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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
[_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
Commission file number: 0-21201
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iMALL, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Nevada 87-0553169
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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233 Wilshire Boulevard, Suite 820
Santa Monica, California 90401
(Address of principal executive offices) (Zip Code)
(310) 309-4000
(Issuer telephone no., including area code)
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Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.008 par value
(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to filing requirements for the past 90
days. Yes [X] No [_]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]
The registrant's revenues for the year ended December 31, 1998 were
$1,596,000.
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 23, 1999 was approximately $200,600,000, based on the
closing sale price per share of the registrant's Common Stock as reported on
the Nasdaq SmallCap Market on such date.
There were 17,190,779 shares outstanding of registrant's Common Stock as of
March 23, 1999.
The following documents are incorporated by reference into this report:
None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
iMALL, Inc. and its subsidiaries (the "Company") provide electronic commerce
services and solutions ("EC services") to small and medium size businesses
enabling them to cost effectively and efficiently sell their products through
the Internet. The Company's integrated e-commerce solution allows businesses
to build Web sites, automatically add electronic commerce services (such as
electronic catalogues, product searching, shopping cart services, sales tax
and shipping calculations, and sales tracking information), acquire a merchant
account online within hours, securely process all major credit cards in real
time, and attract traffic to their Web sites. The Company reaches its target
market by aligning itself with Web hosting firms, Internet Service Providers
("ISPs"), and financial institutions that already service millions of small
and medium size businesses. The Company's integrated EC services are located
at www.merchantstuff.com and its shopping portals can be found at
www.stuff.com and www.imall.com. The Company's corporate site is located at
www.imallinc.com.
The Company's mission is to expand its position as the leading electronic
commerce-enabler of small and medium size businesses by providing merchants
the ability, through its proprietary software and relationship with First Data
Merchant Services Corporation ("First Data"), a wholly owned subsidiary of
First Data Corporation, to transact commerce on-line. Electronic commerce
services include the ability to import, organize and retrieve products
electronically, process transactions securely, and receive credit card
payments over the Internet.
Prior to August 28, 1998, the Company derived its revenues principally from
Internet training, education and consulting services, Web site sales and pre-
paid maintenance fees, all of which were generated by the operations of the
Company's seminar and training division (the "Seminar Division"). While the
Seminar Division historically accounted for approximately 95% of the Company's
revenues, including approximately $7.3 million of revenue for the year ended
December 31, 1998, the Seminar Division was not profitable. Effective August
28, 1998, the Company discontinued the operations of the Seminar Division.
Management believed that the Seminar Division's low margin, highly
competitive, and non-recurring revenue stream was incompatible with the
Company's strategy of seeking to generate recurring revenue from EC services.
General
The Internet is a world-wide series of interconnected electronic and/or
computer networks. The Internet provides a medium for the promotion and
communication of ideas and concepts as well as for the sales of information,
goods and services. The term "electronic commerce" encompasses the use of the
Internet for selling goods and services. The use of the Internet as a
marketing and advertising tool is enhanced by the ability to communicate
information through the Internet to a large number of individuals, businesses
and other entities. Because of the "virtual" nature of electronic commerce, an
on-line presence in the form of a Web site for certain merchants can
significantly reduce or eliminate the costs of maintaining a physical retail
facility. On-line merchants can also achieve significant savings by
eliminating traditional product packaging, print advertising and other point
of purchase materials. Marketing on the Internet can be especially
advantageous for smaller companies because it removes many physical and
capital barriers to entry and serves to level the competitive playing field by
allowing smaller companies to effectively compete with larger companies.
Most large companies are already using the Web to sell their goods and
services and communicate with their customers, investors, and suppliers. These
companies most likely built their Web site internally, or contracted with a
Web site design firm to provide the services. This process is expensive and
requires significant resources. As such, smaller companies, who have limited
resources, often seek a less expensive turnkey solution. They often look to
their ISP or Web site hosting firm to provide the solution.
Products and Services
As a result of the discontinuance of the Seminar Division, the Company is
deriving substantially all of its revenue from Web site creation, Internet
advertising, and recurring monthly fees for EC services. The Company
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believes the majority of its future revenues will come from the monthly EC
service fees, Internet advertising, and transaction revenue.
Electronic Commerce Services
Electronic commerce services include the ability to import, organize and
retrieve products electronically, process transactions securely, and receive
credit card payments over the Internet. The Company has developed proprietary
software that allows small and medium size businesses to quickly, easily, and
securely sell their products over the Internet. These services are offered
through several distribution channels.
Transactional Web Sites
The Company builds Web sites with the functionality necessary to process on-
line commerce transactions in real time ("Transactional Web Sites") with its
proprietary Web site development tool, iSTORE(TM). iSTORE facilitates the
development of basic Web sites, the enhancing of Web sites, and the creation
of fully customized Web sites. iSTORE contains a number of electronic commerce
components that are easily integrated into the merchant's Web site. Basic Web
sites contain text of various fonts and font sizes as well as simple images.
Enhanced sites contain more advanced text, images, forms and tables that are
generated through the use of Java applets (a small computer application
written in the Java language that is downloaded to a browser), JavaScripting
(a language that is interpreted by Web browsers and used to enhance content
that is downloaded to a browser), and similar other tools. iSTORE provides
several stylized templates for basic and enhanced Web site designs.
Bolt-On E-Commerce
During the third quarter of 1998, the Company began marketing its new
product, Bolt-on e-commerce(TM), which allows any existing Web site to be
upgraded seamlessly to a fully commerce-enabled Web site without having to
rebuild the site from scratch. Using the Company's proprietary Web design
tools, these EC services can also be incorporated into any newly constructed
Web site. When using the Company's EC services, the merchant's product data
and purchase transactions are hosted on the Company's servers, freeing the
merchant from needing to purchase or install any hardware or software.
Security Protocols
The Company's current EC services include the use of the secure sockets
layer ("SSL") protocol. SSL supports a fully DES encrypted session (up to 128-
bit, depending on the browser) between the Web browser and the Web server This
service incorporates an RSA encryption method between a shopper on iMALL and a
merchant on iMALL. These security methods provide a high level of encryption
protection for users' credit card numbers, bank account numbers, and other
personal information. To the Company's knowledge, the Company has never
experienced any significant problems with security. However, there can be no
assurance that the Company will never experience such a problem. See "Risk
Factors--Internet Commerce Security Risks."
On-line Shopping
The following section describes the Company's two primary shopping Web
sites, www.imall.com and www.stuff.com. These Web sites provide consumers an
opportunity to purchase goods and services over the Internet using the
Company's software.
iMALL
The Company maintains an Internet Web site called "imall.com," located at
www.imall.com. The Company currently believes this site to be the largest
shopping mall destination on the Internet, hosting over two thousand stores
and hundreds of thousand of products. Upon accessing the iMALL Web site, a
user can view the Company's thousands of merchant Web sites ("storefronts") as
well as classified advertisements. Shoppers can
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find products and services on imall.com through key word searching or using
the iMALL directory. The iMALL directory lists sites by product or service
categories and allows users to perform searches of the entire iMALL Web site.
A shopper who wishes to purchase items offered from an iMALL merchant can do
so by simply submitting an order on-line and entering a credit card number. In
addition to the traditional search options, iMALL offers a special function
called "Deals of the Day." This service is updated daily and alerts iMALL
users to special manufacturer discounts on quality name-brand merchandise.
From January 1996 to December 1998, iMALL's hits have increased from
approximately 1 million per month to over 40 million per month. The Company
intends to continue attracting visitors to the iMALL Web site in order to
increase the Company's advertising revenue and to increase the sales achieved
by the Company's merchants. The Company receives a percentage of the sales
generated by over one hundred of its approximately 2,000 merchants. This
percentage ranges from 4% to 15% of sales.
Stuff.com
On November 1, 1998, the Company launched its shopping portal, located at
www.stuff.com ("Stuff.com"). This shopping portal is a product-level search
engine engineered to make on-line shopping easier. Visitors to Stuff.com can
search a proprietary index of over two million products from merchants across
the Internet. The search experience is efficient and specific to products for
sale; it does not clutter the search results with generic keywords or
extraneous non-retail Web sites. Further, when the user clicks on a chosen
product in the listing of search results, the user is linked directly to the
relevant product page within the merchant Web site, rather than having to
restart a search from the top page of a merchant's Web site. The Company plans
to devote marketing and advertising resources to the expansion of its
Stuff.com shopping portal during 1999. The Company's strategy is to seek
additional revenues through advertising sold on the Web site, royalties earned
from referring Stuff.com shoppers to large merchants paying a percentage of
sales, and through the sale of the Company's EC services to Stuff.com
merchants without e-commerce services. On December 21, 1998, the Company
announced its agreement with AT&T to cooperatively create and promote a
discount shopping club, labeled the [email protected]. AT&T World Net will
promote the [email protected] as a place where its subscribers are eligible to
receive certain discounts on purchases they make of selected products. AT&T
will promote the [email protected] to its AT&T WorldNet subscriber base through
its home page, CD-ROM, and certain e-mail direct marketing. In return, the
Company will provide the products for the [email protected] through its
relationship with distributors and promote AT&T WorldNet Internet access
services and certain long distance products through Stuff.com.
Internet Security
One of the largest barriers to a potential customer's willingness to conduct
commerce over the Internet is the perceived ability of unauthorized persons to
access and use personal information about the user, such as credit card
account numbers, social security numbers and bank account information.
Concerns about the security of the Internet include the authenticity of the
user (i.e., is the user accurately identified), verification and certification
methods of who these users are, and privacy protection for access to private
information transmitted over the Internet. However, the Company believes
recent advances in this area have greatly reduced the possibility of such
unauthorized access or use, which in turn may increase acceptance by consumers
of electronic commerce. The Company is not aware of any occasion in which a
user's credit card was misappropriated while transacting business on any of
the Company's Web sites. See "Risk Factors--Internet Commerce Security Risks."
Technical Infrastructure
The Company's Web server computing infrastructure is composed of a number
(currently 8) of front end UNIX Web servers running the latest release
Stronghold Secure Webserver and a back end set of UNIX application, database
and file servers. The database servers use ODI's ObjectStore database
technology. The system is connected to the Internet via a DS3 (45Mb/s) line
with redundant links through Sprint and MCI. Backup connections to the
Internet provide service in the event of catastrophic failure. The server
platform is protected by both UPS and an on-site emergency generator. See
"Risk Factors--Risk of System Failure."
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The Company's electronic commerce infrastructure is based on a combination
of commercial software and proprietary technology and is designed to provide
all merchant and shopper services required for the Company's business.
Sales and Marketing
The Company offers its EC services primarily through its relationships with
ISPs, Web hosting firms, and financial service companies with an Internet
focus. The Company offers its EC services through reseller arrangements with
First Data, Verio Web Hosting, Sage Networks, and Cardservice International.
In addition to receiving a unique Web site address, businesses that utilize
the Company's EC services have their products automatically listed in
Stuff.com and have the option to be listed in imall.com or other Internet
properties the Company operates. Management believes the Company's reseller
relationships afford the Company the ability to leverage large sales forces
and bases of existing clients in the pursuit of revenue growth.
The Company's strategy includes the continued development of strategic
alliances as a key to building the acceptance and the revenue base of the
Company. See "Risk Factors--Strategic Alliances."
First Data Alliance
In October 1998, the Company and First Data entered into a ten-year
Development and Marketing Agreement (the "Marketing Agreement") pursuant to
which the Company and First Data agreed to jointly market Internet commerce
solutions to First Data's clients and their merchant businesses. The Marketing
Agreement has an initial term of ten years and, unless terminated by either
party, will be renewed for additional two-year terms thereafter. Under the
terms of the Marketing Agreement, First Data is obligated to use its
commercially reasonable efforts to offer the Company's e-commerce tools, e-
commerce enabled Web sites and non-commerce enabled Web sites to all of its
domestic alliances and to name the Company as preferred e-commerce provider in
such offers. The Company will bill First Data monthly for recurring fees based
upon the number of Web sites hosted and types of services provided.
The Marketing Agreement requires the Company to maintain and upgrade, if
necessary, the technology used in connection with the Stuff.com site and
certain other mall sites to ensure that such technology is equal to or better
than that of the top ten percent of all similar services. In the event that
the Company fails to meet the foregoing standard and such failure
substantially impairs the ability of First Data to service its current
customers or add additional customers, First Data will have the right to
reduce its payments to the Company under the Marketing Agreement by fifty
percent, and if such technology is not upgraded to meet the standard described
above within a set period of time, require the Company to pay First Data for
all reasonable conversion costs and expenses incurred by First Data and its
affiliates associated with the deconversion of First Data merchants.
The Marketing Agreement provides that each of the following constitutes an
event of default by the Company: (i) failure to make specified payment
obligations owed to First Data under the Marketing Agreement, (ii) failure to
perform a material term or obligation under the Marketing Agreement which
substantially impairs the ability of First Data to service its customers or
add additional customers, (iii) failure to issue warrants in accordance with
the Investment Agreement, (iv) a material breach of specified representations,
warranties or covenants contained in the Marketing Agreement, (v) specified
events of bankruptcy or insolvency with respect to the Company, (vi) a
material change to the Stuff.com product or brand to which First Data
reasonably objects, or (vii) specified change-of-control events specific to
the Company and First Data competitors. If any such event of default occurs
and is not cured within a set period of time, First Data will have the right
to terminate the Marketing Agreement.
The Company also entered into an Investment Agreement with First Data (the
"Investment Agreement") which provided that the Company would sell to First
Data 2,000,000 shares of authorized and unissued shares of the Company's
common stock, par value $.008 per share (the "Common Stock"), for an aggregate
consideration of $14,000,000, representing a purchase price of $7.00 per
share. On October 30, 1998, the Company issued to
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First Data 1,540,000 shares of Common Stock. The Company then issued the
remaining 460,000 shares of Common Stock to First Data on February 9, 1999.
The Investment Agreement further provides that First Data may earn warrants to
purchase up to 5,000,000 shares of Common Stock at an exercise price of $17.00
per share. The warrants are earned if at any time through the second
anniversary of the successful testing of the systems and technologies provided
by the Company to its Internet shopping mall to be used by First Data, First
Data has implemented either 25,000 merchant web sites using the Company's EC
services or 50,000 total merchant Web sites using any of the Company's
products or services. The warrants, if issued, will expire in October 2003,
and may be redeemed, at the option of the Company, at a redemption price equal
to 0.266 shares of Common Stock per warrant share if the market price of the
Common Stock is equal to or exceeds $25.50 for at least twenty out of thirty
consecutive days.
The Company and First Data also entered into a source code escrow agreement
(the "Escrow Agreement") which required the Company to deposit in an escrow
account the source code for specified Company software and e-commerce tools
(the "Source Code"). The Escrow Agreement provides that any termination by
First Data of the Marketing Agreement for the events of default described
above will cause the escrow agent under the Escrow Agreement to, without any
further payment by First Data to the Company, release the Source Code
deposited in the escrow account to First Data. In addition, the Company is
obligated under the Marketing Agreement to build, at First Data's expense, a
duplicate and redundant data center and computer system which would be
transferred to First Data in the event of specified defaults by the Company.
The Marketing Agreement also contains other specified events of default that
would give either party the right to terminate the agreement without the
transfer of technology described above.
Pure Payments
On March 8, 1999, the Company agreed to acquire all of the outstanding
shares of common stock of Pure Payments, Inc. ("Pure Payments") in exchange
for 450,000 shares of Common Stock. Prior to this acquisition, the Company had
included Pure Payments' products and services as a key component of the
Company's EC services. Pure Payments' products and services allow for on-line
retailers to process credit card orders securely over the Internet. The
integration of Pure Payments' services into the EC services expedites the
store building process by eliminating many manual and time-consuming steps
required to integrate payment processing into a merchant's Internet
storefront. Pure Payments supports advanced credit card payment features for
on-line retailers and has sought to differentiate itself by offering corporate
purchase card processing, automatic merchant sign-up, end-to-end system-wide
monitoring, and transparent software upgrades.
Competition
The on-line commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive. The Company's current or potential
competitors include: (i) e-commerce solution providers that provide shopping
cart based transaction products such as: Yahoo Store!, iCAT, Pandesic; (ii)
Web developers that incorporate e-commerce products in their solutions such as
Mercantec, and Simplenet; (iii) on-line shopping malls such as The Internet
Mall, Branch Mall, and Yahoo! Shopping; (iv) product search engines and
comparison shopping sites such as Excite's Jango, Junglee, Mysimon.com and
Webmarket.com; and (v) payment gateway providers such as Cybercash and Clear
Commerce.
The Company believes that the principal competitive factors in its market
are simplicity, brand recognition, product selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of editorial and other site content and reliability and speed of
fulfillment. Many of the Company's competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than the Company. Some of the
Company's competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web site and systems
development than the Company. Increased competition may result in reduced
gross margins, loss of market share and a diminished brand franchise. See
"Risk Factors--Competition."
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Employees
As of March 23, 1999, the Company had a total of 130 full-time employees. 47
full-time employees are located in Santa Monica, California, 76 are located in
Provo, Utah, and seven are located in San Francisco, California. None of the
Company's employees are covered by an ongoing collective bargaining agreement
with the Company and the Company believes that its relationship with its
employees is good.
Government Regulations
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. It is possible, however, that a number of laws and
regulations may be adopted with respect to the Internet, covering issues such
as user privacy, pricing and characteristics and quality of products and
services. Moreover, the applicability to the Internet or other on-line
services of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. See "Risk Factors--Government
Regulations and Legal Uncertainties."
Patents and Trademarks
The Company relies on a combination of trademark, copyright and trade secret
laws, as well as confidentiality agreements and technical measures to protect
its proprietary rights. Much of the Company's proprietary information may not
be patentable, and the Company does not currently possess any patents. The
Company has registered the iMALL trademark in the United States and claims
trademark rights in, and has applied for trademark registrations in the United
States for, a number of other marks, including the Stuff.com trademark. See
"Risk Factors--Intellectual Property and Proprietary Rights."
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RISK FACTORS
This Annual Report (including without limitation the following Risk Factors)
contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934)
regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Annual Report. Additionally, statements concerning future matters such as
the development of new services, technology enhancements, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Annual Report reflect the good
faith judgment of the Company's management, such statements can only be based
on facts and factors currently known by the Company. Consequently, forward-
looking statements are inherently subject to risks and uncertainties, and
actual results and outcomes may differ materially from results and outcomes
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences in result and outcomes include without
limitation those discussed below as well as those discussed elsewhere in this
Annual Report. Readers are urged not to place undue reliance on these forward-
looking statements, which speak only as of the date of this Annual Report. The
Company undertakes no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Annual Report.
Limited Operating History; Need to Develop Recurring Revenue
The Company has existed in its present state since January 1996 and, until
August 28, 1998, has generated approximately 95% of its revenues from Internet
training, education and consulting services, Web site sales and pre-paid
maintenance fees, all of which were generated by the operations of the Seminar
Division. However, effective August 28, 1998, the Company discontinued the
operations of the Seminar Division. The Company has not begun to generate
significant recurring revenues from on-line EC services that are to be the
Company's focus for the future. Accordingly, the Company has a limited
operating history on which to base an evaluation of its business and
prospects. The Company's business and prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stage of development, particularly companies in new and rapidly
evolving markets such as on-line commerce. Such risks for the Company include,
but are not limited to, an evolving and unpredictable business model,
management of growth, the Company's ability to anticipate and adapt to a
developing market and unforeseen changes and developments in the Company's
strategic alliances. To address these risks, the Company must, among other
things, implement and successfully execute its business strategy, continue to
develop and upgrade its technology, improve its Web sites, provide superior
customer service, respond to competitive developments, attract, retain and
motivate qualified personnel and meet the expectations of its strategic
partners. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so could have a material adverse
effect on the Company's business, prospects, financial condition and results
of operations.
Historical Losses; Anticipated Losses
Since inception, the Company has incurred significant operating losses, and
as of December 31, 1998 had an accumulated deficit of $19,695,200. The Company
expects to significantly increase its operating expenses to expand its
marketing operations, and increase its level of capital expenditures to
further develop and maintain its proprietary software. Such increases in
operating expense levels and capital expenditures will adversely effect
operating results and the Company believes that it will incur substantial
losses for the foreseeable future. There can be no assurance that the Company
will ever achieve or maintain profitability or generate cash from operations
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in the future. Further, in view of the rapidly evolving nature of the
Company's business, its limited operating history and the discontinuance of
the Seminar Division, the Company believes that period-to-period comparisons
of its financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance. See "Management's
Discussion And Analysis of Financial Condition and Results of Operations."
Fluctuations in Operating Results
As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to
accurately predict its revenues. The Company expects to experience significant
fluctuations in its future quarterly operating results due to a variety of
factors, many of which are outside the Company's control. Factors that may
adversely affect the Company's quarterly operating results include: (i) the
Company's ability to retain and attract merchants on its Web sites, (ii) the
level of traffic on the Company's Web sites, (iii) consumer confidence in
encrypted transactions on the Internet, (iv) the level of use of the Internet
and on-line services and increasing consumer acceptance of the Internet as a
medium for commerce, (v) the Company's ability to upgrade and develop its
systems and infrastructure and attract new personnel in a timely and effective
manner, (vi) the announcement or introduction of new sites, services and
products by the Company and its competitors, (vii) technical difficulties,
system downtime or Internet brownouts, (viii) the amount and timing of
operating costs and capital expenditures relating to expansion of the
Company's business, operations and infrastructure, (ix) governmental
regulation, (x) implementation, renewal or expiration of significant contracts
with Verio, Inc., Cardservice International and Animalhouse.com, First Data
and others the Company may enter into in the future, and (xi) general economic
conditions and economic conditions specific to the Internet and on-line
commerce. The Company also faces unforeseeable seasonal sales fluctuations
related to its increasing focus on retail Internet commerce. Due to the
foregoing factors, in one or more future quarters, the Company's operating
results may fall below the expectations of securities analysts and investors.
In such event, the trading price of the Common Stock would likely be
materially adversely affected.
Management of Growth
The Company anticipates that significant expansion of its present operations
will be required to address potential growth in its market opportunities. This
expansion has placed, and is expected to continue to place, a significant
strain on the Company's management, operational and financial resources. The
Company's new employees include a number of key managerial and technical
employees who have not yet been fully integrated into the Company's management
team, and the Company expects to add additional key personnel in the near
future. In order to manage its growth, the Company will be required to
continue to implement and improve its operational and financial systems, to
expand existing operations, to attract and retain superior management and to
train, manage and expand its employee base. Further, the Company's management
will be required to maintain relationships with various merchants and other
third parties. There can be no assurance that the Company will be able to
effectively manage the expansion of its operations, that the Company's
systems, procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to successfully
implement its business plan. If the Company is unable to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Possible Need for Additional Financing
The Company may require additional financing. The Company's working capital
requirements in the foreseeable future will depend on a variety of factors
including the Company's ability to implement its business plan. There can be
no assurance that the Company will be able to successfully negotiate or obtain
additional financing, or that such financing will be on terms favorable or
acceptable to the Company. The Company does not have any commitments for
additional financing. The Company's ability to obtain additional capital will
be dependent on market conditions, the national economy and others factors
outside the Company's control. If adequate funds are not available or are not
available at acceptable terms, the Company's ability to finance its expansion,
develop or enhance services or products or respond to competitive pressures
would be significantly
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limited. The failure to secure necessary financing could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Strategic Alliances
The Company's strategy includes the continued development of strategic
alliances as a key to building the acceptance and the revenue base of the
Company. The Company offers its EC services primarily through its partnerships
with Internet service providers, Web hosting firms, and financial service
companies with an Internet focus. However, there can be no assurance that the
Company will be able to manage those risks associated with such strategic
alliances including, among others, the difficulty of assimilating operations,
technology and personnel, the potential disruption of the Company's ongoing
business and the inability to retain key technical and managerial personnel.
If the Company's strategic alliances are not successfully developed and
managed, the Company's business, prospects, financial condition and results of
operations would be materially adversely affected.
Dependence on the Internet
The Company's ability to derive revenues by providing on-line commerce is
substantially dependent upon continued growth in the use of the Internet and
the infrastructure for providing Internet access and carrying Internet
traffic. There can be no assurance that the necessary infrastructure, such as
a reliable network backbone, or complementary products will be developed or
that the Internet will prove to be a viable commercial marketplace. To the
extent that the Internet continues to experience significant growth in the
level of use and the number of users, there can be no assurance that the
infrastructure will continue to be able to support the demands placed upon it
by such potential growth. In addition, delays in the development or adoption
of new standards or protocols required to handle levels of Internet activity,
or increased governmental regulation may restrict the growth of the Internet.
Critical issues concerning the commercial use of the Internet, including but
not limited to, security, reliability, cost, ease of use and access, and
quality of service, remain unresolved and may impact the growth of Internet
use. If the necessary infrastructure or complementary products and services
are not developed or if the Internet does not become a viable commercial
marketplace, the business, operating results and financial condition of the
Company would be materially adversely affected.
Developing Market; Uncertain Acceptance of the Internet as Medium for Commerce
The market for the Company's services has only recently begun to develop and
is rapidly evolving. As is typical for a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services
over the Internet are subject to a high level of uncertainty and risk.
Moreover, since the market for the Company's services is new and evolving, it
is difficult to predict the size of this market and the future growth rate, if
any. The success of the Company's services will be substantially dependent
upon the widespread acceptance and use of the Internet as a medium for
commerce by a broad base of consumers. Rapid growth in the use of the Internet
is a recent phenomenon, and the Company relies on consumers who have
historically used traditional means of commerce to buy goods and services. For
the Company to be successful, these consumers must accept and utilize novel
ways of conducting business and exchanging information. There can be no
assurance that there will be broad acceptance of the Internet as an effective
medium for commerce by consumers. If the Company's on-line services do not
achieve market acceptance or if the Internet does not become a viable
commercial marketplace, the Company's business, results of operations and
financial condition would be materially adversely affected.
Risks Associated with Brand Development
The Company believes that establishing and maintaining the iMALL and Stuff
brands are a critical aspect of its efforts to attract and expand its audience
and that the importance of brand recognition will increase due to the growing
number of Internet sites and the relatively low barriers to entry. Promotion
and enhancement of the
9
<PAGE>
iMALL and Stuff brands will depend largely on the Company's success in
providing high-quality products and services and in designing and implementing
effective media promotions, which success cannot be assured. In order to
attract and retain Internet users and to promote and maintain brand
recognition such as the iMALL brand and the Stuff brand in response to
competitive pressures, the Company believes it is necessary to increase
substantially its financial commitment to creating and maintaining a distinct
brand loyalty among consumers. If the Company is unable to provide high-
quality products and services, design and implement effective media promotions
or otherwise fails to promote and maintain its brands, or if the Company
incurs excessive expenses in an attempt to improve its products and services
or promote and maintain its brands, the Company's business, operating results
and financial condition would be materially adversely affected.
Intellectual Property And Proprietary Rights
The Company's success is substantially dependent upon its proprietary
technology. The Company relies on a combination of trademark, copyright and
trade secret laws, as well as confidentiality agreements and technical
measures to protect its proprietary rights. Much of the Company's proprietary
information may not be patentable, and the Company does not currently possess
any patents. There can be no assurance that the Company will develop
proprietary products or technologies that are patentable, that any issued
patent will provide the Company with any competitive advantage or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's ability to do business. The Company
has registered the iMALL trademark in the United States and claims trademark
rights in, and has applied for trademark registrations in the United States
for a number of other marks, including the Stuff.com trademark. There can be
no assurance that the Company will be able to secure significant protection
for these trademarks. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or services or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology or duplicate the
Company's products or design around patents issued to the Company or other
intellectual property rights of the Company.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property rights. There can be no assurance that third
parties will not in the future claim infringement by the Company with respect
to current or future products, trademarks or other proprietary rights, that
the Company will counterclaim against any such parties in such actions or that
if the Company makes claims against third parties with respect thereto, that
any such party will not counterclaim against the Company in such action. Any
such claims or counterclaims could be time-consuming and result in costly
litigation, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have
a material adverse effect on the Company's business, prospects, financial
condition and results of operations. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
Rapid Technological Change
The Internet and on-line commerce industries are characterized by rapid
technological change, changing market conditions and customer demands and the
emergence of new industry standards and practices that could render the
Company's existing Web sites and proprietary technology obsolete. The
Company's future success will substantially depend on its ability to enhance
its existing services, develop new services and proprietary technology and
respond to technological advances in a timely and cost-effective manner. The
development of Web site and other proprietary technology entails significant
technical and business risk. There can be no assurance that the Company will
be successful in developing and using new technologies or adapting its
proprietary technology and systems to meet emerging industry standards and
customer requirements. If the Company is unable, for technical, legal,
financial, or other reasons, to adapt in a timely manner in response to
changing market conditions or customer requirements, or if the Company's new
products and EC services do not achieve market acceptance, the Company's
business, prospects, results of operations and financial condition would be
materially adversely affected.
10
<PAGE>
Reliance On Key Management Personnel
The Company's performance is substantially dependent on the continued
services and the performance of its senior management and other key personnel.
The Company's performance also depends on the Company's ability to retain and
motivate its other executive officers and key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations. The Company's future success also depends
on its ability to identify, attract, hire, train, retain and motivate other
highly skilled technical, managerial and marketing personnel. Competition for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. The failure to
attract and retain the necessary technical, managerial and marketing personnel
could have a material adverse effect on the Company's business, prospects,
financial condition and results of operations.
Competition
The on-line commerce market, particularly over the Internet, is new, rapidly
evolving and intensely competitive. The Company's current or potential
competitors include: (i) e-commerce solution providers that provide shopping
cart based transaction products such as: Yahoo Store!, iCAT, Pandesic; (ii)
Web developers that incorporate e-commerce products in their solutions such as
Mercantec, and Simplenet; (iii) on-line shopping malls such as The Internet
Mall, Branch Mall, and Yahoo! Shopping; (iv) product search engines and
comparison shopping sites such as Excite's Jango, Junglee, Mysimon.com and
Webmarket.com; and (v) payment gateway providers such as Cybercash and Clear
Commerce.
The Company believes that the principal competitive factors in its market
are simplicity, brand recognition, product selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of editorial and other site content and reliability and speed of
fulfillment. Many of the Company's competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than the Company. Certain of
the Company's competitors may be able to devote greater resources to marketing
and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development than the Company. Increased competition may result in
reduced gross margins, loss of market share and a diminished brand franchise.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors.
The Company expects that competition in the on-line commerce market will
intensify in the future. For example, as various market segments obtain large,
loyal customer bases, participants in those segments may seek to leverage
their market power to the detriment of participants in other market segments.
Competitive pressures created by any one of the Company's competitors, or by
the Company's competitors collectively, could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
Internet Commerce Security Risks
A significant barrier to on-line commerce is the secure transmission of
confidential information over public networks. The Company relies on
encryption and authentication technology to provide the security and
authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography, or other developments will not
result in a compromise or breach of the algorithms used by the Company to
protect consumers' transaction data. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
operations. The Company may be required to expend significant capital and
other resources to protect against such security breaches or to alleviate
problems caused by such breaches.
11
<PAGE>
Concerns over the security of transactions conducted on the Internet and the
privacy of users may also hinder the growth of on-line services generally,
especially as a means of conducting commercial transactions. To the extent
that activities of the Company or third-party contractors involve the storage
and transmission of proprietary information, such as credit card numbers,
security breaches could damage the Company's reputation and expose the Company
to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will not prevent security
breaches or that failure to prevent such security breaches will not have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
Risk of System Failure
The success of the Company is substantially dependent upon its ability to
deliver high quality, uninterrupted Internet hosting, which requires that the
Company protect its computer equipment and the information stored in its
servers, substantially all of which is located at the Company's office in
Provo, Utah. The Company's systems are vulnerable to damage by fire, natural
disaster, power loss, telecommunications failures, unauthorized intrusion and
other catastrophic events. Any substantial interruption in the Company's
systems would have a material adverse effect on Company's business, prospects,
financial condition and results of operations. Although the Company carries
property and business interruption insurance, its coverage may not be adequate
to compensate for the losses that may occur. In addition, the Company's
systems may be vulnerable to computer viruses, physical or electronic break-
ins and other similar disruptive events. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of the Company's services. The
occurrence of any of these risks could have a material adverse effect on the
Company's business, prospects, financial condition and results of operations.
Risk of Capacity Constraints
The Company seeks to generate a high volume of traffic and transactions on
its Web sites. Accordingly, the satisfactory performance, reliability and
availability of the Company's Web sites, processing systems and network
infrastructure are critical to its reputation and ability to attract and
retain large numbers of users who purchase items on its Web sites while
maintaining adequate customer service levels. Any system interruptions that
result in the unavailability of the Company's Web sites or reduced customer
activity would reduce the volume of items purchased. Any substantial increase
in the volume of traffic on the Company's Web sites will require the Company
to expand and upgrade its technology, transaction processing systems and
network infrastructure. There can be no assurance that the Company will be
able to accurately project the rate or timing of increases, if any, in the use
of the its services or timely expand and upgrade its systems and
infrastructure to accommodate such increases in a timely manner. Any failure
to expand or upgrade its systems could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company uses internally developed systems to operate its services and
for transaction processing, including billing and collections processing. The
Company must continually enhance and improve these systems in order to
accommodate the level of use of its services. Furthermore, in the future, the
Company may add additional features and functionality to its services that
would result in the need to develop or license additional technologies. The
Company's inability to add additional software and hardware or to develop and
further upgrade its existing technology, transaction processing systems or
network infrastructure to accommodate increased traffic on its Web sites or
increased transaction volume through its processing systems or to provide new
features or functionality may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service, impaired quality of
the user's experience, and delays in reporting accurate financial information.
There can be no assurance that the Company will be able in a timely manner to
effectively upgrade and expand its systems or to integrate smoothly any newly
developed or purchased technologies with its existing systems. Any inability
to do so would have a material adverse effect on the Company's business,
results of operations and financial condition.
12
<PAGE>
Government Regulations And Legal Uncertainties
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. It is possible, however, that a number of laws and
regulations may be adopted with respect to the Internet, covering issues such
as user privacy, pricing and characteristics and quality of products and
services. The adoption of any such laws or regulations may decrease the growth
of the Internet, which in turn, could decrease the demand for the Company's
services and increase the Company's cost of doing business or otherwise have
an material adverse effect on the Company's business, prospects, financial
condition and results of operations. Moreover, the applicability to the
Internet or other on-line services of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet or other on-
line services could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
Control By Management
As of March 23, 1999, the Company's officers, directors and greater than 5%
stockholders (and their affiliates) beneficially own in the aggregate
approximately 55.3% of the issued and outstanding voting shares of the
Company's capital stock. As a result, such persons, acting together, will have
the ability to control all matters submitted to stockholders of the Company
for approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of the Company's assets) and
to control the management and affairs of the Company. Accordingly, such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, impede a merger, consolidation, takeover or
other business combination involving the Company or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control
of the Company, which in turn could have an adverse effect on the market price
of the Common Stock.
Possible Volatility of Stock Price
The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations, or new services by the Company or
its competitors, changes in financial estimates by securities analysts,
conditions or trends in the Internet and on-line commerce industries, changes
in the market valuations of other Internet or on-line service companies,
announcements by the Company or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, sales of Common Stock in the open market and
other events or factors, many of which are beyond the Company's control.
Further, the stock markets in general, and the Nasdaq Stock Market and the
market for Internet-related and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of such companies.
The trading prices of many technology companies' stocks are at or near
historical highs and reflect valuations substantially above historical levels.
There can be no assurance that these trading prices and valuations will be
sustained. These broad market and industry factors may materially adversely
affect the market
13
<PAGE>
price of the Common Stock, regardless of the Company's operating performance.
Market fluctuations, as well as general political and economic conditions such
as recession or interest rate or currency rate fluctuations, may also
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of a company's securities,
securities class-action litigation has often been instituted against such
company. Such litigation, if instituted, could result in substantial costs and
a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, prospects, results of
operations and financial condition.
Year 2000
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
order processing, inventory management, distribution, financial business
systems and various administrative functions. Although the Company believes
that its internal software applications contain source code that is able to
interpret appropriately the upcoming calendar year 2000, failure by the
Company to make any required modifications to make such software "Year 2000"
compliant could result in systems interruptions or failures that could have a
material adverse effect on the Company's business. The Company does not
anticipate that it will incur material expense to make its computer software
programs and operating systems "Year 2000" compliant. However, there can be no
assurance that unanticipated costs necessary to update software, or potential
systems interruptions, will not exceed the Company's present expectations and
have a material adverse effect on the Company's business, prospects, financial
condition and results of operations. In addition, failure by key service
providers to the Company, such as its fulfillment house and the Company's Web
hosting service provider, to make their respective computer software programs
and operating systems "Year 2000" compliant could have a material adverse
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
ITEM 2. DESCRIPTION OF PROPERTIES
The Company maintains offices in Santa Monica, California, and Provo, Utah.
Pursuant to a ten-year lease commencing on September 1, 1998, the Company
leases its executive offices at 233 Wilshire Boulevard, Santa Monica,
California. The initial rent is $22,800 per month (8,156 square feet). On
November 5, 1998, the Company entered into a three-year lease commencing
December 1, 1998 for office space at 190 West Riverpark Drive, Suite 220,
Provo, Utah, at a current rate of $3,800 per month (2,875 square feet). The
Company also leases office space at 5314 North 250 West, Units 1, 2 and 3,
Provo, Utah, at a current rent of $7,500 per month (4,590 square feet), which
lease expires on February 29, 2000 and at 5314 North 250 West, #110, Provo,
Utah, at a current rent of $6,600 per month, which lease expires in February
2000. The Company believes that it currently has sufficient space to carry on
its operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various legal proceedings in the ordinary
course of business. Except for the litigation set forth below, the Company is
not aware of any legal proceedings which appear at this time as if they might
have a material adverse effect on the Company's business, results of
operations and financial condition.
As previously disclosed, the FTC has conducted a nonpublic investigation of
the Company's Internet-related business opportunity programs, which programs
have been discontinued. In connection therewith, the Company reserved $750,000
in the third quarter of 1998. The Company has reached a settlement with the
FTC for $750,000, and on March 30, 1999, the Company was notified of the
formal approval by the FTC of such settlement.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of stockholders of the Company was held on December 31,
1998. Richard M. Rosenblatt, Anthony P. Mazzarella, Marshall S. Geller, Harold
S. Blue, Leonard M. Schiller, Howard A. Goldberg, Richard H. Rogel and John F.
Duncan were elected as directors of the Company, each to hold office until the
next annual meeting of stockholders or until his successor has been elected
and qualified, subject to earlier resignation or removal. Additionally, the
stockholders approved an amendment to the iMALL, Inc. 1997 Stock Option Plan
(the "Plan") to increase the maximum number of shares of Common Stock subject
to options granted under the Plan from 750,000 to 3,250,000. The results of
the voting at the annual stockholders meeting were as follows:
Proposal No. 1
(Election of Directors)
<TABLE>
<CAPTION>
Company Nominee For Withheld
--------------- ---------- --------
<S> <C> <C>
Richard M. Rosenblatt................................... 10,739,680 30,200
Anthony P. Mazzarella................................... 10,739,680 30,200
Marshall S. Geller...................................... 10,739,680 30,200
Harold S. Blue.......................................... 10,739,680 30,200
Leonard M. Schiller..................................... 10,739,680 30,200
Howard A. Goldberg...................................... 10,739,680 30,200
Richard H. Rogel........................................ 10,739,680 30,200
John F. Duncan.......................................... 10,739,680 30,200
</TABLE>
Proposal No. 2
(Approval of amendment to the iMALL, Inc. 1997 Stock Option Plan)
<TABLE>
<CAPTION>
Broker
Non-
For Against Abstain Votes
--- ------- ------- ------
<S> <C> <C> <C>
10,284,562 474,515 10,803 0
</TABLE>
15
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
On July 13, 1998, the Common Stock commenced trading on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "IMAL." Prior thereto, the Common Stock
traded on the OTC Electronic Bulletin Board. Prior to trading on Nasdaq, the
trading market was limited and sporadic and did not constitute an "established
trading market."
The following table sets forth the range of sales prices of the Common Stock
as quoted on Nasdaq and the OTC Electronic Bulletin Board during the periods
indicated. Such prices reflect prices between dealers in securities and do not
include any retail markup, markdown or commission and may not necessarily
represent actual transactions. On February 12, 1998, the Company effected a 1
for 8 reverse stock split. All references in this Annual Report take into
effect all stock splits when referring to the number of shares of Common Stock
or per share data.
<TABLE>
<CAPTION>
Price Range
-------------
High Low
------ ------
<S> <C> <C>
1997:
First Quarter............................................... $36.00 $13.04
Second Quarter.............................................. 24.00 8.48
Third Quarter............................................... 13.00 6.48
Fourth Quarter.............................................. 8.48 3.44
1998:
First Quarter............................................... 12.25 4.00
Second Quarter.............................................. 10.00 7.69
Third Quarter............................................... 15.36 5.50
Fourth Quarter.............................................. 32.75 5.69
1999:
First Quarter (through March 23,1999)....................... 25.25 12.38
</TABLE>
Holders
As of March 23, 1999, there were 667 stockholders of record of the Common
Stock.
Dividends
The Company has never paid dividends on Common Stock and does not anticipate
paying dividends on Common Stock in the foreseeable future. It is the present
policy of the Board of Directors to retain all earnings to provide for the
future growth of the Company. Earnings of the Company, if any, not paid as
dividends are expected to be retained to finance the expansion of the
Company's business. The payment of dividends on Common Stock in the future
will depend on the results of operations, financial condition, capital
expenditure plans and other cash obligations of the Company and will be at the
sole discretion of the Board of Directors.
Recent Sales of Unregistered Securities
On November 2, 1998, the Company issued 1,540,000 shares of Common Stock to
First Data at a cash price of $7.00 per share. The Company issued an
additional 460,000 shares of Common Stock to First Data on February 9, 1999 at
a cash price of $7.00 per share. These issuances were exempt from registration
under Section 4(2) of the Securities Act of 1933 and Regulation D thereunder.
16
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Consolidated Financial Data
The following table sets forth certain selected financial data with respect
to the Company and is qualified in its entirety by reference to the financial
statements and notes thereto, and the discussion below.
<TABLE>
<CAPTION>
At December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance Sheet Data:
Current Assets........................................ $12,014,900 $15,136,700
Total Assets.......................................... 14,501,800 16,016,800
Current Liabilities................................... 3,787,500 1,662,600
Long-term Liabilities................................. -- --
Stockholders' Equity.................................. $10,714,300 $14,354,200
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Statement of Operations
Net Revenues...................................... $ 1,596,000 $ 973,600
Cost of Revenues.................................. 605,400 187,600
Selling Expenses.................................. 3,597,900 20,000
Product Development............................... 3,321,800 669,100
General and Administrative Expenses............... 5,813,800 2,676,500
Other Income...................................... 82,100 --
Interest Income (Expense), Net.................... 574,800 (23,100)
Benefit (Provision) for Income Taxes.............. -- 16,500
------------ -----------
(Loss) Income from continuing operations.......... (11,085,800) (2,586,200)
(Loss) from discontinued operations............... (2,062,800) (2,116,800)
Net (Loss) Income................................. (13,148,600) (4,703,000)
============ ===========
Net (Loss) Income Per Common Share--Basic and
Diluted:
Loss from continuing operations................. $ (1.61) $ (.36)
Loss from discontinued operations............... $ (.26) $ (.28)
------------ -----------
Net (Loss)...................................... $ (1.87) $ (.64)
============ ===========
Weighted-Average Common Shares Outstanding........ 8,008,040 7,526,967
============ ===========
</TABLE>
Overview
The Company is an electronic commerce enabler, which provides powerful,
inexpensive browser based electronic commerce solutions to merchants seeking
to engage in commerce on the Internet. The Company also operates a popular
Internet shopping site, located at www.imall.com, as well as an innovative
shopping portal and proprietary product-level search engine, located at
www.stuff.com.
Prior to August 28, 1998, the Company derived the majority of its revenues
from Web site sales and maintenance fees, Internet training, education and
consulting services which were operated by the Company's seminar and training
division. Effective August 28, 1998, the Company discontinued the operations
of its seminar and training division. Management believes the low margin,
highly competitive, and non-recurring nature of the revenue stream from the
seminar and training division made it incompatible with the Company's E-
Commerce focus. The division historically has accounted for approximately 95%
of the revenues of the Company, including approximately $7.3 million of
revenue for the year ended December 31, 1998. The seminar and training
division has not been profitable. Except as indicated, the discussion set
forth below in "--Results of Operations " does not include the financial
results from the seminar and training division.
17
<PAGE>
As a result of the discontinuance of the seminar and training division, the
Company is now deriving substantially all of its revenue from Web site sales
and maintenance fees, Internet advertising sales and recurring monthly fees
for EC services. The Company's strategy is to increase its revenue from
providing EC services to businesses (through Web sites which include the tools
necessary to consummate transactions online), selling Internet advertising and
selling products over the Internet.
During 1998, the Company focused much of its resources on the expansion of
its EC services business. The Company began marketing its new product, Bolt-on
e-commerce(TM), which allows any existing Web site to be upgraded seamlessly
to a fully commerce-enabled Web site without having to rebuild the site from
scratch. Using the Company's proprietary Web design tools, these EC services
can also be incorporated into any newly constructed Web site. When using the
Company's EC services, the merchant's product data and purchase transactions
are hosted on the Company's servers, freeing the merchant from needing to
purchase or install any hardware or software.
In the fourth quarter of 1998, the Company launched its shopping portal,
located at www.stuff.com. This portal is a product-level search engine
designed specifically for online shopping. Visitors to stuff.com can search a
proprietary index of over a million products offered among numerous merchant
sites across the Internet. The search experience is efficient and specific to
products for sale, in that it does not clutter the search results with generic
keywords or extraneous non-retail Web sites. Further, when the user clicks on
a chosen product in the listing of search results, the user is linked directly
to the relevant product page within the merchant Web site, rather than having
to restart a search from the top page of a merchant's Web site. The Company
plans to devote marketing and advertising resources to the expansion of its
Stuff.com shopping portal during 1999. The Company anticipates that Stuff.com
will provide the Company revenues through advertising sold on the site,
royalties earned from referral fee contracts and through sales of upgrades to
the Company's EC services.
Also in the fourth quarter, the Company entered into a strategic marketing
agreement with First Data Merchant Services, a subsidiary of First Data
Corporation. In connection with this agreement, First Data Merchant Services
purchased two million shares of the Company common stock for a total purchase
price of $14 million. Details of this transaction are provided in Item 1 of
this report.
Results of Operations
Comparison of Years Ended December 31, 1998 and 1997
The following discussion and analysis of the Company's financial condition
for the years ended December 31, 1998 and 1997 reflects the discontinuance of
operations of the Seminar Division and should be read in conjunction with the
Company's consolidated financial statements and notes thereto included
elsewhere in this document.
Revenues. Revenues for the year ended December 31, 1998 were $1,596,000
compared to $974,000 for the year ended December 31, 1997, an increase of
$622,000 or 64%. The increase was due primarily to greater technology and
marketing spending as part of the Company's continued expansion of its EC
services focus during 1998. Management's goal is for its advertising revenues
to increase with the continued expansion of its product level search engine,
which, if successful, will create a substantial amount of new page views
available for advertising. Beginning in 1998 the Company received advertising
revenues from customers where the Company would pay web publishers with whom
the Company had pre-existing relationships a service fee for delivering the
advertisements. The Company is responsible for billing and collecting on these
ads and assumes the risk of non-payment from advertisers. Web site sales and
related maintenance fees derived from the Company's internal sales force
increased as part of a planned effort to better diversify the product
selection on the www.imall.com shopping site. During 1998, the Company
continued the process of shifting resources to develop its new businesses in
electronic commerce.
18
<PAGE>
Cost of Revenues. The cost of revenues for the year ended December 31, 1998
was $605,000 compared to $188,000 for the year ended December 31, 1997, an
increase of $417,000 or 222%. The profit margin decreased to 62% in the year
ended December 31, 1998 from 81% in the year ended December 31, 1997.
Beginning in 1998 the Company received advertising revenues from customers
where the Company would pay web publishers with whom the Company had pre-
existing relationships a service fee for delivering the advertisements. This
fee is included in cost of revenues driving the profit margin down from the
relatively high margin realized on EC services. Cost of revenues also includes
labor and related costs to build Web sites as well as the cost of any products
sold on-line directly by the Company.
Selling Expenses. Selling expenses increased by $3,578,000 for the year
ended December 31, 1998. The increase is primarily due to the implementation
of an on-line advertising campaign that began at the end of 1997.
Substantially all of the selling expenses incurred in 1997 were in support of
the seminar and training division. These expenses are now reflected in the
loss from discontinued operations. The Company spent $1,900,000 on its online
advertising campaign and $500,000 in traditional media through radio ads and
the sponsorship of the New York marathon during 1998 in support of its
branding efforts, and to further promote its new focus on EC services. The
Company took a one-time charge of $800,000 as an allowance against advanced
commissions paid to Animalhouse.com. The Company is still actively marketing
the animalhouse.com venture, however the site's initial sales have been
substantially below the Company's expectations. The Company expects to
increase its selling expenses in 1999 through both on-line advertising and
traditional advertising to promote its new product level search engine and new
line of EC services.
Product Development. Product development expenses for the year ended
December 31, 1998 were $3,322,000 compared to $669,000 for the year ended
December 31, 1997, an increase of $2,653,000 or 397%. This increase is due to
the change in the Company's focus in mid 1997 from Internet training and Web
site sales toward electronic commerce. In January, 1998 the Company created
its Electronic Commerce Services Group (ECSG) in a separate office in Provo,
Utah. This office represents the technology arm of the Company and is focused
on the development of the Company's e-commerce software, creating the
technology behind the new product level search engine, rebuilding the overall
technical infrastructure and the programming of all Web sites that make up the
iMALL and the Company's various partner malls. The product development
expenses consist primarily of payroll and related costs for programmers and
software developers in the ECSG office. The redesign of the technological
infrastructure underlying the Company's e-commerce software was required to
provide the flexibility, scalability and reliability found in the version
released in the first quarter of 1999. The Company also expensed $596,000 of
third party software development costs that were incurred prior to achieving
the technological feasibility of the products being developed. During the year
ended December 31, 1997, the Company's product development efforts were
focused mainly on the development of the imall.com shopping site and related
infrastructure.
General and Administrative Expenses. General and administrative expenses for
the year ended December 31, 1998 were $5,814,000 compared to $2,677,000 for
the year ended December 31, 1997, an increase of $3,137,000 or 117%. This
increase was largely due to an increase of $850,000 in payroll expense
resulting from the hiring of a new management team in order to evolve the
Company toward its current focus on EC services. The Company also incurred
approximately $930,000 in professional fees during the year ended December 31,
1998. These fees include the hiring of a new public relations firm, an
investor relations firm, legal and accounting fees. A large portion of these
related expenses in the year ended December 31, 1997 were in support of the
seminar and training division, which is now included in the loss from
discontinued operations. Depreciation also increased by over $300,000 as the
company grew its fixed asset base significantly in building up its
technological infrastructure. The Company anticipates a continued growth in
its general and administrative expense in 1999 but the Company's current goal
is to slow the rate of growth from that of 1998.
Other income (expense), net. Net other income increased by $82,000 for the
year ended December 31, 1998. This was primarily due to an out of court
settlement for a copyright infringement claim for $75,000 during 1998.
19
<PAGE>
Interest income (expense), net. Net interest income for the year ended
December 31, 1998 was $575,000 compared to net expense of $23,000 for the year
ended December 31, 1997. This increase was due to the investment of available
funds in short-term debt securities during 1998 as well as the pay down of all
outstanding debt in the first quarter of 1998.
Loss from discontinued operations. The loss from discontinued operations for
the year ended December 31, 1998 was $2,063,000 compared to $2,117,000 in the
year ended December 31, 1997. The seminar division comprised of the majority
of the discontinued operations, all of which were discontinued in August 1998.
Management believed that the Seminar Division's low margin, highly
competitive, and non-recurring revenue stream was incompatible with the
Company's strategy of generating recurring revenue from EC services.
Liquidity and Capital Resources
In October 1998, the Company entered into a strategic marketing agreement
with First Data. In connection with this agreement, First Data purchased two
million shares of the Company's common stock for a total purchase price of
$14,000,000. $10,780,000 of this amount was funded on November 2, 1998. The
remaining amount was funded in early 1999, after obtaining stockholder
approval. Details of this transaction are provided in Item 1 of this report.
In the fall of 1997, the Company raised $20,000,000 in connection with a
private placement of units consisting of Series A 9% Convertible Preferred
Stock ("Preferred Stock") and warrants to purchase Common Stock. On March 18,
1999, each share of outstanding Preferred Stock was automatically converted
into 1.250 shares of Common Stock. Immediately prior to the conversion, the
Company had 1,755,432 shares of Preferred Stock outstanding.
As of December 31, 1998, the Company had current assets of $12,015,000, with
a cash and cash equivalents balance of $11,181,000 and current liabilities of
$3,788,000.
The Company is currently generating cash receipts (exclusive of financing
activities) of over $200,000 per month and incurring cash expenditures of
approximately $1,300,000 per month, of which fixed costs account for
approximately $800,000. See "Risk Factors--Possible Need for Additional
Financing." The Company anticipates capital expenditures will total
approximately $3,000,000 in 1999. In January 1999, the Company paid a cash
dividend of $900,000 on its Preferred Stock. In connection with the automatic
conversion of all of its outstanding Preferred Stock in the first quarter of
1999, the Company paid a final dividend of approximately $300,000 in March
1999. The Company may also spend funds to invest in various forms of
advertising to increase awareness of the Company and its services. The Company
believes that it will be able to fund its continuing operations with existing
cash, cash expected to be generated by continuing operations and other sources
for at least the next twelve months. The Company had cash and cash equivalents
of approximately $11,200,000 as of March 23, 1999.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in general purpose financial
statements. The Statement is effective for fiscal years beginning after
December 15, 1997. The Company did not have any operations or transactions
during 1998 or 1997 that would give rise to elements of comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 redefines the way
publicly held companies report information about segments. The Statement is
effective for fiscal years beginning after December 15, 1997. Currently,
management makes decisions and assesses performance of the Company based on
consolidated operations and results.
20
<PAGE>
In February 1998, the FASB issued Statement of Financial Accounting Standard
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement which is effective for financial periods ending
after December 15, 1998, requires full disclosure of all pensions plans and
other postretirement benefit plans. The Company does not currently have any
pensions or other postretirement benefit plans.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for financial periods beginning after June 15,
1999, addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities.
The Company has not historically or does not currently hold any derivative
instruments or participate in any hedging activities.
Year 2000
Many currently installed computer systems, hardware and software products
are coded to accept only two digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code fields
will need to distinguish 21st century dates from 20th century dates, and as a
result, many companies' software and computer systems may need to be upgraded
or replaced in order to comply with "Year 2000" requirements.
Internal Systems
The Company's business is dependent on its operating systems and the
programs that run on them to deliver services to its customers and to manage
its business. These programs include hardware and software supplied by third
parties, as well as software the Company has developed.
The Company believes that its operating systems and the programs that run on
them are Year 2000 compliant because the Company purchased such operating
systems and programs during 1998 from suppliers that represented them to be
Year 2000 compliant.
Nonetheless, the Company has appointed a Y2K Compliance Team, which has
designed and begun implementing a five-phase plan to mitigate possible Year
2000 effects on the Company's business and systems.
Awareness Phase: Consists of increasing Company awareness of Year 2000
issues through education of all appropriate levels of management by the Y2K
Compliance Team.
Inventory Phase: Involves identifying all components of the Company's
systems that may be impacted by Year 2000 issues, including hardware,
software, suppliers and proprietary systems.
Assessment Phase: Includes testing essential internal hardware and software
systems as well as non-information technology systems; verifying compliance by
third party vendors, merchants and business partners; assessing the impact of
compliance (or non-compliance) by third party vendors, merchants and business
partners; and developing a plan to repair all systems in need of correction.
Remediation Phase: Consists of implementing the plan to repair, replace or
retire those systems identified as needing correction in the Assessment Phase,
and testing all repaired and replaced systems installed for Year 2000
compliance.
Contingency Planning Phase: Involves developing the Company's response to
failure of mission critical systems and other major risks related to Year 2000
compliance.
At the present time, the Company has completed the Awareness Phase and the
Inventory Phase. The Company recently initiated the Assessment Phase, and
expects to substantially complete it, along with the Remediation Phase, by the
end of second quarter 1999. The Company plans to complete the Contingency
Planning Phase by mid-third quarter 1999.
21
<PAGE>
There can be no assurance, however, that the Company will succeed in
addressing all Year 2000 issues. If the Company fails to complete its five-
phase plan, or if the Company fails to detect any Year 2000 problems during a
particular phase of testing, the Company could be subject to a material
interruption of its business or other consequences, which could have a
material adverse effect on the Company's results of operations and financial
condition. While the Company does not presently expect such a material
interruption to occur, the Company believes its worst case scenario would
involve an unanticipated defect in one or more of its critical hardware or
software systems or those of a critical outsourcing or business partner,
resulting in the inability of the Company to maintain and operate its Web
sites or process transactions generated by its Web sites, thereby interrupting
the Company's business and exposing the Company to contract and other claims
against it by its customers, merchants and business partners.
Furthermore, Year 2000 issues may affect the purchasing patterns of
merchants and advertisers as such merchants and advertisers expend development
and financial resources to remediate their current systems.
The Company has entered into several business agreements, such as the
Investment Agreement with First Data, in which the Company warrants that it is
Year 2000 compliant. Any failure by the Company to achieve Year 2000 readiness
would thus result in a breach of such agreements and expose the company to
potential liabilities which could have a material adverse effect on the
Company's results of operations and financial condition.
Systems of Vendors, Merchants and Business Partners
The Company could be affected by failure of its vendors, merchants and
business partners to have systems that are Year 2000 compliant. For example,
if the Company's credit card processors are not Year 2000 compliant, the
Company will not be able to process credit card sales. The Company is not
presently aware of any existing third party Year 2000 issues that would
materially affect the Company. Regardless, as part of Company's Assessment
Phase, the Company will make inquiries to verify compliance by third party
vendors. If current or future vendors, merchants or business partners fail to
achieve Year 2000 compliance, it could result in a material adverse effect on
the Company's results of operations and financial condition.
Non-Information Technology Systems
The Company could be affected by failure of non-information technology
systems and devices used by the Company in its business, such as building
systems. The Company plans to test such systems for Year 2000 compliance
during its Assessment Phase. However, failure of such systems could have a
material adverse effect on the Company's results of operations and financial
condition.
Infrastructure
As with similarly situated Internet and other companies, the Company relies
upon various governmental agencies, utility companies and telecommunication
service companies, including Internet and other service providers, that are
outside of the Company's control. Failure of such parties to have systems that
are Year 2000 compliant may result in an interruption in, or a failure of,
certain normal business activities or operations, which could have a material
adverse effect on the Company's results of operations and financial condition.
Costs to Address the Company's Year 2000 Issues
To date, the Company has not incurred any material costs associated with
Year 2000 compliance. Moreover, based on the Company's assumptions that its
own systems are Year 2000 compliant, the Company does not expect to incur any
material costs in the future associated with Year 2000 compliance, with the
exception of internal staff costs and expenditures. Should the Company's
assumptions prove inaccurate, the Company could be required to incur material
costs of unknown magnitude.
22
<PAGE>
In addition to its efforts to confirm its Year 2000 compliance, the Company
also endeavors to mitigate the risks associated with other system failures. To
that end, the Company currently has in place dual Internet connectivity,
redundant air conditioning systems, redundant hardware and an on-site
emergency generator. Furthermore, the Company has plans to begin
implementation of redundant installation and facilities during 1999. There can
be no assurance, however, that the Company will not experience system outages
that, if sufficiently severe, could have a material adverse effect on the
Company's results of operations and financial condition.
The above discussion regarding costs and risks is based on the Company's
best current estimates given information that is currently available to it,
and is subject to change.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index To Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Public Accountants' Report................................... 40
Consolidated Balance Sheet as of December 31, 1998....................... 41
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997........................................................... 42
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997.............................................. 43
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997........................................................... 44
Notes to Consolidated Financial Statements............................... 46
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions with the
Company as of the date of this Annual Report of all of the executive officers
and directors of the Company. Also set forth below is information as to the
principal occupation and background for each person named in the table.
<TABLE>
<C> <C> <S>
Richard M. Rosenblatt..... 29 Chairman and Chief Executive Officer
Anthony P. Mazzarella..... 41 Executive Vice President, Secretary/Treasurer,
Chief Financial Officer and Director
Joseph H. Ruszkiewicz..... 39 Executive Vice President and Chief Operating
Officer
Phillip J. Windley........ 40 Chief Technology Officer
Stephen W. Fulling........ 35 Vice President, Information--Technology Services
Daniel S. Odette.......... 36 Senior Vice President, Marketing
Marshall S. Geller........ 60 Director
Harold S. Blue............ 37 Director
Leonard M. Schiller....... 57 Director
Howard A. Goldberg........ 53 Director
Richard H. Rogel.......... 50 Director
John F. Duncan............ 37 Director
</TABLE>
Richard M. Rosenblatt. Mr. Rosenblatt is Chairman of the Board of Directors
and Chief Executive Officer of the Company and has been a director since
January 1998. In 1991, Mr. Rosenblatt formed R&R--Advertising, Inc. which
specialized in advertising and marketing for small to mid-size businesses, and
co-founded Madison, York & Associates in 1994. Mr. Rosenblatt has been an
officer of the Company since January 1996, became Chief Executive Officer in
July 1997 and was elected Chairman in January 1998. Mr. Rosenblatt earned his
BA degree in political science from UCLA, where he graduated Magna Cum Laude
and Phi Beta Kappa. He received his JD from the University of Southern
California with honors.
Anthony P. Mazzarella. Mr. Mazzarella is an Executive Vice President and
Chief Financial Officer and has been a director of the Company since January
1998. Mr. Mazzarella was formerly Managing Director of Geller & Friend Capital
Partners, Inc., a merchant banking firm. From 1991 to 1995, he was Executive
Vice President of Drake Capital Securities, Inc., a California-based
investment banking firm. From 1987 to 1991, Mazzarella served as vice
president of The Davis Companies, Marvin Davis' private holding company, and
was responsible for corporate finance and acquisition activities. Mr.
Mazzarella has also held management positions at Twentieth Century Fox Film
Corporation, United Airlines and Deloitte & Touche, and worked as a flight-
controls engineer with The Boeing Company. Mr. Mazzarella holds a BA in
Physics from Pomona College and an MBA from the Harvard Business School.
Joseph H. Ruszkiewicz. Mr. Ruszkiewicz is an Executive Vice President and
Chief Operating Officer of the Company. Prior to joining the Company in
February 1999, Mr. Ruszkiewicz worked for AT&T Corporation, where he served as
Product Management Vice President for AT&T WorldNet Service. Mr. Ruszkiewicz
previously served as Area Vice President of International Marketing and
Products Management Director at NCR Corporation. Mr. Ruszkiewicz has more than
seventeen years of experience in the information and communications
industries. Mr. Ruszkiewicz received his BS degree in business administration
at Bucknell University, where he graduated cum laude. He also earned an MBA
from the University of Delaware.
Phillip J. Windley, Ph.D. Dr. Windley is Chief Technology Officer of the
Company. He has been a consultant to the Company and its predecessor since
1994. Dr. Windley received his Ph.D. in computer science
25
<PAGE>
from the University of California (Davis) in 1990 and is presently a professor
of computer science at Brigham Young University. Prior to earning his Ph.D.,
Dr. Windley was a member of the technical staff at the Department of Energy's
Division of Naval Reactors. Dr. Windley has held his present position with the
Company since January 1998.
Stephen W. Fulling. Mr. Fulling is Vice President of Information--Technology
Services of the Company. Mr. Fulling served as Senior Network Research
Assistant for the College of Engineering at Oregon State University and
Network Operations Manager for the NERO project for Oregon Joint Graduate
Schools of Engineering, where he designed, built, and deployed state-of-the-
art wide area networking systems. Mr. Fulling has a broad background in
Internet technologies and more than 15 years experience in the
telecommunications industry. He received his Bachelor of Science in Computer
Science from the University of California (Davis). Mr. Fulling has held his
present position at the Company since October 1996.
Daniel S. Odette. Mr. Odette is Senior Vice President of Marketing of the
Company. Mr. Odette held various management positions with AT&T between 1993
and August 1998, where he most recently served as the Premium Services
Director for AT&T WorldNet Service. He received a BA in Marketing and
Economics from Michigan State University. Mr. Odette has held his present
position with the Company since August 1998.
Marshall S. Geller. Mr. Geller has been a director of the Company since
January 1998 and is the Chairman of the Audit Committee and a member of the
Compensation Committee. Mr. Geller is currently the Chairman, Chief Executive
Officer and Founding Partner of Geller & Friend Capital Partners, Inc., a
merchant banking firm. From 1991 to 1995, Mr. Geller was the Senior Managing
Partner and founder of Golenberg & Geller, Inc., a merchant banking and
investment company. Mr. Geller formerly served as Interim Co-Chairman of
Hexcel Corporation and is currently on its board of directors. Mr. Geller was
formerly Interim President and Chief Operating Officer of Players
International, Inc., and now serves on its board and is Chairman of its
Investment Committee. Mr. Geller also serves as Vice Chairman of the board of
Value Vision International, Inc., and serves as Chairman of its Investment
Committee. He also serves on the boards of Ballantyne of Omaha, Inc., Datalink
Corporation, Strouds, Inc. and Cabletel Communications Corporation.
Harold S. Blue. Harold S. Blue has been a director of the Company since
January 1998 and is a member of the Compensation Committee. Mr. Blue is
currently the Chief Executive Officer and Chairman of the Board of ProxyMed,
Inc., a publicly traded medical information technology company engaged in
providing on-line services to physicians and other healthcare providers, since
February 1993, and has served as a director of such company since August 1991.
From 1992 to 1996, Mr. Blue was also President and Chief Executive Officer of
Health Services Inc., a physician practice management company that was sold to
InPhyNet Medical Management, Inc. He currently also serves as a director of
Windsor Capital Corp., a specialty regional mall based retailer, and
AccuMedInternational, Inc., a publicly traded company which manufactures and
markets diagnostic screening products for clinical laboratories.
Leonard M. Schiller. Mr. Schiller has been a director of the Company since
January 1998 and is Chairman of the Compensation Committee. Mr. Schiller has
been a practicing attorney for over 25 years and is a partner in the law firm
of Schiller, Klein & McElroy, P.C. in Illinois. Mr. Schiller is the President
of The Dearborn Group, a residential property management and real estate
company and is involved in the ownership of residential properties throughout
the Midwest. He is currently a director of AccuMed International, Inc., a
publicly traded company that manufactures and markets diagnostic screening
products for clinical laboratories, and Milestone Scientific, Inc., a
dentistry products company.
Howard A. Goldberg. Mr. Goldberg has been a director of the Company since
January 1998 and is a member of the Audit Committee. Mr. Goldberg currently
serves as Chief Executive Officer and a director of Players International,
Inc. Prior to 1993, he was the managing shareholder practicing law in the firm
of Horn, Goldberg, Gorny, Plackter & Weiss, a professional corporation, which
is general counsel to Players. Mr. Goldberg is a graduate of Franklin &
Marshall College and received his law degree from New York University. He is a
member of the New Jersey State and American Bar Associations.
26
<PAGE>
Richard H. Rogel. Mr. Rogel has been a director of iMALL since January 1998
and is a member of the Audit Committee. Mr. Rogel is an independent investor
and a director of CoolSavings.com, an on-line commerce company providing
specialized Internet merchandising. Mr. Rogel was Chief Executive Officer of
the Preferred Provider Organization of Michigan, a firm that he founded in
1982 and sold in 1997. Previously, Mr. Rogel was President and Chief Executive
Officer of Suburban Medical Center, President of Strick Stylehomes, and
Treasurer of Seligman and Associates. He has also worked with Burnham and
Company, investment bankers, and Arthur Young and Company.
John F. Duncan. Mr. Duncan has been a director of the Company since December
1998 and is Executive Vice President of Business Development of First Data.
Mr. Duncan joined First Data in 1994. From 1993 to 1994, Mr. Duncan held a
senior position with MasterCard International.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
a registered class of the Company's equity securities, to file report of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten-percent stockholders are
required by the SEC regulation to furnish the Company with copies of all
reports they file.
Based on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required
for those persons, the Company believes that, during fiscal 1998, all filing
requirements applicable to its officers, directors and greater than ten-
percent stockholders were complied with except that Form 3 reports were filed
late by each of Daniel S. Odette, Stephen E. Rossow and Phillip J. Windley.
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the compensation paid to the
Company's Chief Executive Officer (the "CEO"), each of the Company's four most
highly compensated executive officers other than the CEO who were serving as
executive officers as of December 31, 1998, and the Company's former
President. The following individuals are referred to as the "Named Executive
Officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation (Awards)
-------------------- ------------
Securities All Other
Name and Principal Underlying Compensation
Position Year Salary ($) Bonus ($) Options ($)(1)
------------------ ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard M. Rosenblatt..... 1998 186,250 39,000 520,000 9,500
Chief Executive Officer 1997 119,792 -- -- --
1996 118,712 -- -- --
Mark R. Comer............. 1998 111,875 -- -- 7,250
President(2) 1997 119,217 -- -- --
1996 117,975 -- -- --
Anthony P. Mazzarella .... 1998 165,692 36,000 10,000 8,500
Chief Financial Officer 1997 -- -- 375,000 --
Phillip J. Windley........ 1998 145,837 28,000 100,000 9,000
Chief Technology Officer 1997 -- -- 87,500 --
Steven E. Rossow.......... 1998 111,818 50,000 10,000 8,050
Senior Vice President of
Business Development(3) 1997 -- -- 125,000 --
Stephen W. Fulling........ 1998 101,667 18,000 30,000 6,900
Vice President of 1997 72,084 -- 85,000 --
Information--
Technology Services 1996 13,992 -- -- --
</TABLE>
- --------
(1) Consists of automobile allowance.
(2) Mark R. Comer, former President and director of the Company, has not been
an officer of the Company since August 1998 or a director of the Company
since November 10, 1998.
(3) Steven E. Rossow, former Senior Vice President of Business Development of
the Company, has not been an officer of the Company since March 1, 1999.
28
<PAGE>
The following table provides information on options to purchase Common Stock
granted in fiscal 1998 to the Named Executive Officers under the iMALL, Inc.
1997 Stock Option Plan, as amended. All options were granted at an exercise
price equal to or greater than the Common Stock fair market value on the date
of grant.
Option Grants During Fiscal 1998
<TABLE>
<CAPTION>
Number of Percentage
Securities of Total
Underlying Options Exercise or
Options Granted to Base Price Expiration
Granted Employees (per Share) Date
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Richard M. Rosenblatt(1)......... 375,000(2) 17.3% $ 5.20 2-2-05
145,000(3) 6.7 10.00 12-7-03
Mark R. Comer.................... -- -- -- --
Anthony P. Mazzarella............ 10,000(3) 0.5 10.00 12-7-03
Phillip J. Windley............... 100,000(4) 7.8 10.00 12-6-03
Steven E. Rossow................. 10,000(3) 0.8 10.00 12-6-03
Stephen W. Fulling............... 30,000(3) 2.3 8.50 11-5-03
</TABLE>
- --------
(1) Mr. Rosenblatt received grants of 375,000 options in January 1998 and
145,000 options in December 1998.
(2) Vests in equal thirds on January 5, 1998, February 2, 1999, and February
2, 2000.
(3) Vests in equal thirds on February 1, 1999, February 1, 2000, and February
1, 2001.
(4) Vests in equal thirds on February 1, 2000, February 1, 2001, and February
1, 2002.
The following table sets forth certain information as to the Named Executive
Officers with respect to option exercises during fiscal 1998 and the status of
their options on December 31, 1998.
Aggregate Option Exercises During Fiscal 1998 and Option Values on December
31, 1998
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired December 31, 1998 December 31, 1998(1)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Rosenblatt... 0 0 125,000 395,000 1,420,000 3,791,200
Anthony P. Mazzarella... 0 0 125,000 260,000 1,570,000 3,205,600
Phillip J. Windley...... 0 0 50,000 137,500 568,000 1,082,000
Steven E. Rossow........ 0 0 62,500 62,500 710,000 775,600
Stephen W. Fulling...... 0 0 43,334 71,666 492,274 715,126
Mark Comer.............. 0 0 0 0 -- --
</TABLE>
- --------
(1) Based on the average of the high and low Common Stock price ($16.56)
reported on the Nasdaq SmallCap Market on December 31, 1998, minus the
exercise price of the option, multiplied by the number of shares to which
the option relates.
Employment Agreements
RICHARD M. ROSENBLATT. Pursuant to an Employment Agreement entered into as
of January 5, 1998, the Company employed Richard Rosenblatt as its Chief
Executive Officer. The term of such employment commenced on February 2, 1998
and terminates five years thereafter. Mr. Rosenblatt is paid a salary of
$195,000 per annum, which may be increased in such amounts as the Compensation
Committee determines in good faith. In addition, Mr. Rosenblatt is entitled to
an annual bonus in an amount at least equal to 20% of the salary paid
29
<PAGE>
to Mr. Rosenblatt during the immediately preceding year. Pursuant to the
Employment Agreement, the Company granted Mr. Rosenblatt options to purchase
375,000 shares of Common Stock at the exercise price of $5.20 per share. Such
options vest as follows: (i) 125,000 options vested immediately upon the date
of the Employment Agreement and (ii) the remaining 250,000 options vest at the
rate of 125,000 options on each of the first and second anniversary dates of
Mr. Rosenblatt's employment with the Company. All unexercised options expire
five years after the date on which such options have vested. All of Mr.
Rosenblatt's options shall vest immediately upon (i) the sale by the Company
of all or substantially all of its assets, (ii) the sale of fifty percent or
more of its outstanding shares, or (iii) the merger of the Company into
another company whereby the Company is not the surviving entity.
ANTHONY P. MAZZARELLA. Pursuant to an Employment Agreement entered into as
of December 30, 1997, the Company employed Anthony Mazzarella as its Executive
Vice President and Chief Financial Officer. The term of such employment
commenced on January 15, 1998 and terminates five years thereafter. Mr.
Mazzarella is paid a salary of $180,000 per annum through the calendar year
ending December 31, 1998. Thereafter, Mr. Mazzarella is entitled to annual
salary increases as determined by the Board of Directors but in no event less
than 16%. Prior to the end of each year, the Board of Directors is to review
the compensation of Mr. Mazzarella and pay to him a cash bonus not less than
20% of his salary for that year. Pursuant to the Employment Agreement, the
Company granted Mr. Mazzarella options to purchase an aggregate of 375,000
shares of Common Stock at an exercise price of $4.00 per share. Such options
vest as follows: (i) 125,000 options vested immediately and (ii) 125,000
options vest on January 15, 1999, and 125,000 options vest on January 15,
2000. The options expire 10 years after the date of grant. Upon certain change
of control events, Mr. Mazzarella will be entitled to receive severance pay in
an amount equal to the compensation due to him under the Employment Agreement
for the balance of the term less any salary which Mr. Mazzarella may receive
from another employer during the balance of the term. In other circumstances,
Mr. Mazzarella may be entitled to severance pay in an amount equal to (i) the
compensation due to Mr. Mazzarella under the Employment Agreement for the
balance of the term, or (ii) two times Mr. Mazzarella's then applicable annual
compensation as set forth in the Employment Agreement, whichever is greater.
JOSEPH RUSZKIEWICZ. Pursuant to an Employment Agreement entered into as of
January 6, 1999, the Company employed Joseph Ruszkiewicz as its Executive Vice
President and Chief Operating Officer. The term of such employment commenced
on February 10, 1999 and terminates three years thereafter. Mr. Ruszkiewicz is
paid a salary of $210,000 per annum. Mr. Ruszkiewicz is entitled to an annual
bonus or bonuses that will equal not less than $40,000 each year. Pursuant to
the Employment Agreement, the Company granted Mr. Ruszkiewicz options to
purchase an aggregate of 500,000 shares of Common Stock at an exercise price
of $16.00 per share. Such options vest as follows: (i) 125,000 options vested
upon commencement of the employment term, and (ii) 125,000 options vest on
each anniversary of Mr. Ruszkiewicz's employment with the Company. The options
expire five years after the date of grant. All of Mr. Ruszkiewicz's options
shall vest immediately upon (i) the sale by the Company of all or
substantially all of its assets, (ii) the sale of fifty percent or more of its
outstanding shares, or (iii) the merger of the Company into another company
whereby the Company is not the surviving entity.
PHILLIP J. WINDLEY, PHD. Pursuant to an Employment Agreement entered into as
of December 9, 1997, the Company employed Phillip Windley as its Chief
Technology Officer. The term of such employment commenced on January 1, 1998
and terminates two years thereafter. Dr. Windley is paid a salary of $145,000
per annum. The Company may grant to Dr. Windley an annual bonus or bonuses up
to a maximum aggregate annual amount of $35,000, at the sole and exclusive
discretion of the Chief Executive Officer and the Compensation Committee and
at such times and in such manner as the Chief Executive Officer and the
Compensation Committee may determine. Pursuant to the Employment Agreement,
the Company granted Dr. Windley options to purchase 87,500 shares of Common
Stock at the exercise price of $5.20 per share. Such options vest as follows:
(i) at the rate of 12,500 options per full quarter for the first year during
which Dr. Windley remains employed by the Company, commencing as of January 1,
1998, and (ii) at the rate of 9,375 options per full quarter for the second
year during which Dr. Windley remains employed by the Company,
30
<PAGE>
commencing one year after January 1, 1998. All unexercised options expire five
years after the date on which such options have vested. All of Mr. Windley's
options shall vest immediately upon (i) the sale by the Company of all or
substantially all of its assets, (ii) the sale of fifty percent or more of its
outstanding shares, or (iii) the merger of the Company into another company
whereby the Company is not the surviving entity.
STEPHEN W. FULLING. Pursuant to an Employment Agreement entered into as of
December 9, 1997, the Company employed Stephen W. Fulling as its Vice
President of Technology. The term of such employment commenced on January 1,
1998 and terminates three years thereafter. Mr. Fulling is paid a salary of
$85,000 per annum, which may be increased in such amounts as the Chief
Executive Officer and the Compensation Committee determine at their sole
discretion, except that at a minimum the Company shall increase the salary for
the second and third years of Mr. Fulling's employment by an amount equal to
7% of the total amount of salary due to Mr. Fulling during the immediately-
preceding year. The Company may grant to Mr. Fulling an annual bonus or
bonuses up to a maximum aggregate annual amount of $25,000, at the sole and
exclusive discretion of the Chief Executive Officer and Compensation Committee
and at such times and in such manner as the Chief Executive Officer and the
Compensation Committee may determine. Pursuant to the Employment Agreement,
the Company granted Mr. Fulling options to purchase 85,000 shares of Common
Stock at the exercise price of $5.20 per share. Such options vest as follows:
(i) at the rate of 10,833 options per full quarter for the first year during
which Mr. Fulling remains employed by the Company, commencing as of January 1,
1998, (ii) at the rate of 5,208 options per full quarter for the second year
and per the first three full quarters of the third year during which Mr.
Fulling remains employed by the Company, commencing one year after January 1,
1998, and (iii) at the rate of 5,208 options per the fourth full quarter of
the third year during which Mr. Fulling remains employed by the Company. All
unexercised options expire five years after the date on which such options
have vested. All of Mr. Fulling's options shall vest immediately upon (i) the
sale by the Company of all or substantially all of its assets, (ii) the sale
of fifty percent or more of its outstanding shares, or (iii) the merger of the
Company into another company whereby the Company is not the surviving entity.
Director Compensation
During 1998, the non-employee directors of the Company were paid cash
compensation of $2,000 per quarter plus $500 per meeting attended (either in
person or telephonically). In addition each non-employee director received
options to purchase 25,000 shares of Common Stock, exercisable at $7.50 (the
fair market value on January 26, 1998). These options vest at the rate of
12,500 per year for each of 1998 and 1999, and expire on January 24, 2003.
During 1998, each of the three members of the Audit Committee of the Board
of Directors received $250 per meeting attended (either in person or
telephonically). In addition, the Chairman of the Audit Committee received
cash compensation of $2,500 annually.
Each of the three members of the Compensation Committee of the Board of
Directors received $250 per meeting attended (either in person or
telephonically). In addition, the Chairman of the Compensation Committee
received cash compensation of $2,500 annually.
Effective December 31,1998, non-employee directors will not be paid any cash
compensation other than reimbursement of actual out-of-pocket expenses. As
compensation for services to be performed in 1999, non-employee directors were
each granted on December 7, 1998 15,000 options exercisable at $10.00 (the
fair market value on the grant date). These options vest in equal halves on
June 30, 1999 and December 31, 1999, and expire on December 6, 2003.
Employee directors do not receive any additional compensation for serving as
a director.
31
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of March 23, 1999 by each director, each executive officer and all directors
and executive officers as a group. Except as indicated, each person listed
below has sole authority to vote and dispose of the shares shown.
Directors and Officers
<TABLE>
<CAPTION>
Shares of
Common Percent of
Stock Common Stock
Name and Address of Beneficial Owner Owned Outstanding(1)
------------------------------------ --------- --------------
<S> <C> <C>
Richard M. Rosenblatt........................ 1,923,333(2) 11.00%
233 Wilshire Boulevard, Suite 820
Santa Monica, California 90401
Anthony P. Mazzarella........................ 433,782(3) 2.47%
233 Wilshire Boulevard, Suite 820
Santa Monica, California 90401
Joseph H. Ruszkiewicz ....................... 125,000(4) *
233 Wilshire Boulevard, Suite 820
Santa Monica, California 90401
Phillip J. Windley........................... 182,500(5) 1.06%
5314 North 250 West, #110
Provo, Utah 84604
Stephen W. Fulling........................... 67,088(6) *
5314 North 250 West, #110
Provo, Utah 84604
Daniel S. Odette............................. 16,667(7) *
5314 North 250 West, #110
Provo, Utah 84604
Marshall S. Geller........................... 375,898(8) 2.15%
1875 Century Park East, Suite 2200
Los Angeles, California 90067
Harold S. Blue............................... 44,532(9) *
2501 Davie Road
Ft. Lauderdale, Florida 33317
Leonard M. Schiller.......................... 55,546(10) *
33 N. Dearborn, #1030
Chicago, Illinois 60602
Howard A. Goldberg........................... 27,994(11) *
1300 Atlantic Avenue, #800
Atlantic City, New Jersey 08401
Richard H. Rogel ............................ 197,657(12) 1.15%
56 Rosecrown
Avon, Colorado 81620
John F. Duncan............................... 2,000,000(13) 11.63%
265 Broad Hallow Road
Melville, New York 11747
All directors and executive officers as a
group (12 persons).......................... 5,449,997 29.38%
</TABLE>
32
<PAGE>
- --------
* Less than one percent
(1) Calculations based upon 17,190,779 shares of Common Stock issued and
outstanding on March 23, 1999.
(2) Includes 298,333 shares issuable upon currently exercisable options. Does
not include 950,419 shares issuable upon the exercise of warrants to
Commonwealth Associates and its affiliates with respect to which Mr.
Rosenblatt is the beneficiary of a proxy.
(3) Includes 253,333 shares issuable upon currently exercisable options and
129,167 shares issuable upon currently exercisable warrants.
(4) Consists of 125,000 shares issuable upon currently exercisable options.
(5) Includes 59,375 shares issuable upon currently exercisable options and
9,375 shares issuable upon options exercisable within the next sixty
days.
(6) Consists of 61,880 shares issuable upon currently exercisable options and
5,208 shares issuable upon options exercisable within the next sixty
days.
(7) Consists of 16,667 shares issuable upon currently exercisable options.
(8) Includes 25,000 shares issuable upon currently exercisable options and
248,333 shares issuable upon currently exercisable warrants.
(9) Includes 25,000 shares issuable upon currently exercisable options and
3,907 shares issuable upon currently exercisable warrants.
(10) Includes 25,000 shares issuable upon currently exercisable options and
7,109 shares issuable upon currently exercisable warrants.
(11) Includes 25,000 shares issuable upon currently exercisable options.
(12) Includes 25,000 shares issuable upon currently exercisable options and
19,532 shares issuable upon currently exercisable warrants.
(13) Represents 2,000,000 shares beneficially owned by First Data. Mr. Duncan
disclaims beneficial ownership of such shares.
33
<PAGE>
Certain Beneficial Owners
The following persons are known to the Company to own more than five percent
of the outstanding Common Stock as of March 23, 1999, other than directors and
executive officers who are listed in the table above under "--Directors and
Officers." Except as indicated, each person listed below has sole authority to
vote and dispose of the shares shown.
<TABLE>
<CAPTION>
Shares of
Common Stock Percent of
Beneficially Common Stock
Name and Address of Beneficial Owner Owned Outstanding(1)
------------------------------------ ------------ --------------
<S> <C> <C>
Mark R. Comer................................. 829,908 4.83%
1185 South Mike Jense Circle
Provo, Utah 84601
Craig R. Pickering ........................... 1,287,501(2) 7.48%
1185 South Mike Jense Circle
Provo, Utah 84601
Michael S. Falk .............................. 950,419(3) 5.24%
830 Third Avenue
New York, New York 10022
First Data Merchant Services Corporation...... 2,000,000(4) 11.63%
6200 South Quebec Street
Englewood, Colorado 80111
Cramer Rosenthal McGlynn, Inc. ............... 2,401,893(5) 13.80%
707 Westchester Avenue
White Plains, New York 10604
</TABLE>
- --------
(1) Calculations based upon 17,190,779 shares of Common Stock issued and
outstanding on March 23, 1999.
(2) Includes 12,500 shares issuable upon currently exercisable options.
(3) Based solely on information provided to the Company by Commonwealth
Associates on March 30, 1999. Consists of (i) 603,086 shares issuable upon
currently exercisable warrants owned by Commonwealth Associates and
indirectly owned by Commonwealth Associates Management Corp., Inc., the
corporate general partner of Commonwealth Associates, (ii) 343,426 shares
issuable upon currently exercisable warrants owned by Mr. Falk and
(iii) 3,907 shares issuable upon currently exercisable warrants held by
the Falk Family Foundation, a charitable trust for which Mr. Falk serves
as trustee. Mr. Falk is the chairman and controlling equity owner of
Commonwealth Associates Management Corp., Inc.
(4) Does not include 5,000,000 shares issuable upon exercise of a warrant at
an exercise price of $17.00 per share. Such warrant has not been issued to
First Data and will be earned and issued only if, before the second
anniversary of the successful testing of the systems and technologies
provided by the Company to logistically support the Company's Internet
shopping mall to be used by First Data, First Data has implemented either
25,000 merchant web sites using the Company's e-commerce services or
50,000 total merchant web sites using any of the Company's products or
services.
(5) Based solely on information provided to the Company by Cramer Rosenthal
McGlynn, Inc. ("CRM, Inc.") on March 30, 1999. Consists of (i) 1,133,850
shares owned by third parties of which Cramer Rosenthal McGlynn, LLC, a
registered investment advisor ("CRM LLC") holds voting and investment
power, (ii) 78,125 shares issuable upon currently exercisable warrants of
which CRM LLC holds voting and investment power, (iii) 1,053,199 shares
owned by limited partnerships and limited liability companies of which
CRM, Inc. is the general partner or managing member and holds voting and
investment power and (iv) 136,719 shares issuable upon currently
exercisable warrants owned by limited partnerships and limited liability
companies of which CRM, Inc. is the general partner or managing member and
holds voting and investment power. CRM, Inc. owns in excess of 50% of the
membership interest of CRM LLC.
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the First Data purchase of 2,000,000 shares of Common
Stock of the Company, the Company and First Data entered into a Stockholders
Agreement dated October 31, 1998 (the "Stockholders Agreement") with Messrs.
Rosenblatt, Comer and Pickering, each of whom is a beneficial owner of more
than 5% of outstanding Common Stock. Mr. Rosenblatt is also Chief Executive
Officer and Chairman of the Company. The Stockholders Agreement provides that
First Data will be entitled to representation on the Board of Directors
proportional to its overall share of the Company's voting securities, which
representation will not be less than, and will initially be set at, one
representative. First Data has designated John F. Duncan to serve as its
initial representative on the Board of Directors, and Mr. Duncan was elected
to the Board of Directors on December 31, 1998. The Stockholders Agreement
further provides that First Data will, prior to December 31, 1999, vote all of
its voting stock in favor of the nominees to the Board of Directors designated
by a majority of the members of the Board of Directors (excluding members who
are affiliates of First Data or who were designated by First Data) and that
Messrs. Rosenblatt, Comer and Pickering will vote their securities in favor
of, among other things, the nominees to the Board of Directors designated by
First Data. Subject to certain exceptions, each party to the Stockholders
Agreement will have certain rights of first refusal on the transfer of any
Common Stock or warrants, options and convertible securities of the Company
then outstanding by any other party to the agreement.
The Company and First Data also entered into the Marketing Agreement and the
Escrow Agreement. Under the Marketing Agreement, the Company and First Data
will jointly market Internet commerce solutions to First Data's clients and
their merchant businesses. The Marketing Agreement has an initial term of ten
years and, unless terminated by either party, will be renewed for additional
two-year terms thereafter. The Escrow Agreement required the Company to
deposit in an escrow account the Source Code.
In March 1999 the Company entered into an agreement to sell the fixed assets
related to the former Seminar Division to Mark Comer, a beneficial owner of
more than 5% of the outstanding Common Stock and a former officer and director
of the Company. The total purchase price was $333,000 paid by delivery by Mr.
Comer to the Company of 20,091 shares of Common Stock, valued at fair market
value as of March 22, 1999. The book value of these assets on the date of the
sale was $308,700.
In connection with the discontinuance of the Seminar Division, the Company
paid Sierra Advertising, a private advertising firm owned in part by Messrs.
Pickering and Comer, each of whom are beneficial owners of more than 5% of
outstanding Common Stock and former officers and directors of the Company for
certain expenses related to advertising, rent and computer graphic design.
Sierra Advertising received $1,794,000 in 1997 for advertising expenses, all
of which was distributed directly for advertising costs. The sole purpose for
the existence of Sierra Advertising was to pass through certain costs of
advertising at reduced rates. No officers of the Company received any monetary
compensation from the Company through Sierra Advertising. Sierra Advertising
made no profit on funds received from the Company. All funds paid to Sierra
Advertising were used by Sierra Advertising for the purchase of air time for
advertising.
The Company retained Geller & Friend Capital Partners, Inc. ("Geller &
Friend"), a merchant banking firm, in August 1997 to assist in arranging
equity financing. Geller & Friend earned a fee of $150,000 and was granted
375,000 warrants in connection with its role in the private placement
completed in December 1997. Of the $150,000 fee, Geller & Friend was paid
$50,000 in 1997, and paid the remaining $100,000 during 1998. Marshall S.
Geller, chairman and chief executive officer of Geller & Friend, became a
director of the Company in January 1998. Also in January 1998, the Company
employed Anthony P. Mazzarella, formerly managing director of Geller & Friend,
as its Executive Vice President and Chief Financial Officer. Mr. Mazzarella is
also a director of the Company.
35
<PAGE>
Commonwealth Associates served as placement agent for the Company's December
1997 private placement of units consisting of the Preferred Stock and warrants
to purchase Common Stock and, in connection therewith, received a fee of
$2,050,000, plus expenses, and certain warrants to purchase 1,500,000 shares
of Common Stock. The Company also retained Commonwealth Associates as a
financial advisor in December 1997 pursuant to a 12-month advisory agreement
providing for a fee of $5,000 per month. In addition, in connection with the
solicitation of waivers from the holders of the Preferred Stock with respect
to an adjustment to the conversion price of the Preferred Stock, the Company
paid Commonwealth Associates $85,000 for expenses incurred by them in
connection with such solicitation.
36
<PAGE>
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Documents filed with this Annual Report
1. Financial Statements
The financial statements listed in the index to financial statements at
Item 7 are filed as part of this Annual Report.
2. Exhibits
The Exhibits listed on the accompanying Index to Exhibits are filed as part
of this Annual Report.
(b) No reports on Form 8-K were filed by the Company during the last quarter
of the fiscal year ended December 31, 1998.
INDEX TO EXHIBITS
<TABLE>
<C> <S>
2.1 Share Exchange Agreement between the Company and Madison, York &
Associates, Inc.(1)
2.2 Share Exchange Agreement between the Company and Cabot, Richards & Reed,
Inc.(1)
2.3 Share Exchange Agreement between the Company and R&R Advertising,
Inc.(1)
2.4 Share Exchange Agreement between the Company and Physicomp Corporation
(d.b.a. e.m.a.N.a.t.e.)(1)
Share Exchange Agreement between the Company and Interactive Marketing
2.5 Group, Inc.(1)
3.1 Articles of Incorporation, as amended
3.2 Second Amended and Restated Bylaws dated as of November 9, 1998(3)
4.1 Agency Agreement between the Company and Commonwealth Associates(2)
4.2 Warrant Agreement among the Company, Signature Stock Transfer, Inc. and
Commonwealth Associates(2)
10.1 Agreement between Universal/Hyundai LLC dba Animalhouse.com and iMALL,
Inc. dated April 1, 1998(5)
10.2 Investment Agreement dated as of October 30, 1998 by and between the
Company and First Data Merchant Services Corporation(3)
10.3 Stockholders Agreement dated as of October 30, 1998 by and among the
Company, First Data Merchant Services Corporation, Richard M.
Rosenblatt, Mark R. Comer and Craig R. Pickering(3)
10.4 Registration Rights Agreement dated as of October 30, 1998 by and
between the Company and First Data Merchant Services Corporation(3)
10.5 Form of Warrant issuable to First Data Merchant Services Corporation
pursuant to the Investment Agreement dated as of October 30, 1998 by
and between the Company and First Data Merchant Services Corporation(3)
10.6 Development and Marketing Agreement dated as of October 30, 1998 by and
between the Company and First Data Merchant Services Corporation(3)
10.7 Form of Source Code Escrow Agreement dated as of October 31, 1998 by and
among the Company, Data Securities International, Inc. and First Data
Merchant Services Corporation(3)
10.8 Software License and Distribution Agreement between the Company and
AT&T(1)
10.9 Agreement with Positive Response T.V.(1)
10.10 Memorandum of Understanding between the Company and Softbank(1)
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
10.11 Services and License Agreement between the Company and Koinonia System
Co. Ltd.(2)
10.12 Employment Agreement with Richard Rosenblatt(2)
10.13 Employment Agreement with Anthony Mazzarella(2)
10.14 Employment Agreement with Phillip Windley(2)
10.15 Employment Agreement with Steve Rossow(2)
10.16 Employment Agreement with Stephen Fulling(2)
10.17 Consulting Agreement with Craig Pickering(2)
10.18 Employment Agreement with Joseph Ruszkiewicz
10.19 Employment Agreement with Daniel Odette
10.20 Lease Agreement between Searise Associates, LLC a California Limited
Liability Company as "Landlord" and the Company, dated June 4, 1998(4)
10.21 Lease Agreement dated November 1998 by and between University Campus
Credit Union and the Company.
10.22 Sublease Agreement dated February 16, 1999 by and between Novations
Group, Inc. and the Company.
10.23 Agreement and Plan of Merger by and among the Company, Pure Payments,
Payment Solutions, Inc., Daniel Devlin, and Jeffrey Lipp, dated March
8, 1999
10.24 First Amendment to iMALL, Inc. 1997 Stock Option Plan
21.1 Subsidiaries of Registrant(1)
27.1 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to the Exhibits to the Registration Statement on
Form 10-SB as filed with the Securities and Exchange Commission.
(2) Incorporated by reference to the Exhibits to Amendment No. 2 to the
Registration Statement on Form 10-SB as filed with the Securities and
Exchange Commission.
(3) Incorporated by reference to the Company's Quarterly Report on 10-QSB for
the Quarterly Period Ended September 30, 1998.
(4) Incorporated by reference to the Company's Quarterly Report on 10-QSB for
the Quarterly Period Ended June 30, 1998.
(5) Incorporated by reference to the Company's Quarterly Report on 10-QSB for
the Quarterly Period Ended March 31, 1998.
38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 31, 1999 iMALL, INC.
/s/ Richard M. Rosenblatt
By: _________________________________
Richard M. Rosenblatt
Chairman of the Board and
Chief Executive Officer
/s/ Anthony P. Mazzarella
By: _________________________________
Anthony P. Mazzarella,
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
In accordance with the Securities Exchange Act of 1934, this Annual Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard M. Rosenblatt Chairman of the Board and March 31, 1999
____________________________________ Chief Executive Officer
Richard M. Rosenblatt
/s/ Anthony P. Mazzarella Executive Vice President, March 31, 1999
____________________________________ Chief Financial Officer,
Anthony P. Mazzarella Secretary and Treasurer
/s/ Marshall S. Geller Director March 31, 1999
____________________________________
Marshall S. Geller
/s/ Harold S. Blue Director March 31, 1999
____________________________________
Harold S. Blue
/s/ Leonard M. Schiller Director March 31, 1999
____________________________________
Leonard M. Schiller
/s/ Richard H. Rogel Director March 31, 1999
____________________________________
Richard H. Rogel
/s/ Howard A. Goldberg Director March 31, 1999
____________________________________
Howard A. Goldberg
/s/ John F. Duncan Director March 31, 1999
____________________________________
John F. Duncan
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the stockholders of iMALL, Inc.:
We have audited the accompanying consolidated balance sheet of iMALL, Inc.,
a Nevada corporation, and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of iMALL, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
March 3, 1999
40
<PAGE>
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of December 31, 1998
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 11,180,700
Accounts receivable, net of allowance for doubtful accounts of
$60,000....................................................... 264,400
Prepaid expenses............................................... 144,000
Other current assets........................................... 425,800
------------
Total current assets......................................... 12,014,900
------------
PROPERTY AND EQUIPMENT:
Computer equipment and software................................ 2,260,900
Office equipment............................................... 159,200
Furniture and fixtures......................................... 236,000
Leasehold improvements......................................... 202,700
------------
2,858,800
Less accumulated depreciation and amortization................. (773,400)
------------
Net property and equipment................................... 2,085,400
------------
OTHER ASSETS:
Other assets................................................... 152,700
Net long-term assets of discontinued operations................ 248,800
------------
401,500
------------
$ 14,501,800
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable............................................... $ 1,002,900
Accrued expenses............................................... 144,300
Wages payable.................................................. 418,300
Accrued legal costs............................................ 193,600
Deferred revenues.............................................. 254,500
Dividends payable.............................................. 898,900
Net short-term liabilities of discontinued operations.......... 875,000
------------
Total current liabilities.................................... 3,787,500
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, liquidation value of $16,411,500; 10,000,000
shares authorized, 4,102,879 shares issued and outstanding.... 16,411,500
Common stock, par value $.008; 37,500,000 shares authorized,
10,635,756 shares issued and outstanding...................... 85,100
Additional paid in capital..................................... 14,317,900
Retained deficit............................................... (19,695,200)
Less common stock held in treasury, at cost.................... (405,000)
------------
Total stockholders' equity................................... 10,714,300
------------
$ 14,501,800
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
41
<PAGE>
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
NET REVENUES........................................ $ 1,596,000 $ 973,600
COST OF REVENUES.................................... 605,400 187,600
------------ -----------
Gross profit...................................... 990,600 786,000
------------ -----------
SELLING EXPENSES.................................... 3,597,900 20,000
PRODUCT DEVELOPMENT................................. 3,321,800 669,100
GENERAL AND ADMINISTRATIVE EXPENSES................. 5,813,600 2,676,500
------------ -----------
Loss from operations.............................. (11,742,700) (2,579,600)
------------ -----------
OTHER INCOME (EXPENSE):
Interest income (expense), net...................... 574,800 (23,100)
Other income........................................ 82,100 --
------------ -----------
Net other income (expense)........................ 656,900 (23,100)
------------ -----------
Loss before benefit for income taxes.............. (11,085,800) (2,602,700)
BENEFIT FOR INCOME TAXES............................ -- 16,500
------------ -----------
LOSS FROM CONTINUING OPERATIONS..................... (11,085,800) (2,586,200)
LOSS FROM DISCONTINUED OPERATIONS................... (2,062,800) (2,116,800)
------------ -----------
NET LOSS............................................ $(13,148,600) $(4,703,000)
============ ===========
NET LOSS PER COMMON SHARE--BASIC AND DILUTED
Loss from continuing operations................... $ (1.61) $ (.36)
Loss from discontinued operations................. $ ( .26) $ (.28)
------------ -----------
NET LOSS.......................................... $ (1.87) $ (.64)
============ ===========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING.......... 8,008,040 7,526,967
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
42
<PAGE>
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Retained
------------------- ---------------------- Paid-in Treasury Earnings
Shares Amount Shares Amount Capital Stock (Deficit)
---------- ------- --------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996................... 7,410,566 $59,300 -- $ -- $ 610,400 $ -- $ 44,300
Common stock issued in
private placements..... 316,923 2,500 -- -- 1,027,400 -- --
Common stock issued for
services............... 36,821 300 -- -- 165,400 -- --
Preferred stock issued
in private placement,
net of issuance costs.. -- -- 4,893,750 18,930,800 (1,803,200) -- --
Preferred stock issued
in private placement to
retire debt............ -- -- 106,250 425,000 -- -- --
Treasury stock
repurchased............ (112,500) -- -- -- -- (405,000) --
Net loss................ -- -- -- -- -- -- (4,703,000)
---------- ------- --------- ----------- ----------- --------- ------------
BALANCE, DECEMBER 31,
1997................... 7,651,810 62,100 5,000,000 19,355,800 -- (405,000) (4,658,700)
---------- ------- --------- ----------- ----------- --------- ------------
Adjust common stock to
par value.............. -- (800) -- -- -- -- --
Common stock issued for
services............... 61,556 500 -- -- 195,300 -- --
Dividends............... -- -- -- -- -- -- (1,887,900)
Common stock options
exercised.............. 156,013 1,200 -- -- 874,400 -- --
Conversion of preferred
stock into common
stock.................. 1,166,599 9,300 (897,121) (3,588,400) 3,579,100 -- --
Common stock warrants
exercised.............. 59,778 500 -- -- 190,800 -- --
Sale of common stock,
net of issuance costs.. 1,540,000 12,300 -- -- 10,122,400 -- --
Adjust preferred stock
for liquidation
preference............. -- -- -- 644,100 (644,100) -- --
Net loss................ -- -- -- -- -- -- (13,148,600)
---------- ------- --------- ----------- ----------- --------- ------------
BALANCE, DECEMBER 31,
1998................... 10,635,756 $85,100 4,102,879 $16,411,500 $14,317,900 $(405,000) $(19,695,200)
========== ======= ========= =========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
43
<PAGE>
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(13,148,600) $(4,703,000)
Adjustments to reconcile net loss to net cash used
in Operating Activities:
Loss from discontinued operations............... 2,062,800 2,116,800
Depreciation and amortization................... 633,900 319,600
Provision for doubtful accounts................. -- 33,600
Provision for notes receivable.................. (50,000) 50,000
Change in assets and liabilities:
Accounts receivable........................... (207,000) (24,800)
Income tax receivable......................... 166,200 110,700
Prepaid expenses.............................. (125,900) (19,400)
Other current assets.......................... (256,500)
Deferred income tax asset..................... -- 163,700
Other assets.................................. (16,300) 1,400
Accounts payable.............................. 830,500 151,700
Accrued expenses.............................. 42,800 26,300
Wages payable................................. 418,300 --
Accrued legal costs........................... 193,600 --
Deferred revenues............................. 181,200 50,800
------------ -----------
Net cash used in Operating Activities....... $ (9,275,000) $(1,722,600)
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
44
<PAGE>
iMALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments................ $ -- $(10,000,600)
Proceeds from sales of investments in marketable
securities....................................... 10,000,600 --
Purchases of property and equipment............... (2,229,500) (34,200)
Increase in intangibles........................... (8,700) (44,900)
Principal payments received on notes receivable
from related parties............................. -- 82,900
----------- ------------
Net cash provided by (used in) Investing
Activities..................................... 7,762,400 (9,996,800)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares of common stock.. 11,201,600 1,030,000
Proceeds from issuance of shares of preferred
stock............................................ -- 17,552,500
Purchase of treasury stock........................ -- (405,000)
Principal payments on notes payable to related
parties.......................................... -- (145,100)
Dividends paid on preferred stock................. (989,000) --
Principal payments on capitalized lease
obligations...................................... (5,900) (700)
Principal payments on notes payable............... -- (12,500)
----------- ------------
Net cash provided by Financing Activities....... 10,206,700 18,019,200
----------- ------------
Cash provided by continuing operations............ 8,694,100 6,299,800
Cash used in discontinued operations.............. (2,288,500) (1,581,800)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........... 6,405,600 4,718,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........ 4,775,100 57,100
----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR.............. $11,180,700 $ 4,775,100
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................ $ 4,700 $ 23,100
Cash paid for income taxes........................ $ 5,600 $ 37,500
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
TRANSACTIONS:
Conversion of bridge loans to preferred stock..... $ -- $ 425,000
Conversion of preferred stock into common stock... $ 3,588,400 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
45
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) ORGANIZATION AND NATURE OF OPERATIONS
iMALL, Inc. and subsidiaries (the Company) is a Nevada Corporation. The
Company's mission is to maintain and expand its position as a pioneer in
electronic commerce (EC) services by providing merchants the ability, through
its proprietary software, to transact commerce online. The Company derives a
substantial portion of its revenues from web site creation, internet
advertising, and recurring fees for EC services. The Company also operates two
innovative shopping portals located at www.stuff.com and www.imall.com. The
Company's headquarters are located in Santa Monica, California with additional
offices in Provo, Utah. The Company's operations are located primarily in the
United States. In August 1998, the Company discontinued some of its
operations. (See Note 9)
(2) SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
iMALL, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and accounts have been eliminated in consolidation.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company invests
in highly qualified financial institutions. At times, such investments may be
in excess of insured limits. At December 31, 1998, the Company had
compensating balances of $660,700.
c. Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets. The estimated useful lives of fixed assets are as follows:
<TABLE>
<CAPTION>
Caption Useful Life
------- ---------------------
<S> <C>
Computer equipment and software.................... 3 years
Office equipment................................... 3-5 years
Furniture and fixtures............................. 5 years
Leasehold improvements............................. Lesser of 10 years or
the life of the lease
</TABLE>
Major renewals and betterments are capitalized. Maintenance, repairs and
minor renewals are expensed as incurred.
d. Intangibles
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires adoption of its
provisions for fiscal years beginning after December 15, 1998. The provisions
specify the requirements with respect to the capitalization of certain costs
related to the development of software for internal use. In accordance with
SOP 98-1 the company expensed all of its product development costs in 1998
because it was determined that these costs were all incurred prior to reaching
technological feasibility of the products under development.
46
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses, is stated at cost and
is amortized on a straight-line basis over five years. Amortization of $46,500
and $52,000 was charged to expense for the years ended December 31, 1998 and
1997, respectively.
e. Advertising
Advertising costs are expensed as incurred and amounted to approximately
$2,780,000 and $20,000 for the years ended December 31, 1998 and 1997
respectively. Additional advertising was incurred by the Company's
discontinued operations and is included in the loss from discontinued
operations. (See Note 9)
f. Concentration of Credit Risk
For the year ended December 31, 1998 one customer accounted for 22% of net
revenues generated by the Company, and 21% of accounts receivable at December
31, 1998. For the year ended December 31, 1997 no single customer accounted
for ten percent or more of net revenues.
g. Income Taxes
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled.
h. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
i. Reclassifications
Certain prior year balances have been reclassified to conform with the
current year's presentation.
j. Recognition of Revenues
The Company recognizes revenue related to their various sources of revenue
as follows:
Web site creation--The Company designs and upgrades web sites for
customers. The customer is provided with bids on the design and approves
the design prior to the Company beginning the work. Recognition of the
revenue occurs when the design work is completed.
Advertising revenues--Advertising revenues on banner contracts are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of
the resulting receivable is probable. Company obligations typically include
guarantees of minimum number of "impressions," or times that an
advertisement appears in pages viewed by users of the Company's online
properties. The Company defers recognition of the corresponding revenues
until the remaining guaranteed impression levels are achieved.
Maintenance fee revenues--The Company maintains customer's web sites for a
fee. The fee may be prepaid on an annual, semi-annual, quarterly or monthly
basis by the customer. The Company records cash received as deferred
revenues and recognizes revenues ratably over the prepaid period.
47
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commissions from sales on the Company's shopping portals--Merchants on the
Company's shopping portals pay the Company a percentage of revenues. The
Company recognizes revenues when the sale is made by the merchant.
k. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in general purpose
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. The Company did not have any operations or
transactions during 1998 or 1997 that would give rise to elements of
comprehensive income.
In June 1997, the FASB issue SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 redefines the way publicly
held companies report information about segments. The statement is effective
for fiscal years beginning after December 15, 1997. Currently, management
makes decisions and assesses performance of the Company based on consolidated
operations and results.
In February 1998, the FASB issued Statement of Financial Accounting Standard
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement, which is effective for financial periods ending
after December 15, 1998, requires full disclosure of all pensions plans and
other postretirement benefit plans. The Company does not currently have any
pensions or other postretirement benefit plans.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for financial periods beginning after June 15,
1999, addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities.
The Company has not historically or does not currently hold any derivative
instruments or participate in any hedging activities.
(3) COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain facilities used in its operations. The
approximate aggregate commitments under noncancellable operating leases in
effect at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999......................................................... $ 477,500
2000......................................................... 420,700
2001......................................................... 326,000
2002......................................................... 293,600
2003......................................................... 296,900
Thereafter................................................... 1,464,800
----------
$3,279,500
==========
</TABLE>
The Company incurred rent expense of approximately $321,000 and $160,000 in
connection with operating leases during 1998 and 1997, respectively.
Additional rent expense was incurred by the Company's discontinued operations
and is included in the loss from discontinued operations. (see Note 9)
48
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment Agreements
The Company has various employment agreements with officers, some of which
include bonuses, stock options, and change in control provisions.
Legal Matters
As previously disclosed, the FTC has conducted a nonpublic investigation of
the Company's Internet-related business opportunity programs, which programs
have been discontinued. In connection therewith, the Company reserved $750,000
in the third quarter of 1998. The Company has reached a settlement with the
FTC for $750,000, and on March 30, 1999, the Company was notified of the
formal approval by the FTC of such settlement.
(4) INCOME TAXES
The benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1998 1997
----- ---------
<S> <C> <C>
Current (Benefit) Provision:
Federal................................................ $ -- $(151,400)
State.................................................. -- (28,800)
----- ---------
(180,200)
Deferred Provision (Benefit):
Federal................................................ -- 132,600
State.................................................. -- 31,100
----- ---------
163,700
(Benefit) provision for income taxes................... $ -- $ (16,500)
===== =========
</TABLE>
The differences between the effective income tax rate and the Federal
statutory income tax rate consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Provision at the federal
statutory rate................. $(4,470,500) (34.0)% $(1,604,600) (34.0)%
State income taxes, net of
federal benefit................ (607,500) (4.6)% (283,200) (6.0)%
Nondeductible items for tax
purposes....................... 32,700 0.2 % -- --
Change in valuation allowance... 5,045,300 38.4 % 1,871,300 40.0 %
----------- ----- ----------- -----
Total (benefit) provision for
income taxes................. $ -- -- % $ (16,500) -- %
=========== ===== =========== =====
</TABLE>
49
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred tax asset at December 31, 1998 was:
<TABLE>
<S> <C>
Net operating loss carryforwards............................ $ 6,353,900
Accrued liabilities......................................... 338,000
Other....................................................... 47,700
Less valuation allowance.................................... (6,739,600)
-----------
$ --
===========
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $16 million available to reduce future taxable income that
expire at various dates through 2018.
(5) STOCKHOLDERS' EQUITY
Stock Transactions
In October 1997, the Company completed the issuance of common stock to
qualified investors in a private placement. At December 31, 1997, 316,923
shares were issued at a price per share of $3.25. The Company received net
proceeds of $1,030,000. In December 1997, the Company also issued these
investors 25,749 warrants with the same terms as the warrants in the private
placement of Preferred Stock discussed below.
In November 1997, the Company received $500,000 in financing from four
individuals in the form of notes bearing 10 percent interest. The notes were
convertible into nine percent Convertible Preferred A Shares (Preferred Stock)
in increments of $25,000. In December 1997, $425,000 of principal was
converted into 106,250 shares of Preferred Stock and warrants under the terms
of the private placement discussed below. The remaining balance of the notes
and interest was paid in cash in December 1997.
In December 1997, the Company completed the issuance of Preferred Stock and
warrants to purchase common stock to qualified investors in a private
placement which consisted of 5,000,000 shares of preferred stock, issued at a
price per share of $4.00 and of 1,594,660 warrants. The Company received net
proceeds (after deducting issuance costs) of $17,552,500. Each share of
Preferred Stock has a liquidation value of $4.00 and earns nine percent
cumulative dividends, payable semi-annually in cash or preferred shares at the
discretion of management. Each preferred share is convertible into 1.25 shares
of common stock. This conversion ratio was subject to adjustment causing a
portion of the shares to be converted into 1.389 shares of common stock. Each
warrant became exercisable for one common share, subject to certain anti-
dilution provisions, at a price of $3.20 per share, beginning December 19,
1998 and extending for a period of four years. Preferred and common shares
vote as one class, and each preferred share is entitled to 1.25 votes while
each common share is entitled to one vote. The common stock underlying the
Preferred Stock and warrants were registered in December 1998 and the warrants
were registered in February 1999. As of December 31, 1998 4,102,879 shares of
Preferred Stock and 1,534,882 of these warrants were outstanding
In December 1997, as additional compensation for completion of the private
placement, the Company issued 1,500,000 warrants to the placement agent and
375,000 warrants to their financial advisors. Each warrant may be exercised
for one common share, subject to certain anti-dilution provisions, at a price
of $3.20 per share from December 15, 1997 to December 5, 2002. None of these
warrants were exercised in 1998.
On February 12, 1998 the Company effected a reverse split of 1 for 8 shares.
All share and per share amounts have been retroactively restated to reflect
the stock splits.
50
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 30, 1998, the Company entered into agreements with First Data
Merchant Services Corporation, a Florida corporation ("FDMS"), relating to the
issuance of common stock, and warrants to purchase shares of common stock of
the Company, to FDMS and the joint marketing of certain Internet commerce
services by the Company and FDMS. Under the terms of the Investment Agreement,
FDMS purchased 1.54 million shares of common stock at a cash price of $7.00
per share and, subject to approval by stockholders of the Company, will
purchase an additional 460,000 shares of common stock at a cash price of $7.00
per share.
The Investment Agreement further provides that FDMS may earn warrants to
purchase up to five million shares of common stock at an exercise price of
$17.00 per share. The warrants are earned if at any time through the second
anniversary of the successful testing of the systems and technologies provided
by the Company to logistically support the Company's Internet shopping mall to
be used by FDMS, FDMS has implemented either 25,000 merchant web sites using
the Company's e-commerce services or 50,000 total merchant web sites using any
Company products or services. The warrants, if issued, will expire in October
2003, and may be redeemed, at the option of the Company, at a redemption price
equal to 0.266 shares of Common Stock per warrant share if the market price of
the Common Stock is equal to or exceeds $25.50 for at least twenty out of
thirty consecutive trading days. FDMS also received certain registration
rights covering the common stock and the shares underlying the warrants. The
Investment Agreement also provides that FDMS will be subject to certain
standstill restrictions and generally will be restricted from owning more than
39.9 percent of the Company's voting securities as calculated pursuant to the
terms of the Investment Agreement.
Dividends
The Company's preferred stock issued in the private placement in December
1997 requires the payment of a nine percent semi-annual dividend to be paid in
either cash or stock. In June 1998, the board of directors elected to pay the
July 1998 dividend in cash. The Company paid out $0.18 per share or $989,000
for this dividend payment. In December 1998, the board of directors elected to
pay the January 1999 dividend in cash. The Company paid out $0.18 per share or
$898,900 for this dividend payment in January 1999.
(6) STOCK OPTIONS
The Company has granted incentive stock options and nonqualified stock
options to officers, directors and key employees under a stock compensation
plan at prices not less than fair market value on the date of grant. The
incentive and nonqualified stock options become exercisable between one and
four years from the grant date. The incentive stock options have a maximum
term of ten years from the date of grant, or five years if the employee is a
ten-percent stockholder. The nonqualified stock options have a maximum term of
ten years and one day from the date of grant.
The Company has approximately 800,000 shares available for future grants
under the 1997 stock option plan as of December 31, 1998.
51
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock option plan and changes in
outstanding options is presented below:
<TABLE>
<CAPTION>
Shares
Under Option Weighted Average
(in 000's) Exercise Price
------------ ----------------
<S> <C> <C>
Options outstanding at December 31, 1996..... -- $ --
Options granted............................ 955 4.81
Options exercised.......................... -- --
Options cancelled.......................... -- --
-----
Options Outstanding at December 31, 1997..... 955 4.81
Options Granted............................ 1,781 7.69
Options Exercised.......................... (156) 5.84
Options Canceled........................... (136) 7.54
-----
Options Outstanding at December 31, 1998..... 2,444 $6.84
=====
</TABLE>
At December 31, 1998 and 1997, 895,000 and 153,000 options were exercisable
at a weighted average exercise price of $5.28 and $4.22, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Number of Wtd. Avg. Number of
Shares Wtd. Avg. Remaining Shares Wtd. Avg.
Range of Exercise Prices (in 000's) Exercise Price Contractual Life (in 000's) Exercise Price
- ------------------------ --------- -------------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$4.00--$5.20............ 1,161 $5.14 5.2 661 $4.76
$6.00--$8.00............ 561 $7.25 4.4 234 $6.74
$8.50--$11.00........... 722 $9.26 5.0 -- --
----- ---
$4.00--$11.00........... 2,444 895
===== ===
</TABLE>
In accordance with the terms of APB No. 25, the Company records no
compensation expense for its stock option awards. As required by SFAS No. 123,
the Company provides the following disclosure of hypothetical values for these
awards. The weighted-average grant-date fair value of options granted during
1998 and 1997 was $5.63 and $3.44, respectively. The value was estimated using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998 and 1997, respectively: risk-free interest rate of 5.67
and 5.79 percent; expected life of 3.5 years; expected volatility of 132 and
134 percent; and no expected dividends. Had compensation expense been recorded
based on these hypothetical values, the Company's net loss for December 31,
1998 and 1997 would have been $16,189,000, or $2.02 per share, and $5,209,000
or $0.69 per share, respectively. Because options vest over several years and
additional option grants are expected, the effects of these hypothetical
calculations are not likely to be representative of similar future
calculations.
(7) RELATED-PARTY TRANSACTIONS
The Company retained Geller & Friend Capital Partners, Inc. ("Geller &
Friend"), a merchant banking firm, in August 1997 to assist in arranging
equity financing. Geller & Friend earned a fee of $150,000 and was granted
375,000 warrants in connection with its role in the private placement
completed in December 1997. Marshall Geller, chairman and chief executive
officer of Geller & Friend, became a director of the Company in January 1998.
Also in January 1998, the Company employed Anthony Mazzarella, formerly
managing director of Geller & Friend, as its Executive Vice President and
Chief Financial Officer. Mr. Mazzarella is also a director of the Company.
52
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) EARNINGS PER SHARE
Earnings per share amounts have been reflected in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share." Earnings per
share are computed as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net loss from continuing operations............. $(11,085,800) $(2,586,200)
Add preferred stock dividends................... (1,792,000) (96,000)
------------ -----------
Loss from continuing operations available for
common stock................................... $(12,877,800) $(2,682,200)
============ ===========
Weighted-average common stock outstanding....... 8,008,040 7,526,967
============ ===========
Basic earnings per share........................ $ (1.61) $ (0.36)
============ ===========
</TABLE>
The earnings per share computation for 1998 and 1997 excludes 2,444,000 and
955,000 shares respectively for stock options/compensation plans, 5.13 and
6.25 million shares respectively for convertible securities, and warrants
convertible into 3.4 and 3.5 million shares of common stock because their
effect would have been antidilutive.
(9) DISCONTINUED OPERATIONS
Effective August 28, 1998, the Company discontinued the operations of its
seminar and training division. The discontinued operations historically have
accounted for approximately 95% of the revenues of the Company, and operated
at a loss in 1998 and 1997. In accordance with generally accepted accounting
principles, the operations of this division have been included in the
accompanying consolidated income statements as loss from discontinued
operations. The following is a summary of the operations related to
discontinued operations for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December December
31, 1998 31, 1997
----------- -----------
<S> <C> <C>
Net revenues...................................... $ 7,376,700 $15,803,000
Loss from discontinued operations................. $(2,062,800) $(2,116,800)
</TABLE>
In accordance with generally accepted accounting principles, all assets and
liabilities of this division have been reflected in the accompanying
consolidated balance sheet as net long-term assets and net short-term
liabilities of discontinued operations. The components of the net long-term
assets of the discontinued operations included in the accompanying
consolidated balance sheet as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Assets:
Net property and equipment........................................ $314,400
Liabilities:
Capitalized lease obligation...................................... 65,600
--------
Net long-term assets of discontinued operations................. $248,800
========
</TABLE>
The net long-term assets of discontinued operations were sold subsequent to
year end. (See Note 10)
The Company has also accrued for $875,000 of costs associated with the
seminar and training division and has classified the amount as net short-term
liabilities of discontinued operations.
53
<PAGE>
iMALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest paid by the discontinued operations was $10,600 and $53,700 for
the years ended December 31, 1998 and 1997, respectively.
As of December 31, 1998 the net book value of the fixed assets related to
the discontinued operations approximates fair market value of these assets.
As of December 31, 1998 the discontinued operations had leased office
equipment with a net book value of $61,800 and obligations under capital
leases of $65,600.
In 1997, the Company issued 36,821 unregistered shares to individuals who
provided speaking services to the Company in connection with its discontinued
operations. Compensation expense of $165,700 is included in the loss from
discontinued operations in the accompanying consolidated income statement.
The discontinued operations did not create material severance liability and
their are no longer any employees sharing in the net profits of the Company.
One of the Company's offices in Provo, Utah was leased from RDR Properties
for $12,100 per month. Two former officers/directors each owned 33.33 percent
of RDR Properties. Rent expense of approximately $149,000 and $145,000 was
incurred in connection with its operating leases during the years ended
December 31, 1998 and 1997, respectively, and is included in the loss from
discontinued operations in the accompanying consolidated income statement. The
operating lease was paid off in full in 1998.
The Company paid Sierra Advertising $287,500 in 1998 and $1,794,200 in 1997
for advertising expenses, all of which was distributed directly for
advertising costs, and was owned by former officers of the Company. The
purpose for the existence of Sierra Advertising was to pass through certain
costs of advertising at reduced rates.
All services received by the Company from Sierra Advertising and RDR
properties related to the discontinued operations and will not recur in the
future. The officers/directors with an interest in Sierra Advertising and RDR
Properties are no longer employed by the Company and do not serve as officers
or directors of the Company.
(10) SUBSEQUENT EVENTS
In February 1999, upon approval by the stockholders of the Company, FDMS
purchased an additional 460,000 shares of Common Stock at a cash price of
$7.00 per share in accordance with the Investment Agreement dated October 30,
1998.
On March 8, 1999, the Company agreed to acquire all of the outstanding
shares of common stock of Pure Payments, Inc. ("Pure Payments") in exchange
for 450,000 shares of its common stock valued at $6.2 million. Prior to this
acquisition, the Company had purchased Pure Payments' products and services,
which allow for on-line retailers to process credit card orders securely over
the Internet for use as part of its EC services.
On March 18, 1999, each share of the Company's Series A nine percent
Convertible Preferred Stock was automatically converted into 1.250 shares of
Common Stock. Immediately prior to the conversion, the Company had 1,755,432
shares of Series A nine percent Convertible Preferred Stock outstanding. A
final dividend of approximately $312,000 was paid to Preferred stockholders in
March 1999.
In March 1999, the Company entered into an agreement to sell the fixed
assets related to the seminar and training division to a former officer of the
Company. The total purchase price was $333,000 paid by delivery by the
purchaser to the Company of 20,091 shares of Common Stock, valued at fair
market value as of March 22, 1999. The book value of these assets on the date
of the sale was $308,700.
54
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
iMALL, INC.
The undersigned, natural person of eighteen years or more of age,
acting as incorporator of a Corporation (the "Corporation") under the Nevada
Revised Statutes, adopts the following Articles of Incorporation for the
Corporation:
ARTICLE I
NAME OF CORPORATION
The name of the Corporation is iMall, Inc.
ARTICLE II
SHARES
The amount of the total authorized capital stock of the Corporation is
50,000,000 shares of common stock, par value $.001 per share. Each share of
common stock shall have one (1) vote. Such stock may be issued from time to
time without any action by the stockholders for such consideration as may be
fixed from time to time by the Board of Directors, and shares so issued, the
full consideration for which has been paid or delivered, shall be deemed the
full paidup stock, and the holder of such shares shall not be liable for any
further payment thereof. Said stock shall not be subject to assessment to pay
the debts of the Corporation, and no paid up stock and no stock issued as fully
paid, shall ever be assessed or assessable by the Corporation.
The Corporation is authorized to issue 50,000,000 shares of common
stock, par value $.001 per share.
ARTICLE III
REGISTERED OFFICE AND AGENT
The address of the initial registered office of the Corporation is
2138 Abarth, Las Vegas, Nevada 89122, and the name of its initial registered
agent at such address is Ray Warren.
ARTICLE IV
INCORPORATOR
The name and address of the incorporator is:
NAME ADDRESS
Anita Patterson 215 South State #1100
Salt Lake City, Utah 84111
1
<PAGE>
ARTICLE V
DIRECTORS
The members of the governing board of the Corporation shall be known
as directors, and the number of directors may from time to time be increased or
decreased in such manner as shall be provided by the bylaws of the Corporation,
provided that the number of directors shall not be reduced to less than one (1).
The name and post office address of the first board of directors, which shall be
one in number, is as follows:
NAME ADDRESS
John Clayton 870 East 9400 South #205
Sandy, Utah 84094
ARTICLE VI
GENERAL
A. The board of directors shall have the power and authority to make
and alter, or amend, the bylaws, to fix the amount in cash or otherwise, to be
reserved as working capital, and to authorize and cause to be executed the
mortgages and liens upon the property and franchises of the Corporation.
B. The board of directors shall, from time to time, determine
whether, and to what extent, and at which times and places, and under what
conditions and regulations, the accounts and books of this Corporation, or any
of them, shall be open to the inspection of the stockholders; and no stockholder
shall have the right to inspect any account, book or document of this
Corporation except as conferred by the Statutes of Nevada, or authorized by the
directors or any resolution of the stockholders.
C. No sale conveyance, transfer, exchange or other disposition of all
or substantially all of the property and assets of this Corporation shall be
made unless approved by the vote or written consent of the stockholders entitled
to exercise two-thirds (2/3) of the voting power of the Corporation.
D. The stockholders and directors shall have the power to hold their
meetings, and keep the books, documents and papers of the Corporation outside of
the State of Nevada, and at such place as may from time to time be designated by
the bylaws or by resolution of the board of directors or stockholders, except as
otherwise required by the laws of the State of Nevada.
E. The Corporation shall indemnify each present and future officer
and director of the Corporation and each person who serves at the request of the
Corporation as an officer or director of the Corporation, whether or not such
person is also an officer or director of the Corporation, against all costs,
expenses and liabilities, including the amounts of judgments, amounts paid in
compromise settlements and amounts paid for services of counsel and other
related expenses, which may be incurred by or imposed on him in connection with
any claim,
2
<PAGE>
action, suit, proceedings, investigation or inquiry hereafter made,
instituted or threatened in which he may be involved as a party or otherwise by
reason of any past or future action taken or authorized and approved by him or
any omission to act as such officer or director, at the time of the incurring or
imposition of such costs, expenses, or liabilities, except such costs, expenses
or liabilities as shall relate to matters as to which he shall in such action,
suit or proceeding, be finally adjusted to be liable by reason of his negligence
or willful misconduct toward the Corporation or such other Corporation in the
performance of his duties as such officer or director, as to whether or not a
director or officer was liable by reason of his negligence or willful misconduct
toward the Corporation or such other Corporation in the performance of his
duties as such officer or director, in the absence of such final adjudication of
the existence of such liability, the board of directors and each officer and
director may conclusively rely upon an opinion of legal counsel selected by or
in the manner designated by the board of directors. The foregoing right of
indemnification shall not be exclusive of other rights to which any such officer
or director may be entitled as a matter of law or otherwise, and shall inure to
the benefit of the heirs, executors, administrators and assigns of each officer
or director.
F. To the fullest extent permitted by Nevada Revised Statute or any
other applicable law as now in effect or as it may hereafter be amended, a
director of this Corporation shall not be personally liable to the Corporation
or its shareholders for monetary damages for any action taken or any failure to
take any action, as a director except for acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or the payment of
distributions in violation of Nevada Revised Statute section 78.300.
The undersigned being the individual named in Article III, above, as
the initial registered agent of the Corporation, hereby consents to such
appointment.
/s/: Ray Warren
---------------------------
3
<PAGE>
The undersigned incorporator executed these Articles of Incorporation,
certifying that the facts herein stated are true this 12th day of January, 1996.
/s/: Anita Patterson
---------------------------------
ANITA PATTERSON
STATE OF UTAH )
) ss.
COUNTY OF SALT LAKE )
On this 12th day of January, 1996, personally appeared before me Anita
Patterson personally known to me or proved to me on the basis of satisfactory
evidence to be the person whose name is signed on the preceding document, and
acknowledged to me that she signed it voluntarily for its stated purpose.
/s/: Connie L. Collins
---------------------------------
NOTARY PUBLIC
4
<PAGE>
CERTIFICATES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
IMALL, INC.
We the undersigned as President and Secretary of iMall, Inc. to hereby
certify:
That the Board of Directors of said Corporation by unanimous written
consent adopted a resolution to amend the Articles of Incorporation, as amended,
as follows:
A. Delete Article IV in its entirety and substitute in its place
the following:
ARTICLE IV.
The total authorized capitalization of this Corporation shall be
300,000,000 shares of Common Stock par value of $.001 per share and
10,000,000 shares of Preferred Stock par value of $.001 per share.
The shares of preferred stock authorized hereby may, when
authorized for issuance by the Board of Directors of this corporation,
be issued in series having such designations, powers, preferences,
rights and limitations, and on such terms and conditions as the Board
of Directors may from time to time determine including the rights, if
any, of the holders thereof with respect to voting, dividends,
redemption, liquidation and conversion.
Before this Amendment, 300,000,000 shares of Common Stock with a par
value of $.001 per share were authorized and of those authorized 61,742,239
shares were issued and outstanding. After this amendment, 300,000,000 shares of
Common Stock with a par value of $.001 per share and 10,000,000 shares of Common
Stock with a par value of $.001 per share will be authorized.
5
<PAGE>
The said Amendment has been consented to and approved by a vote of the
shareholders holding an aggregate of 39,000,000 shares representing at least a
majority of the sole class of Common Stock outstanding and entitled to vote
thereon. The change is effective immediately.
/s/: Mark Comer
-----------------------------
Mark Comer, President
/s/: Craig Lewis
------------------------------
Craig Lewis, Secretary
STATE OF UTAH )
) ss.
COUNTY OF SALT LAKE )
On this 14th day of November, 1997, personally appeared before me Mark
Comer and Craig Lewis, personally known to me or proved to me on the basis of
satisfactory evidence to be the persons whose names are signed on the preceding
document, and acknowledged to me that they signed it voluntarily for its stated
purpose.
/s/: Stacey Davis
--------------------------------
NOTARY PUBLIC
6
<PAGE>
CERTIFICATE OF DECREASE OF AUTHORIZED SHARES
PURSUANT TO NRS (S) 78.207
IMALL, INC.,
A NEVADA CORPORATION
Pursuant to Nevada Revised Statutes ("NRS") Sections 78.207 and
78.209, the undersigned Executive Vice President and Secretary of iMALL, Inc., a
Nevada corporation (the "Corporation"), hereby certifies that the Board of
Directors of the Corporation, desiring to decrease the number of authorized
shares of common stock of the Corporation and correspondingly decrease the
number of issued and outstanding shares of the Corporation's common stock (the
"Class Change"), authorized such action at a meeting duly called and held on
January 26, 1998 and by a unanimous written consent dated as of January 11,
1999.
The undersigned further certify that:
(A) The number of authorized shares of the Corporation and the par
value of each class and series prior to the Class Change were as follows::
<TABLE>
<CAPTION>
Number Class Par Value
--------------------- ------------ ---------------
<C> <S> <C>
300,000,000 Common $.001 per share
10,000,000 Preferred $.001 per share
</TABLE>
(B) The number of authorized shares of the Corporation and the par
value of each class and series as of and after the Class Change are as follows::
<TABLE>
<CAPTION>
Number Class Par Value
-------------------- ------------ ---------------
<C> <S> <C>
37,500,000 Common $.008 per share
10,000,000 Preferred $.001 per share
</TABLE>
(C) The total number of issued and outstanding shares of the
Corporation's common stock as of the record date of the Class Change (February
12, 1998) (the "Record Date") decreased from 61,214,479 to 7,652,037 as a result
of the Class Change, such that each holder of eight (8) shares of common stock
of the Corporation on the Record Date received in exchange one (1) share of
common stock of the Corporation.
(D) Fractional shares were not issued in connection with the Class
Change, and in lieu thereof, in accordance with NRS 78.205(2)(b), the
Corporation issued to each holder of a fractional share after the Class Change
such additional fraction of a share as was necessary to increase the fractional
share to a full share. The percentage of all issued and outstanding shares of
common stock with respect to which an additional fraction of a share was issued
was less than ten percent (10%).
(E) Stockholder approval is not required with regard to the Class
Change.
7
<PAGE>
(F) The Class Change and the amendment of the Articles of
Incorporation of the Corporation with respect to the authorized and outstanding
number of shares of common stock of the Corporation, and their par value, as
provided in this Certificate, shall be effective, to the extent permitted by
applicable law, as of the Record Date, and otherwise, upon filing of this
Certificate with the Secretary of State of Nevada.
Dated as of the 12th of January, 1999.
/s/: Anthony P. Mazzarela
-------------------------------
Anthony P. Mazzarella, Executive
Vice President and Secretary
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On January 12, 1999, before me, Juan A. Guiga, a notary public in and
for said State, personally appeared Anthony P. Mazzarella, personally known to
me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument and acknowledged to me that he
executed the same in his authorized capacities, and that by his signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
/s/: Juan A. Guiga (Seal)
- ------------------------------------
Notary Public
8
<PAGE>
Exhibit 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of January 6,
1999, by and between iMALL, Inc., a Nevada corporation (the "Company") and
Joseph Ruszkiewicz, an individual ("Employee"), with reference to the following:
A. The Company desires to employ Employee on the terms and conditions set
forth in this Agreement.
B. Employee desires to be so employed.
NOW, THEREFORE, based on the foregoing premises and in consideration of the
covenants set forth in this Agreement, the parties hereto hereby agree as
follows:
1. Term of Employment. The Company hereby employs Employee and
Employee accepts such employment commencing on February 10, 1998 and terminating
on that date which is three years thereafter, unless sooner terminated in
accordance with the terms of this Agreement.
2. Services to be Rendered.
2.1 Duties. Employee shall serve as Executive Vice President and
Chief Operating Officer of the Company and shall have the responsibilities,
duties and powers customarily associated with such position. It is anticipated
that Employee shall be named President within six months of commencing his
employment, and Employer agrees not to name any other individual as President
during such six month period. Employee shall report directly to the Chief
Executive Officer of the Company, and shall perform his duties pertaining to the
business of the Company (the "Company Business") subject to the direction of the
Chief Executive Officer and to such limits upon Employee's authority as the
Chief Executive Officer may from time to time impose. Employee's principal
place of work hereunder shall be located in Santa Monica, California or such
other location within the State of California as may be designated by the Chief
Executive Officer from time to time. However, Employee shall also render
services at such other place or places within or without the United States as
the Chief Executive Officer may direct from time to time. Employee shall be
subject to the policies and procedures generally applicable to senior executive
employees of the Company to the extent the same are not inconsistent with any
term of this Agreement.
2.2 Exclusive Services. Employee shall at all times faithfully,
industriously and to the best of his ability, experience and talent perform to
the satisfaction of the Chief Executive Officer all of the duties that may be
assigned to Employee hereunder and shall devote all of his productive time and
efforts to the performance of such duties; provided, however, that Employee may
devote time to personal and family investments to the extent that the time so
spent does not conflict with the Company Business. The existence of such a
conflict shall be determined in good faith by the Chief Executive Officer.
1
<PAGE>
2.3 Board of Directors. The Company shall use its best efforts to
elect Employee to the Company's Board of Directors, it being understood that
waivers to existing contractual commitments governing the composition of the
Board may be required. Employee shall receive no additional compensation for
such service as a Director other than that compensation he is entitled to under
Section 3 below.
3. Compensation and Benefits. The Company shall pay the following
compensation and benefits to Employee during the term hereof, and Employee shall
accept the same as payment in full for all services rendered by Employee to or
for the benefit of the Company:
3.1 Salary. A salary ("Salary") of $210,000 per annum. The Salary
shall accrue in equal monthly installments in arrears and shall be payable in
accordance with the payroll practices of the Company in effect from time to
time.
3.2 Fringe Benefits. Employee shall be entitled to participate in
benefits under the Company's benefit plans and arrangements, including, without
limitation, any employee benefit plan or arrangement made available in the
future by the Company to its senior executives, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. The Company shall have the right to amend or delete any such
benefit plan or arrangement made available by the Company to its senior
executives and not otherwise specifically provided for herein.
3.3 Expenses. The Company shall reimburse Employee for reasonable
out-of-pocket expenses incurred in connection with the Company Business and the
performance of his duties hereunder, subject to (i) such policies as the Chief
Executive Officer may from time to time establish, (ii) Employee furnishing the
Company with evidence in the form of receipts satisfactory to the Company
substantiating the claimed expenditures, and (iii) Employee receiving advance
approval from the Chief Executive Officer in case of expenses (or a series of
related expenses) in excess of $1,000.
3.4 Vacation. Employee shall be entitled to the number of paid
vacation days in each calendar year determined by the Company from time to time
for its senior executive officers. Employee shall also be entitled to all paid
holidays given to the Company's senior executive officers.
3.5 Bonus. In addition to the Salary to which Employee is entitled
pursuant to Section 3.1, the Company may grant to Employee an annual bonus or
bonuses, at the sole and exclusive discretion of the Chief Executive Officer and
the Compensation Committee of the Company and at such times and in such manner
as the Chief Executive Officer and the Compensation Committee may determine.
Such bonus(es) will in no event total to less than $40,000 in each year of this
Agreement
3.6 Withholding and other Deductions. All compensation payable to
Employee hereunder shall be subject to such deductions as the Company is from
time to time required to make pursuant to law, governmental regulation or order.
2
<PAGE>
4. Stock Options. The Company has granted Employee, as of the date
of this Agreement, and under the iMall, Inc. 1997 Stock Option Plan, options to
purchase shares of the common stock of the Company ("Options"). The principal
terms of the Options are set forth below and all of the terms of the Options are
set forth in a stock option agreement (a copy of which is attached hereto as
Exhibit A and incorporated herein by this reference). Effective as of January
6, 1999, the Board of Directors of the Company authorized and approved the grant
by the Company of 500,000 Options, each of which will entitle Employee the right
to purchase from the Company one share of the common stock of the Company at the
exercise price of $16.00 per share. The Options will vest in Employee as
follows: (i) 125,000 Options upon Employee's commencement of employment under
this Agreement, and (ii) 125,000 Options on each anniversary of the Employee's
employment with the Company.
4.1 Expiration of Options. All unexercised Options shall expire on
that date which is five (5) years after the date on which such Options were
granted.
4.2 Effect of Employee's Termination. If Employee is terminated
pursuant to 9.1 below, all Options that are unexercised at that time shall
expire on that date which is sixty (60) days after the date of such termination.
If Employee is terminated pursuant to Section 9.2 below, all Options that are
unexercised at that time shall expire immediately.
4.3 Effect of Employee's Improper Termination of this Agreement. If
Employee resigns or terminates this Agreement for any reason other than based on
a material breach hereof by the Company, all Options that are not vested in
Employee at that time shall expire immediately.
4.4 Early Vesting of Options. Regardless of the amount of Options
vested in Employee at such time, Employee shall become immediately vested in a
total of 500,000 Options (if greater than the amount then vested) upon (i) the
sale by the Company of all or substantially all of its assets, (ii) the sale of
50% or more of its outstanding shares, or (iii) the merger of the Company into
another company whereby the Company is not the surviving entity. Further,
regardless of the amount of Options vested in Employee at such time, Employee
shall become immediately vested in a total of 250,000 Options (if greater than
the amount then vested) upon any termination of Employee pursuant to Section 9.3
hereof.
5. Representations and Warranties of Employee. Employee represents
and warrants to the Company that (a) Employee is under no contractual or other
restriction or obligation which is inconsistent with the execution of this
Agreement, the performance of his duties hereunder, or the other rights of the
Company hereunder and (b) Employee is under no physical or mental disability
that would hinder the performance of his duties under this Agreement.
6. Certain Covenants.
3
<PAGE>
6.1 Noncompetition. The parties hereto acknowledge that if Employee
were to compete with the Company, Employee would necessarily use Confidential
Information (as defined below) in doing so. Accordingly, during the term of
this Agreement (including, if Employee is terminated for good cause or
voluntarily terminates his employment hereunder, for the remainder of the term
of this Agreement after such termination) (the "Restricted Period"), Employee
shall not have any ownership interest (of record or beneficial) in, or have any
interest as an employee, salesman, consultant, officer or director in, or
otherwise aid or assist in any manner, any firm, corporation, partnership,
proprietorship or other business that engages in any county, city or part
thereof in the United States and/or any foreign country in a business which is
similar to that in which the Company is engaged in such county, city or part
thereof, so long as the Company, or any successor in interest of the Company the
business and goodwill of the Company, remains engaged in such business in such
county, city or part thereof or continues to solicit customers or potential
customers therein; provided, however, that Employee may own, directly or
indirectly, solely as an investment, securities of any entity which are traded
on any national securities exchange if Employee (a) is not a controlling person
of, or a member of a group which controls, such entity or (b) does not, directly
or indirectly, own one percent (1%) or more of any class of securities of any
such entity.
6.2 Trade Secrets. Employee acknowledges that the nature of
Employee's engagement by the Company is such that Employee will have access to
Confidential Information which has great value to the Company and that except
for Employee's engagement by the Company, Employee would not otherwise have
access to the Confidential Information. During the term of this Agreement and
at all times thereafter, Employee shall keep all of the Confidential Information
in confidence and shall not disclose any of the same to any other person, except
the Company's personnel entitled thereto and other persons designated in writing
by the Company. Employee shall not cause, suffer or permit the Confidential
Information to be used for the gain or benefit of any party outside of the
Company or for Employee's personal gain or benefit outside the scope of
Employee's engagement by the Company.
6.3 Solicitation of Business. Employee shall not during the
Restricted Period solicit or assist any other person to solicit any business
(other than for the Company) from any present or past customer of the Company;
or request or advise any present or future customer of the Company to withdraw,
curtail or cancel its business dealings with the Company; or commit any other
act or assist others to commit any other act which might injure the business of
the Company.
6.4 Solicitation of Employees. Employee shall not during the
Restricted Period, directly or indirectly, hire, solicit or encourage to leave
the employment of the Company or any of its affiliates, any employee of the
Company or any of its affiliates or hire any such employee who has left the
employment of the Company or any of its affiliates within one year of the
termination of such employee's employment with the Company or any of its
affiliates.
4
<PAGE>
6.5 Solicitation of Consultants. Employee shall not during the
Restricted Period, directly or indirectly, hire, solicit or encourage to cease
work with the Company or any of its affiliates any consultant then under
contract with the Company or any of its affiliates within one year of the
termination of such consultant's engagement by the Company or any of its
affiliates.
6.6 Rights and Remedies Upon Breach. If Employee breaches or
threatens to commit a breach of any of the provisions of this Section 6 (the
"Restrictive Covenants"), the Company shall have the following rights and
remedies, each of which rights and remedies shall be independent of the other
and severally enforceable, and all of which rights and remedies shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity:
(a) Specific Performance. The right and remedy to have the
Restrictive Covenants specifically enforced by any court having equity
jurisdiction, all without the need to post a bond or any other security or to
prove any amount of actual damage or that money damages would not provide an
adequate remedy, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide adequate remedy to the Company; and
(b) Accounting and Indemnification. The right and remedy to require
Employee (i) to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits derived or received by
Employee or any associated party deriving such benefits as a result of any such
breach of the Restrictive Covenants; and (ii) to indemnify the Company against
any other losses, damages (including special and consequential damages), costs
and expenses, including actual attorneys' fees and court costs, which may be
incurred by them and which result from or arise out of any such breach or
threatened breach of the Restrictive Covenants.
6.7 Severability of Covenants/Blue Penciling. If any court
determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full effect, without regard to the
invalid portions. If any court determines that any of the Restrictive
Covenants, or any part thereof, are unenforceable because of the duration of
such provision or the area covered thereby, such court shall have the power to
reduce the duration or area of such provision and, in its reduced form, such
provision shall then be enforceable and shall be enforced. Employee hereby
waives any and all right to attack the validity of the Restrictive Covenants on
the grounds of the breadth of their geographic scope or the length of their
term.
6.8 Enforceability in Jurisdictions. The Company and Employee intend
to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon
the courts of any jurisdiction within the geographical scope of such covenants.
If the courts of any one or more of such jurisdictions hold the Restrictive
Covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the Company and Employee that such
determination not bar or in any way affect the right
5
<PAGE>
of the Company to the relief provided above in the courts of any other
jurisdiction within the geographical scope of such covenants, as to breaches of
such covenants in such other respective jurisdictions, such covenants as they
relate to each jurisdiction being, for this purpose, severable into diverse and
independent covenants.
6.9 Definitions.
(a) In Sections 6.1 - 6.9 above, all references to the Company mean
not only the Company, but also any company, partnership or entity which,
directly or indirectly, controls, is controlled by or is under common control
with the Company.
(b) The term "Confidential Information", as used in this Agreement,
means all information or material not generally known by non-Company personnel
which (i) gives the Company some competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which could be
detrimental to the interests of the Company; (ii) which is owned by the Company
or in which the Company has an interest and (iii) which is either (A) marked
"Confidential Information," "Proprietary Information" or other similar marking,
(B) known by Employee to be considered confidential and proprietary by the
Company or (C) from all the relevant circumstances should reasonably be assumed
by Employee to be confidential and proprietary to the Company. Confidential
Information includes, but is not limited to, the following types of information
and other information of a similar nature (whether or not reduced to writing):
trade secrets, inventions, drawings, file data, documentation, diagrams,
specifications, know how, processes, formulas, models, flow charts, software in
various stages of development, source codes, object codes, categories of
information unique to the business, research and development procedures,
research or development and test results, marketing techniques and materials,
marketing and development plans, price lists, pricing policies, business plans,
information relating to customers and/or suppliers' identities, characteristics
and agreements, financial information and projections, and employee files.
Confidential Information also includes any information described above which the
Company obtains from another party and which the Company treats as proprietary
or designates as Confidential Information, whether or not owned or developed by
the Company. NOTWITHSTANDING THE ABOVE, HOWEVER, NO INFORMATION CONSTITUTES
CONFIDENTIAL INFORMATION IF IT IS GENERIC INFORMATION OR GENERAL KNOWLEDGE WHICH
COVENANTOR WOULD HAVE LEARNED IN THE COURSE OF SIMILAR EMPLOYMENT ELSEWHERE IN
THE TRADE OR IF IT IS OTHERWISE PUBLICLY KNOWN AND IN THE PUBLIC DOMAIN.
7. Proprietary Rights.
7.1 Disclosure of Employee's Knowledge. Employee shall make
available to the Company at no cost to the Company all knowledge possessed by
him relating to any methods, developments, inventions and/or improvements,
whether patented, patentable or unpatentable, which concern in any way the
Company Business, acquired by Employee during the term of employment, provided
that nothing herein shall be construed as requiring any disclosure where any
such method, development, invention
6
<PAGE>
and/or improvement is lawfully protected from disclosure as a trade secret of
any third party or by any other lawful bar to such disclosure.
7.2 Ownership of Patent Rights, Copyrights, and Trade Secrets. To
the fullest extent permitted by California law, Employee shall assign, and does
hereby assign, to the Company all of Employee's right, title and interest in and
to all inventions, improvements, developments, trade secrets, discoveries,
computer software, tradenames and trademarks conceived, improved, developed,
discovered or written by Employee, alone or in collaboration with others, during
the term of this Agreement which relate in any manner to the Company Business,
whether or not the same shall be conceived, improved, developed, discovered or
written during customary working hours on the Company's premises. During the
term of this Agreement Employee shall promptly and fully disclose to the Company
all matters within the scope of this Section 7.2, and shall, upon request of the
Company, execute, acknowledge, deliver and file any and all documents necessary
or useful to vest in the Company all of Employee's right, title and interest in
and to all such matters. All expenses incurred in connection with the
execution, acknowledgment, delivery and filing of any papers or documents within
the scope of this Section 7.2 shall be borne by the Company. All matters within
the scope of this Section 7.2 shall constitute trade secrets of the Company
subject to the provisions of Section 6.2, until such matters cease to be trade
secrets by operation of law. Notwithstanding the foregoing, however, Employee
shall be under no obligation to assign to the Company any right in or to any
invention which qualifies fully under the provisions of Section 2870 of the
California Labor Code, which section is reproduced in Exhibit B attached hereto.
8. Insurance. The Company shall have the right to take out life,
health, accident, "key-man" or other insurance covering Employee, in the name of
the Company and at the Company's expense in any amount deemed appropriate by the
Company. Employee shall assist the Company in obtaining such insurance,
including, without limitation, submitting to any required examinations and
providing information and data required by insurance companies.
9. Termination.
9.1 Death or Total Disability of Employee. If Employee dies or
becomes totally disabled during the term of this Agreement, Employee's
employment hereunder shall automatically terminate. For these purposes Employee
shall be deemed totally disabled if Employee shall become physically or mentally
incapacitated or disabled or otherwise unable fully to discharge Employee's
duties hereunder for a period of 90 consecutive calendar days or for 120
calendar days in any 180 calendar-day period.
9.2 Termination for Good Cause. Employee's employment hereunder may
be terminated by the Company for "good cause." The term "good cause" is defined
as any one or more of the following occurrences:
(a) Employee's breach of any of the covenants contained in Section 6
of this Agreement;
7
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(b) Employee's conviction by, or entry of a plea of guilty or nolo
contendere in, a court of competent and final jurisdiction for any crime
involving moral turpitude or punishable by imprisonment in the jurisdiction
involved;
(c) Employee's commission of an act of fraud, whether prior to or
subsequent to the date hereof upon the Company;
(d) Employee's willful failure or refusal to perform Employee's
duties as required by this Agreement for any reason whatsoever (including,
without limitation, Employee's inability to comply with any laws, rules or
regulations of any governmental entity with respect to Employee's employment by
the Company);
(e) Employee's gross negligence, insubordination or material
violation of any duty of loyalty to the Company or any other material misconduct
on the part of Employee;
(f) Employee's commission of any act which is detrimental to the
Company's business or goodwill; or
(g) Employee's breach of any other provision of this Agreement,
provided that termination of Employee's employment pursuant to this subsection
(g) shall not constitute valid termination for good cause unless Employee shall
have first received written notice from the Chief Executive Officer stating with
specificity the nature of such breach and affording Employee at least fifteen
(15) days to correct the breach alleged.
9.3 Other Events. The Company may terminate Employee's employment,
with two weeks prior written notice, within the first six months of employment,
provided the Company vests Employee's Options pursuant to Section 4.4 ("Early
Vesting of Options").
9.4 Return of the Company's Property. If this Agreement is
terminated for any reason whatsoever, the Company shall have the right, at its
option, to require Employee to vacate his offices prior to the effective date of
termination and to cease all activities on the Company's behalf. Upon the
termination of his employment in any manner, Employee shall immediately
surrender to the Company all lists, books and records of, or in connection with,
the Company's business, and all other property belonging to the Company, it
being distinctly understood that all such lists, books and records, and other
documents, are the property of the Company.
10. Arbitration. Any claim or controversy arising out of or relating
to this Agreement shall be settled by arbitration in Los Angeles, California, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrators may be
entered in any court having jurisdiction. There shall be three arbitrators, one
to be chosen directly by each party at will, and the third arbitrator to be
selected by the two arbitrators so chosen. Each party shall pay the fees of the
arbitrator it selects and of its own attorneys, the expenses of its witnesses
and all other expenses connected with presenting its case. Other costs of the
arbitration, including the cost of any record or transcripts of the arbitration,
administrative
8
<PAGE>
fees, the fee of the third arbitrator, and all other fees and costs, shall be
borne equally by the parties.
11. General Relationship. Employee shall be considered an employee
of the Company within the meaning of all federal, state and local laws and
regulations including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
12. Miscellaneous.
12.1 Modification; Prior Claims. This Agreement sets forth the
entire understanding of the parties with respect to the subject matter hereof
and may be modified only by a written instrument duly executed by each party.
Employee hereby waives any claims that may exist on the date hereof arising from
his prior employment, if any, with the Company, other than for compensation
payable or reimbursement of reasonable expenses, all as incurred in the ordinary
course of business.
12.2 Assignment. The rights of the Company under this Agreement may
be assigned by the Company, in its sole and unfettered discretion, to any
person, firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly, acquires all or
substantially all of the assets or business of the Company or an affiliate of
the Company.
12.3 Survival. The covenants, agreements, representations and
warranties contained in or made pursuant to this Agreement shall survive
Employee's termination of employment.
12.4 Third-Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement.
12.5 Waiver. The failure of either party hereto at any time to
enforce performance by the other party of any provision of this Agreement shall
in no way affect such party's rights thereafter to enforce the same, nor shall
the waiver by either party of any breach of any provision hereof be deemed to be
a waiver by such party of any other breach of the same or any other provision
hereof.
12.6 Hiring At Will. Any continuance of Employee's employment by the
Company after the term hereof shall be deemed a hiring at will (unless such
continuance is the subject of a new written agreement) and shall be subject to
termination with or without cause by either party upon delivery of notice
thereof.
12.7 Section Headings. The headings of the several sections in this
Agreement are inserted solely for the convenience of the parties and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
9
<PAGE>
12.8 Notices. All notices, requests and other communications
hereunder shall be in writing and shall be delivered by courier or other means
of personal service (including by means of a nationally recognized courier
service or professional messenger service), or sent by telex or telecopy or
mailed first class, postage prepaid, by certified mail, return receipt
requested, in all cases, addressed to:
Company:
iMALL, Inc.
233 Wilshire Boulevard, Suite 820
Santa Monica, California 90401
Attention: Richard Rosenblatt
With a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard
Suite 1800
Los Angeles, California 90017
Attention: David L. Ficksman, Esq.
Employee:
Joseph Ruszkiewicz
------------------------------------
------------------------------------
------------------------------------
With a copy to:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
Attention:__________________________
All notices, requests and other communications shall be deemed given on the date
of actual receipt or delivery as evidenced by written receipt, acknowledgment or
other evidence of actual receipt or delivery to the address. In case of service
by telecopy, a copy of such notice shall be personally delivered or sent by
registered or certified mail, in the manner set forth above, within three
business days thereafter. Any party hereto may from time to time by notice in
writing served as set forth above designate a different address or a different
or additional person to which all such notices or communications thereafter are
to be given.
12.9 Severability. All Sections, clauses and covenants contained in
this Agreement are severable, and in the event any of them shall be held to be
invalid by any
10
<PAGE>
court, this Agreement shall be interpreted as if such invalid Sections, clauses
or covenants were not contained herein.
12.10 Governing Law and Venue. This Agreement is to be governed by
and construed in accordance with the laws of the State of California applicable
to contracts made and to be performed wholly within such State, and without
regard to the conflicts of laws principles thereof. Any suit brought hereon
shall be brought in the state or federal courts sitting in Los Angeles,
California, the parties hereto hereby waiving any claim or defense that such
forum is not convenient or proper. Each party hereby agrees that any such court
shall have in personam jurisdiction over it and consents to service of process
in any manner authorized by California law.
12.11 Non-transferability of Interest. None of the rights of
Employee to receive any form of compensation payable pursuant to this Agreement
shall be assignable or transferable except through a testamentary disposition or
by the laws of descent and distribution upon the death of Employee. Any
attempted assignment, transfer, conveyance, or other disposition (other than as
aforesaid) of any interest in the rights of Employee to receive any form of
compensation to be made by the Company pursuant to this Agreement shall be void.
12.12 Attorneys' Fees. Subject to the provisions of Section 10
hereof with respect to arbitration, if any legal action, arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of any
alleged dispute, breach, default or misrepresentation in connection with this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs it incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
12.13 Gender. Where the context so requires, the use of the
masculine gender shall include the feminine and/or neuter genders and the
singular shall include the plural, and vice versa, and the word "person" shall
include any corporation, firm, partnership or other form of association.
12.14 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
12.15 Construction. The language in all parts of this Agreement
shall in all cases be construed simply, according to its fair meaning, and not
strictly for or against any of the parties hereto. Without limitation, there
shall be no presumption against any party on the ground that such party was
responsible for drafting this Agreement or any part thereof.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date hereinabove set forth.
THE COMPANY
iMALL, Inc.
By:
--------------------------------
Its:
-------------------------------
Title:
-----------------------------
EMPLOYEE
/s/ Joseph Ruszkiewicz
-----------------------------------
Joseph Ruszkiewicz
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<PAGE>
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of March 22,
1999, by and between iMALL, Inc., a Nevada corporation (the "Company") and
Daniel Odette, an individual ("Employee"), with reference to the following:
A. The Company desires to employ Employee on the terms and conditions set
forth in this Agreement.
B. Employee desires to be so employed.
NOW, THEREFORE, based on the foregoing premises and in consideration
of the covenants set forth in this Agreement, the parties hereto hereby agree as
follows:
1. Term of Employment. The Company hereby employs Employee and
Employee accepts such employment commencing on March 22, 1998 and terminating on
that date which is two years thereafter, unless sooner terminated in accordance
with the terms of this Agreement.
2. Services to be Rendered.
2.1 Duties. Employee shall serve as Senior Vice President of the
Company and shall have the responsibilities, duties and powers customarily
associated with such position. Employee shall perform his duties pertaining to
the business of the Company (the "Company Business") subject to the direction of
the Chief Operating Officer of the Company and to such limits upon Employee's
authority as the Chief Executive Officer may from time to time impose.
Employee's principal place of work hereunder shall be located in Provo, Utah or
such other location within the State of Utah as may be designated by the Chief
Executive Officer from time to time. However, Employee shall also render
services at such other place or places within or without the United States as
the Chief Executive Officer may direct from time to time. Employee shall be
subject to the policies and procedures generally applicable to executive
employees of the Company to the extent the same are not inconsistent with any
term of this Agreement.
2.2 Exclusive Services. Employee shall at all times faithfully,
industriously and to the best of his ability, experience and talent perform to
the satisfaction of the Chief Executive Officer all of the duties
that may be assigned to Employee hereunder and shall devote all of his
productive time and efforts to the performance of such duties; provided,
however, that Employee may devote time to personal and family investments to the
extent that the time so spent does not conflict with the Company Business. The
existence of such a conflict shall be determined in good faith by the Chief
Executive Officer.
3. Compensation and Benefits. The Company shall pay the following
compensation and benefits to Employee during the term hereof, and Employee shall
accept the same as payment in full for all services rendered by Employee to or
for the benefit of the Company:
3.1 Salary. A salary ("Salary") of $120,000 per annum. The Salary
shall accrue in equal monthly installments in arrears and shall be payable in
accordance with the payroll practices of the Company in effect from time to
time.
3.2 Fringe Benefits. Employee shall be entitled to participate in
benefits under the Company's benefit plans and arrangements, including, without
limitation, any employee benefit plan or arrangement made available in the
future by the Company to its executives, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. The
<PAGE>
Company shall have the right to amend or delete any such benefit plan or
arrangement made available by the Company to its executives and not otherwise
specifically provided for herein.
3.3 Expenses. The Company shall reimburse Employee for reasonable
out-of-pocket expenses incurred in connection with the Company Business and the
performance of his duties hereunder, subject to (i) such policies as the Chief
Executive Officer may from time to time establish, (ii) Employee furnishing the
Company with evidence in the form of receipts satisfactory to the Company
substantiating the claimed expenditures, and (iii) Employee receiving advance
approval from the Chief Executive Officer in case of expenses (or a series of
related expenses) in excess of $1,000.
3.4 Vacation. Employee shall be entitled to the number of paid
vacation days in each calendar year determined by the Company from time to time
for its executives. Employee shall also be entitled to all paid holidays given
to the Company's executives.
3.5 Bonus. In addition to the Salary to which Employee is entitled
pursuant to Section 3.1, the Company may grant to Employee an annual bonus or
bonuses, at the sole and exclusive discretion of the Chief Executive Officer and
the Compensation Committee of the Company and at such times and in such manner
as the Chief Executive Officer and the Compensation Committee may determine.
3.6 Withholding and other Deductions. All compensation payable to
Employee hereunder shall be subject to such deductions as the Company is from
time to time required to make pursuant to law, governmental regulation or order.
4. Representations and Warranties of Employee. Employee represents
and warrants to the Company that (a) Employee is under no contractual or other
restriction or obligation which is inconsistent with the execution of this
Agreement, the performance of his duties hereunder, or the other rights of
the Company hereunder and (b) Employee is under no physical or mental disability
that would hinder the performance of his duties under this Agreement.
5. Certain Covenants.
5.1 Noncompetition. The parties hereto acknowledge that if Employee
were to compete with the Company, Employee would necessarily use Confidential
Information (as defined below) in doing so. Accordingly, during the term of this
Agreement (including, if Employee is terminated for good cause or
voluntarily terminates his employment hereunder, for the remainder of the term
of this Agreement after such termination) (the "Restricted Period"), Employee
shall not have any ownership interest (of record or beneficial) in, or have any
interest as an employee, salesman, consultant, officer or director in, or
otherwise aid or assist in any manner, any firm, corporation, partnership,
proprietorship or other business that engages in any county, city or part
thereof in the United States and/or any foreign country in a business which is
similar to that in which the Company is engaged in such county, city or part
thereof, so long as the Company, or any successor in interest of the Company the
business and goodwill of the Company, remains engaged in such business in such
county, city or part thereof or continues to solicit customers or potential
customers therein; provided, however, that Employee may own, directly or
indirectly, solely as an investment, securities of any entity which are traded
on any national securities exchange if Employee (a) is not a controlling person
of, or a member of a group which controls, such entity or (b) does not, directly
or indirectly, own one percent (1%) or more of any class of securities of any
such entity.
5.2 Trade Secrets. Employee acknowledges that the nature of
Employee's engagement by the Company is such that Employee will have access to
Confidential Information which has great value to the Company and that except
for Employee's engagement by the Company, Employee would not otherwise have
access to the Confidential Information. During the term of this Agreement and at
all times thereafter, Employee shall keep all of the Confidential Information in
confidence and shall not disclose any of the same to any other person, except
the Company's personnel entitled thereto and other persons designated in writing
by the Company. Employee shall not cause, suffer or permit the Confidential
Information to be
<PAGE>
used for the gain or benefit of any party outside of the Company or for
Employee's personal gain or benefit outside the scope of Employee's engagement
by the Company.
5.3 Solicitation of Business. Employee shall not during the
Restricted Period solicit or assist any other person to solicit any business
(other than for the Company) from any present or past customer of the Company;
or request or advise any present or future customer of the Company to withdraw,
curtail or cancel its business dealings with the Company; or commit any other
act or assist others to commit any other act which might injure the business of
the Company.
5.4 Solicitation of Employees. Employee shall not during the
Restricted Period, directly or indirectly, hire, solicit or encourage to leave
the employment of the Company or any of its affiliates, any employee of the
Company or any of its affiliates or hire any such employee who has left the
employment of the Company or any of its affiliates within one year of the
termination of such employee's employment with the Company or any of its
affiliates.
5.5 Solicitation of Consultants. Employee shall not during the
Restricted Period, directly or indirectly, hire, solicit or encourage to cease
work with the Company or any of its affiliates any consultant then under
contract with the Company or any of its affiliates within one year of the
termination of such consultant's engagement by the Company or any of its
affiliates.
5.6 Rights and Remedies Upon Breach. If Employee breaches or
threatens to commit a breach of any of the provisions of this Section 6 (the
"Restrictive Covenants"), the Company shall have the following rights and
remedies, each of which rights and remedies shall be independent of the other
and severally enforceable, and all of which rights and remedies shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity:
(a) Specific Performance. The right and remedy to have the
Restrictive Covenants specifically enforced by any court having equity
jurisdiction, all without the need to post a bond or any other security or to
prove any amount of actual damage or that money damages would not provide an
adequate remedy, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide adequate remedy to the Company; and
(b) Accounting and Indemnification. The right and remedy to
require Employee (i) to account for and pay over to the Company all
compensation, profits, monies, accruals, increments or other benefits derived or
received by Employee or any associated party deriving such benefits as a result
of any such breach of the Restrictive Covenants; and (ii) to indemnify the
Company against any other losses, damages (including special and consequential
damages), costs and expenses, including actual attorneys' fees and court costs,
which may be incurred by them and which result from or arise out of any such
breach or threatened breach of the Restrictive Covenants.
5.7 Severability of Covenants/Blue Penciling. If any court
determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full effect, without regard to the
invalid portions. If any court determines that any of the Restrictive Covenants,
or any part thereof, are unenforceable because of the duration of such
provision or the area covered thereby, such court shall have the power to reduce
the duration or area of such provision and, in its reduced form, such provision
shall then be enforceable and shall be enforced. Employee hereby waives any and
all right to attack the validity of the Restrictive Covenants on the grounds of
the breadth of their geographic scope or the length of their term.
5.8 Enforceability in Jurisdictions. The Company and Employee
intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the
<PAGE>
geographical scope of such covenants. If the courts of any one or more of such
jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of
the breadth of such scope or otherwise, it is the intention of the Company and
Employee that such determination not bar or in any way affect the right of the
Company to the relief provided above in the courts of any other jurisdiction
within the geographical scope of such covenants, as to breaches of such
covenants in such other respective jurisdictions, such covenants as they relate
to each jurisdiction being, for this purpose, severable into diverse and
independent covenants.
5.9 Definitions.
(a) In Sections 5.1 - 5.9 above, all references to the Company mean
not only the Company, but also any company, partnership or entity which,
directly or indirectly, controls, is controlled by or is under common control
with the Company.
(b) The term "Confidential Information", as used in this Agreement,
means all information or material not generally known by non-Company personnel
which (i) gives the Company some competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which could be
detrimental to the interests of the Company; (ii) which is owned by the Company
or in which the Company has an interest and (iii) which is either (A) marked
"Confidential Information," "Proprietary Information" or other similar marking,
(B) known by Employee to be considered confidential and proprietary by the
Company or (C) from all the relevant circumstances should reasonably be assumed
by Employee to be confidential and proprietary to the Company. Confidential
Information includes, but is not limited to, the following types of information
and other information of a similar nature (whether or not reduced to writing):
trade secrets, inventions, drawings, file data, documentation, diagrams,
specifications, know how, processes, formulas, models, flow charts, software in
various stages of development, source codes, object codes, categories of
information unique to the business, research and development procedures,
research or development and test results, marketing techniques and materials,
marketing and development plans, price lists, pricing policies, business plans,
information relating to customers and/or suppliers' identities, characteristics
and agreements, financial information and projections, and employee files.
Confidential Information also includes any information described above which the
Company obtains from another party and which the Company treats as proprietary
or designates as Confidential Information, whether or not owned or developed by
the Company. NOTWITHSTANDING THE ABOVE, HOWEVER, NO INFORMATION CONSTITUTES
CONFIDENTIAL INFORMATION IF IT IS GENERIC INFORMATION OR GENERAL KNOWLEDGE
WHICH COVENANTOR WOULD HAVE LEARNED IN THE COURSE OF SIMILAR EMPLOYMENT
ELSEWHERE IN THE TRADE OR IF IT IS OTHERWISE PUBLICLY KNOWN AND IN THE PUBLIC
DOMAIN.
6. Proprietary Rights.
6.1 Disclosure of Employee's Knowledge. Employee shall make
available to the Company at no cost to the Company all knowledge possessed by
him relating to any methods, developments, inventions and/or improvements,
whether patented, patentable or unpatentable, which concern in any way the
Company Business, acquired by Employee during the term of employment, provided
that nothing herein shall be construed as requiring any disclosure where any
such method, development, invention and/or improvement is lawfully protected
from disclosure as a trade secret of any third party or by any other lawful bar
to such disclosure.
6.2 Ownership of Patent Rights, Copyrights, and Trade Secrets. To
the fullest extent permitted by California law, Employee shall assign, and does
hereby assign, to the Company all of Employee's right, title and interest in and
to all inventions, improvements, developments, trade secrets, discoveries,
computer software, tradenames and trademarks conceived, improved, developed,
discovered or written by Employee, alone or in collaboration with others, during
the term of this Agreement which
<PAGE>
relate in any manner to the Company Business, whether or not the same shall be
conceived, improved, developed, discovered or written during customary working
hours on the Company's premises. During the term of this Agreement Employee
shall promptly and fully disclose to the Company all matters within the scope of
this Section 6.2, and shall, upon request of the Company, execute, acknowledge,
deliver and file any and all documents necessary or useful to vest in the
Company all of Employee's right, title and interest in and to all such matters.
All expenses incurred in connection with the execution, acknowledgment, delivery
and filing of any papers or documents within the scope of this Section 6.2 shall
be borne by the Company. All matters within the scope of this Section 6.2 shall
constitute trade secrets of the Company subject to the provisions of Section
5.2, until such matters cease to be trade secrets by operation of law.
Notwithstanding the foregoing, however, Employee shall be under no obligation to
assign to the Company any right in or to any invention which qualifies fully
under the provisions of Section 2870 of the California Labor Code, which section
is reproduced in Exhibit A attached hereto.
7. Insurance. The Company shall have the right to take out life,
health, accident, "key-man" or other insurance covering Employee, in the name of
the Company and at the Company's expense in any amount deemed appropriate by the
Company. Employee shall assist the Company in obtaining such insurance,
including, without limitation, submitting to any required examinations and
providing information and data required by insurance companies.
8. Termination.
8.1 Death or Total Disability of Employee. If Employee dies or
becomes totally disabled during the term of this Agreement, Employee's
employment hereunder shall automatically terminate. For these purposes Employee
shall be deemed totally disabled if Employee shall become physically or mentally
incapacitated or disabled or otherwise unable fully to discharge Employee's
duties hereunder for a period of 90 consecutive calendar days or for 120
calendar days in any 180 calendar-day period.
8.2 Termination for Good Cause. Employee's employment hereunder may
be terminated by the Company for "good cause." The term "good cause" is defined
as any one or more of the following occurrences:
(a) Employee's breach of any of the covenants contained in Section
5 of this Agreement;
(b) Employee's conviction by, or entry of a plea of guilty or nolo
contendere in, a court of competent and final jurisdiction for any crime
involving moral turpitude or punishable by imprisonment in the jurisdiction
involved;
(c) Employee's commission of an act of fraud, whether prior to or
subsequent to the date hereof upon the Company;
(d) Employee's willful failure or refusal to perform Employee's
duties as required by this Agreement for any reason whatsoever (including,
without limitation, Employee's inability to comply with any laws, rules or
regulations of any governmental entity with respect to Employee's employment by
the Company);
(e) Employee's gross negligence, insubordination or material
violation of any duty of loyalty to the Company or any other material misconduct
on the part of Employee;
(f) Employee's commission of any act which is detrimental to the
Company's business or goodwill; or
(g) Employee's breach of any other provision of this Agreement,
provided that termination of Employee's employment pursuant to this subsection
(g) shall not constitute valid termination for good cause unless Employee shall
have first received written notice from the Chief Executive Officer stating
<PAGE>
with specificity the nature of such breach and affording Employee at least
fifteen (15) days to correct the breach alleged.
8.3 Return of the Company's Property. If this Agreement is
terminated for any reason whatsoever, the Company shall have the right, at its
option, to require Employee to vacate his offices prior to the effective date of
termination and to cease all activities on the Company's behalf. Upon the
termination of his employment in any manner, Employee shall immediately
surrender to the Company all lists, books and records of, or in connection with,
the Company's business, and all other property belonging to the Company, it
being distinctly understood that all such lists, books and records, and other
documents, are the property of the Company.
9. Arbitration. Any claim or controversy arising out of or relating
to this Agreement shall be settled by arbitration in Los Angeles, California, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment on the award rendered by the arbitrators may be
entered in any court having jurisdiction. There shall be three arbitrators, one
to be chosen directly by each party at will, and the third arbitrator to be
selected by the two arbitrators so chosen. Each party shall pay the fees of the
arbitrator it selects and of its own attorneys, the expenses of its witnesses
and all other expenses connected with presenting its case. Other costs of the
arbitration, including the cost of any record or transcripts of the arbitration,
administrative fees, the fee of the third arbitrator, and all other fees and
costs, shall be borne equally by the parties.
10. General Relationship. Employee shall be considered an employee of
the Company within the meaning of all federal, state and local laws and
regulations including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.
11. Miscellaneous.
11.1 Modification; Prior Claims. This Agreement sets forth the entire
understanding of the parties with respect to the subject matter hereof and may
be modified only by a written instrument duly executed by each party. Employee
hereby waives any claims that may exist on the date hereof arising from his
prior employment, if any, with the Company, other than for compensation payable
or reimbursement of reasonable expenses, all as incurred in the ordinary course
of business.
11.2 Assignment. The rights of the Company under this Agreement may be
assigned by the Company, in its sole and unfettered discretion, to any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly, acquires all or
substantially all of the assets or business of the Company or an affiliate of
the Company.
11.3 Survival. The covenants, agreements, representations and
warranties contained in or made pursuant to this Agreement shall survive
Employee's termination of employment.
11.4 Third-Party Beneficiaries. This Agreement does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement.
11.5 Waiver. The failure of either party hereto at any time to enforce
performance by the other party of any provision of this Agreement shall in no
way affect such party's rights thereafter to enforce the same, nor shall the
waiver by either party of any breach of any provision hereof be deemed to be a
waiver by such party of any other breach of the same or any other provision
hereof.
11.6 Hiring At Will. Any continuance of Employee's employment by the
Company after the term hereof shall be deemed a hiring at will (unless such
continuance is the subject of a new written agreement) and shall be subject to
termination with or without cause by either party upon delivery of
notice thereof.
<PAGE>
11.7 Section Headings. The headings of the several sections in this
Agreement are inserted solely for the convenience of the parties and are not a
part of and are not intended to govern, limit or aid in the construction of any
term or provision hereof.
11.8 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be delivered by courier or other means of personal
service (including by means of a nationally recognized courier service or
professional messenger service), or sent by telex or telecopy or mailed first
class, postage prepaid, by certified mail, return receipt requested, in all
cases, addressed to:
Company:
iMALL, Inc.
233 Wilshire Boulevard, Suite 820
Santa Monica, California 90401
Attention: Richard Rosenblatt
With a copy to:
Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, California 90071
Attention: Brian Cartwright.
Employee:
Daniel Odette
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------------------------------
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With a copy to:
------------------------------
------------------------------
------------------------------
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Attention:
-------------------
All notices, requests and other communications shall be deemed given on the date
of actual receipt or delivery as evidenced by written receipt, acknowledgement
or other evidence of actual receipt or delivery to the address. In case of
service by telecopy, a copy of such notice shall be personally delivered or sent
by registered or certified mail, in the manner set forth above, within three
business days thereafter. Any
<PAGE>
party hereto may from time to time by notice in writing served as set forth
above designate a different address or a different or additional person to which
all such notices or communications thereafter are to be given.
11.9 Severability. All Sections, clauses and covenants contained in
this Agreement are severable, and in the event any of them shall be held to be
invalid by any court, this Agreement shall be interpreted as if such invalid
Sections, clauses or covenants were not contained herein.
11.10 Governing Law and Venue. This Agreement is to be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed wholly within such State, and without regard
to the conflicts of laws principles thereof. Any suit brought hereon shall be
brought in the state or federal courts sitting in Los Angeles, California, the
parties hereto hereby waiving any claim or defense that such forum is not
convenient or proper. Each party hereby agrees that any such court shall have in
personam jurisdiction over it and consents to service of process in any manner
authorized by California law.
11.11 Non-transferability of Interest. None of the rights of Employee
to receive any form of compensation payable pursuant to this Agreement shall be
assignable or transferable except through a testamentary disposition or by the
laws of descent and distribution upon the death of Employee. Any attempted
assignment, transfer, conveyance, or other disposition (other than as aforesaid)
of any interest in the rights of Employee to receive any form of compensation to
be made by the Company pursuant to this Agreement shall be void.
11.12 Attorneys' Fees. Subject to the provisions of Section 9 hereof
with respect to arbitration, if any legal action, arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of any
alleged dispute, breach, default or misrepresentation in connection with this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs it incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
11.13 Gender. Where the context so requires, the use of the masculine
gender shall include the feminine and/or neuter genders and the singular shall
include the plural, and vice versa, and the word "person" shall include any
corporation, firm, partnership or other form of association.
11.14 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
11.15 Construction. The language in all parts of this Agreement shall
in all cases be construed simply, according to its fair meaning, and not
strictly for or against any of the parties hereto. Without limitation, there
shall be no presumption against any party on the ground that such party was
responsible for drafting this Agreement or any part thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date hereinabove set forth.
THE COMPANY
iMALL, Inc.
By: /s/ Anthony Mazzarella
--------------------------
Name: Anthony Mazzarella
<PAGE>
-------------------------
Title:
-------------------------
EMPLOYEE
/s/ Daniel Odette
------------------------
Daniel Odette
<PAGE>
EXHIBIT 10.21
LEASE CONTRACT
--------------
Contract #030
This lease is made between Universal Campus Credit Union of 188 West River Park
Dr., Provo, UT 84604, herein called UCCU, and iMall Inc. of 5314 North 250 West,
Suite 110, Provo, Utah 84604, herein referred to as Tenant.
Tenant hereby offers to lease from UCCU the premises situated at 190 W.
Riverpark Dr., Provo, UT 94604, Suite #220, as outlined in addendum A of this
contract. Said premise represents 2875 rentable square feet.
1. Term. Contract commences December 1, 1998 and terminates on November 30,
2001.
2. Rent. Three thousand eight hundred and thirty-three dollars ($3833.00) due
the first of each month for that month's rent.
3. Security Deposit. Tenant shall deposit with UCCU on the signing of this
lease the sum of $7666.00 (first and last month's rent) as security for the
performance of Tenant's obligations under this lease, including without
limitation the surrender of possession of the premises to UCCU as herein
provided. If UCCU applies any part of the deposit to cure any default of
Tenant, Tenant shall on demand, deposit with UCCU the amount so applied so
that UCCU shall have the full deposit on hand at all times during the term
of this lease. A nonrefundable premise reconditioning fee of 10% ($766) will
be retained from the security deposit upon termination of contract.
4. Late Payment. In the case that the monthly payment is not received by the
first of the month, a ten day grace period will apply. After the grace
period, a late payment penalty shall be incurred at the rate of $25.00 per
day. If payment is not received within twenty-five days after the first of
the month, UCCU may elect, without notice or legal process, to nullify this
contract, re-enter and take possession of said premises, and retain any and
all funds held as a security deposit.
5. Use. Tenant shall use and occupy the premises for general office work only.
6. Alterations. Tenant shall not, without first obtaining the written consent
of UCCU, make any alterations, additions, or improvements, in, to, or about
the premises. Additionally, any alterations must either be made by a party
of UCCU's choice, or a party approved by UCCU. UCCU reserves the right to
elect which option shall be taken. Tenant shall incur all costs associated
with said alterations.
7. Care and Maintenance of Premises. UCCU shall be responsible to maintain the
roof, exterior walls, structural items, heating, air conditioning,
mechanical systems, building lights, building electrical systems, exterior
windows, and parking lot-sidewalk areas (including snow removal). Tenant
shall be responsible for maintenance of interior walls, interior decorating,
trash removal and all other janitorial items.
8. Utilities. UCCU shall be responsible for power, heating and cooling costs.
Tenant shall be responsible for all telephone and data communication costs.
9. Mail Service. Tenant shall be responsible for Tenant's mail service, with
reasonable accommodations made by UCCU.
10. Insurance. Insurance for personal property is the sole responsibility of
Tenant. UCCU will be responsible for insurance on the building.
<PAGE>
11. Entry and Inspection. Tenant shall permit UCCU or UCCU's agents to enter
upon the premises at reasonable times and upon reasonable notice for the
purpose of inspection and maintenance.
12. Assignment and Subletting. Tenant shall not assign this lease or sublet
any portion of the premises without prior written consent of UCCU, which
shall not be unreasonably withheld. Any such assignment or subletting
without consent shall be void and, at the option of UCCU, may terminate
this lease.
13. Indemnification of Lessor. UCCU shall not be liable for any damage or
injury to Tenant, or any other person, or to any property, occurring on the
demised premises or any part thereof, and Tenant agrees to hold harmless
from any claims for damages, no matter how caused.
14. Option to renew. Tenant may exercise a first right of refusal in order to
renew the contract at the end of the original three-year lease term. Any
and all terms may be renegotiated at such time.
15. Termination of contract. In the event that the Tenant desires to
prematurely terminate this contract, a sixty (60) days written notice will
terminate the contract. If termination from the Tenant occurs at any time
during the contract period, the entire security deposit (equal to two
month's rent) will be withheld and retained by UCCU as penalty. In the
event that UCCU desires to prematurely terminate the contract, a one year,
365 day written notice will terminate the contract with no penalty for such
action.
16. Rules and regulations. Tenant will abide by the rules and regulations as
outlined in addendum B.
17. Parking. Tenant will park in designated areas as outlined in addendum C.
Each party shall be responsible for losses resulting from negligence or
misconduct of himself, his employees or invitees. Furthermore, in case of
failure to faithfully perform the terms and covenants herein set forth, the
defaulting party shall pay all costs, expenses, and reasonable attorneys' fees
resulting from the enforcement of this agreement or any right arising out of
such breach.
Signed ...
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Universal Campus Credit Union
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Title Date
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iMall Inc.
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Title Date
2
<PAGE>
ADDENDUM B
RULES AND REGULATIONS
1. The sidewalks, passages, exits, entrances, public transit system,
accessways, public areas, and stairways of the Building shall not be obstructed
by Tenant or used by it for any purpose other than for ingress to and egress
from the Premises. The halls, passages, exits, entrances, public transit
system, accessways, public areas, and stairways are not for the use of the
general public, and Landlord shall in all cases retain the right to control and
prevent access thereto of all persons whose presence in the judgment of Landlord
would be prejudicial to the safety, character, reputation and interests of the
Building and its tenants, provided that nothing herein contained shall be
construed to prevent such access to persons with whom Tenant normally deals in
the ordinary course of its business, unless such persons are engaged in illegal
activities. Tenant shall not at any time go upon the roofs of the Building.
2. No sign, placard, picture, name, advertisement or notice visible
from the exterior of the Premises shall be inscribed, painted, affixed or
otherwise displayed on any part of the Building. Landlord will adopt and furnish
to Tenant general guidelines relating to signs inside the building on the office
floors. Tenant agrees to conform to such guidelines. All approved signs or
lettering on doors shall be printed, painted, affixed or inscribed at the
expense of Tenant by a person approved by Landlord. Material visible from
outside the building will not be permitted.
3. The Premises shall not be used for the storage of merchandise held
for sale to the general public or for lodging. No cooking shall be done or
permitted by Tenant on the Premises, except that use by Tenant of Underwriters'
Laboratory-approved portable equipment for brewing coffee, tea, hot chocolate
and similar beverages shall be permitted, provided that such use is in
accordance with all applicable federal, state, and city laws, codes, ordinances,
rules and regulations. No dangerous, flammable, combustible, or explosive object
or material shall be brought into the Building or kept in the Premises by Tenant
without prior written consent of Landlord, which consent shall not be
unreasonably withheld.
4. Tenant shall not employee any person or persons other than the
janitor of the Landlord for the purpose of cleaning the Premises, unless
otherwise agreed to by Landlord in writing. Except with written consent of
Landlord, which consent shall not be unreasonably withheld, no person or persons
other than those approved by Landlord shall be permitted to enter the Building
for the purpose of cleaning the same. Tenant shall not cause any unnecessary
labor by reason of Tenant's carelessness or indifference in the preservation of
good order and cleanliness.
5. Landlord will furnish Tenant with five sets of keys to the
Premises, free of charge. Additional keys will provided at $5.00/key
($10.00/set). Tenant, upon the termination of contract, shall deliver to
Landlord all keys to doors in the Building and the Premises that shall have been
furnished to Tenant.
6. Landlord shall have the right to prescribe the weight and position
of safes and other objects of excessive weight. Furthermore, no safe or object
whose weight exceeds the
<PAGE>
lawful load for the area upon which it would stand shall be brought into or kept
at the Premises. If, in the sole and absolute discretion of Landlord, it is
necessary to distribute the concentrated weight if any heavy object, all work,
including any required structural design, shall be done at the expense of Tenant
and in such manner as Landlord shall determine in its sole and absolute
discretion. The moving of safes and other heavy objects shall take place only
outside of ordinary business hours upon previous notice to Landlord.
Additionally, the persons employed to move them in and out of the Building shall
be subject to Landlord's approval and if required by law, shall be properly
licensed and insured.
7. Tenant shall not use, keep, permit, or suffer the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors, and/or vibrations. Tenant
shall not interfere in any way with other tenants or those having business in
the Building. All machines or mechanical equipment permitted to be installed or
used in the Premises shall be equipped, installed, and maintained by Tenant so
as to prevent any disturbing noise, vibration, electrical, or other interference
from being transmitted from the premises to any other area of the Building.
Furthermore, in each case such equipment or machines shall be placed and
operated so as not to disturb other tenants of the Building. No noise, including
the playing of any musical instruments, radio, or television, which might
disturb other tenants of the Building, shall be made or permitted by Tenant.
Tenant shall not do or permit any activity in the Premises, and shall not bring
or keep anything in the Premises, which would impair or interfere with any of
the Building services or Building systems or the proper and economic heating,
cleaning or other servicing of the Building or the Premises, or the use or
enjoyment by any other tenant of any other premises. Neither shall Tenant
install any ventilating, air conditioning, electrical or other equipment of any
kind, which, in the judgment of Landlord, might cause any such impairment or
interference.
8. In the case of invasion, mob, riot, or public excitement rendering
such action advisable in Landlord's opinion, Landlord reserves the right to
prevent access to the Building during the continuance of same by such action as
Landlord may deem appropriate, including closing and locking doors.
9. The directory of the Building will be provided for the display of
the name and location of tenants. Landlord must first approve any additional
name that Tenant shall desire in place upon the directory and, if so approved, a
change will be made thereof.
10. No curtains, draperies, blinds, shutters, shades, screens or
other coverings, hangings or decorations shall be attached to, hung or placed
in, or used in connection with any window of the Building without the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
In any event, with the prior written consent of Landlord, such items shall be
installed on the office side of Landlord's standard window covering and shall in
no way be visible from the exterior of the Building. Tenant shall not alter or
remove any exterior window glass of the Building for any reason.
11. Tenant shall not obtain for use in the Premises ice, drinking
water, food, beverage, or other similar services, except at such reasonable
hours and under such reasonable regulations as may be fixed by Landlord.
2
<PAGE>
12. Tenant shall see that the doors of the Premises are closed and
locked and that all water faucets, water apparatus, and utilities, are shut off
before Tenant or Tenant's employees leave the Premises. Such action will prevent
waste or damage, and for any default or carelessness in this regard Tenant shall
be responsible for all injuries sustained by Tenant and other tenants or
occupants of the Building or Landlord.
13. The toilets, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed. No foreign
substance of any kind whatsoever shall be deposited therein. Any damage
resulting from Tenants misuse thereof shall be paid for by Tenant.
14. Except with the prior written consent of Landlord, which Landlord
may withhold in its sole and absolute discretion, Tenant shall not sell, or
Permit the sale from the Premises of, or use or permit the use of any sidewalk
adjacent to the Premises for the sale of newspapers, magazines, periodicals,
theater tickets, or any other goods, merchandise or service. Neither shall
Tenant carry on, or permit or allow any employee or other person to carry on,
business in or from the Premises for the service or accommodation of occupants
of any other portion of the Building, nor shall the Premises be used for
manufacturing of any kind, or for any business' activity other than that
specifically provided for in Tenant's Lease.
15. Tenant shall not install any radio, television or
telecommunications antenna, loudspeaker, or other device on the roof or exterior
walls of the Building.
16. Tenant shall not use in any part of the Premises, or in the
common areas of the Building, any handtrucks except those equipped with rubber
tires and side guards or such other material-handling equipment as Landlord may
approve in its sole discretion. No such equipment shall be permitted at any time
in the passenger elevators of the Building without consent from Landlord. No
other vehicles of any kind shall be brought by Tenant into the Building or kept
in or about the Premises.
17. Tenant shall store all its trash and garbage within the Premises
until removal of same to such location of the real Property as may be designated
from time to time by Landlord.
18. No material shall be placed in the Building trash boxes or
receptacles if such material is of such nature that it may not be disposed of in
the ordinary and customary manner of removing and disposing of trash and garbage
in the City of Provo without being in violation of any law or ordinance
governing such disposal.
19. Canvassing, soliciting, peddling or distribution of handbills or
any other written material, in the Building is prohibited and Tenant shall
cooperate to prevent same.
20. Tenant shall immediately, upon request from Landlord (which
request need not be in writing), reduce its lighting in the Premises for
temporary periods designated by Landlord, when required to prevent overloads of
the mechanical or electrical systems of the Building.
21. Landlord reserves the right to select the name of the Building
and to make such change or changes of name as it may deem appropriate from time
to time, and Tenant shall not refer to the Building by any name other than: (i)
the names as selected by Landlord (as name
3
<PAGE>
may be changed from time to time), or (ii) if the postal address, as approved by
the United States Post Office. Tenant shall not use the name of the Building in
any respect other than as an address of its operation in the Building without
the prior written consent of Landlord, which Landlord may withhold in its sole
and absolute discretion.
22. The requirements of Tenant will be attended to only upon
application by telephone or writing or in person at the management office of the
Building. Employees of Landlord shall not perform any work or do anything
outside of their regular duties unless under special instructions from Landlord.
23. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of these Rules and Regulations in favor
of any other tenant or tenants, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all of the tenants of the
Building.
24. Wherever the work "Tenant" occurs in these Rules and Regulations,
it is understood and agreed that it shall mean Tenant's associates, agents,
clerks, employees, customers and visitors. Wherever the word "Landlord" occurs
in these Rules and Regulations, it is understood and agreed that it shall mean
Landlord's assigns, agents, clerks, employees, customers and visitors.
25. These Rules and Regulations are in addition to, and shall not be
construed in any to modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the Building.
26. Landlord reserves the right to make such other and reasonable
rules and regulations as may from time to time be needed for the safety, care,
efficiency, cleanliness, management and operation of the Building, and for the
preservation of good order therein.
27. Americans with Disabilities Act (ADA): Tenant accepts liability
for and agrees to make reasonable modifications in policies, practices, or
procedures when the modifications are necessary to afford goods, services,
facilities, privileges, advantages, or accommodations to individuals with
disabilities in accordance with the ADA. Landlord shall bear the costs, if any,
of such modifications required for the premises.
4
<PAGE>
Exhibit 10.22
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (the "Sublease" is entered into by and between Novations
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Group, Inc., a Delaware corporation ("Sublessor"), and imall Incorporated, a
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Nevada corporation ("Sublessee").
W I T N E S S E T H
On March 1, 1997, Sublessor and Novations Partners, L.L.C. ("Landlord")
entered into that certain Lease Agreement (the "Base Lease") wherein Landlord
leased to Sublessor and Sublessor leased from Landlord certain premises known as
Unit Nos. 1, 2 and 3, located at 5314 North 250 West, Provo, Utah (the
"Building"), a copy of the Base Lease being attached hereto as Exhibit A.
---------
Sublessee desires to sublease from Sublessor and Sublessor desires to
sublease to Sublessee the Subleased Premises (as hereinafter defined) subject to
the terms and conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, and for other good and valuable consideration paid by each
party hereto to the other, Sublessor and Sublessee agree as follows:
1. Terms. Capitalized terms used herein but not defined herein shall have
-----
the meanings specified in the Base Lease.
2. Agreement to Sublease. Sublessor subleases to Sublessee, and Sublessee
---------------------
subleases from Sublessor: (a) approximately 4,590 square feet of space (the
"Subleased Premises Rentable Area") consisting of Sublessor's space on the first
(1st) floor of the Building, less and excepting therefrom approximately 1600
square feet (the "Subleased Space"), (b) approximately 350 square feet of
storage space located in the basement of the Building (the "Subleased Storage"),
and (c) fourteen (14) Steelcase workstations, including chairs, (the
"Workstations," with the Subleased Space, Subleased Storage and the Workstations
hereinafter collectively referred to as the "Subleased Premises") in accordance
with and subject to the Base Lease and the terms, conditions and provisions of
this Sublease. A floor plan depicting the Subleased Space is attached hereto as
Exhibit "B."
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3. Term. The term (the "Term") of this Sublease shall commence on
----
February 15, 1999 (the "Commencement Date"), and shall expire on the last day of
February 2000, unless earlier terminated pursuant to the terms of this Sublease.
If the Commencement Date should be changed for any reason, Sublessor shall not
be liable or responsible for any claims, damages or liabilities in connection
therewith or by reason thereof.
4. Rent.
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a) Commencing on the Commencement Date (the "Rent Commencement Date")
and continuing on the first day of each month thereafter throughout the
Term, Sublessee shall pay to Sublessor, as rent (collectively, the "Basic
Rent"): (a) for the
<PAGE>
Subleased Space, the sum of Seven Thousand Seventy-Six and 25/100 Dollars
($7,076.25) per month; (b) for the Subleased Storage, the sum of Two
Hundred Fifty-Four and 00/100 Dollars ($254.00) per month; and (c) for the
Workstations, the sum of One Hundred Twenty-Six and 00/100 Dollars
($126.00) per month, for a total of Seven Thousand Four Hundred Fifty-Six
and 25/100 Dollars ($7,456.25) per month (prorated for any partial month).
b) Sublessee shall pay all amounts that become payable by Sublessee
under this Sublease to Sublessor at the times and in the manner provided in
this Sublease, without demand, deduction, set-off or counterclaim, at 5314
North 250 West, Suite 320, Provo, Utah 84604 (or such other address as
Sublessor may designate in writing). In the event any amounts payable by
Sublessee under this Sublease shall not be paid within five (5) days after
the date due, such amounts shall bear interest for each month or fraction
thereof from the due date until paid computed as set forth in the Base
Lease.
5. Additional Charges. Sublessee further agrees to pay Sublessor
------------------
Sublessee's proportionate share of all additional rent and other charges in the
manner provided in the Base Lease. For the purpose of this Sublease, Lessee's
proportionate share shall be a fraction, (1) the numerator of which is 4590, and
(2) the denominator of which is 21,000. Notwithstanding anything contained
herein to the contrary, the Base Rent shall include, and Sublessee shall not be
responsible for any additional charges hereunder with respect to, the following:
janitorial, electricity, gas, landscaping charges, general liability insurance
obtained by Landlord under the Base Lease, and real estate taxes.
6. Use of Subleased Premises. Sublessee may use and occupy the Subleased
-------------------------
Premises for office purposes, and for no other purpose whatsoever.
7. Acceptance of and Improvements to the Subleased Premises; Modular
-----------------------------------------------------------------
Offices. Upon the Commencement Date, Sublessor shall tender, and Sublessee
- -------
shall accept, possession of the Subleased Premises in its "AS-IS," "WHERE-IS"
and "WITH ALL FAULTS" condition, without the benefit of any further improvement,
and Sublessor shall not be obligated to incur (or to cause Landlord to incur)
any cost or obligation whatsoever for the installation, renovation or demolition
of any improvements to the Subleased Premises. Sublessee may, with the prior
written consent of Sublessee, not to be unreasonably withheld or delayed,
install certain Modular Offices (the "Modular Offices") in the Subleased
Premises. Sublessee shall leave the Modular Offices on the Subleased Premises
upon the expiration or earlier termination of this Sublease.
8. Assumption. Sublessee hereby assumes and agrees, for the benefit of
----------
Sublessor and Landlord, to comply with and be bound by all of the provisions of
the Base Lease with respect to the Subleased Premises which are to be observed
or performed during the Term hereof by Sublessor as "Tenant" thereunder,
including the rules and regulations applicable to the Building, except as
otherwise inconsistent with the agreements and understandings expressly provided
herein.
9. Indemnification. Subject to the provisions of Paragraph 13 below, and
---------------
except to the extent, if any, of the negligence or intentional acts of
Sublessor, Sublessee shall indemnify and hold Sublessor harmless from and
against claims by third parties for any loss or damage to
-2-
<PAGE>
property or person, and all costs (including reasonable attorney's fees)
incurred in connection with the defense of any such claims, to the extent caused
by the acts or omissions or neglect of Sublessee, its agents, invitees,
employees, and contractors in or about the Building, or arising from the
conductor management of Sublessee's business in the Building or Sublessee's use
of the Subleased Premises during the Term hereof.
10. Assignment and Subletting. In no event shall Sublessee assign this
-------------------------
Sublease or sublease the Subleased Premises or any part thereof without first
obtaining the prior written consent of Sublessor (which consent may be withheld
in Sublessor's sole and absolute discretion). Any such assignment or sublease
shall also be in accordance with and subject to the terms of the Base Lease.
Assignment shall include transfer of Sublessee's interest to parent, subsidiary,
affiliate or related entity. Notwithstanding any such assignment or sublease,
Sublessee shall remain primarily liable and shall continue to make all rental
payments and all other payments that may become due and payable hereunder to
Sublessor in a timely manner. Any violation of this Paragraph by Sublessee
shall constitute an Event of Default under this Sublease, entitling Sublessor to
exercise any and all of the remedies herein provided for an Event of Default by
Sublessee, including, but not limited to, termination of this Sublease.
11. Sublessee Default. All of the terms and provisions of Article 19 of
-----------------
the Base Lease are expressly incorporated herein and made applicable hereto,
such that any default by Sublessee under the terms of said Article 19 shall
constitute an event of default ("Event of Default") hereunder. At any time
after such an Event of Default has occurred hereunder, Sublessor may exercise
all rights and remedies provided under the Base Lease for a default thereunder,
including, but not limited to, declaring this Sublease terminated, and Sublessor
may immediately or at any time thereafter re-enter the Subleased Premises and
remove all persons therefrom with or without legal process, and without
prejudice to any of its other legal rights, and all claims for damages by reason
of such re-entry are expressly waived, as well as all claims for damages by
reason of any eviction proceedings or proceedings by way of sequestration or any
other legal proceedings which Sublessor may employ to recover unpaid rents or
possession of the Subleased Premises. In addition, without limiting the
foregoing, in the event Sublessor reasonably believes that Sublessee's failure
to cure any breach under this Sublease will cause a default by Sublessor to
occur under the Base Lease, Sublessor shall specifically have the right, upon
giving Sublessee not less than twenty-four (24) hours' prior written notice
thereof, to cure such breach or default and be reimbursed by Sublessee for all
reasonable expenses incurred by Sublessor in connection therewith upon demand
and presentation of invoices therefor. All rights and remedies of Sublessor
herein enumerated shall be cumulative and none shall exclude any other right or
remedy allowed by law or in equity, and said rights and remedies may be
exercised and enforced concurrently and whenever and as often as occasion
therefore arises.
12. Option to Extend Sublease Term. On the condition that Sublessee is
------------------------------
not in default of any of its covenants or obligations under this Sublease both
at the time of exercise of the options and as of the commencement of each of the
hereinafter described additional terms, Sublessee shall have the option to
extend the Sublease Term on a month to month basis, for a maximum of six (6)
months, the first such month to commence immediately after the expiration of the
initial Sublease term. If Sublessee desires to extend the Sublease Term as
aforesaid, Sublessee shall give notice thereof to the Sublessor no earlier than
six (6) months and not later than three (3) months prior to the end of the
initial Sublease Term. If Sublessee fails to timely
-3-
<PAGE>
give such notice, the Sublessee shall have no right to extend the Sublease Term.
Upon the timely giving of such notice, the Sublease Term shall be deemed
extended upon all the same terms and conditions of this Sublease for one (1)
month, and Sublessee may thereafter continue on a month to month basis for a
maximum of six (6) months. If Sublessee shall exercise its options hereunder for
the full six (6) month period, then this Sublease shall terminate on August 31,
2000. In the event of any such extension, then the word "Term" as used herein
shall thereupon be deemed to include such extension period.
13. Relationship of Parties. Sublessee recognizes that Sublessor is not
-----------------------
the owner of the Subleased Premises, and that the Landlord is the party with
whom Sublessee should deal regarding matters concerning the Subleased Premises
and the Building, and that the Sublessor shall have no obligation to deliver or
provide any services to the Sublessee or the Subleased Premises except to the
extent and only to the extent Landlord delivers such services to Sublessor.
Accordingly, in the event Sublessee desires any extra services (for example,
additional air-conditioning services) other than those provided to the Subleased
Premises under the Base Lease, has any complaints concerning services required
to be provided by Landlord under the Base Lease to the Subleased Premises, or
the improvements thereto, or has any other matters which would normally be
discussed with a Landlord, Sublessee agrees to contact Landlord directly to
handle such matters; it being the intention of the parties hereto that, as to
such matters, the only connection between Sublessee and Sublessor shall be (a)
the flow-through of rights and obligations of Sublessor under the Base Lease,
and (b) the payment of all amounts payable hereunder by Sublessee to Sublessor
as herein provided. Sublessee also acknowledges that all of the covenants and
obligations of Sublessor hereunder are expressly subject to the terms and
conditions of the Base Lease. In the event Sublessee acquires any additional
services from Landlord for which additional costs are incurred, Sublessee shall
be responsible for paying Landlord directly for such services.
14. Waiver of Subrogation. Anything in this Sublease to the contrary
---------------------
notwithstanding, Sublessor and Sublessee each hereby waive any and all rights of
recovery, claim, action or cause of action against the other, its officers,
directors, employees or agents for any damage to their respective property
located in the Subleased Premises or the Premises, regardless of cause or
origin, including the negligence of Sublessor, Sublessee and such parties'
respective officers, directors, employees or agents, and each covenants that no
insurer or other third party shall hold any right of subrogation against such
other party on account thereof. The provisions of this Paragraph shall survive
the expiration or termination of this sublease.
15. Holding Over. In the event Sublessee remains in possession of the
------------
Subleased Premises after the expiration of this Sublease, then Sublessee, at
Sublessor's option, shall be deemed to be occupying the Subleased Premises as a
tenant at will at the base rental equal to one hundred and twenty five percent
(125%) of the Basic Rent and shall otherwise remain subject to all the
conditions, provisions and obligations of this Sublease insofar as the same are
applicable to a tenancy at will, including without limitation, the payment of
all additions to Basic Rent provided and all other sums payable hereunder. No
holding over by Sublessee after the expiration or termination of this Sublease
shall be construed to extend or renew the Term or in any other manner be
construed as permission by Sublessor to hold over. Sublessee shall indemnify
and hold Sublessor harmless from and against any and all damages (actual,
-4-
<PAGE>
consequential or otherwise), losses, costs and expenses, including reasonable
attorneys' fees, incurred by Sublessor by reason of such holding over.
16. Care of the Subleased Premises by Sublessee. Sublessee shall maintain
-------------------------------------------
and repair the Subleased Premises in the manner required by the Base Lease and
shall not commit or allow any waste to be committed on any portion of the
Subleased Premises. At the expiration or earlier termination of this Sublease,
Sublessee shall deliver up the Subleased Premises to Sublessor in at least the
same condition as of the date of this Sublease, excepting only ordinary wear and
tear and any casualty damage and/or repairs which are the obligation of the
Landlord under the Base Lease, and also excepting any Modular Offices installed
with Sublessor's consent as set forth in Paragraph 7.
17. Incorporation of Base Lease Terms. To the extent not otherwise
---------------------------------
inconsistent with the agreements and understandings expressed in this Sublease
or applicable only to the original parties to the Base Lease, the terms,
provisions, covenants and conditions of the Base Lease are hereby incorporated
into this Sublease by reference as fully as if completely reproduced herein, and
a) The term "Landlord" as used therein shall refer to Sublessor
hereunder and its successors and assigns; the term "Tenant" as used therein
shall refer to Sublessee hereunder; the term "Lease Term" as used therein
shall refer to the Term hereunder; and the term "Premises" as used therein
shall refer to Subleased Premises herein;
b) In any case where Landlord reserves the right to enter the
Subleased Premises, said right shall inure to the benefit of Sublessor as
well as to Landlord;
c) Sublessee hereby expressly assumes and agrees (i) to perform all
of the terms, obligations, covenants and conditions to be performed by
Sublessor pursuant to the Base Lease which accrue during the Sublease Term
and which relate to the Subleased Premises, and (ii) not to do, suffer or
permit anything to be done which would result in a default under the Base
Lease or cause the Base Lease to be terminated or forfeited, and,
accordingly, except as otherwise provided herein, Sublessee shall be
entitled to all of the rights and benefits of Sublessor as Tenant under the
Base Lease with respect to the Subleased Premises;
d) Sublessor hereby expressly agrees not to do, suffer or permit
anything to be done which would result in a default under the Base Lease or
cause the Base Lease to be terminated or forfeited, except pursuant to a
right specifically provided to Sublessor therein;
e) To the extent that any notice or consent is required under this
Sublease, Sublessee shall provide copies of all such notices to Sublessor;
f) Sublessee agrees to promptly provide Sublessor with any notices
received from Landlord which affect the Subleased Premises; and
g) Sublessor agrees to promptly provide Sublessee with any notices
received from Landlord which affect the Subleased Premises.
-5-
<PAGE>
18. Security Deposit. Upon the execution of this Sublease, Sublessee
----------------
shall deposit with Sublessor $14,912.50 (the "Security Deposit"), as security
----------------
for the faithful performance and observance by Sublessee of the terms,
provisions, agreements, covenants and conditions of this Sublease. The Security
Deposit shall not be considered an advance payment of Basic Rent or Additional
Charges, and the Security Deposit shall not be considered a measure of
Sublessor's damages in case of the occurrence of any default under this
Sublease. Sublessee shall not be entitled to receive any interest on the
Security Deposit and Sublessor may commingle the same with other monies of
Sublessor. In the event Sublessee defaults in respect to any of the terms,
provisions, agreements, covenants and conditions of this Sublease including, but
not limited to, the payment of Basic Rent or Additional Charges, Sublessor may,
at Sublessor's option, from time to time, without prejudice to any other remedy,
use, apply or retain the whole or any part of the Security Deposit not
theretofore applied to Basic Rent or Additional Charges to the extent necessary
to make good any arrears of Basic Rent or Additional Charges or any damage,
injury, expense or liability caused by such default. If Sublessor shall ever
use the Security Deposit not theretofore applied to Basic Rent to pay the sums
described above, and if this Sublease has not terminated, Sublessee shall
immediately deposit with Sublessor additional monies equal to the amount so used
within ten (10) days after request therefor. If Sublessee shall fully and
faithfully comply with all of the terms, provisions, agreements, covenants and
conditions of this Sublease, then the Security Deposit shall be returned to
Sublessee within thirty (30) days after the termination or expiration of this
Sublease (provided such termination is not a result of a default by Sublessee).
19. Sublessee's Construction. Sublessor consents to the construction by
------------------------
Sublessee of a demising wall between the copy room/work room and the space to be
subleased by Sublessee, as shown on Exhibit B hereto. Such work shall be
---------
completed in a good and workmanlike manner using first class materials and to
Sublessor's reasonable satisfaction, at the sole cost and expense of Sublessee.
At Sublessor's option, Sublessee shall remove the demising wall at the
expiration or earlier termination of this Sublease and restore the affected area
to its condition at the commencement of this Sublease.
20. Notices. All notices or requests provided for hereunder shall be in
-------
writing and shall be either delivered by hand or sent by United States
Registered or Certified Mail, return receipt requested, postage prepaid, if to
Sublessor, to M. Chad McBride, Chief Financial Officer, Novations Group, Inc.,
5314 North 250 West, Suite 320, Provo, Utah 84604; or if for Sublessee, at the
Subleased Premises, Attention: Stephen W. Fulling. All such notices shall be
deemed received either when hand delivered or two (2) business days after being
placed in the United States Mail in the manner set forth above. The parties
hereto shall have the right from time to time to change their respective address
by at least five (5) days prior written notice to the other party.
21. Governing Law. THIS SUBLEASE SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF UTAH.
22. Interest on Sublessee's Obligations. All amounts owed by Sublessee to
-----------------------------------
Sublessor under this Sublease shall bear interest from the date due until paid
at the lesser of (i) the maximum, nonusurious rate permitted by law or (ii)
eighteen percent (18%) per annum, but the payment of such interest shall not
excuse or cure the Event of Default.
-6-
<PAGE>
23. Severability. In the event that any one or more of the provisions
------------
contained in this Sublease shall be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision hereof; and this Sublease shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.
24. Attorneys' Fees. If any action at law or in equity, including an
---------------
action for declaratory relief, is brought to enforce or interpret the provision
of this Sublease, the prevailing party shall be entitled to recover reasonable
attorneys' fees from the other party.
25. Amendments. This sublease may not be altered, changed or amended,
----------
except by an instrument in writing executed by all parties hereto.
26. NO REPRESENTATIONS OR WARRANTIES. SUBLESSEE HEREBY EXPRESSLY
--------------------------------
ACKNOWLEDGES AND AGREES THAT SUBLESSOR HAS MADE NO REPRESENTATIONS OR WARRANTIES
TO SUBLESSEE AS TO THE USE OR CONDITION OF THE SUBLEASED PREMISES OR THE
BUILDING OR AS TO THE ADEQUACY OF ANY EQUIPMENT (INCLUDING THE HEATING,
VENTILATING OR AIR CONDITIONING EQUIPMENT), EITHER EXPRESS OR IMPLIED, AND
SUBLESSOR EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY THAT THE SUBLEASED PREMISES
ARE SUITABLE FOR SUBLESSEE'S INTENDED COMMERCIAL PURPOSE OR ANY OTHER IMPLIED
WARRANTY REGARDING THE SUBLEASED PREMISES. IN ADDITION, EXCEPT AS HEREIN
EXPRESSLY PROVIDED, SUBLESSEE EXPRESSLY ACKNOWLEDGES AND AGREES THAT SUBLESSEE'S
OBLIGATION TO PAY BASIC RENT OR ANY OTHER SUMS DUE HEREUNDER IS NOT DEPENDENT
UPON THE CONDITION OF THE SUBLEASED PREMISES OR THE PERFORMANCE BY SUBLESSOR OF
ITS DUTIES OR OBLIGATIONS HEREUNDER (OR BY LANDLORD OF ITS DUTIES OR OBLIGATIONS
UNDER THE BASE LEASE), AND THAT SUBLESSEE WILL CONTINUE TO PAY BASIC RENT AND
ALL OTHER SUMS PROVIDED FOR HEREIN TO BE PAID BY SUBLESSEE WITHOUT ABATEMENT,
SET-OFF, OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY SUBLESSOR OF IT DUTIES OR
OBLIGATIONS HEREUNDER (OR BY LANDLORD OF ITS DUTIES OR OBLIGATIONS UNDER THE
BASE LEASE), EXPRESS OF IMPLIED, SUBLESSOR AND SUBLESSEE EXPRESSLY AGREE THAT
THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER KIND ARISING OUT OF THIS SUBLEASE
AND THAT ALL EXPRESS OR IMPLIED WARRANTIES IN CONNECTION HEREWITH ARE EXPRESSLY
DISCLAIMED.
27. Quiet Enjoyment. Provided Sublessee has performed all of the terms,
---------------
covenants, agreements and conditions of this Sublease Agreement, Sublessee shall
peaceably and quietly hold and enjoy the Subleased Premises against Sublessor
and all persons claiming by, through or under Sublessor, for the Term herein
described, subject to the provisions and conditions of this Sublease and of the
Base Lease.
28. Entire Agreement. This Sublease constitutes the entire agreement
----------------
between Sublessee and Sublessor and supersedes all prior agreements (whether
written or otherwise)
-7-
<PAGE>
which may exist between the parties with regard to the lease and use of the
Subleased Premises by Sublessee.
29. Consent by Landlord. This Sublease shall be effective only upon
-------------------
Landlord's execution of the Landlord Consent set forth below.
30. Brokers. Sublessee warrants and represents that it has not dealt with
-------
any real estate brokers and/or salesman in connection with the negotiation or
execution of this Sublease and no such broker or salesman has been involved in
connection with this Sublease. Sublessee agrees to defend, indemnify and hold
harmless the Sublessor from and against any and all costs, expenses, attorneys'
fees or liability for any compensation, commission and charges claimed by any
real estate broker and/or salesman, due acts of Sublessee or Sublessee's
representatives.
-8-
<PAGE>
EXECUTED in multiple counterparts, each of which shall have the force and
effect of an original, as of this 15th day of February, 1999.
<TABLE>
<S> <C>
SUBLESSEE: SUBLESSOR:
imall Incorporated Novations Group, Inc.
A Nevada corporation A Delaware corporation
By:_______________________________ By:_____________________________
Name:_____________________________ Name:___________________________
Title:____________________________ Title:__________________________
</TABLE>
LANDLORD CONSENT
----------------
The undersigned, being the Landlord under the Base Lease (as that term is
defined in the foregoing Sublease Agreement), hereby consents: (a) to the
foregoing Sublease Agreement, (b) to the installation by Sublessee of the
Modular Offices (as that term is defined in the foregoing Sublease Agreement and
(c) to the alterations to be performed by Sublessee as set forth in Paragraph 19
of the foregoing Sublease Agreement.
Executed under seal as of this 16th day of February, 1999.
Novations Partners, L.L.C.
By:_____________________________
Name:
Title: Managing Member
-9-
<PAGE>
Exhibit 10.23
AGREEMENT AND PLAN OF MERGER
among
ACQUIROR:
iMALL, INC.
________________________
SUB:
PAYMENT SOLUTIONS, INC.
________________________
TARGET:
PURE PAYMENTS INCORPORATED
________________________
PRINCIPALS:
DANIEL DEVLIN AND JEFFREY LIPP
March 8, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
ARTICLE I. DEFINITIONS.................................................... 1
1.1. Defined Terms..................................................... 1
1.2. Other Defined Terms............................................... 4
ARTICLE II. THE MERGER.................................................... 5
2.1. Approval of Merger................................................ 5
2.2. The Merger........................................................ 5
2.3. Effect of the Merger.............................................. 5
2.4. Effect on Capital Stock........................................... 5
2.5. Assumption of Options............................................. 6
2.6. Charter Documents, Directors, Officers............................ 7
2.7. Escrow of Acquiror Common Stock................................... 7
2.8. Capital Stock of Sub.............................................. 7
2.9. Delivery of Certificates.......................................... 8
2.10. No Further Ownership Rights in Target Stock....................... 8
2.11. Lost, Stolen or Destroyed Certificates............................ 8
2.12. Tax Free Reorganization........................................... 8
2.13. Transfer Taxes.................................................... 9
ARTICLE III. THE CLOSING.................................................... 9
3.1. The Closing....................................................... 9
3.2. Deliveries at the Closing......................................... 9
ARTICLE IV. REPRESENTATIONS AND WARRANTIES CONCERNING THE TARGET........... 9
4.1. Organization, Qualification and Corporate Power................... 9
4.2. Authorization of Transaction...................................... 9
4.3. Noncontravention.................................................. 10
4.4. Brokers' Fees..................................................... 10
4.5. Investment........................................................ 10
4.6. Target Stock...................................................... 11
4.7. Capitalization.................................................... 11
4.8. Title to Assets................................................... 12
4.9. Financial Statements.............................................. 12
4.10. Events Subsequent to Target's Most Recent Fiscal Month End........ 12
4.11. Litigation; Compliance with Laws.................................. 13
4.12. Tax Matters....................................................... 13
4.13. Intellectual Property; Proprietary Information of Third parties... 14
4.14. Contracts......................................................... 15
4.15. Real Property..................................................... 16
4.16. Tangible Assets................................................... 17
4.17. Undisclosed Liabilities........................................... 17
4.18. Notes and Accounts Receivable..................................... 17
4.19. Powers of Attorney................................................ 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
4.20. Insurance......................................................... 17
4.21. Product Liability................................................. 18
4.22. Guaranties........................................................ 18
4.23. Environment, Health, and Safety................................... 18
4.24. Employees......................................................... 18
4.25. Employee Benefits................................................. 19
4.26. Transactions With the Target...................................... 20
4.27. Disclosure........................................................ 21
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR AND THE SUB..... 21
5.1. Organization, Qualification and Corporate Power................... 21
5.2. Authorization of Transaction...................................... 21
5.3. Noncontravention.................................................. 21
5.4. Brokers' Fees..................................................... 22
5.5. Investment........................................................ 22
5.6. Capitalization.................................................... 22
5.7. Title to Assets................................................... 23
5.8. SEC Documents..................................................... 23
5.9. Events Subsequent to September 30, 1998........................... 23
5.10. Litigation; Compliance With Laws.................................. 24
5.11. Tax Matters....................................................... 24
5.12. Intellectual Property; Proprietary Information of Third parties... 25
5.13. Contracts......................................................... 26
5.14. Employees......................................................... 26
5.15. Transactions With Affiliates...................................... 26
5.16. Disclosure........................................................ 27
ARTICLE VI. PRE-CLOSING COVENANTS.......................................... 27
6.1. General........................................................... 27
6.2. Shareholders' Consent............................................. 27
6.3. Notices and Consents.............................................. 27
6.4. Operation of Business............................................. 27
6.5. Preservation of Business.......................................... 28
6.6. Full Access....................................................... 28
6.7. Notice of Developments............................................ 28
6.8. Exclusivity....................................................... 28
ARTICLE VII. POST-CLOSING COVENANTS......................................... 29
7.1. General........................................................... 29
7.2. Litigation Support................................................ 29
7.3. Transition........................................................ 29
7.4. Confidentiality................................................... 29
7.5. Escrow Agreement.................................................. 30
7.6. Employment Agreements............................................. 30
7.7. Covenant Not to Compete........................................... 30
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
7.8. Merger Shares..................................................... 31
ARTICLE VIII. CONDITIONS TO OBLIGATION TO CLOSE.............................. 32
8.1. Conditions to Obligation of the Acquiror and Sub.................. 32
8.2. Conditions to Obligation of the Principals........................ 33
ARTICLE IX. REMEDIES FOR BREACHES OF THIS AGREEMENT........................ 34
9.1. Survival of Representations and Warranties........................ 34
9.2. Indemnification Provisions for Benefit of the Acquiror............ 35
9.3. Indemnification Provisions for Benefit of the Principals.......... 36
9.4. Procedure for Claims between Parties.............................. 36
9.5. Matters Involving Third parties................................... 37
9.6. Determination of Adverse Consequences............................. 38
9.7. Other Indemnification Provisions.................................. 38
ARTICLE X. TAX MATTERS.................................................... 38
10.1. Tax Periods Ending on or Before the Closing Date.................. 38
10.2. Tax Periods Beginning Before and Ending After the Closing Date.... 38
10.3. Refunds and Tax Benefits.......................................... 39
10.4. Cooperation on Tax Matters........................................ 39
10.5. Tax Sharing Agreements............................................ 40
10.6. Certain Taxes..................................................... 40
ARTICLE XI. TERMINATION.................................................... 40
11.1. Termination of Agreement.......................................... 40
11.2. Effect of Termination............................................. 41
ARTICLE XII. MISCELLANEOUS.................................................. 41
12.1. No Third-party Beneficiaries...................................... 41
12.2. Entire Agreement.................................................. 41
12.3. Succession and Assignment......................................... 41
12.4. Counterparts...................................................... 41
12.5. Headings.......................................................... 41
12.6. Notices........................................................... 42
12.7. Governing Law..................................................... 42
12.8. Amendments and Waivers............................................ 42
12.9. Severability...................................................... 43
12.10. Expenses.......................................................... 43
12.11. Construction...................................................... 43
12.12. Incorporation of Exhibits and Schedules........................... 43
</TABLE>
Exhibit A-Form of Escrow Agreement
Exhibit B-Target's Financial Statements
Exhibit C-Form of Employment
Exhibit D-Form of Opinion of Counsel to the Principals
Exhibit E-Form of Opinion of Counsel to the Acquiror
iii
<PAGE>
Schedules-Exceptions to Representations and Warranties
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement is entered into on March 8, 1999, by and among (i) iMALL,
Inc., a Nevada corporation (the "Acquiror"), (ii) Payment Solutions, Inc., a
--------
Delaware corporation ("Sub"), (iii) Pure Payments Incorporated a Delaware
---
corporation (the "Target"), and (iv) Daniel Devlin, an individual and Jeffrey
------
Lipp, an individual (together, the "Principals")
----------
WHEREAS, the respective boards of directors of the Acquiror, the Sub and
the Target, and the requisite number of shareholders of the Target, have
approved the combination of the businesses of the Acquiror and the Target
pursuant to this Agreement; and
WHEREAS, in furtherance of such combination, the respective boards of
directors of the Acquiror, the Sub and the Target have approved the merger of
the Sub with and into the Target with the Target being the surviving corporation
(the "Merger") pursuant to the terms of this Agreement and in accordance with
------
the applicable provisions of the Delaware General Corporation Law (the "DGCL");
----
and
WHEREAS, pursuant to the Merger, each outstanding share of capital stock of
the Target shall be converted into the right to receive shares of capital stock
of the Acquiror, upon the terms and subject to the conditions set forth herein;
and
WHEREAS, the parties intend that the transaction contemplated herein will
qualify as a reorganization within the meaning of Section 368(a) of the Code;
and
WHEREAS, in connection with the Merger, the parties desire to set forth
certain representations, warranties and covenants made by each to the other or
others as an inducement to the consummation of the Merger, upon the terms and
subject to the conditions contained herein; and
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the parties agree as follows.
ARTICLE I.
DEFINITIONS
-----------
1.1. Defined Terms. As used herein, the terms below have the following
-------------
meanings:
"Accredited Investor" has the meaning set forth in Regulation D promulgated
-------------------
under the Securities Act.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
--------------------
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, net Taxes (after taking
into account any Tax savings), liens, losses, expenses, and fees, including
court costs and reasonable attorneys' fees and expenses.
<PAGE>
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
---------
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of Code
----------------
(S)1504(a).
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Confidential Information" means any information concerning the businesses
------------------------
and affairs of a party that is not already generally available to the public.
"Controlled Group of Corporations" has the meaning set forth in Code
--------------------------------
(S)1563.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
---------------------
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) qualified defined benefit retirement plan or
arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA (S)3(2).
-----------------------------
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA (S)3(1).
-----------------------------
"Environmental, Health and Safety Laws" means the Comprehensive
-------------------------------------
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and Recovery Act of 1976, and the Occupational Safety and Health
Act of 1970, each as amended, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local, and foreign governments (and all
agencies thereof) concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or chemical, industrial,
hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Extremely Hazardous Substance" has the meaning set forth in (S)302 of the
-----------------------------
Emergency Planning and Community Right-to-Know Act of 1986, as amended.
"Fiduciary" has the meaning set forth in ERISA (S)3(21).
---------
"GAAP" means United States generally accepted accounting principles as in
----
effect from time to time.
"Knowledge" means actual knowledge of the officers, directors or
---------
individuals, as the case may be, provided that such individuals have not
intentionally avoided such knowledge.
2
<PAGE>
"Multiemployer Plan" has the meaning set forth in ERISA (S)3(37).
------------------
"Ordinary Course of Business" means the ordinary course of business
---------------------------
consistent with past custom and practice (including with respect to quantity and
frequency).
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Person" means an individual, a partnership, a corporation, an association,
------
a joint stock company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Prohibited Transaction" has the meaning set forth in ERISA (S)406 and Code
----------------------
(S)4975.
"Reportable Event" has the meaning set forth in ERISA (S)4043.
----------------
"SEC" means the Securities and Exchange Commission.
---
"SEC Documents" means all documents filed by the Acquiror with the SEC
-------------
since January 1, 1996.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
-----------------------
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
-----------------
or other security interest, other than (i) mechanic's, materialmen's, and
----------
similar liens, (ii) liens for Taxes not yet due and payable, (iii) purchase
money liens and liens securing rental payments under capital lease arrangements,
and (iv) other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
"Target's Most Recent Balance Sheet" means the balance sheet contained
----------------------------------
within the Target's Financial Statements.
"Tax" or "Taxes" shall mean any federal, state, local, foreign or other
--- -----
Tax, levy, impost, fee, assessment or other governmental charge, including
without limitation income, estimated income, gross receipts, business,
occupation, franchise, property, payroll, personal property, sales, transfer,
use, employment, commercial rent, occupancy, escheat or withholding Taxes, and
any premium, together with any interest, penalties and additions in connection
with the foregoing.
"Tax Return" shall mean any return (including any information return),
----------
declaration, report, estimate, statement, schedule, notice, form or other
document or information filed with or submitted to, or required to be filed with
or submitted to, any governmental body in connection with the determination,
assessment, collection or payment of any Tax or in connection with the
administration, implementation or enforcement of, or compliance with, any legal
requirement relating to any Tax.
3
<PAGE>
1.2. Other Defined Terms. As used herein, the terms below have the
-------------------
meanings defined for such terms in the following sections:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Acquiror Preface
Acquiror Indemnified Party................ 9.2.1
Acquiror Common Stock..................... 2.4
Acquiror's Most Recent Balance Sheet...... 5.7
Acquiror's Series A Preferred Stock....... 5.6
Certificate of Designation................ 5.6
Certificates.............................. 2.9
Change of Control......................... 7.8.3
Claim Notice.............................. 9.4.1
Closing................................... 3.1
Closing Date.............................. 3.1
DGCL...................................... Preface
Effective Time............................ 2.2
Effective Date............................ 2.2
Escrow Agreement.......................... 2.7
Holdback Amount........................... 2.7
Indemnified Party......................... 9.5.1
Indemnifying Party........................ 9.5.1
Indemnification Termination Date.......... 2.7
Indemnitor................................ 9.4.1
Intellectual Property..................... 4.13.1
Material Adverse Effect................... 4.1
Merger.................................... Preface
Merger Shares............................. 2.4
Principals................................ Preface
Proposed Acquisition
Transaction............................. 6.8
Right of First Refusal.................... 7.8.4
Sellers................................... 2.7
Series A Agreements....................... 4.7
Shareholders.............................. 2.1
Shareholders' Consent..................... 2.1
Sub....................................... Preface
Surviving Corporation..................... 2.2
Target.................................... Preface
Target Stock............................. 2.9
Target's Financial Statements............. 4.9
Target's Most Recent Fiscal
Month End............................... 4.9
Target's Series A Preferred
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Stock................................... 4.7
Third party Claim......................... 9.5.1
</TABLE>
ARTICLE II.
THE MERGER
----------
2.1. Approval of Merger. The Merger shall be submitted for adoption and
------------------
approval to the shareholders of the Target (the "Shareholders") in a manner
------------
allowed under the DGCL (the "Shareholders' Consent"). The Acquiror, the Sub and
---------------------
the Target shall coordinate and cooperate with respect to the timing of the
Shareholders' Consent and the Principals agree that they shall vote in favor of
and approve this Agreement and the Merger.
2.2. The Merger. Promptly following the execution of this Agreement and
----------
as soon as is practicable after the satisfaction or waiver of the other
conditions contained herein, the parties hereto will cause the Merger to be
consummated by filing with the Secretary of State of the State of Delaware the
Certificate of Merger, in such form or forms as are required by, and executed in
accordance with, the relevant provisions of the DGCL (the time of such filing
being the "Effective Time" and the date upon which the Effective Time occurs,
--------------
being the "Effective Date"). At the Effective Time, in accordance with this
--------------
Agreement and the DGCL, the Sub shall be merged with and into the Target, the
separate existence of the Sub shall cease and the Target shall continue as the
surviving corporation under the corporate name it possesses immediately prior to
the Effective Time. The Target, as the surviving corporation after the Merger,
is sometimes referred to herein as the "Surviving Corporation."
---------------------
2.3. Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchise of Sub and Target shall vest in the Surviving
Corporation. As of the Effective Time, the Surviving Corporation will be a
wholly-owned subsidiary of the Acquiror.
2.4. Effect on Capital Stock. The number of shares of Acquiror common
-----------------------
stock, par value $.008 (the "Acquiror Common Stock") to be issued (including
---------------------
Acquiror Common Stock to be reserved for issuance upon exercise of any of the
Target's options to be assumed by Acquiror pursuant to Section 2.5) in exchange
for the acquisition by Acquiror of all outstanding capital stock of Target and
all outstanding unexpired and unexercised options to acquire capital stock (as
set forth on Schedule 1 hereto and collectively referred to as the "Options") of
-------
the Target shall be Four Hundred and Fifty Thousand (450,000) (the "Merger
------
Shares").
- ------
2.4.1. Conversion of Target Common Stock. Each share of Target
---------------------------------
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted, subject to Section 2.4.3 and Section 2.4.4, into the right
to receive .05863746 of a share of Acquiror Common Stock. All such shares of
Target Common Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate previously
representing any such shares shall thereafter represent the shares of Acquiror
Common Stock into
5
<PAGE>
which such Target Common Stock has been converted. Certificates previously
representing shares of Target Common Stock shall be exchanged for certificates
representing whole shares of Acquiror Common Stock issued in consideration
therefor upon the surrender of such certificates in accordance with Section 2.7
(or in the case of a lost, stolen or destroyed certificate, upon delivery of an
affidavit (and bond, if required) in the manner provided in Section 2.9).
2.4.2. Conversion of Target Preferred Stock. Each share of Target
------------------------------------
Preferred Stock issued and outstanding immediately prior to the Effective Time
shall be converted, subject to Section 2.4.3 and Section 2.4.4, into the right
to receive .05863746 of a share of Acquiror Common Stock. All such shares of
Target Preferred Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate previously
representing any such shares shall thereafter represent the shares of Acquiror
Common Stock into which such Target Preferred Stock has been converted.
Certificates previously representing shares of Target Preferred Stock shall be
exchanged for certificates representing whole shares of Acquiror Common Stock
issued in consideration therefor upon the surrender of such certificates in
accordance with Section 2.7 (or in the case of a lost, stolen or destroyed
certificate, upon delivery of an affidavit (and bond, if required) in the manner
provided in Section 2.9).
2.4.3. Canceled Shares. Each share of capital stock of the Target
---------------
held in the treasury of the Target shall automatically cease to be outstanding,
be canceled and retired and no payment or conversion into Acquiror Common Stock
will be made with respect thereto.
2.4.4. Fractional Shares. No certificates or scrip representing
-----------------
fractional shares of Acquiror shall be issued in connection with the Merger, and
such fractional share interests will be canceled and thereafter will not entitle
the owner thereof to vote or to any rights as a stockholder of Acquiror.
2.5. Assumption of Options.
---------------------
2.5.1. At the Effective Time, each outstanding Option, whether vested
or unvested, shall be assumed by Acquiror and constitute an option to acquire,
on the same terms and conditions as were applicable under such Option prior to
the Effective Time, the number (rounded down to the nearest whole number) of
shares of Acquiror Common Stock as the holder of such Option would have been
entitled to receive pursuant to the Merger had such holder exercised such Option
in full immediately prior to the Effective Time (not taking into account whether
or not such Option was in fact exercisable), at a price per share equal to (x)
the aggregate exercise price for the Target Common Stock purchasable pursuant to
such Option (not taking into account whether or not such Option was in fact
exercisable) divided by (y) the number of shares of Acquiror Common Stock deemed
purchasable pursuant to such assumed Option (rounded to the nearest whole
number). At and after the Effective Time, Acquiror will honor all obligations
with respect to such Options under the terms of such Options as in effect on the
date hereof.
2.5.2. As soon as practicable after the Closing Date, Acquiror shall
deliver to each holder of an outstanding Option an appropriate notice setting
forth such holder's rights pursuant thereto, and such Option shall otherwise
continue in effect on the same terms and conditions as were in effect prior to
the Effective Time.
6
<PAGE>
2.5.3. It is the intention of the parties that the Options assumed by
the Acquiror qualify following the Effective Time as incentive stock options as
defined in Section 422 of the Code to the extent the Options qualified as
incentive stock options immediately prior to the Effective Time.
2.6. Charter Documents, Directors, Officers. At and as of the Effective
--------------------------------------
Time, (i) the Certificate of Incorporation and the By-laws of the Target shall
be the Certificate of Incorporation and By-laws of the Surviving Corporation
until thereafter amended as provided by the DGCL, (ii) the directors of the Sub
immediately prior to the Effective Time will be the initial directors of the
Surviving Corporation, until their successors are elected and qualified and
(iii) the officers of the Sub immediately prior to the Effective Time will be
the initial officers of the Surviving Corporation, until their successors are
elected and qualified.
2.7. Escrow of Acquiror Common Stock. Notwithstanding the provisions of
-------------------------------
this Article 2, Target shall place in escrow pursuant to the terms of the escrow
agreement (the "Escrow Agreement") in form and substance as set forth on Exhibit
---------------- -------
A hereto that number of Acquiror Common Stock equal to 25% of the total Merger
- -
Shares of the Principals (the "Holdback Amount") allocated on a pro rata basis
---------------
between both Principals. On the date eighteen (18) months after the Closing Date
(or the first business day thereafter) (the "Indemnification Termination Date"),
--------------------------------
the escrow agent will distribute all shares of Merger Shares remaining in the
escrow account from the Holdback Amount after the escrow agent's application of
amounts held pursuant to the Escrow Agreement in payment of the Target and
Principals' indemnification obligations to Acquiror and Sub to an account in the
United States designated by the Stockholder Representative (as defined in the
Escrow Agreement) to the escrow agent in writing at least ten (10) business days
prior to the Indemnification Termination Date. The escrow agent may withhold
from the payment any amounts then in dispute relating to indemnification
obligations of the indemnifying shareholders (the "Sellers") arising under this
Agreement and the Escrow Agreement.
2.8. Capital Stock of Sub. At the Effective Time, each share of Common
--------------------
Stock of Sub issued and outstanding immediately prior to the Effective Time
shall be converted into the right to receive one (1) validly issued, fully paid
and nonassessable share of Common Stock of Surviving Corporation. Each stock
certificate of Sub evidencing ownership of any such shares shall continue to
evidence ownership of such shares of capital stock of the Surviving Corporation.
2.9. Delivery of Certificates. At the Effective Time, Acquiror shall make
------------------------
available, and each holder of Target Common Stock or Target Preferred Stock
(together with the Target Common Stock, the "Target Stock") shall be entitled to
------------
receive upon surrender to Acquiror or its representatives of any certificate or
certificates evidencing such Target Stock (the "Certificates") for cancellation
------------
together with any reasonable supporting documentation requested by Acquiror,
including a tax identification number, the aggregate number of Merger Shares to
be issued pursuant to Section 2.4 into which such Target Stock shall have been
converted in the Merger, and upon such surrender of each Certificate and
delivery by Acquiror of the aggregate number of Merger Shares in exchange
therefor, such Certificates shall forthwith be canceled. Until so surrendered,
each Certificate shall be deemed for all corporate purposes to evidence only the
right to receive upon such surrender the aggregate number of Merger Shares into
which the Target Stock represented thereby shall have been converted.
7
<PAGE>
2.10. No Further Ownership Rights in Target Stock. All shares of Acquiror
-------------------------------------------
Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article 2 shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the shares of Target
Stock theretofore represented by such Certificates, and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Target Stock which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Article 2, except as otherwise provided by
law.
2.11. Lost, Stolen or Destroyed Certificates. In the event that any
--------------------------------------
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Certificate to be lost,
stolen or destroyed and, if required by Acquiror, the posting by such Person of
a bond in such reasonable amount as Acquiror may direct as indemnity against any
claim that may be made against it with respect to such Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Certificate the
Acquiror Common Stock and any unpaid dividends or distributions with respect to
Acquiror Common Stock, to which they are entitled pursuant hereto.
2.12. Tax Free Reorganization. The Merger is intended to be a
-----------------------
reorganization within the meaning of Section 368(a) of the Code and this
Agreement is intended to be a "plan of reorganization" within the meaning of the
regulations promulgated under Section 368 of the Code, and the Acquiror will not
take any action contrary to such intention.
2.13. Transfer Taxes. Each holder of shares of Target Stock shall be
--------------
responsible for any stock transfer taxes and any sales, use or other taxes
imposed by reason of the exchange by such holder of shares of Target Stock for
the Merger Shares as provided hereunder and any deficiency, interest or penalty
asserted with respect thereto.
ARTICLE III.
THE CLOSING
3.1. The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall take place at the offices of Latham & Watkins,
-------
633 West Fifth Street, Suite 4000, Los Angeles, California, commencing at 9:00
a.m. local time, on the business day following the satisfaction or waiver of
the conditions contained herein (other than conditions with respect to actions
the respective parties will take at the Closing itself) (the "Closing Date");
------------
provided, however, that the Closing Date shall be no later than March 16, 1999.
- -------- -------
3.2. Deliveries at the Closing. At the Closing, (i) the Principals will
-------------------------
deliver to the Acquiror the various certificates, instruments, and documents
referred to in Section 8.1 below and (ii) the Acquiror will deliver to the
Principals the various certificates, instruments, and documents referred to in
Section 8.2 below.
8
<PAGE>
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
CONCERNING THE TARGET
---------------------
Each of the Principals and Target represent and warrant to the Acquiror and
the Sub that the statements contained in this Article 4 are correct and complete
as of the date of this Agreement and will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Article 4), except as
set forth in the Disclosure Schedules attached hereto as of the date hereof.
4.1. Organization, Qualification and Corporate Power. The Target is a
-----------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation. The Target is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the lack of such
qualification would not have a material adverse effect on the business,
financial condition, operations, results of operations or future prospects
("Material Adverse Effect") of the Target. The Target has full corporate power
-----------------------
and authority to carry on the businesses in which it is engaged and to own and
use the properties owned and used by it. Schedule 4.1 hereto lists the directors
------------
and officers of the Target.
4.2. Authorization of Transaction. The Target and the Principals have
----------------------------
full power and authority to execute and deliver this Agreement and to perform
its or their obligations hereunder. Assuming the due authorization, execution
and delivery by the Acquiror and the Sub, this Agreement constitutes the valid
and legally binding obligation of the Target and the Principals, enforceable in
accordance with its terms and conditions, except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) rights of acceleration and the availability
of equitable remedies may be limited by equitable principles of general
applicability. Other than the filings pursuant to the Merger, neither the Target
nor the Principals need give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
4.3. Noncontravention. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Target or either of the Principals is
subject or any provision of the charter or bylaws of the Target or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which the Target or either of the Principals
is a party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest upon any of its assets),
except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation, failure to give notice, or Security
Interest would not have a Material Adverse Effect on the Target or either of the
Principals or impede the ability of the parties to consummate the transactions
contemplated by this Agreement. Other than the filings pursuant to the Merger,
neither the Target nor the Principals need give any notice to, make any filing
with, or
9
<PAGE>
obtain any authorization, consent, or approval of any government or governmental
agency in order for the parties to consummate the transactions contemplated by
this Agreement, except where the failure to give notice, to file, or to obtain
any authorization, consent, or approval would not have a Material Adverse Effect
on the Target or the Principals, as the case may be, or impede the ability of
the parties to consummate the transactions contemplated by this Agreement.
4.4. Brokers' Fees. Neither of the Principals nor the Target has any
-------------
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement for which
the Acquiror could become liable or obligated.
4.5. Investment.
----------
4.5.1. Each of the Sellers of Target Stock understands that (i) the
Merger Shares have not been registered under the Securities Act, nor qualified
under the securities laws of any other jurisdiction, (ii) the Merger Shares
cannot be resold unless it subsequently is registered under the Securities Act
and qualified under applicable state securities laws or foreign securities laws,
unless exemptions from such registration and qualification requirements are
available, and (iii) the Seller has no right to require such registration or
qualification.
4.5.2. The Merger Shares to be received by the Sellers pursuant to
this Agreement will be acquired for each Seller's own account and not with a
view to, or intention of, distribution thereof in violation of the Securities
Act, any applicable state securities laws or foreign securities laws, and the
Merger Shares will not be disposed of in contravention of the Securities Act or
any applicable state securities laws or foreign securities laws.
4.5.3. Each Seller is an accredited investor as such term is defined
in Section 501 of Regulation D of the Securities Act, has substantial knowledge
and experience in financial and business matters, has specific experience making
investment decisions of a similar nature, and is capable, without the use of a
financial advisor, of utilizing and analyzing the information made available in
connection with the acquisition of the Merger Shares under this Agreement and of
evaluating the merits and risks of an investment in the Merger Shares. Each
Seller will provide the Acquiror with such information concerning any prior
investment experience, business or professional experience and other information
as the Acquiror may deem necessary to further evaluate the foregoing
representations.
4.5.4. Each Seller has carefully reviewed and understands the risks
of, and other considerations relating to, an investment in the Merger Shares.
4.5.5. Each Seller is able to bear the economic risk of his
investment in the Merger Shares for an indefinite period of time because the
Merger Shares have not been registered under the Securities Act and, therefore,
cannot be sold unless subsequently registered under the Securities Act or an
exemption from such registration is available and are subject to additional
restrictions, including without limitation, rights of repurchase, rights of
first refusal and restrictions on transfer as provided in this Agreement.
10
<PAGE>
4.5.6. Each Seller has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Merger Shares, has had full access to such other information concerning the
Acquiror as the Shareholder has requested and has not received and is not
relying upon any written offering literature or prospectus.
4.6. Target Stock. Each Seller holds of record and owns beneficially the
------------
Target Stock set forth next to his name in Schedule 1 hereto, free and clear of
----------
any restrictions on transfer (other than any restrictions under the Securities
Act and state securities laws), Taxes, Security Interests, options, warrants,
purchase rights, contracts, commitments, equities, claims, and demands. None of
the Sellers is a party to any option, warrant, purchase right, or other contract
or commitment that could require the Seller to sell, transfer, or otherwise
dispose of any capital stock of the Target (other than this Agreement). None of
the Sellers is not a party to any voting trusts or agreements, proxy, or other
agreement or understanding with respect to the voting of any capital stock of
the Target.
4.7. Capitalization. The authorized capital stock of the Target consists
--------------
of 15,500,000 shares of common stock, par value $.0001 ("Target's Common Stock")
---------------------
and 1,500,000 shares of preferred stock, par value $.0001 per share, all of
which shares have been designated Series A Preferred Stock ("Target's Series A
-----------------
Preferred Stock"). As of the Closing Date, 5,630,458 shares of the Target's
- ---------------
Common Stock and 1,499,600 shares of the Target's Series A Preferred Stock will
be validly issued and outstanding, fully paid and nonassessable with no personal
liability attaching to the ownership thereof. The Target's Series A Preferred
Stock is the only series of preferred stock of the Target issued and
outstanding. The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Target are as set forth in its charter and the Series A
Preferred Stock Purchase Agreement and the Investor Rights Agreement
(collectively, the "Series A Agreements"), and all such designations, powers,
-------------------
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws. Except as
set forth in the charter or the Series A Agreements, (i) the capital stock of
the Target is free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act and state securities laws), Taxes,
Security Interests, options, warrants, purchase rights, contracts, commitments,
equities, claims, and demands and (ii) the Target is not a party to any option,
warrant, purchase right, or other contract or commitment that could require the
Target to sell, transfer, or otherwise dispose of any of its capital stock. The
Target has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interest therein or to pay
any dividend or make any other distribution in respect thereof. Except for this
Agreement, there are no voting trusts or agreements, stockholders agreements,
pledge agreements, buy-sell agreements, rights of first refusal, preemptive
rights or proxies relating to any securities of the Target.
4.8. Title to Assets. The Target has good and marketable title to, or a
---------------
valid leasehold interest in, the properties and assets used by it, located on
its premises, or shown on the Target's Balance Sheet or acquired after the date
thereof, free and clear of all Security Interests, except for properties and
assets disposed of in the Ordinary Course of Business since the date of the
Target's Balance Sheet.
11
<PAGE>
4.9. Financial Statements. Attached hereto as Exhibit A are the following
-------------------- ---------
financial statements (collectively the "Target's Financial Statements"): (i)
-----------------------------
unaudited consolidated balance sheets and statements of income as of and for the
3 months ended February 28, 1999 (the "Target's Most Recent Fiscal Month End")
-------------------------------------
for the Target. The Target's Financial Statements fairly reflect the financial
condition of the Target as of such dates and the results of operations of the
Target for such periods; provided, however, that the Target's Financial
-----------------
Statements are prepared on a cash basis, have not been prepared in accordance
with GAAP, and do not include reserves or other such entries in accordance with
GAAP.
4.10. Events Subsequent to Target's Most Recent Fiscal Month End. Since
----------------------------------------------------------
Since the Target's Most Recent Fiscal Month End, there has been no change in the
assets, liabilities or financial condition of the Target, except for changes in
the Ordinary Course of Business which individually or in the aggregate have not
had a Materially Adverse Effect on the Target, and there has not been a Material
Adverse Effect on the Target by any occurrence, state of facts or development,
individually or in the aggregate, whether or not insured against. Without
limiting the generality of the foregoing, since that date the Target has not:
(i) issued any stock, bond or other security (except shares issued in connection
with the exercise of employee stock options), (ii) borrowed any amount or
incurred or become subject to any liability (absolute, accrued or contingent),
except current liabilities incurred in the Ordinary Course of Business and
liabilities under contracts entered into in the Ordinary Course of Business,
(iii) declared or made any payment or distribution to equity holders or
purchased or redeemed any share of its capital stock or other security, (iv)
mortgaged, pledged or subjected to lien any of its assets, tangible or
intangible, other than liens for current Taxes not yet due and payable, except
for mortgages, pledges or liens that do not exceed $50,000 in the aggregate, (v)
sold, assigned or transferred any of its assets except in the Ordinary Course of
Business, or canceled any debt or claim, (vi) suffered any material loss of
property or waived any right of substantial value whether or not in the Ordinary
Course of Business, (vii) made any material change to the Target's employee
benefit plans, (viii) made any change in the Target's accounting principles and
practices, (ix) made any material change in the manner of business or
operations, (x) entered into any material transaction except in the Ordinary
Course of Business or as otherwise contemplated hereby or (xi) entered into any
commitment (contingent or otherwise) to do any of the foregoing.
4.11. Litigation; Compliance with Laws. There is no (i) action, suit,
--------------------------------
claim, proceeding or investigation pending or, to the Knowledge of the Target
and the Principals, threatened against the Target or its assets, at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Target or (iii)
governmental inquiry pending or threatened against or affecting the Target
(including, without limitation, any inquiry as to the qualification of the
Target to hold or receive any license or permit), and, to the Knowledge of the
Target and the Principals, there is no basis for any of the foregoing which, in
each case, could reasonably be expected to have a Material Adverse Effect on the
Target. The Target is not in default with respect to any order, writ, injunction
or decree known to or served upon the Target of any court or of any federal
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign. There is no action or suit by
the Target pending or threatened against others. The Target has complied with
all laws, rules, regulations and orders applicable to its business, operations,
properties, assets, products and services, except for
12
<PAGE>
such failures to comply which, individually and in the aggregate, would not have
a Material Adverse Effect on the Target, and the Target has all necessary
permits, licenses and other authorizations required to conduct its business in
all material respects as conducted. To the Knowledge of the Target and the
Principals, there is no existing rule, regulation or order, whether federal or
state, which would prohibit or restrict the Target from, or otherwise materially
adversely affect the Target in, conducting its business in any jurisdiction in
which it is now conducting business or in which it proposes to conduct business.
4.12. Tax Matters. (i) The Target has timely filed all federal, state,
-----------
county, local and foreign Tax returns required to be filed by it; (ii) all such
Tax returns are complete and accurate; (iii) the Target has paid all Taxes shown
to be due by such returns as well as all other Taxes, assessments and
governmental charges that have become due or payable; (iv) the Target has
withheld and collected all amounts required to be withheld from amounts owing to
employees, creditors and third parties; (v) adequate reserves have been
established for all Taxes accrued but not yet payable; (vi) no deficiency or
adjustment of the Target's federal, state, county, local or foreign Taxes has
been asserted or proposed, or is pending or threatened; (vii) there are no Tax
liens outstanding against the assets, properties or business of the Target other
than liens for current Taxes not yet due and payable; (viii) the Target has
never been a member of any Affiliated Group, or any similar group for Tax
purposes, other than the group of which it is currently a member; (ix) the
Target is not a party to any agreement, contract, arrangement or plan that has
resulted or would result, separately or in the aggregate, in the payment of any
"excess parachute payments" within the meaning of Code (S)280G.
4.13. Intellectual Property; Proprietary Information of Third parties.
---------------------------------------------------------------
4.13.1. Intellectual Property. The Target owns or possesses all
---------------------
licenses or other rights to use all patents, patent applications, trademarks,
trademark applications, service marks, service mark applications, Internet
domain names, trade names, trade dress, logos, trade secrets, software,
copyrights, manufacturing processes, formulae, trade secrets and know how
(collectively, "Intellectual Property") necessary to the conduct of its business
---------------------
as conducted and, to the Knowledge of the Target and the Principals, as proposed
to be conducted, and no claim is pending or, to the Knowledge of the Target,
threatened to the effect that the operations of the Target infringe upon,
misappropriate, violate or conflict with the asserted rights of any other Person
under any Intellectual Property and there is no valid basis for any such claim
(whether or not pending or threatened). No claim is pending or, to the
Knowledge of the Target and the Principals, threatened to the effect that any
such Intellectual Property owned or licensed by the Target, or which the Target
otherwise has the right to use, is invalid or unenforceable by the Target, and,
to the Knowledge of the Target and the Principals, there is no basis for any
such claim (whether or not pending or threatened). The Target has not granted
or assigned to any other Person any right to license or sell the software,
trademarks, service marks, Internet domain names, trade names, trade dress,
logos or trade secrets of the Target. Schedule 4.13.1 hereto sets forth (i) all
---------------
Intellectual Property necessary to the conduct of Target's business as currently
conducted and (ii) all licenses granted to any Person for the use of the
software, trademarks, service marks, Internet domain names, trade names, trade
dress, logos or trade secrets of the Target.
13
<PAGE>
4.13.2. Proprietary Information of Third parties. No third party has
----------------------------------------
claimed in writing or has a valid basis to claim that any Person employed by or
affiliated with the Target has (i) violated or is violating any of the terms or
conditions of such Person's employment, non-competition or nondisclosure
agreement with such third party, (ii) disclosed or is disclosing or utilized or
is utilizing any trade secret or proprietary information or documentation of
such third party or (iii) interfered or is interfering in the employment
relationship between such third party and any of its present or former
employees. No third party has requested in writing information from the Target
which could reasonably be interpreted to suggest that such a claim might be
contemplated. No Person employed by the Target has employed or proposes to
employ, any trade secret or any information or documentation in violation of the
proprietary rights of any former employer, and, to the Knowledge of the Target
and the Principals, no Person employed by the Target has violated any
confidential relationship which such Person may have had with any third party,
in connection with the development, manufacture or sale of any product or
proposed product or the development or sale of any service or proposed service
of the Target and there is no reason to believe there will be any such
employment or violation. None of the execution, delivery or performance of this
Agreement, or the carrying on of the business of the Target as officers,
employees or agents by any officer, director or key employee of the Target or
the conduct of the business of the Target will conflict with or result in a
breach of the terms, conditions or provisions of or constitute a default under
any contract, covenant or instrument under which any such Person is obligated.
Schedule 4.13.2 hereto sets forth all employment, non-competition or
- ---------------
nondisclosure agreements currently in effect to which any Person employed by is
a party.
4.14. Contracts. Schedule 4.14 hereto lists the following contracts
--------- -------------
and other agreements to which the Target is a party:
(a) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $10,000 per year;
(b) any agreement (or group of related agreements) for the purchase or
sale of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing or receipt of services, the performance of which
will extend over a period of more than one year or involve consideration in
excess of $10,000;
(c) any agreement concerning a partnership or joint venture;
(d) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation, in excess of $10,000 or under which it has
imposed a Security Interest on any of its assets, tangible or intangible;
(e) any material agreement concerning confidentiality or
noncompetition;
(f) any material agreement with any of the Principals and their
Affiliates (other than the Target);
14
<PAGE>
(g) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers, and
employees;
(h) any collective bargaining agreement;
(i) any agreement for the employment of any individual on a full-time,
part-time, consulting, or other basis providing annual compensation in excess of
$50,000 or providing material severance benefits;
(j) any agreement under which it has advanced or loaned any amount to
any of its directors, officers, and employees outside the Ordinary Course of
Business;
(k) any agreement under which the consequences of a default or
termination could have a material adverse effect on the business, financial
condition, operations, results of operations, or future prospects of the Target;
or
(l) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $10,000.
The Principals have delivered to the Acquiror a correct and complete copy
of each written agreement listed in Schedule 4.14 hereto. With respect to each
-------------
such agreement: (i) the agreement is legal, valid, binding, enforceable, and in
full force and effect in all material respects; (ii) no party is in material
breach or default, and no event has occurred which with notice or lapse of time
would constitute a material breach or default, or permit termination,
modification, or acceleration, under the agreement; and (iii) no party has
repudiated any material provision of the agreement.
4.15. Real Property. Schedule 4.15 hereto lists and describes briefly
------------- -------------
all real property pleased or subleased to the Target. The Principals have
delivered to the Acquiror correct and complete copies of the leases and
subleases listed in Schedule 4.15 hereto. With respect to each material lease
-------------
and sublease listed in Schedule 4.15 hereto:
-------------
(a) the lease or sublease is legal, valid, binding, enforceable, and
in full force and effect in all material respects;
(b) no party to the lease or sublease is in material breach or
default, and no event has occurred which, with notice or lapse of time, would
constitute a material breach or default or permit termination, modification, or
acceleration thereunder;
(c) no party to the lease or sublease has repudiated any material
provision thereof;
(d) there are no material disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(e) the Target has not assigned, transferred, conveyed, mortgaged,
deeded in trust, or encumbered any interest in the leasehold or subleasehold;
and
15
<PAGE>
(f) all facilities leased or subleased thereunder have received, to
the Knowledge of the Target and the Principals, all approvals of governmental
authorities (including material licenses and permits) required in connection
with the operation thereof, and have been operated and maintained in accordance
with applicable laws, rules, and regulations in all material respects.
4.16. Tangible Assets. The buildings, equipment, and other tangible
---------------
assets that the Target owns and leases are free from material defects (patent
and latent), have been maintained in accordance with normal industry practice,
and are in good operating condition and repair (subject to normal wear and
tear).
4.17. Undisclosed Liabilities. The Target has no material liability
-----------------------
(whether known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including any liability for Taxes), except for
(i) liabilities set forth on the face of the Target's Most Recent Balance Sheet
(rather than in any notes thereto) and (ii) liabilities which have arisen after
the Target's Most Recent Fiscal Month End in the Ordinary Course of Business.
4.18. Notes and Accounts Receivable. All notes and accounts receivable of
-----------------------------
the Target are reflected properly on their books and records, are valid
receivables subject to no setoffs or counterclaims, are current and collectible,
and will be collected in accordance with their terms at their recorded amounts,
subject only to the potential for bad debts which is not reflected on the face
of the Target's Most Recent Balance Sheet.
4.19. Powers of Attorney. To the Knowledge of the Target and the
------------------
Principals, there are no material outstanding powers of attorney executed on
behalf of any of the Target.
4.20. Insurance. Schedule 4.20 hereto sets forth the following information
--------- -------------
with respect to each material insurance policy (including policies providing
property, casualty, liability, and workers' compensation coverage and bond and
surety arrangements) with respect to which the Target is a party, a named
insured, or otherwise the beneficiary of coverage: (i) the name and telephone
number of the agent; (ii) the name of the insurer, the name of the policyholder,
and the name of each covered insured; (iii) the period of coverage; (iv) the
scope (including an indication of whether the coverage is on a claims made,
occurrence, or other basis) and amount (including a description of how
deductibles and ceilings are calculated and operate) of coverage; and a
description of any retroactive premium adjustments or other material loss-
sharing arrangements. With respect to each such insurance policy: (a) the policy
is legal, valid, binding, enforceable, and in full force and effect in all
material respects; (b) neither the Target nor any other party to the policy is
in material breach or default (including with respect to the payment of premiums
or the giving of notices), and no event has occurred which, with notice or the
lapse of time, would constitute such a material breach or default, or permit
termination, modification, or acceleration, under the policy; and (c) no party
to the policy has repudiated any material provision thereof. Schedule 4.20
-------------
hereto describes any material self-insurance arrangements affecting the Target.
4.21. Product Liability. The Target has no material liability (whether
-----------------
known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued,
16
<PAGE>
whether liquidated or unliquidated, and whether due or to become due) arising
out of any injury to individuals or property as a result of the ownership,
possession, or use of any product sold, licensed and delivered by the Target.
4.22. Guaranties. The Target is not a guarantor or otherwise is
----------
responsible for any liability or obligation (including indebtedness) of any
other Person.
4.23. Environment, Health, and Safety.
-------------------------------
4.23.1. Each of the Target and its predecessors and Affiliates (i)
has complied with the Environmental, Health and Safety Laws in all material
respects (and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any such failure to comply), (ii) has obtained and been in
substantial compliance with all of the terms and conditions of all material
permits, licenses, and other authorizations which are required under the
Environmental, Health and Safety Laws, and (iii) has complied in all material
respects with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules, and timetables which are
contained in the Environmental, Health and Safety Laws.
4.23.2. The Target has no material liability (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or to
become due), and none of the Target and its predecessors and Affiliates has
handled or disposed of any substance, arranged for the disposal of any
substance, exposed any employee or other individual to any substance or
condition, or owned or operated any property or facility in any manner that
could give rise to any material liability, for damage to any site, location, or
body of water (surface or subsurface), for any illness of or personal injury to
any employee or other individual, or for any reason under any Environmental,
Health and Safety Law.
4.23.3. All properties and equipment used in the business of the
Target and its respective predecessors and Affiliates have been free of
asbestos, PCB's, methylene chloride, trichloroethylene, 1,2-
transdichloroethylene, dioxins, dibenzofurans, and Extremely Hazardous
Substances.
4.24. Employees. To the Knowledge of the Target and the Principals, no
---------
executive, key employee, or significant group of employees plans to terminate
employment with the Target during the next 12 months. The Target is not a party
to or bound by any collective bargaining agreement, nor has any of them
experienced any strike or material grievance, claim of unfair labor practices,
or other collective bargaining dispute. The Target has not committed any
material unfair labor practice. Neither of the Principals and none of the
directors and officers of the Target has any Knowledge of any organizational
effort presently being made or threatened by or on behalf of any labor union
with respect to employees of the Target. The Target has complied in all material
respects with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity and collective
bargaining, and with ERISA, except for such failures to comply which,
individually and in the aggregate, would not have a Material Adverse Effect on
the Target.
17
<PAGE>
4.25. Employee Benefits.
-----------------
4.25.1. Schedule 4.25.1 hereto lists each Employee Benefit Plan that
---------------
the Target maintains or to which the Target contributes.
(a) Each such Employee Benefit Plan (and each related trust, insurance
contract, or fund) complies in form and in operation in all material respects
with the applicable requirements of ERISA, the Code, and other applicable laws.
(b) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-l's, and Summary Plan Descriptions) have
been filed or distributed appropriately with respect to each such Employee
Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code (S)4980B have been met in all material respects with respect to each
such Employee Benefit Plan which is an Employee Welfare Benefit Plan.
(c) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan and all
contributions for any period ending on or before the Closing Date which are not
yet due have been paid to each such Employee Pension Benefit Plan or accrued in
accordance with the past custom and practice of the Target. All premiums or
other payments for all periods ending on or before the Closing Date have been
paid with respect to each such Employee Benefit Plan which is an Employee
Welfare Benefit Plan.
(d) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan meets the requirements of a "qualified plan" under Code (S)401(a)
and has received, within the last two years, a favorable determination letter
from the Internal Revenue Service.
(e) The market value of assets under each such Employee Benefit Plan
which is an Employee Pension Benefit Plan (other than any Multiemployer Plan)
equals or exceeds the present value of all vested and nonvested liabilities
thereunder determined in accordance with PBGC methods, factors, and assumptions
applicable to an Employee Pension Benefit Plan terminating on the date for
determination.
(f) The Principals have delivered to the Acquiror correct and complete
copies of the plan documents and summary plan descriptions, the most recent
determination letter received from the Internal Revenue Service, the most recent
Form 5500 Annual Report, and all related trust agreements, insurance contracts,
and other funding agreements which implement each such Employee Benefit Plan.
4.25.2. With respect to each Employee Benefit Plan that the Target
and the Controlled Group of Corporations which includes the Target maintains or
ever has maintained or to which any of them contributes, ever has contributed,
or ever has been required to contribute:
(a) No such Employee Benefit Plan which is an Employee Pension Benefit
Plan (other than any Multiemployer Plan) has been completely or partially
terminated or been the subject of a Reportable Event as to which notices would
be required to be filed with the PBGC. No proceeding by the PBGC to terminate
any such Employee Pension Benefit Plan (other
18
<PAGE>
than any Multiemployer Plan) has been instituted or, to the Knowledge of the
Target and the Principals, threatened.
(b) There have been no Prohibited Transactions with respect to any
such Employee Benefit Plan. No Fiduciary has any liability for material breach
of fiduciary duty or any other material failure to act or comply in connection
with the administration or investment of the assets of any such Employee Benefit
Plan. No action, suit, proceeding, hearing, or investigation with respect to
the administration or the investment of the assets of any such Employee Benefit
Plan (other than routine claims for benefits) is pending or, to the Knowledge of
the Target and the Principals, threatened.
(c) The Target has not incurred any material liability (whether known
or unknown, whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due) to the PBGC (other than PBGC premium payments) or
otherwise under Title IV of ERISA (including any withdrawal liability) or under
the Code with respect to any such Employee Benefit Plan which is an Employee
Pension Benefit Plan.
4.25.3. None of the Target and the other members of the Controlled
Group of Corporations that includes the Target contributes to, ever has
contributed to, or ever has been required to contribute to any Multiemployer
Plan or has any material liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due), including
any withdrawal liability, under any Multiemployer Plan.
4.25.4. The Target does not maintain or ever has maintained or
contributes, ever has contributed, or ever has been required to contribute to
any Employee Welfare Benefit Plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance with
Code (S)4980B).
4.26. Transactions With the Target. None of the Principals and their
----------------------------
Affiliates owns any material asset, tangible or intangible, which is used in the
business of the Target.
4.27. Disclosure. The representations and warranties contained in this
----------
Article 4 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article 4 not misleading.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
OF THE ACQUIROR AND THE SUB
---------------------------
The Acquiror represents and warrants to the Principals that the statements
contained in this Article 5 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article 5), except as set forth in the Disclosure
Schedules attached hereto on the date hereof.
19
<PAGE>
5.1. Organization, Qualification and Corporate Power. Each of the
-----------------------------------------------
Acquiror and the Sub is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation. Each of
the Acquiror and the Sub is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the lack of such qualification would not have a Material
Adverse Effect on the Acquiror or the Sub, as the case may be. Each of the
Acquiror and the Sub has full corporate power and authority to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it.
5.2. Authorization of Transaction. Each of the Acquiror and the Sub has
----------------------------
full power and authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder and
to issue, sell and deliver the Merger Shares. Assuming the due authorization,
execution and delivery by the Target and the Principals, this Agreement
constitutes the valid and legally binding obligation of the Acquiror and the
Sub, enforceable in accordance with its terms and conditions, except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (ii) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles of
general applicability. Other than filings with respect to the Merger, neither
the Acquiror nor the Sub need give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order to consummate the transactions contemplated by this Agreement.
5.3. Noncontravention. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Acquiror or the Sub is subject or any
provision of its charter or bylaws or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Acquiror or the Sub is a party or by which it is bound or to which
any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets), except where the violation, conflict, breach,
default, acceleration, termination, modification, cancellation, failure to give
notice, or Security Interest would not have a Material Adverse Effect on the
Acquiror or the Sub or impede the ability of the parties to consummate the
transactions contemplated by this Agreement. Other than filings with respect to
the Merger, neither the Acquiror nor the Sub needs to give any notice to, make
any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order for the parties to consummate the
transactions contemplated by this Agreement, except where the failure to give
notice, to file, or to obtain any authorization, consent, or approval would not
have a Material Adverse Effect on the Acquiror or the Sub, as the case may be,
or impede the ability of the parties to consummate the transactions contemplated
by this Agreement.
5.4. Brokers' Fees. Neither the Acquiror nor the Sub has any liability
-------------
or obligation to pay any fees or commissions to any broker, finder, or agent
with respect to the transactions contemplated by this Agreement for which either
of the Principals could become liable or obligated.
20
<PAGE>
5.5. Investment. The Acquiror is not acquiring the Target Stock with a
----------
view to or for sale in connection with any distribution thereof within the
meaning of the Securities Act.
5.6. Capitalization. The authorized capital stock of the Acquiror consists
--------------
of 37,500,000 shares of Acquiror's Common Stock and 10,000,000 shares of
preferred stock, par value $.001 per share, of which 5,250,000 shares have been
designated Series A 9% Convertible Preferred Stock ("Acquiror's Series A
-------------------
Preferred Stock"). As of the Closing Date, 15,029,744 shares of Acquiror's
- ---------------
Common Stock and 1,765,432 shares of Acquiror's Series A Preferred Stock will be
validly issued and outstanding, fully paid and nonassessable with no personal
liability attaching to the ownership thereof. Acquiror's Series A Preferred
Stock is the only series of preferred stock of the Acquiror issued and
outstanding. The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of authorized
capital stock of the Acquiror are as set forth in its charter and the
Certificate of Designation of Acquiror's Series A Preferred Stock and amendments
thereto (the "Certificate of Designation"), and all such designations, powers,
--------------------------
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws. Except as
set forth in the charter, Certificate of Designation or SEC Documents, (i) the
capital stock of the Acquiror is free and clear of any restrictions on transfer
(other than any restrictions under the Securities Act and state securities
laws), Taxes, Security Interests, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands and (ii) the Acquiror is not a party
to any option, warrant, purchase right, or other contract or commitment that
could require the Acquiror to sell, transfer, or otherwise dispose of any of its
capital stock. Except as provided for in the charter or the Certificate of
Designation or as set forth in the SEC Documents, the Acquiror has no obligation
(contingent or otherwise) to purchase, redeem or otherwise acquire any of its
capital stock or any interest therein or to pay any dividend or make any other
distribution in respect thereof. Except for this Agreement and as set forth on
Schedule 5.6 hereto, the Acquiror does not know of any voting trusts or
- ------------
agreements, stockholders agreements, pledge agreements, buy-sell agreements,
rights of first refusal, preemptive rights or proxies relating to any capital
stock of the Acquiror or any of its subsidiaries (whether or not any of them is
a party thereto). All of the outstanding securities of the Acquiror have been
issued in compliance in all material respects with all applicable federal and
state securities laws. Except as set forth in Schedule 5.6 hereto, there are no
------------
agreements or understandings granting to any Person any right to cause the
Acquiror to effect the registration under the Securities Act of any shares of
its capital stock.
5.7. Title to Assets. The Acquiror has good and marketable title to, or a
---------------
valid leasehold interest in, the properties and assets used by them, located on
their premises, or shown on the Acquiror's 10-QSB for the quarter ended
September 30, 1998 ("Acquiror's Most Recent Balance Sheet") or acquired after
------------------------------------
the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of the Acquiror's Most Recent Balance Sheet.
5.8. SEC Documents. Except as set forth in Schedule 5.8 hereto, the
------------- ------------
Acquiror has filed all documents required to be filed by it with the SEC since
January 1, 1996. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and none of the SEC Documents included an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the
21
<PAGE>
statements therein, in the light of the circumstances under which they were
made, not misleading. The consolidated financial statements of the Acquiror
included in the SEC Documents complied as to form in all material respects with
the applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of the unaudited statements,
as permitted by Form 10-QSB of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly present the consolidated financial position of the Acquiror and its
consolidated subsidiaries as of the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the respective periods then ended (subject, in the case of the unaudited
statements, to normal year-end audit adjustments and to any other adjustments
described therein).
5.9. Events Subsequent to September 30, 1998. Except as set forth in the
---------------------------------------
SEC Documents and Schedule 5.9 hereto, since September 30, 1998, there has been
------------
no change in the business, assets, liabilities or financial condition of the
Acquiror, except for changes in the Ordinary Course of Business which
individually or in the aggregate have not had a Material Adverse Effect on the
Acquiror and there has not been a Material Adverse Effect on the Target by any
occurrence, state of facts or development, individually or in the aggregate,
whether or not insured against. Without limiting the generality of the
foregoing, since that date the Acquiror has not: (i) issued any stock, bond or
other security (except shares issued in connection with the exercise of employee
stock options), (ii) borrowed any amount or incurred or become subject to any
liability (absolute, accrued or contingent), except current liabilities incurred
in the Ordinary Course of Business and liabilities under contracts entered into
in the Ordinary Course of Business, (iii) declared or made any payment or
distribution to equity holders or purchased or redeemed any share of its capital
stock or other security, (iv) mortgaged, pledged or subjected to lien any of its
assets, tangible or intangible, other than liens for current Taxes not yet due
and payable, except for mortgages, pledges or liens that do not exceed $50,000
in the aggregate, (v) sold, assigned or transferred any of its assets except in
the Ordinary Course of Business, or canceled any debt or claim, (vi) suffered
any material loss of property or waived any right of substantial value whether
or not in the Ordinary Course of Business, (vii) made any material change to the
Acquiror's employee benefit plans, (viii) made any change in the Acquiror's
accounting principles and practices, (ix) made any material change in the manner
of business or operations, (x) entered into any material transaction except in
the Ordinary Course of Business or as otherwise contemplated hereby or (xi)
entered into any commitment (contingent or otherwise) to do any of the
foregoing.
5.10. Litigation; Compliance With Laws. Except as set forth in the SEC
--------------------------------
Documents and in Schedule 5.10 hereto, there is no (i) action, suit, claim,
-------------
proceeding or investigation pending or, to the Knowledge of the Acquiror,
threatened against the Acquiror or its assets, at law or in equity, or before or
by any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, (ii) arbitration
proceeding relating to the Acquiror or (iii) governmental inquiry pending or, to
the Knowledge of the Acquiror, threatened against or affecting the Acquiror
(including, without limitation, any inquiry as to the qualification of the
Acquiror to hold or receive any license or permit), and there is no basis for
any of the foregoing which, in each case, could reasonably be expected to have a
Material Adverse Effect on the Acquiror. The Acquiror is not in default with
respect to any order, writ, injunction or decree known to or served upon the
Acquiror of any court or of any federal, state, municipal or other
22
<PAGE>
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign. There is no action or suit by the Acquiror pending or
threatened against others. The Acquiror has complied with all laws, rules,
regulations and orders applicable to its business, operations, properties,
assets, products and services, except for such failures to comply which,
individually and in the aggregate, would not have a Material Adverse Effect on
the Acquiror, and the Acquiror has all necessary permits, licenses and other
authorizations required to conduct its business in all material respects as
conducted. To the Knowledge of the Acquiror, there is no existing rule,
regulation or order, whether federal or state, which would prohibit or restrict
the Acquiror from, or otherwise materially adversely affect the Acquiror in,
conducting its business in any jurisdiction in which it is now conducting
business or in which it proposes to conduct business.
5.11. Tax Matters. (i) The Acquiror has timely filed all federal, state,
-----------
county, local and foreign Tax returns required to be filed by it except where
failures to file such Tax returns would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Acquiror; (ii)
all such Tax returns are complete and accurate except where failures of such Tax
returns to be complete and accurate would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Acquiror; (iii)
the Acquiror has paid all Taxes shown to be due by such returns as well as all
other Taxes, assessments and governmental charges that have become due or
payable except where failures to pay such Taxes would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on the
Acquiror; (iv) the Acquiror has withheld and collected all amounts required to
be withheld from amounts owing to employees, creditors and third parties except
where failures to withhold and collect such Taxes would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on the
Acquiror; (v) adequate reserves have been established for all Taxes accrued but
not yet payable except where failures to establish such reserves would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Acquiror; (vi) no deficiency or adjustment of the
Acquiror's federal, state, county, local or foreign Taxes has been asserted or
proposed, or is pending or threatened except where such deficiencies or
adjustments did not or would not reasonably be expected to, individually or in
the aggregate, have a Material Adverse Effect on the Acquiror; (vii) there are
no Tax liens outstanding against the assets, properties or business of the
Acquiror other than liens for current Taxes not yet due and payable except where
such liens would not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect on the Acquiror; and (viii) the Acquiror has
never been a member of any Affiliated Group, or any similar group for Tax
purposes, other than the group of which it is currently a member.
5.12. Intellectual Property; Proprietary Information of Third parties.
5.12.1. Intellectual Property. The Acquiror owns or possesses all
---------------------
licenses or other rights to use all Intellectual Property necessary to the
conduct of its business as conducted and, to the Knowledge of the Acquiror, as
proposed to be conducted, and no claim is pending or, to the Knowledge of the
Acquiror, threatened to the effect that the operations of the Acquiror infringe
upon, misappropriate, violate or conflict with the asserted rights of any other
Person under any Intellectual Property. To the Knowledge of the Acquiror there
is no valid basis for any such claim (whether or not pending or threatened). No
claim is pending or, to the Knowledge of the Acquiror, threatened to the effect
that any such Intellectual Property owned or licensed by the Acquiror, or
23
<PAGE>
which the Acquiror otherwise has the right to use, is invalid or unenforceable
by the Acquiror, and, to the Knowledge of the Acquiror, there is no basis for
any such claim (whether or not pending or threatened). The Acquiror has not
granted or assigned to any other Person any right to license or sell the
software, trademarks, service marks, Internet domain names, trade names, trade
dress, logos or trade secrets of the Acquiror. Except as set forth in Schedule
--------
5.12.1 hereto, the Acquiror has not granted or assigned to any other Person any
- ------
right to license or sell its software.
5.12.2. Proprietary Information of Third parties. No third party has
----------------------------------------
claimed in writing or, to the Knowledge of the Acquiror, has a valid basis to
claim that any Person employed by or affiliated with the Acquiror has (i)
violated or is violating any of the terms or conditions of such Person's
employment, non-competition or nondisclosure agreement with such third party,
(ii) disclosed or is disclosing or utilized or is utilizing any trade secret or
proprietary information or documentation of such third party or (iii) interfered
or is interfering in the employment relationship between such third party and
any of its present or former employees. No third party has requested in writing
information from the Acquiror which could reasonably be interpreted to suggest
that such a claim might be contemplated. To the Knowledge of the Acquiror, no
Person employed by or affiliated with the Acquiror has employed or proposes to
employ, any trade secret or any information or documentation in violation of the
proprietary rights of any former employer, and, to the Knowledge of the
Acquiror, no Person employed by the Acquiror has violated any confidential
relationship which such Person may have had with any third party, in connection
with the development, manufacture or sale of any product or proposed product or
the development or sale of any service or proposed service of the Acquiror and
there is no reason to believe there will be any such employment or violation.
To the Knowledge of the Acquiror, none of the execution, delivery or performance
of this Agreement, or the carrying on of the business of the Acquiror as
officers, employees or agents by any officer, director or key employee of the
Acquiror or the conduct or proposed conduct of the business of the Acquiror will
conflict with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
such Person is obligated.
5.13. Contracts. With respect to any material lease, agreement or
---------
contract now in effect to which the Acquiror is a party or by which it or its
property may be bound, (i) the agreement is legal, valid, binding, enforceable,
and in full force and effect in all material respects; (ii) no party is in
material breach or default, and no event has occurred which with notice or lapse
of time would constitute a material breach or default, or permit termination,
modification, or acceleration, under the agreement; and (iii) no party has
repudiated any material provision of the agreement.
5.14. Employees. To the Knowledge of the directors and officers of the
---------
Acquiror, no executive, key employee, or significant group of employees plans to
terminate employment with the Acquiror during the next 12 months. The Acquiror
has complied in all material respects with all applicable laws relating to the
employment of labor, including provisions relating to wages, hours, equal
opportunity and collective bargaining, and with ERISA, except for such failures
to comply which, individually and in the aggregate, would not have a Material
Adverse Effect on the Acquiror.
5.15. Transactions With Affiliates. Except as disclosed in the SEC
----------------------------
Documents and Schedule 5.15 hereto, no director, officer, employee or
-------------
stockholder owning more than 5% of the
24
<PAGE>
outstanding capital stock of the Acquiror, or member of the family of any such
Person, or any corporation, partnership, trust or other entity in which any such
Person, or any member of the family of any such Person, has a substantial
interest or is an officer, director, trustee, partner or holder of more than 5%
of the outstanding capital stock thereof, is a party to any transaction with the
Acquiror, including any contract, agreement or other arrangement providing for
the employment of, furnishing of services by, rental of real or personal
property from or otherwise requiring payments to any such Person, if in each
case such transaction was required to be disclosed in such SEC Documents.
5.16. Disclosure. The representations and warranties contained in
----------
this Article 5 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article 5 not misleading.
ARTICLE VI.
PRE-CLOSING COVENANTS
---------------------
The parties agree as follows with respect to the period between the
execution of this Agreement and the earlier of the Closing or the termination of
this Agreement.
6.1. General. Each of the parties will use his or its reasonable
-------
best efforts to take all action and to do all things necessary in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article 7 below).
6.2. Shareholders' Consent. The Principals will cause the Target, as soon
---------------------
as practicable following the date of this Agreement, duly call, give notice of,
convene and hold a meeting of its shareholders or seek written consent for the
purpose of obtaining the Shareholders' Consent, and, the Target shall, through
its Board of Directors, recommend to its shareholders that they approve the
transactions contemplated by this Agreement.
6.3. Notices and Consents. The Principals will cause the Target to give
--------------------
any notices to third parties, and will cause the Target to use its reasonable
best efforts to obtain any third party consents, that the Acquiror reasonably
may request in connection with the matters referred to in Section 4.3 above.
Each of the parties will (and the Principals will cause the Target to) give any
notices to, make any filings with, and use its reasonable best efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Section 4.2 above.
6.4. Operation of Business. The Principals will not cause or permit the
---------------------
Target to engage in any practice, take any action, or enter into any transaction
outside the Ordinary Course of Business.
6.5. Preservation of Business. The Principals will cause the Target to
------------------------
keep its business and properties substantially intact, including its present
operations, physical facilities, working conditions, and relationships with
lessors, licensors, suppliers, customers, and employees.
25
<PAGE>
6.6. Full Access. Each of the parties will permit, and the Principals
-----------
will cause the Target to permit, representatives of the other party to have full
access at all reasonable times, and in a manner so as not to interfere with such
parties' normal business operations, to all premises, properties, personnel,
books, records (including Tax records), contracts, and documents of or
pertaining to the Acquiror or the Target, as appropriate. The parties will treat
and hold as such any Confidential Information it receives from any of the other
party in the course of the reviews contemplated by this Section 6.6, will not
use any of the Confidential Information except in connection with this
Agreement, and, if this Agreement is terminated for any reason whatsoever, will
return to the appropriate party all tangible embodiments (and all copies) of the
Confidential Information which are in its possession.
6.7. Notice of Developments. The Principals will give prompt written
----------------------
notice to the Acquiror of any material adverse development causing a breach of
any of the representations and warranties in Article 4 above. The Acquiror will
give prompt written notice to the Principals of any material adverse development
causing a breach of any of its own representations and warranties in Article 5
above. No disclosure by any party pursuant to this Section 6.7, however, shall
be deemed to amend or supplement any Schedule hereto or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
6.8. Exclusivity. Neither of the Principals will (and the
-----------
Principals will not cause or permit the Target to) (i) enter into any sale,
lease, pledge or other disposition of any securities of the Target or all or any
significant part of the assets of the Target or its business, or for a merger,
consolidation or other acquisition proposal involving the Target, or any
transaction similar to the foregoing in format or purpose with any party other
than the Acquiror; or (ii) issue, sell, lease, or otherwise transfer or dispose
of any securities in the Target to any other party other than the Acquiror,
except in the Ordinary Course of Business of the Target consistent with past
practice; or (iii) enter into any transaction outside the Ordinary Course of
Business of the Target consistent with past practice in contemplation of any
transaction described above with any party other than the Acquiror; or (iv)
encourage, solicit, provide information to or negotiate with any party, other
than the Acquiror, to do any of the foregoing (each such transaction, a
"Proposed Acquisition Transaction"). The Target will immediately notify the
--------------------------------
Acquiror if any discussions or negotiations are sought to be initiated, any
inquiry or proposal is made, or any information is requested with respect to any
Proposed Acquisition Transaction.
ARTICLE VII.
POST-CLOSING COVENANTS
----------------------
The parties agree as follows with respect to the period following the
Closing.
7.1. General. In case at any time after the Closing any further
-------
action is necessary to carry out the purposes of this Agreement, each of the
parties will take such further action (including the execution and delivery of
such further instruments and documents) as any other party reasonably may
request, all at the sole cost and expense of the requesting party (unless the
requesting party is entitled to indemnification therefor under Article 9 below).
The Principals acknowledge and agree that from and after the Closing the
Acquiror and/or Sub will be entitled to
26
<PAGE>
possession of all documents, books, records (including Tax records), agreements,
and financial data of any sort relating to the Target.
7.2. Litigation Support. In the event and for so long as any party
------------------
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Target, each of the other parties will
cooperate with him or it and his or its counsel in the contest or defense, make
available their personnel, and provide such testimony and access to their books
and records as shall be necessary in connection with the contest or defense, all
at the sole cost and expense of the contesting or defending party (unless the
contesting or defending party is entitled to indemnification therefor under
Article 9 below).
7.3. Transition. Neither Principal will take (and the Principals
----------
will not cause or permit the Target to take) any action that is designed or
intended to have the effect of discouraging any lessor, licensor, customer,
supplier, or other business associate of the Target from maintaining the same
business relationships with the Target after the Closing as it maintained with
the Target prior to the Closing.
7.4. Confidentiality. The parties will treat and hold as such
---------------
all of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
the party whose Confidential Information is at issue or destroy, at the request
and option of such party, all tangible embodiments (and all copies) of the
Confidential Information which are in his or its possession. In the event that
any party is requested or required (by oral question or request for information
or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar process) to disclose any Confidential
Information of another party, such party will notify the other party promptly of
the request or requirement so that the party whose Confidential Information is
at issue may seek an appropriate protective order or waive compliance with the
provisions of this Section 7.4. If, in the absence of a protective order or the
receipt of a waiver hereunder, any party is, on the advice of counsel, compelled
to disclose any Confidential Information to any tribunal or else stand liable
for contempt, such party may disclose the Confidential Information to the
tribunal; provided, however, that the disclosing party shall use his or its
reasonable best efforts to obtain, at the reasonable request of party whose
Confidential Information is at issue, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as such party shall designate.
7.5. Escrow Agreement. The appropriate parties shall have executed
----------------
and delivered the Escrow Agreement in form and substance as set forth on Exhibit
-------
A hereto and shall have taken such other action as is necessary so that 25% of
- -
the Merger Shares of the Principals are placed in escrow pursuant to the Escrow
Agreement. The Merger Shares placed in escrow, subject to any claims asserted by
Acquiror, shall be released from escrow pursuant to the terms of the Escrow
Agreement on the date eighteen months following the Closing Date.
27
<PAGE>
7.6. Employment Agreements. Each Principal shall enter into an employment
---------------------
agreement with the Acquiror (the "Employment Agreement") in form and substance
--------------------
as set forth on Exhibit C hereto.
7.7. Covenant Not to Compete. For a period of time the shorter of (i)
-----------------------
two years from and after the Closing Date or (ii) up to the date on which
Acquiror breaches the Principal's Employment Agreement, such Principal shall not
have any ownership interest (of record or beneficial) in, or have any interest
as an employee, salesman, consultant, officer or director in, or otherwise aid
or assist in any manner, any firm, corporation, partnership, proprietorship or
other business that engages in any county, city or part thereof in the United
States and/or any foreign country in a business which is similar to that in
which the Acquiror is engaged in such county, city or part thereof, so long as
the Acquiror, or any successor in interest of the Acquiror the business and
goodwill of the Acquiror, remains engaged in such business in such county, city
or part thereof or continues to solicit customers or potential customers
therein; provided, however, that Principal may own, directly or indirectly,
-----------------
solely as an investment, securities of any entity which are traded on any
national securities exchange if Principal (i) is not a controlling person of, or
a member of a group which controls, such entity or (ii) does not, directly or
indirectly, own one percent (1%) or more of any class of securities of any such
entity. If the final judgment of a court of competent jurisdiction declares that
any term or provision of this Section 6.6 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or area of
the term or provision, to delete specific words or phrases, or to replace any
invalid or unenforceable term or provision with a term or provision that is
valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision, and this Agreement shall be
enforceable as so modified after the expiration of the time within which the
judgment may be appealed.
7.8. Merger Shares
-------------
7.8.1. Stock Certificates. Each stock certificate evidencing a
------------------
portion of the Merger Shares will be imprinted with a legend substantially in
the following form:
This stock certificate was originally issued on March 8, 1999, and has
----------------------------------------------------------------------
not been registered under the Securities Act of 1933, as amended. The
----------------------------------------------------------------------
transfer of this stock certificate is subject to certain restrictions set
-------------------------------------------------------------------------
forth in the Agreement and Plan of Merger. The issuer of this stock
--------------------------------------------------------------------
certificate will furnish a copy of these provisions to the holder hereof
------------------------------------------------------------------------
without charge upon written request.
-----------------------------------
7.8.2. Transfer Restrictions. No shareholder of the Target receiving
---------------------
Merger Shares may transfer any Merger Shares except as provided in this Section
7.8.2.
(a) Each holder desiring to transfer a stock certificate evidencing a
portion of the Merger Shares first must furnish the Acquiror with (i) a written
opinion reasonably satisfactory to the Acquiror in form and substance from
counsel reasonably satisfactory to the Acquiror by reason of experience to the
effect that the holder may transfer the stock certificate as desired without
registration under the Securities Act and (ii) a written undertaking executed by
the
28
<PAGE>
desired transferee reasonably satisfactory to the Acquiror in form and substance
agreeing to be bound by the restrictions on transfer contained herein.
(b) (i) For a period of one year from and after the Closing Date, the
Principals shall not sell or otherwise transfer their portion of the Merger
Shares; (ii) for a period of one year from and after the first year following
the Closing Date, neither Principal shall sell or otherwise transfer more than
one-third of the Merger Shares he received on the Closing Date; (iii) from and
after the second year following the Closing Date, the Principals may sell or
otherwise transfer their Merger Shares in accordance with Section 7.8.2(a);
provided, however, that if the Acquiror breaches the Employment Agreement of a
- -----------------
Principal, such Principal may immediately sell or otherwise transfer his
respective Merger Shares in accordance with Section 7.8.2(a).
7.8.3. Right to Repurchase. In the event that either Principal's
-------------------
Employment Agreement is terminated for any reason other than (i) the Principal's
death or disability or (ii) a material breach of the Employment Agreement by the
Acquiror, the Acquiror shall have the right to repurchase such proportion of the
Principal's Merger Shares for a price of $0.10 per share as determined by the
following formula:
24 - n
------
24
where n = the number of full months worked by the
respective Principal since the Closing Date
For the purposes of this caluculation, the Holdback Amount shall be counted as
part of the Principal's Merger Shares. The Acquiror's right to repurchase under
this Section 7.8.3 shall be a right to repurchase Principal's Merger Shares not
then held in escrow. In the event there is a sale of all or substantially all
of the Acquiror's assets or any merger, consolidation or stock sale that results
in the holders of the Acquiror's capital stock immediately prior to such
transaction owning less than 50% of the voting power of the Acquiror's capital
stock immediately after such transaction (a "Change of Control"), the Acquiror's
-----------------
right to repurchase the shares as set forth above shall only be applicable to
one-half of the Merger Shares which otherwise would have been subject to the
repurchase right under this Section 7.8.3 as of the date of such Change of
Control; provided, however, that in the event the acquiror in such a Change of
-----------------
Control transaction does not assume a Principal's Employment Agreement in full
or upon substantially the same or better terms, the Acquiror's right to
repurchase the shares as set forth above shall terminate with respect to all of
the Merger Shares.
7.8.4. Right of First Refusal. For a period of two years commencing
----------------------
upon the Closing Date, if either Principal proposes to sell or otherwise
transfer his Merger Shares at any time from and after the Closing Date, such
Principal shall notify the Acquiror in accordance with Section 12.7 hereof that
it proposes to complete a transfer of some or all, as the case may be, of its
Merger Shares prior to the consummation of such transfer. The notice shall
specify the number of Merger Shares to be transferred, the price at which such
shares are to be transferred and the other terms and conditions of such proposed
transfer. The Merger Shares proposed to be transferred as set forth in the
notice shall be subject to an option of the Acquiror ("Right of First Refusal")
----------------------
to purchase such Merger Shares at the same price and on the same terms and
conditions as are set forth in the notice. The Acquiror must exercise its Right
of First Refusal within a reasonable time period following
29
<PAGE>
receipt of the notice of the proposed transfer by notifying the appropriate
Principal in accordance with Section 12.7 hereof.
ARTICLE VIII.
CONDITIONS TO OBLIGATION TO CLOSE
---------------------------------
8.1. Conditions to Obligation of the Acquiror and Sub. The obligation of
------------------------------------------------
the Acquiror and Sub to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions:
8.1.1. the representations and warranties set forth in Article 4
above shall be true and correct in all material respects at and as of the
Closing Date;
8.1.2. the Principals shall have performed and complied with all of
their covenants hereunder in all material respects through the Closing;
8.1.3. the Target shall have procured the Shareholders' Consent and
all of the material third party consents specified in Section 6.2 above;
8.1.4. Jeffrey Lipp shall have assigned all rights, title and
interest in any trade name or trademark currently used by the Target;
8.1.5. there shall be no Material Adverse Effect on the business of
the Target, including, without limitation, the Target shall not be obligated to
pay any amounts with respect to any Tax imposed on "excess parachute payments"
within the meaning of Code (S)280G.
8.1.6. no action, suit, or proceeding shall be pending before any
court or quasi-judicial or administrative agency of any federal, state, local,
or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement, (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, (iii) affect adversely the right of the Acquiror to own
the Target Stock and to control the Target, or (iv) affect materially and
adversely the right of the Target to own its assets and to operate its
businesses (and no such injunction, judgment, order, decree, ruling, or charge
shall be in effect);
8.1.7. the Principals shall have delivered to the Acquiror a
certificate to the effect that each of the conditions specified above in
Sections 8.1.1 - 8.1.5 is satisfied in all respects;
8.1.8. the Acquiror shall have completed to its reasonable
satisfaction a due diligence review of the assets, liabilities, business,
operations and prospects of the Target;
8.1.9. the transfer of the Merger Shares pursuant to the Merger shall
not violate any state or federal securities laws;
8.1.10. the relevant parties shall have entered into the Escrow
Agreement in form and substance as are set forth in Exhibit A attached hereto
---------
and the same shall be in full force and
30
<PAGE>
effect and the relevant parties have taken such other action as is necessary so
that the Holdback Amount is placed in Escrow pursuant to the Escrow Agreement.
8.1.11. the relevant parties shall have entered into the Employment
Agreement in form and substance as set forth in Exhibit C attached hereto and
---------
the same shall be in full force and effect;
8.1.12. the Acquiror shall have received from counsel to the
Principals an opinion in form and substance as set forth in Exhibit D attached
---------
hereto, addressed to the Acquiror, and dated as of the Closing Date;
8.1.13. the Acquiror shall have received the resignations, effective
as of the Closing, of each director and officer of the Target; and
8.1.14. all actions to be taken by the Principals in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Acquiror.
The Acquiror may waive any condition specified in this Section 8.1 if it
executes a writing so stating at or prior to the Closing.
8.2. Conditions to Obligation of the Principals. The obligation of the
------------------------------------------
Principals to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
8.2.1. the representations and warranties set forth in Article 5
above shall be true and correct in all material respects at and as of the
Closing Date;
8.2.2. the Acquiror shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
8.2.3. no action, suit, or proceeding shall be pending before any
court or quasi-judicial or administrative agency of any federal, state, local,
or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (i) prevent
consummation of any of the transactions contemplated by this Agreement or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
8.2.4. the Acquiror shall have delivered to the Principals a
certificate to the effect that each of the conditions specified above in Section
8.2.1 - 8.2.3 is satisfied in all respects;
8.2.5. the relevant parties shall have entered into the Employment
Agreement in form and substance as set forth in Exhibit B attached hereto and
---------
the same shall be in full force and effect; and
31
<PAGE>
8.2.6. the Principals shall have received from counsel to the
Acquiror an opinion in form and substance as set forth in Exhibit E attached
---------
hereto, addressed to the Principals, and dated as of the Closing Date;
8.2.7. all actions to be taken by the Acquiror in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Principals.
The Principals may waive any condition specified in this Section 8.2 if
they execute a writing so stating at or prior to the Closing.
ARTICLE IX.
REMEDIES FOR BREACHES OF THIS AGREEMENT
---------------------------------------
9.1. Survival of Representations and Warranties. All of the
------------------------------------------
representations and warranties of the Principals and the Target contained in
Article 4 above (other than Section 4.6 above) and all of the representations
and warranties of the Acquiror contained in Article 5 and Section 2.12 above
shall survive the Closing hereunder (even if the damaged party knew or had
reason to know of any misrepresentation or breach of warranty at the time of
Closing) and continue in full force and effect for a period of eighteen months
thereafter; provided, however, that the representations and warranties contained
-----------------
in Section 4.6 above shall survive the Closing hereunder until the expiration of
all relevant statutes of limitation (including any extensions thereof).
9.2. Indemnification Provisions for Benefit of the Acquiror.
------------------------------------------------------
9.2.1. In the event either of the Principals or the Target breaches
any of their representations, warranties and covenants contained herein (except
for the representations and warranties contained in Section 4.6), and, if there
is an applicable survival period pursuant to Section 9.1 above, provided that
the Acquiror Indemnified Party (as defined herein) makes a written claim for
indemnification against any of the Principals pursuant to Section 9.4 below
within the applicable time periods, then each of the Sellers shall indemnify
Acquiror and its partners, officers, directors, employees, stockholders and
agents ("Acquiror Indemnified Parties") from and against the entirety of any
----------------------------
Adverse Consequences the Acquiror Indemnified Party may suffer through and after
the date of the claim for indemnification (including any Adverse Consequences
the Acquiror Indemnified Party may suffer after the end of any applicable
survival period) resulting from, arising out of, relating to, in the nature of,
or caused by the breach; provided, however, that the Sellers shall not have any
-----------------
obligation to indemnify the Acquiror Indemnified Party from and against any
Adverse Consequences resulting from, arising out of, relating to, in the nature
of, or caused by the breach of any representation or warranty of the Principals
or the Target contained in Article 4 above until the Acquiror Indemnified Party
has suffered Adverse Consequences by reason of all such breaches in excess of a
$50,000 aggregate deductible (after which point the Sellers will be obligated
only to indemnify the Acquiror from and against further such Adverse
Consequences); provided further, however, that in no event shall such Sellers be
---------------- -------
liable pursuant to this Section 9.2.1 to the Acquiror Indemnified Parties, on
any claim or claims made by the Acquiror Indemnified
32
<PAGE>
Parties, for any Adverse Consequences in excess of the aggregate value of the
shares (which value is to be determined in accordance with Section 9.2.4) then
held in escrow pursuant to Section 2.7.
9.2.2. In the event the Principals or Sellers breach their
representations and warranties contained in Section 4.6, and, if there is an
applicable survival period pursuant to Section 9.1 above, provided that the
Acquiror Indemnified Party makes a written claim for indemnification against any
of the Principals pursuant to Section 9.4 below, then each of the Principals
shall, jointly and severally, indemnify and hold harmless such Acquiror
Indemnified Party from and against the entirety of any Adverse Consequences the
Acquiror Indemnified Party may suffer through and after the date of the claim
for indemnification (including any Adverse Consequences the Acquiror Indemnified
Party may suffer after the end of any applicable survival period) resulting
from, arising out of, relating to, in the nature of, or caused by the breach;
provided, however, that the Principals shall not have any obligation to
- -----------------
indemnify the Acquiror Indemnified Party from and against any Adverse
Consequences resulting from, arising out of, relating to, in the nature of, or
caused by the breach of any representation or warranty of the Principals
contained in Section 4.6 above until the Acquiror Indemnified Party has suffered
Adverse Consequences by reason of all such breaches in excess of a $50,000
aggregate deductible (after which point the Sellers will be obligated only to
indemnify the Acquiror from and against further such Adverse Consequences).
9.2.3. Each of the Principals agrees to indemnify the Acquiror from
and against the entirety of any Adverse Consequences the Acquiror may suffer
resulting from, arising out of, relating to, in the nature of, or caused by any
liability of the Target (i) for any Taxes of the Target with respect to any Tax
year or portion thereof ending on or before the Closing Date (or for any Tax
year beginning before and ending after the Closing Date to the extent allocable
(determined in a manner consistent with Article 10) to the portion of such
period beginning before and ending on the Closing Date), to the extent such
income Taxes are not reflected in the reserve for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) shown on the face of the Target's Most Recent Balance Sheet
(rather than in any notes thereto), as such reserve is adjusted for the passage
of time through the Closing Date in accordance with the past custom and practice
of the Target in filing their Tax Returns and (ii) for the unpaid Taxes of any
Person (other than the Target) under Reg. (S)1.1502-6 (or any similar provision
of state, local, or foreign law), as a transferee or successor, by contract, or
otherwise.
9.2.4. The indemnification obligations of the Principals or the
Target hereunder shall be satisfied by either the transfer of Merger Shares or
the payment of cash to the Acquiror Indemnified Party, at the election of the
party owning such obligation. In the event that the Seller Representatives (as
defined in the Escrow Agreement) elect to satisfy their indemnification
obligations by the transfer of Merger Shares, such shares shall be valued for
this purpose as the value of the closing trade price of the Acquiror's Common
Stock on the date of execution of this Agreement.
9.3. Indemnification Provisions for Benefit of the Principals. In the event
--------------------------------------------------------
the Acquiror breaches any of its representations, warranties, and covenants
contained herein, and, if there is an applicable survival period pursuant to
Section 9.1 above, provided that a Principal makes a written claim for
indemnification against the Acquiror pursuant to Section 9.4 below within two
years, then
33
<PAGE>
the Acquiror agrees to indemnify each of the Principals from and against the
entirety of any Adverse Consequences the Principal may suffer through and after
the date of the claim for indemnification (including any Adverse Consequences
the Principal may suffer after the end of any applicable survival period)
resulting from, arising out of, relating to, in the nature of, or caused by the
breach provided, however, that the Acquirors shall not have any obligation to
-----------------
indemnify the Principal from and against any Adverse Consequences resulting
from, arising out of, relating to, in the nature of, or caused by the breach of
any representation or warranty of the Principals or the Target contained in
Article 5 above until the Principal has suffered Adverse Consequences by reason
of all such breaches in excess of a $50,000 aggregate deductible (after which
point the Acquiror will be obligated only to indemnify the Principal from and
against further such Adverse Consequences); provided further, however, that in
-------------------------
no event shall the Acquiror be liable pursuant to this Article 9 to the
Principals, on any claim or claims made by Principals, for any Adverse
Consequences in excess of the aggregate value of the shares (which value is to
be determined in accordance with Section 9.2.4) then held in escrow pursuant to
Section 2.7.
9.4. Procedure for Claims between Parties
------------------------------------
9.4.1. Any Acquiror Indemnified Party or Seller Indemnified Party
seeking indemnification hereunder shall, within the relevant limitation period
provided for in Section 9.1 above, give to the party obligated to provide
indemnification to such Indemnified Party (the "Indemnitor") a notice (a "Claim
---------- -----
Notice") describing in reasonable detail the facts giving rise to any claims for
- ------
indemnification hereunder and shall include in such Claim Notice (if then known)
the amount or the method of computation of the amount of such claim, and a
reference to the provision of this Agreement or any agreement, document or
instrument executed pursuant hereto or in connection herewith upon which such
claim is based provided that failure to give such notice shall not relieve the
Indemnitor of its obligations hereunder except to the extent it shall have been
prejudiced by such failure.
9.4.2. In the event that the indemnitee is an Acquiror Indemnified
Party, all provisions set forth in Article 9 regarding notices to, or consents
of, the Sellers shall be determined by the Seller Representative (as defined in
the Escrow Agreement) and shall be binding upon all Sellers.
9.5. Matters Involving Third parties
-------------------------------
9.5.1. If any third party shall notify any party (the "Indemnified
-----------
Party") with respect to any matter (a "Third Party Claim") which may give rise
- ----- -----------------
to a claim for indemnification against any other party (the "Indemnifying
------------
Party") under this Section 9.1, then the Indemnified Party shall promptly notify
each Indemnifying Party thereof in writing; provided, however, that no delay on
-----------------
the part of the Indemnified Party in notifying any Indemnifying Party shall
relieve the Indemnifying Party from any obligation hereunder unless (and then
solely to the extent) the Indemnifying Party thereby is prejudiced.
9.5.2. Any Indemnifying Party will have the right to assume the
defense of the Third Party Claim with counsel of his or its choice reasonably
satisfactory to the Indemnified Party at any time within 15 days after the
Indemnified Party has given notice of the Third Party Claim; provided, however,
-----------------
that the Indemnifying Party must conduct the defense of the Third Party Claim
actively and diligently thereafter in order to preserve its rights in this
regard; and provided further
----------------
34
<PAGE>
that the Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim.
9.5.3. So long as the Indemnifying Party has assumed and is
conducting the defense of the Third Party Claim in accordance with Section 9.4.2
above, (i) the Indemnifying Party will not consent to the entry of any judgment
or enter into any settlement with respect to the Third Party Claim without the
prior written consent of the Indemnified Party (not to be withheld unreasonably)
unless the judgment or proposed settlement involves only the payment of money
damages by one or more of the Indemnifying Parties and does not impose an
injunction or other equitable relief upon the Indemnified Party and (ii) the
Indemnified Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably).
9.5.4. In the event none of the Indemnifying Parties assumes and
conducts the defense of the Third Party Claim in accordance with Section 9.5.2
above, however, (i) the Indemnified Party may defend against, and consent to the
entry of any judgment or enter into any settlement with respect to, the Third
Party Claim in any manner he or it reasonably may deem appropriate (and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith) and (ii) the Indemnifying Parties
will remain responsible for any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to, in the nature of, or caused
by the Third Party Claim to the fullest extent provided in this Article 9.
9.6. Determination of Adverse Consequences. The parties shall make
-------------------------------------
appropriate adjustments for Tax consequences and insurance coverage and take
into account the time cost of money (using a mutually agreed upon rate as the
discount rate) in determining Adverse Consequences for purposes of this Article
9.
9.7. Other Indemnification Provisions. The parties acknowledge and agree
--------------------------------
that the foregoing indemnification provisions in this Article 9 shall be the
exclusive remedy of the parties for any breach of the representations and
warranties contained herein. Each of the Principals hereby agrees that he or it
will not make any claim for indemnification against the Target by reason of the
fact that he or it was a director, officer, employee, or agent of any such
entity or was serving at the request of any such entity as a partner, trustee,
director, officer, employee, or agent of another entity (whether such claim is
for judgments, damages, penalties, fines, costs, amounts paid in settlement,
losses, expenses, or otherwise and whether such claim is pursuant to any
statute, charter document, bylaw, agreement, or otherwise) with respect to any
action, suit, proceeding, complaint, claim, or demand brought by a party against
such other party (whether such action, suit, proceeding, complaint, claim, or
demand is pursuant to this Agreement, applicable law, or otherwise).
ARTICLE X.
TAX MATTERS
-----------
The following provisions shall govern the allocation of responsibility as
between Acquiror and Principals for certain Tax matters following the Closing
Date:
35
<PAGE>
10.1. Tax Periods Ending on or Before the Closing Date. Acquiror shall
------------------------------------------------
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for the Target for all periods ending on or prior to the Closing Date which are
filed after the Closing Date. Acquiror shall permit the Principals to review and
comment on each such Tax Return described in the preceding sentence prior to
filing and shall make such revisions to such Tax Returns as are reasonably
requested by the Principals. The Principals shall reimburse Acquiror for Taxes
of the Target with respect to such periods within 15 days after payment by
Acquiror or the Target of such Taxes to the extent such Taxes are not reflected
in the reserve for Tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown on
the face of the Closing Balance Sheet.
10.2. Tax Periods Beginning Before and Ending After the Closing Date
--------------------------------------------------------------
Acquiror shall prepare or cause to be prepared and file or cause to be filed any
Tax Returns of the Target for Tax periods which begin before the Closing Date
and end after the Closing Date. The Principals shall pay to Acquiror within 15
days after the date on which Taxes are paid with respect to such periods an
amount equal to the portion of such Taxes which relates to the portion of such
taxable period ending on the Closing Date to the extent such Taxes are not
reflected in the reserve for Tax liability (rather than any reserve for deferred
Taxes established to reflect timing differences between book and Tax income)
shown on the face of the Closing Balance Sheet. For purposes of this Section, in
the case of any Taxes that are imposed on a periodic basis and are payable for a
taxable period that includes (but does not end on) the Closing Date, the portion
of such Tax which relates to the portion of such taxable period ending on the
Closing Date shall (i) in the case of any Taxes other than Taxes based upon or
related to income or receipts, be deemed to be the amount of such Tax for the
entire taxable period multiplied by a fraction the numerator of which is the
number of days in the taxable period ending on the Closing Date and the
denominator of which is the number of days in the entire taxable period, and
(ii) in the case of any Tax based upon or related to income or receipts be
deemed equal to the amount which would be payable if the relevant taxable period
ended on the Closing Date. Any credits relating to a taxable period that begins
before and ends after the Closing Date shall be taken into account as though the
relevant taxable period ended on the Closing Date. All determinations necessary
to give effect to the foregoing allocations shall be made in a manner consistent
with prior practice of the Target.
10.3. Refunds and Tax Benefits. Any Tax refunds that are received by
------------------------
Acquiror or the Target, and any amounts credited against Tax to which Acquiror
or the Target become entitled, that relate to Tax periods or portions thereof
ending on or before the Closing Date shall be for the account of the Principals,
and Acquiror shall pay over to the Principals any such refund or the amount of
any such credit within 15 days after receipt or entitlement thereto. In
addition, to the extent that a claim for refund or a proceeding results in a
payment or credit against Tax by a Taxing authority to the Acquiror or the
Target of any amount accrued on the Closing Balance Sheet, the Acquiror shall
pay such amount to the Principals within 15 days after receipt or entitlement
thereto.
10.4. Cooperation on Tax Matters.
--------------------------
10.4.1. The Acquiror, the Target and the Principals shall cooperate
fully, as and to the extent reasonably requested by the other party, in
connection with the filing of Tax Returns pursuant to this Agreement and any
audit, litigation or other proceeding with respect to Taxes.
36
<PAGE>
Such cooperation shall include the retention and (upon the other party's
request) the provision of records and information which are reasonably relevant
to any such audit, litigation or other proceeding and making employees available
on a mutually convenient basis to provide additional information and explanation
of any material provided hereunder. The Target and the Principals agree (i) to
retain all books and records with respect to Tax matters pertinent to the Target
relating to any taxable period beginning before the Closing Date until the
expiration of the statute of limitations (and, to the extent notified by the
Acquiror or the Principals, any extensions thereof) of the respective taxable
periods, and to abide by all record retention agreements entered into with any
Taxing authority, and (ii) to give the other party reasonable written notice
prior to transferring, destroying or discarding any such books and records and,
if the other party so requests, the Target or the Principals, as the case may
be, shall allow the other party to take possession of such books and records.
10.4.2. The Acquiror and the Principals further agree, upon request,
to use their best efforts to obtain any certificate or other document from any
governmental authority or any other Person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including, but not limited
to, with respect to the transactions contemplated hereby).
10.4.3. The Acquiror and the Principals further agree, upon request,
to provide the other party with all information that either party may be
required to report pursuant to (S)6043 of the Code and all Treasury Department
Regulations promulgated thereunder.
10.5. Tax Sharing Agreements. All Tax sharing agreements or similar
----------------------
agreements with respect to or involving the Target shall be terminated as of the
Closing Date and, after the Closing Date, the Target shall not be bound thereby
or have any liability thereunder.
10.6. Certain Taxes. All transfer, documentary, sales, use, stamp,
-------------
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by the
Principals when due, and the Principals will, at their own expense, file all
necessary Tax Returns and other documentation with respect to all such transfer,
documentary, sales, use, stamp, registration and other Taxes and fees, and, if
required by applicable law, Acquiror will, and will cause its Affiliates to,
join in the execution of any such Tax Returns and other documentation.
ARTICLE XI.
TERMINATION
-----------
11.1. Termination of Agreement. Certain of the parties may terminate
------------------------
this Agreement as provided below:
11.1.1. the Acquiror and the Principals may terminate this Agreement
by mutual written consent at any time prior to the Closing;
11.1.2. the Acquiror may terminate this Agreement by giving written
notice to the Principals at any time prior to the Closing (i) in the event that
either of the Principals has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the Acquiror has
notified the Principals of the breach, and the breach has continued without
<PAGE>
cure for a period of 30 days after the notice of breach or (ii) if the Closing
shall not have occurred on or before March 16, 1999, by reason of the failure of
any condition precedent under Section 8.1 hereof (unless the failure results
primarily from the Acquiror itself breaching any representation, warranty, or
covenant contained in this Agreement); and
11.1.3. the Principals may terminate this Agreement by giving written
notice to the Acquiror at any time prior to the Closing (i) in the event the
Acquiror has breached any material representation, warranty, or covenant
contained in this Agreement in any material respect, any of the Principals has
notified the Acquiror of the breach, and the breach has continued without cure
for a period of 30 days after the notice of breach or (ii) if the Closing shall
not have occurred on or before March 16, l999, by reason of the failure of any
condition precedent under Section 8.2 hereof (unless the failure results
primarily from any of the Principals themselves breaching any representation,
warranty, or covenant contained in this Agreement).
11.2. Effect of Termination. If any party terminates this Agreement
---------------------
pursuant to Section 11.1 above, all rights and obligations of the parties
hereunder shall terminate without any liability of any party to any other party
(except for any liability of any party then in breach); provided, however, that
-----------------
Sections 7.4, 7.7 and 9.1-9.6, inclusive, shall survive termination.
ARTICLE XII.
MISCELLANEOUS
-------------
12.1. No Third-party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any Person other than the parties and their respective
successors and permitted assigns.
12.2. Entire Agreement. This Agreement (including the documents
----------------
referred to herein) constitutes the entire agreement among the parties and
supersedes any prior understandings, agreements, or representations by or among
the parties, written or oral, to the extent they related in any way to the
subject matter hereof.
12.3. Succession and Assignment. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No party may assign either this Agreement or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of the Acquiror and the Principals; provided, however, that the
Acquiror may (i) assign any or all of its rights and interests hereunder to one
or more of its Affiliates and (ii) designate one or more of its Affiliates to
perform its obligations hereunder (in any or all of which cases the Acquiror
nonetheless shall remain responsible for the performance of all of its
obligations hereunder).
12.4. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
12.5. Headings. The section headings contained in this Agreement
--------
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
38
<PAGE>
12.6. Notices. All notices, requests, demands, claims, and other
-------
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
<TABLE>
<CAPTION>
If to the Principals: With a copy to:
-------------------- --------------
<S> <C>
iMALL, Inc. Perkins Coie LLP
233 Wilshire Boulevard, Suite 820 250 Montgomery Street, 16th Floor
Santa Monica, California 90403 San Francisco, California 94104
Attn: Jeffrey Lipp Attn: David Hornik
Telecopy: (310) 309-4102 Telecopy: (415) 597-4884
iMALL, Inc.
233 Wilshire Boulevard, Suite 820
Santa Monica, California 90403
Attn: Daniel Devlin
Telecopy: (310) 309-4102
<CAPTION>
If to the Acquiror: With a copy to:
------------------ --------------
<S> <C>
iMALL, Inc. Latham & Watkins
233 Wilshire Boulevard, Suite 820 633 West Fifth Street, Suite 4000
Santa Monica, California 90403 Los Angeles, California 90071
Attn: Richard Rosenblatt Attn: Paul Tosetti
Telecopy: (310) 309-4102 Telecopy: (213) 891-8763
</TABLE>
Any party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other parties notice in the manner herein set forth.
12.7. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the domestic laws of the State of California without giving
effect to any choice or conflict of law provision or rule (whether of the State
of California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California.
12.8. Amendments and Waivers. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
Acquiror and the Principals. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder,
39
<PAGE>
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
12.9. Severability. Any term or provision of this Agreement that
------------
is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
12.10. Expenses. The Acquiror agree that the Target will bear all
--------
of the Sellers' costs and expenses (including any of their legal fees and
expenses) in connection with this Agreement or any of the transactions
contemplated hereby.
12.11. Construction. The parties have participated jointly in the
------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
12.12. Incorporation of Exhibits and Schedules. The Exhibits and
---------------------------------------
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
*****
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
iMALL, INC.
By:
-----------------------------
Name:
-----------------------------
Title:
----------------------------
DANIEL DEVLIN, an individual
By:
-----------------------------
Name:
-----------------------------
JEFFREY LIPP, an individual
By:
-----------------------------
Name:
-----------------------------
PURE PAYMENTS
By:
-----------------------------
Name:
-----------------------------
Title:
----------------------------
S-1
<PAGE>
EXHIBIT A
TARGET'S FINANCIAL STATEMENTS
-----------------------------
1
<PAGE>
EXHIBIT B
FORM OF EMPLOYMENT AGREEMENT
----------------------------
2
<PAGE>
EXHIBIT C
FORM OF ESCROW AGREEMENT
------------------------
3
<PAGE>
SCHEDULE 1
SELLERS
-------
<TABLE>
<CAPTION>
AMOUNT OF TARGET CAPITAL STOCK AMOUNT OF iMALL SHARES TO BE
SELLER TO BE TRANSFERRED RECEIVED
- ------------------------------ ------------------------------ ----------------------------
<S> <C> <C>
1.
2.
3.
4.
5.
6.
7.
8.
</TABLE>
4
<PAGE>
EXHIBIT 10.24
FIRST AMENDMENT TO
iMALL, INC.
1997 STOCK OPTION PLAN
THIS FIRST AMENDMENT TO iMALL, INC. 1997 STOCK OPTION PLAN (the "First
Amendment"), dated as of December 31, 1998, is made and adopted by iMALL, Inc.,
a Nevada corporation (the "Company"). Capitalized terms used but not otherwise
defined herein shall have the respective meanings ascribed to such terms in the
Plan (as defined below).
WHEREAS, effective as of January 31, 1997, the Company adopted the iMALL,
Inc. 1997 Stock Option Plan (as amended from time to time, the "Plan") for the
benefit of its directors, officers, key employees and consultants.
WHEREAS, the Board of Directors of the Company reserved the right to amend
the Plan pursuant to Section 8 thereof.
WHEREAS, this First Amendment was duly adopted by a resolution of the Board
of Directors of the Company dated as of December 15, 1998.
WHEREAS, this First Amendment was approved by the stockholders of the
Company on December 31, 1998.
WHEREAS, this First Amendment shall give effect to any stock splits,
reverse stock splits and like transactions to the date hereof.
NOW THEREFORE, in consideration of the foregoing, the Company hereby amends
the Plan as follows:
1. Section 4(a) of the Plan is hereby amended and restated in its entirety
as follows:
The maximum number of Shares that may be issued or transferred pursuant to
Options is 3,250,000 (or the number and kind of share of stock or other
securities which are substituted for those Shares or to which those Shares are
adjusted upon a Change in Capitalization), and the Company shall reserve for the
purposes of the Plan, out of its authorized but unissued Shares or out of Shares
held in the Company's treasury, or party out of each, such number of Shares as
shall be determined by the Board.
2. This First Amendment shall be and is hereby incorporated in and forms a
part of the Plan.
3. This First Amendment shall be effective as of December 31, 1998.
4. Except as set forth herein, the Plan shall remain in full force and
effect.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this amendment to the Plan
to be executed by its duly authorized officer as of December 31, 1998.
iMALL, INC.
By: /s/ Anthony Mazzarella
Name: Anthony P. Mazzarella
Title: Executive
Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 11,180,700 4,775,100
<SECURITIES> 0 0
<RECEIVABLES> 324,400 117,400
<ALLOWANCES> 60,000 60,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,014,900 15,136,700
<PP&E> 2,858,800 631,100
<DEPRECIATION> 773,400 293,500
<TOTAL-ASSETS> 14,501,800 16,016,800
<CURRENT-LIABILITIES> 3,787,500 1,662,600
<BONDS> 0 0
0 0
16,411,500 19,355,800
<COMMON> 85,100 62,100
<OTHER-SE> (5,782,300) 0
<TOTAL-LIABILITY-AND-EQUITY> 10,714,300 16,016,800
<SALES> 1,596,000 973,600
<TOTAL-REVENUES> 1,596,000 973,600
<CGS> 0 0
<TOTAL-COSTS> 605,400 187,600
<OTHER-EXPENSES> 12,733,300 3,365,600
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,700 23,100
<INCOME-PRETAX> (11,085,800) (2,602,700)
<INCOME-TAX> 0 (16,500)
<INCOME-CONTINUING> (11,085,800) (2,586,200)
<DISCONTINUED> (2,062,800) (2,116,800)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,148,600) (4,703,000)
<EPS-PRIMARY> (1.87) (.64)
<EPS-DILUTED> (1.87) (.64)
</TABLE>
