERTAIN
TRANSACTIONS. On December 17, 1997, the Company obtained a new line of credit.
Pursuant to the terms of the Company's line of credit, the Company is prohibited
for engaging in certain transactions without first obtaining the written consent
of the lender. Such transactions include, but are not limited to: (i) acquiring
or sell any assets over $50,000; (ii) selling or transferring any collateral
under the line credit, except for sale of items in the Company's finished
inventory in the ordinary course of business; (iii) selling of inventory on a
sale-or-return, guaranteed sale, consignment, or other contingent basis; (iv)
any other transaction outside the ordinary course of business. No assurance can
be given that these restrictions will not impact the Company's ability to
conduct business in the future. It does not however prohibit or restrict the
Company from acquiring other companies (including acquisitions for amounts
greater than $50,000) pursuant to its acquisition strategy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents,
accounts receivable and accounts payable. At March 31, 2000, the carrying values
of the Company's financial instruments approximated fair values based on current
market prices and rates. Because of their short duration, changes in market
interest rates would not have a material effect on fair value.
It is our policy not to enter into derivative financial instruments. We
do not currently have any significant foreign currency exposure as we do not
transact business in foreign currencies. As such, we do not have significant
currency exposure at March 31, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about August 7, 1997, a class action complaint was filed against
the Company and certain of the Company's officers and directors. Underwriters
for the Company's initial public offering were also named as defendants. The
class action plaintiffs are Lincoln Adair, Antique Prints, Ltd., and Martha
Seamons, on behalf of themselves and all others similarly situated. In addition
to seeking to have themselves declared proper plaintiffs and having the case
certified as a class action, plaintiffs were seeking unspecified monetary
damages. The plaintiffs' complaint alleged claims under the federal securities
laws for alleged misrepresentations and omissions in connection with sales of
the Company's securities. On December 23, 1997, the Company filed a motion to
dismiss the complaint, and on May 14, 1998, the court denied the Company's
request. On May 3, 1999, the Company and the plaintiffs agreed to settle the
class action complaint against the Company and a stipulation has been filed with
the United States District Court, Southern District of New York (the Court). The
Company has insurance that will cover the claim except for a deductible of
$250,000 less attorney fees. To date, the Company has spent approximately
$150,000 on legal fees and has made an accrual of $100,000 in the accompanying
consolidated balance sheet at December 31, 1999. Currently, the settlement money
from the insurance company is in a trust fund. Final disposition of funds to the
plaintiffs will occur when the Company pays the money owed as agreed to per the
settlement. No amounts have been paid as of March 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 4.14* Certificate of Designation, Preferences and Rights
of Series C Convertible Preferred Stock
11* Calculation of Earnings per Share
10.20* Investment Agreement by and between Bristol Retail
Solutions, Inc. and Berthel SBIC, LLC. for 500,000
shares of Series C Convertible Preferred Stock.
27* Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
During the three months ended March 31, 2000, the Company
has not filed a Current Report on Form 8-K.
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SIGNATURE
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.
Bristol Retail Solutions, Inc.
-------------------------------------------
(Registrant)
May 22, 2000 By: /s/ MICHAEL S. SHIMADA
- -------------------------- -------------------------------------------
Date Michael S. Shimada
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
Page 19
CERTIFICATE OF DESIGNATION
OF
RIGHTS AND PREFERENCES
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
BRISTOL RETAIL SOLUTIONS, INC.
BRISTOL RETAIL SOLUTIONS, INC., a corporation organized and
existing under the General Corporation Law of the State of Delaware, hereby
certifies that, pursuant to the authority contained in article four of its
certificate of incorporation, as amended, and in accordance with the provisions
of Section 151 of the General Corporation Law of the State of Delaware, its
Board of Directors has adopted the following resolution creating a series of its
preferred stock designated as Series C Convertible Preferred Stock:
RESOLVED, that a series of the class of authorized Preferred
Stock of the Corporation be, and hereby is, created, and that the designation
and amount thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such series,
and the qualifications, limitations or restrictions thereof, are as follows:
SECTION 1. SHARES AND CLASSES AUTHORIZED.
Five hundred thousand (500,000) of the four million (4,000,000)
preferred shares that are authorized by article four of this corporation's
certificate of incorporation are hereby designated series C convertible
preferred shares, $.01 par value (hereinafter referred to as "Series C Preferred
Shares") and the rights and preferences of such Series C Preferred Shares shall
be set forth in section 2. The term "Series B Preferred Shares" as used herein
shall mean this corporation's 1,000,000 authorized shares of Series B
Convertible Preferred Stock, as authorized by this corporation's "Certificate of
Designation of Rights and Preferences of Series B Convertible Preferred Stock."
The term "Series B Participating Preferred Stock" shall mean this corporation's
100,000 authorized shares of Series B Participating Preferred Stock. The Series
B Preferred Shares, the Series B Participating Preferred Shares and the Series C
Preferred Shares are sometimes referred to herein as the "Preferred Shares."
"Common Shares" as used herein shall refer to the shares of this corporation's
common stock authorized under article four of this corporation's articles of
incorporation. Common Shares and Preferred Shares are herein sometimes referred
to collectively as "Capital Stock".
SECTION 2. DESCRIPTION OF SERIES C PREFERRED SHARES.
The rights, preferences, privileges and restrictions granted to or
imposed upon Series C Preferred Shares or the holders thereof are as follows:
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<PAGE>
(A) VOTING RIGHTS; BOARD OF DIRECTORS.
The holders of Series C Preferred Shares shall have the right, voting
separately as a class, to designate and elect one (1) member of the Board of
Directors at all meetings of shareholders of the Company at which the board of
directors is to be elected; except as otherwise provided in subsection 2(C)(3),
the holders of Series C Preferred Shares shall have no rights as to the election
of any other members of the Board of Directors. Each holder of Series C
Preferred Shares shall have the special voting rights which are described in
subsection 2(C)(3). No holder of any Series C Preferred Shares shall have any
cumulative voting rights. Except as set forth in this subsection 2(A) or in
subsection 2(C)(3), the Series C Preferred Shares shall not be voting shares.
(B) PREEMPTIVE RIGHTS.
No holders of Series C Preferred Shares shall be entitled as such, as a
matter of right, to subscribe for, purchase or receive any part of any stock of
this corporation of any class whatsoever, or of securities convertible into or
exchangeable for any stock of any class whatsoever, whether now or hereafter
authorized and whether issued for cash or other consideration or by way of
dividend.
(C) OTHER RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS.
(1) DIVIDENDS. The holders of Series C Preferred Shares shall be
entitled to receive out of any funds at any time legally available for the
declaration of dividends, cash dividends at the rate of $.24 per annum per
share, such dividends to be payable quarterly not later than the last business
day of each March, June, September and December. Dividends on Series C Preferred
Shares shall start to accrue on January 11, 2000, or the date of original
issuance, whichever is later, and shall be cumulative thereafter, whether or not
earned or declared.
Upon the occurrence of an event of default (an "Event of Default")
under Section XI of the Investment Agreement (which Investment Agreement may be
amended without the approval of the shareholders of this corporation), which
Event of Default has remained uncured for a period of sixty (60) days after the
date the holders of a majority of the Series C Preferred Shares shall give
notice to the Company of such Event of Default, the dividend rate on the Series
C Preferred Shares shall thereupon be adjusted, and for the period from the date
of such notice from the holder to the Company of such Event of Default, until
the date the Company shall cure all outstanding Events of Default, shall be
equal to $.36 per annum, per share.
In no event shall any dividend be paid or declared, nor shall any
distribution be made on the Series A Preferred Shares, the Series B Preferred
Shares, the Series B Participating Preferred Shares or the Common Shares, nor
shall any Series B Preferred Shares, Series B Participating Preferred Shares or
Common Shares be purchased, redeemed or otherwise acquired by the corporation
for value, unless all dividends on the Series C Preferred Shares for all past
quarterly dividend periods and for the then current quarterly dividend period
shall have been paid or declared and a sum sufficient for the payment thereof
set apart for payment.
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(2) LIQUIDATION RIGHT AND PREFERENCE. In the event of the liquidation,
dissolution or winding up of this corporation, whether voluntary or involuntary,
the holders of Series C Preferred Shares shall be entitled to receive in cash,
out of the assets of this corporation, an amount equal to $2.00 per share (the
"Base Liquidation Preference") for each outstanding Series C Preferred Share,
plus all accumulated but unpaid dividends, before any payment shall be made or
any assets distributed to the holders of the Series B Preferred Shares, the
Series B Participating Preferred Shares, the Common Shares or any other class of
shares of this corporation ranking junior to Series C Preferred Shares. If, upon
any liquidation or dissolution of this corporation, the assets of this
corporation are insufficient to pay such $2.00 per share, plus all accumulated
but unpaid dividends, the holders of such Series C Preferred Shares shall share
pro rata in any such distribution in proportion to the full amounts to which
they would otherwise be respectively entitled. Following such payment to the
holders of Series C Preferred Shares upon such liquidation, dissolution or
winding up of this corporation, the holders of series of Preferred Shares other
than the Series C Preferred Shares shall be entitled to receive in cash, out of
the assets of this corporation and to the exclusion of any further payment on
the Series C Preferred Shares, an amount equal to the liquidation preference per
share for each outstanding of such Preferred Shares, plus all accumulated but
unpaid dividends, before any payment shall be made or any assets distributed to
the holders of Common Shares or any other class of shares of this corporation
ranking junior to the Series B Preferred Shares. After such payments to the
Series C Preferred Shares and series of Preferred Shares other than the Series C
Preferred Shares, upon such liquidation, dissolution or winding up of this
corporation, the holders of Common Shares shall then be entitled, to the
exclusion of the holders of Preferred Shares, to receive in cash, out of the
assets of this corporation, an amount equal to the aggregate paid-in capital
reflected on the financial statements of this corporation as of the date of such
distribution, with such distribution being made on a pro rata basis to the
holders of all outstanding Common Shares. Following such payment to the holders
of Common Shares, the holders of Common Shares and the holders of Preferred
Shares shall be entitled to share ratably in all the assets of this corporation
thereafter remaining. For purposes of this joint distribution of assets to the
holders of Common Shares and the holders of Preferred Shares, the holders of the
Series C Preferred Shares should be regarded as owning that number of Common
Shares into which the Series C Preferred Shares would then be convertible.
(3) SPECIAL VOTING RIGHTS. Without the affirmative vote of the holders
(acting together as a class) of at least a majority (with respect to (a), (b),
(c) and (e) below) or at least 90% (with respect to (d) below) of Series C
Preferred Shares at the time outstanding given in person or by proxy at any
annual meeting, or at such special meeting called for that purpose, or, if
permitted by law, in writing without a meeting, this corporation shall not:
(a) authorize or issue any (i) additional Series C Preferred
Shares or (ii) shares of stock having priority over Series C Preferred
Shares or ranking on a parity therewith as to the payment of dividends
or as to the payment or distribution of assets upon the liquidation or
dissolution, voluntary or involuntary, of this corporation; or
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(b) declare or pay any dividend or make any other distribution
on any shares of Capital Stock of this corporation at any time created
and issued ranking junior to the Series C Preferred Shares with respect
to the right to receive dividends and the right to the distribution of
assets upon liquidation, dissolution or winding up of this corporation
(hereinafter called "Junior Stock"), other than dividends or
distributions payable solely in shares of Junior Stock, or purchase,
redeem or otherwise acquire for any consideration (other than in
exchange for or out of the net cash proceeds of the contemporaneous
issue or sale of other shares of Junior Stock), or set aside as a
sinking fund or other fund for the redemption or repurchase of any
shares of Junior Stock or any warrants, rights or options to purchase
shares of Junior Stock except as specifically permitted by the terms of
the investment agreement, dated January 11, 2000, between this
corporation and the investor listed therein, as it may be amended from
time to time (the "Investment Agreement");
(c) issue Common Shares at a price below what is at the time
of issuance the fair market value per share, or any stock purchase
rights, except for such share issuances or stock purchase rights
specifically permitted by the terms of the Investment Agreement;
(d) alter or amend the rights or preferences of the Series C
Preferred Shares as stated in these articles of incorporation;
(e) sell, lease, license or otherwise dispose of all or
substantially all of its assets, or consolidate with or merge into any
other corporation or entity, or permit any other corporation or entity
to consolidate or merge into it, except that (i) any subsidiary of this
corporation may merge into another subsidiary or into this corporation,
and (ii) this corporation may consolidate or merge with or into another
corporation if the shareholders of this corporation immediately prior
to such merger or consolidation own at least eighty percent (80%) of
the equity of the combined entity immediately after such merger or
consolidation becomes effective; or
(f) increase the size of its board of directors to a number
greater than seven (7).
If (i) this corporation fails to pay any dividend on the
Series C Preferred Shares when and as required, whether or not earned or
declared, or to comply with any redemption obligation set forth in subsection
2(C)(5), whether or not funds are available to effect such redemption
obligation, which failure has remained uncured for a period of sixty (60) days
after the date the holders of a majority of the Series C Preferred Shares shall
give written notice to the Company of such failure, then: (i) the holders of
Series C Preferred Shares, voting jointly as a separate class, shall be entitled
to designate and elect three (3) of the members of this corporation's Board of
Directors (the "Default Directors"), and the holders of Common Shares, voting
jointly as a separate class, shall be entitled to designate and elect three (3)
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directors; and the remaining director of the Corporation shall be designated and
approved by a majority of each of the Series C Preferred Shares and the Common
Shares, each voting separately as a class. If each of the holders of the Series
C Preferred Shares and the Common Shares, voting as a class, shall fail to
approve a nominee for the remaining director seat, such seat shall be filled by
the vote of the holders of the Series C Preferred Shares and the Common Shares
voting together as a single class, with the holders of the Series C Shares
casting a number of votes equal to the number of Common Shares into which all of
the Series C Shares are then convertible, provided that any nominee for such
position shall meet the requirements for qualification as an "independent"
director, as such term is defined in the rules of the New York Stock Exchange.
The right of the holders of Series C Preferred Shares to designate and elect the
Default Directors may be exercised until such time as this corporation's
redemption obligation has been complied with or funds sufficient therefor have
been deposited in trust, and until the Event of Default under the Investment
Agreement has been cured or waived. When such redemption obligation shall have
been complied with, or when funds sufficient therefor shall have been deposited
in trust, or when such Event of Default under the Investment Agreement shall
have been cured or waived, the President of this corporation shall call a
meeting of shareholders at which all directors shall be elected anew, and the
term of office of all persons who are then directors shall terminate immediately
upon the election of their successors; subject always to the same provisions in
the vesting of such right in the holders of the Series C Preferred Shares in the
case of any future redemption default or in the case of the occurrence of any
future Event of Default under the Investment Agreement.
The foregoing right of the holders of Series C Preferred Shares with
respect to the election of directors of this corporation may be exercised at any
annual meeting of shareholders or, within the limitations hereinafter provided,
at a special meeting of the shareholders. If the date upon which such right of
the holders of Series C Preferred Shares shall become vested shall be more than
thirty (30) days preceding the date of the next ensuing annual meeting of
shareholders as fixed by the Bylaws of this corporation, the President of this
corporation shall, immediately after delivery to this corporation at its
principal office of a request to such effect signed by the holders of at least a
majority of Series C Preferred Shares then outstanding, call a special meeting
of the shareholders, to be held within sixty (60) days after the delivery of
such request for the purpose of electing the directors who they shall designate
as the representatives of Series C Preferred Shares on the Board of Directors,
which directors shall serve until the next annual meeting, until their
successors shall be elected and shall qualify or until they are divested of such
office pursuant to the immediately preceding paragraph. Notice of such meeting
shall be mailed to each shareholder not less than twenty (20) days prior to the
date of such meeting.
Whenever the holders of Series C Preferred Shares shall be entitled to
elect the Default Directors, any holder of such Series C Preferred Shares shall
have the right, during regular business hours, in person or by a duly authorized
representative, to examine and to make transcripts of the stock records of this
corporation for Series C Preferred Shares for the purpose of communicating with
other holders of Series C Preferred Shares with respect to the exercise of such
right of election.
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At any annual or special meeting of shareholders held for the purpose
of electing directors when the holders of Series C Preferred Shares shall be
entitled to elect the Default Directors, the presence in person or by proxy of
the holders of a majority of the outstanding Series C Preferred Shares shall be
required to constitute a quorum for the election by such class of such
directors, and the presence in person or by proxy of the holders of a majority
of the outstanding Common Shares shall be required to constitute a quorum for
the election by such class of the remaining directors; provided, however, that
the holders of a majority of either such class of stock who are present in
person or by proxy shall have power to adjourn such meeting for the election of
directors by such class from time to time without notice other than announcement
at the meeting. No delay or failure by the holders of either of such classes of
stock to elect the members of the Board of Directors whom such holders are
entitled to elect shall invalidate the election of the remaining members of the
Board of Directors by the holders of the other such class of stock.
If, during any interval between annual meetings of shareholders for the
election of directors and while the holders of Series C Preferred Shares shall
be entitled to elect the Default Directors, the number of directors in office
who have been elected by the holders of Series C Preferred Shares or Common
Shares and the series of Preferred Shares other than the Series C Preferred
Shares, as the case may be, shall, by reason of resignation, death or removal,
be less than the total number of directors subject to election by the holders of
shares of such class, the vacancy or vacancies in the directors elected by the
holders of Common Shares and the series of Preferred Shares other than the
Series C Preferred Shares, shall be filled by a majority vote of the remaining
directors then in office who were elected by the holders of Common Shares and
series of Preferred Shares other than the Series C Preferred Shares or succeeded
a director so elected, although such majority be less than a quorum, and the
vacancy in the directors elected by the holders of Series C Preferred Shares
shall be filled by a majority vote of the remaining directors then in office who
were elected by the holders of Series C Preferred Shares or succeeded a director
so elected, although such majority may be less than a quorum.
(4) NOTICE OF CERTAIN EVENTS. In case any time:
(a) this corporation shall pay any dividend payable in stock
upon Common Shares or Series B Preferred Shares, or make any
distribution (other than regular cash dividends) to the holders of
Common Shares or Series B Preferred Shares; or
(b) this corporation shall offer for subscription pro rata to
the holders of Common Shares or Series B Preferred Shares any
additional shares of stock of any class or other rights; or
(c) there shall be any capital reorganization,
reclassification of the capital stock of this corporation, or
consolidation or merger of this corporation with, or sale of all or
substantially all of its assets, to another corporation; provided,
however, that this provision shall not be applicable to the merger or
consolidation of this corporation with or into another corporation if,
following such merger or consolidation, the shareholders of this
corporation immediately prior to such merger or consolidation own at
least 80% of the equity of the combined entity; or
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(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of this corporation;
then, in any one or more of said cases, this corporation shall give
written notice, by first-class mail, postage prepaid, addressed to the
holders of Series C Preferred Shares at the addresses of such holders
as shown on the books of this corporation, of the date on which (i) the
books of this corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights, or (ii) such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place, as the case
may be. Such notice shall also specify the date as of which the holders
of Common Shares of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange
their Common Shares for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be. Such
written notice shall be given at least 20 days prior to the action in
question and not less than 20 days prior to the record date or the date
on which this corporation's transfer books are closed in respect
thereto.
(5) REDEMPTION RIGHTS.
(a) OPTIONAL REDEMPTION. This corporation shall have the
right, but not the obligation, to purchase and redeem all, or any
portion, of the then outstanding Series C Preferred Shares at a price
per Series C Preferred Share equal to the Base Liquidation Preference
plus accrued and unpaid dividends thereon (the "the Redemption Price"),
if the exercise of such redemption option is approved by a majority of
the members of this corporation's Board of Directors. With respect to
each optional redemption, the corporation may not redeem a number of
shares having an aggregate Base Liquidation Preference of less than the
lesser of (i) One Hundred Thousand and no/100 Dollars ($100,000); or
(ii) the aggregate Base Liquidation Preference of all Series C
Preferred Shares then outstanding.
(b) NOTICE OF REDEMPTION. Except as otherwise provided herein,
the corporation shall mail written notice of each redemption of any
Series C Preferred Shares to each record holder thereof not more than
90 nor less than 60 days prior to the date on fixed for redemption (the
"Redemption Date"). Such notice shall include the date for redemption
and the number of Series C Preferred Shares held by such holder to be
redeemed.
(c) METHOD OF PAYMENT OF REDEMPTION PRICE. This corporation
shall complete the redemption of any Series C Preferred Shares by
mailing to the registered holders thereof, on the Redemption Date, an
amount in cash out of moneys legally available therefor sufficient to
redeem the Series C Preferred Shares held by each such holder, at the
Redemption Price, upon surrender by such holders of the certificates
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evidencing the shares being redeemed, which certificates shall be
properly endorsed in blank. In case fewer than the total number of
Series C Preferred Shares represented by any certificate are to be
redeemed, a new certificate representing the number of unredeemed
Series C Preferred Shares shall be issued to the holder thereof without
cost to such holder within five (5) business days after surrender of
the certificate representing the redeemed Series C Preferred Shares.
All rights with respect to such Series C Preferred Shares called for
redemption shall cease and terminate on the Redemption Date, except
only the right of the holders to receive the Redemption Price without
interest upon surrender of their certificates therefor. All Series C
Preferred Shares which are in any manner redeemed or acquired by this
corporation shall be retired and cancelled and none of such shares
shall be reissued.
If the funds of the corporation legally available for
redemption of Series C Preferred Shares on any applicable Redemption
Date are insufficient to redeem the total number of Series C Preferred
Shares called for redemption, those funds which are legally available
shall be used to redeem the maximum possible number of Series C
Preferred Shares called for redemption pro rata among the holders of
the Series C Preferred Shares. At any time after such redemption that
additional funds of the corporation become legally available for the
redemption of Series C Preferred Shares, such funds shall immediately
be used to redeem any Series C Preferred Shares theretofore called for
redemption pro rata among the holders of the Series C Preferred Shares.
(d) DETERMINATION OF THE NUMBER OF EACH HOLDER'S PREFERRED
SHARES TO BE REDEEMED. The number of shares of Series C Preferred
Shares to be redeemed from each holder thereof in redemptions under
subsection 2(C)(5)(a) hereunder of less than all of the Series C
Preferred Shares shall be the number of shares determined by
multiplying the total number of Series C Preferred Shares to be
redeemed by a fraction, the numerator of which shall be the total
number of Series C Preferred Shares then held by such holder and the
denominator of which shall be the total number of Series C Preferred
Shares then outstanding.
(e) DIVIDENDS AFTER REDEMPTION. No Series C Preferred Share
redeemed pursuant to this Section 5 shall be entitled to any dividends
accruing after the Redemption Date with respect to Series C Preferred
Shares called for redemption. On such date, all rights of the holder of
such Series C Preferred Share shall cease (except the right to receive
payment in accordance with subsection 2(C)(5)(c)), and such Series C
Preferred Share shall no longer be deemed to be issued and outstanding.
(f) OTHER REDEMPTIONS OR ACQUISITIONS. The corporation shall
not, nor shall it permit any Subsidiary to, redeem or otherwise acquire
any Preferred Shares, except as expressly authorized herein or pursuant
to a purchase offer made pro rata to all holders of Series C Preferred
Shares on the basis of the number of Series C Preferred Shares owned by
each such holder.
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(g) CONVERSION PRIOR TO REDEMPTION. Upon the giving of a
written notice from this corporation of a redemption, and prior to the
date fixed by such notice for redemption of the Series C Preferred
Shares, a holder of Series C Preferred Shares may elect to convert,
prior to redemption, in accordance with Section 2(C)(6) hereof, all or
a part of the number of Series C Preferred Shares fixed by the notice
for redemption from such holder. In such event, the number of Series C
Preferred Shares to be redeemed from such holder shall be reduced by
the number of shares that the holder of such Series C Preferred Shares
shall have elected to convert prior to redemption.
(h) ISSUANCE OF COMMON STOCK PURCHASE WARRANTS UPON FAILURE TO
REDEEM.
(i) If this corporation shall not have redeemed, by
the close of business on January 15, 2005, Series C Preferred
Shares (including as shares redeemed, Series C Preferred
Shares converted by the holder prior to such date), having an
aggregate Base Liquidation Preference of not less than
$500,000, this corporation shall issue to each holder of the
Series C Preferred Shares, a warrant to acquire Common Shares
of the corporation, in substantially the form of the warrant
issued pursuant to the Investment Agreement, for the purchase
of a number of Common Shares equal to (xx) the aggregate Base
Liquidation Preference of all Series C Preferred Shares
outstanding as of January 15, 2005, less 500,000; multiplied
by (yy) 0.85 (adjusted proportionately to account for stock
splits, stock dividends, recapitalizations and other similar
events); which amount shall then be multiplied by (zz) a
fraction, the numerator of which is the total number of Series
C Preferred Shares held as of January 15, 2005, by the holder
to whom such warrant will be issued, and the denominator of
which is the aggregate number of outstanding Series C
Preferred Shares as of January 15, 2005.
(ii) If this corporation shall not have redeemed,
between January 16, 2005 and the close of business on January
15, 2006, Series C Preferred Shares (including as shares
redeemed, Series C Preferred Shares converted by the holder
during such period), having an aggregate Base Liquidation
Preference of the lesser of (x) $500,000, or (y) the aggregate
base Liquidation Preference of all Series C Preferred Shares
immediately following the close of business on January 15,
2005, this corporation shall issue to each holder of the
Series C Preferred Shares, a warrant to acquire Common Shares
of the corporation, in substantially the form of the warrant
issued pursuant to the Investment Agreement, for the purchase
of a number of Common Shares equal to (xx) the lesser of (aa)
$500,000, or (bb) the aggregate base Liquidation Preference of
all Series C Preferred Shares outstanding as of January 15,
2006; multiplied by (yy) 0.85 (adjusted proportionately to
account for stock splits, stock dividends, recapitalizations
and other similar events); which amount shall then be
multiplied by (zz) a fraction, the numerator of which is the
total number of Series C Preferred Shares held as of January
15, 2006, by the holder to whom such warrant will be issued,
and the denominator of which is the aggregate number of
outstanding Series C Preferred Shares as of January 15, 2006.
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(iii) The initial exercise price per Common Share
with respect to the warrants issued pursuant to this Section
2(C)(5)(h) shall be One Cent ($.01).
6. CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION. Each Preferred Share shall be
convertible at the option of the holder thereof into Common Shares of
this corporation in accordance with the provisions and subject to the
adjustments provided for in subsection 2(C)(6)(c). In order to exercise
the conversion privilege, a holder of Preferred Shares shall surrender
the certificate evidencing such Preferred Shares to this corporation at
its principal office, duly endorsed to this corporation and accompanied
by written notice to this corporation that the holder elects to convert
a specified portion or all of such shares. Preferred Shares converted
at the option of the holder shall be deemed to have been converted on
the day of surrender of the certificate representing such shares for
conversion in accordance with the foregoing provisions, and at such
time the rights of the holder of such Preferred Shares, as such holder,
shall cease and such holder shall be treated for all purposes as the
record holder of Common Shares issuable upon conversion. As promptly as
practicable on or after the conversion date, this corporation shall
issue and mail or deliver to such holder a certificate or certificates
for the number of Common Shares issuable upon conversion, computed to
the nearest one hundredth of a full share, and a certificate or
certificates for the balance of Preferred Shares surrendered, if any,
not so converted into Common Shares.
With respect to any fraction of a Common Share
resulting from the conversion of Series C Preferred Shares, this
corporation shall not be required to issue a certificate for a
fractional share, but shall instead pay to the holder of such
fractional share, cash, equal to such fraction, multiplied by the then
current fair market value for a Common Share, as determined by the
Board of Directors of this corporation, acting in good faith.
(b) CONVERSION PRICE AND ADJUSTMENTS. The number of Common
Shares issuable in exchange for each of the Preferred Shares upon
conversion shall be equal to the Base Liquidation Preference, divided
by the conversion price then in effect (the "Conversion Price"). The
Conversion Price shall initially be $1.50, but shall be subject to
adjustment from time to time as hereinafter provided:
(i) In case this corporation shall at any time
subdivide or split its outstanding Common Shares into a
greater number of shares or declare any dividend payable in
Common Shares, the Conversion Price in effect immediately
prior to such subdivision, split or dividend shall be
proportionately decreased, and conversely, in case the
outstanding Common Shares of this corporation shall be
combined into a smaller number of shares, the Conversion Price
in effect immediately prior to such combination shall be
proportionately increased.
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(ii) Except for (x) pursuant to options to purchase
common stock of the Company granted to employees or directors
of the Company, approved by its Board of Directors or a
committee thereof, and having an exercise price per share not
less than eighty percent (80%) of the fair market value of a
share of Common Stock as of the date granted (provided that
the "fair market value" used for the purpose of such
determination is not less than the average closing "bid" and
"ask" prices for the Common Stock of the Company on a
registered securities exchange (if available), for the thirty
(30) trading days immediately preceding such determination),
or (y) as consideration for the acquisition by the Company of
the stock, or all or substantially all of the assets of
another entity or business, if, in such transaction the value
placed on the Common Shares is determined by the Board of
Directors, acting in good faith, to be equal to or in excess
of what is then the fair market value of a Common Share, (the
"Excluded Issuances"), if at any time, this corporation shall
issue or sell any Common Shares for a consideration per share
less than92/100 Dollars ($0.92) (the "Trigger Price") (other
than dividends payable in Common Shares) or shall issue any
options, warrants or other rights for the purchase of such
shares at a consideration per share of less than the Trigger
Price, then, upon such issuance or sale of such shares,
options, warrants or other purchase rights, the Conversion
Price in effect immediately prior to such issuance or sale for
the Preferred Shares shall be reduced to the price at which
such Common Shares were sold or at which Common Shares are
issuable upon the exercise of such options, warrants or other
purchase rights. If any options or purchase rights that are
taken into account in any such adjustment of the Conversion
Price subsequently expire without exercise, the Conversion
Price shall be recomputed at the time of expiration by
deleting such options or purchase rights. If the Conversion
Price is adjusted as the result of the issuance of any
options, warrants or other purchase rights, no further
adjustment of the Conversion Price shall be made at the time
of the exercise of such options, warrants or other purchase
rights.
(iii) Except for Excluded Issuances, if at any time
this corporation shall issue or sell any Common Shares for a
consideration per share less than the Trigger Price (other
than dividends payable in Common Shares), or shall issue any
options, warrants or other rights for the purchase of such
shares at a consideration per share of less than the Trigger
Price, the Conversion Price in effect immediately prior to
such issuance or sale shall be adjusted and shall be equal to
(x) the Conversion Price then in effect, multiplied by (y) a
fraction, the numerator of which shall be an amount equal to
the sum of (a) the number of Common Shares outstanding
immediately prior to such issuance or sale multiplied by the
Conversion Price then in effect, and (b) the total
consideration payable to this corporation upon such issuance
or sale of such shares and such purchase rights and upon the
exercise of such purchase rights, and the denominator of which
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shall be the amount determined by multiplying (aa) the number
of Common Shares outstanding immediately after such issuance
or sale plus the number of the Common Shares issuable upon the
exercise of any purchase rights thus issued, by (bb) the
Conversion Price then in effect. If any options or purchase
rights that are taken into account in any such adjustment of
the Conversion Price subsequently expire without exercise, the
Conversion Price shall be recomputed by deleting such options
or purchase rights. If the Conversion Price is adjusted as the
result of the issuance of any options, warrants or other
purchase rights, no further adjustment of the Conversion Price
shall be made at the time of the exercise of such options,
warrants or other purchase rights.
(iv) The anti-dilution provisions of this subsection
2(C)(6)(b) may be waived by the affirmative vote of the
holders (acting together as a class) of at least ninety
percent (90%) of the then outstanding Preferred Shares.
(c) NOTICE OF CONVERSION PRICE ADJUSTMENT. Upon any adjustment
of the Conversion Price, then and in each such case the corporation
shall give written notice thereof, by first-class mail, postage
prepaid, addressed to the registered holders of the Series C Preferred
Shares at the addresses of such holders as shown on the books of this
corporation, which notice shall state the Conversion Price resulting
from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such price upon the conversion of Series
C Preferred Shares, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(d) ADJUSTMENT OF CONVERSION PRICE UPON EVENT OF DEFAULT UNDER
INVESTMENT AGREEMENT. Upon the occurrence of an Event of Default, which
Event of Default has remained uncured for a period of sixty (60) days
after the date the holders of a majority of the Series C Preferred
Shares shall give notice to the Company of such Event of Default, the
Conversion Price shall thereupon be adjusted, and shall be equal to the
Conversion Price in effect immediately prior to the occurrence of the
Event of Default giving rise to the adjustment, divided by 2.
(e) DEFINITION OF COMMON SHARES. As used in subsections
2(C)(6)(b)-(c) the term "Common Shares" shall mean and include this
corporation's presently authorized Common Shares and shall also include
any capital stock of any class of this corporation hereafter authorized
which shall have the right to vote on all matters submitted to the
shareholders of this corporation and 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 this
corporation; provided that the shares receivable pursuant to conversion
of Preferred Shares shall include shares designated as Common Shares of
this corporation as of the date of issuance of such Preferred Shares,
or, in case of any reclassification of the outstanding shares thereof,
the stock, securities or assets provided for in subsection
2(C)(6)(b)(ii) above.
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SECTION 3. ELIMINATION OF SERIES A PREFERRED STOCK.
Pursuant to the authorization of this corporation's Board of Directors,
this corporation has designated 4,000,000 shares of Series A Preferred Shares,
of which only 1,000,000 shares were issued. Inasmuch as no shares of such
designation remain outstanding, the Board of Directors has adopted resolutions
setting forth elimination of such shares of Series A Preferred Stock, and in
accordance with such resolutions, the Articles of Incorporation of this
corporation are hereby amended. This corporation does not hereby eliminate
designations of its Series B Preferred Shares, Series B Participating Preferred
Shares or Series C Preferred Shares, nor its authority to issue additional
shares of preferred stock in accordance with its articles of incorporation. The
elimination and cancellation of the Series A Preferred Shares shall be deemed to
take place immediately prior to the designation and issuance of the Series C
Convertible Preferred Shares of this corporation.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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<PAGE>
SIGNATURE PAGE FOR CERTIFICATE OF DESIGNATION
FOR SERIES C PREFERRED STOCK
IN WITNESS WHEREOF, Bristol Retail Solutions, Inc. has caused
this Certificate of Designation of Rights and Preferences of Series C
Convertible Preferred Stock to be duly executed by its Chief Financial Officer
and attested to by its Assistant Secretary and has caused its corporate seal to
be affixed hereto this _______ day of January, 2000.
BRISTOL RETAIL SOLUTIONS, INC.
By:_____________________________________
Michael S. Shimada
Chief Financial Officer
(Corporate Seal)
ATTEST:
- ------------------------------------
Assistant Secretary
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INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT, made and entered into this 12th day of
January, 2000, by and among BRISTOL RETAIL SOLUTIONS, INC., a corporation
incorporated under the laws of the State of Delaware (the "Company"), BERTHEL
SBIC, LLC, a Delaware limited liability company (the "Investor") and Lawrence
Cohen, (the "Principal"):
RECITALS
WHEREAS, the Company has an authorized capitalization of 20,000,000
shares of common stock, .001 par value (the "Common Stock"), of which 6,968,000
shares are issued and outstanding, and 5,000,000 shares of preferred stock; and
WHEREAS, the Company is and will be principally engaged in the resale
of point of sale hardware and software; and
WHEREAS, the Company proposes to sell to the Investor and the Investor
is prepared under the terms and conditions specified herein, to purchase 500,000
shares of the Series C Convertible Preferred Stock; and
WHEREAS, the Company proposes to sell to the Investor and the Investor
is prepared under the terms and conditions specified herein, to purchase a
warrant for the purchase of 425,000 shares of the Common Stock; and
WHEREAS, the parties hereto wish to agree to the terms and conditions
of the foregoing sale and purchase, and other related matters, to the extent set
forth herein;
NOW, THEREFORE, in consideration of the foregoing, the premises and
representations contained herein, and the payment of valuable consideration,
receipt of which is hereby acknowledged by each party hereto, it is agreed as
follows:
TERMS
I. SALE AND PURCHASE OF SECURITIES
Subject to the terms, conditions and warranties that follow, the
Company agrees to sell to the Investor, and subject to the terms and
conditions herein, and on the basis of the representations and
warranties set forth herein, the Investor agrees to purchase from the
Company the following securities:
A. Five Hundred Thousand (500,000) shares of the Series C
Convertible Preferred Stock (the "Series C Preferred Stock"),
having the rights and preferences set forth in the Certificate
of Designation for such Series C Preferred Stock, attached
hereto as Exhibit I.A, at a price per share of Two and no/100
Dollars ($2.00).
<PAGE>
B. A Warrant (the "Warrant"), in the form designated as Exhibit
I.B hereto, for the purchase of Four Hundred Twenty-Five
Thousand (425,000) shares of the Common Stock (the "Warrant
Shares").
II. RESERVED.
III. CLOSING
A. The closing shall take place at the offices of Bradley & Riley
PC and the Closing Date shall be on January 12, 2000, or such
other time and/or place as the parties may mutually agree in
writing, and the date of which closing shall be the "Closing
Date".
B. The Investor shall purchase the Series C Preferred Stock and
Warrant subject to the terms and conditions of this Agreement,
by delivery to the Company, on the Closing Date, of a check or
wire transfer to an account designated by the Company, in the
amount of the Purchase Price.
C. The Company shall simultaneously therewith issue and deliver
to the Investor on such Closing Date an executed Series C
Preferred Stock in favor of the Investor in the amount of the
Purchase Price, and the Warrant.
IV. SURRENDER AND CANCELLATION OF PRINCIPAL OPTIONS
The Company and the Principal agree that either: (i) not later than the
close of business on June 1, 2000 the Principal shall surrender,
without exercise by the Principal, options granted to the Principal by
the Company for the acquisition of 1,330,000 shares of Common Stock, at
an average exercise price per share of $1.06, and the Company shall
thereupon cancel such options, or (ii) such options shall expire by
their terms not later than the close of business on such date,
unexercised.
V. CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATION TO PURCHASE
The Investor's obligation to purchase the Series C Preferred Stock and
Warrant from the Company shall be subject to the performance of the
Company of all its agreements to be performed hereunder before the time
of such purchase, to the accuracy of the covenants, representations and
warranties of the Companies herein contained, and to the satisfaction
of the following further conditions precedent:
A. Delivery of a certified copy of the resolution of the Board of
Directors of the Company, designated as Exhibit V.A,
authorizing the execution, delivery and performance of this
Agreement, and the execution and delivery of the Series C
Preferred Stock and Warrant called for hereunder.
B. Delivery of the opinion of the Company's counsel, Atlas,
Pearlman, Trop & Borkson, P.A., dated the Closing Date in the
form of Exhibit V.B hereto.
C. Delivery of SBA Form 480 Size Status Declaration, SBA Form
1031 Portfolio Financing Report, and SBA Form 652(d) Assurance
of Compliance.
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<PAGE>
D. Delivery of a certificate or certificate of the President or
Chief Financial Officer of the Company, attached hereto as
Exhibit V.D, dated the Closing Date to the effect that there
is no condition or event constituting an event of default as
defined herein, and that the representations and warranties
set forth in Section VI are true and correct as of the Closing
Date.
E. Delivery of a certified copy of the Certificate of
Incorporation and By-Laws of the Company, which shall be
attached to this Agreement as Exhibit V.E.
F. Delivery of such other documents or instruments as the
Investor may reasonably request, consistent, however, with the
provisions of this Agreement.
G. As a further condition to the purchase of the Series C
Preferred Stock and Warrant hereunder:
1. Each of the representations and warranties contained
in Section VI shall be true and correct on the date
hereof and as of the Closing Date as if such
representations and warranties had been made again as
of such later date.
2. The Company shall not be in default hereunder or
under any other material agreement and no event shall
have occurred, but for the giving of notice or lapse
of time or both, which would constitute a default
hereunder or thereunder.
3. The Principal, and any other shareholder of the
Company holding anti-dilution and/or stock issuance
rights, if any, pertaining to the Common Stock held
by such shareholder, shall have waived such rights
with respect to the issuance of the Preferred Stock
and the Warrant, and the issuances of the Common
Stock contemplated thereby.
VI. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
To induce the Investor to purchase the Series C Preferred Stock and
Warrant issued hereunder, the Company represents and warrants to the
Investor that:
A. The Company is duly incorporated and validly existing and in
good standing under the laws of the State of Delaware, with
all franchise and other taxes, currently or previously due,
paid, authorized to carry on the business in which they are
engaged and to own the property owned by them and to execute
and deliver this Agreement, the Series C Preferred Stock and
the Warrant, and to perform and observe the provisions hereof
and thereof and that they are duly qualified, licensed and in
good standing in each state where licensing is required by the
nature of their business or the character and location of
their property, except where the failure to so qualify would
not have a material adverse effect on the Company or its
operations.
B. There is: (i) no litigation, proceeding or governmental
investigation pending nor to the best of the knowledge and
belief of the executive officers and directors of the Company,
are there any actions at law or suits in equity that may be
threatened against the Company, except those items listed in
the Company Disclosure Schedule, attached hereto as Exhibit
VI, or in the documents filed by the Company with the
Securities Exchange Commission (the "SEC"), and publicly
-3-
<PAGE>
available on the EDGAR system (the "Company SEC Filings") nor
do the executive officers or the Board of Directors of the
Company have any knowledge of any pending and/or threatened
actions at law or suits in equity which might affect this
transaction; (ii) no proceeding before any governmental
commission, bureau or other administrative agency pending, or
to the knowledge of the executive officers and directors of
the Company, threatened against the Company except as listed
in the Company Disclosure Schedule; and (iii) no material
change in the financial condition or affecting the business or
properties of the Company that is not reflected on the balance
sheet of the Company as of September 30, 1999, attached hereto
as Exhibit VI.B (the "Company Balance Sheet"); and (iv) no
outstanding indebtedness of the Company other than that
reflected on the Company Balance Sheet, except for changes in
accounts payable incurred in the ordinary and normal course of
business.
C. The making and performance by the Company of this Agreement,
the Series C Preferred Stock and the Warrant, and all other
documents required hereby have been duly authorized by all
corporate action and will not (i) conflict with or result in
any breach of any of the terms, conditions or provisions of
the Certificate of Incorporation or Bylaws of the Company or
of any material indenture, mortgage, deed of trust, loan
agreement, contract, agreement or other instrument or of any
regulation, order, injunction or decree of any court or
governmental or public body or authority to which the Company
is a party or by which they may be bound or to which they are
subject or (ii) constitute a default thereunder or an event
that, but for the giving of notice or lapse of time or both,
would constitute a default thereunder or (iii) result in the
creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon any of the properties or assets of
the Company.
D. The Company has corporate power to enter into this Agreement
as herein contemplated and have taken all necessary corporate
action to authorize the provisions of this Agreement herein
provided for upon the terms and conditions herein set forth
and to execute and deliver the Series C Preferred Stock, the
Warrant and this Agreement, and this Agreement is, and such
instruments, upon delivery thereof will be valid and
enforceable obligations of the Company in accordance with
their terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium,
preference, fraudulent conveyance or other laws affecting the
enforcement of creditors' rights or remedies generally now or
hereafter in effect and by the availability of equitable
remedies, regardless of whether the same are considered in a
proceeding in equity or at law.
E. There are no liabilities of the Company known to its executive
officers or directors, contingent or otherwise, not reflected
on the Company Balance Sheet and since the date of the Company
Balance Sheet, the Company has not issued, sold or acquired
any of their shares of any class or declared or paid any
dividends on their outstanding shares.
F. The Company Balance Sheet is a true and correct and fairly
presents, in conformity with generally accepted accounting
principles, consistently applied in all material respects
throughout the periods indicated ("GAAP"), the financial
position and the results of operation of the Company as of the
date indicated and for the respective period indicated,
subject to normal recurring adjustments.
-4-
<PAGE>
G. The Company is not party to any contract or agreement made
otherwise than in the ordinary course of business, except as
disclosed in the Company Disclosure Schedule or the Company
SEC Filings.
H. The Company has authorized 20,000,000 shares of the Common
Stock, of which 6,968,200 shares are validly issued and
outstanding. Except as set forth in the Company Disclosure
Schedule or the Company SEC Filings, other than the Warrant,
there is no agreement, obligation or duty of any kind of the
Company to issue or authorize additional Common Stock, or any
other capital stock.
I. The Company has authorized 4,000,000 shares of preferred
stock; it has designated the rights and preferences of shares
of 4,000,000 shares of Series A Preferred Stock, of which only
1,000,000 shares were ever issued, no shares of which are
issued or outstanding, and which class has been canceled by
the Board of Directors of the Company; it has designated the
rights and preferences of 1,000,000 shares of Series B
Preferred Stock, of which 400,000 shares are issued and
outstanding; and it has designated the rights and preferences
of 500,000 shares of Series C Preferred Stock, of which no
shares were issued and outstanding prior to the Closing
hereunder; and it has designated the rights and preferences of
100,000 shares of Series B Participating Preferred Stock, of
which no shares have ever been issued.
J. The Company is a "small business concern" as such term is
defined in the Small Business Investment Act of 1958, as
amended, and in the Regulations of the Small Business
Administration as promulgated thereunder.
K. The Company has good and marketable title to its properties
and assets, including the properties and assets reflected in
its financial statements furnished to the Investor and has all
permits, licenses, and franchise rights necessary to allow it
to conduct its business as now operated and, so far as the
Company can now foresee, as proposed to be operated, and no
royalties or commissions are payable under the license or
franchise agreements to any shareholder, officer or director
of the Company.
L. Except as set forth in the Company Disclosure Schedule or the
Company SEC Filings, the Company has no (i) subsidiaries; (ii)
other investments (either in equity or debt securities) or
interests in any other person or company; or (iii) commitment
to acquire any such subsidiary or any such investment or
interest.
M. The Company Disclosure Schedule or the Company SEC Filings
list, among other documents and matters set forth elsewhere
herein:
1. All material contracts or other commitments to which
the Company is a party or is bound.
2. Any and all contracts or commitments relating to the
management of the Company to which a shareholder
and/or director and/or officer of the Company is a
party and all leases of real and/or personal property
to which the Company is a party.
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<PAGE>
3. All stockholder agreements to which the Company is a
party, or which relate to or affect the equity
ownership of either the Company.
4. Any options to purchase real estate granted or held
by the Company. On or prior to the date hereof, the
Company has delivered to the Investor a true and
correct copy of each of the documents listed on the
Company Disclosure Schedule, initialed by the
President or Secretary of the Company for
identification.
N. The Company, taken together with its "affiliates" (as that
term is defined in 13 C.F.R. ss.121.103), is a "Small Business
Concern" within the meaning of 15 U.S.C.ss.662(5), that is
Section r 103(5) of the Small Business Investment Act of 1958,
as amended (the "SBIC Act"), and the regulations thereunder,
including 13 C.F.R.ss.107, and meets the applicable size
eligibility criteria set forth in 13 C.F.R.ss.121.301(c)(1) or
the industry standard covering the industry in which the
Company is primarily engaged as set forth in 13 C.F.R.
ss.121.301(c)(2).
O. The Company does not presently engage in any activities for
which a small business investment company is prohibited from
providing funds by the SBIC Act and the regulations
thereunder, including 13 C.F.R.ss.107.
P. The Company has its principal business operations in the
United States or its territories.
Q. The Company has a class of securities registered pursuant to
Section 12(b) of the Securities Exchange Act of 1934
("Exchange Act") or a class of equity securities registered
pursuant to Section 12(g) of the Exchange Act or is required
to file reports pursuant to Section 15(d) of the Exchange Act.
R. The Company: (a) has been subject to the requirements of
Section 12 or 15(d) of the Exchange Act and has filed all the
material required to be filed pursuant to Sections 13, 14 or
15(d) for a period of at least twelve calendar months; and (b)
has filed in a timely manner all reports required to be filed
during the twelve calendar months and any portion of a month
immediately preceding this Agreement and, if the Company has
used (during the twelve calendar months and any portion of a
month immediately preceding the date hereof) Rule 12b-25(b)
under the Exchange Act with respect to a report or a portion
of a report, that report or portion thereof has actually been
filed within the time period prescribed.
S. Neither the Company nor any of its consolidated or
unconsolidated subsidiaries have, since the end of the last
fiscal year for which certified financial statements of the
registrant and its consolidated subsidiaries were included in
a report filed pursuant to Section 13(a) or 15(d) of the
Exchange Act: (a) failed to pay any dividend or sinking fund
installment on preferred stock; or (b) defaulted (i) on any
installment or installments on indebtedness for borrowed
money, or (ii) on any rental on one or more long term leases,
which defaults in the aggregate are material to the financial
position of the Company and its consolidated and
unconsolidated subsidiaries, taken as a whole.
-6-
<PAGE>
T. The Principal owns options to purchase 2,660,000 shares of
Common Stock, at an average exercise price per share of $0.63;
warrants to purchase 20,000 shares of Common Stock, at an
average exercise price per share of $6.00; and 1,285,600
shares of Common Stock. The spouse of the Principal is the
owner of 31,775 shares of Common Stock, and warrants to
purchase 5,000 shares of Common Stock. The Principal is not
the beneficial owner of any other shares of Common Stock, or
rights to acquire the Common Stock of the Company.
U. The Company has set aside 131,845 shares of Common Stock for
issuance pursuant to its 1997 Employee Stock Purchase Plan.
V. The Company has granted to its employees, officers and
directors, options to acquire 3,410,000 shares, at an average
price per share of $0.92. Other than such options, the Company
has no other outstanding options to acquire the Common Stock.
The Company has set aside an additional 40,000 shares of its
common stock for issuance pursuant to its option plan for
employees, officers and directors.
W. The Company has issued, in the amounts and to the parties set
forth on the Company Disclosure Schedule, warrants to purchase
1,306,312 shares of Common Stock, at an average exercise price
per share of $5.21. Other than such warrants, the Company has
no other outstanding warrants to acquire the Common Stock.
VII. AFFIRMATIVE COVENANTS OF THE COMPANIES
The Companies covenant and agree that from the date hereof, and so long
as the Investor and/or its assigns shall, collectively be holders of
the Warrant or of three percent (3%) or more of the outstanding Common
Stock of the Company that the Companies will:
a. Maintain true and accurate accounting records in accordance
with GAAP; and shall provide to the Investor:
1. Monthly and year-to-date income statements, balance
sheets, and cash flow statements for each of the
Companies within thirty (30) days after the end of
each month, prepared (although unaudited) in
accordance with GAAP, and certified by the Chief
Financial Officer of each of the Companies.
2. Within forty-five (45) days after the end of each
quarter, a consolidated balance sheet of the Company
and any other subsidiary that may or may not be
acquired after Closing Date.
3. Within ninety (90) days after the end of each fiscal
year, a certified audit report prepared by a Board
agreed upon certified public accounting firm (which
shall be a Big Six firm or another firm of recognized
standing acceptable to the Investor and the Board)
prepared in accordance with GAAP accounting
principles and, together with these reports, a copy
of such firm's management letter which shall include
a statement with reference to the Company's
compliance with its financial covenants in its
material agreements.
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<PAGE>
Each report described above in (1), (2) and (3) shall
set forth in each case comparisons to the Budget (as
described below) and the corresponding period to the
previous fiscal year, all in reasonable detail and
signed, subject in the case of unaudited reports to
changes resulting from year-end audit adjustments, by
the Chief Financial Officer of the Company, who shall
also certify that the Company is not in default under
the Company's Certificate of Incorporation, its
By-Laws, this Agreement or any other agreements to
which it is a party or to which it or any of its
properties is subject.
4. Thirty (30) days prior to each fiscal year-end
(except as to the fiscal year ended December 31,
1999, in which case, within forty-five (45) days
after the fiscal year end), a detailed operating
budget (the "Budget"), complete with written
narrative, for the subsequent fiscal year. The Budget
shall be broken down on a month-to-month basis and
shall include detailed balance sheets, profit and
loss statements, and cash flow statements. All
budgets will be approved by the Board of Directors
prior to the beginning of each fiscal year. The
Investor expressly acknowledges that the failure of
the Company to meet or fulfill an annual Budget shall
not alone constitute an Event of Default pursuant to
this Investment Agreement; PROVIDED, however, that
such acknowledgment shall not affect, limit or
preclude the existence or declaration of an Event of
Default under any other provision of this Agreement.
5. Within ten (10) days of issuance, duplicate copies of
any material written communications received from or
delivered by either of the Companies to their
stockholders, the Board of Directors, any
committee(s) thereof, lenders or with the financial
community at large and any reports filed by the
Company with and securities exchange, the National
Association of Securities Dealers, Inc., any
governmental official or agency.
6. Copies of all Federal and State Income Tax Returns
filed by the Companies within twenty (20) days of
filing thereof.
7. All other information reasonably requested by the
Investor.
B. Give immediate notice to the Investor, or its assigns, by
telephone, with confirmation in writing, of any failure by
either of the Companies to file timely Federal, State or local
tax returns, or any material default by the Company on any
obligation, or violation of the terms and conditions of any
such obligation.
C. Promptly pay and discharge, when due, all of their taxes and
assessments of any kind whatsoever as well as all of their
claims and other liabilities which, if unpaid, might become a
lien or charge upon their property or assets, except those
contested in good faith and in appropriate proceedings
diligently prosecuted.
D. At all times maintain on all of their insurable property, real
and personal, adequate insurance against loss or damage by
fire and from other casualties, contingencies, hazards and
liabilities (including public liability and products liability
insurance) in such amounts, with such carriers and for such
coverage as are reasonable and proper in accordance with sound
business practice and as customarily carried by businesses
similarly situated.
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<PAGE>
E. Take all action necessary to preserve and maintain their
corporate existence as well as their right to continue
business.
F. Promptly notify the Investor or its assigns of any default,
declared or otherwise, of the Company in the performance or
observance of any material obligation or material condition of
any indebtedness or other material agreement of the Company.
G. Indemnify and hold harmless the Investor and its assigns from
any and all claims for a broker's or finder's fee arising out
of this transaction.
H. Execute such documents, forms, or other instruments and
furnish such information as may be required to effectuate this
Agreement and/or to comply with any Rules and Regulations of
the Small Business Investment Act of 1958 and Amendments
thereto and/or of the Small Business Administration.
I. Furnish to the Investor or its assigns with reasonable
promptness, such other information concerning the business,
financial conditions, results of operation and ownership of
the Company and of each subsidiary, if any, as may be
reasonably requested by the Investor and at any and all
reasonable times during business hours, upon written request,
permit the Investor, by its agents and attorneys to examine
all the books of account, records, reports and financial
papers of the Company.
J. Maintain its property in good repair, working order and
condition; from time to time to make all needful and proper
repairs, replacements, additions, betterments and improvements
thereto; and comply in all material respects with the
requirements of all governmental authorities, so that the
business carried on by the Companies may be properly conducted
at all times in accordance with prudent business management.
K. Keep in full force and effect the life insurance policy on the
life of the Michael Pollastro, required by the terms of this
Agreement, so long as Michael Pollastro shall be employed by,
or party to a written or oral independent contractor agreement
with, the Company, and so long as the Company is able to
obtain such insurance policy at an annual cost to the Company
not in excess of $10,000.
L. Use the proceeds from the Investor's purchase of the Series C
Preferred Stock and the Warrant solely for purposes set forth
on Exhibit VII.L , and for no other purposes; and to assure
such application, (i) deliver to the Investor, within ninety
(90) days of the Closing, a written report, certified as
correct by the Principal, verifying the purposes and amounts
for which the purchase price for the Series C Preferred Stock
and Warrant have been disbursed and, if the proceeds have not
been fully disbursed within that ninety (90) day period, an
additional report shall be delivered not later than the end of
each succeeding ninety (90) period verifying the purposes and
amounts for which the proceeds have been disbursed; and (ii)
supply to the Investor such additional information and
documents as the Investor reasonably requests with respect to
the use of proceeds and permit the Investor to have access to
any and all Company records and information and personnel as
the Investor deems necessary to verify how proceeds have been
or are being used, and to assure that the proceeds have been
used for the purposes specified. (The Company acknowledges (a)
that the Investor is a federally licensed small business
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<PAGE>
investment company and is subject to the regulations
promulgated by the SBA relating to the small business
investment company program (the "Regulations"), that the
Regulations prohibited certain uses of proceeds of loans made
by small business investment companies, as follows: (i)
personal use of loan proceeds by shareholders, officers, and
employees of the Company; (ii) any relending or reinvestment
of loan proceeds, if the Company's primary business activity
of the Company involves, directly or indirectly, providing
funds to others; the purchasing debt obligations factoring; or
long- term leasing of equipment with no provision for
maintenance or repair; (iii) purchasing any stock in or
providing capital to any small business investment company;
(iv) making any real estate purchases if the Company is
classified under Major Group 65 of the Standard Industrial
Classification Manual, unless such transaction would otherwise
be exempt by virtue of Section 901(c) of the Regulations; (v)
any use of proceeds that is contrary to the public interest,
including, but not limited to, activities which are in
violation of law, or inconsistent with free competitive
enterprise; or (vi) foreign investment and use outside the
United States, except as permitted under Section 901(e) of the
Regulations; and (b) the Company represents, covenants and
agrees that no portion of the proceeds shall be used for any
of the foregoing prohibited purposes or for any purposes not
expressly permitted by this Agreement and the Regulations, and
that any prohibited use of any portion of the proceeds shall
constitute a material breach of this Agreement and shall,
notwithstanding any other provision hereof to the contrary, at
the option of the Investor, cause all amounts invested
hereunder shall become immediately due and payable upon
written notice to the Company.)
M. Furnish such information as shall be required by the SBA
concerning the economic impact of the Investor's investment in
the Company, including but not limited to, information
concerning federal, state and local income taxes paid, number
of employees, gross revenues, source of revenue growth,
after-tax profit or loss, and federal, state and employee
income tax withholding; furnish annually all required
information on the appropriate SBA forms; furnish or cause to
be furnished to the SBA such other information regarding the
business, affairs and condition of the Company as the SBA may
from time to time reasonably request in connection with the
Investor's investment hereunder.
N. Permit SBA examiners or the SBA to inspect the books and any
of the properties or assets of the Company and its
subsidiaries, and to discuss the Company business with senior
management employees at such reasonable times as the SBA may
from time to time request in connection with the Investor's
investment hereunder.
O. Assure that at all times the Bylaws of the Company, as
necessary to assure that such provision is enforceable
according to its terms, shall contain a provision for
indemnification of directors to the fullest extent permitted
by applicable law.
P. Promptly pay all taxes, including excise taxes, unless
contested in good faith, as well as lawful claims for labor,
materials, and supplies which, if unpaid, might become a lien
or charge on any of their properties.
Q. Promptly notify the Investors of any material adverse change
in the condition of the Companies, financial or otherwise,
including material obligations.
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<PAGE>
R. Maintain compliance in all material respects with all
applicable laws, regulations, ordinances, rule and orders,
including but not limited to legislative and regulatory
requirements of ERISA, EPA, OSHA, etc.
S. Acquire and maintain directors and officers liability
insurance.
T. Provide in each of their By-laws for a number of directors not
to exceed seven (7) members, and also provide in such By-laws
that:
1. Any two members of the respective Boards of Directors
shall have the right to call a meeting of such Board
of Directors at the principal office of the Company,
as applicable, upon at least forty-eight hours prior
notice;
2. A majority of the members of the Board of Directors
shall constitute a quorum.
U. Within thirty (30) days of the Closing Date, adopt a written
policy regarding related party transactions.
V. Maintain all commercially reasonable protections of their
proprietary information.
W. Unless the Company is unable, with reasonable best efforts, to
obtain such insurance policy at an annual cost to the Company
not in excess of $10,000, deliver to Investor, within 45 days
after the Closing Date, satisfactory evidence of issuance of a
life insurance policy, or "binder" to issue a policy to the
Company, by an acceptable insurance company, in the amount of
One Million Dollars ($1,000,000) on the life of the Michael
Pollastro, which policy shall be non-cancellable for so long
as Michael Pollastro shall be employed by, or party to a
written or oral independent contractor agreement with, the
Company, and the Series C Preferred Stock is outstanding, and
the proceeds of which upon the death of Michael Pollastro
shall be applied first to redeem the Series C Preferred Stock
with the balance of the proceeds, if any, to be used by the
Company in its discretion.
X. Maintain its principal business operations in the United
States or its territories.
Y. Maintain the registration of the class of its securities
currently registered pursuant to Section 12(g) of the Exchange
Act.
Z. File all the material required to be filed pursuant to
Sections 13, 14 or 15(d) of the Exchange Act for a period of
at least twelve calendar months; and file in a timely manner
all reports required to be filed pursuant to such Sections.
AA. Assure that the Principal shall, within the time periods
permitted for such filings to be deemed timely by the SEC,
file all required Forms 3, 4 and 5, and Schedules 13D and/or
13G with respect to his beneficial ownership of the Common
Stock, or rights to acquire the Common Stock, of the Company.
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VIII. NEGATIVE COVENANTS OF THE COMPANIES
The Company covenants and agrees that from the date hereof, and so long
as the Investor and/or its assigns shall, collectively be holders of
the Warrant or of three percent (3%) or more of the outstanding Common
Stock of the Company that the Company will not:
A. Make any redemption or purchase or otherwise acquire any of
its capital stock, now or hereafter issued other than
mandatory redemptions required by the terms of the Series B
Preferred Stock presently outstanding, or an optional
redemption by the Company of the Series B Preferred Stock
presently outstanding.
B. Guarantee, endorse or otherwise become surety for any
obligations of others or purchase any evidence of indebtedness
or securities (including stock) or the business or
substantially all of the property of any other person or make
any capital contribution or capital advance to any other
person or firm except (i) guarantees of the indebtedness of
wholly-owned subsidiaries of the Company; (ii) guarantees
undertaken in connection with, and as required to permit
acquisition by the Company of the stock, or all or
substantially all of the assets of another entity or business.
C. Modify or amend its Certificate of Incorporation or Bylaws or
change in any manner its capitalization as to adversely affect
the Investor; provided, however, without limiting the
foregoing, that the Company may: (i) increase the authorized
number of common or preferred shares; and (ii) effect stock
splits.
D. Make any loans or advances to any of their officers or
directors or any persons related to such persons.
E. Enter into, or permit to remain in effect, any agreement to
rent or lease any real or personal property except those
rental agreements listed in the Company Disclosure Schedule,
other than in the ordinary course of business.
F. Enter into any sale and lease-back arrangement, other than in
the ordinary course of business.
G. Make any payment of principal upon or purchase or retire in
any manner except as otherwise permitted or required hereunder
any present outstanding indebtedness to any present
shareholder or relative thereof.
H. Move the place where its corporate and business records are
kept, or its management maintained from one state to another
state or jurisdiction unless the Company shall have given
written notice to the Investor of date of its relocation, and
of its new address, not less than 30 days in advance of the
date of such relocation.
I. Sell, assign, transfer, mortgage, pledge or encumber any part
of their assets or property now owned or hereafter acquired or
permit the same to be sold, assigned, transferred, mortgaged,
pledged or encumbered except as to (i) the lien of taxes,
assessments or other governmental charges not yet due that may
be paid without penalty; (ii) liens of carriers, warehousemen,
and materialsmen incurred in the ordinary course of business
for sums not yet due; (iii) any pledge or lien securing only
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unemployment insurance, workmen's compensation or similar
obligations that are not in default; (iv) deposits to secure
surety and appeal bonds to which it is a party; (v) sales in
the ordinary course of business; or (vi) refinancing of
existing indebtedness of the Company, on terms not less
favorable to the Company than the terms of the indebtedness
that is refinanced.
J. Declare or pay dividends of any kind, other than dividends on
the Series B Preferred Stock; PROVIDED, however, that the
Company has paid all accumulated or current dividends on the
Series C Preferred Stock.
K. Merge, liquidate or consolidate with or into any other entity,
or lease, sell or otherwise transfer all or substantially all
of its property, or business assets, other than as expressly
permitted by the Certificate of Designation for the Series C
Preferred Stock, or transfer any of its property for
consideration less than fair market value.
L. Except as disclosed on the Company Disclosure Schedule or the
Company SEC Documents, directly or indirectly purchase,
acquire or lease any property to or from any stockholder,
director, officer, agent or employee of the Companies or any
relative thereof or any firm or corporation in which any one
or more of the foregoing have directly or indirectly in the
aggregate more than a five percent (5%) interest.
M. Except for those contracts set forth in the Company Disclosure
Schedule, make or enter into any management agreement whereby
management, supervision or control of its business shall be
delegated to or placed in any person other than their duly
elected Boards of Directors and their executive officers nor
any contract or agreement whereby any of the principal
functions of operating their present business or any other
business is delegated or placed with any agent or independent
contractor, excepting, however, work let to or subcontractors
in the ordinary course of business consistent with past
practice.
N. Reserved.
O. Change the general character of their business as constituted
at the time of execution and delivery of this Agreement. Such
"change" shall include, but not be limited to, a sale of all
or a significant portion of their assets.
P. Permit the occurrence of a net loss by the Company (as
determined in accordance with GAAP) for any calendar year
ended after December 31, 1999; provided, however, that the
Company shall not be deemed in violation of this provision,
with respect to the year ended December 31, 2000, if it shall
have negative EBIT for such period of not more than One
Hundred Fifty Thousand and no/100 Dollars ($150,000);
PROVIDED, however, that even if such negative EBIT for the
period ended December 31, 2000 shall exceed One Hundred Fifty
Thousand and no/100 Dollars ($150,000), it shall not be a
violation of this Section VIII.P if, for the six month period
ended June 30, 2001, the Company shall have positive EBIT of
not less than One Dollar ($1.00). For the purpose of this
section, "net loss" shall mean such loss before all
extraordinary items and after all taxes. Whenever the term
"EBIT" is used in this Agreement, it shall mean, as all
amounts shall be determined in accordance with GAAP, (i) the
sum of the Company's revenue for the relevant period,
exclusive of any interest income during such period, less (ii)
the cost of goods sold producing such revenue for such period,
less (iii) the sales, general and administrative expenses
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incurred in the ordinary course of the business of the Company
during the relevant period; such expenses exclusive of (x) the
amount of any interest expense; and (y) the amount of the
provision for foreign, federal, state, and local income taxes
for such period.
Q. Use the proceeds of the Offering in any manner other than as
set forth in Section VII.L hereof.
R. Issue any Common Stock, preferred stock, equity or any other
security with equity or profit sharing features: (i) having
rights and preferences superior to, or pari passu with those
of the Series C Preferred Stock; or (ii) for a consideration
less than fair market value.
S. Create or permit to continue in existence any liens , liens
for taxes not yet due and payable, involuntary liens contested
in good faith or other similar encumbrances, other than in the
ordinary course of business.
T. Create or permit to continue to exist any secured or unsecured
debt (or guarantees) above $50,000 in the aggregate, other
than liabilities incurred in the ordinary course of business
and not more than 90 days past due.
U. Enter into any transaction not in the ordinary course of
business, or for less than fair market value to the Company,
including without limitation, the purchase, sale, lease,
rental or exchange of property or the rendering of any
service, with an affiliate, employee, officer, director or
shareholder or engage in any transaction not in the ordinary
course of business with any supplier, customer or any other
person.
V. Approve or agree to any reorganization, merger, consolidation
or combination with, any person, or dispose of fifty percent
(50%) or more of its assets other than the sale of inventory
in the ordinary course of business, or liquidate, dissolve,
recapitalize or reorganize in any form of transaction.
W. Issue to any future purchaser of securities of the Company
registration rights that are equal to or more favorable to the
new purchasers than those granted to the Investor.
X. Issue any securities for any consideration other than cash,
other than issuances of Common Stock:
1. in connection with the conversion or exercise, as the
case may be, of the Series C Preferred Stock and
Warrant;
2. as dividends payable on shares of outstanding Common
Stock, provided such issuance is not otherwise
prohibited by this Agreement; or
3. in connection with the exercise of stock options
under any incentive stock option plan of the Company;
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4. in connection with the conversion or exercise, as the
case may be, of any rights outstanding as of the
Closing, to acquire the Common Stock of the Company;
or
5. in connection with, and as consideration for or as
necessary to facilitate, the acquisition by the
Company of the stock, or all or substantially all of
the assets of another entity or business.
Y. Make loans or advances to any company, other than a subsidiary
of the Company.
Z. Make any investment in, or purchase any stock, security or
evidence of indebtedness of any person except for those of the
US government and banks with capital in excess of $25 million,
having a maturity of one year or less, except in connection
with the acquisition by the Company of the stock, or all or
substantially all of the assets of another entity or
business..
AA. Fail to pay any dividend or sinking fund installment on any
class of preferred stock.
BB. Default (i) on any installment or installments on indebtedness
for borrowed money, or (ii) on any rental on one or more long
term leases, which defaults in the aggregate are material to
the financial position of the Company and its consolidated and
unconsolidated subsidiaries, taken as a whole.
IX. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor hereby represents and warrants to the Company that (i) it
has the corporate power and authority to enter into this Agreement and
consummate the transaction contemplated hereby, (ii) the execution and
delivery of this Agreement, and the purchase of the Series C Preferred
Stock and Warrant, have been duly authorized by all necessary actions.
The Investor represents that it is acquiring the Series C Preferred
Stock and the Warrant for investment and not with a view to
distribution. The Investor is an "accredited investor" as defined in
the Securities Act.
X. WAIVERS/SEVERABILITY
Any of the acts that the Company is required to do, or prohibited from
doing, by any of the provisions hereof, may, notwithstanding the
provisions hereof, be omitted or done, as the case may be, if the
Investor, by an instrument in writing, consents thereto. The invalidity
of any provision of this Agreement, or part thereof, shall not affect
the validity or enforceability of the remainder of such provision
and/or this Agreement.
XI. EVENTS OF DEFAULT
An event of default ("Event of Default") under this Agreement shall be
deemed to have occurred if:
A. The Company fails to perform or comply with or observe any of
the other terms, conditions or covenants hereof, and such
failure shall continue for a period of sixty (60) days after
written notice thereof shall have been given by the Investor.
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B. The Company becomes insolvent, makes an assignment for the
benefit of creditors or admits in writing its inability to pay
its debts as they mature, consents to, or acquiesces in the
appointment of a Trustee or Receiver for the Company or any
property thereof, or any bankruptcy reorganization, debt
arrangements, or other proceeding under any bankruptcy or
insolvency law is instituted by or against the Company (and
where in the case of an involuntary petition it is not
dismissed within sixty (60) days from its filing), or shall
consent to any involuntary petition filed pursuant to or
purporting to be pursuant to any bankruptcy, reorganization or
insolvency law of any jurisdiction or shall be adjudicated
bankrupt.
C. The Company fails within sixty (60) days from the entry
thereof to discharge or have vacated any final judgment for
the payment of money in an amount exceeding Fifty Thousand
Dollars ($50,000), which shall be rendered against it or,
within such period, appealed therefrom and give such security
as may be required by law for payment of any amount ultimately
found to be due.
D. The Company discontinues business; or any parent or subsidiary
shall take, suffer or permit any of the actions or events
specified in Section B or C above.
E. The Company shall have made any representation or warranty
herein or in any report, financial or otherwise, or any
statement or instrument furnished pursuant to this Agreement,
that shall be in any material respect false or erroneous as of
the date of which the facts therein set forth were stated or
certified.
F. The Company becomes the subject of a liquidation or
dissolution proceeding.
G. If any material indebtedness of the Company becomes or is
declared to be due and payable prior to its expressed maturity
by reason of any default by the Company in the performance or
observance of any obligation or condition, and the Company
fails to cure such default or condition, and all other
accelerations caused by such default within the period of
grace, if any therein specified.
H. Default by the Company in the performance of any material
agreement.
I. The occurrence of a Change of Control. A "Change of Control
shall be deemed to have occurred if, any time after the date
hereof: (x) the Company or any shareholder of the Company
other than the Investor issues, grants or otherwise conveys,
to any person or entity, or combination of persons or
entities, not shareholders of the Company as of the date
hereof, rights to purchase Common Stock, or the equivalent
thereof, of the Company equal to, on a cumulative basis,
twenty-five percent (25%) or more of the fully diluted number
of the Company's shares as of the Closing Date; PROVIDED,
however, that a "Change of Control" shall not be deemed to
occur hereunder if the Company shall sell, at a price or
prices determined by the Board of Directors acting in good
faith to be not less than fair market value, Common Stock, or
rights to acquire Common Stock, constituting twenty-five
percent (25%) or more of the then outstanding Common Stock of
the Company, in a private or public offering to not fewer than
25 purchasers, none of whom shall acquire in such offering
more than ten percent (10%) of the securities sold in such
offering.
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J. If: (i) Michael Pollastro shall, as a result of his death,
cease to be one of (x) an executive officer of the Company, or
(y) be party to an oral or written independent contractor
agreement with the Company; (ii) the Company shall have
received the proceeds of the life insurance policy maintained
by the Company on the life of Michael Pollastro; and (iii) the
Company shall have failed to redeem the outstanding Series C
Preferred Stock at the amount of its Base Liquidation
Preference, as defined in the Certificate of Designation for
the Series C Preferred Stock within 60 days of notice from the
Investor to the Company of demand for such redemption.
K. The Principal sells, or liquidates by any method, (i) unless
there shall be a Qualified Exchange Listing (as defined in
Section XIII.B.2 below), forty percent (40%) or more of the
ownership interest of the Principal in the Company, owned by
the Principal at the Closing Date, as determined on a fully
diluted basis; or (ii) while there shall be a Qualified
Exchange Listing, fifty percent (50%) or more of the ownership
interest of the Principal in the Company, owned by the
Principal at the Closing Date, as determined on a fully
diluted basis.
XII. REMEDIES
A. The Investor or its assigns may pursue any rights or remedies
hereunder independently or concurrently, and all such rights,
powers and remedies shall be cumulative to the extent not
prohibited by law, and not exclusive of any other thereof. The
Investor or its assigns may proceed to protect and enforce its
rights hereunder by suit in equity, action at law and/or by
other appropriate proceedings, whether for specific
performance of any covenant herein, or in the aid of the
exercise of any power granted herein or to enforce any other
legal or equitable right.
B. To the extent permitted by law, the Company agrees to waive
and does hereby absolutely and irrevocably waive and
relinquish the benefit and advantage of any valuation,
appraisement or redemption laws now existing or which may
hereafter exist, which, but for this provision, might be
applicable to any enforcement of or any sale made under any
judgment, order or decree of any court, or pursuant to the
provisions hereof, or otherwise based hereon or on any claim
for interest due hereon.
C. Notwithstanding anything herein contained to the contrary, in
the event that a court of competent jurisdiction shall have
determined that there shall have been an Event of Default as
herein specified, the Investor or its assigns, to the extent
permitted by law shall be entitled as a matter of right to the
appointment of a Receiver or Receivers of the property,
interest, rights and business of the Company and the
subsidiaries, if any, and of the earnings, income, rents,
issues and profits thereof pending such proceedings and with
such power as the Court in making such appointment shall
confer. This remedy, as with all others, is cumulative and not
exclusive of any other rights, powers, or remedies available
to the Investor and its assigns.
D. The Company shall, in the event of the occurrence of an Event
of Default, pay to the Investor all costs and expenses
incurred in the enforcement and collection of this Agreement,
the successful enforcement of any rights as a holder of the
Series C Preferred Stock, or any other provision of any
agreement entered into by the Company hereunder, including
reasonable compensation to the Investor's agents and attorneys
as well as any all actual expenses of such agent or attorney,
including, without limitation, travel, lodging, meals,
deposition expenses and expert witness fees.
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XIII. PUT
A. In the circumstances set forth in XIII.B, below, the Investor
may tender to the Company the Warrant or Warrant Shares, and
shares of Common Stock held by the Investor as a result of the
conversion of all or any part of the Series C Preferred Stock
(such shares of Common Stock are referred to herein as
"Conversion Shares"), and shares of the Series C Preferred
Stock, or any portion or combination of the foregoing, and the
Company shall pay to holder the Put Price, as defined below.
B. Investor may exercise its rights pursuant to this Section XIII
at any time after the fifth anniversary of the Closing Date,
and prior to the close of business on the seventh anniversary
of the Closing Date; unless the Common Stock shall, at the
time of such exercise, be listed or approved for quotation on
(i) a stock exchange or automated quotation system such that
the Common Stock will qualify as a "covered security" within
the meaning of Section 18(b) of the Securities Act; or (ii)
the NASDAQ Small Cap Market, provided that there shall have
been average daily trading volume for the prior thirty (30)
trading days, of at least seventy thousand (70,000) shares
(either (i) or (ii), a "Qualified Exchange Listing").
C. The price at which the Investor may put the Warrant, any of
the Warrant Shares, the Conversion Shares and/or the Series C
Preferred Stock to the Company shall be the "Put Price," which
shall be equal to the "Fair Market Value" of the Company,
multiplied by a fraction,
the numerator of which is the total of (i) the number
of Warrant Shares tendered by the Investor, (ii) the
number of shares of Common Stock for which the
portion of the Warrant tendered by the Investor
remains exercisable, (iii) the number of Conversion
Shares tendered by the Investor and (iv) the number
of shares of Common Stock for which the Series C
Preferred Stock tendered by the Investor remain
convertible;
and the denominator of which is the total of (x) the
total shares of outstanding Common Stock of the
Company, (y) the number of shares of Common Stock for
which the Warrant remains exercisable, and (z) the
number of Conversion Shares for which all shares of
Series C Preferred Stock held by the Investor remain
convertible.
The Put Price, as determined according to the foregoing, shall
be increased by the amount of all accrued and unpaid dividends
on the Warrant Shares, Conversion Shares and shares of Series
C Preferred Stock tendered by the Investor.
1. "Fair Market Value" shall be, if the Company and the
Investor are able to reach agreement within 30 days
of notice from Investor of its exercise of rights
pursuant to this Section XIII, the higher of: (i) the
average of the closing "bid and "ask" prices of the
Common Stock for the thirty (30) trading days
immediately prior to the date on which the Investor
shall give notice to the Company of the exercise of
its put rights hereunder; or (ii) an amount
determined pursuant to the Appraisal Process,
described below.
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2. The Appraisal Process shall be as set forth in this
paragraph. If the Company and the Investor shall be
unable to agree on Fair Market Value within 30 days
of notice from Investor of its exercise of rights
pursuant to this Section XIII, each of the Company
and the Investor shall select a qualified appraiser,
regularly doing business in the area of business
valuation, and each of the two appraisers selected
shall, within 30 days of retention, render an opinion
as to Fair Market Value. If the lower of the two
appraisals rendered is at least 90% of the higher of
the two appraisals, Fair Market Value shall be the
average of the two appraisals. If the lower of the
two appraisals is not at least 90% of the higher of
the two appraisals, the two appraisers selected by
the parties shall select a third appraiser, who shall
then, within 30 days of retention, render an opinion
concerning Fair Market Value. In this event, the Fair
Market Value shall be the average of the two closest
appraisals. The appraisals shall be made without
consideration of any discount for minority interest
or lack of public market.
3. Each party shall each bear the cost of the appraiser
it selects hereunder. The parties shall share evenly
the cost of the third appraisal.
4. Following the determination of Fair Market Value, the
Investor may rescind its election to put its Common
Stock and/or Warrant to the Company, without
prejudice to its right to later exercise its rights
hereunder; provided it shall then be required to pay
the cost of all appraisals hereunder.
D. In the event of the exercise by the Investor of any rights
pursuant to this Section XIII, the Company shall pay the total
Put Price to the Investor within one hundred twenty (120) days
from the date the Company receives written notice from the
Investor of the exercise of the put rights granted by this
Section, or such later date as shall be sixty (60) days after
the date Fair Market Value is finally determined hereunder.
XIV. REGISTRATION RIGHTS
A. At any time after the Closing Date, the Investor may demand
registration under the Securities Act of shares of Common
Stock owned by the Investor, on Form S-2 or S-3 or any similar
short-form registration ("Short-Form Registration"), provided
that the Company shall then be eligible to use such form in
the registration of its securities. The registration requested
pursuant to this Section XIV.A is referred to herein as
"Demand Registration."
1. The Investor shall be entitled to demand two Demand
Registrations hereunder. A registration will count as
the Demand Registration when it has become effective
or is withdrawn prior to effectiveness at the request
of the Investor; provided that in any event, the
Company shall, as provided in Section XIV.E, pay all
registration expenses in connection with any
registration initiated as a Demand Registration.
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2. If the Demand Registration is an underwritten
offering, and the managing underwriters advise the
Company in writing that in their opinion the number
of shares of Common Stock requested to be included
exceeds the number of shares of Common Stock that can
be sold in such offering, the Company will include in
such registration prior to the inclusion of any
securities that are not shares of Common Stock owned
by the Investor, the number of shares of Common Stock
requested by the Investor to be included, which in
the opinion of such underwriters can be sold. The
balance of the shares of Common Stock that the
Investor requested to be included in such offering
shall be withheld from sale for a period of time
requested by the underwriters, but not to exceed 180
days from the effective date of the registration
statement.
3. The Company will not be obligated to effect the
Demand Registration within 180 days after the
effective date of a registration in which the
Investor was given "piggyback rights" pursuant to
Section XIV.B hereof. The Company may postpone the
filing or the effectiveness of a registration
statement for the Demand Registration if the Board of
Directors of the Company shall determine that such
Demand Registration might have an adverse effect on
any proposal or plan by the Company to engage in any
acquisition of assets (other than in the ordinary
course of business) or any merger, consolidation,
tender offer or similar transaction; provided that in
such event, the Investor will be entitled to withdraw
such request and that, if such request is withdrawn,
such Demand Registration will not be considered as a
Demand Registration.
4. The Company will have the right to select the
investment banker(s) and manager(s) to administer any
offering, subject to the approval of Investor, which
approval will not be unreasonably withheld.
B. If the Company at any time or times proposes or is required to
register any of its Common Stock or other equity securities
for public sale for cash under the Securities Act (other than
on Forms S-4 or S-8 or similar registration forms not
permitting the registration of the Common Stock owned by the
Investor), or any applicable state securities law, it will at
each such time or times give written notice to the Investor of
its intention to do so. Upon the written request of the
Investor, given within ten days after receipt of any such
notice, the Company shall use its reasonable best efforts to
cause any Common Stock held by the Investor and requested to
be registered, to be included in such registration under the
Securities Act and any applicable state securities laws;
provided, that if the managing underwriter advises that less
than all of the shares to be registered should be offered for
sale so as not materially and adversely to affect the price or
saleability of the shares being registered by the Company, the
Investor and each other shareholder not exercising demand
rights to include shares in the registration statement (but
not the Company to the extent it desires to include shares for
its own account) shall reduce on a pro rata basis the number
of their shares to be included in the registration statement
as required by the underwriter to the extent requisite to
permit the sale or other disposition (in accordance with the
intended method of disposition thereof as aforesaid) by the
prospective seller or sellers of the securities so registered.
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The rights of Investor under this Section XIV.B and Section
XIV.A above shall terminate at such date as the Investor holds
less than 3% of the total Common Stock of the Company
outstanding on a fully diluted basis.
C. It shall be a condition precedent to the obligation of the
Company to register any Common Stock pursuant to Sections
XIV.A or XIV.B that the Investor shall (a) furnish to the
Company such information regarding the Common Stock and the
intended method of disposition thereof and other information
concerning the Investor as the Company shall reasonably
request and as shall be required in connection with the
registration statement to be filed by the Company; (b) agree
to abide by such additional or customary terms affecting the
proposed offering as reasonably may be requested by the
managing underwriter of such offering, including a
requirement, if applicable, to withhold from the public market
for a period of at least 120 days after any such offering, any
shares excluded from the offering at the instance of the
underwriter as permitted under Sections XIV.A and XIV.B; and
(c) agree in writing in form satisfactory to the Company to
pay all underwriting discounts and commissions applicable to
the securities being sold by the Investor.
D. If and whenever the Company is required by the provisions of
Sections XIV.A or XIV.B to effect the registration of the
Common Stock under the Securities Act, until the securities
covered by such registration statement have been sold, or for
six months after effectiveness, whichever is the shorter
period of time, the Company shall:
1. Prepare and file with the SEC a registration
statement with respect to such securities and use its
reasonable best efforts to cause such registration
statement to become and remain effective;
2. Prepare and file with the SEC such amendments to such
registration statement and supplements to the
prospectus contained therein as may be necessary to
keep such registration statement effective;
3. Furnish to the security holders participating in such
registration and to the underwriters of the
securities being registered such reasonable number of
copies of the registration statement, preliminary
prospectus, final prospectus and such other documents
as such underwriters may reasonably request in order
to facilitate the public offering of such securities;
4. Use its reasonable best efforts to register or
qualify the securities covered by such registration
statement under such state securities or "Blue Sky"
laws of such jurisdictions as such participating
holders may reasonably request within 20 days
following the original filing of such registration
statement, except that the Company shall not for any
purpose be required to execute a general consent to
service of process or to qualify to do business as a
foreign corporation in any jurisdiction wherein it is
not so qualified, and except that the Company shall
not be required to so register or qualify in more
than 25 such jurisdictions if in the good faith
judgment of the Company, the Investor such additional
registrations or qualifications would be unreasonably
expensive or harmful to the consummation of the
proposed offering;
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5. Notify the security holders participating in such
registration, promptly after it shall receive notice
thereof, of the time when such registration statement
has become effective or a supplement to any
prospectus forming a part of such registration
statement has been filed;
6. Notify such holders promptly of any request by the
SEC for the amending or supplementing of such
registration statement or prospectus or for
additional information;
7. Prepare and file with the SEC, promptly upon the
request of any such holders, any amendments or
supplements to such registration statement or
prospectus which, in the opinion of counsel for such
holders, are required under the Securities Act or the
rules and regulations thereunder in connection with
the distribution of Common Stock by such holders;
8. Prepare and promptly file with the SEC and promptly
notify such holders of the filing of such amendment
or supplement to such registration statement or
prospectus as may be necessary to correct any
statements or omissions if, at the time when a
prospectus relating to such securities is required to
be delivered under the Securities Act, any event
shall have occurred as the result of which any such
prospectus or any other prospectus as then in effect
would include an untrue statement of a material fact
or omit to state any material fact necessary to make
the statements therein, in light of the circumstances
in which they were made, not misleading;
9. In case any of such holders or any underwriter for
any such holders is required to deliver a prospectus
at a time when the prospectus then in circulation is
not in compliance with the Securities Act, the
Company will prepare and file such supplements or
amendments to such registration statement and such
prospectus or prospectuses as may be necessary to
permit compliance with the requirements of the
Securities Act;
10. Advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance
of any stop order by the SEC suspending the
effectiveness of such registration statement or the
initiation or threatening of any proceeding for that
purpose and promptly use its reasonable best efforts
to prevent the issuance of any stop order or to
obtain its withdrawal if such stop order should be
issued;
11. Not file any amendment or supplement to such
registration statement or prospectus to which a
majority in interest of such holders shall reasonably
have objected on the grounds that such amendment or
supplement does not comply in all material respects
with the requirements of the Securities Act or the
rules and regulations thereunder, after having been
furnished with a copy thereof at least five business
days prior to the filing thereof; and
-22-
<PAGE>
12. If required by an underwriter selected by the
Company, at the request of any holder, (i) use its
best efforts to obtain and furnish on the effective
date of the registration statement or, if such
registration includes an underwritten public
offering, at the closing provided for in the
underwriting agreement, a customary opinion, dated
such date, of the counsel representing the Company
for the purposes of such registration, addressed to
the underwriters, if any, and to the holder or
holders making such request, or, if the offering is
not underwritten, shall notify the holders that such
registration statement has become effective under the
Securities Act and (ii) use its best efforts to
obtain customary letters dated on such effective
date, and such closing date, if any, from the
independent certified public accountants of the
Company, addressed to the underwriters, if any, and
to the holder or holders making such request, stating
that they are independent certified public
accountants within the meaning of the Securities Act
and dealing with such matters as the underwriters may
request, or, if the offering is not underwritten,
stating that in the opinion of such accountants, the
financial statements and other financial data
pertaining to the Company included in the
registration statement or the prospectus or any
amendment or supplement thereto comply in all
material respects with the applicable accounting
requirements of the Securities Act.
E. With respect to each inclusion of Common Stock in a
registration statement pursuant to Sections XIV.A or XIV.B,
all registration expenses, fees, costs and expenses of and
incidental to such registration, inclusion and public offering
in connection therewith shall be borne by the Company;
provided, however, that holders participating in the
registration shall bear their pro rata share of the
underwriting discount and commissions and shall bear any fees
and disbursements of accountants and counsel retained by them
(other than accountants and counsel also retained by the
Company). The fees, costs and expenses of registration to be
borne by the Company shall include, without limitation, all
registration, filing and NASD fees, printing expenses, fees
and disbursements of counsel and accountants for the Company
(including the cost of any special audit requested in order to
effect such registration), fees and disbursements of counsel
for the underwriter or underwriters of such securities (if the
Company and/or selling security holders are required to bear
such fees and disbursements), all legal fees and disbursements
and other expenses of complying with state securities or "blue
sky" laws of any jurisdiction in which the securities to be
offered are to be registered or qualified, fees and
disbursements of counsel and accountants for the selling
holders who are also retained by the Company and the premiums
and other costs of policies of insurance against liability
arising out of such public offering which the Company
determines to obtain.
F. Subject to the conditions set forth below, in connection with
any registration of Securities pursuant to Sections XIV.A or
XIV.B above, the Company agrees to indemnify and hold harmless
each person selling securities pursuant to said Sections and
each person, if any, who controls any such seller, within the
meaning of Section 15 of the Securities Act, as follows:
1. Against any and all loss, claim, damage and expense
whatsoever arising out of or based upon (including,
but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing or
defending any litigation, commenced or threatened, or
any claim whatsoever based upon) any untrue or
-23-
<PAGE>
alleged untrue statement of a material fact contained
in any preliminary prospectus (if used prior to the
effective date of the registration statement), the
registration statement or the prospectus (as from
time to time amended and supplemented), or in any
application or other document executed by the Company
or based upon written ,information furnished by the
Company filed in any jurisdiction in order to qualify
the Company's securities under the securities laws
thereof; or the omission or alleged omission
therefrom of a material fact required to be stated
therein or necessary to make the statements therein
not misleading; or any other violation of applicable
federal or state statutory or regulatory requirements
or limitations relating to action or inaction by the
Company in the course of preparing, filing, or
implementing such registered offering; provided,
however, that the indemnity agreement contained in
this Section XIV.F(1) shall not apply to any loss,
claim, damage, liability or action arising out of or
based upon any untrue or alleged untrue statement or
omission made in reliance upon and in conformity with
any information furnished in writing to the Company
by or on behalf of any seller expressly for use in
connection therewith;
2. Subject to the proviso contained in Section XIV.F(1)
above, against any and all loss, liability, claim,
damage and expense whatsoever to the extent of the
aggregate amount paid in settlement of any
litigation, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or
omission or any such alleged untrue statement or
omission (including, but not limited to, any and all
expense whatsoever reasonably incurred in
investigating, preparing or defending against any
such litigation or claim) if such settlement is
effected with the written consent of the Company;
3. In no case shall the Company be liable under this
indemnity agreement with respect to any claim made
against any seller or any such controlling person
unless the Company shall be notified, by letter or by
telegram confirmed by letter, of any action commenced
against such persons, promptly after such person
shall have been served with the summons or other
legal process giving information as to the nature and
basis of the claim, but failure to so notify the
Company shall not relieve it from any liability which
it may have otherwise than on account of this
indemnity agreement. The Company shall be entitled to
participate at its own expense in the defense of any
suit brought to enforce any such claim, but if the
Company elects to assume the defense, such defense
shall be conducted by counsel chosen by it, provided
that such counsel is reasonably satisfactory to the
sellers or controlling persons, defendants in any
suit so brought. If the Company elects to assume the
defense of any such suit and retain such counsel, the
sellers or controlling persons, defendants in the
suit, shall, after the date they are notified of such
election, bear the fees and expenses of any counsel
thereafter retained by them as well as any other
expenses thereafter incurred by them in connection
with the defense thereof.
G. Each person selling securities in any registered offering
pursuant to Sections XIV.A or XIV.B severally and individually
agrees to indemnify and hold harmless the Company, each
underwriter for the offering, and each of their officers and
directors and agents and each other person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act against any and all such losses, liabilities,
claims, damages and expenses as are indemnified against by the
Company under Section XIV.F; provided, however, that such
-24-
<PAGE>
indemnification by such sellers hereunder shall be limited to
statements or omissions, if any, made (or in settlement of any
litigation effected with the written consent of such sellers,
alleged to have been made) in any preliminary prospectus, the
registration statement or prospectus or any amendment or
supplement thereof or any application or other document in
reliance upon, and in conformity with, written information
furnished in respect of such seller by or on behalf of such
seller expressly for use in any preliminary prospectus, the
registration statement or prospectus or any amendment or
supplement thereof or in any such application or other
document. In case any action shall be brought against the
Company, or any other person so indemnified, in respect of
which indemnity may be sought against any seller, such seller
shall have the rights and duties given to the Company, and
each other person so indemnified shall have the rights and
duties given to the several sellers, by the provisions of
Section XIV.F(3). The person indemnified agrees to notify the
sellers promptly after the assertion of any claim against the
person indemnified in connection with the sale of securities.
H. Whenever the Company is subject to the reporting requirements
of either Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 ("Exchange Act"), the Company shall,
whenever requested by any holder of any shares issued
hereunder, notify such holder in writing whether the Company
has, as of any date specified in such request, complied with
the Exchange Act reporting requirements as to which it is
subject to a period prior to such date as may be specified in
such request. In addition, if the Company has become subject
to such reporting requirements, the Company shall take such
other measures and file such other information, documents and
reports as shall hereafter be required by the SEC as a
condition to the availability of Rule 144 under the Securities
Act (or any corresponding rule hereafter in effect). The
Company covenants that all such information, documents and
reports or any registration statement required by Section 12
of the Exchange Act filed with the SEC shall not contain any
untrue statement of a material fact or fail to state therein a
material fact required to be stated therein or necessary to
make the statements contained therein not misleading, and the
Company agrees to indemnify and hold each holder of any shares
issued hereunder or thereunder and each broker, dealer,
underwriter or other person acting for such holder (and any
controlling person of any of the foregoing) harmless from and
against any and all claims, liabilities, losses, damages or
expenses and judgments arising out of or based upon any breach
of the foregoing covenants, representations or warranties.
XV. ADDITIONAL RIGHTS OF THE INVESTOR
In addition to any rights which the Investor or its assigns might have
as a matter of law, or by reason of its rights as a holder of the
Series C Preferred Stock given it by the Company or by reason of this
Agreement, or by any documents executed pursuant hereto, so long as the
Investor and/or its assigns shall, collectively be holders of the
Warrant or of three percent (3%) or more of the outstanding Common
Stock of the Company the Investor shall have the following additional
rights:
A. If the Principal desires at any time to make a bona fide
transfer of all or any part of his Common Stock to any
third-party purchaser in a single private transaction or a
series of private transactions (other than to members of the
immediate family of the Principal), and (i) at the time of
-25-
<PAGE>
such transfer, there shall not be a Qualified Exchange
Listing, and prior to such proposed transaction(s), or as a
result of such transaction(s), Principal shall have sold more
than fifteen percent (15%) of the shares of Common Stock owned
by the Principal as of the Closing Date (taking into account
stock splits, stock dividends, recapitalizations and other
similar events); or (ii) at the time of such transfer, there
shall be a Qualified Exchange Listing, and prior to such
proposed transaction(s), or as a result of such
transaction(s), Principal shall have sold more than thirty
percent (30%) of the shares of Common Stock owned by the
Principal as of the Closing Date (taking into account stock
splits, stock dividends, recapitalizations and other similar
events), the Investor shall have the right to sell a
proportionate number of shares of Common Stock to the
third-party purchaser at the same price and on the same terms
and conditions as those contained in the third-party offer. A
"proportionate number of shares" is the total number of shares
the party wishes to sell, multiplied by a percentage,
determined as follows: the number of shares of Common Stock to
be sold, multiplied by a fraction, the numerator of which is
the number of shares of Common Stock the party wishes to sell,
and the denominator of which is the total number of shares of
Common Stock all parties wish to sell. The Investor may
exercise its option under this Section by giving written
notice to the Principal within 15 days after receipt from the
Principal of notice of the terms of the proposed sale. The
Principal shall not accept any third-party offer which does
not contain a provision requiring the third party to comply
with the terms of this Section.
B. After the Closing Date, and notwithstanding the fact that no
provisions with respect to pre- emptive rights of shareholders
are contained in the Certificate of Incorporation of the
Company, and in the event no other provision of this Agreement
prevents such issuance for any reason including waiver of the
Investor, in no event shall any shares of Common Stock be
offered for sale by the Company to anyone until the Investor
or its assigns shall have had an opportunity to subscribe for
and purchase their proportionate share of such additional
Common Stock so as to prevent any dilution of their interest
in the Company.
C. The Investor shall be entitled, at its sole option, to have
one (1) designee elected to and maintained on the Board of
Directors. The designee of the Investor shall be entitled to
the highest amount of director's fees and other remunerations
as are paid by the Company to its directors and shall be
reimbursed promptly for all out-of-pocket expenses incurred in
connection with such representatives' service to the Company.
The Company shall furnish the Investor, at least 48 hours in
advance, with copies of the agenda for each Board of Directors
and shareholders' meeting and shall furnish copies of the
minutes of all Board of Directors and shareholders' meetings
within 30 days after such meeting. The designee of the
Investor shall be entitled to submit agenda items to meetings
of the Board of Directors and any committees thereof, and the
Investor's designee shall be entitled to be members of any
committees of the Board of Directors that are established.
XVI. REPRESENTATIONS CONTINUING
All covenants, agreements, representations and warranties contained
herein or in any document or writing delivered by the Company to the
Investor in connection with this Agreement are and shall be deemed and
construed to be continuing representations and warranties and
covenants, and the Company agrees that same shall survive the execution
and delivery of this Agreement, the Series C Preferred Stock, and the
-26-
<PAGE>
Warrant, and the Warrant Shares and any investigation at any time made
by the Investor, and shall continue in full force and effect, except as
otherwise specifically excepted hereunder.
XVII. BENEFIT
All the terms and provisions hereof shall inure to the benefit of and
be binding upon the successors and assigns of the Investor, and, in
particular, shall inure to the benefit of and be enforceable by the
holder of the Series C Preferred Stock, the Warrant, and the Warrant
Shares.
XVIII. NON-WAIVER
The Investor and its assigns shall not be deemed to have waived any of
their rights or remedies hereunder unless such waiver is made in
writing duly signed by an appropriate officer of the Investor, or its
assigns. No delay or failure on the part of the Investor or its assigns
in exercising any rights, privilege, remedy or option provided for in
this Agreement, or by laws, shall operate as a waiver of such or of any
rights, privilege, remedy or option and no wavier whatever shall be
valid unless in writing as above provided and then only to the extent
therein expressly set forth. The Investor and its assigns shall have
the right to enforce any one or more remedies available to them
successively, alternatively or concurrently.
XIX. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which together
shall be deemed to constitute one and the same Agreement.
XX. HEADINGS
The headings of the paragraphs of this Agreement are for convenience
and reference only and do not form a part hereof, and in no way modify,
interpret or construe the understanding of the parties hereto.
XXI. MISCELLANEOUS
A. The Company certifies and warrants that all representations,
warranties and agreements made by each herein and all
documents hereto or in connection herewith or attached hereto
are correct as of the Closing Date and shall be deemed to have
been relied upon by the Investor, and shall survive the
delivery to the Investor of the Series C Preferred Stock and
Stock to be purchased hereunder, regardless of any
investigation made by the Investor; and all representations,
warranties and agreements made herein shall bind and inure to
the benefit of the parties hereto and their respective
successors and assigns whether or not so expressed.
B. The Company agrees to pay to Investor, upon invoice, all
reasonable out-of-pocket expenses incurred by the Investor,
including but not limited to expenses for due diligence, legal
counsel (provided that such costs shall be limited to $20,000,
unless the Company shall have given its consent to a greater
amount), consultants, accountants, and other out-of-pocket
expenses relating to investigation of this transaction,
documentation or closing, regardless of whether closing
occurs.
-27-
<PAGE>
C. All notices hereunder shall be in writing and will be deemed
to have been given if delivered personally or mailed by
Registered or Certified mail, return receipt requested,
postage prepaid, addressed as respectively indicated:
1. If to the Company, addressed to it at:
Attn: Michael Shimada
5000 Birch Street, Suite 205
Newport Beach, CA 92660
with a copy to:
Atlas, Pearlman, Trop & Borkson, P.A.
Attn: Joel D. Mayersohn
350 East Las Olas Blvd., Suite 1700
Ft. Lauderdale, FL 33301
2. If to the Investor, addressed to it at:
100 Second Street S.E.
P.O. Box 74250
Cedar Rapids, IA 52407-4250
with a copy to:
William T. McCartan
Bradley & Riley PC
2007 First Avenue SE
Cedar Rapids, IA 52402
D. This Agreement, which shall be construed and enforceable in
accordance with the laws of the State of Iowa (provided,
however, that the terms of the Series C Preferred Stock shall
be governed by, and interpreted in accordance with, the laws
of Delaware), constitutes the entire understanding between the
partes hereto and may not be changed, nor modified orally, but
only by the amendment to this Agreement in writing, signed by
the party against whom enforcement of any change or
modification is sought.
E. The Company agrees that any action or claim in connection with
or related to this Agreement, the Warrant or the Series C
Preferred Stock, may be brought in any state or federal court
sitting in Linn County, Iowa, and the Company consents to
personal jurisdiction and venue in any such court.
-28-
<PAGE>
SIGNATURE PAGE FOR INVESTMENT AGREEMENT
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
BRISTOL RETAIL SOLUTIONS, INC.
By: /s/ Michael Shimada
------------------------------------------
Michael Shimada, Chief Financial Officer
BERTHEL SBIC, LLC
By: BERTHEL FISHER & COMPANY PLANNING, INC.
By: /s/ Ronald O. Brendengen
------------------------------------------
Ronald O. Brendengen, COO
/s/ Lawrence Cohen
------------------------------------------
Lawrence Cohen, Individually
-29-
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibit I.A Certificate of Designation for Series C Convertible
Preferred Stock
Exhibit I.B Warrant
Exhibit V.A Resolutions of the Board of Directors of the Company
Exhibit V.B Legal Opinion
Exhibit V.D Certificate of the President or Chief Financial
Officer of the Company
Exhibit V.E. Certified copies of the Certificate of Incorporation
and By-Laws of the Company
Exhibit VI Company Disclosure Schedule
Exhibit VI.B Company Balance Sheet
Exhibit VII.L Use of Proceeds
-30-
EXHIBIT 11
<TABLE>
BRISTOL RETAIL SOLUTIONS, INC.
Computation of Loss per Share
<CAPTION>
Three Months Ended March 30,
2000 1999
-------------- --------------
<S> <C> <C>
BASIC LOSS PER SHARE
Net loss $ (1,219,992) $ (497,815)
Accretion related to Series C Convertible Preferred Stock (334,056) --
Cumulative dividends for Preferred Stock (33,978) --
-------------- --------------
Net loss applicable to common stockholders $ (1,588,026) $ (497,815)
============== ==============
Weighted average number of common shares outstanding
during the period 6,963,282 6,915,519
============== ==============
Basic loss to common stockholders per share $ (0.23) $ (0.07)
============== ==============
DILUTED LOSS PER SHARE
Net loss $ (1,219,992) $ (497,815)
Accretion related to Series C Convertible Preferred Stock (334,056) --
Cumulative dividends for Preferred Stock (33,978) --
-------------- --------------
Net loss applicable to common stockholders $ (1,588,026) $ (497,815)
============== ==============
Weighted average number of common shares outstanding
during the period 6,963,282 6,915,519
Effect of stock options, warrants and convertible preferred stock
treated as common stock equivalents under the treasury stock method -- --
-------------- --------------
Total shares 6,963,282 6,915,519
============== ==============
Diluted loss to common stockholders per share $ (0.23) $ (0.07)
============== ==============
</TABLE>
Page 1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE UNAUDITED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 IN THE REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2000 OF BRISTOL RETAIL SOLUTIONS, INC. AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 393,383
<SECURITIES> 0
<RECEIVABLES> 4,390,897
<ALLOWANCES> 309,421
<INVENTORY> 3,828,026
<CURRENT-ASSETS> 8,779,199
<PP&E> 1,062,469
<DEPRECIATION> 514,542
<TOTAL-ASSETS> 13,823,625
<CURRENT-LIABILITIES> 8,461,448
<BONDS> 0
0
1,100,000
<COMMON> 6,968
<OTHER-SE> 4,112,418
<TOTAL-LIABILITY-AND-EQUITY> 13,823,625
<SALES> 6,144,011
<TOTAL-REVENUES> 6,144,011
<CGS> 4,950,820
<TOTAL-COSTS> 7,233,231
<OTHER-EXPENSES> (8,133)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,905
<INCOME-PRETAX> (1,219,992)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,219,992)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
