U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(g) of
The Securities Exchange Act of 1934
SYTRON, INC.
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(Name of Small Business Issuer in its charter)
Pennsylvania 22-3200841
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2770 Industrial Lane
Broomfield, Colorado 80020
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (303) 469-6100
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
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(Title of Class)
Page One of Two Hundred Fifty Two Pages
Exhibit Index is Located at Page Seventy Two
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TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion of Financial Condition
and Results of Operations . . . . . . . . . . . 24
Item 3. Description of Property. . . . . . . . . . . . . . . . . . . . . 31
Item 4. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . . . . . 31
Item 5. Directors, Executive Officers, Promoters
and Control Persons. . . . . . . . . . . . . . . . . . . . . . 34
Item 6. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 35
Item 7. Certain Relationships and
Related Transactions. . . . . . . . . . . . . . . . . . . . . 38
Item 8. Description of Securities. . . . . . . . . . . . . . . . . . . . 40
PART II
Item 1. Market for Common Equities and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 2. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 43
Item 3. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . 43
Item 4. Recent Sales of Unregistered Securities. . . . . . . . . . . . . 43
Item 5. Indemnification of Directors and Officers. . . . . . . . . . . . 51
PART F/S
Financial Statements . . . . . . . . . . . . . . . . . . . . . . 52
PART III
Item 1. Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . 72
Item 2. Description of Exhibits. . . . . . . . . . . . . . . . . . . . . 74
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PART I
Item 1. Description of Business
Sytron, Inc. and its subsidiaries (collectively "Sytron" or the "Company")
are active in several segments of the commercial security business. Sytron sells
electronic products and services to security dealers, distributors, integrators,
and original equipment manufacturers (OEMs), and to end users who own and
operate government and commercial facilities .
Sytron, Inc. was incorporated in Pennsylvania in 1992, and changed its name
from MHB Technology, Inc. in 1995. At that time Sytron began to acquire
innovative technology from other small security companies. Sytron, Inc. now has
three main operating subsidiaries, Sytron Security Group, Inc., Dorado Systems
Corporation and Sytron Security Systems, Inc. Sytron provides management,
purchasing and financial services to these subsidiaries under contract.
Sytron Security Group, Inc. ("SSG"), a Colorado corporation, sells
sophisticated security systems, including hardware and software, for airports,
correctional facilities, and major corporate security applications. SSG mostly
supplies equipment; it also offers design, engineering and construction
management services, and parking control systems. SSG started in 1996 when
Sytron bought Mundix Control Systems, Inc. and the parking assets of The Stanley
Works.
Dorado Systems Corporation ("DSC"), a California corporation, manufactures
access control readers which it sells to original equipment manufacturers, to
integrators and to dealers. DSC was purchased in September 1995.
Sytron Security Systems, Inc. ("SSS"), a Colorado corporation, sells high
security entrance portals to banks, laboratories and other secure facilities.
SSS began this business in 1997 by buying the operating assets of Camenco, Inc.
("Camenco"). See "Terms of Acquisitions" below.
There were other, less successful, acquisitions in 1997 and 1998 which are
inactive, being liquidated, or which have been sold. Any 1999 operations of
Nautica Security Group, Inc. ("Nautica"), ECSI Construction Services, Inc.
("ECSI"), and Law Enforcement Technologic Resources, Inc. ("LETR") are reported
as discontinued businesses. Point Automation, Inc.'s fire alarm product line is
not being marketed. Note 1 to the Consolidated Financial Statements has a more
detailed description of Sytron's acquisition history, and Note 9 details
discontinued businesses.
In late 1995, Sytron decided to dispose of MHB Manufacturing, Inc., a
wholly owned contract manufacturing company. When MHB
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Manufacturing filed a bankruptcy petition in 1996, Sytron did not consider it to
be an important contributing subsidiary.
Before 1999, Sytron passed up short term profits, spending heavily to
develop and market products and acquire other companies so that it could quickly
grow much larger. In October 1998, Sytron refocused operations to reduce costs
and improve cash flow and return on assets. Without giving up on long-term
growth, acquisitions were delayed for at least until such time as the Company
begins generating profits from operations and has sufficient available working
capital to allow the Company to integrate such acquisitions into the Company's
existing businesses. There can be no assurances that such events will occur in
the foreseeable future, or at all.
In order to accomplish its aforesaid objectives, the following changes were
made by the Company:
- Sales and marketing were reorganized to use resources more
effectively, concentrating on large companies, on systems
integrators and on the correctional market.
- Monthly costs were reduced for personnel ($40,600) (23%), rent
($9,000) (53%) and development contractors ($26,700). To
accomplish these goals the Company simplified its product
offerings, delayed some product development and market
introductions, closed the UK sales office and integrated
operations to eliminate overlapping costs.
- Each business was evaluated for its short term (six months to
one year) and longer-term profit potential. The Company
discontinued LETR's fingerprint technology and Nautica's
vehicle tracking software and sold ECSI.
Sytron Security Group, Inc.
SSG is an integrated supplier of electronic products and services, both to
the security industry as a whole, and to owners and operators of government and
commercial facilities. With the completion of the major development efforts of
1998 and 1999, SSG began to focus its efforts on aggressively marketing its new
products.
SSG released its new, Microsoft Windows NT(R) compliant, security
management software (Maxx-Net NT(TM)) which is tailored for large commercial
projects such as airports and corporate security programs. Projects recently
installed include the Albany (New York) International Airport, Lincoln
(Nebraska) International Airport, Papa John's corporate headquarters and the St.
Croix International Airport in the Virgin Islands. The Anchorage, Alaska
International Airport and the corporate security system for Jacor
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Communications are in the final stages of completion. Now that the Maxx-Net
NT(TM) software is fully released and customer tested, a stronger sales focus
will be placed on the large jobs, such as airports and corporate headquarters,
for which the system is designed.
SSG also completed the development of a correctional facility- specific
product (Maxx-Net 5000(TM)). This product both monitors and controls all
security aspects of a detention or correctional facility, including cells,
doors, elevators, etc. Maxx-Net 5000(TM) may use either modern touch-sensitive
screens with graphic door controls on them, or standard control panels with
switches and lights connected to the system. This product accounted for a major
portion of sales in fiscal 1999. The $178,000 contract for the Missoula
Correctional Facility is now completed. In 1999, the Company substantially
completed the $500,000 of additional equipment added to the $925,000 Sterling
Prison project, which began in 1998 and completed much of the work on the
$518,000 Southwest County Justice Center in Riverside County, California. A
$23,000 contract was signed for the Multnomah County Detention Facility in
Portland, Oregon, which will be a major project of early 2000.
SSG targets the correctional and the airport industries while gradually
growing the end user and systems integrator sectors of sales.
End-user, Systems Integrators (Commercial)
At the present time, Sytron has 10 dedicated integrators nationwide which
are continuing to sell and market the Maxx-Net system within their respective
geographical area. These integrators target commercial projects such as Papa
Johns corporate headquarters, as well as multi-tenant sites where the building
developer or manager desires an overall system for security.
Maxx-Net has been developed to allow ease of use by these end- users and
also offers the ability to perform tailored functions for the customer. This has
led to several of the higher profile jobs such as Galileo International who
required the system be installed on their corporate Wide Area Network (WAN)
worldwide and Papa Johns Pizza which required special functionality to meet
their specific needs.
The system software is constantly being improved to better fit the end
users needs and in 2000 it is expected that modifications directly related to
making the system more dealer friendly will be undertaken. Although this is
development, the basic system will be only modified to meet this specification,
not re-developed. This development is expected to cost Sytron approximately
$50,000 over a period of 6 months.
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Correctional Systems
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Over the past 10 years, SSG has provided specialized systems tailored to
the needs of the correctional market. The first systems were site central
monitoring systems for the integration of the overall facilities systems. Since
then the systems have taken on a more active position in the facilities
including card access, door controls, personnel tracking, utility controls and
others. Because of this expansion of the Maxx-Net system into other areas of the
correction facilities controls, the systems are now sole source specified by one
correctional consultant and are accepted by several others. The correction
industry is growing at a substantial rate with new jails, prisons, court houses
and detention facilities being built every day. Because of this steady flow of
new business, Sytron has focused on this market as one niche where there are a
limited number of competitors as well as customers. These limited number of
contacts makes it possible to sell and market the Company's products with a
minimum of overhead and personnel, reducing the cost of sales. At the present
time Sytron has several projects under contract with a correctional backlog
value of approximately $600,000 remaining to be billed.
Airport Systems
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Since providing the original access system in the late 1980's for the now
closed Stapleton Airport in Denver, Colorado, Sytron has been providing FAA
compliant systems to airports throughout the United States. The Maxx-Net system
which was installed at Stapleton was specified and installed at Denver's new
Denver International Airport. As part of this project, the system was improved
from both a hardware and software prospective to meet the requirements for the
project which at the time was the largest access system ever installed by
anyone. After completing the modifications, the system was then able to be sold
to other airports such as Lincoln, Nebraska, Albany, New York, Anchorage,
Alaska, Eagle/Vail, Colorado, St. Thomas and St. Croix, United States Virgin
Islands, Pueblo, Colorado and has been approved for the new Detroit, Michigan
airport which is expected to be bid in March 2000. In addition to the access
control functions within the system, the capability of controlling the airfield
lighting has led to the installation of several systems for that purpose.
Sytron has recently been awarded the contract for access control and
vehicle gates at the Jefferson County Airport in Colorado. This $130,000
contract is expected to be completed by May 2000.
Parking Systems
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Sytron's parking systems business manufactures and sells access control
gates and ticket dispensers. The business was started with the 1996 purchase of
the parking division assets of
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The Stanley Works and Stanley dealers remain a significant portion of the
business. Sytron currently competes in the lower end of the parking market,
primarily with traditional mechanical devices. Sales are usually to dealers and
price, product reliability and quality of service are the key purchase
determinants. Sales to large customers like parking chains could be available
with more sophisticated, high-end products.
The overall market for parking products and services is reported by
industry associations at $65 billion. The parking equipment portion of this
market is estimated at $110 million in a study commissioned in 1994 by The
Stanley Works. The parking market is broadly divided into low-end, mid-range and
high-end segments.
The low-end segment consists of simple equipment and small card access, in
installations from $2,000 to occasionally as high as $100,000 in equipment cost.
The equipment is usually sold through a master distributor or large dealer.
There are perhaps 30 suppliers and no one is dominant. Many larger suppliers
focus on the more sophisticated market segments, spending little effort on the
lower end. This market heavily values price, as well as on time delivery and
after market service. Installations include office buildings, single lots,
employee lots, small commercial, condos and residential.
Sytron has a strong presence in this low-end market, and its products and
pricing are competitive. A complete UL certification (costing about $15,000) is
needed in early 2000 to comply with new rules. The product has been essentially
unchanged for at least six years and redesign of some assemblies would improve
functioning and reduce cost. The Company is in the process of redesigning the
gate control board to broaden the applications for which the product is
suitable. Financial constraints have limited Sytron's market penetration.
Profitable volume growth can be achieved with the usual resources--trade shows,
advertising and travel expenses to call on dealers. A low power system, with
battery backup, would make additional business available.
The mid-range market requires revenue control and card access systems. This
is a large market and includes large parking lot operators, city lots,
hospitals, hotels and convention centers. Jobs generally exceed $50,000 in
equipment cost. A number of companies participate in this segment, with US
Federal APD (division of Federal Signal Corp) and Amano-Cincinnati (division of
Amano Time of Japan) the dominant suppliers. An updated, network capable revenue
control program (development cost $35,000) is the Company's major product need
to be fully competitive in this segment. The Company's card access capability is
powerful, but is being modified to be more user friendly. Computerized systems
compute revenue by tracking vehicle usage and can direct drivers to available
parking spaces by floor or section. The value added is
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in protecting revenue in a largely cash business and in utilizing the
available space most efficiently. Customers for these systems are operators of
multiple parking facilities and high usage facilities such as airport parking
garages.
The high-end market includes complex capabilities such as pay- on-foot and
central equipment. This is a small segment, perhaps 2% of the market, dominated
by European suppliers, with over 10 companies in the U.S. competing for 100
available jobs each year. The equipment cost per job averages over $200,000,
installed in applications like airport central parking facilities. This segment
is characterized by very high research and development costs and technical
support costs. Sytron has no plans to enter this market segment.
Parking, Access Control and Security
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Integrating the parking system into Maxx-Net(TM), the same equipment
provides card access and security monitoring for both parking lots and for
buildings within the facility. This means people working within the facility
carry only one card for all functions. It also means that management can control
all the facility's functions on one system.
CountMaster Lot Capacity Indicator
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In 1998, SSG began offering its new CountMaster system, available as an
optional feature. This system tracks the number of cars entering and leaving a
parking facility, and the residual number of spaces available. When capacity has
been reached, it displays a "Lot Full" indicator at the entrance. The
CountMaster has been designed to display by area of a parking lot the number of
spaces available. With variable message signs at the entrance, this feature can
direct customers to areas with open spots more efficiently, improve customer
service by helping to avoid frustration and wasted time, and reduce pollution
created by fruitless searches for an available space.
Dorado Systems Corporation
DSC, founded in 1971, has been a Sytron subsidiary since 1995. DSC is a
leading manufacturer of magnetic stripe card readers and of related cards and
accessories for access control security systems. Management believes that DSC's
products have a competitive advantage because of its proprietary EMPI(R) data
encryption technology.
A magnetic stripe card is read by being "swiped" through a reader. The
magnetic stripe card format provides secure encoding and decoding. It allows
DSC, the system supplier, the installing security dealer, or even the end user
to encode cards on that user's proprietary system. DSC's products also support
multiple
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"open" magnetic stripe card formats for card encoding. This allows any entity
chosen by the customer to encode cards. We believe this encryption format leads
to a more secure magnetic stripe card than those of DSC's competitors.
DSC's cards and readers have been selected by many high security facilities
such as the Port Authority of New York, and by many international airports such
as Denver, LaGuardia (New York), San Francisco, Detroit, and Philadelphia. DSC
readers are also in use at several nuclear power stations such as Boston Edison,
Duke Power, New Central Nuclear (Spain) and Zorita Nuclear Power Plant (Spain).
One of DSC's OEMs was also awarded a contract to provide EMPI(R) readers for San
Onofre Nuclear Power in California.
Historically, the majority of DSC products have been designed for interior
use only. In June 1997, DSC introduced a weatherproof version of one of its
largest selling reader models. Some existing users converted all of their
standard readers to the weatherproof version. To date, the weatherproof readers
account for approximately 20% of DSC sales, some of which are new sales and some
of which are replacement sales.
As the market for magnetic stripe card readers decreased, DSC responded by
developing proximity-type readers. A proximity reader allows information to be
read from a card held near the reader rather than by "swiping" the card through
the reader. This makes the scanning quicker and the cards do not have a magnetic
stripe to wear out. In 1996, DSC introduced its EmpiProx TM Reader, a
proximity-type reader utilizing radio frequency (RF) identification. This
product is flexible in that the choices of reading format do not have to be made
at the factory.
DSC's proximity readers use the same outer casing as DSC's Series 500
magnetic stripe readers. This makes it easy for existing customers to convert to
the convenience of a proximity reader without modifying wall mounts, or dealing
with other aesthetic considerations. Thus, the customer has a virtual "plug and
play" upgrade from magnetic stripe to proximity reader.
In 1999, DSC finished developing the Universal Reader(TM) series of
proximity card readers. DSC now has proximity card readers which can capture
information from cards designed for readers manufactured by other companies. The
Universal Reader(TM) can also optionally be equipped to also read magnetic
cards. This dual function reader presents an opportunity to upgrade to proximity
scanning DSC's 10,000 EMPI(R) magnetic stripe users. The greatest cost of
conversion to the user is changing all of the existing cards. The dual function
reader allows the magnetic stripe cards to be replaced over time as they wear
out. In the last calendar quarter of 1999, Sytron applied for a patent on this
technology and as of the date of this Registration Statement, the Company has
not received any response to its application. Product deliveries began
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in March 1999, but litigation with HID Corporation significantly limited sales
1999. This litigation has been settled, removing the marketing impediment.
DSC also manufactures fire alarm and security point transmitters and
receivers for sending alarm signals over standard telephone lines to a central
station. The Company believes this product provides a competitive advantage
because it can work with the equipment of any fire alarm system manufacturer. In
January, 1999, DSC introduced a new product known as the Fiber Optic 5300 which
permits these units to be connected via fiber optic cable.
Sytron Security Systems, Inc.
Sytron began to market portals in 1997 after purchasing assets and
technology from Camenco, Inc. A portal is an entrance structure to control
access to a bank, laboratory or other facility requiring high security. The
portal is constructed of bulletproof glass and aluminum with a door at each end.
The second door will not open until the first door is closed, allowing an
individual to be confined on either entrance or exit by control from a remote
location. Options include metal detectors, weight scan comparison and biological
or card restricted door access.
The potential market for this device is estimated to be $15-20 million.
There are many banks in this country and very few have portals. Portals are
marketed through dealers who install and maintain them. There are several
products in this market, including those manufactured by Hamilton Safe of Ohio,
Nova Comm of Puerto Rico and Bliendart of Italy, but there is no single dominant
supplier. Quality, on time delivery, and maintaining working relationships with
a dealer network are key to success.
Sytron has devoted minimal resources to this business, both in marketing
and operational support. Those limited resources have produced a number of
installations which are still in use. No momentum has been generated because
dealer sign up efforts have been limited and sporadic, and because failure to
meet delivery commitments has discouraged dealer loyalty.
Marketing
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Sytron's primary channels of distribution include:
(i) Sale of 75% of the dollar volume of DSC products to
Original Equipment Manufacturers (OEMs) such as
Honeywell and Westinghouse which resell the product
to end users through the OEM's direct sales offices
or authorized dealers.
(ii) Sale of DSC communications modules to security and
fire alarm dealers which use these products on
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projects the dealers have sold to end users. These
products are marketed by the dealers under DSC's
name.
(iii) Sale by SSG of its products and systems primarily to
security and access control dealers or integrators,
which actively resell the products and systems
directly to end users. SSG also contracts directly
with end users in some instances.
(iv) Sale by SSS of its products and services to banking
industry dealers.
SSG's revenues come from the sale of its Maxx-Net(TM) products and services
to end users and system integrators or dealers. Many of the dealers that buy
Maxx-Net products are loyal to the product but do not purchase all of their
access control systems from the systems group because of its low level of stock
and long delivery times. Many of the competitors to Maxx-Net have 48-72 hour
shipment guarantees to their dealer networks.
End-user and large integrated systems sales are presently hampered because
Sytron's lack of financial credibility frequently outweighs the benefits that
our system products offer. If a construction bond is required on the project, we
are precluded from bidding, significantly reducing potential sales. With a
negative net worth, bonding companies will not provide bonding for Sytron. With
an improved balance sheet a bonding line can be arranged that would enable
Sytron to bid substantial projects over the next year and beyond. Some of these
projects range in size from $500,000 to over $10 Million each in contracts.
In both the correctional industry and the airport industry there are a
limited number of competitors and customers, so that sales and marketing
requires a minimum of overhead and personnel.
SSG also markets into the low-end segment of the parking market, in
installations from $2,000 to occasionally as high as $100,000 in equipment cost.
The equipment is usually sold through a master distributor or large dealer.
There are perhaps 30 suppliers and no one is dominant. Many larger suppliers
focus on the more sophisticated market segments, spending little effort on the
lower end. This market heavily values price, as well as on time delivery and
after market service. Installations include office buildings, single lots,
employee lots, small commercial, condos and residential.
DSC markets products to end users and dealers through industry trade
magazines as well as directly to OEMs via mailing campaigns and direct contact.
With a customer base of approximately 25 companies who account for more than 80%
of DSC sales, the target marketing is very focused for those accounts. 75% of
the dollar
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volume of DSC products is sold to OEMs such as Honeywell and Westinghouse which
resell the product to end users through direct sales offices or authorized
dealers. DSC's communications modules are sold to security and fire alarm
dealers for use on projects the dealers sell to end users. These products are
marketed by the dealers under DSC's name.
In the magnetic stripe market, DSC is a premier name among a number of
small companies. While magnetic stripe has lost ground in recent years to
proximity scanning, the magnetic stripe market appears to have leveled out.
Magnetic stripe technology remains attractive in environments, such as
universities, where one card is to be used for multiple purposes in addition to
access control, particularly with the advent of the "smart card."
In the proximity market, DSC is one of a number of small competitors. The
dominant force in this market is HID Corporation, with sales of about $100
million. We believe there is ample growth opportunity remaining for DSC, and
that its EMPI(R) encryption technology and unique Universal Reader(TM) provide
functional differentiation from its competitors.
In 1999, as part of the Sytron profit improvement program, products
produced or marketed by each of the subsidiaries are sold by that subsidiary to
a target market. Moreover, each subsidiary will cross-sell other products within
the corporate family to enhance Sytron's role as an integrated vendor in the
industries in which it operates.
As part of the Company's web site, Internet users are able to obtain
general or detailed information on specific products and to leave a request for
a sales call or for more in depth information. In addition, the site supports
dealers, OEMs and manufacturer representatives in processing orders, verifying
shipping dates and logging field problems.
Manufacturing and Assembly
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Sytron operates an assembly manufacturing plant in Broomfield, Colorado,
where it assembles and markets access control systems and security products and
where it develops and markets a standard software product for the integration of
disparate electronic security products (systems integration).
Consolidation of the manufacturing assembly capacity has allowed Sytron to
become more efficient by centralizing activities such as customer service, order
entry, purchasing, assembly, quality control and shipping/receiving. Where
components used by the subsidiaries are common, Sytron purchases in combined
quantity, lowers the unit cost for each item and reduce the space required to
store the item.
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Acquisitions
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In 1999, Sytron focused on generating profit and cash flow from existing
operations. Further acquisitions will be deferred, except in the event the
opportunity to Sytron is significant. At such later date as Sytron is able to
consider acquisitions, management believes that the fragmented make-up of the
security industry, characterized by a large number of participating companies
with a wide variance in annual revenues, will continue to provide Sytron with
opportunities for growth. There can be no assurances that this will occur.
Terms of Recent Acquisitions
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In 1995, Sytron began acquiring small businesses with technological
advantages in the field of electronic security products and services. In
September 1995, Sytron acquired the stock of Dorado Systems Corporation for
$1,083,850. The funds for the acquisition came from three sources which later
became Sytron affiliates: Katonah West Pension Plan, Springhill Holdings, Ltd.
and Werren Holdings, Ltd. $330,000 remains outstanding from that loan. See
"Certain Relationships and Related Party Transactions."
In September 1996, Sytron acquired the stock of Mundix Control Systems,
Inc. for 300,000 of Sytron's common shares. The value of Sytron's stock
attributed to this purchase was $1,500,000.
Effective November 22, 1996, Sytron acquired parking equipment assets from
The Stanley Works, a Connecticut corporation, for $25,000 in cash and royalties
payable to Stanley during a two year period.
In March 1997, Sytron acquired certain assets from Camenco to begin the
portals business. Sytron paid $10,000 and 200,000 shares of its Common Stock and
assumed an aggregate of $418,018 in Camenco liabilities.
In October, 1997, Sytron purchased a fire products line from Point
Automation, Inc. in exchange for 25,000 shares of restricted Common Stock. The
agreement also provided for the purchase of usable inventory of up to $50,000.
In 1999 the contract was renegotiated and the seller received 25,000 Sytron
common shares for the inventory.
In May 1998, a subsidiary of Sytron acquired the net assets of Nautica
Technology Group International for 50,000 restricted shares of Sytron Common
Stock valued at $190,000. Up to 550,000 additional restricted shares of Sytron
Common Stock could be payable based on annual increases in net sales and in
earnings before income taxes over the following three years. This subsidiary is
not in operation at this time, there are no plans to market its products in the
near future and management does not
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believe any additional stock will be issued beyond the original 50,000 shares.
In October 1998, Sytron acquired the outstanding shares of Law Enforcement
Technologic Resources, Inc. ("LETR"). LETR was in the business of biometric
recognition systems, which requires significant capital funds for development.
Because of the high degree of capital required for this speculative product,
LETR's operations were closed in October 1998. Sytron issued 440,000 restricted
shares of Common Stock for LETR.
In November 1998, Sytron acquired all of the outstanding stock of ECSI
Construction Services, Inc. for 100,000 Sytron common shares. ECSI operates
primarily along the Pacific Coast and in Nevada, installing commercial security
systems. In August 1999, ECSI was sold back to the original owners for the
return of the 100,000 shares of Sytron Common Stock.
Crescent Financing
Since May 1998, Crescent International Limited ("Crescent"), a foreign
corporation based in Switzerland, has been the primary source of financing for
the Company. Two transactions have taken place. In May 1998, Sytron sold to
Crescent for $250,000 in cash, 166,667 shares of Common Stock and a warrant to
acquire an additional 100,000 common shares at an exercise price of $3.37 per
share, which warrant is exercisable until May 2003 (the "May Transaction").
Rights under the May Transaction Warrant expire in May 2003. Under the May
Transaction, the Company had the conditional right to sell additional shares to
Crescent. The Company also had an obligation to file a registration statement
for all of the shares issued and issuable to Crescent under the various aspects
of the May Transaction. The Company was not able to meet its obligations. As a
result both of that failure and of the fall in the price of the Company's Common
Stock on the market on which that stock is traded, the Company was unable to
comply with the conditions underlying its right to sell to Crescent certain
additional shares of stock. In the autumn of 1998, the Company and Crescent
agreed to terminate the May Transaction and to replace it with a revised
financing arrangement (the "January Transaction").
The January Transaction closed on January 15, 1999. It involves (i) the
sale to Crescent by the Company of a Convertible Promissory Note with a face
amount of $350,000 (the "First Note"), and the conditional right to sell to
Crescent a second Convertible Promissory Note in the face amount of $400,000
(the "Second Note"); (ii) the issuance of 73,045 shares to Crescent as a
commitment fee for entering into the January Transaction, and the Company's
agreement to issue an additional number of shares every six months to Crescent
so long as any portion of the First Note or the Second Note remains unpaid;
(iii) the sale to Crescent of 100,000 shares for an aggregate of $1.00; (iv) the
issuance to Crescent of a
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Warrant (the "Additional Warrant") to purchase up to 726,000 shares from the
Company for $0.01 per share; and (v) the payment by the Company to Crescent of a
Note Issuance Fee of $10,500 in cash.
The Convertible Promissory Notes are secured by a first lien on the
Company's inventory. Each Note is convertible in $50,000 minimum segments at any
time into the Company's Common Stock.
In the January Transaction, share price formulas are part of the First
Note, the Additional Warrant and the commitment fee. These formulas determine
the precise number of the Company's common shares that are required to be issued
to Crescent. Each formula is based on "Market Price." "Market Price" is defined,
for purposes of the January Transaction, as the lowest three consecutive trading
day average of bid prices for the Company's Common Stock during the thirty
trading days before the date on which Market Price is determined.
The conversion formula in the First Note is the lower of $0.8125 per share
and eighty five (85%) percent of Market Price. Using as an example, Market Price
as determined on July 20, 1999, if the entire First Note were to be converted,
the Company would be obligated to issue 1,520,326 shares of its Common Stock. If
the entire First Note is converted at any time the Market Price has risen to
more than $0.96 a share, the Company would be obligated to issue 430,769 shares
of its Common Stock. The fewest number of shares of Common Stock that the
Company is obligated to issue on conversion of the First Note is 430,769.
The Company's ability to sell the Second Note to Crescent is limited by
several important conditions over which it has no control. They include (i) that
the average daily trading volume for the Company's Common Stock equals or
exceeds 20,000 shares per trading day; (ii) that Crescent shall have converted
at least $175,000 of the First Note to the Company's Common Stock; (iii) that
the collateral that Crescent holds to secure the Company's obligations to
Crescent shall be worth at least 150% of the combined outstanding debt evidenced
by the Crescent Notes; and (iv) that the lowest three consecutive trading days
average of bid prices for the Company's Common Stock is not less than $1.50 per
share.
The Company has no present expectation that it will be able to sell the
Second Note to Crescent, but if it is able to do so, the terms are substantially
similar to the terms of the First Note.
The shares which Crescent may acquire under the Additional Warrant are
reduced as the Market Price of the Company's Common Stock on the effective date
of share registration increases. If the market price is $0.28 per share or
lower, then Crescent may acquire all 726,000 shares of $0.01 per share. However,
if, for example, the market price is $0.38 per share, Crescent's right to
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acquire shares under the Additional Warrant is reduced to 491,228 shares, at
$0.01 per share.
The number of shares issuable each six months as a continuing commitment
fee is also based on Market Price on the date before the commitment fee is
payable. Shares are issuable if there is an unpaid balance under either of the
Convertible Promissory Notes. Five (5%) percent of the unpaid balance of the
Convertible Promissory Notes is divided by the Market Price, and the quotient is
the number of additional shares that the Company is required to issue. At July
15, 1999, the Company became obligation to issue an additional 76,019 shares of
Common Stock as a commitment fee for the six month period starting on that date.
The First Note may not be converted into the Company's Common Stock if by
reason of such conversion Crescent would own (beneficially and through Crescent
affiliates) more than 4.9% of the outstanding shares of the Company's Common
Stock. Nor may the Additional Warrant be exercised to acquire the Company's
Common Stock, if, by reason of such exercise, Crescent would own (beneficially
and through Crescent affiliates) more than 9.9% of the outstanding shares of the
Company's Common Stock.
As part of the terms of these financings, the Company provided Crescent
with certain demand registration rights. Relevant thereto, in February 1999, the
Company filed a registration statement on Form SB-2 with the US Securities and
Exchange Commission, attempting to register an aggregate of 2,249,045 shares
issued and reserved for issuance in favor of Crescent. However, after
discussions with Crescent, the Company voluntarily elected to abandon this
registration statement with Crescent's consent.
Industry Overview
Since 1980, the U.S. market for security products and services has
experienced robust growth, expanding from $13.4 billion in revenues in 1980 to
$38.0 billion in 1990, $60 billion in 1995 and forecasted to grow to over $100
billion by the Year 2000. Forces behind this growth are several. Commercial and
industrial companies are increasing the deployment of security products and
services to confront concerns regarding unacceptable loss, excessive insurance
costs or insurability, harm to employees via workplace violence and litigation
liability resulting from potential victimization by criminal or terrorist acts.
The Department of Justice Hallcrest Report II forecasts that product
sales from the industry's estimated 4,800 manufacturers and distributors will
grow to $23.7 billion by the Year 2000. Of the major products categories, the
fastest growing segments will continue to be electronic security products, those
products based upon intelligent chip technologies, including access control,
video surveillance and alarm processing. As a group, electronic security
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products are expected to continue to offer the highest product growth to the
Year 2000, with annual growth rates from 11% to 40% depending on the product
category.
Historically, systems to solve a single problem were used at a facility,
when additional needs were identified additional systems were installed. This
activity produced a multiple system environment which was expensive, unwieldy
and sometimes ineffective.
In the past, these systems have been interfaced to give interaction between
them but now, with technology advancements, it is possible to integrate the
functions of these several systems into one system using one database and
possibly one operator terminal for the main machine interface. This
"integration" can lead to reduced initial cost, maintenance cost and also allows
many functions to be dependent or controlled because of changes in other
functions; for example, turning off utilities after all personnel have left an
area.
As stated by Lehman Brothers Senior Vice President and Industry analyst
Jeffrey Kessler in the 1995 Security Industry Review, "Integrated Systems will
drive the security industry's growth into the year 2000." Kessler's report also
adds "access control is the cornerstone of integration."
Sytron Security Group's plan is to develop and supply this integrated
solution. Maxx-Net(TM) is our solution for the integrated system and has
received industry acceptance with a level of reliability and price points that
the dealer network endorses.
DSC and Parking Systems, as providers of equipment to this industry,
continue to have an opportunity to grow with this industry.
Employees
The Company presently has 40 full-time employees functioning in the
capacities of management (4), manufacturing, purchasing and production (23),
administration (5), engineering (3) and sales, marketing and customer service
(5). The number of people employed by the Company varies from time to time
depending upon the Company's production levels. From time to time and on an "as
needed" basis, the Company will also employ additional persons on a part or full
time basis. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that its relationship with its
employees is excellent.
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Competition
Management believes that the security industry is fragmented and that there
is no one or group of companies with major market share having control of the
future of the industry. Sytron has and will continue to encounter competition
from numerous other firms and established institutions, many of which are
larger, have longer histories of operations and have greater financial,
marketing and other resources than those of Sytron. No assurances can be
provided that Sytron will be successful in its efforts to maintain market
acceptance or that, even if successful, will be able to attract sufficient sales
to make its operations commercially profitable.
Over the past ten years the industry has been undergoing a great
transformation because of the mergers and acquisitions occurring in it. The
larger security companies to offer a broader line of products have acquired many
of the older names in the business. As these companies are merged into the
larger entities they have become less responsive to industry and end-users
needs, these companies normally take longer to develop new product and within
the larger bureaucracy development is accomplished at higher costs. In addition,
while these new owners can now offer a broader line of products, they also
alienate many of the old customers of the acquired company because they directly
compete with another line of the parent company. This has been evident in
acquisitions such as MDI by Ultrak as well as Software House and Continental
Systems by Sensormatic.
SSG is one of approximately 10 independent manufacturers of integrated
systems in the access control marketplace. The size of these ten competitors
ranges from $2 million in annual sales for companies such as Toye Corporation
and Receptors to over $15 million in the case of companies such as Continental
Instruments, PCSC, Matrix, Corby and Infographics. The difference between
companies such as these and SSG is that they each have specific niche markets,
some of which are the same and SSG is able to cross over to multiple niche
areas.
The niche segments targeted by SSG at this time are the correctional,
airport and high-end integrated commercial systems markets. These markets have
been targeted because the other competitors in the market are focused on the mid
size segment of the market that requires systems with basic features and
normally includes from 16 to 64 readers. In this segment the competition is
extremely fierce while loyalty from customers is very low. By focusing on the
higher end projects, SSG competes with fewer competitors and in some cases has
been selected as sole source, not allowing any competitors to bid against them.
While SSG has and will focus on its target markets, its systems are
evolving into systems that the dealer network is now
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embracing. With the planned developments in the software to allow dealers to
install the system easier, management expects the dealer base to grow
significantly over the next 5 years and beyond. No assurances can be provided
that this will occur.
In the proximity market, DSC is one of a number of small competitors. The
dominant force in this market is HID Corporation, with sales of about $100
million. Management believes there is ample growth opportunity remaining for DSC
and that its EMPI(R) encryption technology and unique Universal Reader(TM)
provide functional differentiation from its competitors.
Governmental Regulations
The Company is not subject to any extraordinary governmental regulations.
Risk Factors
The Company's business is subject to numerous risk factors, including the
following:
THE COMPANY'S INDEPENDENT AUDITORS HAVE EXPRESSED A GOING CONCERN OPINION
As a result of the Company's continued losses from operations and its
accumulated deficit of $(12,494,486) at September 30, 1999, and its minimal
capital resources then available to meet obligations which were normally
expected to be incurred by similar companies, there is a substantial doubt about
the Company's ability to continue as a going concern and, as a result, the
Company's independent auditors have issued a "going concern" opinion as to the
Company's ability to continue as a going concern in connection with the audits
for the years ended September 30, 1999 and 1998. This qualification points out
the substantial doubt which exists about Sytron's ability to continue as a going
concern. See Note 8 to the Consolidated Financial Statements.
Management believes that the Company's operations will generate positive
cash flow during fiscal 2000. Net income in the quarter ended December 31, 1999
was $56,552, but management cannot assure that Sytron will achieve profitable
operations in the remainder of 2000, or that it will continue to maintain
profitable operations. In any event, unless the Company can secure additional
financing, as to which there can be no assurance, the Company may have to cease
operations. Financing plans are discussed below.
There can be no assurance that the Company will be successful in raising
sufficient cash to meet its current obligations, or that it will achieve
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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THE COMPANY HAS A NEED FOR ADDITIONAL FINANCING AND HAS A WORKING CAPITAL
DEFICIT
As a result of Sytron's continued losses, it had a negative working capital
position of ($2,164,700) at September 30, 1999. Additional equity or debt
financing will be needed to sustain Sytron's present operating levels. The
Company's business and operations will be materially and adversely affected if
it is unable to obtain a level of financing and working capital commensurate
with the level of its revenues.
There is no assurance that adequate financing will be available on
acceptable terms, or on any terms. Management is currently pursuing private
equity financing, but there is no assurance of success. Future secured loans are
unlikely to be available since Sytron has granted security interests in
substantially all of its assets, including inventory to Crescent and its
accounts receivable, fixed assets and technology to other lenders.
THE COMPANY HAS A LIMITED ABILITY FOR SECURED BORROWING
The Company may be limited in its ability to obtain future secured loans
from potential lenders because it has already granted security interests in
almost all of its assets, including inventory, to Crescent and its accounts
receivable to other lenders. It is unlikely that the Company will be able to use
its proprietary technology to secure any loans. (See "Item 7, Certain
Relationships and Related Transactions.")
THE COMPANY HAS A LIMITED SALES FORCE AND LIMITED CHANNELS OF DISTRIBUTION
The Company's security system products and services are not aimed at
consumers, but are targeted to owners, operators and developers of commercial
and institutional facilities. The Company must offer and sell its services and
products both to owners and managers of existing structures and facilities and
to the owners, designers and financial institutions involved in the development
of structures and facilities now being planned or built. The Company has only a
limited number of sales and marketing employees. In order to cover additional
market areas and to increase revenues, the Company will need to expand its
marketing and sales resources. Management cannot assure that it will be able to
do this, particularly in light of the Company's present financial resources. The
failure to expand sales would have a material adverse effect on the Company's
business. See "Item 1, Description of Business - Marketing."
THERE IS SIGNIFICANT COMPETITION IN THE SECURITY SYSTEMS AND SERVICES MARKET
The market both for security and for parking systems services and products
is intensely competitive. Since there are no substantial barriers to enter the
market, management believes
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competition in this market will intensify. The Company believes that the
principal competitive factors in these markets are name recognition,
performance, ease of use and functionality of products. Right now, the market
for the Company's services and products is changing rapidly. The market is
characterized by an increasing number of entrants who have introduced or
developed services and products for use in the industry. As a result, the
Company's products and services may undergo substantial changes as it reacts to
competition. The Company currently competes against other regional firms and
nationally represented companies which develop, design and manufacture security
electronics and related products. Many of its competitors have much greater
financial, technical, human and marketing resources than that of the Company.
There is no assurance that the Company can compete successfully against these
competitors. See "Description of Business -- Competition."
THERE IS A RISK OF TECHNOLOGICAL CHANGE AND RISK OF OBSOLESCENCE
The high technology products Sytron offers, such as computer -based
security access systems containing microelectronics, and computer hardware and
software, are subject to rapid and significant technological change. Competitors
who develop more effective and efficient technology may render the Company's
technology and products obsolete. Thus, the Company's future success will depend
in part on its ability to adapt to rapidly changing technologies, to adjust its
services and products to evolving industry standards and to continue to improve
the performance, qualities and reliability of its services and products. It must
do so not only to meet the demands of the marketplace, but also to keep pace
with competitive service and product offerings. There can be no assurance that
the Company will successfully meet these requirements. Failure to adapt to such
changes would have a material adverse effect on the Company's business.
THERE IS A RISK THAT THE COMPANY WILL NOT BE ABLE TO MAINTAIN TECHNOLOGY
PROTECTION AND PROPRIETARY RIGHTS
Sytron regards its technology as its property and attempts to protect it
through trade secret laws, restrictions on disclosure and other methods. The
Company enters into confidentiality agreements with its employees and
contractors and tries to control access to and distribution of its documents and
proprietary technology. However, the steps taken may not prevent
misappropriation or infringement of the Company's proprietary technology. Thus,
the Company is exposed to the risk that others may use its technology and
processes without redress. Further, no assurances can be provided that the
Company's technology or processes will not be found to infringe upon the patents
and proprietary technology of others.
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THE SUCCESS OF THE COMPANY'S FUTURE GROWTH IS DEPENDENT UPON ITS ABILITY TO
SUCCESSFULLY MANAGE GROWTH
For Sytron to expand rapidly, to offer its services and products
successfully and to implement its business plan, the Company will require
effective planning and management. Its future performance and profitability will
depend on many factors, including (i) management must successfully maintain
existing customer relationships; (ii) the Company must effectively market
expanded service capabilities; (iii) the Company needs to keep up a consistent
high quality of service; and (iv) the Company must recruit, train, motivate and
retain qualified personnel. No assurances can be provided that the Company will
either maintain or accelerate Sytron's growth or that the Company will
anticipate all of the changing demands that expanding operations will impose on
management, financial systems and management information systems. Any failure to
do so could have a material adverse effect on the Company's business.
THE COMPANY HAS NOT PAID DIVIDENDS AND HAS NO INTENTION TO PAY A DIVIDEND IN THE
FUTURE.
Sytron has not paid cash dividends on its Common Stock, nor is it
anticipated that it will pay cash dividends in the future. The Company currently
intends to retain all earnings, if any, to finance the development and expansion
of its business.
THE COMPANY IS DEPENDENT ON KEY PERSONNEL
The Company is substantially dependent for the success of its operations on
the expertise and personal efforts of Robert Howard, its President and CEO. The
loss of the services of Mr. Howard would have a material adverse effect on
Sytron. Until January 2000, Mr. Howard was engaged pursuant to a contract. As of
the date of this Registration Statement no new agreement has been executed, but
it is anticipated that such an agreement will be executed in the future. The
Company's success is also dependent upon its ability to hire and retain
qualified personnel. No assurances can be provided that the Company can hire or
retain such necessary personnel.
THERE IS A LIMITED TRADING MARKET FOR THE COMPANY'S COMMON STOCK.
As of the date of this Registration Statement, Sytron's Common Stock is
traded on the "Electronic Bulletin Board" operated by the National Association
of Securities Dealers, Inc. (the "NASD") under the symbol "SITR." The Electronic
Bulletin Board is a more limited trading market than the NASDAQ Small Cap Market
and timely, accurate quotations as to the price of the Common Stock may not
always be available. A holder of the Company's Common Stock may expect that
trading volume will continue to be low in such market. Consequently, the
activity of only a few shares may affect the
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market and may result in wide swings in price and in volume. While no assurances
can be provided, Sytron intends to file an application to cause its securities
to be listed on the NASDAQ SmallCap Market when it is able to qualify for such a
listing. Among the primary standards which must be met to qualify for the NASDAQ
SmallCap Market is a bid price of $4.00 per share, with 1,000,000 publicly held
shares, which shares shall have a market value of $5,000,000. The Company must
also have net tangible assets of $4,000,000, market capitalization of
$50,000,000 or net income of $750,000 in the most recent completed fiscal year
or in two of the last three most recently completed fiscal years. The Company is
not currently able to meet such standards and there is no assurance that it will
meet or be able to maintain such standards in the future.
THE COMPANY'S COMMON STOCK IS CURRENTLY DESIGNATED AS A "PENNY STOCK," WHICH HAS
AN ADVERSE EFFECT ON TRADING.
The Securities and Exchange Commission has adopted rules which established
the definition of a"penny stock," for purposes relevant to the Company, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require: (i)
that a broker or dealer approve a person's account for transactions in penny
stocks; and (ii) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person's account for
transactions in penny stocks, the broker or dealer must (i) obtain financial
information and investment experience and objectives of the person; and (ii)
make a reasonable determination that the transactions in penny stocks are
suitable for that person and that person has sufficient knowledge and experience
in financial matters to be capable of evaluating the risks of transactions in
penny stocks. The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prepared by the Commission relating to
the penny stock market, which, in highlight form, (i) sets forth the basis on
which the broker or dealer made the suitability determination; and (ii) that the
broker or dealer received a signed, written agreement from the investor prior to
the transaction. Disclosure also has to be made about the risks of investing in
penny stock in both public offering and in secondary trading, and about
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Because the Company's securities are currently subject to the rules on penny
stocks, the market liquidity for the Company's securities is adversely affected.
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THERE IS A RISK OF POTENTIAL ADVERSE EFFECTS ARISING FROM THE ISSUANCE OF
PREFERRED STOCK
The Company's Board of Directors is authorized to issue 10,000,000 shares
of Preferred Stock. They determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. For example, the
holders of Preferred Stock may have the right to convert their shares to Common
Stock. The issuance of Preferred Stock could also have the effect of delaying,
deferring or preventing a change in control of Sytron. At present, Sytron could
consummate any merger, reorganization, sale of substantially all of its assets,
liquidation or other extraordinary corporate transaction without the approval of
the holders of the outstanding shares of the Preferred Stock. The Company has no
present plan to issue shares of Preferred Stock. The existence of Preferred
Stock may make it more difficult for the Company to raise capital when necessary
and may depress the market price of Sytron's Common Stock. See "Item 8,
Description of Securities."
THE COMPANY IS DEPENDENT ON THIRD-PARTY SUPPLIERS.
Sytron is dependent on third-party suppliers for the various component
parts of its products. Although management believes there are alternative
sources for these component parts, the failure of the Company's current
suppliers to supply such component parts or the absence of readily available
alternative sources could have a material adverse effect on the Company,
including delaying the implementation of the Company's business plan to achieve
profitability. Sytron does not have supply contracts with any third-party
suppliers and purchases components pursuant to purchase orders placed from time
to time. See "Item 1, Description of Business."
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Registration Statement. This Registration Statement contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
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Overview
Sytron was incorporated under the laws of the Commonwealth of Pennsylvania
on November 9, 1992. The Company participates in several segments of the
commercial security business. Sytron's sells electronic products and services to
security dealers, distributors, integrators, and original equipment
manufacturers (OEMs), and to end users who own and operate government and
commercial facilities. The Company operates principally through three
subsidiaries, two of which are in the developmental stage. Much of the Company's
revenue is derived from large contracts performed over many months and which are
subject to changes in timing. As a result, revenue and profits can vary up or
down from one quarter to the next.
In 1995, the Company began to acquire innovative technology from other
small security companies. Sytron now has three main operating subsidiaries, SSG,
DSC and SSS. The Company provides management, purchasing and financial services
to these subsidiaries under contract. SSG sells sophisticated security systems,
including hardware and software, for airports, correctional facilities and major
corporate security applications. SSG mostly supplies equipment but also offers
design, engineering and construction management services and parking control
systems. SSG started in 1996 when Sytron bought Mundix Control Systems, Inc. and
the parking assets of The Stanley Works.
DSC manufactures access control readers which it sells to original
equipment manufacturers, to integrators and to dealers. DSC was purchased in
September 1995. SSS sells high security entrance portals to banks, laboratories
and other secure facilities. SSS began this business in 1997 by buying the
operating assets of Camenco.
The Company has suffered losses from operations during every year since
1993. Note 8 to the Consolidated Financial Statements discusses whether Sytron
can continue as a going concern, the assumption on which the statements were
prepared. Before 1999, Sytron passed up short term profits to develop and market
products and acquire other companies so that it could quickly grow much larger.
In 1999 Sytron refocused operations to generate the profits and positive cash
flow it believes can be obtained by operating with that goal rather than for
future growth. Without giving up on long-term growth, acquisitions were delayed
until such time as the Company begins generating profits from operations and has
sufficient working capital to allow management the opportunity to assimilate
such acquisitions into the Company's existing businesses. There can be no
assurances that this will occur.
In October 1998, management reorganized sales and marketing to use the
Company's resources more effectively, concentrating on large companies, on
systems integrators and on the correctional
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market. At the same time, management began to reduce operating costs by reducing
personnel, renegotiating leases, simplifying Sytron's product offerings, and
delaying some product development and market introductions. Sytron did reduce
its operating losses as planned. Project timing changes made sales grow more
slowly than planned, but tightly controlling expenditures cut operating losses,
even with heavy legal expenses in the third and fourth quarters.
Income from
Quarter Revenue Operations %Sales Net Income
------- ------- ---------- ------ ----------
October-December 1998 $1,291,200 $ (72,600) (6%) $(344,100)
January- March 1999 1,222,200 (60,300) (5%) (121,400)
April- June 1999 1,169,300 (103,100) (9%) (237,400)
July- September 1999 1,537,500 69,000 5% 108,600
Results of Operations
Comparisons of Results of Operations for the Fiscal Years Ended September
30, 1999 and 1998
Sales for fiscal 1999 grew by $181,700 or 4% over 1998 sales. This net
increase included a major product mix change:
- Security product sales through SSG increased by $646,000
(38%). The Company finished the $970,000 Sterling, Colorado
detention facility project started in 1998, and the added
$500,000 third phase is nearly done. Other projects included
the Riverside County Correctional Facility, the Anchorage
International Airport, Papa Johns corporate security system,
and the St. Croix, Virgin Islands, airport.
- Parking systems sales in 1999 declined by $181,500 (18%). The
decrease resulted from inadequate sales resources and
continuity in the earlier part of 1999, as well as
rationalizing this product line and discontinuing a DOS based
revenue control system.
- DSC's reader business decreased $36,800 (2%) in 1999. The
magnetic card reader market was flat and proximity reader
sales were limited by the HID Corporation patent infringement
suit, which has now been settled, against DSC's new Universal
Reader(TM).
- SSS sales dropped $245,600 (62%). Management believes the
portal business has potential, but it has had an inadequate
dealer organization and limited marketing. In 1999, Sytron did
not have available the resources which SSS needed for renewal
and growth.
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Gross profit in 1999 was $389,000 (18%) less than in 1998. Gross profit as
a percent of sales declined from 42% to 34%, because there were major changes in
the mix of products sold. SSG's security contracts have a higher cost of sales
than readers and other standard products, but have low operating expenses. The
income from operations which security projects generate is comparable to that of
Sytron's traditional products.
Operating expenses dropped by $1,170,800 (36%) in 1999, with decreases of
$357,000 (51%) in R&D, $324,300 (38%) in sales and marketing and $489,400 (32%)
in administration. Development costs declined steeply in 1999, as the commercial
and correctional versions of the Maxx-Net NT(TM) based security system were
introduced and DSC's innovative universal proximity reader completed final
development. Much heavier development spending for both product lines was
incurred in 1998. Sales and marketing expense decreased in line with the
strategy change of October 1998 to focus on large corporate, airport and
correctional market sales. Dealing with the designers and integrators who direct
bidding on these projects takes substantially less sales resources than the
previous dealer- oriented strategy. Administration expense benefited from
eliminating the additional staff and costs previously needed for newly acquired
and planned subsidiaries, as well as by the overall cost cutting started in
October 1998. Included in 1999 expenses are legal fees aggregating $200,000 for
defense of the Universal Reader(TM) patent infringement suit and for work on a
registration statement which was later withdrawn. The small sales growth,
coupled with major operating expense reductions, resulted in a much smaller loss
from operations in 1999 of ($162,400), an improvement of 83% from the ($944,210)
loss in 1998.
Interest expense in 1999 decreased a modest $4,800 (2%) from 1998. There
was additional interest of $26,000 on the convertible note issued in January
1999, but the lower average market price of Sytron stock reduced the expense
caused by paying a fixed number of common shares as interest on other notes.
1999 did not have any of the major non-operating charges which were
absorbed in 1998. 56% of the 1998 net loss resulted from asset write-downs. With
the 1998 release of new hardware and software products and integration of prior
acquisitions, Sytron reduced recorded assets by $1,095,900, reflecting their
anticipated future business contribution. Capitalized security software running
under IBM OS/2, superseded by software running under Microsoft Windows NT(R),
was the largest write off. Inventory carrying value was reduced by $869,700 with
the introduction of the 386 hardware platform, and more precise measurement
(facilitated by improved operating systems and personnel) of requirements for
inventory held, and the effects of integration of products lines acquired. The
loss from discontinued operations was ($427,500) in 1998, but only ($600) in
1999, as cost reduction programs began to produce results.
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Sytron had net operating loss carryforwards at September 30, 1999, of
approximately $12,500,000, expiring in 2007 through 2014. Future tax benefits
for these accumulated losses represent a potential asset, but they will expire
unused unless Sytron is able to generate enough earnings to offset the losses.
1999 Profitability and Liquidity Improvement Program
In October 1998, Sytron made many changes to reduce costs and improve
return on assets. Management's objective was a profit by the fourth quarter of
fiscal 1999, which was accomplished. Acquisitions already made were integrated
to eliminate overlapping costs or shut down to conserve cash. Each business was
evaluated for its short term (six months to one year) and longer-term profit
potential.
Sytron delayed developing existing technology where the funding was not
available. Management looked at selling or closing operations where the funds
needed were too much for the profit potential, where delaying development was
not commercially viable or where the proceeds might fund more promising
opportunities. The Company stopped developing LETR's fingerprint technology and
Nautica's vehicle tracking software in October 1998, and decided in September
1999 to liquidate these companies and the sales office in England. ECSI was sold
in August 1999. While ECSI was profitable, Sytron could not invest the
management and financial resources it needed.
Even though the Company is focused on generating profits and cash, sales of
its products will grow and needs to obtain more working capital. Additional
acquisitions are expected to occur after the Company becomes profitable and has
sufficient capital. There are no assurances either of the aforesaid situations
will occur in the near future, or at all. In the nearer term, selling some
product lines to fund growth of the remaining products remains a distinct
possibility.
Cost Reductions
- ---------------
In 1999, labor and overhead costs for all functions and businesses were
examined for cost reductions. As a result, Sytron's labor cost is $40,600 (23%)
less per month than it was in September 1998. This savings comes from all
functions and includes efficiencies from reorganizing sales and marketing, from
closing Sytron's distribution office in England and from manufacturing
improvements. Additionally, completing the major development projects of 1998
allowed reductions in contract engineering in 1999 of about $26,700 per month
from average 1998 levels. Rent dropped $9,000 (53%) per month from consolidating
operations, contract manufacturing of selected high volume products and closing
the United Kingdom office.
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Other activities, like combining Sytron Parking Systems, Inc. and Sytron
Security Products Inc. into SSG, are harder to quantify, but reduce costs by
reducing the effort to account for, manage and market similar product lines.
Liquidity and Capital Resources
In 1998 and 1999, Sytron made some improvements in its capital position.
$567,300 was raised by a cash sale of stock, to two offshore investors, Werren
Holdings Limited and Crescent International Ltd, in 1998. Sytron also issued
2,265,656 common shares in exchange for services, for debt settlement and for
interest totaling $1,466,900 over this period. Net new borrowings totaled
$370,300 in 1998, and Sytron received $350,000 from a convertible note issued to
Crescent in January 1999.
Sytron's capital requirements are primarily for working capital, consisting
of accounts receivable and inventories, the need for which increases
proportionately as Sytron's sales increase. Sytron also needs capital to market
its products appropriately and to keep their technology competitive. New
equipment needs are minor (only $25,100 in 1999) and the Company leases when
possible. Sytron has focused on improved internal cash flow in 1999, but
additional working capital had to be financed. In 2000, growth in existing
product lines is expected to require more working capital.
At September 30, 1999, Sytron owed $344,200 to related parties and
$1,375,400 to unaffiliated lenders; all of these notes except for $361,800 are
due within one year. Maturing debt, particularly the $608,000 of notes secured
by accounts receivable which mature January 31, 2000, must be refinanced or
extended. There are no present demands from any note holder for repayment of the
obligations owed by Sytron, but no specific agreements have been reached with
any of these holders of notes which are maturing or in default. Note 5 to the
Consolidated Financial Statements provides a detailed listing of these
liabilities.
Another $1,300,000 is owed to past vendors, much of it dating to 1997 or
earlier. Opportunities do exist to negotiate compromises of the amounts owed or
payments over extended periods. These debts result from Sytron's consistent
losses and from funds needed by acquired companies. Between 1995 and 1998 Sytron
bought nine companies or product lines in exchange for stock. Each company
needed money, generally about $100,000 to $250,000 each. Mundix needed to fund
the cost incurred to standardize its Maxx- Net(TM) system and Sytron Security
Systems needed to replace outdated equipment and to pay off debt. Borrowing and
sale of Sytron common shares did not cover all of these needs. Some of these
unpaid vendors have obtained judgments, but there is little business disruption
anticipated in view of liens held by secured creditors on Sytron assets. Sytron
continues to maintain good working
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relationships with its current vendors, most of whom extend credit and are paid
on satisfactory terms.
In building a broad based security provider, Sytron has created two groups
of businesses, of roughly equal size, each with very different characteristics
from an investor's viewpoint.
- Systems represents a high growth, high risk opportunity which
is not mature enough to generate adequate funds internally and
must look for cash to the parent company or outside investors.
The Portals product line is a similar model, but too small to
have much effect so far since the Company has emphasized
Systems rather than Portals.
- DSC's access control business and Parking Systems are solid
lower growth, lower risk businesses, which generate enough
cash to be self sustaining in the absence of such
extraordinary circumstances as the HID patent litigation in
1999.
There are investors who are interested in either type of business. They may
be two different groups, however, with quite different investment strategies and
combining the businesses creates a whole which may not be attractive to either
group. Recognizing this, management is looking at ways to attract additional
funds to these businesses separately, seeking new investors appropriate to each.
Sytron may also divest portions of these businesses to fund operations and to
help create a position which would help attract investors to fund the remaining
businesses.
Since Sytron's assets are already securing existing debt, new debt is only
possible if it is replacing maturing debt or funding increases in accounts
receivable. Beyond that, the sale of Sytron stock (or debt deriving much of its
value from conversion into stock) represents the only fund raising avenue open.
At recent market prices for Sytron common shares, the sale of additional stock
is likely to represent significant dilution for existing shareholders. Sytron
continues to actively pursue the additional financing needed, but there is no
assurance that additional investment can be obtained.
Inflation
While its operations are influenced by general economic conditions, Sytron
does not believe that inflation has had a material effect on the results of
operations during 1999, and no material impact is anticipated in 2000.
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Trends
Management believes substantial growth opportunities exist in each of the
Company's core businesses. In the 2000 fiscal year, the Company plans to
continue to defer new acquisitions and continue the tight cost control
implemented in 1999. All available funds will be used to grow the Company's
business. The degree to which the Company succeeds will be largely determined by
the extent of resources available. Management expects that Sytron will earn its
first annual profit in 2000, but this cannot be assured.
Item 3. Description of Property
The Company's principal place of business is located at 2770 Industrial
Lane, Broomfield, Colorado. It consists of approximately 17,000 square feet of
executive offices and manufacturing and warehouse space. The applicable lease
agreement requires monthly lease payments of $8,094 and is effective until
December 31, 2002, at which time the Company intends to exercise an option to
renew for an additional five year term. Management believes that this space will
be sufficient to meet the Company's needs in the immediate future.
Item 4. Security Ownership of Certain Beneficial Owners and
Management
The table below lists the beneficial ownership of the Company's voting
securities by each person known by the Company to be the beneficial owner of
more than 5% of such securities, as well as the securities of the Company
beneficially owned by all directors and officers of the Company. Unless
otherwise indicated, the shareholders listed possess sole voting and investment
power with respect to the shares shown.
Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership(2) Class
- -------------- ---------------- ------------ -----
Common Mitchel Feinglas(1) 3,020,358(3) 28.2%
Common Robert B. Howard(1) 741,754(4) 6.9%
Common James W. Power(1) 5,000(5) *
Common Michael B. Fitzsimons(1) 127,462 1.2%
Common Werren Holdings, Ltd. 662,893(6) 6.2%
8 Queensway House Queen Street
St. Helier, Jersey
Channel Islands JE2 4WD FC
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Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership(2) Class
- -------------- ---------------- ------------ -----
Common Katonah West Pension Plan(1) 855,007(7) 8.0%
Common Springhill Holdings, Ltd. 561,393(8) 5.2%
8 Queensway House Queen Street
St. Helier, Jersey
Channel Islands JE2 4WD FC
Common Crescent International Ltd. 1,061,398(9) 9.9%
Greenlight (Switzerland) SA
84, av. Louis-Casai
P.O. Box 161, 1216 Geneva
Cointrin, Switzerland
Attention: Melvyn Craw/
Maxi Brezzi
Common All Officers and 3,894,574 36.3%
Directors as a
Group (4 persons)
* Less than 1%
(1) The address for each person named is c/o Sytron, Inc., 2770
Industrial Lane, Broomfield, Colorado 80020, except as otherwise
stated.
(2) For purposes hereof, a person or group of persons is deemed to have
"beneficial" ownership of any shares which such person or group of
persons has the right to acquire by option, warrant or otherwise (and
without regard to the exercise price of any option or warrant) within
60 days of the date of this Registration Statement. Except as otherwise
noted, the Company believes that the persons in the table have sole
voting and investment power with respect to the shares of Common Stock
indicated as being beneficially owned by them.
(3) Includes 345,414 shares of Common Stock owned by Private Capital Group,
Ltd. ("PCG"), an enterprise owned by Peggy Feinglas, his wife, and
warrants to acquire 200,000 shares and options to acquire 1,351,355
shares, also owned by PCG; 855,007 shares of Common Stock owned by
Katonah West Pension Plan, a pension plan of which Mr. Feinglas and his
sister-in- law, Susan Maisch, are trustees; 187,596 shares of Common
Stock owned by Peggy Feinglas, Mitchel Feinglas' spouse, in her
individual capacity; 40,602 shares of Common Stock and options to
acquire 10,000 shares owned by Stuart Feinglas, Mitchel Feinglas'
brother; 3,138 shares of Common Stock owned by Lori Feinglas, Mitchel
Feinglas' daughter; 1,892 shares of
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Common Stock owned jointly by Lori Feinglas and her husband, Kevin
Welty; and 3,867 shares of Common Stock owned by Allison Feinglas,
Mitchel Feinglas' daughter. All of the issued and outstanding shares of
PCG are held by Peggy Feinglas. Mitchel Feinglas is a primary
beneficiary of the Katonah West Pension Plan, a pension plan of which
Mr. Feinglas and his sister-in-law Susan Maisch are trustees, but there
are other beneficiaries of the plan as well. Mr. Feinglas disclaims any
beneficial interest in the shares of Common Stock owned by PCG, by his
spouse, by his brother, jointly by his daughter and son-in-law, or by
either of his daughters.
(4) Includes warrants to acquire 200,000 shares and options to acquire
496,947 shares of Common Stock. Also includes 2,000 shares of Common
Stock held by Robert Howard as custodian for his minor son Garrett;
1,000 shares of Common Stock held by Robert Howard as custodian for his
minor son, Cole; 25,000 shares of Common Stock owned by Kerry Howard,
Mr. Howard's wife; and 16,807 shares of Common Stock owned by Libby T.
Howard, Mr. Howard's mother. Mr. Howard disclaims any beneficial
interest in the shares owned by his sons and his mother.
(5) Includes an option to acquire 5,000 shares of Common Stock.
(6) Werren Holdings, Ltd., is a trust which is both lender to,
and stockholder of, the Company. Includes warrants to acquire
268,200 shares of Common Stock. Springhill Holdings Ltd. and
Werren Holdings Ltd. are unrelated parties, but each is
advised by the same investment advisor, operating from the
same address.
(7) Includes 855,007 shares of Common Stock owned by Katonah West Pension
Plan, a retirement plan for the primary benefit of Mitchel Feinglas, of
which Mr. Feinglas and Susan Maisch, his sister-in-law, are trustees.
(8) Springhill Holdings, Ltd. is a trust which is both lender to,
and a stockholder of, the Company. Includes warrants to
acquire 15,000 shares of Common Stock.
(9) Includes warrants to acquire 529,000 shares of Common Stock, but does
not include stock which may not be currently acquired by reason of
restrictions in the governing instruments.
The balance of the Company's outstanding Common Shares are held by
approximately 275 persons, not including those persons who hold their shares in
"street name."
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Item 5. Directors, Executive Officers, Promoters and Control Persons.
The directors and officers of the Company are as follows:
Name Age Position
---- --- --------
Robert Howard 36 President, Chief Executive
Officer, Director
Michael B. Fitzsimons 56 Vice President, Secretary,
Treasurer and Chief Financial
Officer
Mitchel Feinglas 50 Director
James W. Power 72 Director
The above listed officers and directors will serve until the next annual
meeting of the shareholders or until their death, resignation, retirement,
removal, or disqualification, or until their successors have been duly elected
and qualified. Vacancies in the existing Board of Directors are filled by
majority vote of the remaining Directors. Officers of the Company serve at the
will of the Board of Directors. There is no family relationship between any
executive officer and director of the Company.
Resumes
Robert Howard. From February 1996 through May 1996, Mr. Howard was Vice
President of Marketing and Sales of Sytron Security Products, Inc., a subsidiary
of the Company. In May 1996, Mr. Howard was named President of the Company. In
July 1999, he was also appointed as the Company's Chief Executive Officer. Mr.
Howard assisted in the establishment of the Company's relationship with Mundix
beginning in October 1995. Mr. Howard served as Sales Manager for the Integrated
Systems Group of Cardkey Systems, Inc. (later acquired by AMTECH, Inc.) from
1992 to 1995, and, in that capacity, was responsible for sales, including both
the Denver International Airport project and security systems for several
correctional facilities. Mr. Howard served as Project Engineer, Project Manager,
Sales and District Sales Manager for Kidde Automated Systems (acquired by Thorn
EMI during his employment). Mr. Howard received his Bachelor of Science degree
from Ohio State University in 1985. He devotes substantially all of his time to
the business of the Company.
Michael Fitzsimons. Mr. Fitzsimons assumed his positions as Chief Financial
Officer and Vice President in March 1998. He was appointed to his positions of
Secretary and Treasurer of the Company in August 1999. Prior, Mr. Fitzsimons was
Chief Financial Officer for several high-tech companies, including FullDeck
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Technologies (software) from 1995 to 1998, Sandhill Scientific (medical software
and instruments) from 1990 to 1995, Rocky Mountain Instrument (electro-optical
manufacturer) from 1988 to 1990, and Sigma Design (computer hardware and
software) from 1984 to 1988. Additional operating responsibilities included
manufacturing at Sandhill Scientific, and manufacturing and sales/marketing at
Rocky Mountain Instrument. Mr. Fitzsimons held a series of financial management
positions with Corning Glass Works from 1972 to 1983. He began his career with
Price Waterhouse in New York, holds a Bachelor of Science degree in Business
Administration from LeMoyne College, and is a CPA in New York and Colorado. He
devotes substantially all of his time to the business of the Company.
Mitchel Feinglas. Mr. Feinglas is currently a director of the Company. From
March 1994 through July 1999, Mr. Feinglas was Chief Executive Officer of the
Company. In addition, Mr. Feinglas has served as President of Private Capital
Group, Ltd. ("PCG") since 1993. PCG is a financial consulting organization which
represented the Company from March 1994 through December 31, 1999. Mr. Feinglas
served as Chief Executive Officer and Director of Great Earth Vitamins, Ltd.
from 1991 to 1993. Mr. Feinglas organized and served as President, Director,
Principal and Registered Broker of Jonathan Alan & Co., Inc., a Registered
Broker-Dealer from 1983 to 1990. Mr. Feinglas serves on the Board of Directors
of Create-a-Check Software, Inc. Mr. Feinglas received his Bachelor of Arts in
Accounting from New York University in 1971. He devotes only such time as
necessary to the business of the Company, which is not expected to exceed 10% of
his business time.
James W. Power. From 1996 through 1998 Mr. Power was the Chairman of the
Board of Infographics, Inc., a manufacturer of access control software and
hardware. Mr. Power founded Martec Systems, Inc. and was a principal there from
1991 to 1995, when it was sold to SAIC of San Diego. He also acted as Vice
President and General Manager of Cardkey Systems, Inc. Mr. Power also served on
the Board of Directors and as Treasurer of Citicorp Credit Services and on the
Board of National Semiconductor Corporation. He has also served as Vice
President and General Manager of TRW Data Systems, a unit of TRW Inc. Mr. Power
served in the U.S. Air Force where he was trained in electronics, languages and
intelligence gathering. He devotes only such time as necessary to the business
of the Company, which is not expected to be in excess of 10% of his business
time.
Item 6. Executive Compensation.
Remuneration
The following table reflects all forms of compensation for services to the
Company for the years ended September 30, 1999 and 1998 of the then Chief
Executive Officer of the Company and any
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other officer of the Company who received in excess of $100,000 in
annual compensation.
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------
Annual Compensation Awards Payouts
--------------------- -------------------- -------
Securities
Other Under- All
Name Annual Restricted lying Other
and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ---------- ---- ------ ------- ------- -------- ------- ------- ------
Mitchel
Feinglas,
CEO & 1998 $ 0 0 106,574 0 497,416 0 $6,484
Director(1) 1997 $ 0 0 106,574 0 0 0 $5,505
Robert
Howard,
President &
Director(2) 1999 $78,108 0 5,916 0 696,947 0 0
- -------------------------
(1) Mr. Feinglas resigned his position as Chief Executive Officer of the
Company in July 1999. No direct salary was paid to Mr. Feinglas.
However, the Company had a contract with Private Capital Group, Inc.
("PCG"), a corporation owned by Peggy Feinglas, Mr. Feinglas' wife.
Pursuant to the terms of such agreement, PCG was obligated to provide
the services of Mr. Feinglas as a director and further required the
Company to pay those sums listed in "Other Annual Compensation," above.
PCG, in its own right, is a lender to the Company and the holder of
certain options and certain stock. See "Item 7, Certain Relationships
and Related Party Transactions" and "Item 4, Security Ownership of
Certain Beneficial Owners and Management."
(2) In July 1999, Mr. Howard assumed the position of Chief Executive
Officer of the Company, in addition to his position as President.
No other employee of the Company has received compensation of $100,000 or
more and it is not anticipated that any employee will receive compensation
exceeding $100,000 during the fiscal year ending September 30, 2000.
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<PAGE>
As of the date of this Registration Statement, the Company is not a party
to any employment agreement with any person or entity.
STOCK PLANS
On June 28, 1996, the Board of Directors of the Company adopted a
nonstatutory stock option plan (the "Plan") for employees, officers, directors,
consultants and other persons who, or enterprises which, have assisted the
Company. The Plan became effective on June 28, 1996. No more options will be
granted under the Plan after June 28, 2000, but options granted prior to that
date may extend beyond that date. At a Special Meeting of Shareholders on
January 8, 1999, the shareholders restated, ratified and re-approved the Plan
and authorized an aggregate of three million five hundred thousand (3,500,000)
shares of Common Stock for its use.
The Plan was adopted to attract and to retain people of ability and
initiative and to offer an incentive for such persons to continue to render
outstanding service to the Company. The Board of Directors considered it in the
best interests of the Company and its shareholders to provide such able and
industrious people or the enterprises with which they are affiliated the
opportunity to participate in any appreciation in value of the Company's Common
Stock which may result from their efforts. The Plan, through the granting of
stock options, is designed to meet that goal.
The Plan is administered by the Board of Directors or by an Option
Committee. Shares subject to options have been and will continue to be made
available from either authorized and unissued shares or previously issued
treasury shares. The Option Committee is authorized to establish rules and
regulations for administration of the Plan; to interpret, correct or amend the
Plan or any option granted thereunder; and to terminate the Plan.
The Plan provides for the grant of Nonstatutory Stock Options. The options
may be granted to employees, including employee directors, non-employee
directors of the Company and others.
The exercise price per share will vary with the market price of the Common
Stock on the date the option is granted and on subsequent April 1 and October 1
dates over a period of forty-eight (48) months. However, the Option Committee
may determine to grant an option at not less than 85% of the then-current market
price. Any lower price for an option must be specifically approved by the Board
of Directors, but, in any event, no option may be granted at less than 75% of
the then-market price. The Option Committee determines the time of exercise and
the term of each option when granted. Each option will expire not more than five
(5) years from the date of its grant unless the option holder dies while the
option is exercisable. In that case, the option will not expire
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<PAGE>
until one year from the date of death. The Plan permits the payment of the
exercise price only in cash.
Options are not transferable, except by the laws of descent and
distribution. Options which for any reason cease to be exercisable shall be
considered terminated. Common Stock subject to an expired or terminated option
is again available for grant.
With very limited exceptions, if any change is made in the shares subject
to the Plan or to any option granted thereunder (through merger, reorganization,
stock dividend, issuance of subscription rights or similar events), such
adjustments or substitutions will be made in the number of shares and in the
exercise price as the Option Committee, with the approval of the Board of
Directors, deems equitable to prevent dilution or enlargement of option rights.
The Board of Directors may amend or terminate the Plan in all respects,
except that without the approval of the Company's shareholders, no such
amendment or modification may either increase the number of shares reserved for
options (except as described in the immediately preceding paragraph) or reduce
the exercise price below 75% of the fair market value at the applicable date.
Since the Plan was adopted, options have been granted to 99 persons and
enterprises. Those options authorize the purchase of 1,762,511 shares of Common
Stock. As of September 30, 1999, 176,666 shares of Common Stock have been issued
on exercise of options and options to acquire 1,296,577 shares are outstanding.
Under the outstanding options, Common Stock may be acquired at prices ranging
from $0.3125 to $3.625 per share.
There are no other bonus or incentive plans in effect, nor are there any
understandings in place concerning additional compensation to the Company's
management.
Item 7. Certain Relationships and Related Transactions.
On May 1, 1997, the Company entered into an agreement with Private Capital
Group, Ltd. ("PCG"), an enterprise owned by Peggy Feinglas, to provide the
services of her spouse, Mitchel Feinglas, as CEO of the Company with duties
including general, stock transaction and financing management. The agreement
provided for $104,546 to be paid to PCG per year through January 1, 2000, for
Mitchel Feinglas' services.
Katonah West Pension Plan ("Katonah West") is a pension plan for the
benefit of Mitchel Feinglas, among others. Beginning in 1995, it has loaned
money to the Company on terms that were more favorable to the Company than were
otherwise available. The loans were used by the Company for the acquisition of
DSC and for working capital. The trustees of Katonah West are Mr. Feinglas and
his
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<PAGE>
sister-in-law, Susan Maisch. At December 31, 1999, the Company owed Katonah West
$249,750; the sum is payable on demand, carries interest at the rate of 10% per
year, and is secured by certain of the Company's assets.
Katonah West owns 695,167 shares of the Company's Common Stock. Of this
total, 87,927 were issued in payment of the Company's debt to Katonah West
arising from loans by Katonah West to the Company. In addition, 767,080 shares
were issued in lieu of interest on loans provided to the Company by Katonah West
for use by the Company in making the down payment on the purchase of DSC in
September 1995.
PCG now owns 345,414 shares of the Company's Common Stock. Of this total,
32,528 shares were issued on August 20, 1996, upon the conversion of debentures
originally issued for cash in 1994. PCG also exercised warrants and, in December
1994, acquired 18,731 shares. In addition, unpaid consultant fees for the
services of Mitchel Feinglas and related expenses were converted into 246,751
shares between June 1995 and October 1997. On April 1, 1996, the Company entered
into an agreement with PCG pursuant to which PCG was permitted to convert
certain notes it held evidencing monies owed to it by the Company into the
Company's Common Stock at the rate of $1.31 of debt for each share of stock. At
the time of the agreement, the conversion rate was not lower than the price at
which certain shares of the Company's Common Stock were trading on the NASDAQ
Bulletin Board. The notes evidenced the Company's obligation to PCG for $92,500
borrowed and for reimbursement of unpaid expenses due to Mr. Feinglas totaling
$36,748.97. The agreement permitted the conversion to occur through September
30, 1996; pursuant to it, PCG converted $129,248 into 98,663 shares of Common
Stock on September 4, 1996.
Springhill Holdings Limited ("Springhill") is both a creditor and a
shareholder of the Company. Springhill first loaned the Company $45,000 in
October 1995 to assist in the acquisition of Dorado Systems Corporation. At
various times thereafter, Springhill was issued Common Stock of the Company, and
Springhill loaned the Company additional funds or deferred the collection of
sums due it. In May 1998, Springhill was issued 10,000 shares of the Company's
Common Stock on assignment of certain rights of Mitchel Feinglas. In September
1998, Springhill was issued 48,452 shares of Common Stock in exchange for
waiving its right to $18,203.27 accumulated unpaid interest. At September 30,
1998, the Company was obligated to Springhill for $73,000, evidenced by a note
bearing interest at 10%, payable on demand, and collateralized by certain of the
Company's assets.
Werren Holdings Limited ("Werren") is also both a creditor and a
shareholder of the Company. Werren first loaned the Company $10,000 in October
1995 to assist in the acquisition of Dorado Systems Corporation. At various
times thereafter, Werren was
39
<PAGE>
issued Common Stock of the Company, and Werren loaned the Company additional
funds or deferred the collection of sums due it. In April 1998, Werren was
issued 154,706 shares of the Company's Common Stock in exchange for releasing
the Company from an obligation for borrowed money and interest on borrowed money
of $205,758.82. In that same month, Werren also exchanged $12,704 due it for
12,704 shares of the Company's Common Stock. In September 1998, Werren was
issued 2,754 shares of Common Stock in exchange for waiving its right to
$1,032.82 accumulated unpaid interest. At September 30, 1998, the Company was
obligated to Werren for $10,000, evidenced by a note bearing interest at 10%,
payable on demand, and collateralized by certain of the Company's assets.
Robert Howard was hired by the Company in February 1996 and became its
President in May 1996 and Chief Executive Officer in July 1999. He is also a
director of the Company. In connection with his engagement and in return for
equipment transferred to the Company, on December 31, 1995, Mr. Howard was
awarded 45,000 shares of Common Stock, which have been reissued in his wife's
name in the amount of 25,000 shares, in the name of his mother in the amount of
10,000 shares and in the name of his brother-in-law in the amount of 10,000
shares. As of January 15, 2000, Mr. Howard owns or controls 44,807 shares of the
Company's Common Stock. He disclaims any ownership interest in 16,807 shares of
Common Stock owned by his mother, Libby T. Howard. Mr. Howard also disclaims any
ownership interest in the 2,000 shares which he holds as custodian for his minor
son, Garrett, or in the 1,000 shares which he holds as custodian for his minor
son, Cole.
Item 8. Description of Securities.
The Articles of Incorporation of the Company authorize the issuance of
20,000,000 shares of Common Stock, par value $0.01 per share and 10,000,000
shares of Preferred Stock. As of the date of this Registration Statement, there
are 7,100,123 shares of Common Stock issued and outstanding and no Preferred
Shares issued or outstanding.
Common Shares
Holders of the Company's Common Shares, par value $0.01 per share, are
entitled to one vote for each share held on each matter submitted to a vote of
the shareholders. There are no preemptive rights to purchase any additional
Common Shares. The Articles of Incorporation of the Company prohibit cumulative
voting in the election of directors. Since cumulative voting is not available to
the holders of Common Stock, the holders of more than 50% of the outstanding
Common Stock can elect all of the directors of the Company if they so choose. In
the event of liquidation, dissolution or winding up of the Company, holders of
the Common Shares would be entitled to receive, on a pro rata basis, all assets
of the Company remaining after satisfaction of all liabilities of the Company.
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Preferred Stock
The Articles of Incorporation of the Company authorize issuance of a
maximum of 10,000,000 Preferred Shares. The Articles of Incorporation vest the
Board of Directors of the Company with the authority to divide the class of
Preferred Stock into series and to fix and determine the relative rights and
preferences of the shares of any such series so established to the full extent
permitted by the laws of the Commonwealth of Pennsylvania and the Articles of
Incorporation in respect of, among other things: (a) the number of Preferred
Shares to constitute such series and the distinctive designations thereof; (b)
the rate and preference of dividends (if any), the time of payment of dividends,
whether dividends are cumulative and the date from which any dividend shall
accrue; (c) whether Preferred Shares may be redeemed and, if so, the redemption
price and the terms and conditions of redemption; (d) the liquidation
preferences payable on Preferred Stock in the event of involuntary or voluntary
liquidation; (e) sinking fund or other provisions, if any, for redemption or
purchase of Preferred Stock; (f) the terms and conditions by which Preferred
Stock may be converted, if the Preferred Stock of any series are issued with the
privilege of conversion, and (g) voting rights, if any. Because the Company has
not issued any Preferred Stock, no designation of the rights and preferences of
any such shares has been established as of the date of this Registration
Statement. The issuance of Preferred Stock could decrease the amount of money
and assets available for distribution to the holders of Common Stock or
adversely affect the rights and powers, including voting rights, of the holders
of Common Stock.
No Preferred Stock is issued or outstanding on the date of this
Registration Statement and management has no plans to issue any Preferred Stock
in the foreseeable future.
PART II
Item 1. Market Price for Common Equity and Related Stockholder Matters.
(a) Market Information. The Company's Common Stock is currently trading on
the OTC Bulletin Board operated by the National Association of Securities
Dealers ("NASD") under the symbol "SITR." As of January 27, 2000, the price of
the Company's Common Stock was $0.16 bid, $0.21 asked.
Below are the reported high and low bid prices for the Company's Common
Stock for the previous two years. The bid prices shown reflect quotations
between dealers, without adjustment for markups, markdowns or commissions, and
may not represent actual transactions in the Company's securities.
41
<PAGE>
Bid Price
Date High Low
---- ---- ---
March 31, 1998 $2.87 $0.88
June 30, 1998 $2.06 $1.38
September 30, 1998 $1.47 $0.38
December 31, 1998 $0.56 $0.25
March 31, 1999 $0.38 $0.22
June 30, 1999 $0.84 $0.30
September 30, 1999 $0.41 $0.31
December 31, 1999 $0.19 $0.13
The Securities and Exchange Commission adopted Rule 15g-9, which
established the definition of a "penny stock," for purposes relevant to the
Company, as any equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require: (i) that a broker or dealer approve a person's account for
transactions in penny stocks; and (ii) the broker or dealer receive from the
investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person's
account for transactions in penny stocks, the broker or dealer must (i) obtain
financial information and investment experience and objectives of the person;
and (ii) make a reasonable determination that the transactions in penny stocks
are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. The broker or dealer must also deliver, prior to
any transaction in a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, which, in highlight form, (i)
sets forth the basis on which the broker or dealer made the suitability
determination; and (ii) that the broker or dealer received a signed, written
agreement from the investor prior to the transaction. Disclosure also has to be
made about the risks of investing in penny stock in both public offering and in
secondary trading, and about commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
b. Holders. There are approximately Two Hundred Fifty (250) holders of the
Company's Common Stock, not including those persons who hold their shares in
"street name."
c. Dividends. The Company has not paid any dividends to date and has no
plans to do so in the immediate future.
42
<PAGE>
Item 2. Legal Proceedings.
Except as described below, the Company is not a party to any legal
proceedings which it considers material and is not aware of any threatened
litigation that could have a material adverse effect on the Company's business,
financial condition or results of operations.
HID Corporation ("HID") filed suit in January, 1998 in the United States
District Court for the District of Colorado claiming that Dorado's Universal
Reader (TM) infringed two HID patents because the reader is capable of reading
HID access control cards, as well as reading the cards of other manufacturers of
access control equipment. In 1999, the Company and HID settled the litigation
and, as a part thereof, HID licensed to the Company and its subsidiaries United
States Patent Nos. 4,546,241 and 4,730,188.
Camenco, Inc. is seeking to enforce an arbitrator's award against SSS
arising from the transaction in which the Sytron subsidiary purchased
substantially all of Camenco's business assets. Camenco obtained a judgment
confirming the arbitration award and SSS is obligation to pay $184,545 under the
judgment in exchange for which Camenco would be required to return 160,000
shares of Sytron Common Stock which Camenco received in the 1997 purchase
transaction.
Item 3. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Company has not changed accountants since its formation and there are
no disagreements with the findings of said accountants.
Item 4. Recent Sales of Unregistered Securities.
Following is a description of all shares of the Company's common stock
issued over the previous three (3) years prior to the date of this Registration
Statement.
In March 1999, the Company issued 324,000 shares of its common stock in
favor of Springhill Holdings, Ltd.(*) and 10,789 shares of common stock in favor
of Werren Holdings Ltd.(*) at a price of $2.00 per share in consideration for
the risk premium due these entities for the prior 17 months. Also in March 1997,
the Company issued 200,000 shares of common stock in favor of Camenco as part of
the terms of acquisition described above.
In April 1997, Libby Howard, Springhill Holdings Ltd. and Thomas Tunner
converted outstanding debentures issued by the Company in the amounts of $5,128,
$7,820 and $5,128 respectively, into 2,564, 3,910 and 2,564 shares of common
stock, respectively, which were converted at the price of $2.00 per share. Also
in
43
<PAGE>
April 1997, Charles V. Salzano and John Stewart exercised their Class C Warrants
and received 160 and 900 shares of common stock, respectively. The conversion
price of these warrants was $2.20 per warrant.
In May 1997, Ms. Howard, Mr. Tunner and Steve Yacht each converted $482 in
debt owed by the Company to each of the aforesaid persons at a price of $2.00
per share and each received 241 shares of the Company's common stock.
In July 1997, the six persons exercised options to purchase shares of the
Company's common stock which were previously issued to them by the Company under
the Company's Stock Option Plan, including Brian FitzGerrell (1,463 shares),
Paul Ahern (2,138 shares), Sherry Maples (89 shares), Private Capital Group,
Ltd. (3,939 shares), Thomas Tunner (1,247 shares) and Werner Uhlmann(*) (16,445
shares). The Company relied upon Rule 701 et seq. promulgated under the
Securities Act of 1933, as amended, as authority to issue these shares. The
exercise price for all of these options was $1.125 per share, except for the
shares issued to Mr. Uhlmann, which was $1.0946 per share.
In August 1997, the Company issued 25,000 shares of its common stock in
favor of Gary Handelin as part of the consideration for the acquisition of the
Point Automation assets, which shares were valued at $1.0625 per share. Also in
August 1997, Nola Brown was issued 356 shares of common stock in exchange for
the conversion of debt and cash, which shares were issued at a price of $1.125.
In October 1997, the Company issued 6,000 shares of its common stock in
favor of Richard C. Landis in consideration for the conversion of debt owed by
the Company, which shares were valued at $1.00 per share. Also in October 1997,
PCG exercised 100,000 options to purchase 100,000 shares and Thomas Tunner
exercised 22,932 options under the Company's stock plan, which options were
exercisable at $1.00 per share.
In December 1997, two employees of the Company, Karl Fellman and Chris
Reither received 1,000 shares of common stock apiece as a reward for their being
named the Company's employee of the month. These shares were valued at $1.14 and
$0.95 per share, respectively. Also in December 1997, the Company issued 6,500
shares of common stock in favor of Kevin Welty in exchange for services provided
to the Company in 1996. These shares were issued at $.25 per share, the price of
the Company's common stock when the services were performed.
In February 1998, Nick LaCorte and Brock LaCorte received 50 shares of
common stock apiece in exchange for services valued at $1.00 per share. Donald
Werthman received 16,875 shares in exchange for services, which shares were
issued at $0.875 per share. Arthur Hughes (3,333 shares), Mark Brinkman (9,806
shares)
44
<PAGE>
and Rolf Loos(*) (48,996 shares) received shares in exchange for conversion of
debt at a conversion price of $1.50 per share, except for Mr. Loos, whose shares
were values at $1.125 per share. Matt McMahon and Jeff Zweygardt each received
1,000 shares for being named the Company's employee of the month, which shares
were valued at $1.50 per share.
In March 1998, 25,000 shares of common stock were issued to Bernt
Horrolt(*) at a price of $1.25 per share in exchange for cash. Walter Murr(*)
and Werner Uhlmann(*) received 17,292 and 43,265 shares, respectively, in
consideration of forgiveness of debt, which shares were also valued at $1.25 per
share. Anne deGuisti(*), Caroline Weldon(*) and John Weldon received 2,000,
1,000 and 23,000 shares in exchange for services, which shares were valued at
$1.18 per share. Werren Holdings Ltd.(*) received an aggregate of 700,000 shares
of common stock in exchange for cash, which shares were valued at $1.25 per
share. Scott Hyman and Robert Snively each received 10,000 shares of common
stock for services valued at $20,000 ($2.00 per share).
In April 1998, the Company issued shares in favor of Ulrich W. Rud(*)
(10,000) and Jane Kingsley Smith (1,500) for cash, which shares were valued at
$1.25 per share. Lois McCann received 19,239 shares in exchange for the release
of $33,668 owed by the Company, which shares were valued at $1.75 per share.
Cable and Harness, Inc. (300 shares) and D&D Electric (1,600 shares) received
their shares in consideration for the release of debt in the amounts of $1,023
and $4,528, respectively, which shares were valued at $2.73 and $2.83,
respectively. Michael Howard received 133 shares in consideration for the
release of $266 in monies owed by the Company, which shares were also valued at
$2.00 per share. Comfort Inn received 300 shares at $2.75 per share in exchange
for debt. Ernest Schuster(*) received 20,000 shares of common stock at a price
of $1.25 per share in consideration for releasing the Company from debt
obligations. Raymond Vandenberg received 17,518 shares valued at $1.05 per share
in exchange for services rendered to the Company. Werren Holdings Ltd.(*)
received 12,074 shares of common stock valued at $1.00 per share in exchange for
debt and, along with Boulder Financial Group, Ltd. also received 154,706 shares
of common stock each for forgiveness of $411,518 in debt owed to the Ragsdale
Family Trust, which shares were valued at $1.33 per share.
In May 1998, Marion Bloch(*) (591 shares), Basil and Susan Bicknell(*)
(1,319 shares) and John Stuart(*) (887 shares) received shares in exchange for
debt, which shares were valued at $1.80, $1.80 and $1.50, respectively. An
aggregate of 50,000 shares were issued to the shareholders of Nautica in
consideration for the acquisition described above, which shares were valued at
$2.00 per share. Crescent received 166,667 shares in exchange for cash, which
shares were valued at $1.50 per share. See "Crescent Financing", above.
45
<PAGE>
From June 1998 through the present, the Company issued shares of common
stock to the following persons and entities, in exchange for the consideration
as noted:
Nature of
# of Shares $ per Share Consideration
----------- ----------- -------------
Architectural Glass 200 $ 3.12 debt
Easter Owens 200 3.00 debt
Larsen Distributing 140 2.6964 debt
Springhill Holdings Ltd. 10,000 2.125 interest
Lance King 2,399 2.125 services
Michael Van Atta &
Beth Hamilton 6,000 1.50 cash
Technical Marketing
Manufacturing 600 2.6891 debt
Robert & Gail Briner 700 1.75 cash
Vinson & Karen Gilliam 1,500 1.75 cash
July 1998:
Irwin Associates Pension
Scheme(*) 1,423 1.75 cash
V.W. Warren Pearl(*) 1,319 1.80 interest
John & Kay Boor 3,167 1.50 interest
Charles Robinson 1,583 1.50 interest
Janet Robinson 1,583 1.50 interest
Michael Fitzsimons 7,445 1.50 debt
Edward C. Spahn 3,715 2.00 debt
Ronald Jakubowski 3,022 2.00 debt
Patsy Craven 2,275 2.00 debt
Charles Hale 304 2.00 debt
Michael Van Atta &
Beth Hamilton 3,000 1.625 cash
1,000 1.50 cash
The Fryer Living Trust 7,000 1.625 cash
Scott Appelt 1,000 1.5625 services
Richard Lentz 1,000 1.5625 services
Angela Smith 1,000 1.5625 services
Kevin Welty 1,000 1.5625 services
Kenneth Sanders 500 1.125 Option
August 1998:
One World Arts 200 2.0137 debt
Boulder Business Products 400 2.38 debt
Irwin Associates Pension
Scheme(*) 1,843 1.3893 interest
V.W. Warren Pearl(*) 1,709 1.3893 interest
John Stewart(*) 957 1.3893 interest
Basil & Susan Bicknell(*) 1,709 1.3893 interest
Marion Bloch(*) 766 1.3893 interest
46
<PAGE>
Nature of
# of Shares $ per Share Consideration
----------- ----------- -------------
September 1998:
Thomas Tunner 512 0.82 debt
Michael Fitzsimons 4,445 0.75 debt
Kenneth Sanders 100 0.75 Option
William Wilcox 50 0.75 Option
Lou Rodina 167 0.75 Option
Kristopher Hale Gochanour 50 0.75 Option
Sherry Maples 100 0.75 Option
Jerry Saaijenga-New 100 0.75 Option
Shaun Himmerick 100 0.75 Option
Ellen Boak 1,250 0.75 Option
Springhill Holdings Ltd.(*)34,200 0.375 risk premium
interest
Werren Holdings Ltd.(*) 7,592 0.375 risk premium
interest
Katonah West Pension Plan 175,419 0.375 risk premium
interest
Springhill Holdings Ltd.(*)48,542 0.375 debt
Werren Holdings Ltd.(*) 2,754 0.375 debt
Katonah West Pension Plan 198,119 0.375 debt
Michael Begler 15,000 0.375 services
Werner Uhlmann(*) 20,000 0.375 services
Rolf Loos(*) 20,000 0.375 services
October 1998:
Law Enforcement Technologies
Resources, Inc. 440,000 0.5313 acquisition
Michael A. Howard 618 1.305 debt
Robert L. Salazaar 250 0.469 cash
David Houston 1,130 0.5313 services
Glenn Junik 90,343 0.50 services
November 1998:
Irwin Associates Pension
Scheme(*) 5,422 0.4725 interest
Basil & Susan Bicknell(*) 5,027 0.4725 interest
John Stuart(*) 2,815 0.4725 interest
V.W. Warren Pearl(*) 5,027 0.4725 interest
John & Kay Boor 5,027 0.4725 interest
Charles Robinson 2,514 0.4725 interest
Janet Robinson 2,514 0.4725 interest
Marion Block(*) 2,252 0.4725 interest
Rob Howard 3,602 0.75 Option
Michael Fitzsimons 8,889 0.375 services
47
<PAGE>
Nature of
# of Shares $ per Share Consideration
----------- ----------- -------------
December 1998:
Ellen Marie Bossman 1,000 0.3125 services
Ellen Boak 1,000 0.3125 services
Shaun Himmerick 1,000 0.3125 services
Harry Anderson 1,000 0.3125 services
Michael Fitzsimons 5,334 0.3125 services
January 1999:
Crescent
International Ltd.(*) 173,045 0.3125 financing
Michael Fitzsimons 7,474 0.21875 services
February 1999:
Irwin Associates Pension
Scheme(*) 12,308 0.20813 interest
Basil & Susan Bicknell(*) 11,411 0.20813 interest
John Stewart(*) 6,390 0.20813 interest
V.W. Warren Pearl(*) 11,411 0.20813 interest
John & Kay Boor 11,411 0.20813 interest
Charles Robinson 5,706 0.20813 interest
Janet Robinson 5,706 0.20813 interest
Marion Bloch(*) 5,112 0.20813 interest
Michael Fitzsimons 7,474 0.21875 services
March 1999:
Michael Fitzsimons 7,474 0.21875 services
April 1999:
Michael Fitzsimons 5,450 0.30 services
May 1999:
Michael Fitzsimons 4,359 0.36563 services
Irwin Associates Pension
Scheme(*) 9,036 0.36563 interest
Basil & Susan Bicknell(*) 8,377 0.36563 interest
John Stewart(*) 4,691 0.36563 interest
V.W. Warren Pearl(*) 8,377 0.36563 interest
John & Kay Boor 8,377 0.36563 interest
Charles Robinson 4,189 0.36563 interest
Janet Robinson 4,189 0.36563 interest
Marion Bloch(*) 3,753 0.36563 interest
48
<PAGE>
Nature of
# of Shares $ per Share Consideration
----------- ----------- -------------
June 1999:
Michael Fitzsimons 5,813 0.28125 services
Springhill Holdings, Ltd. 34,200 0.21875 interest
Werren Holdings, Ltd.(*) 7,592 0.21875 interest
Katonah West
Pension Plan 186,208 0.21875 interest
July 1999:
Crescent International
Limited(*) 76,019 0.23021 financing
Michael Fitzsimons 5,232 0.3125 services
August 1999:
Irwin Associates Pension
Scheme(*) 7,590 0.3375 interest
Basil & Susan Bicknell(*) 7,037 0.3375 interest
John Stewart(*) 3,941 0.3375 interest
V.W. Warren Pearl(*) 7,037 0.3375 interest
John & Kay Boor 7,037 0.3375 interest
Charles Robinson 3,519 0.3375 interest
Janet Robinson 3,519 0.3375 interest
Marion Bloch(*) 3,153 0.3375 interest
Michael Fitzsimons 5,813 0.28125 services
Robert Snively 22,568 0.30 services
Scott Hyman 13,192 0.30 services
Robert Snively 15,694 0.3125 services
Scott Hyman 3,408 0.3125 services
September 1999:
Michael Fitzsimons 6,540 0.25 services
Werren Holdings, Ltd.(*) 168,600 0.6250 financing
October 1999:
Springhill Holdings Ltd. 46,720 0.15625 interest
Werren Holdings, Ltd.(*) 6,400 0.15625 interest
Katonah West Pension
Plan 159,840 0.15625 interest
Michael Fitzsimons 12,576 0.13 services
49
<PAGE>
Nature of
# of Shares $ per Share Consideration
----------- ----------- -------------
November 1999:
Irwin Associates Pension
Scheme(*) 12,576 0.117 interest
Basil & Susan Bicknell(*) 20,299 0.117 interest
John Stewart(*) 11,368 0.117 interest
V.W. Warren Pearl(*) 20,299 0.117 interest
John & Kay Boor 20,299 0.117 interest
Charles Robinson 10,150 0.117 interest
Janet Robinson 10,150 0.117 interest
Marion Bloch(*) 9,094 0.117 interest
Michael Fitzsimons 3,144 0.13 services
Andrew I. Telsey 15,000 0.13 services
January 2000:
Crescent International
Ltd.(*) 116,667 0.15 commitment
fee
Unless otherwise stated herein, the Company relied upon the exemptions from
the registration requirements included under the Securities Act of 1933, as
amended, including but not necessarily limited to Section 4(2) and/or Regulation
D of said Act. In addition, for those entities marked with an (*), the Company
relied upon the exemption from the registration requirements included under the
Securities Act of 1933, as amended, including but not limited to Regulation S,
as each of these persons or entities are not domiciled or residents of the
United States, or otherwise controlled, either directly or indirectly by any US
resident.
The Company utilized the Company's then current market price in
ascertaining the price at which it issued the relevant shares. In each instance,
the Company engaged in "arms-length" negotiations with the respective party
receiving the shares in determination of the offering price.
Each of the above US shareholders was and is either an "accredited
investor" (as that term is defined in the 1933 Act), or were provided all
information necessary in order to allow each investor to exercise their
respective business judgment as to the merits of the investment. Further, those
shareholders who are not "accredited investors" had a preexisting business
and/or personal relationship with management of the Company and the Company
believes that these shareholders are considered "sophisticated" investors based
upon their previous investment experience, or were employees of the Company at
the time of such issuance.
All of the shares of Common Stock of the Company previously issued have
been issued for investment purposes in a "private transaction" and are
"restricted" shares as defined in Rule 144 and
50
<PAGE>
Regulation S under the Securities Act of 1933, as amended. These shares may not
be offered for public sale except under Rule 144, or otherwise, pursuant to the
Act.
Item 5. Indemnification of Directors and Officers.
The Company's Bylaws provide that the Company's officers and directors
shall not be personally liable to the Company for monetary damages as such for
any action other than as expressly provided under the laws of the State of
Pennsylvania. Pursuant to the Company's Bylaws, the Company indemnifies every
director and officer and may indemnify any employee or agent, to the full extent
permitted by the Pennsylvania Business Corporation Law of 1988, the Pennsylvania
Directors' Liability Act and any other present or future provision of
Pennsylvania law. The Company is authorized to pay and advance expenses to
directors and officers for matters covered by indemnification to the full extent
permitted by such law and any similarly pay and advance expenses for employees
and agents.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
51
<PAGE>
PART F/S
Financial Statements.
The audited financial statements for the fiscal years ended September 30,
1999 and 1998 of the Company are attached to this Registration Statement and
filed as a part hereof. See page 53.
1) Independent Auditors' Report
2) Consolidated Balance Sheet
3) Consolidated Statement of Operations
4) Consolidated Statement of Shareholders' Equity (Deficit)
5) Consolidated Statement of Cash Flows
6) Notes to Financial Statements
52
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
53
<PAGE>
C O N T E N T S
Independent Auditors' Report............................................. 3
Consolidated Balance Sheet............................................... 4
Consolidated Statements of Operations.................................... 6
Consolidated Statements of Stockholders' Equity (Deficit)................ 7
Consolidated Statements of Cash Flows.................................... 8
Notes to the Consolidated Financial Statements........................... 9
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Sytron, Inc. and Subsidiaries
Broomfield, Colorado
We have audited the accompanying consolidated balance sheet of Sytron, Inc. and
Subsidiaries as of September 30, 1999 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
September 30, 1999 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the consolidated financial position of Sytron,
Inc. and Subsidiaries as of September 30, 1999 and the consolidated results of
their operations and their cash flows for the years ended September 30, 1999 and
1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company has suffered losses from
operations since inception, which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 8. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
December 20, 1999
3
55
<PAGE>
<TABLE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1999
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 21,359
Accounts receivable, net of $48,980
allowance for doubtful accounts 1,051,196
Inventory (Note 2) 510,565
Prepaid expenses 48,751
------------
Total Current Assets 1,631,871
------------
PROPERTY AND EQUIPMENT (Note 2)
Equipment 1,278,560
Leasehold improvements 24,471
Software 9,512
Less - accumulated depreciation and amortization (1,057,121)
------------
Total Property and Equipment 255,422
------------
OTHER ASSETS
Computer software, net of amortization
of $221,710 (Note 2) 1,067,695
Other assets 49,574
Goodwill (Note 2) 105,467
------------
Total Other Assets 1,222,736
------------
TOTAL ASSETS $ 3,110,029
============
4
56
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Continued)
September 30, 1999
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 2,040,569
Accrued expenses 348,249
Reserve for discontinued operations 35,000
Capital leases - current portion (Note 4) 14,827
Notes payable - related parties (Note 5) 344,250
Notes payable - current portion (Note 5) 1,013,649
------------
Total Current Liabilities 3,796,544
------------
LONG-TERM DEBT
Capital leases (Note 4) 46,111
Long-term debt (Note 5) 361,768
------------
Total Long-Term Debt 407,879
------------
Total Liabilities 4,204,423
------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 20,000,000
shares authorized, 6,963,056 shares issued
and outstanding 69,631
Additional paid-in capital 11,330,461
Accumulated deficit (12,494,486)
------------
Total Stockholders' Equity (Deficit) (1,094,394)
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 3,110,029
============
The accompanying notes are an integral part
of these consolidated financial
statements.
</TABLE>
5
57
<PAGE>
<TABLE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended September 30,
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 5,220,330 $ 5,038,634
COST OF SALES 3,468,553 2,897,822
----------- -----------
GROSS PROFIT 1,751,777 2,140,812
----------- -----------
EXPENSES
Sales and marketing 537,924 862,231
General and administrative 1,035,235 1,524,683
Research and development 341,109 698,108
----------- -----------
Total Expenses 1,914,268 3,085,022
----------- -----------
(LOSS) FROM OPERATIONS (162,491) (944,210)
----------- -----------
OTHER INCOME (EXPENSES)
Interest expense (299,288) (304,092)
Other expenses (165,568) (145,926)
Loss on disposal of assets - (1,254,958)
Income from debt release 22,935 217,483
Loss from obsolete inventory - (827,698)
----------- -----------
Total Other Income (Expenses) (441,921) (2,315,191)
----------- -----------
(LOSS) BEFORE DISCONTINUED OPERATIONS (604,412) (3,259,401)
----------- -----------
DISCONTINUED OPERATIONS (Note 9)
Loss from discontinued operations (631) (427,451)
Gain from disposal of subsidiary 10,667 -
----------- -----------
Net Discontinued Operations 10,036 (427,451)
----------- -----------
NET (LOSS) $ (594,376) $(3,686,852)
=========== ===========
BASIC (LOSS) PER SHARE (Note 2)
Loss from operations $ (0.09) $ (0.70)
Discontinued operations 0.00 (0.09)
----------- -----------
Basic (Loss) Per Share $ (0.09) $ (0.79)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 6,872,803 4,647,259
=========== ===========
The accompanying notes are an integral part
of these consolidated financial
statements.
</TABLE>
6
58
<PAGE>
<TABLE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<CAPTION>
Additional Stock
Common Stock Paid-in Subscriptions Accumulated
Shares Amount Capital Receivable Deficit
--------- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 3,606,664 $ 36,067 $ 9,100,495 $ - $ (8,213,258)
Common stock issued for:
Services rendered 188,970 1,890 167,337 - -
The purchase of the net assets
of Nautica Security Group, Inc. 50,000 500 189,500 - -
Conversion of debt 1,079,619 10,796 1,018,514 - -
Cash 978,284 9,782 905,578 (269,625) -
Stock offering costs - - (78,418) - -
1998 net (loss) - - - - (3,686,852)
--------- -------- ----------- --------- ------------
Balance, September 30, 1998 5,903,537 59,035 11,303,006 (269,625) (11,900,110)
Common stock issued for:
Services rendered 396,785 3,968 117,664 - -
Conversion of debt 28,725 287 12,937 - -
Interest expense 571,557 5,716 137,788 - -
Cash 3,852 39 2,779 - -
Purchase of Law Enforcement
Technologic Resources, Inc. 440,000 4,400 229,350 - -
Purchase of ECSI Construction
Services, Inc. 100,000 1,000 42,750 - -
Cancellation of subscription
receivable (431,400) (4,314) (265,311) 269,625 -
Return of shares related to
Nautica Security Group, Inc.
acquisition (50,000) (500) (189,500) - -
Shares received in sale of ECSI
Construction Services, Inc. (100,000) (1,000) (42,750) - -
Stock offering costs 100,000 1,000 (18,252) - -
1999 net (loss) - - - - (594,376)
--------- -------- ----------- --------- ------------
Balance, September 30, 1999 6,963,056 $ 69,631 $11,330,461 $ - $(12,494,486)
========= ======== =========== ========= ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
7
59
<PAGE>
<TABLE>
SYTRON, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended September 30,
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (594,376) $(3,686,852)
Adjustments to reconcile net (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization 297,523 705,616
Income from debt release (22,935) (217,483)
Stock issued for services rendered 121,632 169,226
Stock issued for interest 143,504 203,246
Loss on disposal of asset - 1,321,958
Bad debt expense - 18,030
Loss from obsolete inventory - 827,698
Loss from discontinued operations 631 -
Gain from disposal of subsidiary (10,667) -
Changes in operating assets and liabilities:
(Increase) in accounts receivable
and related receivables (311,714) (171,254)
Decrease in inventory 265,837 86,661
(Increase) in prepaid expenses
and other assets (6,720) (57,670)
Increase (decrease) in accrued expenses (236,535) 77,188
Increase in accounts payable 150,704 896,323
---------- -----------
Net Cash (Used) Provided by
Operating Activities (203,116) 172,687
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (25,121) (183,462)
Computer software development (117,932) (737,312)
---------- -----------
Net Cash (Used) by Investing Activities (143,053) (920,774)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock offering costs (17,252) -
Proceeds from issuance of stock 2,818 567,317
Proceeds from note payable 447,706 190,659
Repayment of notes payable and capital leases (88,537) (86,318)
---------- -----------
Net Cash Provided by Financing Activities 344,735 671,658
---------- -----------
NET (DECREASE) IN CASH (1,434) (76,429)
CASH AT BEGINNING OF YEAR 22,793 99,222
---------- -----------
CASH AT END OF YEAR $ 21,359 $ 22,793
========== ===========
CASH PAID DURING THE YEAR FOR:
Interest $ 106,177 $ 162,027
Income taxes $ - $ -
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for services rendered $ 121,632 $ 169,226
Conversion of debt to common stock $ 156,728 $ 1,029,310
Purchase of subsidiaries by the
issuance of common stock $ 233,750 $ 190,000
Purchase of equipment through capital lease $ 5,118 $ -
The accompanying notes are an
integral part of these
consolidated financial
statements.
</TABLE>
8
60
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Sytron, Inc. and its consolidated subsidiaries (collectively "Sytron") are
engaged in several segments of the commercial security business. Sytron,
Inc., incorporated in Pennsylvania November 9, 1992, has three principal
operating subsidiaries, Sytron Security Group, Inc., Dorado Systems
Corporation, and Sytron Security Systems, Inc. Sytron, Inc. provides
management, purchasing and financial services to these subsidiaries under
contract.
a. Sytron Security Group, Inc. (SSG) sells sophisticated security
systems, consisting of both hardware and software, and marketed for
airports, correctional facilities, and major corporate security
applications. SSG, primarily an equipment supplier, also provides
design, engineering and construction management services, as well as
parking access control systems. SSG originated in the September 1996
acquisition of Mundix Control Systems, Inc. for 300,000 Sytron, Inc.
common shares, valued at $1,500,000.
b. Dorado Systems Corporation (Dorado) manufactures access control
readers which it sells to original equipment manufacturers, to
integrators and to dealers. Dorado was purchased in September 1995 for
$1,029,137.
c. Sytron Security Systems, Inc. (SSS) sells high security entrance
portals to banks, laboratories and other secure facilities. In March
1997, SSS purchased the assets of Camenco for $816,000, comprised of
$10,000, 200,000 Sytron, Inc. common shares, and the assumption of
certain liabilities.
There have been other, less successful, acquisitions which are inactive,
being liquidated, or which have been sold (see also Note 9).
a. Point Automation, Inc., in October 1997, purchased assets of a fire
alarm product line for 50,000 Sytron, Inc. common shares. Under
contingent purchase terms, an additional 50,000 shares was paid in
1999. This product line is not being marketed.
b. Nautica Security Group, Inc., in May 1998, acquired the net assets of
Nautica Technology Group, Intl., a provider of vehicle location and
control equipment and services for 50,000 Sytron common shares valued
at $190,000. Sytron recovered a portion of the stock paid, has blocked
transfer of the remainder of the shares, and may pursue litigation if
necessary to recover the balance of the shares. This product line is
no longer marketed and Nautica Security Group, Inc. is being
liquidated.
c. In October 1998, Sytron acquired ECSI Construction Services, Inc.
(ECSI) for 100,000 Sytron, Inc. common shares valued at $43,750. On
August 31, 1999, Sytron sold its interest in ECSI in exchange for the
return of the 100,000 originally issued shares.
d. In October 1998, Sytron acquired Law Enforcement Technologic
Resources, Inc. (LETR) for 440,000 Sytron, Inc. common shares valued
at $233,750. LETR is inactive, pending liquidation or sale.
All Sytron acquisitions have been accounted for under the purchase method
of accounting, with acquired assets and liabilities recorded at their fair
market value.
9
61
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
Sytron's consolidated financial statements are prepared using the accrual
method of accounting. Sytron has elected a September 30 year end. Unless
otherwise indicated, the years presented refer to Sytron's fiscal year.
b. 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,
disclosure of contingencies and reported revenues and expenses. Actual
results could differ from those estimates.
c. Basic Loss Per Share
1999 1998
------------- -------------
Loss (numerator) $ (594,376) $ (3,686,852)
Shares (denominator) 6,872,803 4,647,259
Per share amount $ (0.09) $ (0.79)
The basic loss per share of common stock is based on the weighted average
number of shares issued and outstanding during the period of the
consolidated financial statements. Shares to be issued from warrants and
options are not included in the computation because they would have an
antidilutive effect on the net loss per common share.
d. Provision for Taxes
At September 30, 1999, Sytron has net operating loss carryforwards of
approximately $12,500,000 which will expire in 2007 through 2014. No tax
benefit has been reported in the consolidated financial statements because
future earnings against which to offset the loss carryforwards are not
assured.
e. Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents.
f. Principles of Consolidation
The consolidated financial statements include those of Sytron, Inc. and its
wholly-owned subsidiaries: Dorado Systems Corporation, Sytron Security
Group, Inc. and Sytron Security Systems, Inc. Biometrics, Inc., Mundix
Control Systems, Inc., Point Automation, Inc., and Law Enforcement
Technologic Resources, Inc., inactive at September 30, 1999, are also
included. All significant intercompany accounts and transactions have been
eliminated.
10
62
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. Inventory
Inventory is carried at the lower of average cost or market value. At
September 30, 1999 inventories were:
Raw materials and supplies $ 724,386
Work-in-process 232,525
Reserve for obsolete items (446,346)
-----------
Total $ 510,565
===========
It is Sytron's policy to review its perpetual inventory quarterly for items
which have become obsolete to its operations and to reserve for any items
identified.
h. Property and Equipment
Property and equipment are recorded at cost. Major additions and
improvements are capitalized. Minor replacements, maintenance and repairs
that do not increase the useful life of the assets are expensed as
incurred. Depreciation of property and equipment is determined using the
straight-lien method over the expected useful lives of the assets as
follows:
Description Useful Lives
----------- ------------
Equipment 5 years
Leasehold improvements 5 years
Software 5 years
Depreciation expense was $72,625 and $129,734 in 1999 and 1998,
respectively.
i. Goodwill
The excess of the purchase price over the fair market value of the assets
and liabilities acquired in the purchase of Dorado and Mundix has been
recorded as goodwill.
Goodwill is amortized using the straight-line method over 5 years.
Amortization expense was $94,969 and $94,969 for 1999 and 1998,
respectively.
Sytron reviews quarterly ,on a subsidiary-by-subsidiary basis, the goodwill
recorded in the purchase of its subsidiaries. When it becomes evident that
the Company will not recover its investment through sales of the
subsidiaries' products, then the goodwill is charged to expense in that
period.
11
63
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
j. Computer Software
Sytron capitalizes appropriate costs incurred to develop, or to acquire the
rights to, software products for sale to customers, in accordance with the
rules of Statement of Financial Accounting Standards No. 96. Computer
software now consists primarily of the MaxxNet system developed in 1998 for
correctional facility security, and the related MaxxNet versions for
airports and for corporate access control developed in 1999. Balances
reported are stated at cost less accumulated amortization. Amortization is
on a straight line method over an estimated useful life of five years,
subject to review quarterly to determine whether any additional writedown
is appropriate based on estimated future product sales.
Amortization expense was $129,929 and $418,329 for 1999 and 1998,
respectively. In 1998, computer software was written down an additional
$1,321,958, based on management's evaluation of likely future sales for
older software products.
k. Concentrations of Credit Risk
Sytron sells its product to various customers throughout the United States,
and extends credit to its customers.
Credit losses, if any, have been provided for in the consolidated financial
statements and are based on management's expectations. Sytron's accounts
receivable are subject to potential concentrations of credit risk. Sytron
does not believe that it is subject to any unusual risks, nor significant
risks in the normal course of its business.
l. Revenue Recognition
Revenue is recognized upon shipment of goods to the customer. For
construction projects, revenue is recognized using the percentage of
completion method of accounting and, therefore, takes into account the
cost, estimated earnings and revenue to date on contracts not yet
completed. The amount of revenue recognized is the portion of the total
contract price that the cost expended to date bears to the anticipated
final total cost, based on current estimates of costs to complete.
m. Advertising
Sytron charges advertising costs to expense as incurred.
n. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued certain new standards,
including standards on earnings per share (SFAS 128), capital structure
(SFAS 129), comprehensive income (SFAS 130), operating segments (SFAS 131)
and postretirement benefits (SFAS 132). The adoption of these standards did
not have a material impact on Sytron's consolidated financial statements.
12
64
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
o. Year 2000 Issue
Sytron has conducted a comprehensive review of its computer systems to
identify any systems that could fail to properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize the year could fail to function or generate erroneous data.
Management believes its products and software are Year 2000 compliant.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
a. Lease Agreement
On August 8, 1996, Sytron signed an operating lease for its office and
manufacturing space, located in Broomfield, Colorado. On June 13, 1998,
Sytron amended the operating lease to be effective February 1, 1999 through
December 31, 2002. The lease requirements are:
2000 $ 97,128
2001 97,128
2002 97,128
2003 24,282
2004 and thereafter -
------------
$ 315,666
============
Rent expense for 1999 and 1998 was $124,965 and $125,978, respectively.
b. Litigation
In 1999, Sytron and HID Corporation settled the patent infringement
litigation between the companies. HID will license to Sytron, Inc. and its
affiliated companies, U.S. patent Nos. 4,546,241 and 4,730,188.
In 1998, Sytron Security Systems, Inc. settled through arbitration an
outstanding suit with Camenco, Inc. originating with the March 1997
purchase of Camenco assets. SSS agreed to pay Camenco $237,000 in ten
monthly installments. Camenco agreed to return 200,000 Sytron, Inc. common
shares pro rata as SSS paid the ten installments and to pay its debt to
Wells Fargo which was to have been assumed by SSS in the purchase
agreement. SSS was unable to make all of the payments and Camenco obtained
a judgment confirming the arbitration award. Currently, SSS owes $184,545
under the judgment, and 160,000 Sytron, Inc. common shares have not been
returned.
Various companies in the Sytron group are party to other actions, which
management believes are not material to the consolidated financial
statements.
13
65
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 3 - COMMITMENTS AND CONTINGENCIES (Continued)
c. Employment Agreements
Sytron has employment agreements for the services of two of its key
officers, which expire January 1, 2000. The agreements require a total of
$200,546 to be paid on a yearly basis as compensation for these
individuals.
d. Security Interest in Stock of a Subsidiary
In consideration for funds loaned by related parties for the purchase of
Dorado Systems Corporation, Sytron granted a security interest in Dorado's
common stock. The 22,403 shares of Dorado's common stock outstanding are
being held in a nominee's name until loans have been paid.
NOTE 4 - CAPITAL LEASES
Sytron leases certain equipment with lease terms ending in 2002 and 2003.
Obligations under these capital leases have been recorded in the
accompanying consolidated financial statements at the present value of
future minimum lease payments.
Capital lease obligations at September 30, 1999 were:
Total $ 60,938
Less: current portion (14,827)
------------
Long-term portion $ 46,111
============
Future minimum lease payments under these capital leases and their net
present value are:
2000 $ 21,272
2001 21,272
2002 21,272
2003 5,122
2004 and thereafter -
------------
Total future minimum lease payments 68,938
Less, amount representing interest (8,000)
------------
Present value of future minimum lease payments $ 60,938
============
14
66
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 5 - NOTES PAYABLE AND NOTES PAYABLE - RELATED PARTIES
September 30,
1999
------------
Note payable Springhill Holdings Limited (Shareholder),
10% interest, due on demand, collateralized by certain
Sytron assets. $ 73,000
Note payable Werren Holdings Limited, (Shareholder),
10% interest, due on demand, collateralized by certain
Sytron assets. 10,000
Note payable Katonah West Pension Plan, (Shareholder),
10% interest, due on demand, collateralized by certain
Sytron assets. 249,750
Note payable (Shareholder), non-interest bearing,
unsecured, in default. 11,500
------------
Total Notes Payable - Related Parties $ 344,250
============
Note payable Forum Trading, due from judgment dated
February 15, 1996, 8.0% interest, unsecured, in default. $ 55,559
Note payable Wagner Sharer & Co. from judgment dated
September 12, 1996, 7.0% interest, unsecured, in default. 30,233
Notes payable to various individuals, 12.0% interest,
unsecured, in default. 40,000
Note payable to various individuals, 12.0% interest,
unsecured, in default. 40,000
Notes payable to various individuals, 9.5% interest,
interest payments due quarterly, principal due
January 31, 2000, secured by accounts receivable. 608,656
Note payable United Credit, 14.0% interest, balance not
to exceed $250,000 or 75% of accounts receivable, monthly
payments based on outstanding accounts receivable balance,
secured by accounts receivable, inventory and equipment
of Dorado. 208,706
Note payable Crescent International Limited, 10% interest,
convertible to common stock based on market price,
interest payments bi-annually in common stock, principal
due January 15, 2001. 350,000
Convertible subordinated debentures, 10% interest payable
annually, convertible to common stock based on market
price, in default. 42,263
------------
Total Notes Payable 1,375,417
Less Current Portion (1,013,649)
------------
Total Long-Term Notes Payable $ 361,768
============
Scheduled maturities of notes payable - related parties and notes payable
are as follows:
2000 $ 1,357,899
2001 361,768
2002, 2003, 2004 and thereafter -
------------
$ 1,719,667
============
15
67
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 6 - OUTSTANDING STOCK OPTIONS AND PURCHASE WARRANTS
The following summarizes the exercise price per share and expiration date
of the Company's outstanding options and warrants to purchase common stock
at September 30, 1999. Warrants may be extended at the Company's
discretion.
Type Expiration Date Exercise Price Number
------- ----------------- -------------- ---------
Options February 2002 $3.625 453
Options 2002 to 2003 $2.50 23,889
Options June 2001 $2.26 53,081
Options March to May 2002 $1.53 52,169
Options June 2002 $1.50 2,724
Options February 2003 $1.375 1,000
Options 2002 to 2003 $1.125 36,309
Options October 2002 $1.00 22,932
Options 2002 to 2003 $0.875 43,700
Options 2002 to 2004 $0.75 1,818,779
Options 2003 to 2004 $0.469 50,332
Options January 2004 $0.3125 5,000
Warrants 2000 to 2002 $2.50 55,153
Warrants May 2003 $2.00 100,000
Warrants April 2002 $1.75 2,000
Warrants 1999 to 2003 $1.625 157,200
Warrants 1999 to 2000 $1.50 72,000
Warrants February 2003 $1.375 80,000
Warrants July 2002 $1.125 86,000
Warrants 2002 to 2003 $1.00 38,000
Warrants 2001 to 2003 $0.75 415,000
Warrants October 2002 $0.625 268,600
Warrants January 2004 $0.75 80,000
Warrants January 2002 $0.01 726,000
---------
Total 4,190,321
=========
Sytron's June 28, 1996 non-statutory stock option plan, as amended January
8, 1999, provides options to purchase 3,500,000 shares of common stock.
1,473,243 options are fully vested of which 176,666 options were exercised
at September 30, 1999. Remaining options vest from 1999 through 2003. No
options may be granted after June 28, 2000. Options have a five year
exercise period.
The plan provides a special incentive to selected individuals who have made
significant contributions to Sytron. The plan shall be administered by the
board of directors of Sytron or an option committee.
16
68
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 7 - CRESCENT FINANCING
In 1998, Sytron sold to Crescent International Limited (Crescent) for
$250,000 in cash, 166,667 common shares and a warrant to acquire an
additional 100,000 common shares at $3.375 per share, until May 2003.
Sytron did not register the shares issued and issuable to Crescent. As a
result of that failure, and of the fall in the price of its common stock,
Sytron was unable to meet the requirements to sell additional shares to
Crescent. Sytron and Crescent agreed to replace the May transaction with a
revised financing arrangement on January 15, 1999.
Under the January transaction, Sytron: (a) sold to Crescent a convertible
promissory note for $350,000, with the conditional right to sell to
Crescent a second note for $400,000; (b) will issue shares to Crescent as a
commitment fee every six months equal to 5% of the unpaid principal; (c)
sold to Crescent 100,000 shares for an aggregate of $1.00; (d) issued an
"additional warrant" for up to 726,000 shares at $0.01 per share; (e) paid
Crescent a fee of $10,500. The note is secured by a first lien on Sytron's
inventory and is convertible at any time into Sytron's common stock.
Share price formulas in the note, the additional warrant, and the
commitment fee, determine the number of Sytron shares to be issued, based
on "market price", defined as the lowest three consecutive trading day
average of bid prices during the last thirty trading days.
The note conversion price is the lower of $0.8125 per share and 85% of
market price. If the note is converted at $0.375, 933,333 shares would be
issued. If the market price is $0.96 a share or higher, the minimum 430,769
common shares would be issued.
The shares Crescent may acquire under the additional warrant are reduced as
the market price of Sytron's common stock on the effective date of share
registration increases. If the market price is $0.28 per share or lower,
then Crescent may acquire all 726,000 shares for $0.01 per share. But if,
for example, the market price is $0.38 per share, Crescent's right to
acquire shares under the additional warrant is reduced to 491,228 shares,
at $0.01 per share.
The note may not be converted and the additional warrant may not be
exercised if Crescent would then own more than 4.9% and 9.9%, respectively,
of the outstanding common shares.
17
69
<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 8 - GOING CONCERN
Sytron's consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in
the normal course of business. The Company has incurred operating losses
from its inception through September 30, 1999. It has not established
revenues sufficient to cover its operating costs and to allow it to
continue as a going concern.
Sytron feels it can achieve operating profits and positive cash flow if
operated for maximum return in its current form. Management believed,
however, that substantial opportunity existed in the highly fragmented
security industry for a broad line, full service provider, and committed to
creating such a provider through extensive product development and
acquisition of companies with complimentary products and/or distribution
networks. Many of these acquisitions were early stage companies with
limited cash flow and heavy capital needs to realize their potential.
Operating according to this philosophy has required greater spending, and
foregoing current profit opportunities for future growth opportunities.
In October 1998, Sytron restructured its sales and marketing programs and
made other changes intended to reduce operating costs. These steps included
personnel and overhead reductions and deferral of some product development
and marketing introduction activities.
Without abandoning its long-term growth strategy, the Company has refocused
existing operations to achieve profitability and positive cash flow.
Additional acquisitions will be undertaken only after these goals are
achieved, and after financing to support them is obtained.
18
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<PAGE>
SYTRON, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1999
NOTE 9 - LOSS FROM DISCONTINUED OPERATIONS
Effective August 31, 1999, Sytron sold its 100% ownership in ECSI
Construction Services, Inc. in return for the originally issued 100,000
shares. In addition, Sytron discontinued the operations of Nautica Security
Group, Inc., Sytron Security Group, Ltd. (United Kingdom) and Law
Enforcement Technologic Resources, Inc. (no operations in 1999) effective
September 29, 1999. The following is a summary of the loss from
discontinued operations as required by APB 30.
<TABLE>
<CAPTION>
Sytron Security
ECSI Group, Ltd. Nautica Combined
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1999
- ----
NET SALES $ 1,333,399 $ - $ 32,656 $1,366,055
COST OF SALES 1,158,089 - 409 1,158,498
----------- --------- ---------- ----------
GROSS PROFIT 175,310 - 32,247 207,557
----------- --------- ---------- ----------
SELLING, ADMINISTRATIVE
AND ENGINEERING EXPENSES 44,453 12,841 105,301 162,595
----------- --------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS 130,857 (12,841) (73,054) 44,962
----------- --------- ---------- ----------
OTHER (EXPENSES) (12,177) - (33,416) (45,593)
----------- --------- ---------- ----------
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS $ 118,680 $ (12,841) $(106,470) $ (631)
=========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Sytron Security
Group, Ltd. Nautica Combined
--------- --------- ----------
<S> <C> <C> <C>
1998
- ----
NET SALES $ 6,375 $ 42,127 $ 48,502
COST OF SALES (1,796) 2,943 1,147
--------- --------- ----------
GROSS PROFIT 8,171 39,184 47,355
--------- --------- ----------
SELLING, ADMINISTRATIVE AND
ENGINEERING EXPENSES 246,597 151,044 397,641
--------- --------- ----------
(LOSS) FROM OPERATIONS (238,426) (111,860) (350,286)
--------- --------- ----------
OTHER INCOME (EXPENSES)
Other expenses (1,420) (8,745) (10,165)
Loss on disposal of assets - (67,000) (67,000)
--------- --------- ----------
Total Other Income (Expenses) (1,420) (75,745) (77,165)
--------- --------- ----------
NET (LOSS) FROM DISCONTINUED OPERATIONS $(239,846) $(187,605) $ (427,451)
========= ========= ==========
</TABLE>
19
71
<PAGE>
PART III
Item 1. Exhibit Index
No.
- ---
Sequential
Page No.
--------
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation 74
3.2 Amendment to Articles of Incorporation 78
3.3 Amendment to Articles of Incorporation 81
3.4 Bylaws 83
(10) Material Contracts
10.1 Note Purchase Agreement Between the
Company and Crescent International
Limited 102
10.2 Lease Between the Company and Robert
Law Family Trust 230
(27) Financial Data Schedule
27.1 Financial Data Schedule 251
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
SYTRON, INC.
(Registrant)
Date: January 30, 2000
By:s/ Robert Howard
-------------------
Robert Howard, President
73
<PAGE>
SYTRON, INC.
------------------------------
EXHIBIT 3.1
------------------------------
ARTICLES OF INCORPORATION
------------------------------
74
<PAGE>
Microfilm Number ___________ Filed with the Department of
State on NOV 09 1992
Entity Number________________ /s/
-----------------------------
Secretary of the Commonwealth
ARTICLES OF INCORPORATION
DSCB: 15-1306 (Rev 89)
X Business-Stock (15 Pa. C.S. Section 1306)
- -----
Business-nonstock (15 Pa. C.S. Section 2102)
- -----
Business-statutory close (15 Pa. C.S. Section 2304a)
- -----
Professional (15 Pa. C.S. Section 2903)
Management (15 Pa. C.S. Section 2701)
- -----
Cooperative (15 Pa. C.S. Section 7701)
- -----
1. The name of the Corporation is: MHB Technology, Inc.
This Corporation is incorporated under the provisions of the Business
Corporation Law of 1988.
2. The address of this Corporation's initial registered office in this
Commonwealth is: 1735 Market Street, 38th Floor, Philadelphia, Philadelphia
County, Pennsylvania 19103-7593.
3. The aggregate number of shares the Corporation shall have authority to
issue is:
(a) Ten Million Shares (10,000,000) of Common Stock, $.0l par value per
share; and
(b) (i) Ten Million Shares (10,000,000) of Preferred Stock, without par
value.
(ii) The Preferred Stock may be issued from time to time in one or
more series with such distinctive designations as may be stated
in a resolution or resolutions providing for the issue of such
stock from time to time adopted by the Board of Directors. The
resolution or resolutions providing for the issue of shares of a
particular series shall fix, subject to applicable laws and the
provisions hereof,
75
<PAGE>
the designation, rights, preferences and limitations of the
shares of each such series. The authority of the Board of
Directors with respect to each series shall include, but not be
limited to, determination of the following:
(A) The number of shares constituting such series, including the
authority to increase or decrease such number, and the
distinctive designation of such series;
(B) The dividend rate of the shares of such series, whether the
dividends shall be cumulative and, if so, the date from
which, they shall be cumulative and the relative rights off
priority, if any, off payment of dividends on shares off
such series;
(C) The right, it any, of the Corporation to redeem shares of
such series and the terms and conditions of such redemption;
(D) The rights of the shares in case of a voluntary or
involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of
payment of shares of such series;
(E) The voting power, if any, of such series and the terms and
conditions under which such voting power may be exercised;
(F) The obligation, if any, of the Corporation to retire shares
of such series pursuant to a retirement or sinking fund or
funds of a similar nature or otherwise and the terms and
conditions of such obligations;
(G) The terms and conditions, if any, upon which shares of such
series shall be convertible into or exchangeable for shares
of stock of any other class or classes, including the price
or prices or the rate or rates of conversion or exchange and
the terms off adjustment, if any; and
76
<PAGE>
(H) Any other rights, preferences or limitations of the shares
of such series.
(iii)The authority to divide the authorized and unissued
shares into classes or series, or both, and to
determine for any such class or series its voting
rights, designations, preferences, limitations and
special rights is vested in the Board of Directors.
4. The name and address, including street and number, if any, of each
incorporator is:
Name Address
---- -------
Lisa Small 735 Market Street
Philadelphia, PA 19103-7598
5. In all elections for Directors, each shareholder entitled to vote shall be
entitled to only one vote for each share held, it being intended hereby to
deny to shareholders of this Corporation the right of cumulative voting in
the election of Directors.
IN TESTIMONY WHEREOF, the incorporator has signed and sealed these Articles
of Incorporation this 6th day of November, 1992.
/s/ LISA SMALL
--------------------------------
LISA SMALL
Sole Incorporator
77
<PAGE>
SYTRON, INC.
-----------------------------
EXHIBIT 3.2
-----------------------------
AMENDMENT TO
ARTICLES OF INCORPORATION
-----------------------------
78
<PAGE>
Microfile Number Filed with the Department of State on Jul 03 1995
--------- -----------
Number 2154533 /s/
-------- -----------------------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSC8:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. Section 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: MHB Technology, Inc.
----------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the following
information to conform to the records of the Department):
(a) 6 Pheasant Run Newtown PA 18940 Bucks
---------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o Steven Borack
---------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
3. The statute by or under which it was incorporated is: Business-Stock
(15Pa.C.S. Section 1306) --------------
- ------------------------
4. The date of its incorporation is: November 9, 1992
----------------------------------------
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of Amendment
in the Department of State.
The amendment shall be effective on: at
--------------- ------------------
Date Hour
6. (Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to 15
Pa.C.S. Section 1914(a) and (b).
The amendment was adopted by the board of directors pursuant to 15 Pa.C.S.
Section 1914(c).
7. (Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, which amended
paragraph 3.1 of the original articles is as follows:
The aggregate number of shares of the Corporation shall have the authority
to issue is: (a) Twenty million shares of Common Stock, $0.01 par value
per share.
79
<PAGE>
8. (Check if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original Articles and
all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this _____
day of June, 1995.
MHB TECHNOLOGY, INC.
-------------------------------------
(Name of Corporation)
BY: /s/ Allen N. Solento
--------------------------------
(Signature)
TITLE: Secretary
-----------------------------
Jul 03 1995
80
<PAGE>
SYTRON, INC.
-----------------------------
EXHIBIT 3.3
------------------------------
AMENDMENT TO
ARTICLES OF INCORPORATION
------------------------------
81
<PAGE>
Microfile Number 9553-1500 Filed with the Department of State on Aug 14 1995
--------- -----------
Number 2154533 /s/
-------- -----------------------------------------
Secretary of the Commonwealth
ARTiCLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSC8:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. Section 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
1. The name of the corporation is: MHB Technology, Inc.
----------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the following
information to conform to the records of the Department):
(a) 6 Pheasant Run Newtown PA 18940 Bucks
---------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o Steven Borack
---------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
3. The statute by or under which it was incorporated is: Business-Stock
(15Pa.C.S. Section 1306) ---------------
4. The date of its incorporation is: November 9, 1992
----------------------------------------
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of Amendment
in the Department of State.
The amendment shall be effective on: at
--------------- ------------------
Date Hour
6. (Check one of the following):
The amendment was adopted by the shareholders (or members) pursuant to 15
Pa.C.S. Section 1914(a) and (b).
X The amendment was adopted by the board of directors pursuant to 15 Pa.C.S.
Section 1914(c).
7. (Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, which amended
paragraph 1 of the original articles is as follows:
The name of the corporation is Sytron, Inc.
-------------------------------------------
The amendment adopted by the corporation is set forth in full in Exhibit A
attached hereto and made a part hereof.
August 14 1995
82
<PAGE>
SYTRON, INC.
-----------------------------
EXHIBIT 3.4
-----------------------------
BYLAWS
-----------------------------
83
<PAGE>
MHB TECHNOLOGY, INC.
BY-LAWS
-------
KEY TO BY-LAWS
--------------
ARTICLE PAGE
- ------- ----
ARTICLE I - OFFICES 1
ARTICLE II - SEAL 1
ARTICLE III - SHAREHOLDERS' MEETINGS 1
ARTICLE IV - SHARE CERTIFICATES 4
ARTICLE V - BOARD OF DIRECTORS 7
ARTICLE VII - OFFICERS 10
ARTICLE VIII - LIMITATION OF LIABILITY
AND INDEMNIFICATION 12
ARTICLE IX - NOTICES 13
ARTICLE X - MISCELLANEOUS PROVISIONS 14
ARTICLE XI - AMENDMENTS 15
84
<PAGE>
MHB TECHNOLOGY, INC.
BY-LAWS
-------
ARTICLE I - OFFICES
-------------------
1.1 Registered Office. The registered office of the corporation shall be at
such place within the Commonwealth of Pennsylvania as the Board of Directors may
from time to time determine.
1.2 Other Offices. The corporation may also have offices at such other
places as the Board of Directors may from time to time appoint or the activities
of the corporation may require.
ARTICLE II - SEAL
-----------------
2.1 Seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its incorporation, and the words "Corporate Seal,
Pennsylvania".
ARTICLE III - SHAREHOLDERS' MEETINGS
------------------------------------
3.1 Annual Meeting. There shall be an annual meeting of the shareholders
during November of each year, at such time and place as the Board of Directors
may determine. At the annual meeting, the shareholders shall elect directors, if
appropriate,
85
<PAGE>
and transact such other business as may properly be brought before the
meeting.
3.2 Special Meetings. Special meetings of the shareholders may be called at
any time for any purpose not prohibited by law or the Articles of Incorporation
by the Chairman of the Board, the President, the Board of Directors, or the
holders of at least 20% of the shares outstanding and entitled to vote at the
meeting, by submitting a written request therefor, stating the object of the
meeting, to the Secretary. The Secretary shall fix the time and place of the
meeting, which shall be not later than 60 days after the receipt of the request.
If the Secretary shall neglect or fail to set the time and place of the meeting,
the persons or entities calling the meeting may do so. Business transacted at
all special meetings shall be confined to the objects stated in the request
therefor, and matters directly related and germane thereto. (Revised per minutes
of August 8, 1993 meeting of the Board of Directors.)
3.3 Notice. Written notice of every meeting of the shareholders, stating
the place, time and hour thereof, shall be given to each shareholder not later
than five days prior to the date of the meeting or ten days prior to the day
named for a meeting called to consider a fundamental change. Notice of a special
meeting shall state the nature of the business to be transacted.
3.4 Quorum. At all meetings of the shareholders, the holders of a majority
of the issued and outstanding shares entitled to vote, present in person or
represented by proxy, shall
(2)
86
<PAGE>
constitute a quorum. If a meeting of shareholders cannot be organized because of
the absence of a quorum, the shareholders present in person or by proxy may
adjourn the meeting to such time and place as they may determine, and in the
case of a meeting called for the election of Directors, those who attend the
second such adjourned meeting shall constitute a quorum for the purpose of
electing Directors. Except as otherwise provided in these By-Laws, the Articles
of Incorporation, or applicable law, the acts of the holders of a majority of
shares entitled to vote, present in person or by proxy, and voting at a meeting
having a quorum shall be the acts of the shareholders.
3.5 Voting. Each shareholder shall be entitled to one vote in person or by
proxy for each share he or she holds having voting power. An unrevoked proxy
which is not coupled with in shall not be voted on after 11 months after its
execution, unless one proxy expressly provides for a longer time of not more
than three years.
3.6 Voting List. The officer having charge of the transfer books for shares
of the corporation shall prepare, at least five days before each meeting of
shareholders, an alphabetical list of the names and addresses of and shares held
by the shareholders entitled to vote at the meeting. The list shall be kept on
file at the registered office of the corporation, and be produced and kept open
for inspection by shareholders throughout the meeting for purposes of the
meeting.
(3)
87
<PAGE>
3.7 Judges of Elections. The Board of Directors may, before a meeting of
shareholders, appoint one or three Judges (who need not be shareholders) for
such meeting. If no such Judges of Election are appointed, the chairman of the
meeting may, and on the request of any shareholder or his proxy shall, make such
appointment. If Judges are appointed at the request of one or more shareholders
or proxies, the shareholders present and entitled to vote shall determine
whether there will be one or three Judges. The Judges of Election shall take
such action as may be necessary or proper fairly to conduct the election or vote
and shall report in writing on any matter they determine, executing a
certificate of any fact they find, if requested by the chairman of the meeting
or any shareholder. No person who is a candidate for office shall act as a
Judge.
ARTICLE V - SHARE CERTIFICATES
------------------------------
4.1 Form of Certificate. The certificates of shares of the corporation
shall state that the corporation is incorporated under the laws of this
Commonwealth; the name of the person to whom issued; the number, class, and
designation of series (if any) of the shares represented; and the par value of
each share or the absence of par value, as appropriate. Each certificate shall
be numbered and registered in a share register in the order issued.
(4)
88
<PAGE>
4.2 Signature. Each share certificate shall be signed, by the President or
a Vice President and the Secretary or an Assistant Secretary or the Treasurer or
an Assistant Treasurer, and sealed with the corporate seal. When a certificate
is signed by a transfer agent or registrar, the signature of an authorized
officer may be facsimile. If an officer who has signed a certificate, personally
or by facsimile, ceases to be an officer before the certificate is delivered,
the certificate may be issued as if the signatory remained in office.
4.3 Lost Certificates. The Board of Directors shall cause the issuance of
a new certificate as a replacement for a certificate claimed to have been lost,
destroyed or wrongfully taken, upon submission of an affidavit of the person
making the claim of the loss, destruction, or wrongful taking. The Board of
Directors may in its discretion, require as a condition to the issuance of a
replacement certificate that the owner of the certificate advertise the loss in
such manner as the Board may determine, and/or give the corporation a bond in
such sum and with such sureties as the Board may direct as indemnity against any
claim that may be made against the corporation with respect to the certificate
claimed to have been lost, destroyed or wrongfully taken.
4.4 Transfer of Shares. Upon surrender to the corporation of its transfer
agent of a share certificate duly endorsed or accompanied proper evidence of
succession, assignment or authority to transfer, the corporation shall issue a
new certificate
(5)
89
<PAGE>
to the person entitled thereto, cancel the old certificate and record the
transaction in its books.
4.5 Determination of Shareholders of Record. The Board of Directors may fix
a record date for the determination of the shareholders entitled to notice of
and to vote at a meeting, to receive payment of a dividend or distribution, to
receive an allotment of rights, or to exercise rights in respect to a change,
conversion or exchange of shares. In such case, only the shareholders of record
on the record date shall be entitled to notice of or to vote at or participate
in such meeting or activity or event, notwithstanding any transfer of any shares
on the books of the corporation after the record date. If the Board of Directors
closes the transfer books during such period, it shall so notify each
shareholder in writing. The record date may not be more than 50 days prior to
the meeting, activity, or event to which it relates.
4.6 Registered Shareholders. The corporation shall be entitled to treat the
holder of record of any shares as the holder in fact for all purposes and shall
not be bound to recognize any claim to or interest in such share on the part of
any other person The corporation shall not be liable for any improper or
impermissible registration or transfer of shares which are or to be registered
in the name of a fiduciary or its nominee unless the corporation had actual
knowledge that the fiduciary or nominee are committing a breach of trust in
requesting such registration or
(6)
90
<PAGE>
transfer, or the corporation had knowledge of such facts that its participation
in the registration or transfer amounts to bad faith.
4.7 Partial Written Consent. Any action required or permitted to be taken
at a meeting of shareholders or of a class of shareholders may be taken without
a meeting upon the consent of the shareholders who would have been entitled to
cast the minimum number of votes that would be necessary to authorize the action
at a meeting at which all shareholders entitled to vote thereon were present and
voting. The consents shall be filed with the secretary of the Corporation. The
action shall not become effective until after at least ten days' written notice
of the action has been given to each shareholder entitled to vote thereon who
has not consented thereto. This Section shall not be construed to restrict the
right of the shareholders or any class of shareholders to act without a meeting
by unanimous written consent.
ARTICLE V - BOARD OF DIRECTORS
------------------------------
5.1 General Powers. The business and affairs of the corporation shall be
managed by the Board of Directors, and all powers of the corporation are hereby
granted to and vested in the Board of Directors, except as otherwise expressly
provided in these By-Laws, the Articles of Incorporation, or by law.
(7)
91
<PAGE>
5.2 Composition and Selection. There shall be not more than seven and no
less than one member of the Board of Directors, as the Board may determine from
the annual meeting of shareholders, or at any special meeting called for that
purpose. (Revised per minutes of August 8, 1993 meeting of the Board of
Directors.)
5.3 Term. Directors shall serve for a term of at least one year, or until
their successors are duly qualified and seated, except that the initial
Directors shall serve until the first annual meeting of the Shareholders
following their election.
5.4 Regular Meetings. The Board may hold regular meetings at such times
and places as it may determine.
5.5 Special Meetings. Special meetings of the Board of Directors may be
called, at any time, by the Chairman of the Board, the President, or a majority
of the members of the Board, by submitting a written request therefor, stating
the object of the meeting, to the Secretary. The Secretary shall set the time
and place of the meeting, which shall be held not later than 30 days after the
receipt of the request. If the Secretary shall neglect or refuse to set the time
and place of the meeting, the person or persons calling the meeting may do so.
Business transacted at all special meetings shall be confined to the subjects
stated in the request therefor and matters directly related and germane thereto.
(Revised per minutes of August 8, 1993 meeting of the Board of Directors.)
5.6 Annual Meeting. There shall be an annual meeting of the Board of
Directors following each annual meeting of the shareholders. At the annual
meeting, the Board of Directors shall
(8)
92
<PAGE>
elect officers and transact such other business as may be properly brought
before the meeting.
5.7 Notices. Written notice of regular and annual meetings of the Board of
Directors, stating the time and place shall be given to all directors at least
five days prior to the date of the meeting. Written notice of special meetings
of the bard of Directors shall be given to each director at least 48 hours to
the time of the meeting and shall state the business to be transacted at the
meeting.
5.8 Ouorum. A majority of the members of the Board of Directors shall
constitute a quorum for the transaction of business, and the acts of a majority
of directors present and voting at a meeting at which a quorum is present shall
be the acts of the card of Directors. In the event that a quorum is not present
at any meeting of the Board of Directors, the directors present may adjourn the
meeting without any notice of the time and place of the adjourned meeting except
for announcement at the meeting at which adjournment is taken.
5.9 Vacancies. If the office of a director shall become vacant for any
reason, including an increase in the number of directors, the remaining
directors shall elect a successor, who shall hold office for the unexpired term
for which the vacancy or until his or her successor is duly qualified and
seated. A majority of the remaining directors shall constitute a
(9)
93
<PAGE>
quorum for purposes of filling the vacancy on the Board of Directors.
5.10 Alternate Directors. A shareholder or group of shareholders entitled
to elect, appoint, designate or otherwise select one or more directors may
select an alternate for each such director. In the absence of a director from
a meeting of the Board, his or her alternate may, in the manner and upon the
notice provided in these By-laws, attend the meeting or execute a written
consent and exercise at the meeting or in such consent all of the powers of the
absent director.
ARTICLE VI - COMMITTEES
-----------------------
6.1 Establishment. The Board of Directors may establish one or more standing
or special committees, including without an executive committee. Except as
otherwise provided in these By-Laws, the Articles of Incorporation, or
applicable law, any committee may exercise such powers and functions as the
Board of Directors may from time to time determine.
6.2 Committee Members. The President shall appoint all committee members
and committee chairpersons and may appoint alternates for any member or
chairperson of any committee. Members of a committee need not be directors.
(10)
94
<PAGE>
ARTICLE VII - OFFICERS
----------------------
7.1 Officers. The officers of the corporation shall be chosen by the Board
of Directors and shall be a Chairman of the Board, a President, a Treasurer, a
Secretary, and such Vice Presidents and assistant officers as the Board of
Directors may determine that the needs of the corporation require. All officers
shall be natural persons of full age, and any two or more offices may be held by
the same person. (Revised per minutes of August 8, 1993 meeting of the Board of
Directors.)
7.2 Election and Term.
A. The President, each Vice President, Treasurer and Secretary shall be
elected by the Board of Directors at its annual meeting or at an appropriate
special meeting and shall serve for a term of one year, or until their
successors are duly elected and qualified. All assistant officers shall be
elected or at such times and for such terms as the Board of Directors may
determine.
B. Any vacancy in any office shall be filled by the Board.
7.3 President. The President shall be the chief operating officer of the
corporation, and shall manage the day-to-day affairs of the corporation, and
administer the general direction of the affairs of the corporation except as
otherwise determined by the Board. He or she shall perform the duties and powers
of the Chairman of the Board during the absence or disability of the Chairman,
and such other duties and powers as the Board of Directors shall designate. He
or she may execute on behalf of the corporation all bonds, mortgages,
(11)
95
<PAGE>
contracts and other documents, except where such documents are required by law
to be otherwise executed or when the execution thereof shall be delegated by the
Board of Directors to another officer. (Revised per minutes of August 8, 1993
meeting of the Board of Directors.)
7.4 Vice Presidents. The Vice Presidents, if any,in such order as the Board
may determine, shall act in all cases for and as the President in the
President's absence, disability, or incapacity, and shall perform such other
duties as may be delegate to any of them by the Board of Directors or the
President.
7.5 Treasurer. The Treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all monies
and other valuable effects of the corporation in separate accounts or
depositaries in the name of and to the credit of the corporation as shall be
designated by the Board of Directors. He or she shall disburse the funds of the
corporation as may be ordered by the Board of Directors for such disbursements
and shall render to the Board of Directors, whenever it may so require it, an
account of all his or her transactions as Treasurer and of the financial
condition of the corporation. The Treasurer may be a corporation.
7.6 Secretary. The Secretary shall attend all meetings of the Board of
Directors and record all votes of the corporation and the minutes of all
transactions in a book to be kept for that purpose and perform like duties for
committees of the Board of
(12)
96
<PAGE>
Directors, if and when required. He or she shall give, or cause to be given,
notice of all meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors or the President. He or
she shall keep, or cause to be kept, in safe custody, the corporate seal and,
when authorized to do so by the Board of Directors, affix the same to any
instrument requiring it and attest to it by his or her signature.
7.7 Assistant Officers. Assistant officers shall perform such functions
and have such responsibilities as the Board of Directors may determine.
7.8 Chairman of the Board. The Chairman of the Board shall be the chief
executive officer of the corporation, and shall preside at all meetings of the
Board of Directors and at all meetings of the shareholders. He or she shall act
as liaison from and as spokesperson for the Board of Directors. He or she shall
participate in long range planning of the corporation and shall see that all
resolutions and orders of the Board of Directors are carried into effect. He or
she shall be authorized to execute on behalf of the corporation all bonds,
mortgages, contracts, and other documents, except where such documents are
required by law to be otherwise executed or when the execution thereof shall be
delegated by the Board of Directors to another officer. (Added per minutes of
August 8, 1993 meeting of the Board of Directors.)
ARTICLE VIII - LIMITATION OF LIABILITY AND INDEMNIFICATION
----------------------------------------------------------
8.1 Limitation of Liability. Directors of this corporation shall not be
personally liable for monetary damages as such for any action other than as
expressly provided in 15 Pa. C.S.A. Section 513, 1713 and 1721, and any other
present or future provision of Pennsylvania law.
8.2 Indemnification. The corporation shall indemnify every director and
officer, and may indemnify any employee or agent, to the full extent permitted
by the Pennsylvania Business
(13)
97
<PAGE>
Corporation Law of 1988, the Pennsylvania Directors' Liability Act and any other
present or future provision of Pennsylvania law. The corporation shall pay and
advance expenses to directors and officers for matters covered by
indemnification to the full extent permitted by such law, and may similarly pay
and advance expenses for employees and agents.This Section 3.2 shall not exclude
any other indemnification or other rights to which any party may be entitled in
any manner.
ARTICLE IX - NOTICES
--------------------
9.1 Manner of Giving Notice. Whenever written notice is or permitted, by
these By-Laws or otherwise, to be given to any person or entity, it may be given
either personally or by sending a copy thereof by first class mail, postage
prepaid, or by telegram, (with messenger service specified), telex or TWX (with
answerback received) or courier service, charges prepaid, or by telecopies, to
the address to the address of the appropriate person or entity (or to the telex,
TWX, telecopier or telephone number) as it appears on the books of the
corporation. If notice is sent by telecopier, notice shall be deemed to have
been given upon receipt. If the notice is sent by mail or telegraph, it shall be
deemed to have been given when deposited in the United States Mail or with a
telegraph office for transmission.
(14)
98
<PAGE>
9.2 Waiver of Notice. Whenever a written notice is required, by these
By-Laws or otherwise, a waiver of such notice in writing, signed by the person
or persons or on behalf of the entity or entities entitled to receive the notice
shall be deemed equivalent to the giving of such notice, whether the waiver is
signed before or after the time required for such notice. Except as otherwise
required by law, the waiver of notice need not state the business to be
transacted at nor the purpose of the meeting, except that the waiver of notice
of a special meeting of the shareholders or the Board of Directors shall specify
the general nature of the business to be transacted at the meeting.
9.3 Waiver by Attendance/Execution of Consent. Attendance at any meeting or
execution of any consent shall constitute waiver of notice of such meeting,
except where a person attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of business because the meeting
was not called or convened upon proper notice.
ARTICLE X - MISCELLANEOUS PROVISIONS
------------------------------------
10.1 Fiscal Year. The fiscal year of the corporation shall be as the Board
of Directors may determine.
10.2 Participation by Telecommunications. One or more persons may
participate in a meeting of the Board of Directors or of any committee by means
of a conference telephone or similar
(15)
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communications equipment by which all persons participating in the meeting can
hear one another. Participation in a meeting pursuant to this section shall
constitute the presence in person at such meeting.
10.3 Dividends. The Board of Directors may, at any meeting, declare
dividends upon the shares of the corporation to be paid in cash, property or
shares, subject to any limitations in the Articles of Incorporation or
applicable law. Before payment of any dividend, the Board may set aside out of
any funds of the corporation available for dividends such sum as the Board, in
its absolute discretion, thinks proper to meet contingencies, equalize
dividends, repair or maintain corporate property, or serve such other purposes
as the Board thinks the best interest of the corporation, and the Board may
modify or abolish any such reserve in the manner in which it was created.
10.4 Financial Reports to Shareholders. Unless otherwise agreed by a
shareholder, the Board shall send to each shareholder financial statements of
the corporation which include a balance sheet as of the end of each fiscal year
and a statement of income and expenses for the fiscal year, which may be
consolidated statements of the corporation and one or more of its subsidiaries
(if any). The financial statements shall be mailed to each shareholder thereto
within 120 days after close of each fiscal year and, after the mailing and upon
written request, to any shareholder or beneficial owner entitled thereto to whom
a copy of
(16)
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the most recent annual financial statements has not previously been mailed.
ARTICLE XI - AMENDMENTS
-----------------------
11.1 Amendments. These By-laws may be adopted, amended or repealed, in
whole or in part, by the shareholders or by the Board of Directors, subject to
the power of the shareholders to change such action.
(17)
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SYTRON, INC.
-------------------------------
EXHIBIT 10.1
_______________________________
NOTE PURCHASE AGREEMENT BETWEEN
THE COMPANY AND
CRESCENT INTERNATIONAL LIMITED
------------------------------
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TABLE OF CONTENTS
Page
----
ARTICLE I CERTAIN DEFINITIONS 2
Section 1.1 "Additional Warrant" 2
Section 1.2 "Additional Warrant Shares" 2
Section 1.3 "Average Daily Trading Volume" 2
Section 1.4 "Bid Price" 2
Section 1.5 "Capital Shares" 2
Section 1.6 "Closing" 2
Section 1.7 "Closing Date" 2
Section 1.8 "Collateral" 2
Section 1.9 "Commitment Fees" 2
Section 1.10 "Commitment Period" 2
Section 1.11 "Common Stock" 2
Section 1.12 "Common Stock Equivalents" 2
Section 1.13 "Condition Satisfaction Date" 2
Section 1.14 "Contract" 3
Section 1.15 "Damages" 3
Section 1.16 "Disclosure Schedule" 3
Section 1.17 "Effective Date" 3
Section 1.18 "Equity Line Agreement" 3
Section 1.19 "Exchange Act" 3
Section 1.20 "Incentive Warrant" 3
Section 1.21 "Incentive Warrant Shares" 3
Section 1.22 "Intellectual Property" 3
Section 1.23 "Legend" 3
Section 1.24 "Lien" 3
Section 1.25 "Market Price" 3
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TABLE OF CONTENTS
(continued)
Section 1.26 "Material Adverse Effect" 3
Section 1.27 "Minimum Time Interval" 4
Section 1.28 "NASD" 4
Section 1.29 "Note Issuance Notice Date" 4
Section 1.30 "Note Issuance Notice" 4
Section 1.31 "Note Shares" 4
Section 1.32 "Original Registration Rights Agreement" 4
Section 1.33 "Outstanding" 4
Section 1.34 "Option" 4
Section 1.35 "Permitted Lien" 4
Section 1.36 "Person" 4
Section 1.37 "Preferred Stock" 4
Section 1.38 "Principal Market" 4
Section 1.39 "Put Shares" 4
Section 1.40 "Registrable Securities" 5
Section 1.41 "Registration Rights Agreement" 5
Section 1.42 "Registration Statement" 5
Section 1.43 "Regulation D" 5
Section 1.44 "SEC" 5
Section 1.45 "Section 4(2)" 5
Section 1.46 "Securities Act" 5
Section 1.47 "SEC Documents" 5
Section 1.48 "Security Agreement" 5
Section 1.49 "Subscription Date" 5
Section 1.50 "Trading Day" 5
Section 1.51 "Underwriter" 6
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TABLE OF CONTENTS
(continued)
Section 1.52 "Valuation Period" 6
Section 1.53 "Warrants" 6
Section 1.54 "Warrant Shares" 6
ARTICLE II PURCHASE AND SALE OF COMMON STOCK;
TERMINATION OF OBLIGATIONS; WARRANT 6
Section 2.1 Investments 6
Section 2.2 Mechanics 6
Section 2.3 Closings 7
Section 2.4 Commitment Fees 7
Section 2.5 Note Issuance Fees 7
Section 2.6 Right of First Refusal 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR 8
Section 3.1 Intent 8
Section 3.2 Sophisticated Investor 8
Section 3.3 Authority 9
Section 3.4 Not an Affiliate 9
Section 3.5 Organization and Standing 9
Section 3.6 Absence of Conflicts 9
Section 3.7 Disclosure; Access to Information 9
Section 3.8 Manner of Sale 9
Section 3.9 Resale Restrictions 9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY 10
Section 4.1 Organization of the Company 10
Section 4.2 Authority 10
Section 4.3 Corporate Documents 10
Section 4.4 Books and Records 10
Section 4.5 Capitalization 11
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TABLE OF CONTENTS
(continued)
Section 4.6 Common Stock 11
Section 4.7 Financial Statements 11
Section 4.8 Exemption from Registration; Valid Issuances 11
Section 4.9 No General Solicitation or Advertising
in Regard to this Transaction 12
Section 4.10 No Conflicts 12
Section 4.11 No Material Adverse Change 12
Section 4.12 No Undisclosed Liabilities 14
Section 4.13 No Undisclosed Events or Circumstances 14
Section 4.14 No Integrated Offering 14
Section 4.15 Litigation and Other Proceedings 15
Section 4.16 No Misleading or Untrue Communication 15
Section 4.17 Material Non-Public Information 15
Section 4.18 Real Property 15
Section 4.19 Tangible Personal Property 16
Section 4.20 Intellectual Property Rights 16
Section 4.21 Contracts 17
Section 4.22 Licenses 18
Section 4.23 Environmental Matters 18
Section 4.24 Substantial Customers and Suppliers 19
Section 4.25 Accounts Receivable 20
Section 4.26 Disclosure 20
ARTICLE V COVENANTS OF THE INVESTOR 20
ARTICLE VI COVENANTS OF THE COMPANY 20
Section 6.1 Registration Rights 20
Section 6.2 Reservation of Common Stock 20
Section 6.3 Listing of Common Stock 21
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TABLE OF CONTENTS
(continued)
Section 6.4 Exchange Act Registration 21
Section 6.5 Legends 21
Section 6.6 Corporate Existence 21
Section 6.7 SEC Documents 21
Section 6.8 Notice of Certain Events Affecting Registration;
Suspension of Right to Issue Convertible Note No. 2 21
Section 6.9 Consolidation; Merger 22
Section 6.10 Issuance of Put Shares, Warrant Shares,
Convertible Notes and Note Shares 22
Section 6.11 Legal Opinion on Closing Date 22
Section 6.12 No Other Similar Arrangements 22
ARTICLE VII CONDITIONS TO DELIVERY OF NOTE ISSUANCE
NOTICES AND CONDITIONS TO CLOSING 24
Section 7.1 Conditions Precedent to the Obligation of the
Company to Issue and Sell Convertible Notes 24
Section 7.2 Conditions Precedent to the Right of the Company
to Deliver a Note Issuance Notice and the Obligation
of the Investor to Purchase Convertible Note No. 2 24
Section 7.3 Due Diligence Review; Non-Disclosure
of Non-Public Information 26
ARTICLE VIII LEGENDS 27
Section 8.1 Legends 27
Section 8.2 No Other Legend or Stock Transfer Restrictions 28
Section 8.3 Investor's Compliance 28
ARTICLE IX INDEMNIFICATION 28
Section 9.1 Indemnification 28
Section 9.2 Method of Asserting Indemnification Claims 29
ARTICLE X MISCELLANEOUS 32
Section 10.1 Fees and Expenses 32
Section 10.2 Reporting Entity for the Common Stock 32
Section 10.3 Brokerage 32
Section 10.4 Notices 32
Section 10.5 Assignment 33
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TABLE OF CONTENTS
(continued)
Section 10.6 Amendment; No Waiver 33
Section 10.7 Annexes and Exhibits; Entire Agreement 33
Section 10.8 Survival 34
Section 10.9 Severability 34
Section 10.10 Title and Subtitles 34
Section 10.11 Counterparts 34
Section 10.12 Choice of Law 34
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NOTE PURCHASE AGREEMENT
by and between
CRESCENT INTERNATIONAL LIMITED
and
SYTRON, INC.
dated as of JANUARY 15, 1999
This NOTE PURCHASE AGREEMENT is entered into as of the 15th day of January, 1999
(this "Agreement"), by and between CRESCENT INTERNATIONAL LIMITED (the
"Investor"), an entity organized and existing under the laws of Bermuda, and
SYTRON, INC., a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania (the "Company").
WHEREAS, the Company and the Investor have entered into a private equity line
agreement, dated as of May 14, 1998 (the "Equity Line Agreement");
WHEREAS, pursuant to the Equity Line Agreement the Company has issued and sold
to the Investor, $250,000 of the Common Stock (as defined below) represented by
166,667 shares of the Common Stock (the "Put Shares");
WHEREAS, pursuant to the Equity Line Agreement the Company has issued to the
Investor a warrant dated as of May 14, 1998, exercisable from time to time
within five (5) years following the date of issuance (the "Incentive Warrant")
for the purchase of an aggregate of up to 100,000 shares of Common Stock at a
price specified in such Incentive Warrant;
WHEREAS, the parties agree to terminate the Equity Line Agreement
contemporaneously with the execution of this Agreement;
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue and sell to the Investor and the
Investor shall purchase, up to two convertible notes worth, in the aggregate,
$750,000 of the Common Stock; and
WHEREAS, such investments have been and will be made in reliance upon the
provisions of Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of
the United States Securities Act of 1933, as amended and the rules and
regulations promulgated thereunder (the "Securities Act"), and/or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments in securities of the
Company to be made hereunder.
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NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 "Additional Warrant" shall mean the Additional Warrant in the form
of Exhibit E hereto issued pursuant to Section 2.1(e) of this Agreement.
Section 1.2 "Additional Warrant Shares" shall mean all shares of Common Stock
issued or issuable pursuant to exercise of the Additional Warrants.
Section 1.3 "Average Daily Trading Volume" shall mean, with respect to any
Closing Date, the average of the daily trading volumes for the Common Stock on
the Principal Market during the applicable Valuation Period, and with respect to
any other date, such average during the portion of the applicable Valuation
Period that has expired as of such date.
Section 1.4 "Bid Price" shall mean the closing bid price (as reported by
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.5 "Capital Shares" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of dividends (as and when declared) and
assets (upon liquidation of the Company).
Section 1.6 "Closing" shall mean one of the closings of a purchase and sale of
the Convertible Notes pursuant to Section 2.1.
Section 1.7 "Closing Date" shall mean, with respect to a Closing, the seventh
Trading Day following the Note Issuance Notice Date related to such Closing,
provided all conditions to such Closing have been satisfied on or before such
Trading Day.
Section 1.8 "Collateral" shall have the meaning specified in the Security
Agreement.
Section 1.9 "Commitment Fees" shall have the meaning specified in Section 2.4
hereof.
Section 1.10 "Commitment Period" shall mean the period commencing on the date
hereof and expiring on (1) the date on which the Investor shall have purchased
Convertible Note No. 2 or (ii) November 14, 1999.
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Section 1.11 "Common Stock" shall mean the Company's common stock, $0.01 par
value per share.
Section 1.12 "Common Stock Equivalents" shall mean any securities that are
convertible into or exchangeable for Common Stock or any warrants, options or
other rights to subscribe for or purchase Common Stock or any such convertible
or exchangeable securities.
Section 1.13 "Condition Satisfaction Date" shall have the meaning set forth in
Section 7.2 of this Agreement.
Section 1.14 "Contract" shall mean any agreement, lease, evidence of
indebtedness, mortgage, indenture, security agreement or other contract (whether
written or oral).
Section 1.15 "Damages" shall mean any loss, claim, damage, liability, costs and
expenses (including, without limitation, reasonable attorneys' fees and
disbursements and costs and expenses of expert witnesses and investigation).
Section 1.16 "Disclosure Schedule" shall mean the record delivered to the
Investor by the Company herewith and dated as of the date hereof, containing all
lists, descriptions, exceptions and other information and materials as are
required to be included therein by the Company pursuant to this Agreement.
Section 1.17 "Effective Date" shall mean the date on which the SEC first
declares effective the Initial Registration Statement as set forth in Section
7.2(a).
Section 1.18 "Equity Line Agreement" shall have the meaning specified in the
recitals of this Agreement.
Section 1.19 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and the rules and regulations promulgated thereunder.
Section 1.20 "Incentive Warrant" shall have the meaning specified in the
recitals of this Agreement.
Section 1.21 "Incentive Warrant Shares" shall mean all shares of Common Stock
issued or issuable pursuant to exercise of the Incentive Warrant.
Section 1.22 "Intellectual Property" shall mean all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business and product names, logos, slogans, trade secrets, industrial
models, processes, designs, methodologies, computer programs (including all
source codes) and related documentation, technical information, manufacturing,
engineering and technical drawings, know-how and all pending applications for
and registrations of patents, trademarks, service marks and copyrights.
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Section 1.23 "Legend" shall have the meaning specified in Section 8.1.
Section 1.24 "Lien" shall mean any mortgage, pledge, assessment, security
interest, lease, lien, adverse claim, levy, charge or other encumbrance of any
kind, or any conditional sale Contract, title retention Contract or other
Contract to give any of the foregoing.
Section 1.25 "Market Price" shall mean the lowest three-consecutive-Trading-Day-
average of Bid Prices during the Valuation Period.
Section 1.26 "Material Adverse Effect" shall mean any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company or to the Company and such other entities
controlling or controlled by the Company, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise
materially interfere with the ability of the Company to enter into and perform
its obligations under any of (i) this Agreement, (ii) the Registration Rights
Agreement, (iii) the Warrants, (iv) Convertible Notes, and (v) the Security
Agreement.
Section 1.27 "Minimum Time Interval" shall mean 90 days after the date the
Initial Registration Statement is declared effective by the SEC.
Section 1.28 "NASD" shall mean the National Association of Securities Dealers,
Inc.
Section 1.29 "Note Issuance Notice Date" shall mean the date on which a Note
Issuance Notice is delivered to the Investor by the Company in accordance with
Section 2.2.
Section 1.30 "Note Issuance Notice" shall mean a written notice to the Investor
setting forth the Investment Amount that the Company intends to require the
Investor to purchase pursuant to the terms of this Agreement.
Section 1.31 "Note Shares" shall have the meaning specified in Section 2.1
hereof.
Section 1.32 "Original Registration Rights Agreement" shall mean the
registration rights agreement, dated as of May 14, 1998, by and between the
Company and the Investor.
Section 1.33 "Outstanding" when used with reference to Common Shares or Capital
Shares (collectively the "Shares"), shall mean, at any date as of which the
number of such Shares is to be determined, all issued and outstanding Shares,
and shall include all such Shares issuable in respect of outstanding scrip or
any certificates representing fractional interests in such Shares; provided,
however, that "Outstanding" shall not refer to any such Shares then directly or
indirectly owned or held by or for the account of the Company.
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Section 1.34 "Option" with respect to any Person shall mean any security, right,
subscription, warrant, option, "phantom" stock right or other Contract that
gives the right to (i) purchase or otherwise receive or be issued any shares of
capital stock of such Person or any security of any kind convertible into or
exchangeable or exercisable for any shares of capital stock of such Person or
(ii) receive any benefits or rights similar to any rights enjoyed by or accruing
to the holder of shares of capital stock of such Person, including any rights to
participate in the equity, income or election of directors or officers of such
Person.
Section 1.35 "Permitted Lien" shall mean (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with Generally Accepted
Accounting Principles, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a Liability that is not yet due or
delinquent and (iii) any minor imperfection of title or similar Lien which
individually or in the aggregate with other such Liens does not materially
impair the value of the property subject to such Lien or the use of such
property in the conduct of the business of the Company or any of its
subsidiaries.
Section 1.36 "Person" shall mean an individual, a corporation, a partnership, an
association, a trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
Section 1.37 "Preferred Stock" shall have the meaning specified in Section 4.5
hereof.
Section 1.38 "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq SmallCap Market, the American Stock Exchange, the Bulletin Board or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.
Section 1.39 "Put Shares" shall have the meaning specified in the recitals of
this Agreement.
Section 1.40 "Registrable Securities" shall mean (i) the Put Shares, (ii) the
Warrant Shares, (iii) the Note Shares, (iv) the Indemnity Shares, (v) the
Commitment Shares and (vi) any securities issued or issuable with respect to any
of the foregoing by way of exchange, stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization or otherwise. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (w) the Registration Statement has been declared effective by the SEC and
all Registrable Securities have been disposed of pursuant to the Registration
Statement, (x) all Registrable Securities have been sold under circumstances
under which all of the applicable conditions of Rule 144 (or any similar
provision then in force) under the Securities Act ("Rule 144") are met, (y) such
time as all Registrable Securities have been otherwise transferred to holders
who may trade such shares without restriction under the Securities Act, and the
Company has delivered a new certificate or other evidence of ownership for such
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securities not bearing a restrictive legend or (z) in the opinion of counsel to
the Company, which counsel shall be reasonably acceptable to the Investor, all
Registrable Securities may be sold without registration or the need for an
exemption from any registration requirements and without any time, volume or
manner limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act.
Section 1.41 "Registration Rights Agreement" shall mean the amended and restated
registration rights agreement in the form of Exhibit C hereto.
Section 1.42 "Registration Statement" shall mean a registration statement on
Form SB-2 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement, and the Warrants), for the
registration of the resale by the Investor of the Registrable Securities under
the Securities Act.
Section 1.43 "Regulation D" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.44 "SEC" shall mean the Securities and Exchange Commission.
Section 1.45 "Section 4(2)" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.46 "Securities Act" shall have the meaning set forth in the recitals
of this Agreement.
Section 1.47 "SEC Documents" shall mean the Company's latest Form 10-K as of the
time in question, all Forms 10-Q and 8-K filed thereafter, and the Proxy
Statement for its latest fiscal year as of the time in question until such time
the Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.
Section 1.48 "Security Agreement" shall mean the Security Agreement in the form
of Exhibit D hereto.
Section 1.49 "Subscription Date" shall mean May 14, 1998.
Section 1.50 "Trading Day" shall mean any day during which the Principal Market
shall be open for business.
Section 1.51 "Underwriter" shall mean any underwriter participating in any
disposition of the Registrable Securities on behalf of the Investor pursuant to
the Registration Statement.
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Section 1.52 "Valuation Period" shall mean the thirty (30) Trading Day period
ending on the earlier of (i) the date on which a Convertible Note first becomes
due and payable or (ii) the Conversion Date for such Convertible Note.
Section 1.53 "Warrants" shall mean the Additional Warrants and Incentive
Warrant.
Section 1.54 "Warrant Shares" shall mean the Additional Warrant Shares and the
Incentive Warrant Shares.
ARTICLE II
PURCHASE AND SALE OF COMMON STOCK;
TERMINATION OF OBLIGATIONS; WARRANT
Section 2.1 Investments.
(a) Issuance of Convertible Notes. Upon the terms and conditions set forth
herein (including, without limitation, the provisions of Article VII hereof),
the Company may issue and sell and the Investor shall purchase no more than two
notes, which notes may be converted, at the Investor's option, into Common Stock
(the "Convertible Notes") (such shares issued upon conversion of the Convertible
Notes are referred to herein as "Notes Shares").
(b) Convertible Note No. 1. The Company shall issue and sell and the Investor
shall purchase, on the date hereof, a Convertible Note in principal amount of
$350,000 ("Convertible Note No. 1") in the form attached hereto as Exhibit A.
For the purpose only of the issuance and purchase of Convertible Note No. 1
,
the Investor waives the requirements of Section 2.2, and the conditions set
forth in paragraphs (a), (b), (g) and (p) of Section 7.2, hereof.
(c) Convertible Note No. 2. Subject to the conditions set forth herein, the
Company may issue and sell and the Investor shall purchase, a Convertible Note
in principal amount of $400,000 ("Convertible Note No. 2") ("Convertible Note
No. 2 Principal Amount") in the form attached hereto as Exhibit B.
(d) Indemnity Shares. On the date hereof, the Company shall issue and sell to
the Investor 100,000 shares of Common Stock (the "Indemnity Shares"). As
consideration for such Indemnity Shares, the Investor agrees (i) to refrain from
enforcing its rights, and waives any obligations of the Company, under the
Original Registration Rights Agreement and (ii) to pay one dollar ($1.00).
(e) Additional Warrant. On the date hereof, the Company shall issue to the
Investor an additional warrant (the "Additional Warrant") with an exercise price
of $0.01 for each Share of Common Stock.
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Section 2.2 Mechanics.
(a) Note Issuance Notice. At any time during the Commitment Period, the Company
may deliver a Note Issuance Notice to the Investor, subject to the conditions
set forth in Section 7.2.
(b) Date of Delivery of Note Issuance Notice. A Note Issuance Notice shall be
deemed delivered on (i) the Trading Day it is received by facsimile or otherwise
by the Investor if such notice is received prior to 12:00 noon New York time, or
(ii) the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 noon New York time on a Trading Day or at any time on a
day which is not a Trading Day. No Put Notice may be deemed delivered, on a day
that is not a Trading Day.
Section 2.3 Closings.
(a) Convertible Note No. 1 Closing. On the date hereof, (i) the Company
shall deliver to the Investor, at the address specified in Section 10.4 hereof,
such note in the form attached hereto as Exhibit A and (ii) within twenty-four
(24) hours after receiving such Convertible Note No. 1, the Investor shall
deliver $350,000 less the applicable Note Issuance Fee in accordance with
Section 2.5, by wire transfer of immediately available funds to the Company.
Notwithstanding anything to the contrary set forth above, to the extent the
Company has not paid the fees, expenses and disbursements of the Investor's
counsel in accordance with Section 10.1, the amount of such fees, expenses and
disbursements shall be deducted from the amount the Investor is required to wire
to the Company pursuant to clause (ii) of the first sentence of this section.
(b) Convertible Note No. 2 Closing. On the Closing Date for the issuance of
Convertible Note No. 2, (i) the Company shall deliver to the Investor, at the
address specified in Section 10.4 hereof, such note in the form attached hereto
as Exhibit B and (ii) within twenty-four (24) hours after receiving such
Convertible Note No. 2, the Investor shall deliver $400,000 less the applicable
Note Issuance Fee in accordance with Section 2.5, by wire transfer of
immediately available funds to the Company. In addition, on or prior to such
Closing Date, each of the Company and the Investor shall deliver to the other
all documents, instruments and writings required to be delivered or reasonably
requested by either of them pursuant to this Agreement in order to implement and
effect the transactions contemplated herein. Notwithstanding anything to the
contrary set forth above, to the extent the Company has not paid the fees,
expenses and disbursements of the Investor's counsel in accordance with Section
10.1, the amount of such fees, expenses and disbursements shall be deducted from
the amount the Investor is required to wire to the Company pursuant to clause
(ii) of the first sentence of this section.
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Section 2.4 Commitment Fees. The Company shall pay the Investor the following
fees (the "Commitment Fees") at the beginning of each six-month period,
including on the date hereof: (i) from the date of issuance of Convertible Note
No. 1 until payment in full of the outstanding principal sum has been made, an
amount equivalent to five percent (5%) of the outstanding value of such note at
the beginning of the applicable six-month period, and (ii) from the date of
issuance of Convertible Note No. 2 until payment in full of the outstanding
principal sum has been made, an amount equivalent to five percent (5%) of the
outstanding value of such note. Such Commitment Fees shall be paid by the
Company in a number of shares of Common Stock (the "Commitment Shares")
represented by (a) the Commitment Fee due divided by (b) the Market Price on the
date immediately preceding the date such Commitment Fee is due in accordance
with this Section 2.4. Upon an Event of Default under either of the Convertible
Notes, the Commitment Fee with respect to such Convertible Note shall be
increased to six and one quarter percent (6.25%) for such period as the Event of
Default shall continue uncured.
Section 2.5 Note Issuance Fees The Company shall pay the Investor the following
fees (the "Note Issuance Fees"): (i) $10,500 or the date hereof and (ii) $12,000
on the Closing Date for the issuance of Convertible Note No. 2.
Section 2.6 Right of First Refusal. If the Company, for the purpose of obtaining
any additional financing in connection with an acquisition of 50% or more of the
outstanding common stock of a corporation, a partnership, an association, a
trust or other entity or organization (the "Acquisition"), wishes to sell its
Common Stock for cash (the "Sale"), in a transaction exempt from registration
under the Securities Act, to a party (the "Third Party") other than the
Investor, the Company shall first offer (the "Offer") to the Investor, in
writing, the right to purchase such Common Stock (the "Offered Shares") at (a)
the bona fide price offered by the Third Party (the "Third Party Offer Price"),
or (b) the Market Price less the product of the Discount and the Market Price,
whichever is less (the "Investor Offer Price"), within a ten (10) calendar day
period (the "Offer Period"). The Offer shall grant the Investor the right during
the ten (10) calendar days next following the date of the Offer to elect to
purchase all of the Offered Shares. The Company, in connection with such an
Acquisition, shall refrain from circumventing or attempting to circumvent the
Investor's right of first refusal by way of making such a Sale to any of its
affiliates without first making an Offer to the Investor. If, however, the
Company, prior to such a Sale to an affiliate, makes an Offer to the Investor,
and the Investor declines such Offer, the Company shall have a right to make
such a Sale pursuant to the terms and conditions of this Section 2.6. If the
Investor so exercises it right to purchase all of the Offered Shares, the
purchase price for the Offered Shares shall be the Investor Offer Price, and the
closing and method of payment shall be as provided for in the immediately
succeeding paragraph hereof and the closing date therefor shall be five (5)
Trading Days after the Investor exercises such right. If the Investor fails to
exercise its right to purchase all of the Offered Shares, then during the sixty
(60) calendar days next following the expiration of such right, the Company
shall be free to sell any or all of the Offered Shares to a purchaser for a
purchase price not lower than the Third Party Offer Price payable on terms and
conditions that are not more favorable to such purchaser than those contained in
the Offer.
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On the closing date for a purchase of Offered Shares, (i) the Company shall
deliver to the Investor, at the address specified in Section 10.4 hereof, one or
more certificates, at the Investor's option, representing the Offered Shares to
be purchased by the Investor, registered in the name of the Investor (the "Share
Certificate") and (ii) within twenty-four (24) hours after receiving the Share
Certificate, the Investor shall deliver an amount representing the lower of (a)
the Third Party Offer Price and (b) the Investor Offer Price, by wire transfer
of immediately available funds to the Company. In addition, on or prior to such
closing date, each of the Company and the Investor shall deliver to the other
all documents, instruments and writings required to be delivered or reasonably
requested by either of them pursuant to this Agreement in order to implement and
effect the transactions contemplated herein. Notwithstanding anything to the
contrary set forth above, to the extent the Company has not paid the fees,
expenses and disbursements of the Investor"s counsel in accordance with Section
10.1, the amount of such fees, expenses and disbursements shall be deducted from
the amount the Investor is required to wire to the Company with no reduction in
the number of Offered Shares issuable to the Investor on the applicable closing
date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that as of the date hereof:
Section 3.1 Intent. The Investor is entering into this Agreement in its own name
and has no view to the distribution of the Registrable Securities, Convertible
Notes or Warrants and has no present arrangement (whether or not legally
binding) at any time to sell the Registrable Securities, Convertible Notes or
Warrants to or through any person or entity and has not been solicited by any
person or entity to act as a link in a chain of transactions through which
securities of the Company move from the Company to the public; provided,
however, that by making the representations herein, the Investor does not agree
to hold the Registrable Securities, Convertible Notes or Warrants for any
minimum or other specific term and reserves the right to dispose of the
Registrable Securities, Convertible Notes or Warrants at any time pursuant to a
Registration Statement and in accordance with federal and state securities laws
applicable to such disposition.
Section 3.2 Sophisticated Investor. The Investor is a sophisticated investor (as
described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as
defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it is capable of evaluating the merits and
risks of an investment in the Convertible Notes and the Common Stock. The
Investor acknowledges that an investment in the Common Stock is speculative and
involves a high degree of risk.
Section 3.3 Authority. Each of this Agreement and the Registration Rights
Agreement has been duly authorized by all necessary corporate action and no
further consent or authorization of the Investor, or its Board of Directors or
stockholders is required. Each of this Agreement and the Registration Rights
Agreement was validly executed and delivered by the Investor and each is a valid
and binding agreement of the Investor enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
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Section 3.4 Not an Affiliate. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5 Organization and Standing. Investor is duly organized, validly
existing, and in good standing under the laws of Bermuda.
Section 3.6 Absence of Conflicts. The execution and delivery of this Agreement
and any other document or instrument contemplated hereby, and the consummation
of the transactions contemplated thereby, and compliance with the requirements
thereof, will not (a) violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on Investor, or, to the Investor's
knowledge, (b) violate any provision of any indenture, instrument or agreement
to which Investor is a party or is subject, or by which Investor or any of its
assets is bound, (c) conflict with or constitute a material default thereunder,
(d) result in the creation or imposition of any lien pursuant to the terms of
any such indenture, instrument or agreement, or constitute a breach of any
fiduciary duty owed by Investor to any third party, or (e) require the approval
of any third-party (that has not been obtained) pursuant to any material
Contract to which Investor is subject or to which any of its assets, operations
or management may be subject.
Section 3.7 Disclosure; Access to Information. Investor has received all
documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. Investor has had
effective access to all documents, records and other information that Investor
may need or wish to review in connection with making an informed decision with
respect to the Company and the purchase of the Registrable Securities,
Convertible Notes and Warrants.
Section 3.8 Manner of Sale. At no time was Investor presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.
Section 3.9 Resale Restrictions. It is acknowledged by Investor that any
Registrable Securities, Convertible Notes and Warrants to be acquired by
Investor have not been registered under the federal securities laws or any
applicable state securities laws in reliance upon exemptions available for
non-public or limited offerings. Investor understands that Investor must bear
the economic risk of the investment in the Registrable Securities, Convertible
Notes and Warrants because the Registrable Securities, Convertible Notes and
Warrants have not been so registered and therefore are subject to restrictions
upon transfer such that they may not be sold or otherwise transferred unless
registered under the applicable securities laws or an exemption from such
registration is available. Investor will not reoffer, sell, assign, transfer,
pledge, encumber, hypothecate or otherwise dispose of any Registrable
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Securities, Convertible Notes or the Warrants in the absence of an effective
registration statement, qualification or authorization relating thereto under
federal and applicable state securities laws or an opinion of qualified counsel
satisfactory to the Company to the effect that the proposed transaction in the
Registrable Securities, Convertible Notes or the Warrants will neither
constitute nor result in any violation of the federal or state securities laws.
Subject to Section 8.1 of this Agreement, any certificate or other document that
may be issued representing any shares of Registrable Securities, Convertible
Notes or the Warrants may be endorsed with a legend to this effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that as of the date hereof:
Section 4.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Except as set forth in Section IV of the Disclosure Schedule, the
Company does not own more than fifty percent (50%) of the outstanding capital
stock of or control any other business entity. The Company is duly qualified as
a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary, other than those in which the failure so
to qualify would not have a Material Adverse Effect.
Section 4.2 Authority. (i) The Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement, the
Convertible Notes, the Registration Rights Agreement and the Warrants and the
Warrants, and the Warrant Shares; (ii) the execution and delivery of this
Agreement and the Registration Rights Agreement, and the execution, issuance and
delivery of the Warrants and the Convertible Notes, by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required; and (iii) each of this Agreement and the Registration Rights Agreement
has been duly executed and delivered, and the Warrants and the Convertible Notes
have been duly executed, issued and delivered, by the Company and constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 4.3 Corporate Documents. The Company has furnished or made available to
the Investor true and correct copies of the Company's Articles of Incorporation,
as amended and in effect on the date hereof (the "Certificate"), and the
Company's By-Laws, as amended and in effect on the date hereof (the "By-Laws").
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Section 4.4 Books and Records. The minute books and other similar records of the
Company and its subsidiaries as made available to Investor prior to the
execution of this Agreement contain a true and complete record, in all material
respects, of all action taken at all meetings and by all written consents in
lieu of meetings of the stockholders, the boards of directors and committees of
the boards of directors of the Company and the subsidiaries. The stock transfer
ledgers and other similar records of the Company and the subsidiaries as made
available to Investor prior to the execution of this Agreement accurately
reflect all record transfers prior to the execution of this Agreement in the
capital stock of the Company and the subsidiaries. Neither the Company nor any
subsidiary has any of its Books and Records recorded, stored, maintained,
operated or otherwise wholly or partly dependent upon or held by any means
(including any electronic, mechanical or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
are not under the exclusive ownership and direct control of the Company or a
subsidiary.
Section 4.5 Capitalization. Except as set forth in Section 4.5 of the Disclosure
Schedule, as of November 30, 1998, the authorized capital stock of the Company
consisted of 20,000,000 shares of Common Stock, of which 6,534,227 shares were
issued and outstanding, and 10,000,000 shares of preferred stock (the "Preferred
Stock"), none of which were issued and outstanding. Except for (i) options to
purchase not more than 2,585,510 shares of Common Stock with purchase prices
between $0.469 and $3.625 per share; and (ii) warrants to purchase not more than
1,730,353 shares of Common Stock with purchase prices between $0.750 and $2.500
per share, there are no options, warrants, or rights to subscribe to,
securities, rights or obligations convertible into or exchangeable for or giving
any right to subscribe for any shares of capital stock of the Company. Except as
set forth in Section 4.5 of the Disclosure Schedule, all of the outstanding
shares of Common Stock of the Company have been duly and validly authorized and
issued and are fully paid and nonassessable. As of January 8, 1999, all of the
outstanding shares of Common Stock of the Company shall have been duly and
validly authorized and issued and fully paid and nonassessable.
Section 4.6 Common Stock. The Company has maintained all requirements for the
continued listing or quotation of its Common Stock, and such Common Stock is
currently listed or quoted on the Principal Market. As of the date hereof, the
Principal Market is the Nasdaq Bulletin Board.
Section 4.7 Financial Statements. Prior to the execution of this Agreement, the
Company has delivered to the Investor a true and complete copy of the audited
balance sheets of the Company and its consolidated subsidiaries as of September
30, 1998, and the related audited consolidated statements of operations,
stockholders' equity and cash flows for the fiscal year then ended, together
with a true and correct copy of the report on such audited information by Jones,
Jensen & Company, and all letters from such accountants with respect to the
results of such audit. The financial statement of the Company delivered to the
Investor has been prepared in accordance with generally accepted accounting
principles applied on a consistent basis with other financial statements of the
Company and fairly presents in all material respects the financial position of
the Company as of the date thereof and the results of operations and cash flows
for the period then ended.
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Section 4.8 Exemption from Registration; Valid Issuances. The sale and issuance
of the Warrants, the Warrant Shares, the Put Shares, the Convertible Notes, the
Commitment Shares, the Indemnity Shares and any Note Shares in accordance with
the terms and on the bases of the representations and warranties set forth in
this Agreement, may and shall be properly issued pursuant to Rule 4(2),
Regulation D and/or any applicable state law. When issued and paid for as herein
provided, the Put Shares, the Warrant Shares, the Convertible Notes, the
Commitment Shares, the Indemnity Shares and any Note Shares shall be duly and
validly issued, fully paid, and nonassessable. None of the sales of the Put
Shares, the Warrants, the Warrant Shares, the Convertible Notes, the Commitment
Shares, the Indemnity Shares or any Note Shares pursuant to, nor the Company's
performance of its obligations under, this Agreement, the Registration Rights
Agreement, the Warrants or the Convertible Notes shall (i) result in the
creation or imposition of any liens, charges, claims or other encumbrances upon
the Put Shares, the Warrant Shares, the Convertible Notes, the Commitment
Shares, the Indemnity Shares or any of the assets of the Company, or (ii)
entitle the holders of Outstanding Capital Shares to preemptive or other rights
to subscribe to or acquire the Capital Shares or other securities of the
Company. The Put Shares, the Warrant Shares, the Convertible Notes, the
Commitment Shares, the Indemnity Shares and any Note Shares shall not subject
the Investor to personal liability by reason of the ownership thereof.
Section 4.9 No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares, the Warrants, the
Warrant Shares, the Convertible Notes, the Commitment Shares, the Indemnity
Shares or any Note Shares, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that would
require registration of the Common Stock under the Securities Act.
Section 4.10 No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the Put
Shares, the Warrants, the Warrant Shares, the Convertible Notes, the Commitment
Shares, the Indemnity Shares and any Note Shares do not and will not (i) result
in a violation of the Certificate or By-Laws or (ii) conflict with, or
constitute a material default (or an event that with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture,
instrument or any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state, local or foreign law, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations) applicable
to the Company or by which any property or asset of the Company is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect) nor is the Company otherwise in
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violation of, conflict with or in default under any of the foregoing; provided,
however, that for purposes of the Company's representations and warranties as to
violations of foreign law, rule or regulation referenced in clause (iii), such
representations and warranties are made only to the best of the Company's
knowledge insofar as the execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby are or may be affected by the status of the Investor under
or pursuant to any such foreign law, rule or regulation. The business of the
Company is not being conducted in violation of any law, ordinance or regulation
of any governmental entity, except for possible violations that either singly or
in the aggregate do not and will not have a Material Adverse Effect. The Company
is not required under federal, state or local law, rule or regulation to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement or issue and sell the Common Stock,
the Convertible Notes or the Warrant in accordance with the terms hereof (other
than any SEC, NASD or state securities filings that may be required to be made
by the Company subsequent to any Closing, any registration statement that may be
filed pursuant hereto, and any shareholder approval required by the rules
applicable to companies whose common stock trades on the Nasdaq SmallCap
Market); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.
Section 4.11 No Material Adverse Change. Since September 30, 1998, no event has
occurred that would have a Material Adverse Effect on the Company, except as
disclosed in Section 4.11 of the Disclosure Schedule. Without limiting the
foregoing, except as disclosed in Section 4.11 of the Disclosure Schedule there
has not occurred between September 30, 1998 and the date hereof:
(i) any declaration, setting aside or payment of any dividend or other
distribution in respect of the capital stock of the Company or any of its
subsidiaries not wholly owned by the Company, or any direct or indirect
redemption, purchase or other acquisition by the Company or any of its
subsidiary of any such capital stock of or any Option with respect to the
Company or any of its subsidiary not wholly owned by the Company;
(ii) any authorization, issuance, sale or other disposition by the Company or
any of its subsidiaries of any shares of capital stock of or Option with respect
to the Company or any of its subsidiaries, or any modification or amendment of
any right of any holder of any outstanding shares of capital stock of or Option
with respect to the Company or any of its subsidiaries;
(iii) (x) any increase in the salary, wages or other compensation of any
officer, employee or consultant of the Company or any of its subsidiaries whose
annual salary is, or after giving effect to such change would be, $150,000 or
more; (y) any establishment or modification of (A) targets, goals, pools or
similar provisions in respect of any fiscal year under any benefit plan,
employment Contract or other employee compensation arrangement or (B) salary
ranges, increase guidelines or similar provisions in respect of any benefit
plan, employment Contract or other employee compensation arrangement; or (z) any
adoption, entering into, amendment, modification or termination (partial or
complete) of any benefit plan except to the extent required by applicable law
and, in the event compliance with legal requirements presented options, only to
the extent the option which the Company or any of its subsidiaries reasonably
believed to be the least costly was chosen;
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(iv) (A) incurrences by the Company or any of its subsidiaries of indebtedness
in an aggregate principal amount exceeding $100,000 (net of any amounts
discharged during such period), or (B) any voluntary purchase, cancellation,
prepayment or complete or partial discharge in advance of a scheduled payment
date with respect to, or waiver of any right of the Company or any of its
subsidiaries under, any indebtedness of or owing to the Company or any of its
subsidiaries (in either case other than any indebtedness of the Company or a
subsidiary owing to the Company or a wholly-owned subsidiary);
(v) any physical damage, destruction or other casualty loss (whether or not
covered by insurance) affecting any of the plant, real or personal property or
equipment of the Company or any of its subsidiaries in an aggregate amount
exceeding $10,000;
(vi) any material change in (x) any pricing, investment, accounting, financial
reporting, inventory, credit, allowance or tax practice or policy of the Company
or any of its subsidiaries, (y) any method of calculating any bad debt,
contingency or other reserve of the Company or any of its subsidiaries for
accounting, financial reporting or tax purposes or (z) the fiscal year of the
Company or any of its subsidiaries;
(vii) any write-off or write-down of or any determination to write off or down
any of the assets and properties of the Company or any of its subsidiaries in an
aggregate amount exceeding $100,000;
(viii) any acquisition or disposition of, or incurrence of a Lien (other than a
Permitted Lien) on, any assets and properties of the Company or any of its
subsidiaries, other than in the ordinary course of business consistent with past
practice;
(ix) any (x) amendment of the certificate or articles of incorporation or
by-laws (or other comparable corporate charter documents) of the Company or any
of its subsidiaries, (y) reorganization, liquidation or dissolution of the
Company or any of its subsidiaries or (z) business combination involving the
Company or any of its subsidiaries and any other Person;
(x) any entering into, amendment, modification, termination (partial or
complete) or granting of a waiver under or giving any consent with respect to
(A) any Contract which is required (or had it been in effect on the date hereof
would have been required) to be disclosed pursuant to Section 4.26 hereof or (B)
any material license held by the Company or any of its subsidiaries;
(xi) capital expenditures or commitments for additions to property, plant or
equipment of the Company and its subsidiaries constituting capital assets in an
aggregate amount exceeding $50,000;
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(xii) any commencement or termination by the Company or any of its subsidiaries
of any line of business;
(xiii) any transaction by the Company or any of its subsidiaries with the
Company, any officer, director, affiliate or associate of the Company or any
associate of any such officer, director or affiliate (other than the Company or
any of its subsidiaries) (A) outside the ordinary course of business consistent
with past practice or (B) other than on an arm's-length basis, other than
pursuant to any Contract in effect on September 30, 1998 and disclosed to by
Company to the Investor pursuant to Section 4.21 hereof.
(xiv) any entering into of an agreement to do or engage in any of the foregoing
after the date hereof; or
(xv) any other transaction involving or development affecting the Company or any
of its subsidiaries outside the ordinary course of business consistent with past
practice.
Section 4.12 No Undisclosed Liabilities. Except as reflected or reserved against
in the balance sheet included in the last audited financial statements or in the
notes thereto or as disclosed in Section 4.12 or any other section(s) of the
Disclosure Schedule, there are no liabilities against, relating to or affecting
the Company or any of its subsidiaries or any of their respective assets and
properties, other than liabilities incurred in the ordinary course of business
consistent with past practice which in the aggregate are not material to the
business or condition of the Company.
Section 4.13 No Undisclosed Events or Circumstances. Since September 30, 1998,
no event or circumstance has occurred or exists with respect to the or its
businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in Section 4.13 of the Disclosure Schedule.
Section 4.14 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act.
Section 4.15 Litigation and Other Proceedings. Except as may be set forth in
Section 4.15 of the Disclosure Schedule, there are no lawsuits or proceedings
pending or to the best knowledge of the Company threatened, against the Company,
nor has the Company received any written or oral notice of any such action,
suit, proceeding or investigation, which might have a Material Adverse Effect.
Except as set forth in the Disclosure Schedule, no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which might
result in a Material Adverse Effect.
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Section 4.16 No Misleading or Untrue Communication. The Company, any Person
representing the Company, and, to the knowledge of the Company, any other Person
selling or offering to sell the Put Shares, the Warrants, the Warrant Shares,
the Convertible Notes or the Note Shares in connection with the transactions
contemplated by this Agreement, have not made, at any time, any oral
communication in connection with the offer or sale of the same which contained
any untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading.
Section 4.17 Material Non-Public Information. The Company is not in possession
of, nor has the Company or its agents disclosed to the Investor, any material
non-public information that (i) if disclosed, would, or could reasonably be
expected to have, an effect on the price of the Common Stock or (ii) according
to applicable law, rule or regulation, should have been disclosed publicly by
the Company prior to the date hereof but which has not been so disclosed.
Section 4.18 Real Property. Section 4.18(a) of the Disclosure Schedule contains
a true and correct list of (i) each parcel of real property owned by the Company
or any of its subsidiaries, (ii) each parcel of real property leased by the
Company or any of its subsidiaries (as lessor or lessee) and (iii) all Liens
(other than Permitted Liens) relating to or affecting any parcel of real
property referred to in clause (a).
(a) The Company or a subsidiary has good and marketable fee simple title to and,
except for the real property leased to others referred to in clause (ii) of
paragraph (a) above, the Company or a subsidiary is in possession of each parcel
of real property, together with all buildings, structures, facilities, fixtures
and other improvements thereon, listed in Section 4.18(a) of the Disclosure
Schedule, and in each case such parcel is, except as listed in Section 4.18(a)
of the Disclosure Schedule, free and clear of all Liens other than Permitted
Liens. The Company and the subsidiaries have adequate rights of ingress and
egress with respect to such real property, buildings, structures, facilities,
fixtures and other improvements. None of such real property, buildings,
structures, facilities, fixtures or other improvements, or the use thereof,
contravenes or violates any building, zoning, administrative, occupational
safety and health or other applicable law in any material respect (whether or
not permitted on the basis of prior nonconforming use, waiver or variance).
(b) The Company or a subsidiary has a valid and subsisting leasehold estate in
and the right to quiet enjoyment of the real properties leased by it for the
full term of the lease thereof. Each lease referred to in clause (ii) of
paragraph (a) above is a legal, valid and binding agreement, enforceable in
accordance with its terms, of the Company or a subsidiary and of each other
Person that is a party thereto, and except as set forth in Section 4.18(c) of
the Disclosure Schedule, there is no, and neither the Company nor any of its
subsidiaries has received notice of any, default (or any condition or event
which, after notice or lapse of time or both, would constitute a default)
thereunder. Neither the Company nor any of its subsidiaries owes any brokerage
commissions with respect to any such leased space.
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(c) the Company has delivered to Investor prior to the execution of this
Agreement true and complete copies of (i) all deeds, leases, mortgages, deeds of
trust, certificates of occupancy, title insurance policies, title reports,
surveys and similar documents, and all amendments thereof, with respect to the
real property listed in Section 4.18(a) of the Disclosure Schedule pursuant to
clause (i) of paragraph (a) above and (ii) all leases (including any amendments
and renewal letters) and, to the extent reasonably available, all other
documents referred to in clause (i) of this paragraph (d) with respect to the
real property listed in Section 4.18(a) of the Disclosure Schedule pursuant to
clause (ii) of paragraph (a) above.
(d) Except as set forth in Section 4.18(e) of the Disclosure Schedule, no tenant
or other party in possession of any of the real properties identified in Section
4.18(a) of the Disclosure Schedule has any right to purchase, or holds any right
of first refusal to purchase, such properties.
(e) Except as disclosed in Section 4.18(f) of the Disclosure Schedule, the
improvements on the real property identified in Section 4.18(a) of the
Disclosure Schedule are in good operating condition and in a state of good
maintenance and repair, ordinary wear and tear excepted, are adequate and
suitable for the purposes for which they are presently being used and, to the
knowledge of the Company, the Company and the subsidiaries, there are no
condemnation or appropriation proceedings pending or threatened against any of
such real property or the improvements thereon.
Section 4.19 Tangible Personal Property. The Company or a subsidiary is in
possession of and has good title to, or has valid leasehold interests in or
valid rights under Contract to use, all tangible personal property used in the
conduct of their business, including all tangible personal property reflected on
the balance sheet included in the unaudited financial statements and tangible
personal property acquired since the unaudited financial statement Date other
than property disposed of since such date in the ordinary course of business
consistent with past practice. All such tangible personal property is free and
clear of all Liens, other than Permitted Liens and Liens disclosed in Section
4.19 of the Disclosure Schedule, and is in good working order and condition,
ordinary wear and tear excepted, and its use complies in all material respects
with all applicable laws.
Section 4.20 Intellectual Property Rights. The Company and its subsidiaries have
interests in or use only the Intellectual Property disclosed in Section 4.20 of
the Disclosure Schedule, each of which the Company or a subsidiary either has
all right, title and interest in or a valid and binding license to use. No other
Intellectual Property is used or necessary in the conduct of the business of the
Company or any of its subsidiaries. Except as disclosed in Section 4.20 of the
Disclosure Schedule, (i) the Company or a subsidiary has the exclusive right to
use the Intellectual Property disclosed in Section 4.20 of the Disclosure
Schedule, (ii) all registrations with and applications to governmental or
regulatory authorities in respect of such Intellectual Property are valid and in
full force and effect and are not subject to the payment of any taxes or
maintenance fees or the taking of any other actions by the Company or a
subsidiary to maintain their validity or effectiveness, (iii) there are no
restrictions on the direct or indirect transfer of any license, or any interest
therein, held by the Company or any of its subsidiaries in respect of such
Intellectual Property, (iv) the Company has delivered to Investor prior to the
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execution of this Agreement documentation with respect to any invention,
process, design, computer program or other know-how or trade secret included in
such Intellectual Property, which documentation is accurate in all material
respects and reasonably sufficient in detail and content to identify and explain
such invention, process, design, computer program or other know-how or trade
secret and to facilitate its full and proper use without reliance on the special
knowledge or memory of any Person, (v) the Company and the subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of their trade secrets, (vi) neither the Company nor any subsidiary is, or
has received any notice that it is, in default (or with the giving of notice or
lapse of time or both, would be in default) under any license to use such
Intellectual Property and (vii) neither the Company, the Company nor any
subsidiary has any knowledge that such Intellectual Property is being infringed
by any other Person. Neither the Company, the Company nor any subsidiary has
received notice that the Company or any subsidiary is infringing any
Intellectual Property of any other Person, no claim is pending or, to the
knowledge of the Company, the Company and the its subsidiaries, has been made to
such effect that has not been resolved and, to the knowledge of the Company, the
Company and the subsidiaries, neither the Company nor any subsidiary is
infringing any Intellectual Property rights of any other Person.
Section 4.21 Contracts. Section 4.21(a) of the Disclosure Schedule (with
paragraph references corresponding to those set forth below) contains a true and
complete list of each of the following Contracts or other arrangements (true and
complete copies or, if none, reasonably complete and accurate written
descriptions of which, together with all amendments and supplements thereto and
all waivers of any terms thereof, have been delivered to Investor prior to the
execution of this Agreement), to which the Company or any subsidiary is a party
or by which any of their respective assets and properties is bound:
(i) (A) all Contracts (excluding Benefit Plans) providing for a commitment of
employment or consultation services for a specified or unspecified term, the
name, position and rate of compensation of each Person party to such a Contract
and the expiration date of each such Contract; and (B) any written or unwritten
representations, commitments, promises, communications or courses of conduct
(excluding Benefit Plans and not embodied in a Contract) involving an obligation
of the Company or any of its subsidiaries to make payments in any year, other
than with respect to salary or incentive compensation payments in the ordinary
course of business, to any employee exceeding $50,000 or any group of employees
exceeding $150,000 in the aggregate;
(ii) all Contracts with any Person containing any provision or covenant
prohibiting or limiting the ability of the Company or any of its subsidiaries to
engage in any business activity or compete with any Person or prohibiting or
limiting the ability of any Person to compete with the Company or any of its
subsidiaries;
(iii) all partnership, joint venture, shareholders' or other similar Contracts
with any Person;
(iv) all Contracts relating to Indebtedness of the Company or any of its
subsidiary in excess of $100,000 or to preferred stock issued by the Company or
any of its subsidiary (other than Indebtedness owing to or preferred stock owned
by the Company or any wholly-owned subsidiary);
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(v) all Contracts with distributors, dealers, manufacturer's representatives,
sales agencies or franchisees;
(vi) all Contracts relating to (A) the future disposition or acquisition of any
assets and properties, other than dispositions or acquisitions in the ordinary
course of business consistent with past practice, and (B) any business
combination;
(vii) all Contracts between or among the Company or any of its subsidiaries, on
the one hand, and the Company, any officer, director, affiliate or associate of
the Company or any associate of any such officer, director or affiliate (other
than the Company or any of its subsidiaries), on the other hand;
(viii) all collective bargaining or similar labor Contracts;
(ix) all Contracts that (A) limit or contain restrictions on the ability of the
Company or any of its subsidiaries to declare or pay dividends on, to make any
other distribution in respect of or to issue or purchase, redeem or otherwise
acquire its capital stock, to incur Indebtedness, to incur or suffer to exist
any Lien, to purchase or sell any assets and properties, to change the lines of
business in which it participates or engages or to engage in any business
combination or (B) require the Company or any of its subsidiaries to maintain
specified financial ratios or levels of net worth or other indicia of financial
condition; and
(x) all other Contracts that (A) involve the payment or potential payment,
pursuant to the terms of any such Contract, by or to the Company or any of its
subsidiaries of more than $100,000 and (B) cannot be terminated within ninety
(90) calendar days after giving notice of termination without resulting in any
material cost or penalty to the Company or any of its subsidiaries.
(b) Each Contract required to be disclosed in Section 4.21(a) of the Disclosure
Schedule is in full force and effect and constitutes a legal, valid and binding
agreement, enforceable in accordance with its terms, of each party thereto; and
except as disclosed in Section 4.21(b) of the Disclosure Schedule neither the
Company, any subsidiary nor, to the knowledge of the Company, the Company and
the subsidiaries, any other party to such Contract is, or has received notice
that it is, in violation or breach of or default under any such Contract (or
with notice or lapse of time or both, would be in violation or breach of or
default under any such Contract).
(c) Except as disclosed in Section 4.21(c) of the Disclosure Schedule, neither
the Company nor any subsidiary is a party to or bound by any Contract that has
been or could reasonably be expected to be, individually or in the aggregate
with any other such Contracts, materially adverse to the business or condition
of the Company.
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Section 4.22 Licenses. Section 4.22 of the Disclosure Schedule contains a true
and complete list of all licenses used in and material to the business or
operations of the Company or any of its subsidiary, setting forth the owner, the
function and the expiration and renewal date of each. Prior to the execution of
this Agreement, the Company has delivered to Investor true and complete copies
of all such licenses. Except as disclosed in Section 4.22 of the Disclosure
Schedule:
(i) The Company and each subsidiary owns or validly holds all licenses that are
material to its business or operations;
(ii) each license listed in Section 4.22 of the Disclosure Schedule is valid,
binding and in full force and effect; and
(iii) neither the Company nor any subsidiary is, or has received any notice that
it is, in default (or with the giving of notice or lapse of time or both, would
be in default) under any such license.
Section 4.23 Environmental Matters. Each of the Company and the subsidiaries has
obtained all licenses which are required in respect of its business, operations
or assets and properties under applicable environmental laws. Each of the
Company and the subsidiaries is in compliance in all material respects with the
terms and conditions of all such licenses and with any applicable environmental
law. Except as set forth in Section 4.23 of the Disclosure Schedule (with
paragraph references corresponding to those set forth below):
(a) No order has been issued, no complaint has been filed, no penalty has been
assessed and no investigation or review is pending or, to the knowledge of the
Company, the Company and the subsidiaries, threatened by any governmental or
regulatory authority with respect to any alleged failure by the Company or any
subsidiary to have any license required in connection with the conduct of the
business or operations of the Company or any of the subsidiaries or with respect
to any treatment, storage, recycling, transportation, disposal or "release" as
defined in 42 U.S.C. " 9601(22) ("Release"), of any hazardous material, and
neither the Company, the Company nor any subsidiary is aware of any facts or
circumstances which could reasonably be expected to form the basis for any such
order, complaint, penalty or investigation.
(b) Neither the Company, any subsidiary nor, to the knowledge of the Company,
the Company and the subsidiaries, any prior owner or lessee of any property now
or previously owned or leased by the Company or any subsidiary has handled any
hazardous material on any property now or previously owned or leased by the
Company or any of its subsidiaries; and, without limiting the foregoing, (i) no
polychlorinated biphenyl is or has been present, (ii) no asbestos is or has been
present, (iii) there are no underground storage tanks, active or abandoned, and
(iv) no hazardous material has been Released in a quantity reportable under, or
in violation of, any environmental law, at, on or under any property now or
previously owned or leased by the Company or any of its subsidiaries, during any
period that the Company or a subsidiary owned or leased such property or, to the
knowledge of the Company, the Company and the subsidiaries, prior thereto.
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(c) Neither the Company nor any subsidiary has transported or arranged for the
transportation of any hazardous material to any location which is the subject of
any Action or Proceeding that could lead to claims against Investor, the Company
or any of its subsidiaries for clean-up costs, remedial work, damages to natural
resources or personal injury claims, including, but not limited to, claims under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, and the rules and regulations promulgated thereunder
("CERCLA").
(d) No oral or written notification of a Release of a hazardous material has
been filed by or on behalf of the Company or any of its subsidiaries and no
property now or previously owned or leased by the Company or any of its
subsidiaries is listed or proposed for listing on the National Priorities List
promulgated pursuant to CERCLA or on any similar state list of sites requiring
investigation or clean-up.
(e) There are no Liens (other than Permitted Liens) arising under or pursuant to
any environmental law or order on any real property owned or leased by the
Company or any of its subsidiary, and no action of any governmental or
regulatory authority has been taken or, to the knowledge of the Company, the
Company and the subsidiaries, is in process which could subject any of such
properties to such Liens, and neither the Company nor any subsidiary would be
required to place any notice or restriction relating to the presence of
hazardous material at any property owned by it in any deed to such property.
(f) There have been no environmental investigations, studies, audits, tests,
reviews or other analyses conducted by, or which are in the possession of, the
Company or any of its subsidiary in relation to any property or facility now or
previously owned or leased by the Company or any of its subsidiary which have
not been delivered to Investor prior to the execution of this Agreement.
Section 4.24 Substantial Customers and Suppliers. Section 4.24 of the Disclosure
Schedule lists the six (6) largest customers of the Company and the
subsidiaries, on the basis of revenues for goods sold or services provided for
the most recent fiscal year. None of the Company's existing suppliers are
non-replaceable. Except as disclosed in Section 4.24 of the Disclosure Schedule,
no such customer or supplier has ceased or materially reduced its purchases from
or sales or provision of services to the Company and the subsidiaries since
September 30, 1998, or to the knowledge of the Company, the Company and the
subsidiaries, has threatened to cease or materially reduce such purchases or
sales or provision of services after the date hereof. Except as disclosed in
Section 4.24 of the Disclosure Schedule, to the knowledge of the Company, the
Company and the subsidiaries, no such customer or supplier is threatened with
bankruptcy or insolvency.
Section 4.25 Accounts Receivable. Except as set forth in Section 4.25 of the
Disclosure Schedule, the accounts and notes receivable of the Company and the
subsidiaries reflected on the balance sheet included in the unaudited financial
statements, and all accounts and notes receivable arising subsequent to the
unaudited financial statement Date, (i) arose from bona fide sales transactions
in the ordinary course of business and are payable on ordinary trade terms, (ii)
are legal, valid and binding obligations of the respective debtors enforceable
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in accordance with their terms, (iii) are not subject to any valid set-off or
counterclaim, (iv) do not represent obligations for goods sold on consignment,
on approval or on a sale-or-return basis or subject to any other repurchase or
return arrangement, (v) are collectible in the ordinary course of business
consistent with past practice in the aggregate recorded amounts thereof, net of
any applicable reserve reflected in the balance sheet included in the unaudited
financial statements, and (vi) are not the subject of any Actions or Proceedings
brought by or on behalf of the Company or any subsidiary. Section 4.25 of the
Disclosure Schedule sets forth a description of any security arrangements and
collateral securing the repayment or other satisfaction of receivables of the
Company and the subsidiaries. All steps necessary to render all such security
arrangements legal, valid, binding and enforceable, and to give and maintain for
the Company or a subsidiary, as the case may be, a perfected security interest
in the related collateral, have been taken.
Section 4.26 Disclosure. All material facts relating to the business or
condition of the Company have been disclosed to Investor in or in connection
with this Agreement. No representation or warranty contained in this Agreement,
and no statement contained in the Disclosure Schedule or in any certificate,
list or other writing furnished to Investor pursuant to any provision of this
Agreement (including without limitation the Financial Statements), contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
ARTICLE V
COVENANTS OF THE INVESTOR
The Investor's trading activities with respect to shares of the Company's Common
Stock will be in compliance with all applicable state and federal securities
laws, rules and regulations and the rules and regulations of the Principal
Market on which the Company's Common Stock is listed.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1 Registration Rights. The Company shall cause the Registration Rights
Agreement to remain in full force and effect and the Company shall comply in all
respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the Company has
available and the Company shall reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligation to issue the Warrant Shares and the Note
Shares; such amount of shares of Common Stock to be reserved shall be calculated
based upon the Exercise Price of the Warrant and the maximum amount of Note
Shares issuable upon conversion of the Convertible Notes and the maximum number
of shares issuable upon exercise of the Additional Warrant. The number of shares
so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder.
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Section 6.3 Listing of Common Stock. The Company shall maintain the listing of
the Common Stock on a Principal Market, and as soon as practicable will cause
the Put Shares, the Indemnity Shares, the Commitment Shares, the Warrant Shares
and any Note Shares to be listed on the Principal Market. The Company further
shall, if the Company applies to have the Common Stock traded on any other
Principal Market, include in such application the Put Shares, the Indemnity
Shares, the Commitment Shares, the Warrant Shares and any Note Shares, and shall
take such other action as is necessary or desirable in the opinion of the
Investor to cause the Common Stock to be listed on such other Principal Market
as promptly as possible. The Company shall use its best efforts to continue the
listing and trading of its Common Stock on the Principal Market (including,
without limitation, maintaining sufficient net tangible assets) and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.
Section 6.4 Exchange Act Registration. After the Registration Statement becomes
effective, the Company shall cause its Common Stock to continue to be registered
under Section 12(g) or 12(b) of the Exchange Act, will comply in all respects
with its reporting and filing obligations under said Act, and will not take any
action or file any document (whether or not permitted by said Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act.
Section 6.5 Legends. The certificates evidencing the Put Shares, the Indemnity
Shares, the Warrant Shares and the Note Shares shall be free of legends, except
as provided for in Article VIII.
Section 6.6 Corporate Existence. The Company shall take all steps necessary to
preserve and continue the corporate existence of the Company.
Section 6.7 SEC Documents. The Company shall deliver to the Investor, as and
when the originals thereof are submitted to the SEC for filing, copies of all
SEC Documents so furnished or submitted to the SEC.
Section 6.8 Notice of Certain Events Affecting Registration; Suspension of Right
to Issue Convertible Note No. 2. The Company shall immediately notify the
Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the registration statement for amendments or supplements to
the registration statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
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any proceedings for that purpose; (iii) receipt of any notification with respect
to the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the registration
statement would be appropriate, and the Company shall promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Note Issuance Notice during the
continuation of any of the foregoing events. While in possession of material
non-public information received from the company, the Investor shall not dispose
of any Registrable Securities until such information is disclosed to the public.
Section 6.9 Consolidation; Merger. The Company shall not, at any time after the
date hereof, effect any merger or consolidation of the Company with or into, or
a transfer of all or substantially all of the assets of the Company to, another
entity unless the resulting successor or acquiring entity (if not the Company)
assumes by written instrument the obligation to deliver to the Investor such
shares of stock and/or securities as the Investor is entitled to receive
pursuant to this Agreement, the Convertible Notes and the Warrant.
Section 6.10 Issuance of Put Shares, Warrant Shares, Convertible Notes and Note
Shares. The issuance of the Warrant Shares pursuant to exercise of the Warrants
and the issuance of any Note Shares shall be made in accordance with the
provisions and requirements of Regulation D and any applicable state law.
Issuance of the Warrant Shares pursuant to exercise of the Warrants through a
cashless exercise shall be made in accordance with the provisions and
requirements of Section 3(a)(9) under the Securities Act and any applicable
state law.
Section 6.11 Legal Opinion on Closing Date. The Company's independent counsel
shall deliver to the Investor on the Closing Date an opinion in the form of
Exhibit G, except for paragraph 6 thereof.
Section 6.12 No Other Similar Arrangements. The Company shall refrain from
entering into any other agreements, arrangements or understandings granting to
the Company the right to issue and sell convertible notes until the Initial
Registration Statement shall have been declared effective by the SEC. If the
Company, for the purpose of obtaining any additional financing, wishes to issue
and sell convertible notes (a "Convertible Note Sale") to a party (the "Third
Party") other than the Investor, the Company shall first offer (the "Convertible
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Note Offer") to the Investor, in writing, the right to purchase such Convertible
Notes (the "Offered Convertible Notes") at (a) the bona fide price offered by
the Third Party (the "Convertible Note Offer Price"), within a ten (10) calendar
day period (the "Convertible Note Offer Period"). The Convertible Note Offer
shall grant the Investor the right during the ten (10) calendar days next
following the date of the Convertible Note Offer to elect to purchase any or all
of the Offered Convertible Notes. The Company, in connection with such a
Convertible Note Sale, shall refrain from circumventing or attempting to
circumvent the Investor's right of first refusal by way of making such a
Convertible Note Sale to any of its affiliates without first making a
Convertible Note Offer to the Investor. If, however, the Company, prior to such
a Convertible Note Sale to an affiliate, makes a Convertible Note Offer to the
Investor, and the Investor declines such Convertible Note Offer, the Company
shall have the right to make such a Convertible Note Sale pursuant to the terms
and conditions of this Section 6.12. If the Investor so exercises it right to
purchase all of the Offered Convertible Notes, (i) the purchase price for the
Offered Convertible Notes shall be the Convertible Note Offer Price, and the
closing and method of payment shall be as provided for in Section 2.6 hereof and
the Closing Date shall be five (5) Trading Days after the Investor exercises
such right. If the Investor fails to exercise its right to purchase all of the
Offered Convertible Notes, then during the sixty (60) calendar days next
following the expiration of such right, the Company shall be free to sell any or
all of the Offered Convertible Notes to a purchaser for a purchase price not
lower than the Convertible Note Offer Price payable on terms and conditions that
are not more favorable to such purchaser than those contained in the Convertible
Note Offer. If the Company issues and sells Offered Convertible Notes to a Third
Party, any and all terms of such Offered Convertible Notes that are more
favorable than those of the Convertible Notes purchased by the Investor pursuant
to this Agreement, shall automatically apply to such Convertible Notes.
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ARTICLE VII
CONDITIONS TO DELIVERY OF
NOTE ISSUANCE NOTICES AND CONDITIONS TO CLOSING
Section 7.1 Conditions Precedent to the Obligation of the Company to Issue and
Sell Convertible Notes. The obligation hereunder of the Company to issue and
sell the Convertible Notes to the Investor incident to each Closing is subject
to the satisfaction, at or before each such Closing, of each of the conditions
set forth below.
(a) Accuracy of the Investor's Representation and Warranties. The
representations and warranties of the Investor shall be true and correct in all
material respects as of the date of this Agreement and as of the date of each
such Closing as though made at each such time.
(b) Performance by the Investor. The Investor shall have performed, satisfied
and complied in all respects with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Investor at or prior to such Closing.
Section 7.2 Conditions Precedent to the Right of the Company to Deliver a Note
Issuance Notice and the Obligation of the Investor to Purchase Convertible Note
No. 2. The right of the Company to deliver a Note Issuance Notice relating to
Convertible Note No. 2 and the obligation of the Investor hereunder to acquire
and pay for Convertible Note No. 2 is subject to the satisfaction, on (i) the
applicable Note Issuance Notice Date and (ii) the Closing Date for the issuance
of Convertible Note No. 2 (each a "Condition Satisfaction Date"), of each of the
following conditions:
(a) Registration of the Registrable Securities with the SEC. As set forth in the
Registration Rights Agreement, the Company shall have filed with the SEC a
Registration Statement with respect to the resale of the Registrable Securities
and Note Shares relating to Convertible Note No.1 (the "Initial Registration
Statement") by the Investor that shall have been declared effective by the SEC
prior to delivery of the Note Issuance Notice relating to Convertible Note No.
2, and in no event later than one hundred fifty (150) days after the filing of
the Initial Registration Statement.
(b) Effective Registration Statement. As set forth in the Registration Rights
Agreement, the Initial Registration Statement shall have previously become
effective and shall remain effective on each Condition Satisfaction Date and (i)
neither the Company nor the Investor shall have received notice that the SEC has
issued or intends to issue a stop order with respect to the Initial Registration
Statement or that the SEC otherwise has suspended or withdrawn the effectiveness
of the Initial Registration Statement, either temporarily or permanently, or
intends or has threatened to do so (unless the SEC's concerns have been
addressed and the Investor is reasonably satisfied that the SEC no longer is
considering or intends to take such action), and (ii) no other suspension of the
use or withdrawal of the effectiveness of the Initial Registration Statement or
related prospectus shall exist.
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(c) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct as of
each Condition Satisfaction Date as though made at each such time (except for
representations and warranties specifically made as of a particular date).
(d) Performance by the Company. The Company shall have performed, satisfied and
complied in all respects with all covenants, agreements and conditions required
by this Agreement, the Registration Rights Agreement, Convertible Note No. 1 and
the Warrants to be performed, satisfied or complied with by the Company at or
prior to each Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or adopted by any
court or governmental authority of competent jurisdiction that prohibits the
transactions contemplated by this Agreement or otherwise has a Material Adverse
Effect, and no actions, suits or proceedings shall be in progress, pending or
threatened by any Person, that seek to enjoin or prohibit the transactions
contemplated by this Agreement or otherwise could reasonably be expected to have
a Material Adverse Effect. For purposes of this paragraph (e), no proceeding
shall be deemed pending or threatened unless one of the parties has received
written or oral notification thereof prior to the Second Closing Date.
(f) No Suspension of Trading In or Delisting of Common Stock. The trading of the
Common Stock shall not have been suspended by the SEC, the Principal Market or
the NASD and the Common Stock shall have been approved for listing or quotation
on and shall not have been delisted from the Principal Market. The issuance of
Convertible Note No. 2 or the Note Shares relating thereto, if any, shall not
violate the shareholder approval requirements of the Principal Market.
(g) Legal Opinion. The Company shall have caused to be delivered to the
Investor, within five (5) Trading Days of the effective date of the Initial
Registration Statement, an opinion of the Company's independent counsel in the
form of Exhibit G hereto, addressed to the Investor.
(h) Due Diligence. No dispute between the Company and the Investor shall exist
pursuant to Section 7.3 as to the adequacy of the disclosure contained in the
Initial Registration Statement.
(i) Ten Percent Limitation. The issuance of Convertible Note No. 2 shall not
result in the beneficial ownership by the Investor and its affiliates of more
than 9.9% of the outstanding shares of Common Stock. For the purposes of this
provision, beneficial ownership shall be determined in accordance with Section
16 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
(j) Minimum Average Daily Trading Volume. The Average Daily Trading Volume for
the Common Stock with respect to the applicable Note Issuance Notice Date and
Closing Date equals or exceeds 20,000 shares per Trading Day.
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(k) No Knowledge. The Company shall have no knowledge of any event more likely
than not to have the effect of causing the Initial Registration Statement to be
suspended or otherwise ineffective.
(l) Minimum Time Interval. The Minimum Time Interval shall have elapsed.
(m) Shareholder Vote. The issuance of Convertible Note No. 2 shall not violate
the shareholder approval requirements of the Principal Market.
(n) Conversion of Convertible Note No. 1. The Investor shall have converted at
least fifty percent (50%) of the original value of Convertible Note No.1 into
Note Shares.
(o) Value of Collateral. The Collateral shall be worth a dollar amount of at
least one hundred fifty percent (150%) of the combined outstanding indebtedness
evidenced by the Convertible Notes.
(p) Market Price of Common Stock. The Market Price of the Common Stock shall be
no less than one dollar and fifty cents ($1.50) per share.
(q) Other. On each Condition Satisfaction Date, the Investor shall have received
and been reasonably satisfied with such other certificates and documents as
shall have been reasonably requested by the Investor in order for the Investor
to confirm the Company's satisfaction of the conditions set forth in this
Section 7.2., including, without limitation, a certificate in substantially the
form and substance of Exhibit I hereto, executed in either case by an executive
officer of the Company and to the effect that all the conditions to such Closing
shall have been satisfied as at the date of each such certificate.
Section 7.3 Due Diligence Review; Non-Disclosure of Non-Public Information.
(a) The Company shall make available for inspection and review by the Investor,
advisors to and representatives of the Investor (who may or may not be
affiliated with the Investor and who are reasonably acceptable to the Company),
any Underwriter, any Registration Statement or amendment or supplement thereto
or any blue sky, NASD or other filing, all financial and other records, all SEC
Documents and other filings with the SEC, and all other corporate documents and
properties of the Company as may be reasonably necessary for the purpose of such
review, and cause the Company's officers, directors and employees to supply all
such information reasonably requested by the Investor or any such
representative, advisor or Underwriter in connection with such Registration
Statement (including, without limitation, in response to all questions and other
inquiries reasonably made or submitted by any of them), prior to and from time
to time after the filing and effectiveness of the Registration Statement for the
sole purpose of enabling the Investor and such representatives, advisors and
Underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.
(b) Each of the Company, its officers, directors, employees and agents shall in
no event disclose non-public information to the Investor, advisors to or
representatives of the Investor unless prior to disclosure of such information
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the Company identifies such information as being non-public information and
provides the Investor, such advisors and representatives with the opportunity to
accept or refuse to accept such non-public information for review. The Company
may, as a condition to disclosing any non-public information hereunder, require
the Investor's advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Investor.
(c) Nothing herein shall require the Company to disclose non-public information
to the Investor or its advisors or representatives, and the Company represents
that it does not disseminate non-public information to any investors who
purchase stock in the Company in a public offering, to money managers or to
securities analysts; provided, however, that notwithstanding anything herein to
the contrary, the Company shall, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and any Underwriters of any event
or the existence of any circumstance (without any obligation to disclose the
specific event or circumstance) of which it becomes aware, constituting
non-public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 7.3 shall be construed to mean that such
persons or entities other than the Investor (without the written consent of the
Investor prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms and conditions of this Agreement and nothing herein shall prevent any such
persons or entities from notifying the Company of their opinion that based on
such due diligence by such persons or entities, that the Registration Statement
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading.
ARTICLE VIII
LEGENDS
Section 8.1 Legends. Each of the Additional Warrant, the Convertible Notes and,
unless otherwise provided below, each certificate representing Registrable
Securities will bear the following legend (the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
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MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION, IN WHICH EVENT SYTRON SHALL HAVE RECEIVED AN
OPINION OF COUNSEL STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES LAWS. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A NOTE PURCHASE AGREEMENT BETWEEN SYTRON, INC. AND CRESCENT
INTERNATIONAL LIMITED DATED AS OF JANUARY 15, 1999. A COPY OF THE PORTION OF THE
AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE
COMPANY'S EXECUTIVE OFFICES.
As soon as practicable after the execution and delivery hereof, but in any event
within five (5) Trading Days hereafter, the Company shall issue to the transfer
agent for its Common Stock (and to any substitute or replacement transfer agent
for its Common Stock upon the Company's appointment of any such substitute or
replacement transfer agent) instructions in substantially the form of Exhibit H
hereto, with a copy to the Investor. Other than as required as a result of
change in law, such instructions shall be irrevocable by the Company from and
after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investor to issue certificates evidencing such
Registrable Securities free of the Legend during the following periods and under
the following circumstances and without consultation by the transfer agent with
the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor:
(a) At any time after the Effective Date, upon surrender of one or more
certificates evidencing Common Stock that bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective and (ii) if reasonably requested by the
transfer agent the Investor confirms to the transfer agent that the Investor has
transferred the Registrable Securities pursuant to the Registration Statement
and has complied with the prospectus delivery requirement.
(b) At any time upon any surrender of one or more certificates evidencing
Registrable Securities that bear the Legend, to the extent accompanied by a
notice requesting the issuance of new certificates free of the Legend to replace
those surrendered and containing representations that (i) the Investor is
permitted to dispose of such Registrable Securities without limitation as to
amount or manner of sale pursuant to Rule 144(k) under the Securities Act.
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Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend other than
the one specified in Section 8.1 has been or shall be placed on the share
certificates representing the securities referred to in such section and no
instructions or "stop transfers orders," so called, "stock transfer
restrictions," or other restrictions have been or shall be given to the
Company's transfer agent with respect thereto other than as expressly set forth
in this Article VIII.
Section 8.3 Investor's Compliance. Nothing in this Article VIII shall affect in
any way the Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
ARTICLE IX
INDEMNIFICATION
Section 9.1 Indemnification. The Company agrees to indemnify and hold harmless
the Investor, its partners, affiliates, officers, directors, employees, and duly
authorized agents, and each Person or entity, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, together with the Controlling Persons (as defined in the
Registration Rights Agreement) from and against any Damages, joint or several,
and any action in respect thereof to which the Investor, its partners,
affiliates, officers, directors, employees, and duly authorized agents, and any
such Controlling Person becomes subject to, resulting from, arising out of or
relating to any misrepresentation, breach of warranty or nonfulfillment of or
failure to perform any covenant or agreement on the part of Company contained in
this Agreement, as such Damages are incurred, unless such Damages result
primarily from the Investor's gross negligence, recklessness or bad faith in
performing its obligations under this Agreement.
Section 9.2 Method of Asserting Indemnification Claims. All claims for
indemnification by any Indemnified Party (as defined below) under Section 9.1
shall be asserted and resolved as follows:
(a) In the event any claim or demand in respect of which any person claiming
indemnification under any provision of Section 9.1 (an "Indemnified Party")
might seek indemnity under Section 9.1 is asserted against or sought to be
collected from such Indemnified Party by a person other than the Company, the
Investor or any affiliate of the Company or (a "Third Party Claim"), the
Indemnified Party shall deliver a written notification, enclosing a copy of all
papers served, if any, and specifying the nature of and basis for such Third
Party Claim and for the Indemnified Party's claim for indemnification that is
being asserted under any provision of Section 12.2 against any person (the
"Indemnifying Party"), together with the amount or, if not then reasonably
ascertainable, the estimated amount, determined in good faith, of such Third
Party Claim (a "Claim Notice") with reasonable promptness to the Indemnifying
Party. If the Indemnified Party fails to provide the Claim Notice with
reasonable promptness after the Indemnified Party receives notice of such Third
Party Claim, the Indemnifying Party shall not be obligated to indemnify the
Indemnified Party with respect to such Third Party Claim to the extent that the
Indemnifying Party's ability to defend has been irreparably prejudiced by such
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failure of the Indemnified Party. The Indemnifying Party shall notify the
Indemnified Party as soon as practicable within the period ending thirty (30)
calendar days following receipt by the Indemnifying Party of either a Claim
Notice or an Indemnity Notice (as defined below) (the "Dispute Period") whether
the Indemnifying Party disputes its liability or the amount of its liability to
the Indemnified Party under Section 9.1 and whether the Indemnifying Party
desires, at its sole cost and expense, to defend the Indemnified Party against
such Third Party Claim.
(i) If the Indemnifying Party notifies the Indemnified Party within the Dispute
Period that the Indemnifying Party desires to defend the Indemnified Party with
respect to the Third Party Claim pursuant to this Section 9.2(a), then the
Indemnifying Party shall have the right to defend, with counsel reasonably
satisfactory to the Indemnified Party, at the sole cost and expense of the
Indemnifying Party, such Third Party Claim by all appropriate proceedings, which
proceedings shall be vigorously and diligently prosecuted by the Indemnifying
Party to a final conclusion or will be settled at the discretion of the
Indemnifying Party (but only with the consent of the Indemnified Party in the
case of any settlement that provides for any relief other than the payment of
monetary damages or that provides for the payment of monetary damages as to
which the Indemnified Party shall not be indemnified in full pursuant to Section
9.1). The Indemnifying Party shall have full control of such defense and
proceedings, including any compromise or settlement thereof; provided, however,
that the Indemnified Party may, at the sole cost and expense of the Indemnified
Party, at any time prior to the Indemnifying Party's delivery of the notice
referred to in the first sentence of this clause (i), file any motion, answer or
other pleadings or take any other action that the Indemnified Party reasonably
believes to be necessary or appropriate to protect its interests; and provided
further, that if requested by the Indemnifying Party, the Indemnified Party
will, at the sole cost and expense of the Indemnifying Party, provide reasonable
cooperation to the Indemnifying Party in contesting any Third Party Claim that
the Indemnifying Party elects to contest. The Indemnified Party may participate
in, but not control, any defense or settlement of any Third Party Claim
controlled by the Indemnifying Party pursuant to this clause (i), and except as
provided in the preceding sentence, the Indemnified Party shall bear its own
costs and expenses with respect to such participation. Notwithstanding the
foregoing, the Indemnified Party may take over the control of the defense or
settlement of a Third Party Claim at any time if it irrevocably waives its right
to indemnity under Section 9.1 with respect to such Third Party Claim.
(ii) If the Indemnifying Party fails to notify the Indemnified Party within the
Dispute Period that the Indemnifying Party desires to defend the Third Party
Claim pursuant to Section 9.2(a), or if the Indemnifying Party gives such notice
but fails to prosecute vigorously and diligently or settle the Third Party
Claim, or if the Indemnifying Party fails to give any notice whatsoever within
the Dispute Period, then the Indemnified Party shall have the right to defend,
at the sole cost and expense of the Indemnifying Party, the Third Party Claim by
all appropriate proceedings, which proceedings shall be prosecuted by the
Indemnified Party in a reasonable manner and in good faith or will be settled at
the discretion of the Indemnified Party (with the consent of the Indemnifying
Party, which consent will not be unreasonably withheld). The Indemnified Party
will have full control of such defense and proceedings, including any compromise
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or settlement thereof; provided, however, that if requested by the Indemnified
Party, the Indemnifying Party will, at the sole cost and expense of the
Indemnifying Party, provide reasonable cooperation to the Indemnified Party and
its counsel in contesting any Third Party Claim which the Indemnified Party is
contesting. Notwithstanding the foregoing provisions of this clause (ii), if the
Indemnifying Party has notified the Indemnified Party within the Dispute Period
that the Indemnifying Party disputes its liability or the amount of its
liability hereunder to the Indemnified Party with respect to such Third Party
Claim and if such dispute is resolved in favor of the Indemnifying Party in the
manner provided in clause (iii) below, the Indemnifying Party will not be
required to bear the costs and expenses of the Indemnified Party's defense
pursuant to this clause (ii) or of the Indemnifying Party's participation
therein at the Indemnified Party's request, and the Indemnified Party shall
reimburse the Indemnifying Party in full for all reasonable costs and expenses
incurred by the Indemnifying Party in connection with such litigation. The
Indemnifying Party may participate in, but not control, any defense or
settlement controlled by the Indemnified Party pursuant to this clause (ii), and
the Indemnifying Party shall bear its own costs and expenses with respect to
such participation.
(iii) If the Indemnifying Party notifies the Indemnified Party that it does not
dispute its liability or the amount of its liability to the Indemnified Party
with respect to the Third Party Claim under Section 9.1 or fails to notify the
Indemnified Party within the Dispute Period whether the Indemnifying Party
disputes its liability or the amount of its liability to the Indemnified Party
with respect to such Third Party Claim, the Loss in the amount specified in the
Claim Notice shall be conclusively deemed a liability of the Indemnifying Party
under Section 9.1 and the Indemnifying Party shall pay the amount of such Loss
to the Indemnified Party on demand. If the Indemnifying Party has timely
disputed its liability or the amount of its liability with respect to such
claim, the Indemnifying Party and the Indemnified Party shall proceed in good
faith to negotiate a resolution of such dispute, and if not resolved through
negotiations within the Resolution Period, such dispute shall be resolved by
arbitration in accordance with paragraph (c) of this Section 9.2.
(b) In the event any Indemnified Party should have a claim under Section 9.1
against the Indemnifying Party that does not involve a Third Party Claim, the
Indemnified Party shall deliver a written notification of a claim for indemnity
under Section 9.1 specifying the nature of and basis for such claim, together
with the amount or, if not then reasonably ascertainable, the estimated amount,
determined in good faith, of such claim (an "Indemnity Notice") with reasonable
promptness to the Indemnifying Party. The failure by any Indemnified Party to
give the Indemnity Notice shall not impair such party's rights hereunder except
to the extent that the Indemnifying Party demonstrates that it has been
irreparably prejudiced thereby. If the Indemnifying Party notifies the
Indemnified Party that it does not dispute the claim or the amount of the claim
described in such Indemnity Notice or fails to notify the Indemnified Party
within the Dispute Period whether the Indemnifying Party disputes the claim or
the amount of the claim described in such Indemnity Notice, the Loss in the
amount specified in the Indemnity Notice will be conclusively deemed a liability
of the Indemnifying Party under Section 9.1 and the Indemnifying Party shall pay
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the amount of such Loss to the Indemnified Party on demand. If the Indemnifying
Party has timely disputed its liability or the amount of its liability with
respect to such claim, the Indemnifying Party and the Indemnified Party shall
proceed in good faith to negotiate a resolution of such dispute, and if not
resolved through negotiations within the Resolution Period, such dispute shall
be resolved by arbitration in accordance with paragraph (c) of this Section 9.2.
(c) Any dispute under this Agreement or the Warrants shall be submitted to
arbitration (including, without limitation, pursuant to this Section 12.3) and
shall be finally and conclusively determined by the decision of a board of
arbitration consisting of three (3) members (the "Board of Arbitration")
selected as hereinafter provided. Each of the Indemnified Party and the
Indemnifying Party shall select one (1) member and the third member shall be
selected by mutual agreement of the other members, or if the other members fail
to reach agreement on a third member within twenty (20) days after their
selection, such third member shall thereafter be selected by the American
Arbitration Association upon application made to it for such purpose by the
Indemnified Party. The Board of Arbitration shall meet on consecutive business
days in New York County, New York or such other place as a majority of the
members of the Board of Arbitration determines more appropriate, and shall reach
and render a decision in writing (concurred in by a majority of the members of
the Board of Arbitration) with respect to the amount, if any, which the
Indemnifying Party is required to pay to the Indemnified Party in respect of a
claim filed by the Indemnified Party. In connection with rendering its
decisions, the Board of Arbitration shall adopt and follow such rules and
procedures as a majority of the members of the Board of Arbitration deems
necessary or appropriate. To the extent practical, decisions of the Board of
Arbitration shall be rendered no more than thirty (30) calendar days following
commencement of proceedings with respect thereto. The Board of Arbitration shall
cause its written decision to be delivered to the Indemnified Party and the
Indemnifying Party. Any decision made by the Board of Arbitration (either prior
to or after the expiration of such thirty (30) calendar day period) shall be
final, binding and conclusive on the Indemnified Party and the Indemnifying
Party and entitled to be enforced to the fullest extent permitted by law and
entered in any court of competent jurisdiction. Each party to any arbitration
shall bear its own expense in relation thereto, including but not limited to
such party's attorneys' fees, if any, and the expenses and fees of the Board of
Arbitration shall be divided between the Indemnifying Party and the Indemnified
Party in the same proportion as the portion of the related claim determined by
the Board of Arbitration to be payable to the Indemnified Party bears to the
portion of such claim determined not to be so payable.
ARTICLE X
MISCELLANEOUS
Section 10.1 Fees and Expenses. Each of the Company and the Investor agrees to
pay its own expenses incident to the performance of its obligations hereunder,
except that the Company shall pay the fees, expenses and disbursements of the
Investor's counsel in an amount of $5,000 as provided in the Equity Line
Agreement, it being understood that such amount has not yet been paid by the
Company.
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Section 10.2 Reporting Entity for the Common Stock. The reporting entity relied
upon for the determination of the trading price or trading volume of the Common
Stock on any given Trading Day for the purposes of this Agreement shall be
Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
Section 10.3 Brokerage. Each of the parties hereto represents that it has had no
dealings in connection with this transaction with any finder or broker who will
demand payment of any fee or commission from the other party. The Company on the
one hand, and the Investor, on the other hand, agree to indemnify the other
against and hold the other harmless from any and all liabilities to any persons
claiming brokerage commissions or finder's fees on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby.
Section 10.4 Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice given in accordance herewith. Any notice or
other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company:
Sytron, Inc.
2770 Industrial Lane
Broomfield, CO 80020
Attention: Mitchel Feinglas, CEO
Telephone: (303) 469-6100
Facsimile: (303) 469-7100
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with a copy (which shall not constitute notice) to:
Bresler Goodman & Unterman LLP
521 Fifth Avenue
New York, NY 10175
Attention: Andrew J. Goodman, Esq. or
Jay Jacobson, Esq.
Telephone: (212) 661-2150
Facsimile: (212) 949-6131
if to the Investor:
Crescent International Limited
c/o DMI S.A.
84, av Louis-Casai, P.O. Box 161
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
with a copy (which shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Sara P. Hanks, Esq./Earl S. Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile number
for notices under this Section by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 10.5 Assignment. Neither this Agreement nor any rights of the Investor
or the Company hereunder may be assigned by either party to any other person.
Notwithstanding the foregoing, (a) the provisions of this Agreement shall inure
to the benefit of, and be enforceable by, any transferee of any of the Common
Stock purchased or acquired by the Investor hereunder with respect to the Common
Stock held by such person, and (b) the Investor's interest in this Agreement may
be assigned at any time, in whole or in part, to any other person or entity
(including any affiliate of the Investor) upon the prior written consent of the
Company, which consent shall not to be unreasonably withheld.
Section 10.6 Amendment; No Waiver. No party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth in this Agreement or therein. Except as expressly
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provided in this Agreement, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by both parties hereto. The failure of the either party to insist on
strict compliance with this Agreement, or to exercise any right or remedy under
this Agreement, shall not constitute a waiver of any rights provided under this
Agreement, nor estop the parties from thereafter demanding full and complete
compliance nor prevent the parties from exercising such a right or remedy in the
future.
Section 10.7 Annexes and Exhibits; Entire Agreement. All annexes and exhibits to
this Agreement are incorporated herein by reference and shall constitute part of
this Agreement. This Agreement, the Convertible Notes, the Security Agreement,
the Warrants and the Registration Rights Agreement set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and thereof and supersede all prior and contemporaneous agreements, negotiations
and understandings between the parties, both oral and written, relating to the
subject matter hereof.
Section 10.8 Survival. The provisions of Articles VI, VIII, IX and X, and of
Section 7.3, shall survive the termination of this Agreement.
Section 10.9 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 10.10 Title and Subtitles. The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.
Section 10.11 Counterparts. This Agreement may be executed in multiple
counterparts, each of which may be executed by less than all of the parties and
shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.
Section 10.12 Choice of Law. This Agreement shall be construed under the laws of
the State of New York.
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IN WITNESS WHEREOF, the parties hereto have caused this Note Purchase Agreement
to be executed by the undersigned, thereunto duly authorized, as of the date
first set forth above.
CRESCENT INTERNATIONAL LIMITED
By: s/Melvyn Craw
--------------------------------
Melvyn Craw
Title:
SYTRON, INC.
By: s/Mitchel Feinglas
--------------------------------
Mitchel Feinglas
Chief Executive Officer
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EXHIBIT A
CONVERTIBLE NOTE NO. 1
THE NOTE REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE; AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT IN COMPLIANCE WITH, OR PURSUANT TO AN EXEMPTION FROM,
THE REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
--------------------
CONVERTIBLE NOTE
Due January 15, 2001
January 15, 1999 $350,000
No. 1
Sytron, Inc., a Pennsylvania corporation (hereinafter called the "Issuer"),
for value received, hereby promises to pay to the Holder (as defined below) on
January 15, 2001 the principal amount of $350,000 payable in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for public and private debts or, subject to the conditions
contained herein, in Common Shares (as defined below) at the principal office of
the Issuer. This Note shall be secured by the Collateral as provided in the
Security Agreement.
ARTICLE 1
DEFINITIONS
SECTION 1.1. Definitions. The terms defined in this Article whenever used
in this Note shall have the respective meanings hereinafter specified.
(a) "Additional Capital Shares" shall have the meaning set forth in
Section 3.5(d).
(b) "Bid Price" shall have the meaning specified in the Purchase
Agreement.
(c) "Business Day" shall mean a day other than Saturday, Sunday or any
day on which banks located in the state of New York are authorized or obligated
to close.
(d) "Capital Shares" shall mean the Common Shares and any other shares
of any other class of common stock, whether now or hereafter authorized, which
have the right to participate in the distribution of earnings and assets of the
Issuer.
(e) "Closing Date" shall mean January 15, 1999.
(f) "Collateral" shall have the meaning specified in the Security
Agreement.
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(g) "Common Shares" shall mean shares of the common stock, par value
$.01, of the Issuer.
(h) "Conversion Date" shall mean any day on which all or some part of
the principal amount of this Note is converted into Note Shares in accordance
with the terms of this Note, provided that a Conversion Date must be a Business
Day.
(i) "Conversion Notice" shall have the meaning set forth in Section
3.2.
(j) "Conversion Price" shall have the meaning set forth in Section
3.1.
(k) "Conversion Ratio" shall have the meaning set forth in Section
3.1.
(l) "Discount" shall mean fifteen percent (15%).
(m) "Event of Default" shall have the meaning set forth in Section
6.1.
(n) "Holder" shall mean Crescent International Limited.
(o) "Issuer" shall mean Sytron, Inc., a Pennsylvania corporation, and
any successor corporation by merger, consolidation, sale or exchange of all or
substantially all of the Issuer's assets, or otherwise.
(p) "Market Disruption Event" shall mean any event that results in a
material suspension or limitation of trading of Common Shares on the Principal
Market (as defined in the Purchase Agreement).
(q) "Market Price" shall mean the lowest three consecutive Trading Day
average of Bid Prices during the Valuation Period.
(r) "Material Adverse Effect" shall mean a material adverse effect on
the business, assets, operations (financial or otherwise) of the Issuer and the
Subsidiaries taken as a whole.
(s) "Note" shall mean this Convertible Note or such other Convertible
Note or Notes exchanged therefor as provided in Section 2.1.
(t) "Notes" shall mean the Convertible Note issued pursuant to the
Purchase Agreement and such other Convertible Note or Notes exchanged therefor
as provided in Section 2.1.
(u) "Note Shares" when used with reference to the securities issuable
upon conversion of this Note, shall mean all Common Shares now or hereafter
Outstanding and securities of any other class into which the Note Shares shall
hereafter have been changed, whether now or hereafter created.
(v) "Outstanding" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), shall mean, at any date as of which the number
of such Shares is to be determined, all issued and outstanding Shares, and shall
include all such Shares issuable in respect of outstanding scrip or any
certificates representing fractional interests in such Shares; provided,
however, that "Outstanding" shall not mean any such Shares then directly or
indirectly owned or held by or for the account of the Issuer or any Subsidiary.
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(w) "Person" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
(x) "Purchase Agreement" means the Note Purchase Agreement, dated the
date hereof by and between the Issuer and the Holder.
(aa) "Redemption Price" shall have the meaning set forth in Section
2.4.
(bb) "Registration Rights Agreement" shall mean that certain Amended
and Restated Registration Rights Agreement, dated as of the date hereof, by and
between the Issuer and the Holder. This is the Note referred to as Convertible
Note No. 1 in the Registration Rights Agreement.
(cc) "SEC" shall mean the United States Securities and Exchange
Commission.
(dd) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(ee) "Security Agreement" shall mean that certain Security Agreement,
dated as of the date hereof, by and between the Issuer and the Holder.
(ff) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Issuer.
(gg) "Trading Day" shall mean any day on which trades of securities
listed thereon are reported by the NASDAQ (or, if the Common Shares are not
listed for trading on the NASDAQ, the principal trading market for the Common
Shares) and on which no Market Disruption Event has occurred.
(hh) "Valuation Period" shall mean the thirty (30) Trading Day period
ending on the earlier of (i) the date on which this Note first becomes due and
payable or (ii) the Conversion Date.
ARTICLE 2
EXCHANGES AND TRANSFER; REDEMPTION
SECTION 2.1. Exchange and Registration of Transfer of Notes. The Holder
may, at its option, surrender this Note at the office of the Issuer and receive
in exchange therefor a Note or Notes, each in the denomination of $50,000 or an
integral multiple of $50,000 in excess thereof, dated as of the date of this
Note, and, subject to Section 4.1, payable to such Person, or order, as may be
designated by such Holder. The aggregate principal amount of such Note or Notes
exchanged in accordance with this Section 2.1 shall equal the aggregate unpaid
principal amount of this Note as of the date of such surrender; provided,
however, that upon such exchange there shall be filed with the Issuer the name
and address for all purposes hereof of the Holder or Holders of the Note or
Notes delivered in such exchange. This Note, when presented for registration of
transfer or for exchange, conversion or payment, shall (if so required by the
Issuer) be duly endorsed by, or be accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer duly executed by, the
Holder or its attorney duly authorized in writing.
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SECTION 2.2. Loss. Theft. Destruction of Note. Upon receipt of evidence
satisfactory to the Issuer of the loss, theft, destruction or mutilation of this
Note and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Issuer, or, in the case of
any such mutilation, upon surrender and cancellation of this Note, the Issuer
will make and deliver, in lieu of such lost, stolen, destroyed or mutilated
Note, a new Note of like tenor and unpaid principal amount dated as of the date
hereof. This Note shall be held and owned upon the express condition that the
provisions of this Section 2.2 are exclusive with respect to the replacement of
a mutilated, destroyed, lost or stolen Note and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.
SECTION 2.3. Who Deemed Absolute Owner. The Issuer may deem the person in
whose name this Note shall be registered upon the registry books of the Issuer
to be, and may treat it as, the absolute owner of this Note (whether or not this
Note shall be overdue) for the purpose of receiving payment of or on account of
the principal of this Note, for the conversion of this Note and for all other
purposes, and the Issuer shall not be affected by any notice to the contrary.
All such payments and such conversion shall be valid and effectual to satisfy
and discharge the liability upon this Note to the extent of the sum or sums so
paid or the conversion so made.
SECTION 2.4. Optional Redemption by the Issuer. The Issuer at its election,
upon notice given as provided in Section 2.5, may redeem this Note in whole or
in part at any time and from time to time, but only with respect to that portion
of this Note for which the Company has not been provided with a Conversion
Notice. The price to redeem the Note (the "Redemption Price") shall be equal to
120% of (x)(i) the portion of the Note being redeemed divided (ii) by the
Conversion Price on the date of such redemption multiplied by (y) the Bid Price
on the date of such redemption. In addition to the foregoing, the Issuer, at its
election, upon notice as provided for in Section 2.5, may, if the bid Price is
equal to or less than $0.375 for a period of five (5) consecutive Trading Days,
redeem the Note for 120% of its then outstanding principal amount.
SECTION 2.5. Notice of Redemptions: Right to Convert in Lieu of Accepting
Redemptions. In the case of redemption of this Note, notice thereof shall be
given in writing to the Holder not fewer than 5 nor more than 15 days prior to
the date fixed for such redemption, which notice shall specify the date fixed
for such redemption and make reference to this Section 2.5 pursuant to which
such redemption is to be made. Such notice of redemption and all other notices
to be given to the Holder shall be given by facsimile and confirmed by
registered mail at its designated address.
Upon notice of any redemption being given as provided in this Section 2.5,
the Holder shall have the right to exercise, either in whole or in part, the
conversion privilege pursuant to Article 3 hereof until 5:00 P.M., New York City
time, on the date fixed for redemption.
SECTION 2.6. Surrender of Notes: Notation Thereon. Upon any redemption of a
portion of the principal amount of this Note pursuant to this Article 2, the
Holder at its option may require the Issuer to make and deliver, at the expense
of the Issuer (other than for transfer taxes, if any), upon surrender of this
Note, a new Note payable to such person or persons, or order, as may be
designated by the Holder for the principal amount of this Note then remaining
unredeemed, dated as of the date of this Note or may present this Note to the
Issuer for notation hereon of the payment of the portion of the principal amount
so redeemed. The Issuer may, as a condition of payment of all or any of the
principal of or interest on this Note, require the Holder to present this Note
for notation of such payment and, if this Note be paid in full, require the
surrender hereof.
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SECTION 2.7. Redemption with Common Shares. Subject to the conditions
contained herein, this Note may be redeemed in Common Shares; provided, however
that this Note shall be redeemed in cash so long as the Market Price of the
Common Shares in less than two dollars ($2.00). If the Issuer elects to redeem
this Note in Common Shares pursuant to this Section 2.7, the Issuer shall issue
to the Holder 120% of the number of Common shares determined by (x) the dollar
amount of the outstanding principal of this Note divided by (y) the Market Price
of the Common Shares.
ARTICLE 3
CONVERSION OF NOTE
SECTION 3.1. Conversion: Conversion Price. At the option of the Holder, at
any time following the date of issuance of this Note until this Note is paid in
full, this Note may be converted, either in whole or in part up to the principal
amount hereof (or in case some portion of this Note shall have been called for
redemption prior to such date, then at the portion that is not so called), at
the conversion price the ("Conversion Price") equal to the lower of (i) $0.8125
and (ii) the Market Price (on the date on which the Holder gives notice to the
Issuer of its intention to convert this Note) less the product of the Discount
and the Market Price; provided, however, that the Conversion Price shall in no
event be less than $0.375 for a period of six months following the Closing Date.
Notwithstanding anything to the contrary contained herein, in no event shall the
Holder be entitled to convert this Note into any Note Shares when the result of
such conversion would entitle the Holder to receive that number of shares of the
Issuer's Common Stock of which the sum of (xx) the number of shares of Common
Stock beneficially owned by the Holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of this Note) and (yy) the number of shares of Common Stock
issuable upon conversion of this Note, would result in beneficial ownership by
the Holder and its affiliates of more than 4.9% of the outstanding shares of
Common Stock. For the purposes of this provision, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D and G thereunder, except as otherwise
provided in clause (xx) of this provision.
SECTION 3.2. Exercise of Conversion Privilege. In order to convert this
Note into Note Shares, the Holder shall (i) send via facsimile, on or prior to
11:59 p.m., New York City time on the Conversion Date, a copy of the fully
executed conversion notice in the form attached hereto in Annex I (the
"Conversion Notice") to the Issuer at the office of the Issuer stating that the
Holder elects to convert, which Conversion Notice shall specify the Conversion
Date, the portion of this Note to be converted, the applicable Conversion Price,
the name or names (with address) of the persons who are to become holders of the
Note Shares in connection with such conversion, and a calculation of the number
of Note Shares issuable upon such conversion and (ii) surrender to a common
courier for delivery to the office of the Issuer, this Note accompanied by a
proper assignment hereof to the Issuer or in blank; provided, however, that the
Issuer shall not be obligated to issue certificates evidencing the Note Shares
issuable upon such conversion unless either this Note is delivered to the Issuer
as provided above, or the Holder notifies the Issuer that this Note has been
lost, stolen or destroyed (subject to the requirements of Section 2.2). Upon
receipt by the Issuer of a facsimile copy of a Conversion Notice, the Issuer
shall immediately send, via facsimile, a confirmation of receipt of the
Conversion Notice to the Holder, which shall specify that the Conversion Notice
has been received and the name and telephone number of a contact person at the
Issuer whom the Holder should contact regarding information related to the
conversion of this Note. In the event of a dispute as to the calculation of the
Conversion Ratio, the Issuer shall promptly issue to the Holder the number of
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Note Shares that is not disputed and shall submit the disputed calculations to
its outside accountant (the "Accountant") via facsimile within three (3) days of
receipt of the Conversion Notice. The Issuer shall cause the Accountant to
perform the calculations and notify the Issuer and Holder of the results no
later than two (2) Business Days from the time it receives the disputed
calculations. The Accountant's calculations shall be deemed conclusive absent
manifest error.
SECTION 3.3. Delivery of Note Shares Upon Conversion. The Issuer shall, no
later than the close of business on the third Business Day after receipt by the
Issuer of a facsimile copy of a Conversion Notice and receipt by the Issuer of
all necessary documentation duly executed and in proper form required for
conversion, including this Note (or after the provisions required by Section 2.2
in the case of a lost, stolen or destroyed Note), issue and surrender to a
common courier for either overnight or (if delivery is outside the United
States) two (2) day delivery to the Holder at the address or addresses and in
the name or names provided in the Conversion Notice. The person or persons
entitled to receive the Note Shares issuable upon conversion of this Note shall
be treated for all purposes as the record holder or holders of such Note Shares
on the Conversion Date.
SECTION 3.4. Fractional Shares. No fractional Note Shares or scrip
representing fractional Note Shares shall be issued upon conversion of this
Note. If any conversion of this Note would create a fractional Note Share or a
right to acquire a fractional Note Share, such fractional Note Share shall be
disregarded and the number of Note Shares issuable upon conversion, in the
aggregate, shall be the next higher number of shares.
SECTION 3.5. Adjustment of Conversion Price. The Conversion Price and,
accordingly, the number of Note Shares issuable upon the conversion of this Note
shall be subject to adjustment from time to time upon the happening of certain
events as follows:
(a) Reclassification, Consolidation, Merger or Mandatory Share
Exchange. At any time while this Note remains outstanding and unexpired, in case
of any reclassification or change of Outstanding Common Shares issuable upon
conversion of this Note (other than a change in par value, or from par value to
no par value per share, or from no par value per share to par value or as a
result of a subdivision or combination of outstanding securities issuable upon
conversion of this Note) or in case of any consolidation, merger or mandatory
share exchange of the Issuer with or into another corporation (other than a
merger or mandatory share exchange with another corporation in which the Issuer
is a continuing corporation and which does not result in any reclassification or
change, other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value, or as a result of a
subdivision or combination of Outstanding Common Shares upon conversion of this
Note), or in the case of any sale or transfer to another corporation of the
property of the Issuer as an entirety or substantially as an entirety, the
Issuer, or such successor or purchasing corporation, as the case may be, shall,
without payment of any additional consideration therefore, execute a new Note
providing that the Holder shall have the right to convert such new Note (upon
terms not less favorable to the Holder than those then applicable to this Note)
and to receive upon such exercise, in lieu of each Common Share theretofore
issuable upon conversion of this Note, the kind and amount of shares of stock,
other securities, money or property receivable upon such reclassification,
change, consolidation, merger, mandatory share exchange, sale or transfer by the
holder of one Common Share issuable upon conversion of this Note had this Note
been converted immediately prior to such reclassification, change,
consolidation, merger, mandatory share exchange or sale or transfer. Such new
Note shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 3.4. The provisions
of this subsection (a) shall similarly apply to successive reclassifications,
changes, consolidations, mergers, mandatory share exchanges and sales and
transfers.
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(b) Subdivision or Combination of Shares. If the Issuer at any time
while this Note remains outstanding and unexpired, shall subdivide or combine
its Common Shares, the Conversion Price shall be proportionately reduced, in
case of subdivision of such shares, as of the effective date of such
subdivision, or, if the Issuer shall take a record of holders of its Common
Shares for the purpose of so subdividing, as of such record date, whichever is
earlier, or shall be proportionately increased, in the case of combination of
such shares, as of the effective date of such combination, or, if the Issuer
shall take a record of holders of its Common Shares for the purpose of so
combining, as of such record date, whichever is earlier.
(c) Stock Dividends. If the Issuer at any time while this Note is
outstanding and unexpired shall pay a dividend in its Capital Shares, or make
any other distribution of its Capital Shares, then the Conversion Price shall be
adjusted, as of the date the Issuer shall take a record of the holders of its
Capital Shares for the purpose of receiving such dividend or other distribution
(or if no such record is taken, as at the date of such payment or other
distribution), to that price determined by multiplying the Conversion Price in
effect immediately prior to such payment or other distribution by a fraction:
(i) the numerator of which shall be the total number of Outstanding
Capital Shares immediately prior to such dividend or distribution, and
(ii) the denominator of which shall be the total number of Outstanding
Capital Shares immediately after such dividend or distribution.
The provisions of this subsection (c) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a) or
(b).
(d) Issuance of Additional Capital Shares. If the Issuer at any time
while this Note remains outstanding and unexpired shall issue any additional
Capital Shares (the "Additional Capital Shares"), otherwise than as provided in
the foregoing subsections (a) through (c) above, at a price per share less, or
for other consideration lower, than the Conversion Price in effect immediately
prior to such issuance, or without consideration, then upon such issuance the
Conversion Price shall be reduced to that price determined by multiplying the
Conversion Price in effect immediately prior to such event by a fraction:
(i) the numerator of which shall be the number of Outstanding Capital
Shares immediately prior to the issuance of the Additional Capital Shares
plus the number of Capital Shares which the aggregate consideration for the
total number of such Additional Capital Shares so issued would purchase at
the then effective Conversion Price, and;
(ii) the denominator of which shall be the number of Outstanding
Capital Shares immediately after the issuance of the Additional Capital
Shares plus the number of Additional Capital Shares so issued.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b)
or (c). No adjustment of a Conversion Price shall be made under this
subsection (d) upon the issuance of any Additional Capital Shares which are
issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights or pursuant to the exercise of any
conversion or exchange rights in any convertible or exchangeable securities
if any such adjustments shall previously have been made upon the issuance
of any such warrants, options or other rights or upon the issuance of any
convertible or exchangeable securities (or upon the issuance of any
warrants, options or any rights therefor) pursuant to subsection (e) or
(f).
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(e) Issuance of Warrants, Options or Other Rights. If the Issuer at
any time while this Note remains outstanding and unexpired shall issue any
warrants, options (other than options under the Issuer's non-qualified stock
option plan) or other rights to subscribe for or purchase any Additional Capital
Shares and the price per share for which Additional Capital Shares may at any
time thereafter be issuable pursuant to such warrants, options or other rights
shall be less than the Conversion Price in effect immediately prior to such
issuance, then upon such issuance the Conversion Price shall be adjusted as
provided in subsection (d) hereof on the basis that:
(i) the maximum number of Additional Capital Shares issuable pursuant
to all such warrants, options or other rights shall be deemed to have been
issued as of the date of actual issuance of such warrants, options or other
rights, and
(ii) the aggregate consideration for such maximum number of Additional
Capital Shares issuable pursuant to such warrants, options or other rights,
shall be deemed to be the consideration received by the Issuer for the
issuance of such warrants, options, or other rights plus the minimum
consideration to be received by the Issuer for the issuance of Additional
Capital Shares pursuant to such warrants, options, or other rights.
(f) Issuance of Convertible or Exchangeable Securities. If the Issuer
at any time while this Note remains outstanding and unexpired shall issue any
securities convertible into or exchangeable for Capital Shares and the
consideration per share for which Additional Capital Shares may at any time
thereafter be issuable pursuant to the terms of such convertible or exchangeable
securities shall be less than the Conversion Price in effect immediately prior
to such issuance, then upon such issuance the Conversion Price shall be adjusted
as provided in subsection (d) hereof on the basis that:
(i) the maximum number of Additional Capital Shares necessary to
effect the conversion or exchange of all such convertible or exchangeable
securities shall be deemed to have been issued as of the date of issuance
of such convertible or exchangeable securities, and
(ii) the aggregate consideration for such maximum number of Additional
Capital Shares shall be deemed to be the consideration received by the
Issuer for the issuance of such convertible or exchangeable securities plus
the minimum consideration received by the Issuer for the issuance of such
Additional Capital Shares pursuant to the terms of such convertible or
exchangeable securities.
No adjustment of the Conversion Price shall be made under this subsection
(f) upon the issuance of any convertible or exchangeable securities which
are issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants, options or
other rights pursuant to subsection (e) hereof.
(g) Adjustment of Number of Shares. Upon each adjustment of the
Conversion Price pursuant to any provisions of this Section 3.4, the number of
Note Shares issuable hereunder at the option of the Holder shall be calculated,
to the next higher whole share, to be the quotient obtained by dividing (i) the
then outstanding principal amount of this Note by (ii) the Conversion Price
immediately after such adjustment.
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(h) Liquidating Dividends, Etc. If the Issuer at any time while this
Note is outstanding and unexpired makes a distribution of its assets or
evidences of indebtedness to the holders of its Capital Shares as a dividend in
liquidation or by way of return of capital or other than as a dividend payable
out of earnings or surplus legally available for dividends under applicable law
or any distribution to such holders made in respect of the sale of all or
substantially all of the Issuer's assets (other than under the circumstances
provided for in the foregoing subsections (a) through (g)), provided, in each
case, that such distribution described in this subsection (h) does not
constitute an Event of Default hereunder, the Holder shall be entitled to
receive upon the conversion of this Note, in addition to the Note Shares
receivable upon such exercise, and without payment of any consideration other
than the Conversion Price, an amount in cash equal to the value of such
distribution per Capital Share multiplied by the number of Note Shares which, on
the record date for such distribution, are issuable upon Conversion of this Note
(with no further adjustment being made following any event which causes a
subsequent adjustment in the number of Note Shares issuable upon the exercise
hereof), and an appropriate provision therefor shall be made a part of any such
distribution. The value of a distribution which is paid in other than cash shall
be determined in good faith by the Board of Directors.
(i) Other Provisions Applicable to Adjustments Under this Section. The
following provisions will be applicable to the making of adjustments in a
Conversion Price hereinabove provided in this Section 3.4:
(i) Computation of Consideration. To the extent that any Additional
Capital Shares or any convertible or exchangeable securities or any
warrants, options or other rights to subscribe for or purchase any
Additional Capital Shares or any convertible or exchangeable securities
shall be issued for a cash consideration, the consideration received by the
Issuer therefor shall be deemed to be the amount of the cash received by
the Issuer therefor, or, if such Additional Capital Shares or convertible
or exchangeable securities are offered by the Issuer for subscription, the
subscription price, or, if such Additional Capital Shares or convertible or
exchangeable securities are sold to underwriters or dealers for public
offering without a subscription offering, or through underwriters or
dealers for public offering without a subscription offering, the initial
public offering price, in any such case excluding any amounts paid or
incurred by the Issuer for and in the underwriting of, or otherwise in
connection with the issue thereof. To the extent that such issuance shall
be for a consideration other than cash, then, the amount of such
consideration shall be deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith by the Issuer's Board
of Directors. The consideration for any Additional Capital Shares issuable
pursuant to any warrants, options or other rights to subscribe for or
purchase the same shall be the consideration received by the Issuer for
issuing such warrants, options or other rights, plus the additional
consideration payable to the Issuer upon the exercise of such warrants,
options or other rights. The consideration for any Additional Capital
Shares issuable pursuant to the terms of any convertible or exchangeable
securities shall be the consideration paid or payable to the Issuer in
respect of the subscription for or purchase of such convertible or
exchangeable securities, plus the additional consideration, if any, payable
to the Issuer upon the exercise of the right of conversion or exchange in
such convertible or exchangeable securities. In case of the issuance at any
time of any Additional Capital Shares or convertible or exchangeable
securities in payment or satisfaction of any dividend upon any class of
stock preferred as to dividends in a fixed amount, the Issuer shall be
deemed to have received for such Additional Capital Shares or convertible
or exchangeable securities a consideration equal to the amount of such
dividend so paid or satisfied.
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(ii) Readjustment of Conversion Price. Upon the expiration of the
right to convert or exchange any convertible or exchangeable securities, or
upon the expiration of any rights, options or warrants, the issuance of
which convertible or exchangeable securities, rights, options or warrants
effected an adjustment in a Conversion Price, if any such convertible or
exchangeable securities shall not have been converted or exchanged, or if
any such rights, options or warrants shall not have been exercised, the
number of Capital Shares deemed to be issued and Outstanding by reason of
the fact that they were issuable upon conversion or exchange of any such
convertible or exchangeable securities or upon exercise of any such rights,
options, or warrants shall no longer be computed as set forth above, and
such Conversion Price shall forthwith be readjusted and thereafter be the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section 3.4 after
the issuance of such convertible or exchangeable securities, rights,
options or warrants) had the adjustment of the Conversion Price made upon
the issuance or sale of such convertible or exchangeable securities or
issuance of rights, options or warrants been made on the basis of the
issuance only of the number of Additional Capital Shares actually issued
upon conversion or exchange of such convertible or exchangeable securities,
or upon the exercise of such rights, options or warrants, and thereupon
only the number of Additional Capital Shares actually so issued, if any,
shall be deemed to have been issued and only the consideration actually
received by the Issuer (computed as set forth in sub-subsection (i) hereof)
shall be deemed to have been received by the Issuer. If the purchase price
provided for in any rights, options or warrants, or the additional
consideration (if any) payable upon the conversion or exchange of any
convertible or exchangeable securities, or the rate at which any
convertible or exchangeable securities are convertible into or exchangeable
for Capital Shares changes at any time (other than under or by reason of
provisions designed to protect against dilution), the Conversion Price in
effect at the time of the change shall be adjusted to the Conversion Price
that would have been in effect at such time had such rights, options,
warrants or convertible or exchangeable securities still outstanding
provided for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially granted, issued
or sold.
(iii) Other Action Affecting Capital Shares. In case after the date
hereof the Issuer shall take any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing
subsections (a) through (h) hereof, inclusive, which in the opinion of the
Issuer's Board of Directors would have a materially adverse effect upon the
rights of the Holder at the time of a conversion of this Note, the
Conversion Price shall be adjusted in such manner and at such time as the
Board or Directors on the advice of the Issuer's independent public
accountants may in good faith determine to be equitable in the
circumstances.
SECTION 3.6. Notice of Adjustments. Whenever the Conversion Price under the
terms of this Note shall be adjusted pursuant to Section 3.4 hereof, the Issuer
shall promptly make a certificate signed by its President or a Vice President
and by its Treasurer or Assistant Treasurer or its Secretary or Assistant
Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Issuer's Board
of Directors made any determination hereunder), and the Conversion Price and
number of Note Shares purchasable at that Conversion Price after giving effect
to such adjustment, and shall promptly cause copies of such certificate to be
mailed (by first class and postage prepaid) to the Holder.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
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SECTION 4.1. Status of Note. Subject to Section 4.2 below, this Note is a
direct, general and unconditional obligation of the Issuer ranking, and
constitutes a valid and legally binding obligation of the Issuer, enforceable in
accordance with its terms subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other similar laws of general applicability relating to or
affecting creditors' rights and to general principals of equity. To secure the
obligations of the Issuer under this Note, the Issuer grants the Holder a
security interest in the Collateral which Collateral shall, at all times, be
worth a dollar amount of at least one hundred fifty percent (150%) of the
combined outstanding value of this Note and Convertible Note No. 2 (as defined
in the Purchase Agreement). To perfect those security interests, simultaneously
with the execution of this Note, the Issuer is executing and delivering to the
Holder UCC-1 Financing Statements with respect to the Collateral which secures
this Note. The Issuer agrees that he will not, without the prior written consent
of the Holder, take any action, nor fail to take any action which would in any
manner adversely affect the rights of the Holder pursuant to the Note or the
value of the Collateral or subject the Holder to any liability. If the Issuer
fails to pay the entire principal amount evidenced by this Note and all accrued
interest when it becomes due, the Holder will have all the rights with regard to
the Collateral granted by the laws in effect in the State of New York to a
creditor upon default by its debtor. Without limiting what is said in the
preceding sentence, if the Issuer fails to pay the entire principal amount
evidenced by this Note and all accrued interest when it becomes due, the Holder
may, by a notice to the Issuer accompanied by an agreement by the Holder to
return any principal paid with regard to this Note if it determined that
principal is not subject to offset as provided below, obtain the Collateral in
satisfaction of the obligations created by this Note. The Issuer waives, to the
full extent permitted by law, any right to object to the retention of the
Collateral by the Holder and to require the Holder to dispose of the Collateral.
SECTION 4.2. Restrictions on Transfer. This Note, and any Note Shares
issued according to the terms hereof, have not been and will not be registered
under the United States Securities Act. This Note and any Note Shares may not be
offered or sold, directly or indirectly, except pursuant to registration under
the Act, an available exemption therefrom, or pursuant to Regulation S.
ARTICLE 5
COVENANTS
The Issuer covenants and agrees that so long as this Note shall be
outstanding:
SECTION 5.1. Payment of Note. The Issuer will punctually, according to the
terms hereof, (a) pay or cause to be paid the principal of this Note and (b)
issue Note Shares upon conversion.
SECTION 5.2. Notice of Default. If any one or more events occur which
constitute or which, with the giving of notice or the lapse of time or both,
would constitute an Event of Default or if the Holder shall demand payment or
take any other action permitted upon the occurrence of any such Event of
Default, the Issuer will forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or other event or of such demand or
action, as the case may be.
SECTION 5.3. Sufficient Number of Authorized Common Shares. So long as the
this Note shall be outstanding, the Issuer shall at all times have authorized
and reserved for issuance, free from preemptive rights, a sufficient number of
Common Shares to yield a number of Note Shares sufficient to satisfy the
conversion rights of the Holder pursuant to the terms and conditions hereof.
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SECTION 5.4. Insurance. The Issuer will carry and maintain in full force
and effect at all times with insurers the Issuer reasonably believes to be
financially sound and reputable such insurance in such amounts as is customary
in the respective industries of the Issuer and such subsidiaries.
SECTION 5.5. Payment of Obligations. The Issuer will pay and discharge at
or before maturity, all its respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings, and will maintain in
accordance with generally accepted accounting principles, appropriate reserves
for the accrual of any of the same;
SECTION 5.6. Compliance with Laws. The Issuer will comply in all material
respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings.
SECTION 5.7. Inspection of Property, Books and Records. The Issuer will
keep proper books of record and account in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and
activities and will permit representatives of the Holder at the Holder's expense
to visit and inspect any of its respective properties, to examine and make
abstracts from any of its respective books and records and to discuss its
respective affairs, finances and accounts with its respective officers,
employees and independent public accountants, all at such reasonable times and
as often as may reasonably be desired.
ARTICLE 6
REMEDIES
SECTION 6.1. Events of Default. "Event of Default" wherever used herein
means any one of the following events:
(a) default in the issuance of Note Shares due upon conversion;
(b) default in the due and punctual payment of the principal of on, or
any other amount owing in respect of, this Note when and as the same shall
become due and payable, and continuance of such default for a period of thirty
(30) calendar days; or
(c) substantial failure in the performance or observance of Section
5.5 of this Note and the continuance of such default for a period of thirty (30)
calendar days; or
(d) default in the performance or observance of any covenant or
agreement of the Issuer in this Note (other than a covenant or agreement a
default in the performance of which is specifically provided for elsewhere in
this Section), and the continuance of such default for a period of thirty (30)
calendar days after there has been given to the Issuer by a Holder a written
notice specifying such default and requiring it to be remedied; or
(e) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Issuer or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Issuer under the Bankruptcy
Code or any other applicable Federal or state law, or appointing a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Issuer or of any substantial part of its property, or ordering the winding-up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 30 calendar days, except in case that
such event does not result in a Material Adverse Effect; or
(f) the institution by the Issuer or any Subsidiary of proceedings to
be adjudicated a bankrupt or insolvent, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the Federal
Bankruptcy Code or any other applicable Federal or state law, or the consent by
it to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Issuer or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Issuer in furtherance of any such action, except in case
that such event does not result in a Material Adverse Effect; or
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(g) the Issuer shall fail to issue and deliver the Note Shares within
three (3) Business Days of its receipt of the original Note and the original
Conversion Notice in accordance with Section 3.2; or
(h) any principal of other indebtedness of the Issuer or any
Subsidiary, exceeding $500,000 is not repaid on its original maturity date or
becomes due and payable by reason of default before its original maturity date;
or
(i) (i) the Issuer or any Subsidiary is unable to pay its debts as
they fall due, stops, suspends, or threatens in writing to stop or suspend
payment of all or any material part of its debts (other than debts contested in
good faith by appropriate proceedings), begins negotiations or takes any
proceeding or other step with a view to readjustment, rescheduling or deferral
of all of its indebtedness (or any material part thereof) that it will or might
otherwise be unable to pay when due or seeks the appointment of a statutory
manager or proposes in writing or makes a general assignment or an arrangement
or composition with or for the benefit of its creditors or any group or class
thereof or files a petition for suspension of payments or other relief of
debtors of for bankruptcy or is declared bankrupt or a moratorium or statutory
management is agreed or declared in respect of or affecting all or any material
part of the indebtedness of the Issuer or any of its wholly owned subsidiaries,
or (ii) the Issuer ceases or threatens in writing to cease to carry on all or
any material part of the business carried on by the Issuer and its Subsidiaries
taken as a whole and as a result of such cessation or threat of cessation, the
Issuer will not be able to perform or comply with its payment obligations under
this Note, except in case that any such event does not result in a Material
Adverse Effect; or
(j) on or after the date hereof, a final judgment or final judgments
for the payment of money shall have been entered by any court or courts of
competent jurisdiction against the Issuer and remains undischarged for a period
(during which execution shall be effectively stayed) of 30 days, provided that
the aggregate amount of all such judgments at any time outstanding (to the
extent not paid or to be paid, as evidenced by a written communication to that
effect from the applicable insurer, by insurance) exceeds $500,000; or
(k) it becomes unlawful for the Issuer to perform or comply with its
obligations under this Note or the Registration Rights Agreement.
SECTION 6.2. Acceleration of Maturity: Rescission and Annulment. If an
Event of Default occurs and is continuing, then and in every such case any
Holder may declare the principal of this Note to be due and payable immediately,
by a notice in writing to the Issuer, and upon any such declaration the
principal of this Note shall become immediately due and payable.
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SECTION 6.3. Remedies Not Waived. No course of dealing between the Issuer
and the Holder or any delay in exercising any rights hereunder shall operate as
a waiver by the Holder.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1. Register. (a) The Issuer shall keep at its principal office a
register in which the Issuer shall provide for the registration of this Note.
Upon any transfer of this Note in accordance with Article 2 and 4 hereof, the
Issuer shall register such transfer on the Note register.
(b) The Issuer may deem the person in whose name this Note shall be
registered upon the registry books of the Issuer to be, and may treat it as, the
absolute owner of this Note (whether or not this Note shall be overdue) for the
purpose of receiving payment of principal of this Note, for the conversion of
this Note and for all other purposes, and the Issuer shall not be affected by
any notice to the contrary. All such payments and such conversions shall be
valid and effective to satisfy and discharge the liability upon this Note to the
extent of the sum or sums so paid or the conversion or conversions so made.
SECTION 7.2. Withholding. To the extent required by applicable law, the
Issuer may withhold amounts for or on account of any taxes imposed or levied by
or on behalf of any taxing authority in the United States having jurisdiction
over the Issuer from any payments made pursuant to this Note.
SECTION 7.3. Governing Law. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDINGS
RELATING TO THIS NOTE, THE ISSUER IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES
DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK AND
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SUBJECT TO APPLICABLE LAW, THE ISSUER AGREES THAT FINAL JUDGMENT AGAINST IT IN
ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE
UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH JUDGMENT SHALL
BE CONCLUSIVE EVIDENCE THEREOF AND THE AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH
OTHER MEANS PROVIDED BY LAW.
SECTION 7.4. Headings. The headings of the Articles and Sections of this
Note are inserted for convenience only and do not constitute a part of this
Note.
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IN WITNESS WHEREOF, the Issuer has caused this Note to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Note.
Sytron, Inc.
By:_________________________________
Name:
Title:
Attest
By:____________________________
Name:
Title: Secretary
[Corporate Seal]
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ANNEX I TO THE NOTE
FORM OF CONVERSION NOTICE
TO _____________________:
The undersigned owner of the Convertible Note, dated January 15, 1999,
issued by Sytron, Inc. (the "Note") hereby irrevocably exercises the option to
convert $______________ of the principal amount of the Note into Common Shares,
par value $.01, of Sytron,, Inc. (the "Note Shares"), in accordance with the
terms of the Note. The undersigned directs that the Note Shares issuable and
certificates therefor (to the extent that certificates evidencing Common Shares
are then being issued by Sytron, Inc. deliverable upon the conversion, together
with any check in payment for fractional Note Shares, be issued in the name of
and delivered, if appropriate, to the undersigned unless a different name has
been indicated below.
Dated:
---------------------
Signature:_____________________
Fill in for registration of Note Shares:
Please print name and address:
(including zip code number)
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EXHIBIT B
CONVERTIBLE NOTE NO. 2
THE NOTE REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE; AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT IN COMPLIANCE WITH, OR PURSUANT TO AN EXEMPTION FROM,
THE REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
--------------------
CONVERTIBLE NOTE
Due [DATE]
[DATE] $400,000
No. 2
Sytron, Inc., a Pennsylvania corporation (hereinafter called the "Issuer"),
for value received, hereby promises to pay to the Holder (as defined below) on
________ __, 200_ the principal amount of $400,000 payable in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for public and private debts or, subject to the conditions
contained herein, in Common Shares (as defined below) at the principal office of
the Issuer. This Note shall be secured by the Collateral as provided in the
Security Agreement.
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. The terms defined in this Article whenever used in
this Note shall have the respective meanings hereinafter specified.
(a) "Additional Capital Shares" shall have the meaning set forth in Section
3. 5(d).
(b) "Bid Price" shall have the meaning specified in the Purchase Agreement.
(c) "Business Day" shall mean a day other than Saturday, Sunday or any day
on which banks located in the state of New York are authorized or obligated to
close.
(d) "Capital Shares" shall mean the Common Shares and any other shares of
any other class of common stock, whether now or hereafter authorized, which have
the right to participate in the distribution of earnings and assets of the
Issuer.
(e) "Closing Date" shall mean January 15, 1999.
(f) "Collateral" shall have the meaning specified in the Security
Agreement.
(g) "Common Shares" shall mean shares of the common stock, par value $.01,
of the Issuer.
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(h) "Conversion Date" shall mean any day on which all or some part of the
principal amount of this Note is converted into Note Shares in accordance with
the terms of this Note, provided that a Conversion Date must be a Business Day.
(i) "Conversion Notice" shall have the meaning set forth in Section 3.2.
(j) "Conversion Price" shall have the meaning set forth in Section 3. 1.
(k) "Conversion Ratio" shall have the meaning set forth in Section 3.1.
(l) "Discount" shall mean fifteen percent (15%).
(m) "Event of Default" shall have the meaning set forth in Section 6.1.
(n) "Holder" shall mean Crescent International Limited.
(o) "Issuer" shall mean Sytron Technologies, Inc., a Pennsylvania
corporation, and any successor corporation by merger, consolidation, sale or
exchange of all or substantially all of the Issuer's assets, or otherwise.
(p) "Market Disruption Event" shall mean any event that results in a
material suspension or limitation of trading of Common Shares on the Principal
Market (as defined in the Purchase Agreement).
(q) "Market Price" shall mean the lowest three consecutive Trading Day
average of Bid Prices during the Valuation Period.
(r) "Material Adverse Effect" shall mean a material adverse effect on the
business, assets, operations (financial or otherwise) of the Issuer and the
Subsidiaries taken as a whole.
(s) "Note" shall mean this Convertible Note or such other Convertible Note
or Notes exchanged therefor as provided in Section 2.1.
(t) "Notes" shall mean the Convertible Note issued pursuant to the Purchase
Agreement and such other Convertible Note or Notes exchanged therefor as
provided in Section 2.1.
(u) "Note Shares" when used with reference to the securities issuable upon
conversion of this Note, shall mean all Common Shares now or hereafter
Outstanding and securities of any other class into which the Note Shares shall
hereafter have been changed, whether now or hereafter created.
(v) "Outstanding" when used with reference to Common Shares or Capital
Shares (collectively, "Shares"), shall mean, at any date as of which the number
of such Shares is to be determined, all issued and outstanding Shares, and shall
include all such Shares issuable in respect of outstanding scrip or any
certificates representing fractional interests in such Shares; provided,
however, that "Outstanding" shall not mean any such Shares then directly or
indirectly owned or held by or for the account of the Issuer or any Subsidiary.
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(w) "Person" shall mean an individual, a corporation, a partnership, an
association, a trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
(x) "Purchase Agreement" means the Note Purchase Agreement, dated as of the
date hereof, by and between the Issuer and the Holder.
(y) "Redemption Price" shall have the meaning set forth in Section 2.4.
(z) "Registration Rights Agreement" shall mean that certain Amended and
Restated Registration Rights Agreement, dated as of the date hereof, by and
between the Issuer and the Holder. This is the Note referred to as Convertible
Note No. 2 in the Registration Rights Agreement.
(aa) "SEC" shall mean the United States Securities and Exchange Commission.
(bb) "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder, all as in effect at the
time.
(cc) "Security Agreement" shall mean that certain Security Agreement, dated
as of the date hereof, by and between the Issuer and the Holder.
(dd) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Issuer.
(ee) "Trading Day" shall mean any day on which trades of securities listed
thereon are reported by the NASDAQ (or, if the Common Shares are not listed for
trading on the NASDAQ, the principal trading market for the Common Shares) and
on which no Market Disruption Event has occurred.
(ff) "Valuation Period" shall mean the thirty (30) Trading Day period
ending on the earlier of (i) the date on which this Note first becomes due and
payable or (ii) the Conversion Date.
ARTICLE II
EXCHANGES AND TRANSFER; REDEMPTION
SECTION 2.1. Exchange and Registration of Transfer of Notes. The Holder may, at
its option, surrender this Note at the office of the Issuer and receive in
exchange therefor a Note or Notes, each in the denomination of $50,000 or an
integral multiple of $50,000 in excess thereof, dated as of the date of this
Note, and, subject to Section 4.1, payable to such Person, or order, as may be
designated by such Holder. The aggregate principal amount of such Note or Notes
exchanged in accordance with this Section 2.1 shall equal the aggregate unpaid
principal amount of this Note as of the date of such surrender; provided,
however, that upon such exchange there shall be filed with the Issuer the name
and address for all purposes hereof of the Holder or Holders of the Note or
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Notes delivered in such exchange. This Note, when presented for registration of
transfer or for exchange, conversion or payment, shall (if so required by the
Issuer) be duly endorsed by, or be accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer duly executed by, the
Holder or its attorney duly authorized in writing.
SECTION 2.2. Loss. Theft. Destruction of Note. Upon receipt of evidence
satisfactory to the Issuer of the loss, theft, destruction or mutilation of this
Note and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Issuer, or, in the case of
any such mutilation, upon surrender and cancellation of this Note, the Issuer
will make and deliver, in lieu of such lost, stolen, destroyed or mutilated
Note, a new Note of like tenor and unpaid principal amount dated as of the date
hereof. This Note shall be held and owned upon the express condition that the
provisions of this Section 2.2 are exclusive with respect to the replacement of
a mutilated, destroyed, lost or stolen Note and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.
SECTION 2.3 Who Deemed Absolute Owner. The Issuer may deem the person in
whose name this Note shall be registered upon the registry books of the Issuer
to be, and may treat it as, the absolute owner of this Note (whether or not this
Note shall be overdue) for the purpose of receiving payment of or on account of
the principal of this Note, for the conversion of this Note and for all other
purposes, and the Issuer shall not be affected by any notice to the contrary.
All such payments and such conversion shall be valid and effectual to satisfy
and discharge the liability upon this Note to the extent of the sum or sums so
paid or the conversion so made.
SECTION 2.4 Optional Redemption by the Issuer. The Issuer at its election,
upon notice given as provided in Section 2.5, may redeem this Note in whole or
in part at any time and from time to time, but only with respect to that portion
of this Note for which the Company has not been provided with a Conversion
Notice. The price to redeem the Note (the "Redemption Price") shall be equal to
120% of (x)(i) the portion of the Note being redeemed divided (ii) by the
Conversion Price on the date of such redemption multiplied by (y) the Bid Price
on the date of such redemption. In addition to the foregoing, the Issuer, at its
election, upon notice as provided for in Section 2.5, may, if the Bid Price is
equal to or less than $0.375 for a period of five (5) consecutive Trading Days,
redeem the Note for 120% of its then outstanding principal amount.
SECTION 2.5 Notice of Redemptions: Right to Convert in Lieu of Accepting
Redemptions. In the case of redemption of this Note, notice thereof shall be
given in writing to the Holder not fewer than 5 nor more than 15 days prior to
the date fixed for such redemption, which notice shall specify the date fixed
for such redemption and make reference to this Section 2.5 pursuant to which
such redemption is to be made. Such notice of redemption and all other notices
to be given to the Holder shall be given by facsimile and confirmed by
registered mail at its designated address.
Upon notice of any redemption being given as provided in this Section 2.5,
the Holder shall have the right to exercise, either in whole or in part, the
conversion privilege pursuant to Article 3 hereof until 5:00 P.M., New York City
time, on the date fixed for redemption.
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SECTION 2.6 Surrender of Notes: Notation Thereon. Upon any redemption of a
portion of the principal amount of this Note pursuant to this Article 2, the
Holder at its option may require the Issuer to make and deliver, at the expense
of the Issuer (other than for transfer taxes, if any), upon surrender of this
Note, a new Note payable to such person or persons, or order, as may be
designated by the Holder for the principal amount of this Note then remaining
unredeemed, dated as of the date of this Note or may present this Note to the
Issuer for notation hereon of the payment of the portion of the principal amount
so redeemed. The Issuer may, as a condition of payment of all or any of the
principal of or interest on this Note, require the Holder to present this Note
for notation of such payment and, if this Note be paid in full, require the
surrender hereof.
SECTION 2.7 Redemption with Common Shares. Subject to the conditions
contained herein, this Note may be redeemed in Common Shares; provided, however
that this Note shall be redeemed in cash so long as the Market Price of the
Common Shares in less than two dollars ($2.00). If the Issuer elects to redeem
this Note in Common Shares pursuant to this Section 2.7, the Issuer shall issue
to the Holder 120% of the number of Common shares determined by (x) the dollar
amount of the outstanding principal of this Note divided by (y) the Market Price
of the Common Shares.
ARTICLE 3
CONVERSION OF NOTE
SECTION 3.1 Conversion: Conversion Price. At the option of the Holder, at
any time following the date of issuance of this Note until this Note is paid in
full, this Note may be converted, either in whole or in part up to the principal
amount hereof (or in case some portion of this Note shall have been called for
redemption prior to such date, then at the portion that is not so called), at
the conversion price the ("Conversion Price") equal to the lower of (i) two
dollars ($2.00) and (ii) the Market Price (on the date on which the Holder gives
notice to the Issuer of its intention to convert this Note) less the product of
the Discount and the Market Price; provided, however that the Conversion Price
shall in no event be less than $1.00 for a period of six months following the
Closing Date. Notwithstanding anything to the contrary contained herein, in no
event shall the Holder be entitled to convert this Note into any Note Shares
when the result of such conversion would entitle the Holder to receive that
number of shares of the Issuer's Common Stock of which the sum of (xx) the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of this Note) and (yy)
the number of shares of Common Stock issuable upon conversion of this Note,
would result in beneficial ownership by the Holder and its affiliates of more
than 4.9% of the outstanding shares of Common Stock. For the purposes of this
provision, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13 D
and G thereunder, except as otherwise provided in clause (xx) of this provision.
SECTION 3.2 In order to convert this Note into Note Shares, the Holder
shall (i) send via facsimile, on or prior to 11:59 p.m., New York City time (the
"Conversion Notice Deadline") on the Conversion Date, a copy of the fully
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executed conversion notice in the form attached hereto in Annex I (the
"Conversion Notice") to the Issuer at the office of the Issuer stating that the
Holder elects to convert, which conversion Notice shall specify the Conversion
Date, the portion of this Note to be converted, the applicable Conversion Price,
the name or names (with address) of the persons who are to become holders of the
Note Shares in connection with such conversion, and a calculation of the Member
of Note Shares issuable upon such conversion and (ii) surrender to a common
courier for delivery to the office of the Issuer, this Note accompanied by a
proper assignment hereof to the Issuer or in blank; provided, however, that the
Issuer shall not be obligated to issues certificates evidencing the Note Shares
issuable upon such conversion unless either this Note is delivered to the Issuer
as provided above, or the Holder notifies the Issuer that this Note has been
lost, stolen or destroyed subject to the requirements of Section 2.2). Upon
receipt by the Issuer of a facsimile copy of a Conversion Notice, the Issuer
shall immediately send, via facsimile, a confirmation of receipt of the
Conversion Notice to the Holder which shall specify that the Conversion Notice
has been received and the name and telephone number of a contact person at the
Issuer whom the Holder should contact regarding information related to the
conversion of this Note. In the event of a dispute as to the calculation of the
Conversion Ratio, the Issuer shall promptly issue to the Holder the number of
Note Shares that is not disputed and shall submit he disputed calculations to
its outside accountant (the "Accountant") via facsimile within three (3) days of
receipt of the Conversion Notice. The Issuer shall cause the Accountant to
perform the calculations and notify the Issuer and Holder of the results no
later than two (2) Business Days from the time it receives that disputed
calculations. The Accountant's calculations shall be deemed conclusive absent
manifest error.
SECTION 3.3 Delivery of Note Shares Upon Conversion. The Issuer shall, no
later than the close of business on the third Business Day after receipt by the
Issuer of a facsimile coy of a Conversion Notice and receipt by the Issuer of
all necessary documentation duly executed and in proper form required for
conversion, including this Note (or after the provisions required by Section 2.2
in the case of a lost, stolen or destroyed Note), issue and surrender to a
common courier for either overnight or (if delivery is outside the United
States) two (2) day delivery to the Holder a the address or addresses and in the
name or names provided in the Conversion Notice. The person or persons entitled
to receive the Note Shares issuable upon conversion of this Note shall be
treated for all purposes as the record holder or holders of such Note Shares on
the Conversion Date.
SECTION 3.4 Fractional Shares. No fractional Note Shares or scrip
representing fractional Note Shares shall be issued upon conversion of this
Note. If any conversion of this Note would create a fractional Note Share or a
right to acquire a fractional Note Share, such fractional Note Share shall be
disregarded and the number of Note Shares issuable upon conversion, in the
aggregate, shall be the next higher number of shares.
SECTION 3.5 Adjustment of Conversion Price. The Conversion Price and,
accordingly, the number of Note Shares issuable upon the conversion of this Note
shall be subject to adjustment from time to time upon the happening of certain
events as follows:
(a) Reclassification, Consolidation, Merger or Mandatory Share
Exchange. At any time while this Note remains outstanding and unexpired, in case
of any reclassification or change of Outstanding Common Shares issuable upon
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conversion of this Note (other than a change in par value, or from par value to
no par value per share, or from no par value per share to par value or as a
result of a subdivision or combination of outstanding securities issuable upon
conversion of this Note) or in case of any consolidation, merger or mandatory
share exchange of the Issuer with or into another corporation (other than a
merger or mandatory share exchange with another corporation in which the Issuer
is a continuing corporation and which does not result in any reclassification or
change, other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value, or as a result of a
subdivision or combination of Outstanding Common Shares upon conversion of this
Note), or in the case of any sale or transfer to another corporation of the
property of the Issuer as an entirety or substantially as an entirety, the
Issuer, or such successor or purchasing corporation, as the case may be, shall,
without payment of any additional consideration therefore, execute a new Note
providing that the Holder shall have the right to convert such new Note (upon
terms not less favorable to the Holder than those then applicable to this Note)
and to receive upon such exercise, in lieu of each Common Share theretofore
issuable upon conversion of this Note, the kind and amount of shares of stock,
other securities, money or property receivable upon such reclassification,
change, consolidation, merger, mandatory share exchange, sale or transfer by the
holder of one Common Share issuable upon conversion of this Note had this Note
been converted immediately prior to such reclassification, change,
consolidation, merger, mandatory share exchange or sale or transfer. Such new
Note shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 3.4. The provisions
of this subsection (a) shall similarly apply to successive reclassifications,
changes, consolidations, mergers, mandatory share exchanges and sales and
transfers.
(b) Subdivision or Combination of Shares. If the Issuer at any time
while this Note remains outstanding and unexpired, shall subdivide or combine
its Common Shares, the Conversion Price shall be proportionately reduced, in
case of subdivision of such shares, as of the effective date of such
subdivision, or, if the Issuer shall take a record of holders of its Common
Shares for the purpose of so subdividing, as of such record date, whichever is
earlier, or shall be proportionately increased, in the case of combination of
such shares, as of the effective date of such combination, or, if the Issuer
shall take a record of holders of its Common Shares for the purpose of so
combining, as of such record date, whichever is earlier.
(c) Stock Dividends. If the Issuer at any time while this Note is
outstanding and unexpired shall pay a dividend in its Capital Shares, or make
any other distribution of its Capital Shares, then the Conversion Price shall be
adjusted, as of the date the Issuer shall take a record of the holders of its
Capital Shares for the purpose of receiving such dividend or other distribution
(or if no such record is taken, as at the date of such payment or other
distribution), to that price determined by multiplying the Conversion Price in
effect immediately prior to such payment or other distribution by a fraction:
(i) the numerator of which shall be the total number of Outstanding
Capital Shares immediately prior to such dividend or distribution, and
(ii) the denominator of which shall be the total number of Outstanding
Capital Shares immediately after such dividend or distribution.
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The provisions of this subsection (c) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a) or
(b).
(d) Issuance of Additional Capital Shares. If the Issuer at any time
while this Note remains outstanding and unexpired shall issue any additional
Capital Shares (the "Additional Capital Shares"), otherwise than as provided in
the foregoing subsections (a) through (c) above, at a price per share less, or
for other consideration lower, than the Conversion Price in effect immediately
prior to such issuance, or without consideration, then upon such issuance the
Conversion Price shall be reduced to that price determined by multiplying the
Conversion Price in effect immediately prior to such event by a fraction:
(i) the numerator of which shall be the number of Outstanding Capital
Shares immediately prior to the issuance of the Additional Capital Shares
plus the number of Capital Shares which the aggregate consideration for the
total number of such Additional Capital Shares so issued would purchase at
the then effective Conversion Price, and;
(ii) the denominator of which shall be the number of Outstanding
Capital Shares immediately after the issuance of the Additional Capital
Shares plus the number of Additional Capital Shares so issued.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b)
or (c). No adjustment of a Conversion Price shall be made under this
subsection (d) upon the issuance of any Additional Capital Shares which are
issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights or pursuant to the exercise of any
conversion or exchange rights in any convertible or exchangeable securities
if any such adjustments shall previously have been made upon the issuance
of any such warrants, options or other rights or upon the issuance of any
convertible or exchangeable securities (or upon the issuance of any
warrants, options or any rights therefor) pursuant to subsection (e) or
(f).
(e) Issuance of Warrants, Options or Other Rights. If the Issuer at
any time while this Note remains outstanding and unexpired shall issue any
warrants, options (other than options under the Issuer's non-qualified stock
option plan) or other rights to subscribe for or purchase any Additional Capital
Shares and the price per share for which Additional Capital Shares may at any
time thereafter be issuable pursuant to such warrants, options or other rights
shall be less than the Conversion Price in effect immediately prior to such
issuance, then upon such issuance the Conversion Price shall be adjusted as
provided in subsection (d) hereof on the basis that:
(i) the maximum number of Additional Capital Shares issuable pursuant
to all such warrants, options or other rights shall be deemed to have been
issued as of the date of actual issuance of such warrants, options or other
rights, and
(ii) the aggregate consideration for such maximum number of Additional
Capital Shares issuable pursuant to such warrants, options or other rights,
shall be deemed to be the consideration received by the Issuer for the
issuance of such warrants, options, or other rights plus the minimum
consideration to be received by the Issuer for the issuance of Additional
Capital Shares pursuant to such warrants, options, or other rights.
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(f) Issuance of Convertible or Exchangeable Securities. If the Issuer
at any time while this Note remains outstanding and unexpired shall issue any
securities convertible into or exchangeable for Capital Shares and the
consideration per share for which Additional Capital Shares may at any time
thereafter be issuable pursuant to the terms of such convertible or exchangeable
securities shall be less than the Conversion Price in effect immediately prior
to such issuance, then upon such issuance the Conversion Price shall be adjusted
as provided in subsection (d) hereof on the basis that:
(i) the maximum number of Additional Capital Shares necessary to
effect the conversion or exchange of all such convertible or exchangeable
securities shall be deemed to have been issued as of the date of issuance
of such convertible or exchangeable securities, and
(ii) the aggregate consideration for such maximum number of Additional
Capital Shares shall be deemed to be the consideration received by the
Issuer for the issuance of such convertible or exchangeable securities plus
the minimum consideration received by the Issuer for the issuance of such
Additional Capital Shares pursuant to the terms of such convertible or
exchangeable securities.
No adjustment of the Conversion Price shall be made under this subsection
(f) upon the issuance of any convertible or exchangeable securities which
are issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants, options or
other rights pursuant to subsection (e) hereof.
(g) Adjustment of Number of Shares. Upon each adjustment of the
Conversion Price pursuant to any provisions of this Section 3.4, the number of
Note Shares issuable hereunder at the option of the Holder shall be calculated,
to the next higher whole share, to be the quotient obtained by dividing (i) the
then outstanding principal amount of this Note by (ii) the Conversion Price
immediately after such adjustment.
(h) Liquidating Dividends, Etc. If the Issuer at any time while this
Note is outstanding and unexpired makes a distribution of its assets or
evidences of indebtedness to the holders of its Capital Shares as a dividend in
liquidation or by way of return of capital or other than as a dividend payable
out of earnings or surplus legally available for dividends under applicable law
or any distribution to such holders made in respect of the sale of all or
substantially all of the Issuer's assets (other than under the circumstances
provided for in the foregoing subsections (a) through (g)), provided, in each
case, that such distribution described in this subsection (h) does not
constitute an Event of Default hereunder, the Holder shall be entitled to
receive upon the conversion of this Note, in addition to the Note Shares
receivable upon such exercise, and without payment of any consideration other
than the Conversion Price, an amount in cash equal to the value of such
distribution per Capital Share multiplied by the number of Note Shares which, on
the record date for such distribution, are issuable upon Conversion of this Note
(with no further adjustment being made following any event which causes a
subsequent adjustment in the number of Note Shares issuable upon the exercise
hereof), and an appropriate provision therefor shall be made a part of any such
distribution. The value of a distribution which is paid in other than cash shall
be determined in good faith by the Board of Directors.
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(i) Other Provisions Applicable to Adjustments Under this Section. The
following provisions will be applicable to the making of adjustments in a
Conversion Price hereinabove provided in this Section 3.4:
(i) Computation of Consideration. To the extent that any Additional
Capital Shares or any convertible or exchangeable securities or any
warrants, options or other rights to subscribe for or purchase any
Additional Capital Shares or any convertible or exchangeable securities
shall be issued for a cash consideration, the consideration received by the
Issuer therefor shall be deemed to be the amount of the cash received by
the Issuer therefor, or, if such Additional Capital Shares or convertible
or exchangeable securities are offered by the Issuer for subscription, the
subscription price, or, of such Additional Capital Shares or convertible or
exchangeable securities are sold to underwriters or dealers for public
offering without a subscription offering, or through underwriters or
dealers for public offering without a subscription offering, the initial
public offering price, in any such case excluding any amounts paid or
incurred by the Issuer for and in the underwriting of, or otherwise in
connection with the issue thereof. To the extent that such issuance shall
be for a consideration other than cash, then, the amount of such
consideration shall be deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith by the Issuer's Board
of Directors. The consideration for any Additional Capital Shares issuable
pursuant to any warrants, options or other rights to subscribe for or
purchase the same shall be the consideration received by the Issuer for
issuing such warrants, options or other rights, plus the additional
consideration payable to the Issuer upon the exercise of such warrants,
options or other rights. The consideration for any Additional Capital
Shares issuable pursuant to the terms of any convertible or exchangeable
securities shall be the consideration paid or payable to the Issuer in
respect of the subscription for or purchase of such convertible or
exchangeable securities, plus the additional consideration, if any, payable
to the Issuer upon the exercise of the right of conversion or exchange in
such convertible or exchangeable securities. In case of the issuance at any
time of any Additional Capital Shares or convertible or exchangeable
securities in payment or satisfaction of any dividend upon any class of
stock preferred as to dividends in a fixed amount, the Issuer shall be
deemed to have received for such Additional Capital Shares or convertible
or exchangeable securities a consideration equal to the amount of such
dividend so paid or satisfied.
(ii) Readjustment of Conversion Price. Upon the expiration of the
right to convert or exchange any convertible or exchangeable securities, or
upon the expiration of any rights, options or warrants, the issuance of
which convertible or exchangeable securities, rights, options or warrants
effected an adjustment in a Conversion Price, if any such convertible or
exchangeable securities shall not have been converted or exchanged, or if
any such rights, options or warrants shall not have been exercised, the
number of Capital Shares deemed to be issued and Outstanding by reason of
the fact that they were issuable upon conversion or exchange of any such
convertible or exchangeable securities or upon exercise of any such rights,
options, or warrants shall no longer be computed as set forth above, and
such Conversion Price shall forthwith be readjusted and thereafter be the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section 3.4 after
the issuance of such convertible or exchangeable securities, rights,
options or warrants) had the adjustment of the Conversion Price made upon
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the issuance or sale of such convertible or exchangeable securities or
issuance of rights, options or warrants been made on the basis of the
issuance only of the number of Additional Capital Shares actually issued
upon conversion or exchange of such convertible or exchangeable securities,
or upon the exercise of such rights, options or warrants, and thereupon
only the number of Additional Capital Shares actually so issued, if any,
shall be deemed to have been issued and only the consideration actually
received by the Issuer (computed as set forth in sub-subsection (i) hereof)
shall be deemed to have been received by the Issuer. If the purchase price
provided for in any rights, options or warrants, or the additional
consideration (if any) payable upon the conversion or exchange of any
convertible or exchangeable securities, or the rate at which any
convertible or exchangeable securities are convertible into or exchangeable
for Capital Shares changes at any time (other than under or by reason of
provisions designed to protect against dilution), the Conversion Price in
effect at the time of the change shall be adjusted to the Conversion Price
that would have been in effect at such time had such rights, options,
warrants or convertible or exchangeable securities still outstanding
provided for such changed purchase price, additional consideration or
conversion rate, as the case may be, at the time initially granted, issued
or sold.
(iii) Other Action Affecting Capital Shares. In case after the date
hereof the Issuer shall take any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing
subsections (a) through (h) hereof, inclusive, which in the opinion of the
Issuer's Board of Directors would have a materially adverse effect upon the
rights of the Holder at the time of a conversion of this Note, the
Conversion Price shall be adjusted in such manner and at such time as the
Board or Directors on the advice of the Issuer's independent public
accountants may in good faith determine to be equitable in the
circumstances.
SECTION 3.6 Notice of Adjustments. Whenever the Conversion Price under the
terms of this Note shall be adjusted pursuant to Section 3.4 hereof, the Issuer
shall promptly make a certificate signed by its President or a Vice President
and by its Treasurer or Assistant Treasurer or its Secretary or Assistant
Secretary, setting forth in reasonable detail the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Issuer's Board
of Directors made any determination hereunder), and the Conversion Price and
number of Note Shares purchasable at that Conversion Price after giving effect
to such adjustment, and shall promptly cause copies of such certificate to be
mailed (by first class and postage prepaid) to the Holder.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
SECTION 4.1 Status of Note. Subject to Section 4.2 below, this Note is a
direct, general and unconditional obligation of the Issuer ranking, and
constitutes a valid and legally binding obligation of the Issuer, enforceable in
accordance with its terms subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other similar laws of general applicability relating to or
affecting creditors' rights and to general principals of equity. To secure the
obligations of the Issuer under this Note, the Issuer grants the Holder a
security interest in the Collateral which Collateral shall at all times be worth
a dollar amount of at least one hundred fifty percent (150%) of the combined
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outstanding value of this Note and Convertible Note No. 1 (as defined in the
Purchase Agreement). To perfect those security interests, simultaneously with
the execution of this Note, the Issuer is executing and delivering to the Holder
UCC-1 Financing Statements with respect to the Collateral which secures this
Note. The Issuer agrees that he will not, without the prior written consent of
the Holder, take any action, nor fail to take any action which would in any
manner adversely affect the rights of the Holder pursuant to the Note or the
value of the Collateral or subject the Holder to any liability. If the Issuer
fails to pay the entire principal amount evidenced by this Note and all accrued
interest when it becomes due, the Holder will have all the rights with regard to
the Collateral granted by the laws in effect in the State of New York to a
creditor upon default by its debtor. Without limiting what is said in the
preceding sentence, if the Issuer fails to pay the entire principal amount
evidenced by this Note and all accrued interest when it becomes due, the Holder
may, by a notice to the Issuer accompanied by an agreement by the Holder to
return any principal paid with regard to this Note if it determined that
principal is not subject to offset as provided below, obtain the Collateral in
satisfaction of the obligations created by this Note. The Issuer waives, to the
full extent permitted by law, any right to object to the retention of the
Collateral by the Holder and to require the Holder to dispose of the Collateral.
SECTION 4.2 Restrictions on Transfer. This Note, and any Note Shares issued
according to the terms hereof, have not been and will not be registered under
the United States Securities Act. This Note and any Note Shares may not be
offered or sold, directly or indirectly, except pursuant to registration under
the Act, an available exemption therefrom, or pursuant to Regulation S.
ARTICLE 5
COVENANTS
The Issuer covenants and agrees that so long as this Note shall be
outstanding:
SECTION 5.1 Payment of Note. The Issuer will punctually, according to the
terms hereof, (a) pay or cause to be paid the principal of this Note and (b)
issue Note Shares upon conversion.
SECTION 5.2 Notice of Default. If any one or more events occur which
constitute or which, with the giving of notice or the lapse of time or both,
would constitute an Event of Default or if the Holder shall demand payment or
take any other action permitted upon the occurrence of any such Event of
Default, the Issuer will forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or other event or of such demand or
action, as the case may be.
SECTION 5.3 Sufficient Number of Authorized Common Shares. So long as the
this Note shall be outstanding, the Issuer shall at all times have authorized
and reserved for issuance, free from preemptive rights, a sufficient number of
Common Shares to yield a number of Note Shares sufficient to satisfy the
conversion rights of the Holder pursuant to the terms and conditions hereof.
SECTION 5.4 Insurance. The Issuer will carry and maintain in full force and
effect at all times with insurers the Issuer reasonably believes to be
financially sound and reputable such insurance in such amounts as is customary
in the respective industries of the Issuer and such subsidiaries.
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SECTION 5.5 Payment of Obligations. The Issuer will pay and discharge at or
before maturity, all its respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings, and will maintain in
accordance with generally accepted accounting principles, appropriate reserves
for the accrual of any of the same;
SECTION 5.6 Compliance with Laws. The Issuer will comply in all material
respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings.
SECTION 5.7 Inspection of Property, Books and Records. The Issuer will keep
proper books of record and account in which full, true and correct entries shall
be made of all dealings and transactions in relation to its business and
activities and will permit representatives of the Holder at the Holder's expense
to visit and inspect any of its respective properties, to examine and make
abstracts from any of its respective books and records and to discuss its
respective affairs, finances and accounts with its respective officers,
employees and independent public accountants, all at such reasonable times and
as often as may reasonably be desired.
ARTICLE 6
REMEDIES
SECTION 6.1 Events of Default. "Event of Default" wherever used herein
means any one of the following events:
(a) default in the issuance of Note Shares due upon conversion;
(b) default in the due and punctual payment of the principal of on, or
any other amount owing in respect of, this Note when and as the same shall
become due and payable, and continuance of such default for a period of thirty
(30) calendar days; or
(c) substantial failure in the performance or observance of Section
5.5 of this Note and the continuance of such default for a period of thirty (30)
calendar days; or
(d) default in the performance or observance of any covenant or
agreement of the Issuer in this Note (other than a covenant or agreement a
default in the performance of which is specifically provided for elsewhere in
this Section), and the continuance of such default for a period of thirty (30)
calendar days after there has been given to the Issuer by a Holder a written
notice specifying such default and requiring it to be remedied; or
(e) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Issuer or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Issuer under the Bankruptcy
Code or any other applicable Federal or state law, or appointing a receiver,
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liquidator, assignee, trustee or sequestrator (or other similar official) of the
Issuer or of any substantial part of its property, or ordering the winding-up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 30 calendar days, except in case that
such event does not result in a Material Adverse Effect; or
(f) the institution by the Issuer or any Subsidiary of proceedings to
be adjudicated a bankrupt or insolvent, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the filing by it of a
petition or answer or consent seeking reorganization or relief under the Federal
Bankruptcy Code or any other applicable Federal or state law, or the consent by
it to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Issuer or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due, or the taking of
corporate action by the Issuer in furtherance of any such action, except in case
that such event does not result in a Material Adverse Effect; or
(g) the Issuer shall fail to issue and deliver the Note Shares within
three (3) Business Days of its receipt of the original Note and the original
Conversion Notice in accordance with Section 3.2; or
(h) any principal of other indebtedness of the Issuer or any
Subsidiary, exceeding $500,000 is not repaid on its original maturity date or
becomes due and payable by reason of default before its original maturity date;
or
(i) (i) the Issuer or any Subsidiary is unable to pay its debts as
they fall due, stops, suspends, or threatens in writing to stop or suspend
payment of all or any material part of its debts (other than debts contested in
good faith by appropriate proceedings), begins negotiations or takes any
proceeding or other step with a view to readjustment, rescheduling or deferral
of all of its indebtedness (or any material part thereof) that it will or might
otherwise be unable to pay when due or seeks the appointment of a statutory
manager or proposes in writing or makes a general assignment or an arrangement
or composition with or for the benefit of its creditors or any group or class
thereof or files a petition for suspension of payments or other relief of
debtors of for bankruptcy or is declared bankrupt or a moratorium or statutory
management is agreed or declared in respect of or affecting all or any material
part of the indebtedness of the Issuer or any of its wholly owned subsidiaries,
or (ii) the Issuer ceases or threatens in writing to cease to carry on all or
any material part of the business carried on by the Issuer and its Subsidiaries
taken as a whole and as a result of such cessation or threat of cessation, the
Issuer will not be able to perform or comply with its payment obligations under
this Note, except in case that any such event does not result in a Material
Adverse Effect; or
(j) on or after the date hereof, a final judgment or final judgments
for the payment of money shall have been entered by any court or courts of
competent jurisdiction against the Issuer and remains undischarged for a period
(during which execution shall be effectively stayed) of 30 days, provided that
the aggregate amount of all such judgments at any time outstanding (to the
extent not paid or to be paid, as evidenced by a written communication to that
effect from the applicable insurer, by insurance) exceeds $500,000; or
(k) it becomes unlawful for the Issuer to perform or comply with its
obligations under this Note or the Registration Rights Agreement.
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SECTION 6.2 Acceleration of Maturity: Rescission and Annulment. If an Event
of Default occurs and is continuing, then and in every such case any Holder may
declare the principal of this Note to be due and payable immediately, by a
notice in writing to the Issuer, and upon any such declaration the principal of
this Note shall become immediately due and payable.
SECTION 6.3 Remedies Not Waived. No course of dealing between the Issuer
and the Holder or any delay in exercising any rights hereunder shall operate as
a waiver by the Holder.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Register. (a) The Issuer shall keep at its principal office a
register in which the Issuer shall provide for the registration of this Note.
Upon any transfer of this Note in accordance with Article 2 and 4 hereof, the
Issuer shall register such transfer on the Note register.
(b) The Issuer may deem the person in whose name this Note shall be
registered upon the registry books of the Issuer to be, and may treat it as, the
absolute owner of this Note (whether or not this Note shall be overdue) for the
purpose of receiving payment of principal of this Note, for the conversion of
this Note and for all other purposes, and the Issuer shall not be affected by
any notice to the contrary. All such payments and such conversions shall be
valid and effective to satisfy and discharge the liability upon this Note to the
extent of the sum or sums so paid or the conversion or conversions so made.
SECTION 7.2 Withholding. To the extent required by applicable law, the
Issuer may withhold amounts for or on account of any taxes imposed or levied by
or on behalf of any taxing authority in the United States having jurisdiction
over the Issuer from any payments made pursuant to this Note.
SECTION 7.3 Governing Law. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDINGS
RELATING TO THIS NOTE, THE ISSUER IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES
DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK AND
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SUBJECT TO APPLICABLE LAW, THE ISSUER AGREES THAT FINAL JUDGMENT AGAINST IT IN
ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE
UNITED STATES BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH JUDGMENT SHALL
BE CONCLUSIVE EVIDENCE THEREOF AND THE AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH
OTHER MEANS PROVIDED BY LAW.
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SECTION 7.4 Headings. The headings of the Articles and Sections of this
Note are inserted for convenience only and do not constitute a part of this
Note.
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Note.
Sytron, Inc.
By:_________________________________
Name:
Title:
Attest
By:____________________________
Name:
Title: Secretary
[Corporate Seal]
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ANNEX I TO THE NOTE
[FORM OF CONVERSION NOTICE]
TO _____________________:
The undersigned owner of the Convertible Note, dated ________________,
issued by Sytron, Inc. (the "Note") hereby irrevocably exercises the option to
convert $______________ of the principal amount of the Note into Common Shares,
par value $.01, of Sytron,, Inc. (the "Note Shares"), in accordance with the
terms of the Note. The undersigned directs that the Note Shares issuable and
certificates therefor (to the extent that certificates evidencing Common Shares
are then being issued by Sytron, Inc. deliverable upon the conversion, together
with any check in payment for fractional Note Shares, be issued in the name of
and delivered, if appropriate, to the undersigned unless a different name has
been indicated below.
Dated:
-----------------------------
Signature:
--------------------------
Fill in for registration of Note Shares:
Please print name and address:
(including zip code number)
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EXHIBIT C
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement"),
dated as of January 15, 1999, is made and entered into by and between SYTRON
INC., a corporation organized and existing under the laws of the Commonwealth of
Pennsylvania (the "Company"), and CRESCENT INTERNATIONAL LIMITED, an entity
organized and existing under the laws of Bermuda (the "Investor").
WHEREAS, the Company and the Investor entered into a Private Equity Line
Agreement, dated as of May 14, 1998 (the "Equity Line Agreement");
WHEREAS, pursuant to the terms of the Equity Line Agreement, the Company
has issued to the Investor 166,667 shares of Common Stock;
WHEREAS, pursuant to the terms of the Equity Line Agreement, the Company
has issued to the Investor a warrant dated as of May 14, 1998, exercisable from
time to time within five (5) years following the date of issuance (the
"Warrant") for the purchase of an aggregate of up to 100,000 shares of Common
Stock at a price specified in such Warrant;
WHEREAS, the parties have agreed to terminate the Equity Line Agreement and
shall terminate the Equity Line Agreement on the date hereof;
WHEREAS, the Company and the Investor have entered into that certain Note
Purchase Agreement, dated as of the date hereof (the "Note Purchase Agreement"),
pursuant to which, upon certain terms and subject to certain conditions, the
Company has the right to issue and sell to the Investor and the Investor has the
obligation to purchase up to $750,000 worth of convertible notes (the
"Convertible Notes");
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investor's agreement to enter into the Note Purchase Agreement, the Company has
agreed to provide the Investor with certain registration rights with respect to
the securities issued to the Investor and any additional shares of Common Stock
issued or distributed to the Investor by way of a dividend, stock split, or
other distribution with respect of the Shares, or acquired by way of any rights
offering or similar offering made in respect of the shares (collectively, the
"Registrable Securities");
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, in the Warrants, in the
Convertible Notes and in the Note Purchase Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, intending to be legally bound hereby, the parties hereto agree as
follows (capitalized terms used herein and not defined herein shall have the
respective meanings ascribed to them in the Note Purchase Agreement):
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ARTICLE I
REGISTRATION RIGHTS
SECTION 1.1. REGISTRATION STATEMENTS.
(a) Filing of Registration Statements. Subject to the terms and
conditions of this Agreement the Company shall file with the SEC on or before:
(i) January 31, 1999, a registration statement or statements on
such form promulgated by the SEC for which the Company qualifies, that counsel
for the Company shall deem appropriate and which form shall be available for the
sale of the Put Shares, the maximum number of shares of Common Stock into which
Convertible Note No. 1 could be converted, the Commitment Shares, the Warrant
Shares and the Indemnity Shares (the "Initial Registration Statement"); and
(ii) the end of a thirty (30) calendar day period immediately
following the date of issuance of Convertible Note No. 2, a registration
statement on such form promulgated by the SEC for which the Company qualifies,
that counsel for the Company shall deem appropriate and which form shall be
available for the sale of the maximum number of shares of Common Stock into
which Convertible Note No. 2 could be converted (the "Second Registration
Statement" and together with the Initial Registration Statement, the
"Registration Statements").
(b) Effectiveness of the Registration Statements. The Company shall
use its best efforts: (i) to have the Initial Registration Statement declared
effective by the SEC in no event later than 150 days after such Registration
Statement has been filed, (ii) to have the Second Registration Statement
declared effective by the SEC in no event later than ninety (90) calendar days
after the date of issuance of Convertible Note No. 2 and (iii) to ensure that
each Registration Statement remains in effect for a period ending 180 days
following termination of the Commitment Period; provided that such period shall
be extended one day for each day after the applicable Effective Date, that a
Registration Statement covering is not effective during the period such
Registration Statement is required to be effective pursuant to this Agreement.
(c) Failure to Obtain or Maintain Effectiveness of Registration
Statements. In the event the Company fails for any reason (including, without
limitation, the occurrence or continuation of any Blackout Period (as defined in
Section 2.1 (p)) to obtain the effectiveness of a Registration Statement within
the time periods set forth in Section 1.1(b) or to maintain the effectiveness of
a Registration Statement (or the underlying prospectus) throughout the period
set forth in Section 4.2 and the Investor holds any Registrable Securities at
any time during any period of such ineffectiveness (an "Ineffective Period"),
then in either event the Company shall pay to the Investor in immediately
available funds into an account designated by the Investor (i) with respect to
the Initial Registration Statement, an amount equal to six thousand dollars
($6,000) for each calendar month (or portion thereof) during an Ineffective
Period and (ii) with respect to the Second Registration Statement, an amount
equal to four thousand dollars ($4000) for each calendar month (or portion
thereof) during an Ineffective Period. Such payments shall be made on the first
Trading Day after the earlier to occur of (i) the expiration of the applicable
Ineffective Period and (ii) the last day of each calendar month during an
Ineffective Period. On the date hereof, the Company shall place $50,000 in
escrow, which amount shall be released to the Company on the date the Initial
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Registration Statement is declared effective by the SEC. On the date that the
Company issues and sells, and the Investor purchases Convertible Note No. 2, the
Company shall place $30,000 in escrow, which amount shall be released to the
Company on the date the Second Registration Statement is declared effective by
the SEC. Such amounts shall be applied against the liquidated damages referred
to in clauses (i) and (ii) of this Section 1.1(c) until the applicable
Registration Statement is declared effective by the SEC.
(d) Liquidated Damages. The Company and the Investor hereto
acknowledge and agree that the sums payable under subsection 1(c) above shall
constitute liquidated damages and not penalties. The parties further acknowledge
that (i) the amount of loss or damages likely to be incurred is incapable or is
difficult to precisely estimate, (ii) the amounts specified in such subsections
bear a reasonable proportion and are not plainly or grossly disproportionate to
the probable loss likely to be incurred in connection with any failure by the
Company to obtain or maintain the effectiveness of a Registration Statement,
(iii) one of the reasons for the Company and the Investor reaching an agreement
as to such amounts was the uncertainty and cost of litigation regarding the
question of actual damages, and (iv) the Company and the Investor are
sophisticated business parties and have been represented by sophisticated and
able legal and financial counsel and negotiated this Agreement at arm's length.
ARTICLE II
REGISTRATION PROCEDURES
SECTION 2.1. FILINGS; INFORMATION. The Company will effect the registration
of such Registrable Securities in accordance with the intended methods of
disposition thereof as furnished to the Company by any proposed seller of such
Registrable Securities. Without limiting the foregoing, the Company in each such
case will do the following as expeditiously as possible, but in no event later
than the deadline, if any, prescribed therefor in this Agreement:
(a) The Company shall (i) prepare and file with the SEC Registration
Statements on Form SB-1 or such other form promulgated by the SEC for which the
Company then qualifies, that counsel for the Company shall deem appropriate and
which form shall be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the provisions of this Agreement and in
accordance with the intended method of distribution of such Registrable
Securities); (ii) use its best efforts to cause such filed Registration
Statements to become and remain effective (pursuant to Rule 415 under the
Securities Act or otherwise); (iii) prepare and file with the SEC such
amendments and supplements to such Registration Statements and the prospectus
used in connection therewith as may be necessary to keep such Registration
Statements effective for the time periods prescribed by Section 1.1(b); and (iv)
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the Investor set forth in
such Registration Statement.
(b) The Company shall file all necessary amendments to a Registration
Statement in order to effectuate the purpose of this Agreement, the Note
Purchase Agreement, the Warrant and the Convertible Notes.
(c) If so requested by the managing underwriters (if any), with
respect to, or the holders of, a majority in aggregate amount of the Registrable
Securities to be sold in connection with the filing of a Registration Statement
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under the Securities Act for the offering on a continuous or delayed basis in
the future of all of the Registrable Securities (a "Shelf Registration"), the
Company shall (i) promptly incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriters, if any,
and such holders agree should be included therein, and (ii) make all required
filings of such prospectus supplement or post-effective amendment as soon as
practicable after the Company has received notification of the matters to be
incorporated in such prospectus supplement or post-effective amendment;
provided, however, that the Company shall not be required to take any action
pursuant to this Section 2.1(c)(ii) that would, in the opinion of counsel for
the Company, violate applicable law.
(d) In connection with the filing of a Shelf Registration, the Company
shall enter into such agreements and take all such other reasonable actions in
connection therewith (including those reasonably requested by the managing
underwriters (if any), with respect to, or the holders of, a majority in
aggregate amount of the Registrable Securities being sold) in order to expedite
or facilitate the disposition of such Registrable Securities, and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration, the Company shall (i)
make such representations and warranties to the holders of such Registrable
Securities and the underwriters, if any, with respect to the business of the
Company (including with respect to businesses or assets acquired or to be
acquired by the Company), and any Registration Statement, prospectus and
documents, if any, incorporated or deemed to be incorporated by reference
therein, in each case, in form, substance and scope as are customarily made by
issuers to underwriters in underwritten offerings, and confirm such
representations and warranties if and when requested; (ii) if an underwriting
agreement is entered into, it shall contain indemnification provision and
procedures no less favorable to the selling holders of such Registrable
Securities and the underwriters, if any, than those set forth herein (or such
other provisions and procedures acceptable to the holders of a majority in
aggregate amount of Registrable Securities covered by such Registration
Statement and such managing underwriters, if any); and (iii) deliver such
documents and certificates as may be reasonably requested by the holders of a
majority in aggregate amount of the Registrable Securities being sold, their
counsel and the managing underwriters, if any, to evidence the continued
validity of their representations and warranties made pursuant to clause (i)
above and to evidence compliance with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company.
(e) Five (5) Trading Days prior to filing a Registration Statement or
prospectus, or any amendment or supplement thereto (excluding amendments deemed
to result from the filing of documents incorporated by reference therein), the
Company shall deliver to the Investor and one firm of counsel representing the
Investor, in accordance with the notice provisions of Section 4.8, copies of
such Registration Statement as proposed to be filed, together with exhibits
thereto, which documents will be subject to review and comment by the Investor
and such counsel, and thereafter deliver to the Investor and such counsel, in
accordance with the notice provisions of Section 4.8, such number of copies of
the Registration Statement, each amendment and supplement thereto (in each case
including all exhibits thereto), the prospectus included in the Registration
Statement (including each preliminary prospectus) and such other documents or
information as the Investor or counsel may reasonably request in order to
facilitate the disposition of the Registrable Securities.
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(f) The Company shall deliver, in accordance with the notice
provisions of Section 4.8, to each seller of Registrable Securities covered by a
Registration Statement such number of conformed copies of such Registration
Statement and of each amendment and supplement thereto (in each case including
all exhibits and documents incorporated by reference), such number of copies of
the prospectus contained in the Registration Statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 promulgated under the Securities Act relating to such
seller's Registrable Securities, and such other documents, as such seller may
reasonably request to facilitate the disposition of its Registrable Securities.
(g) After the filing of a Registration Statement, the Company shall
promptly notify the Investor of any stop order issued or threatened by the SEC
in connection therewith and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(h) The Company shall use its best efforts to (i) register or qualify
the Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States as the Investor may reasonably (in light of
its intended plan of distribution) request, and (ii) cause the Registrable
Securities to be registered with or approved by such other governmental agencies
or authorities in the United States as may be necessary by virtue of the
business and operations of the Company and do any and all other acts and things
that may be reasonably necessary or advisable to enable the Investor to
consummate the disposition of the Registrable Securities; provided, however,
that the Company will not be required to qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
paragraph (h), subject itself to taxation in any such jurisdiction, or consent
or subject itself to general service of process in any such jurisdiction.
(i) The Company shall immediately notify the Investor upon the
occurrence of any of the following events in respect of a Registration Statement
or related prospectus in respect of an offering of Registrable Securities: (i)
receipt of any request by the SEC or any other federal or state governmental
authority for additional information, amendments or supplements to a
Registration Statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) except during a Blackout
Period, the happening of any event that makes any statement made in a
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in a Registration Statement, related
prospectus or documents so that, in the case of a Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; (v) the declaration by the SEC of the effectiveness of a
Registration Statement and (vi) the Company's reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate and,
except during a Blackout Period, the Company will promptly make available to the
Investor any such supplement or amendment to the related prospectus.
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(j) The Company shall enter into customary agreements and take such
other actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities (whereupon the Investor may, at its
option, require that any or all of the representations, warranties and covenants
of the Company also be made to and for the benefit of the Investor).
(k) The Company shall make available to the Investor (and will deliver
to Investor's counsel), subject to restrictions imposed by the United States
federal government or any agency or instrumentality thereof, copies of all
correspondence between the SEC and the Company, concerning a Registration
Statement, and except during a Blackout Period, will also make available for
inspection by the Investor and any attorney, accountant or other professional
retained by the Investor (collectively, the "Inspectors"), all financial and
other records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers
and employees to supply all information reasonably requested by any Inspectors
in connection with a Registration Statement. Records that the Company
determines, in good faith, to be confidential and that it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in a Registration Statement or (ii) the disclosure or release of
such Records is requested or required pursuant to oral questions,
interrogatories, requests for information or documents or a subpoena or other
order from a court of competent jurisdiction or other process; provided,
however, that prior to any disclosure or release pursuant to clause (ii), the
Inspectors shall provide the Company with prompt notice of any such request or
requirement so that the Company may seek an appropriate protective order or
waive such Inspectors' obligation not to disclose such Records; and, provided,
further , that if failing the entry of a protective order or the waiver by the
Company permitting the disclosure or release of such Records, the Inspectors,
upon advice of counsel, are compelled to disclose such Records, the Inspectors
may disclose that portion of the Records that counsel has advised the Inspectors
that the Inspectors are compelled to disclose. The Investor agrees that
information obtained by it solely as a result of such inspections (not including
any information obtained from a third party who, insofar as is known to the
Investor after reasonable inquiry, is not prohibited from providing such
information by a contractual, legal or fiduciary obligation to the Company)
shall be deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the Company or its affiliates unless
and until such information is made generally available to the public. The
Investor further agrees that it will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction, give notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of the Records deemed confidential.
(l) To the extent required by law or reasonably necessary to effect a
sale of Registrable Securities in accordance with prevailing business practices
at the time of any sale of Registrable Securities pursuant to a Registration
Statement, the Company shall deliver to the Investor a signed counterpart,
addressed to the Investor, of (1) an opinion or opinions of counsel to the
Company, and (2) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such matters
of the type customarily covered by opinions or comfort letters, as the case may
be, as the Investor therefor reasonably requests.
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(m) The Company shall otherwise comply with all applicable rules and
regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
(n) The Company shall appoint a transfer agent and registrar for all
of the class that includes the Registrable Securities covered by such
Registration Statement not later than the effective date of such Registration
Statement.
(o) The Company may require the Investor to promptly furnish in
writing to the Company such information as may be legally required in connection
with such registration including, without limitation, information regarding the
intended method of disposition of Registrable Securities, all such information
as may be requested by the SEC or the National Association of Securities
Dealers. The Investor agrees to provide such information requested in connection
with such registration within ten (10) business days after receiving such
written request and the Company shall not be responsible for any delays in
obtaining or maintaining the effectiveness of a Registration Statement caused by
the Investor's failure to timely provide such information. Each seller of
Registrable Securities shall notify the Company as promptly as practicable of
any inaccuracy or change in information previously furnished by such seller to
the Company or of the occurrence of any event, in either case as a result of
which any prospectus relating to the Registrable Securities contains or would
contain an untrue statement of a material fact regarding such seller or its
intended method of disposition of such Registrable Securities or omits to state
any material fact regarding such seller or such seller's intended method of
disposition of such Registrable Securities required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and promptly furnish to the Company
any additional information required to correct and update any previously
furnished information or required so that such prospectus shall not contain,
with respect to such seller or the disposition of such Registrable Securities,
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(p) Notwithstanding anything in this Agreement to the contrary, the
Company shall be entitled to postpone for a period of time in its reasonable
judgment, but not to exceed 120 days (a "Blackout Period"), the filing of a
Registration Statement in accordance with this Agreement, and the preparation
and/or filing of any prospectus or any amendments or supplements to a
Registration Statement or prospectus, if the Company reasonably determines that
any such filing or the offering of any Registrable Securities would (i) impede,
delay or otherwise interfere with any financing, offer or sale of securities,
acquisition, corporate reorganization or other significant transaction involving
the Company or any of its affiliates, or (ii) require disclosure of material
information that, if disclosed at that time, would be harmful to the interests
of the Company and its stockholders; provided, however, that, during the
Blackout Period pursuant to (ii) above, the Blackout Period shall earlier
terminate upon public disclosure by the Company or public admission by the
Company of such material information. Upon notice by the Company to any holder
of Registrable Securities of such determination, the holder covenants that it
shall (i) keep the fact of any such notice strictly confidential, (ii) promptly
halt any offer, sale, trading or transfer by it or any of its affiliates of any
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of the Registrable Securities for the duration of the Blackout Period set forth
in such notice (or until earlier terminated in writing by the Company) and (iii)
promptly halt any use, publication, dissemination or distribution of a
Registration Statement, each prospectus included therein, and any amendment or
supplement thereto by it and any of its affiliates for the duration of the
Blackout Period set forth in such notice (or until earlier terminated in writing
by the Company). During any Blackout Period, liquidated damages shall accrue
pursuant to Section 1(c) hereof, at a rate of six thousand dollars ($6,000) per
calendar month.
SECTION 2.2. REGISTRATION EXPENSES. In connection with each Registration
Statement, the Company shall pay all registration expenses incurred in
connection with the registration thereunder (the "Registration Expenses"),
including, without limitation: (i) all registration, filing, securities exchange
listing and fees required by the National Association of Securities Dealers,
(ii) all registration, filing, qualification and other fees and expenses of
compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) all of the Company's word processing,
duplicating, printing, messenger and delivery expenses, (iv) the Company's
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), (v) the fees
and expenses incurred by the Company in connection with the listing of the
Registrable Securities, (vi) reasonable fees and disbursements of counsel for
the Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any special
audits or comfort letters or costs associated with the delivery by independent
certified public accountants of such special audit(s) or comfort letter(s)
requested pursuant to Section 2.1(l) hereof), (vii) the fees and expenses of any
special experts retained by the Company in connection with such registration,
(viii) premiums and other costs of policies of insurance purchased at the
discretion of the Company against liabilities arising out of any public offering
of the Registrable Securities being registered, and (ix) any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities, but excluding underwriting fees, discounts, transfer taxes or
commissions, if any, attributable to the sale of Registrable Securities, which
shall be payable by each holder of Registrable Securities pro rata on the basis
of the number of Registrable Securities of each such holder that are included in
a registration under this Agreement.
ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
SECTION 3.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless the Investor, its partners, affiliates, officers,
directors, employees and duly authorized agents, and each Person or entity, if
any, who controls the Investor within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, together with the partners,
Affiliates, officers, directors, employees and duly authorized agents of such
controlling Person or entity (collectively, the "Controlling Persons"), from and
against any loss, claim, damage, liability, costs and expenses (including,
without limitation, reasonable attorneys' fees and disbursements and costs and
expenses of investigating and defending any such claim) (collectively,
"Damages"), joint or several, and any action or proceeding in respect thereof to
which the Investor, its partners, affiliates, officers, directors, employees and
duly authorized agents, and any Controlling Person, may become subject under the
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Securities Act or otherwise, as incurred, insofar as such Damages (or actions or
proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement, or in any preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement relating to the Registrable
Securities or arises out of, or are based upon, any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and shall reimburse the Investor,
its partners, affiliates, officers, directors, employees and duly authorized
agents, and each such Controlling Person, for any legal and other expenses
reasonably incurred by the Investor, its partners, affiliates, officers,
directors, employees and duly authorized agents, or any such Controlling Person,
as incurred, in investigating or defending or preparing to defend against any
such Damages or actions or proceedings; provided, however, that the Company
shall not be liable to the extent that any such Damages arise out of the
Investor's failure to send or give a copy of the final prospectus or supplement
to the persons asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the sale
of Registrable Securities to such person if such statement or omission was
corrected in such final prospectus or supplement; provided, further, that the
Company shall not be liable to the extent that any such Damages arise out of or
are based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such Registration Statement, or any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by the Investor or any other person who participates as a seller or as
an underwriter in the offering or sale of such securities, in either case,
specifically stating that it is for use in the preparation thereof.
Each seller of any Registrable Securities shall, and the Company may
require (as a condition to entering into any underwriting or similar agreement
with respect to the offer or sale of any Registrable Securities) that the
Company shall have received an undertaking reasonably satisfactory to it from
each agent or underwriter named in any such agreement to, (i) indemnify the
Company, its affiliates, officers, directors, employees and duly authorized
agents and any Controlling Persons from and against any Damages, joint or
several, and any action or proceeding in respect thereof to which the Company,
its affiliates, officers, directors, employees and duly authorized agents and
any Controlling Person may become subject under the Securities Act or otherwise,
as incurred, insofar as such Damages (or actions or proceedings in respect
thereof) arise out of, or are based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Registration Statement, or
any preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by that seller or any other person who participates with that
seller or as an underwriter in the offering or sale of such securities, in
either case, specifically stating that it is for use in preparation of a
Registration Statement; provided, however, such indemnification shall in no
event exceed $150,000.
SECTION 3.2. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by any person or entity in respect of which indemnity may be sought pursuant to
Section 3.1 (an "Indemnified Party") of notice of any claim or the commencement
of any action, the Indemnified Party shall, if a claim in respect thereof is to
be made against the person or entity against whom such indemnity may be sought
(the "Indemnifying Party"), notify the Indemnifying Party in writing of the
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claim or the commencement of such action. In the event an Indemnified Party
shall fail to give such notice as provided in this Section 3.2 and the
Indemnifying Party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, the indemnification provided for in Section 3.1
shall be reduced to the extent of any actual prejudice resulting from such
failure to so notify the Indemnifying Party; provided, however, that the failure
to notify the Indemnifying Party shall not relieve the Indemnifying Party from
any liability that it may have to an Indemnified Party otherwise than under
Section 3.1. If any such claim or action shall be brought against an Indemnified
Party, and it shall notify the Indemnifying Party thereof, the Indemnifying
Party shall be entitled to participate therein, and, to the extent that it
wishes, jointly with any other similarly notified Indemnifying Party, to assume
the defense thereof with counsel reasonably satisfactory to the Indemnified
Party. After notice from the Indemnifying Party to the Indemnified Party of its
election to assume the defense of such claim or action, the Indemnifying Party
shall not be liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Indemnified Party shall have the right to employ separate counsel to
represent the Indemnified Party and its Controlling Persons who may be subject
to liability arising out of any claim in respect of which indemnity may be
sought by the Indemnified Party against the Indemnifying Party, but the fees and
expenses of such counsel shall be for the account of such Indemnified Party,
unless (i) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (ii) in the reasonable judgment of
the Company and such Indemnified Party, representation of both parties by the
same counsel would be inappropriate due to actual or potential conflicts of
interest between them, it being understood, however, that the Indemnifying Party
shall not, in connection with any one such claim or action or separate but
substantially similar or related claims or actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all Indemnified Parties, or for fees
and expenses that are not reasonable. No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
claim or pending or threatened proceeding in respect of which the Indemnified
Party is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability arising out
of such claim or proceeding. Whether or not the defense of any claim or action
is assumed by the Indemnifying Party, such Indemnifying Party will not be
subject to any liability for any settlement made without its consent, which
consent will not be unreasonably withheld.
SECTION 3.3. OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding paragraphs of this Article 3 (with appropriate
modifications) shall be given by the Company with respect to any required
registration or other qualification of securities under any federal or state law
or regulation of any governmental authority other than the Securities Act. The
provisions of this Article III shall be in addition to any other rights to
indemnification, contribution or other remedies which an Indemnified Party may
have pursuant to law, equity, contract or otherwise.
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SECTION 3.4. CONTRIBUTION. If the indemnification and reimbursement
obligations provided for in any section of this Article III is unavailable or
insufficient to hold harmless the Indemnified Parties in respect of any Damages
referred to herein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Damages as between the Company on the one
hand and the Investor or seller on the other, in such proportion as is
appropriate to reflect the relative fault of the Company and of the Investor or
seller in connection with such statements or omissions, as well as other
equitable considerations. The relative fault of the Company on the one hand and
of the Investor or seller on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Investor agree that it would not be just and equitable
if contribution pursuant to this Section 3.4 were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the Damages
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 3.4, the Investor or seller shall in no event be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities of the Investor or seller were sold to the public (less
underwriting discounts and commissions) exceeds the amount of any damages which
the Investor or seller has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
ARTICLE IV
MISCELLANEOUS
SECTION 4.1. NO OUTSTANDING REGISTRATION RIGHTS. Except as set forth on
Schedule 4.1, the Company represents and warrants to the Investor that there is
not in effect on the date hereof any agreement by the Company pursuant to which
any holders of securities of the Company have a right to cause the Company to
register or qualify such securities under the Securities Act or any securities
or blue sky laws of any jurisdiction.
SECTION 4.2. TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate at such time as all Registrable
Securities have been issued and have ceased to be Registrable Securities.
Notwithstanding the foregoing, paragraphs (c) and (d) of Section 1.1, Article
III, Section 4.8, and Section 4.9 shall survive the termination of this
Agreement.
SECTION 4.3. RULE 144. If the Company is required to file reports under the
Exchange Act, the Company will file in a timely manner, information, documents
and reports in compliance with the Securities Act and the Exchange Act and will,
at its expense, promptly take such further action as holders of Registrable
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Securities may reasonably request to enable such holders of Registrable
Securities to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act ("Rule 144"), as such Rule may be amended from time to
time, or (b) any similar rule or regulation hereafter adopted by the SEC. If at
any time the Company is not required to file such reports, it will, at its
expense, forthwith upon the written request of any holder of Registrable
Securities who intends to make a sale under Rule 144, make available adequate
current public information with respect to the Company within the meaning of
paragraph (c)(2) of Rule 144 or such other information as necessary to permit
sales pursuant to Rule 144. Upon the request of the Investor, the Company will
deliver to the Investor a written statement, signed by the Company's principal
financial officer, as to whether it has complied with such requirements. This
Section 9.3 shall terminate at the same time as the registration rights as
provided in Section 9.2.
SECTION 4.4. CERTIFICATE. The Company will, at its expense, forthwith upon
the request of any holder of Registrable Securities, deliver to such holder a
certificate, signed by the Company's principal financial officer, stating (a)
the Company's name, address and telephone number (including area code), (b) the
Company's Internal Revenue Service identification number, (c) the Company's
Commission file number, (d) the number of shares of each class of Stock
outstanding as shown by the most recent report or statement published by the
Company, and (e) whether the Company has filed the reports required to be filed
under the Exchange Act for a period of at least ninety (90) days prior to the
date of such certificate and in addition has filed the most recent annual report
required to be filed thereunder.
SECTION 4.5. AMENDMENT AND MODIFICATION. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
both parties to this Agreement. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained the written consent of the holders of a majority
of the then outstanding Registrable Securities. Notwithstanding the foregoing,
the waiver of any provision hereof with respect to a matter that relates
exclusively to the rights of holders of Registrable Securities whose securities
are being sold pursuant to a Registration Statement and does not directly or
indirectly affect the rights of other holders of Registrable Securities may be
given by holders of at least a majority of the Registrable Securities being sold
by such holders; provided that the provisions of this sentence may not be
amended, modified or supplemented except in accordance with the provisions of
the immediately preceding sentence. No course of dealing between or among any
Person having any interest in this Agreement will be deemed effective to modify,
amend or discharge any part of this Agreement or any rights or obligations of
any person under or by reason of this Agreement.
SECTION 4.6. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and
all of the provisions hereof shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. The Investor may
assign its rights under this Agreement to any subsequent holder the Registrable
Securities, provided that the Company shall have the right to require any holder
of Registrable Securities to execute a counterpart of this Agreement and agree
to be bound by the provisions of this Agreement as a condition to such holder's
claim to any rights hereunder. This Agreement, together with the Note Purchase
Agreement, the Security Agreement and the Warrant(s) sets forth the entire
agreement and understanding between the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
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SECTION 4.7. SEPARABILITY. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
SECTION 4.8. NOTICES. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing and
shall be (i) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (ii) delivered by reputable air courier service with
charges prepaid, or (iii) transmitted by hand delivery, telegram or facsimile,
addressed as set forth below or to such other address as such party shall have
specified most recently by written notice. Any notice or other communication
required or permitted to be given hereunder shall be deemed effective (a) upon
hand delivery or delivery by facsimile, with accurate confirmation generated by
the transmitting facsimile machine, at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
If to the Company:
Sytron, Inc.
2770 Industrial Lane
Broomfield, CO 80020
Attention: Mitchel Feinglas, CEO
Telephone: (303) 469-6100
Facsimile: (303) 469-7100
with a copy (which shall not constitute notice) to:
Bresler Goodman & Unterman, LLP
521 Fifth Avenue
New York, NY 10175
Attention: Andrew J. Goodman, Esq., or
Jay Jacobson, Esq.
Telephone: (212) 661-2150
Facsimile: (212) 949-6131
if to the Investor:
Crescent International Limited
Greenlight (Switzerland) SA
84, av Louis-Casai, P.O. Box 161
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
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with a copy (which communication shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Sara Hanks, Esq./Earl Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 4.8 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the other
party hereto.
SECTION 4.9. GOVERNING LAW. This Agreement shall be construed under the
laws of the State of New York.
SECTION 4.10. HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not constitute a part of this Agreement, nor shall
they affect their meaning, construction or effect.
SECTION 4.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
SECTION 4.12. FURTHER ASSURANCES. Each party shall cooperate and take such
action as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
SECTION 4.13. ABSENCE OF PRESUMPTION. This Agreement shall be construed
without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing any instrument to be
drafted.
SECTION 4.14. REMEDIES. In the event of a breach or a threatened breach by
any party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific performance
of its rights under this Agreement or to injunctive relief, in addition to being
entitled to exercise all rights provided in this Agreement and granted by law.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being agreed by the parties that the remedy at law, including
monetary damages, for breach of any such provision may be inadequate
compensation for any loss.
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IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Registration Rights Agreement to be executed by the undersigned,
thereunto duly authorized, as of the date first set forth above.
SYTRON INC.
By:
-----------------------------------
Name
Title
CRESCENT INTERNATIONAL LIMITED
By:
-----------------------------------
Name
Title
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EXHIBIT D
SECURITY AGREEMENT
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of January 15, 1999 between SYTRON, INC.,
a corporation organized and existing under the laws of the Commonwealth of
Pennsylvania (the "Company"), and CRESCENT INTERNATIONAL LIMITED, an entity
organized and existing under the laws of Bermuda (the " Secured Party").
W I T N E S S E T H :
---------------------
WHEREAS, pursuant to that certain Note Purchase Agreement dated as of
the date hereof (as the same may be amended, supplemented, modified, extended or
restated from time to time, the "Note Purchase Agreement"), between the Company
and the Secured Party, upon certain terms and subject to certain conditions, the
Company has the right to issue and sell and the Secured Party has the obligation
to purchase up to $750,000 worth of notes convertible into shares of common
stock (the "Common Stock"), par value $0.01 per share, of the Company (the
"Convertible Notes"); and
WHEREAS, it is a condition to the obligations of the Secured Party
under the Note Purchase Agreement that the Company shall have executed and
delivered this Security Agreement to the Secured Party;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company hereby
agrees with the Secured Party, as follows:
SECTION 1. Defined Terms.
(a) As used herein, the following terms shall have the following meanings:
"Chattel Paper": shall mean any and all "chattel paper", as defined in
the UCC, now or hereafter owned by the Company or in which the Company has any
rights or interest.
"Collateral": shall have the meaning specified in Section 2 of this
Security Agreement.
"Documents": shall mean any and all "documents" as defined in the UCC
now or hereafter owned by the Company or in which the Company has any rights or
interest.
"Instrument": shall mean any "instrument," as such term is defined in
the UCC, now or hereafter owned by the Company or in which the Company has any
rights or interest.
"Inventory": shall mean any "inventory", as such term is defined in
the UCC, now or hereafter owned by the Company or in which the Company has any
rights or interest and, in any event, shall mean and include, but not be limited
to, all inventory, merchandise, goods and other personal property (including
goods in transit) which are held for sale or lease or are furnished or are to be
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furnished under a contract of service or which constitute raw materials, work in
process or materials used or consumed or to be used or consumed in the Company's
business, or the processing, packaging, delivery or shipping of the same, all
finished goods, and all such property the sale or other disposition of which has
given rise to Accounts and which has been returned to or repossessed or stopped
in transit by the Company.
"Proceeds": shall mean "proceeds", as such term is defined in the UCC
and, in any event, shall mean and include, but not be limited to, the following
at any time whatsoever arising or receivable: (i) whatever is received upon any
collection, exchange, sale or other disposition of any of the Collateral, and
any property into which any of the Collateral is converted, whether cash or
non-cash proceeds, (ii) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to the Company from time to time with respect to
any of the Collateral, (iii) any and all payments (in any form whatsoever) made
or due or payable to the Company from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any governmental authority (or any other Person), and
(iv) any and all other amounts from time to time paid or payable under or in
connection with any of the Collateral.
"Security Agreement": shall mean this Security Agreement, as the same
may be amended, supplemented or otherwise modified from time to time.
"UCC": shall mean the Uniform Commercial Code as in effect on the date
hereof in the State of New York; provided that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the security interest in any Collateral is governed by the Uniform Commercial
Code as in effect in a jurisdiction other than New York, "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions hereof relating to such perfection or effect of perfection or
non-perfection.
(b) Unless otherwise defined herein, capitalized terms used
herein shall have the respective meanings given to them in the Note Purchase
Agreement.
SECTION 2. Grant of Security Interest. As security for the prompt and
complete payment and performance when due of all the Company's obligations under
the Note Purchase Agreement, the Registration Rights Agreement, the Warrants and
the Convertible Notes (the "Obligations"), the Company hereby sells, assigns,
conveys, mortgages, pledges, hypothecates and transfers to the Secured Party and
hereby grants to the Secured Party a lien on and continuing security interest
in, all the Company's right, title and interest in, to and under all Inventory
and Proceeds and products of any or all of the foregoing of the Company, whether
now owned or hereafter acquired or arising and wheresoever located (all of which
being hereinafter collectively called the "Collateral").
SECTION 3. Limitation on Secured Party's Obligations. It is expressly
agreed by the Company that, anything herein to the contrary notwithstanding, the
Company shall remain liable under all contracts and agreements included in or
giving rise to the Collateral to observe and perform all the conditions and
obligations to be observed and performed by it thereunder, all in accordance
with and pursuant to the terms and provisions thereof, as if this Security
Agreement had not been executed. The Secured Party shall not have any obligation
or liability under any such contract or agreement by reason of or arising out of
this Security Agreement or the granting to the Secured Party of a Lien thereon
or the receipt by the Secured Party of any payment relating thereto pursuant to
the terms hereof, nor shall the Secured Party be required or obligated in any
manner to perform or fulfill any of the obligations of the Company under or
pursuant to any such contract or other agreement, or to make any payment, or to
make any inquiry as to the nature or the sufficiency of any payment received by
it or the sufficiency of any performance by any party thereunder, or to present
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or file any claim, or to take any action to collect or enforce any performance
or the payment of any amounts which may have been assigned to it or to which it
may be entitled at any time or times.
SECTION 4. Representations and Warranties. The Company hereby represents
and warrants to the Secured Party that:
(a) This Security Agreement has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms.
(b) The Company is the sole legal and beneficial owner of the
Collateral, free and clear of any and all Liens, except as set forth on
Schedule 4(b) and except for the Liens granted to the Secured Party
pursuant hereto.
(c) There is no security agreement, financing statement, equivalent
security or lien instrument or continuation statement executed by the
Company or, to the best of its knowledge, any other Person covering all or
any part of the Collateral on file or of record in any public office,
except as set forth on Schedule 4(c) and except such as may have been filed
by the Company in favor of the Secured Party pursuant to this Security
Agreement.
(d) This Security Agreement creates a valid lien on the Collateral in
favor of the Secured Party securing the payment of the Obligations. Upon
filing UCC financing statements naming the Company as debtor and the
Secured Party as secured party in the jurisdictions listed on Schedule 4(j)
hereto, all action necessary to perfect the security interest of the
Secured Party will have been taken and such security interest will have
priority over all other Liens.
(e) All Inventory that has been or is hereafter produced by the
Borrower has been and will be produced in compliance with all applicable
requirements of the Fair Labor Standards Act.
(f) The exact name of the Company as that name appears on its
Certificate of Incorporation is "Sytron, Inc." Schedule 4(f) sets forth a
list of all other names (including trade names or similar appellations)
used by the Company, or any other business or organization to which the
Company became the successor by merger, consolidation, acquisition, change
in form, nature or jurisdiction of organization or otherwise, now or at any
time during the past three years
(g) The Company's federal employer identification number is
22-3200841.
(h) The chief executive office of the Company is located at 2770
Industrial Lane, Broomfield, Boulder County, Colorado 80020. Schedule 4(h)
sets forth all other places of business of the Company.
(i) All books or records relating to the Collateral are located at
2770 Industrial Lane, Broomfield, Colorado 80020.
(j) All of the Collateral is located at 2770 Industrial Lane,
Broomfield, Colorado 80020.
(k) Schedule 4(k) sets forth the names and addresses of all persons or
entities other than the Company, such as lessees, consignees or
warehousemen, which have possession or are intended to have possession of
any of the Collateral.
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(l) Schedule 4(l) sets forth each location or place of business
previously maintained by the Company at any time during the past five years
in a state in which the Company has previously maintained a location or
place of business at any time during the past four months.
(m) Schedule 4(m) sets forth each other location at which, or other
person or entity with which, any of the Collateral consisting of Inventory
has been previously held at any time during the past four months.
(n) Attached hereto as Schedule 4(n)(i) is a true copy of a file
search report from the Uniform Commercial Code filing officer (or, if such
officer does not issue such reports, from an experienced Uniform Commercial
Code search organization acceptable to the Secured Party) in each
jurisdiction identified in Schedules 4(h), (i), (j), (k), (l) or (m).
Attached hereto as Schedule 4(n)(ii) is a true copy of each financing
statement or other filing identified in such file search reports.
(o) Attached hereto as Schedule 4(o) is a schedule setting forth the
filing offices in each jurisdiction identified in 4(h), (i), (j) or (k)
where Uniform Commercial Code financing statements are required to be filed
in order to perfect the security interest of the Secured Party, in all
Collateral in which a security interest may be perfected by filing,
including, without limitation, Collateral consisting of fixtures.
SECTION 5. Covenants. The Company covenants and agrees with the Secured
Party, that from and after the date of this Security Agreement and until the
Obligations are fully satisfied:
(a) The Company will not change (i) its name, identity or corporate
structure in any manner, or (ii) the locations of its places of business or
its chief executive office or the locations where it keeps or holds any
Collateral (other than Inventory in transit) or records relating thereto
from the applicable location described herein, unless the Company shall
have given the Secured Party at least 90 days' prior written notice thereof
and shall have delivered to the Secured Party duly executed UCC-1 financing
statements for filing in each jurisdiction in which any such filing is
required in order to perfect the Lien created by this Security Agreement in
the Collateral affected by the change of name, identity or corporate
structure or location and shall have taken all action necessary or
requested by the Secured Party to amend any financing statement or
continuation statement so that it is not seriously misleading.
(b) The Company will keep and maintain at its own cost and expense
satisfactory and complete records of the Collateral, including, without
limitation, a record of all payments received and all credits granted with
respect to the Collateral and all other dealings with the Collateral. The
Company will mark its books and records pertaining to the Collateral to
evidence this Security Agreement and the Liens and security interests
granted hereby. As further security, the Company agrees that the Secured
Party shall have a special property interest in all of the Company's books
and records pertaining to the Collateral and upon the occurrence of an
Event of Default the Company shall deliver and turn over any such books and
records to the Secured Party or to its representatives or agents on demand
of the Secured Party.
(c) The Company will, without unreasonable delay, furnish to the
Secured Party from time to time upon the Secured Party's request therefor,
such statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as the
Secured Party may reasonably require.
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(d) The Company will advise the Secured Party promptly, in reasonable
detail, (i) of any Lien on or asserted against any of the Collateral, and
(ii) of the occurrence of any other material event which would adversely
affect the aggregate value of the Collateral or the security interests
created hereunder.
(e) If any of the Collateral shall be now or hereafter evidenced by an
Instrument, Chattel Paper or Document the Company shall deliver to the
Secured Party the originals of such Instrument, Chattel Paper or Document
duly endorsed or accompanied by an appropriate instrument of transfer or
assignment.
(f) The chief financial officer of the Company (the "Chief Financial
Officer") shall provide to the Secured Party, on a bi-weekly basis, a
statement setting forth the dollar value of the Inventory as of the date
thereof. Upon request of the Company, the Chief Financial Officer shall
provide to the Company, within two (2) business days of such request, a
more detailed report relating to the Inventory, which report shall be in
form and substance satisfactory to the Secured Party.
SECTION 6. Further Assurances. At any time and from time to time, upon the
written request of the Secured Party, and at the sole expense of the Company,
the Company will promptly and duly execute and deliver any and all such further
instruments and documents and take such further action as the Secured Party may
require to obtain the full benefits of this Security Agreement and of the rights
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the UCC with respect to the Liens
granted hereby, transferring Collateral for which possession is necessary to
perfect a security interest to the Secured Party's possession and obtaining
waivers from landlords and mortgagees. The Company also hereby authorizes the
Secured Party to file any such financing or continuation statement without the
signature of the Company to the extent permitted by applicable law.
SECTION 7. Secured Party's Appointment as Attorney-in-Fact.
(a) The Company hereby irrevocably constitutes and appoints the
Secured Party, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of the Company and in the name of the Company or in its own name, from
time to time in the Secured Party's discretion, for the purpose of carrying out
the terms of this Security Agreement, to take any and all appropriate action and
to execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security Agreement and, without
limiting the generality of the foregoing, hereby gives the Secured Party the
power and right, on behalf of the Company, without prior notice to or assent by
the Company to do the following:
(i) upon the occurrence and continuance of any Event of Default, to
ask, demand, collect, receive and give acquittances and receipts for any
and all moneys due and to become due under any Collateral and, in the name
of the Company or its own name or otherwise, to take possession of and
endorse and collect any checks, drafts, notes, acceptances or other
instruments for the payment of moneys due under any Collateral and to file
any claim or to take any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Secured Party for the purpose
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of collecting any and all such moneys due under any Collateral whenever
payable and to file any claim or to take any other action or proceeding in
any court of law or equity or otherwise deemed appropriate by the Secured
Party for the purpose of collecting any and all such moneys due under any
Collateral whenever payable;
(ii) to pay or discharge any taxes or Liens levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance
called for by the terms of the Credit Agreement and to pay all or any part
of the premiums therefor and the costs thereof; and
(iii) upon the occurrence and continuance of any Event of Default, (A)
to direct any party liable for any payment under any of the Collateral to
make payment of any and all moneys due and to become due thereunder
directly to the Secured Party or as the Secured Party shall direct; (B) to
receive payment of and receipt for any and all moneys, claims and other
amounts due and to become due at any time in respect of or arising out of
any Collateral; (C) to sign and endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications and notices in connection with accounts
and other documents relating to the Collateral; (D) to commence and
prosecute any suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the Collateral or any thereof
and to enforce any other right in respect of any Collateral; (E) to defend
any suit, action or proceeding brought against the Company with respect to
any Collateral; (F) to settle, compromise or adjust any suit, action or
proceeding described above and, in connection therewith, to give such
discharges or releases as the Secured Party may deem appropriate; and (G)
generally to sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though
the Secured Party were the absolute owner thereof for all purposes, and to
do, at the Secured Party's option and the Company's expense, at any time,
or from time to time, all acts and things which the Secured Party deems
necessary to protect, preserve or realize upon the Collateral and the
Secured Party's security interest, therein, in order to effect the intent
of this Security Agreement, all as fully and effectively as the Company
might do.
The Company hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. This power of attorney is a
power coupled with an interest and shall be irrevocable until all Obligations of
the Company to the Secured Party have been fully and completely satisfied.
(b) The powers conferred on the Secured Party hereunder are solely to
protect its interests in the Collateral and shall not impose any duty upon it to
exercise any such powers. The Secured Party shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers and
neither it nor any of its officers, partners, directors, employees or agents
shall be responsible to the Company for any act or failure to act, except for
its own gross negligence or willful misconduct.
(c) The Company also authorizes the Secured Party, at any time and
from time to time, to execute, in connection with the sale provided for in
paragraph (b) of Section 9 of this Security Agreement, any endorsements,
assignments or other instruments of conveyance or transfer with respect to the
Collateral.
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SECTION 8. Performance of Company's Obligations. If the Company fails to
perform or comply with any of its agreements contained herein, the Secured
Party, may (but shall not be obligated to) perform or comply, or otherwise cause
performance or compliance, with such agreement, and the Secured Party, may from
time to time take any other action which it deems necessary for the maintenance,
preservation or protection of any of the Collateral or the Secured Party's
Liens, thereon. The cost and expenses of the Secured Party (including, without
limitation, the fees and disbursements of counsel to the Secured Party, incurred
in connection with any of the foregoing) shall be payable by the Company to the
Secured Party, on demand and shall constitute Obligations secured hereby.
SECTION 9. Remedies, Rights Upon Default.
(a) If an Event of Default shall occur and be continuing:
(i) All payments received by the Company under or in connection with
any of the Collateral shall be held by the Company in trust for the Secured
Party, shall be segregated from other funds of the Company and shall
forthwith upon receipt by the Company, be turned over to the Secured Party,
in the same form as received by the Company (duly endorsed by the Company
to the Secured Party, if required); and
(ii) Any and all such payments so received by the Secured Party
(whether from the Company or otherwise) may, in the sole discretion of the
Secured Party, be held by the Secured Party as collateral security for,
and/or then or at any time thereafter applied in whole or in part by the
Secured Party, against all or any part of the Obligations in such order as
the Secured Party may elect. Any balance of such payments held by the
Secured Party and remaining after payment in full of all the Obligations
shall be paid over to the Company or to whomsoever may be lawfully entitled
to receive the same.
(b) If any Event of Default shall occur and be continuing, the Secured
Party may in addition to all other rights and remedies granted to it in this
Security Agreement and in any other instrument or agreement securing, evidencing
or relating to the Obligations, exercise all rights and remedies of a secured
party under the UCC. Without limiting the generality of the foregoing, the
Company expressly agrees that upon the occurrence of an Event of Default, the
Secured Party, without demand of performance or other demand, advertisement or
notice of any kind (except as specified below) to or upon the Company or any
other person (all and each of which demands, advertisements and/or notices are
hereby expressly waived to the extent permitted by law), may forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or may forthwith sell, lease, assign, give an option or options to purchase,
or sell or otherwise dispose of and deliver said Collateral (or contract to do
so), or any part thereof, in one or more parcels at public or private sale or
sales, at any exchange or broker's board or at any of the Secured Party' s
offices or elsewhere at such prices as it may deem best, for cash or on credit
or for future delivery without assumption of any credit risk. If any consent,
approval or authorization of, or filing with, any governmental authority or any
other Person should be necessary to effectuate any sale or other disposition of
the Collateral, or any partial disposition of the Collateral, the Company agrees
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to execute all such applications and other instruments as may be required in
connection with securing any such consent, approval or authorization, and will
otherwise use its best efforts to secure the same. The Secured Party shall have
the right upon any such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the whole or any part of
said Collateral so sold, free of any right or equity of redemption which right
or equity of redemption the Company hereby waives and releases. The Company
further agrees, at the Secured Party's request, to assemble the Collateral and
make it available to the Secured Party at such places which the Secured Party
may select, whether at the Company's premises or elsewhere. The Secured Party
may apply the proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care, safe keeping or otherwise of
any or all of the Collateral or in any way relating to the rights of the Secured
Party hereunder, including reasonable attorneys' fees and legal expenses, to the
payment in whole or in part of the Obligations, in such order as the Secured
Party may elect, the Company remaining liable for any deficiency remaining
unpaid after such application, and only after so applying such proceeds, and
after the payment by the Secured Party of any other amount required by any
provision of law, need the Secured Party account for the surplus, if any, to the
Company. To the extent permitted by applicable law, the Company waives all
claims, damages, and demands against the Secured Party arising out of the
repossession, retention or sale of the Collateral. The Company agrees that, to
the extent notice of sale shall be required by law, five (5) Business Days'
notice to the Company (which notification shall be deemed given when mailed,
postage prepaid, addressed to the Company at its address set forth in Section
10.4 of the Note Purchase Agreement) of the time and place of any public sale or
of the time after which a private sale may take place shall constitute
reasonable notification of such matters. No notification need be given to the
Company if the Company, after the occurrence of a Default, has signed a
statement renouncing or modifying any right to notification of sale or other
intended disposition. The Company shall remain liable for any deficiency if the
proceeds of any sale or disposition of the Collateral are insufficient to pay
all amounts to which the Secured Party is entitled, the Company also being
liable for the fees of any attorneys employed by the Secured Party to collect
such deficiency.
(c) The Company also agrees to pay all costs of the Secured
Party, including reasonable attorneys' fees and disbursements, incurred with
respect to the collection of any of the Obligations and the enforcement of any
of its rights hereunder.
(d) The Company hereby waives presentment, demand, protest or any
notice (to the extent permitted by applicable law) of any kind in connection
with this Security Agreement or any Collateral.
SECTION 10. Secured Party's Duties. The Secured Party shall have no duty of
care with respect to the Collateral, except that the Secured Party shall
exercise reasonable care with respect to Collateral or any income thereon in the
custody of the Secured Party or any agent or nominee of the Secured Party. The
Secured Party shall be deemed to have exercised reasonable care if such property
is accorded treatment substantially equal to that which the Secured Party
accords its own property, or if the Secured Party takes such action with respect
to the Collateral as the Company shall request in writing, but no failure to
comply with any such request nor any omission to do any such act requested by
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the Company shall be deemed a failure to exercise reasonable care, nor shall the
Secured Party's failure to take steps to preserve rights against any parties or
property be deemed a failure to have exercised reasonable care with respect to
Collateral in the Secured Party's custody.
SECTION 11. Notices. Notices to the parties hereto shall be given in
accordance with the provisions of Section 10.4 of the Note Purchase Agreement.
SECTION 12. Severability. Any provision of this Security Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 13. No Waiver; Cumulative Remedies. The Secured Party shall not by
any act, delay, omission or otherwise be deemed to have waived any of its rights
or remedies hereunder and no waiver shall be valid unless in writing, signed by
the Secured Party and then only to the extent therein set forth. A waiver by the
Secured Party of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Secured Party would
otherwise have had on any future occasion. No failure to exercise nor any delay
in exercising on the part of the Secured Party, any right, power or privilege
hereunder, shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or future
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies hereunder provided are cumulative and may be exercised
singly or concurrently, and are not exclusive of any rights and remedies
provided by law or in any other agreement with respect to the Obligations. None
of the terms or provisions of this Security Agreement may be waived, altered,
modified or amended except by an instrument in writing, duly executed by the
Secured Party.
SECTION 14. Successors and Assigns; Governing Law. This Security Agreement
and all obligations of the Company hereunder shall be binding upon the
successors and assigns of the Company, and shall, together with the rights and
remedies of the Secured Party hereunder, inure to the benefit of the Secured
Party and its successors and assigns. The Company may not assign any of its
rights or obligations hereunder without the consent of the Secured Party.
SECTION 15. GOVERNING LAW. THIS SECURITY AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK WITHOUT REGARD TO ITS CONFLICTS OF LAWS PRINCIPLES.
SECTION 16. WAIVER OF JURY TRIAL. THE COMPANY AND THE SECURED PARTY EACH
HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS SECURITY AGREEMENT.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be executed and delivered by its duly authorized officer on the
date first set forth above.
SYTRON, INC.
By:
------------------------------------
Name:
Title:
per pro CRESCENT INTERNATIONAL LIMITED
By:
------------------------------------
Name:
Title:
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EXHIBIT E
FORM OF ADDITIONAL WARRANT
WARRANT
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE
BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH IN AN AMENDED AND
RESTATED PRIVATE EQUITY LINE AGREEMENT, DATED AS OF JANUARY 15, 1999, BETWEEN
SYTRON, INC. AND CRESCENT INTERNATIONAL LIMITED A COPY OF THE PORTION OF THE
AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM SYTRON
INC.'S EXECUTIVE OFFICES.
JANUARY 15, 1999
Warrant to Purchase up to 726,000 Shares of Common Stock of SYTRON, INC.
(hereinafter, the "Additional Warrant").
Sytron, Inc., a Pennsylvania corporation (the "Company"), hereby agrees that
Crescent International Limited (the "Investor") or any other Warrant Holder is
entitled, on the terms and conditions set forth below, to purchase from the
Company at any time during the Exercise Period up to 726,000 fully paid and
nonassessable shares of Common Stock, par value $0.01 per share, of the Company
(the "Common Stock"), as the same may be adjusted from time to time pursuant to
Section 7 hereof, at the Exercise Price (hereinafter defined), as the same may
be adjusted pursuant to Section 7 hereof. The resale of the shares of Common
Stock or other securities issuable upon exercise or exchange of this Additional
Warrant is subject to the provisions of the Registration Rights Agreement (as
defined below).
Section 1. Definitions.
"Agreement" shall mean the Note Purchase Agreement, dated the date hereof,
between the Company and the Investor.
"Capital Shares" shall mean the Common Stock and any shares of any other
class of common stock whether now or hereafter authorized, having the right to
participate in the distribution of earnings and assets of the Company.
"Date of Exercise" shall mean the date that the advance copy of the
Exercise Form is sent by facsimile to the Company, provided that the original
Additional Warrant and Exercise Form are received by the Company within
reasonable time thereafter. If the Warrant Holder has not sent advance notice by
facsimile, the Date of Exercise shall be the date the original Exercise Form is
received by the Company.
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"Exercise Period" shall mean the period beginning on the Effective Date of
the Initial Registration Statement and continuing until the expiration of the
one-year period thereafter; provided that such period shall be extended one day
for each day after such Effective Date, that the Initial Registration Statement
is not effective during the period such Registration Statement is required to be
effective pursuant to the Registration Rights Agreement.
"Exercise Price" as of the date hereof shall mean $0.01 per share of Common
Stock, subject to the adjustments provided for in Section 7 of this Additional
Warrant.
"Floor Price" shall mean $0.28.
"Per Share Additional Warrant Value" shall mean the difference resulting
from subtracting the Exercise Price from the Bid Price of one share of Common
Stock on the Trading Day immediately preceding the Date of Exercise.
"Registration Rights Agreement" shall mean the amended and restated
registration rights agreement, dated the date hereof between the Company and the
Investor.
"Subscription Date" shall mean May 14, 1998.
"Warrant Holder" shall mean the Investor or any assignee or transferee of
all or any portion of this Additional Warrant;
and other capitalized terms used but not defined herein shall have their
respective meanings set forth in the Agreement.
Section 2. Exercisability.
(a) Timing. If the Market Price on the Effective Date of the
Initial Registration Statement is lower than $1.50, this Additional Warrant
shall become immediately exercisable, subject to clause (c) below.
(b) Number of Shares. The number of shares of Common Stock for
which this Additional Warrant is exercisable (the "Additional Warrant Shares")
shall be determined by subtracting (x) 166,667 from (y) $250,000 divided by the
greater of (i) the Market Price on the Effective Date of the Initial
Registration Statement and (ii) the Floor Price.
Section 3. Exercise; Cashless Exercise.
(a) Method of Exercise. This Additional Warrant may be exercised
in whole or in part (but not as to a fractional share of Common Stock), at any
time and from time to time during the Exercise Period, by the Warrant Holder by
(i) surrender of this Additional Warrant, with the form of exercise attached
hereto as Exhibit A duly executed by the Warrant Holder (the "Exercise Notice"),
to the Company at the address set forth in Section 14 hereof, accompanied by
payment of the Exercise Price multiplied by the number of shares of Common Stock
for which this Additional Warrant is being exercised (the "Aggregate Exercise
Price") or (ii) telecopying an executed and completed Exercise Notice to the
Company and delivering to the Company within three business days thereafter the
original Exercise Notice, this Additional Warrant and the Aggregate Exercise
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Price. Each date on which an Exercise Notice is received by the Company in
accordance with clause (i) and each date on which the Exercise Notice is
telecopied to the Company in accordance with clause (ii) above shall be deemed
an "Exercise Date".
(b) Payment of Aggregate Exercise Price. Subject to paragraph (c)
below, payment of the Aggregate Exercise Price shall be made by check or bank
draft payable to the order of the Company or by wire transfer to an account
designated by the Company. If the amount of the payment received by the Company
is less than the Aggregate Exercise Price, the Warrant Holder will be notified
of the deficiency and shall make payment in that amount within five (5) business
days. In the event the payment exceeds the Aggregate Exercise Price, the Company
will refund the excess to the Warrant Holder within three (3) business days of
receipt.
(c) Cashless Exercise. As an alternative to payment of the
Aggregate Exercise Price in accordance with paragraph (b) above, the Warrant
Holder may elect to effect a cashless exercise by so indicating on the Exercise
Notice and including a calculation of the number of shares of Common Stock to be
issued upon such exercise in accordance with the terms hereof (a "Cashless
Exercise"). In the event of a Cashless Exercise, the Warrant Holder shall
surrender this Additional Warrant for that number of shares of Common Stock
determined by (i) multiplying the number of Additional Warrant Shares for which
this Additional Warrant is being exercised by the Per Share Additional Warrant
Value and (ii) dividing the product by the Bid Price of one share of the Common
Stock on the Trading Day immediately preceding the Date of Exercise.
(d) Replacement of Additional Warrant. In the event that the
Additional Warrant is not exercised in full, the number of Additional Warrant
Shares shall be reduced by the number of such Additional Warrant Shares for
which this Additional Warrant is exercised, and the Company, at its expense,
shall forthwith issue and deliver to or upon the order of the Warrant Holder a
new Additional Warrant of like tenor in the name of the Warrant Holder or as the
Warrant Holder may request, reflecting such adjusted number of Additional
Warrant Shares.
Section 4. Ten Percent Limitation. The Warrant Holder may not exercise this
Additional Warrant such that the number of Additional Warrant Shares to be
received pursuant to such exercise aggregated with all other shares of Common
Stock then owned by the Warrant Holder beneficially or deemed beneficially owned
by the Warrant Holder would result in the Warrant Holder owning more than 9.9%
of all of such Common Stock as would be outstanding on such date, as determined
in accordance with Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder. As of any date prior to the Date of Exercise, the
aggregate number of shares of Common Stock into which this Additional Warrant is
exercisable, together with all other shares of Common Stock then beneficially
owned (as such term is defined in Rule 16 under the Exchange Act) by such
Warrant Holder and its affiliates, shall not exceed 9.9% of the total
outstanding shares of Common Stock as of such date.
Section 5. Delivery of Stock Certificates.
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(a) Subject to the terms and conditions of this Additional
Warrant, as soon as practicable after the exercise of this Additional Warrant in
full or in part, and in any event within three (3) Trading Days thereafter, the
Company at its expense (including, without limitation, the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate
or certificates for the number of validly issued, fully paid and non-assessable
Additional Warrant Shares to which the Warrant Holder shall be entitled on such
exercise, together with any other stock or other securities or property
(including cash, where applicable) to which the Warrant Holder is entitled upon
such exercise in accordance with the provisions hereof; provided, however, that
any such delivery to a location outside of the United States shall be made
within five (5) Trading Days after the exercise of this Additional Warrant in
full or in part.
(b) This Additional Warrant may not be exercised as to fractional
shares of Common Stock. In the event that the exercise of this Additional
Warrant, in full or in part, would result in the issuance of any fractional
share of Common Stock, then in such event the Warrant Holder shall receive in
cash an amount equal to the Bid Price of such fractional share within three (3)
Trading Days.
Section 6. Representations, Additional Warranties and Covenants of the
Company.
(a) The Company shall take all necessary action and proceedings
as may be required and permitted by applicable law, rule and regulation for the
legal and valid issuance of this Additional Warrant and the Additional Warrant
Shares to the Warrant Holder.
(b) At all times during the Exercise Period, the Company shall
take all steps reasonably necessary and within its control to insure that the
Common Stock remains listed or quoted on the Principal Market.
(c) The Additional Warrant Shares, when issued in accordance with
the terms hereof, will be duly authorized and, when paid for or issued in
accordance with the terms hereof, shall be validly issued, fully paid and
non-assessable.
(d) The Company has authorized and reserved for issuance to the
Warrant Holder the requisite number of shares of Common Stock to be issued
pursuant to this Additional Warrant. The Company shall at all times reserve and
keep available, solely for issuance and delivery as Additional Warrant Shares
hereunder, such shares of Common Stock as shall from time to time be issuable as
Additional Warrant Shares.
Section 7. Adjustment of the Exercise Price. The Exercise Price shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(a) Reclassification, Consolidation, Merger or Mandatory Share
Exchange. If the Company, at any time while this Additional Warrant is
outstanding (i) reclassifies or changes its Outstanding Capital Shares or (ii)
consolidates, merges or effects a mandatory share exchange with or into another
corporation (other than a merger or mandatory share exchange with another
corporation in which the Company is a continuing corporation and that does not
result in any reclassification or change, or as a result of a subdivision or
combination of Outstanding Capital Shares issuable upon exercise of this
Additional Warrant), then in any such event the Company, or such successor or
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purchasing corporation, as the case may be, shall, without payment of any
additional consideration therefore, amend this Additional Warrant or issue a new
warrant providing that the Warrant Holder shall have rights not less favorable
to the holder than those then applicable to this Additional Warrant and to
receive upon exercise under such amendment of this Additional Warrant or new
warrant, in lieu of each share of Common Stock theretofore issuable upon
exercise of this Additional Warrant hereunder, the kind and amount of shares of
stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one share of Common Stock issuable upon exercise of
this Additional Warrant had this Additional Warrant been exercised immediately
prior to such reclassification, change, consolidation, merger, mandatory share
exchange or sale or transfer. Such amended warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 7. The provisions of this subsection (a) shall
similarly apply to successive reclassifications, changes, consolidations,
mergers, mandatory share exchanges and sales and transfers.
(b) Subdivision or Combination of Shares. If the Company, at any
time while this Additional Warrant is outstanding shall subdivide its Common
Stock, the number of shares of Common Stock issuable to the Investor hereunder
shall be proportionately increased as of the effective date of such subdivision,
or, if the Company shall take a record of holders of its Common Stock for the
purpose of so subdividing, as of such record date, whichever is earlier. If the
Company, at any time while this Additional Warrant is outstanding shall combine
its Common Stock, the number of shares of Common Stock issuable to the Investor
hereunder shall be proportionately decreased as of the effective date of such
combination, or, if the Company shall take a record of holders of its Common
Stock for the purpose of so combining, as of such record date, whichever is
earlier.
(c) Stock Dividends. If the Company, at any time while this
Additional Warrant is unexpired and not exercised in full, shall pay a dividend
in its Capital Shares, or make any other distribution of its Capital Shares,
then the Exercise Price shall be adjusted, as of the date the Company shall take
a record of the holders of its Capital Shares for the purpose of receiving such
dividend or other distribution (or if no such record is taken, as at the date of
such payment or other distribution), to that price determined by multiplying the
Exercise Price in effect immediately prior to such payment or other distribution
by a fraction:
1. the numerator of which shall be the total number of Outstanding
Capital Shares immediately prior to such dividend or distribution, and
2. the denominator of which shall be the total number of Outstanding
Capital Shares immediately after such dividend or distribution. The provisions
of this subsection (c) shall not apply under any of the circumstances for which
an adjustment is provided in subsections (a) or (b).
(d) Adjustment of Number of Shares. Upon each adjustment of the
Exercise Price pursuant to any provisions of this Section 7, the number of
Additional Warrant Shares issuable hereunder at the option of the Warrant Holder
shall be calculated, to the nearest one hundredth of a whole share, multiplying
the number of Additional Warrant Shares issuable prior to an adjustment by a
fraction:
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1. the numerator of which shall be the Exercise Price before any
adjustment pursuant to this Section 7; and
2. the denominator of which shall be the Exercise Price after such
adjustment.
(e) Liquidating Dividends, Etc. If the Company, at any time while
this Additional Warrant is unexpired and not exercised in full, makes a
distribution of its assets or evidences of indebtedness to the holders of its
Capital Shares as a dividend in liquidation or by way of return of capital or
other than as a dividend payable out of earnings or surplus legally available
for dividends under applicable law or any distribution to such holders made in
respect of the sale of all or substantially all of the Company's assets (other
than under the circumstances provided for in the foregoing subsections (a)
through (g)) while an exercise is pending, then the Warrant Holder shall be
entitled to receive upon such exercise of the Additional Warrant in addition to
the Additional Warrant Shares receivable in connection therewith, and without
payment of any consideration other than the Exercise Price, an amount in cash
equal to the value of such distribution per Capital Share multiplied by the
number of Additional Warrant Shares that, on the record date for such
distribution, are issuable upon such exercise of the Additional Warrant (with no
further adjustment being made following any event which causes a subsequent
adjustment in the number of Additional Warrant Shares issuable), and an
appropriate provision therefor shall be made a part of any such distribution.
The value of a distribution that is paid in other than cash shall be determined
in good faith by the Board of Directors of the Company.
(f) Other Provisions Applicable to Adjustments Under this
Section. The following provisions will be applicable to the making of
adjustments in any Exercise Price hereinabove provided in this Section 7:
1. Other Action Affecting Capital Shares. In case after the date
hereof the Company shall take any action affecting the number of Outstanding
Capital Shares, other than an action described in any of the foregoing
subsections (a) through (e) hereof, inclusive, which in the opinion of the
Company's Board of Directors would have a materially adverse effect upon the
rights of the Warrant Holder at the time of exercise of the Additional Warrant,
the Exercise Price shall be adjusted in such manner and at such time as the
Board or Directors on the advice of the Company's independent public accountants
may in good faith determine to be equitable in the circumstances.
2. Notice of Certain Actions. In the event the Company shall, at a
time while the Additional Warrant is unexpired and outstanding, take any action
which pursuant to subsections (a) through (e) of this Section 7 may result in an
adjustment of the Exercise Price, the Company shall give to the Warrant Holder
at its last address known to the Company written notice of such action ten (10)
days in advance of its effective date in order to afford to the Warrant Holder
an opportunity to exercise the Additional Warrant prior to such action becoming
effective.
3. Notice of Adjustments. Whenever the Exercise Price or number of
Additional Warrant Shares shall be adjusted pursuant to Section 7 hereof, the
Company shall promptly make a certificate signed by its President or a Vice
President and by its Treasurer or Assistant Treasurer or its Secretary or
Assistant Secretary, setting forth in reasonable detail the event requiring the
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adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Company's
Board of Directors made any determination hereunder), and the Exercise Price and
number of Additional Warrant Shares purchasable at that Exercise Price after
giving effect to such adjustment, and shall promptly cause copies of such
certificate to be mailed (by first class and postage prepaid) to the Holder of
the Additional Warrant.
Section 8. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or By-Laws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Additional Warrant, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Warrant Holder against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any Additional
Warrant Shares above the amount payable therefor on such exercise, and (b) will
take all such action as may be reasonably necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable
Additional Warrant Shares on the exercise of this Additional Warrant.
Section 9. Rights As Stockholder. Prior to exercise of this Additional
Warrant, the Warrant Holder shall not be entitled to any rights as a stockholder
of the Company with respect to the Additional Warrant Shares, including (without
limitation) the right to vote such shares, receive dividends or other
distributions thereon or be notified of stockholder meetings. However, in the
event of any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend) or other distribution, any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, the
Company shall mail to each Warrant Holder, at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
Section 10. Replacement of Additional Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of the Additional Warrant and, in the case of any such loss, theft or
destruction of the Additional Warrant, upon delivery of an indemnity agreement
or security reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, on surrender and cancellation of such Additional
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Additional Warrant of like tenor.
Section 11. Choice of Law. This Agreement shall be construed under the laws
of the State of New York, without giving effect to conflict of law provisions.
Section 12. Entire Agreement; Amendments. This Additional Warrant, the
Incentive Warrant, the Registration Rights Agreement, and the Agreement contain
the entire understanding of the parties with respect to the matters covered
hereby and thereby. No provision of this Additional Warrant may be waived or
amended other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought.
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Section 13. Restricted Securities.
(a) Registration or Exemption Required. This Additional Warrant
has been issued in a transaction exempt from the registration requirements of
the Securities Act in reliance upon the provisions of Section 4(2) promulgated
by the SEC under the Securities Act. This Additional Warrant and the Additional
Warrant Shares issuable upon exercise of this Additional Warrant may not be
resold except pursuant to an effective registration statement or an exemption to
the registration requirements of the Securities Act and applicable state laws.
(b) Legend. Any replacement Additional Warrants issued pursuant
to Section 2 hereof and any Additional Warrant Shares issued upon exercise
hereof, shall bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION WHICH IS EXEMPT
FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS
CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY
SET FORTH IN A NOTE PURCHASE AGREEMENT, DATED AS OF JANUARY 15, 1999
BETWEEN SYTRON, INC. AND CRESCENT INTERNATIONAL LIMITED. A COPY OF THE
PORTION OF THE AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE
OBTAINED FROM SYTRON'S EXECUTIVE OFFICES."
Removal of such legend shall be in accordance with the legend removal
provisions in the Agreement.
(c) No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in Section 12(b) has been or shall be placed on the
share certificates representing the Additional Warrant Shares and no
instructions or "stop transfer orders," so called, " stock transfer
restrictions" or other restrictions have been or shall be given to the Company's
transfer agent with respect thereto other than as expressly set forth in this
Section 12.
8
214
<PAGE>
(d) Assignment. Assuming the conditions of Section 12(a) above
regarding registration or exemption have been satisfied, the Warrant Holder may
sell, transfer, assign, pledge or otherwise dispose of this Additional Warrant,
in whole or in part. The Warrant Holder shall deliver a written notice to
Company, substantially in the form of the Assignment attached hereto as Exhibit
B, indicating the person or persons to whom the Additional Warrant shall be
assigned and the respective number of warrants to be assigned to each assignee.
The Company shall effect the assignment within ten (10) days, and shall deliver
to the assignee(s) designated by the Warrant Holder an Additional Warrant or
Additional Warrants of like tenor and terms for the appropriate number of
shares.
(e) Investor's Compliance. Nothing in this Section 12 shall
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
Section 14. Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing and
shall be (i) personally served, (ii) deposited in the mail, registered or
certified, return receipt requested, postage prepaid, (iii) delivered by
reputable air courier service with charges prepaid, or (iv) transmitted by hand
delivery, telegram or facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written notice. Any
notice or other communication required or permitted to be given hereunder shall
be deemed effective (a) upon hand delivery or delivery by facsimile (with
accurate confirmation generated by the transmitting facsimile machine) at the
address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:
If to the Company:
Sytron, Inc.
2770 Industrial Lane
Broomfield, CO 80020
Attention: Mitchel Feinglas, CEO
Telephone: (303) 469-6100
Facsimile: (303) 469-7100
with a copy (which shall not constitute notice) to:
Bresler Goodman & Unterman, LLP
521 Fifth Avenue
New York, NY 10175
Attention: Andrew J. Goodman, Esq.
Jay Jacobson, Esq.
Telephone: (212) 661-2150
Facsimile: (212) 949-6131
9
215
<PAGE>
if to the Investor:
Crescent International Limited
Greenlight (Switzerland) SA
84, av Louis-Casai, P.O. Box 161
1216 Geneva, Cointrin
Switzerland
Attention: Melvyn Craw/Maxi Brezzi
Telephone: +41 22 791 72 56
Facsimile: +41 22 929 53 94
with a copy (which communication shall not constitute notice) to:
Rogers & Wells LLP
200 Park Avenue, 52nd Floor
New York, NY 10166
Attention: Sara Hanks, Esq./Earl Zimmerman, Esq.
Telephone: (212) 878-8000
Facsimile: (212) 878-8375
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 13 by giving at least ten (10) days'
prior written notice of such changed address or facsimile number to the
other party hereto.
Section 15. Miscellaneous. This Additional Warrant and any term hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. The headings in this Additional Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof. The invalidity or unenforceability of any provision hereof shall
in no way affect the validity or enforceability of any other provision.
IN WITNESS WHEREOF, this Additional Warrant was duly executed by the
undersigned, thereunto duly authorized, as of the date first set forth above.
SYTRON, INC.
By:
----------------------------
Name:
Title:
Attested:
By:
----------------------------
Name:
Title:
10
216
<PAGE>
EXHIBIT A TO THE ADDITIONAL WARRANT
EXERCISE FORM
SYTRON, INC.
The undersigned hereby irrevocably exercises the right to purchase
__________________ shares of Common Stock of Sytron, Inc., a Pennsylvania
corporation (the "Company"), evidenced by the attached Additional Warrant, and
herewith makes payment of the Exercise Price with respect to such shares in full
in the form of (check the appropriate box) (i) |_| cash or certified check in
the amount of $________; (ii) |_| wire transfer to the Company's account at
__________________, _________, _________ (Account No.:_________); or (iii) |_|
______ Additional Warrant Shares, which represent the amount of Additional
Warrant Shares as provided in the attached Additional Warrant to be canceled in
connection with such exercise, all in accordance with the conditions and
provisions of said Additional Warrant.
The undersigned requests that stock certificates for such Additional
Warrant Shares be issued, and a Additional Warrant representing any unexercised
portion hereof be issued, pursuant to this Additional Warrant in the name of the
registered Holder and delivered to the undersigned at the address set forth
below.
Dated:_______________________________________
- ----------------------------------------------
Signature of Registered Holder
Name of Registered Holder (Print)
- ----------------------------------------------
Address
11
217
<PAGE>
EXHIBIT B TO THE ADDITIONAL WARRANT
ASSIGNMENT
(To be executed by the registered Warrant Holder desiring to transfer the
Additional Warrant)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached
Additional Warrant hereby sells, assigns and transfers unto the persons below
named the right to purchase ______________ shares of the Common Stock of Sytron,
Inc. evidenced by the attached Additional Warrant and does hereby irrevocably
constitute and appoint ______________________ attorney to transfer the said
Additional Warrant on the books of the Company, with full power of substitution
in the premises.
Dated:
- -------------------------------
Signature
12
218
<PAGE>
Fill in for new Registration of Additional Warrant:
- ------------------------------------------
Name
- ------------------------------------------
Address
- ------------------------------------------
Please print name and address of assignee
(including zip code number)
13
219
<PAGE>
EXHIBIT F
TERMINATION AGREEMENT
TERMINATION AGREEMENT
TERMINATION AGREEMENT (the "Agreement"), dated as of January 15, 1999,
by and between Sytron, Inc. (the "Company") and Crescent International Limited
(the "Investor").
WHEREAS, the Company and the Investor entered into a Private Equity
Line Agreement, dated as of May 14, 1998, (the "Equity Line Agreement");
WHEREAS, the parties hereto desire to terminate the Equity Line
Agreement;
NOW, THEREFORE, in consideration of the agreements set forth below,
and other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
Definitions. Unless otherwise indicated, capitalized terms used herein and
not defined herein shall have the respective meanings given to them in the
Equity Line Agreement.
Termination of the Equity Line Agreement. Each of the parties hereto agrees
that (i) except as otherwise may be expressly provided under the provisions of
the Equity Line Agreement, the Equity Line Agreement is hereby terminated, such
termination to be effective as of the date hereof, except with respect to those
provisions which expressly survive the termination of the Equity Line Agreement,
(ii) any requirement for notice (whether written or oral) with respect to the
termination of the Equity Line Agreement is hereby waived, and (iii) any other
requirement or condition precedent to the termination of the Equity Line
Agreement is hereby waived or shall be deemed to have been satisfied, as the
case may be.
Counterparts. This Agreement may be executed in any number of counterparts
and by different parties hereto on separate counterparts, each of which
counterparts, when executed and delivered, shall be deemed an original and all
of which counterparts, taken together, shall constitute one and the same
Agreement.
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
1
220
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
CRESCENT INTERNATIONAL LIMITED
By:
-----------------------------------
Melvyn Craw
Title:
SYTRON, INC.
By:
-----------------------------------
Mitchel Feinglas
Title: Chief Executive Officer
2
221
<PAGE>
EXHIBIT G
OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
[Date]
Crescent International Limited
Re: Note Purchase Agreement Between Crescent International Limited and Sytron,
Inc.
Dear Ladies and Gentlemen:
We have acted as special counsel for the Company in connection with the
execution, delivery and performance of the Note Purchase Agreement by and
between Crescent International Limited, a Bermuda entity (the "Investor") and
Sytron, Inc. (the "Company"), dated January 15, 1999 (the "Agreement"), which
provides for, among other things, the issuance and sale by the Company of
convertible notes (the "Convertible Notes") certain shares in payment of fees as
specified in the Agreement (the "Commitment Shares"), certain additional shares
(the "Indemnity Shares") and a warrant to purchase up to 568,627 shares of
Common Stock (the "Additional Warrant, and the shares of Common Stock issued or
issuable pursuant to exercise of the Warrants, the "Additional Warrant Shares").
This opinion is furnished to you pursuant to Section 7.2(g) of the Note Purchase
Agreement. All terms used herein have the meaning defined for them in the Note
Purchase Agreement unless otherwise defined herein.
For purposes of this opinion, we have examined copies of the following
documents:
(a) an executed copy of the Note Purchase Agreement;
(b) an executed copy of the Registration Rights Agreement;
(c) an executed copy of the Additional Warrant;
(d) an executed copy of Convertible Note No. 1;
(e) an executed copy of the Security Agreement;
(f) an executed copy of the Termination Agreement;
(g) the Articles of Incorporation of the Company, certified by the Department of
State of the Commonwealth of Pennsylvania by a certificate dated April 29, 1998,
and certified to us by an officer of the Seller as being complete and in full
force and effect as of the date of this opinion;
(h) the Bylaws of the Company, as amended to date, and certified to us by an
officer of the Company as being complete and in full force and effect as of the
date of this opinion; and
222
<PAGE>
(i) records certified to us by an officer of the Company as constituting records
of proceedings and actions by the Board of Directors of the Company relating to
the transactions contemplated by the Note Purchase Agreement.
Items (a) through (f) above collectively are referred to as the "Agreements."
As special counsel, we also examined such other certificates, documents and
records, and have made such examinations of law, as we have deemed necessary to
enable us to render the opinions expressed below. In addition, we have examined
and relied as to matters of fact upon representations contained in the Note
Purchase Agreement and in a certificate of the Chief Executive Officer of the
Company.
Whenever a statement herein is qualified by "to our knowledge," or words of
similar import, it indicates that no information that would give us current
actual knowledge of the inaccuracy of such statement has come to the attention
of attorneys in this firm who had significant responsibility representing the
Company during the course of our representation of the Company with respect to
this matter. We have not made any independent investigation to determine the
accuracy of such statement, except as expressly described herein.
The opinions expressed herein are limited solely to the laws and regulations of
the United States of America and the State of the Colorado.
For purposes of rendering the opinion set forth below, we have assumed, with
your consent and without independent investigation or examination, that:
(i) each of the parties to the Agreements (other than the Company, as to which
our opinion is rendered below) has duly and validly executed and delivered each
Agreement to which such party is a signatory, and such party's obligations set
forth therein are its legal, valid and binding obligations, enforceable against
such party in accordance with their respective terms.
(ii) each person executing any Agreement on behalf of any party is duly
authorized to do so;
(iii) each natural person executing any Agreement is legally competent to do so.
(iv) there are no oral or written modifications of, or amendments to, any
Agreement, and there has been no waiver of any of the provisions of any
Agreement by action or conduct of the parties or otherwise; and
223
<PAGE>
(v) all documents submitted to us as originals are authentic and complete, all
documents submitted to us as certified or photostatic copies conform to the
original documents, all signatures on all documents submitted to us for
examination are genuine, and all public records reviewed are accurate and
complete.
For purposes of this opinion, we have assumed that the Investor has all
requisite power and authority, and has taken any and all necessary corporate
action, to execute and deliver the Agreements, and we are assuming that the
representations and warranties made by the Investor in the Agreements and
pursuant thereto are true and correct.
Based on the foregoing, and upon such other investigation as we have deemed
necessary, and subject to the qualifications and assumptions set forth below, we
are of the opinion that:
1. The Company is duly qualified as a foreign corporation to do business and is
in good standing in Colorado.
2. Each of the Agreements has been duly executed and delivered, and the
Additional Warrant has been duly executed and delivered, by the Company and, in
reliance on the opinion of Pennsylvania Counsel, each of the Agreements
constitutes valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except to the extent that enforcement
thereof may be limited by applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or similar laws of general application
relating to or affecting the enforcement of the rights of creditors and the
application of general principles of equity (regardless of whether enforcement
is sought in a proceeding at law or in equity) and further subject to the
qualifications set forth in the last sentence of this paragraph. We express no
opinion as to (a) the validity and enforceability of any provision of the
Agreements to the extent that such provision purports to waive any rights,
remedies or defense or of any provision for contribution or indemnification, (b)
whether any particular provisions of the Agreements will be specifically
enforced or (c) the enforceability of any provision of the Agreements, after any
adjustment, relating to the sufficiency of the number of authorized shares
available or the valid issuance of any shares for less than par value. [We note
that the Agreements are governed by the laws of the State of New York; if the
laws of the State of Colorado were determined by a court of competent
jurisdiction to govern any Agreement, such Agreement would constitute the legal,
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms subject to the exceptions set forth in the two
immediately preceding sentences.]
3. The execution, delivery and performance of the Agreements and the Additional
Warrant by the Company and the consummation by the Company of the transactions
contemplated thereby, including without limitation the issuance of the
224
<PAGE>
Convertible Notes, the Additional Warrant, and the Warrant Shares, do not and
will not (i) result in a violation of the Company's Articles or By-Laws; (ii) to
our knowledge, conflict with, or constitute a material default (or an event that
with notice or lapse of time or both would become a material default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement listed on Schedule 1 hereto, which the Company
has certified is a complete list of every agreement, indenture or instrument
involving more than $100,000 or any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company or any of its
subsidiaries is a party (each a "Material Agreement"); or (iii) result in a
violation of any federal or Colorado law, rule or regulation applicable to the
Company or by which any property or asset of the Company is bound or affected.
4. Based upon, and in reliance upon, the representations of the Investor in the
Note Purchase Agreement, the issuance of the Convertible Notes, the Additional
Warrant and the Note Shares in accordance with the Note Purchase Agreement, and
the issuance of the Warrant Shares in accordance with the Warrants, will be
exempt from securities registration under the Securities Act of 1933 and the
Colorado Securities Act.
5. To our knowledge, there are no outstanding options, warrants, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any right to
subscribe for or acquire any shares of Common Stock or contracts, commitments,
understanding, or arrangements by which the Company is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock, except as described in the Disclosure
Schedule.
Based and relying solely upon a review of the litigation docket maintained by
the Company, except as disclosed in the Disclosure Schedule, we hereby confirm
to you that to our knowledge there are no claims, actions, suits, proceedings or
investigations that are pending against the Company or its properties, or
against any officer or director of the Company in his or her capacity as such,
nor has the Company received any written threat of any such claims, actions,
suits, proceedings, or investigations which are required to be and have not been
disclosed in the Disclosure Schedule.
With respect to the enforceability of the choice of New York law provisions in
the Agreements, we think it is likely that a Colorado court will honor the
choice made by the parties thereto. There is, however, always the possibility
that a Colorado court would hold that it has a materially greater interest than
the State of New York in the determination of a particular issue arising under
the Agreements, that Colorado law would apply absent the parties' choice of law,
and that the application of New York law would be contrary to a fundamental
policy of Colorado.
225
<PAGE>
We express no opinion as to any other matter other than as expressly set forth
herein this opinion, and no other opinion is intended to be implied or inferred
herefrom. The opinions expressed herein are given as of the date hereof, and we
undertake no obligation hereby and disclaim any obligation to advise you of any
change in law, facts or circumstances occurring after the date hereof pertaining
to any matter referred to herein.
The opinions expressed in this letter are strictly limited to the matters stated
herein, and no other opinions may be implied. This opinion is provided as a
legal opinion only, effective as of the date of this letter, and not as a
guarantee or warranty of the matters discussed herein. The opinions expressed in
this letter are solely for your information in connection with the execution and
delivery of the Agreements and may not be relied upon in any respect by any
other person or for any other person. This letter may not be published, quoted,
or referenced to, or filed with any person without our prior written consent.
Very truly yours,
226
<PAGE>
EXHIBIT H
Irrevocable Instructions to Transfer Agent
January 15, 1999
[Transfer Agent]
[Address]
[Phone number]
[Facsimile number]
Ladies and Gentlemen:
Reference is made to the certain Note Purchase Agreement (the "Note
Purchase"), dated as of the date herewith, by and between Sytron, Inc. (the
"Company"), and the "Holder" (as defined below) pursuant to which the Company is
issuing to the Holder, and may issue in the future, Convertible Notes (the
"Convertible Notes"). The Convertible Notes are convertible into shares (the
"Note Shares") of Common Stock. This letter shall serve as our irrevocable
authorization and direction to you to issue and deliver Note Shares in the
manner and within the time frames set forth in the Convertible Notes.
Certificates for the Note Shares shall not bear any legend restricting their
transfer and shall not be subject to any stop-transfer restriction other than as
permitted in Section ___ of the Note Purchase; provided, however, if the Note
Shares are not registered for resale under the Securities Act of 1933, as
amended, and legend removal is not otherwise allowed under Section ___ of the
Note Purchase, then the certificates for the Shares shall bear the following
legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION, IN WHICH EVENT SYTRON SHALL HAVE RECEIVED AN
OPINION OF COUNSEL STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES LAWS. THE
HOLDER OF THIS CERTIFICATE IS THE BENEFICIARY OF CERTAIN OBLIGATIONS OF THE
COMPANY SET FORTH IN A NOTE PURCHASE AGREEMENT BETWEEN SYTRON, INC. AND CRESCENT
INTERNATIONAL LIMITED DATED AS OF JANUARY 15, 1999. A COPY OF THE PORTION OF THE
AFORESAID AGREEMENT EVIDENCING SUCH OBLIGATIONS MAY BE OBTAINED FROM THE
COMPANY'S EXECUTIVE OFFICES.
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<PAGE>
Please be advised that Holder is relying upon this letter as an inducement
to enter into the Note Purchase Agreement and, accordingly, it is agreed that
Holder is a third party beneficiary to these instructions. Moreover, the Company
cannot revoke or modify these instructions without the prior written consent of
Holder.
The Company hereby agrees that it will not unilaterally terminate its
relationship with the Transfer Agent. In the event the Company's agency
relationship with the Transfer Agent should be terminated for any reason prior
to the date which is three (3) years after Closing for the issuance of
Convertible Note No. 2 (as described in the Note Purchase Agreement), the
Company's Transfer Agent shall continue acting as transfer agent pursuant to the
terms of these Irrevocable Instructions to Transfer Agent until such time that a
successor transfer agent (i) is appointed by the Company; and (ii) executes and
agrees to be bound by the terms of these Irrevocable Instructions to Transfer
Agent.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at (___) ___-____.
Very truly yours,
SYTRON, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Agreed and Acknowledged as of January 15, 1999:
[TRANSFER AGENT]
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Enclosure
cc: Crescent International Limited ("Holder")
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<PAGE>
EXHIBIT I
COMPLIANCE CERTIFICATE
The undersigned, __________, hereby certifies, with respect to shares of common
stock of the _____________ (the "Company") issuable in connection with the Put
Notice, dated _____________ (the "Notice"), delivered pursuant to Article II of
the Note Purchase Agreement, dated January 15, 1999, by and between the Company
and Crescent International Limited (the "Agreement"), as follows:
1. The undersigned is the duly elected Chairman and Chief Executive Officer of
the Company.
2. The representations and warranties of the Company set forth in Article V of
the Agreement are true and correct in all material respects as though made on
and as of the date hereof.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Closing Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in Article VII of the Agreement.
The undersigned has executed this Certificate this ____ day of ________, 199_.
------------------------------------
Name:
Title:
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<PAGE>
SYTRON, INC.
-----------------------------
EXHIBIT 10.2
-----------------------------
LEASE BETWEEN
THE COMPANY AND
ROBERT LAW FAMILY TRUST
-----------------------------
230
<PAGE>
LEASE of 2770, 2780 to SYTRON
LEASE OF 35040 sf approx. of 2770 & 2880 INDUSTRIAL LN.,
BROOMFIELD, CO. to SYTRON INC.
This lease made and entered into this thirtieth day of June 1998, by and between
the Robert Law Family Trust, hereinafter referred to as "Landlord" and SYTRON
INC. of 2770 Industrial Lane, Broomfield, CO. hereinafter referred to as
"Tenant."
1. PREMISES: Landlord for and in consideration of all rents, covenants,
agreements and conditions hereinafter set forth to be kept and performed by
Tenant has this day and by these presents rents, leases, and lets unto Tenant
the premises identified by FLOOR PLAN in Exhibit A attached hereto and
incorporated herein by this reference consisting of approximately 35,040 square
feet (the "Demised Premises") which are located in the building located at 2770
& 2780 Industrial Lane, Broomfield, Colorado ("the Building") . The Area
occupied is 43% of the total building.
2. TERMS OF LEASE: The term of this lease (the "Term") shall commence upon
signing & ending 12/31/2002. The Tenant will be leasing both spaces at the rent
schedule listed in item 3 below, 'RENT' . As a special consideration Sytron will
pay 1/2 rent on 2780 [18,000sf] for the first three months of this lease. The
Temporary tenant 'Fusion Specialties' will be allowed to stay in the space until
31 days after Sytron requests in writing to landlord that they be removed. All
rent paid by Fusion Specialties will be collected and retained by landlord.
3. RENT: Tenant agrees to pay as rent to Landlord at its address specified
in this Lease, or at such other place Landlord may from time to time designate
to Tenant in Writing, the following amounts for the periods indicated:
Period Rental Rate/sf/yr.
------ ------ -----------
7/1/98 to 12/31/2002 $15,768/mo. 5.40
In advance on the 1st day of each and every calendar month during the Term
hereof, starting the first day Tenant moves into new space. The 1st months rent
will be prorated if tenant moves in mid-month.
Rent is due on the first (1st) day of each calendar month. In the event
that rent is received by Landlord after the fifth day of the month for any
reason this will be a material breach of the lease and a 10% late fee(l0% of
monthly rent) will be assessed to be paid with the rent. Failure to pay this
late fee will also be a material breach of the lease. Further 1.5% per month
will be charged on all
1
/s/ RL RH
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<PAGE>
LEASE of 2770, 2780 to SYTRON
uncollected back charges. The Rent for any partial month to be paid hereunder
shall be prorated for the portion of the month the Demised Premises are occupied
by Tenant. The last month's Rent shall be due and Payable on or before
11/31/2003
3.5 TAXES:
Tenant shall pay, as additional rent hereunder, all prorated increases in
general property taxes and increases in insurance premiums of Landlord paid for
general liability, hazard, fire and extended coverage insurance under Paragraph
5 hereof, over the base year of 1998 for general property taxes ("Base Tax
Rate") and base year of 1998 for insurance, for the Demised Premises. Such
increases in general property taxes and insurance premiums shall be paid by
Tenant to Landlord each year within 30 days following receipt of Landlord's
notice to Tenant of such increases, prorated for Tenant's use of above stated
percentage of the total building.
4. LIMITATION of USE of PREMISES: During the term of this Lease, the
Demised Premises shall be used and operated only for the purposes of
engineering, development, marketing, sales, & manufacture of security devices
together with such other activities as tenant shall reasonably engage. Provided,
however, no change in the use of the Demised Premises from that set forth above
shall be made without the prior written approval and consent of the Landlord.
Tenant will not use or permit any person to use said Demised Premises or any
buildings situated upon the Demised Premises at any time, for any purpose in
violation of the laws of the United States, the State of Colorado, or the
Ordinances of the City of Broomfield, Colorado. Tenant shall keep said Demised
Premises and improvements at any time situated thereon, and every part thereof
in a clean condition and in a good state of repair, and shall comply fully with
all laws and regulations relating to health and safety, applicable to the real
property upon which the Demised Premise is located.
Tenant to have the right to park two storage trailers in a area designated
by the Landlord, provided that they put blocks under the front dollies of the
trailers to prevent damage to the asphalt. This trailer parking may have to come
out of the parking that is designated for Sytron.
5. INSURANCE: Landlord shall maintain general liability insurance and
hazard, fire and extended coverage insurance on the Building throughout the Term
based on
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replacement value from a licensed casualty insurance company authorized to do
business in the State of Colorado and approved by Landlord in Landlord's sole
discretion. The general liability hazard, fire and extended coverage insurance
shall be at Landlord's expense except that Tenant shall pay for all prorated
increases in premiums for such coverage attributable to the Demised Premises as
occupied by Tenant as set forth in Paragraph 3. At the beginning of this lease
term, the insurance premium on the Demised Premises is 43% of $3014. Landlord
shall notify Tenant in writing of any increases in its insurance costs for the
Demised Premises by delivering to Tenant a copy of any notice of increase that
Landlord receives from its insurance carrier with the notice of Increases
provided for in paragraph 3 of this Lease. Such insurance to be obtained by
Landlord shall not cover the contents of the Demised Premises, and Tenant shall
be responsible for insuring such contents. The parties hereby waive all rights
of subrogation against one another, and agree to execute whatever other
documents are reasonably required to carry out this mutual waiver of
subrogation. Tenant shall at all times during the Term keep in effect public
liability insurance and property damage insurance with bodily injury coverage in
the names of and for the benefit of Tenant and Landlord (as an additional named
[insured] with limits as follows:
Bodily Injury: $1,000,000 each person
$3,000,000 each accident
Property Damage: $1,000,000 aggregate or each
occurrence
Such insurance may, at Tenant's election, be carried under any general blanket
coverage of Tenant. A certificate of insurance acceptable to Landlord shall be
tendered by Tenant and provided to Landlord not less than fifteen (15) days
after the execution of this lease. Each original policy or a certified copy
thereof, or a certificate of the insurer evidencing insurance carried with proof
of payment of the premium by Tenant will be deposited with Landlord within ten
(10) days after execution of the lease. Tenant shall have the right to settle
and adjust all liability claims and all claims against the insuring companies,
but without subjecting Landlord to any liability or obligation.
6. INDEMNIFICATION of LANDLORD: Tenant hereby agrees to indemnify and hold
harmless Landlord from any and all claims of any kind or nature arising from the
Tenant's use of the Demised Premises during the Term hereof. Tenant
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hereby waives all claims against Landlord for damage to goods, wares or
merchandise or for injury to persons in and upon the Demised Premises from any
cause whatsoever, except such as might result from the negligence of Landlord to
perform its obligations hereunder within a reasonable time after notice provided
to Landlord in writing by the Tenant requiring such performance by the Landlord.
Notice will be delivered to 1045 Emerald, Broomfield, CO, 80020 by certified
mail.
7. MAINTENANCE: Landlord agrees to maintain in good repair (i) the roof of
the Building. (ii) the asphalt paved parking lot, and (iii) the existing
landscaping adjacent to the parking lot. Tenant agrees to keep the exterior of
the Demised Premise (including but not limited to the overhead doors, lighting,
wall panels, windows, doors and dock assemblage) and all the interior(including
without limitation all lights, windows, doors, plumbing, electrical, and carpet)
of the Demised Premises, clean and in good repair at all times. Tenant shall
maintain all EVAC that is for the benefit of the demised premises whether
installed in the demised premises, on the roof, or outside the building. This
shall not be limited to ordinary maintenance, all repairs of above outlined
items are the responsibility of the tenant. Landlord shall not be obligated to
make any repairs until reasonable written notice of the need of repair shall
have been given to the Landlord by Tenant and after such notice is so given,
Landlord shall have fifteen [153 business days to commence such repairs. Tenant
agrees to replace all glass broken or damaged due to negligence of Tenant during
the term of this Lease with glass of the same quality as that broken or damaged.
Inspection of the demised premises may be made at any time deemed necessary
by the Landlord; inspection to be performed by the Landlord or his designee with
the tenant or his designee to make a list of all repairs required of the Tenant
to maintain the space in as near as original condition as possible normal wear
and tear accepted. The Tenant shall have thirty [30] days to complete these
repairs to the reasonable satisfaction of the Landlord in a mutually agreed upon
workmanlike manner. If the required repairs are not completed in the above time,
and in a workmanlike manner, the Landlord has the right to contract with an
outside contractor to effect the required repairs at the sole expense of the
Tenant.
a) All welding or noxious/toxic fume generation, if any, is to be done in
City of Broomfield approved ventilated hoods or rooms.
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b) All spray painting to be done in City of Broomfield approved ventilated
hoods or rooms.
c) The building shall be returned to the Landlord in as like ORIGINAL
CONDITION, excepting normal wear and tear, REGARDLESS of use to which the
building is put during occupation by the tenant. The Landlord shall furnish a
completed checklist of the specific condition of the demised premises to the
Tenant at the beginning of the lease. At the end of the lease it shall be the
sole responsibility of the tenant to return the demised premises to the landlord
in the original condition, as noted above, excepting normal wear and tear.
8. ERECTION and REMOVAL of SIGNS: Since Tenant already has signs for 2770
Industrial Lane no additional signs will be allowed on building.
9. FIXTURES and EQUIPMENT: It is specifically understood and agreed that
Tenant shall own any and all equipment and machinery, or any other property
installed by Tenant, at its own expense, in or on said Demised Premises during
the Term of this Lease, whether or not attached to the Building, and that said
equipment or machinery may be removed from the Demised Premises by Tenant
provided that all sums due hereunder to the landlord shall have been paid in
full, and provided further that repairs necessary as the result of the removal
of said machinery and equipment are made to return the Building to substantially
the same condition it was in prior to the installation of said fixtures,
equipment and machinery. Tenant shall not exercise the rights and privileges
granted by this paragraph in such a manner as to damage or affect the structure
or structural integrity or qualities of the Building. At the end of the lease
period Tenant and landlord will go over building and agree as to what
improvements made by tenant are to be removed, provided the tenant shall be
solely responsible to return the premises to the Landlord in the same condition
as when entered upon.
10. ALTERATIONS TO THE PREMISES: Tenant shall have the right, at its sole
expense, to make changes or alterations to the Demised Premises; subject to the
Landlord's prior written consent and provided, however, that in all cases any
such changes or alterations shall be made subject to the following conditions,
which the Tenant agrees to observe and perform:
a. No Structural Changes: No change or alteration shall at any time be made
which shall impair
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the structural integrity or soundness or diminish the value of the Building or
the Demised Premises or disturb or interfere with the quiet enjoyment of any
other tenants or lessees of the Building.
b. Notice to Landlord: Tenant shall give the Landlord at least seven (7]
days prior written notice of any proposed alteration and shall fully cooperate
with Landlord in either (i) notifying proposed contractors of the landlord's
non-liability therefor and, or (ii) posting notice of non-liability in a
conspicuous place on the Demised Premises in accordance with Colorado law.
c. Consent of Landlord: No changes or alteration shall be made involving an
expenditure in excess of $500.00 without the prior written consent of the
Landlord.
d. Permits: No change or alteration shall be undertaken on the Demised
Premises until Tenant shall have procured and paid for all required municipal
and other governmental permits and authorizations of the various municipal
departments and governmental subdivisions having jurisdiction. All plans and
specifications relating to any changes or alterations shall be submitted to the
Landlord for it's approval.
e. Compliance With The Law: All work done in connection with any changes or
alterations shall be done in a good and workmanlike manner and in compliance
with all applicable building and zoning laws, and with other laws, ordinances,
orders, rules, regulations, and requirements of all federal, state, and
municipal governments and the appropriate departments, boards and officers
thereof.
f. Insurance: At all times when any change or alterations are in progress,
there shall be maintained at tenants sole expense, adequate workers Compensation
Insurance in accordance with the law or laws now or hereafter enacted governing
all persons employed in connection with the contemplated change or alteration
and general liability insurance for the mutual benefit of Landlord and Tenant,
expressly covering the additional hazards due to the change or alterations in
amounts reasonably prudent by industry standards for similar construction
projects in the vicinity.
g. Security Against Liens: Prior to the construction of any improvements,
the repair or restoration of any improvements, or any work to be done upon the
Demised
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Premises, Tenant shall furnish to the Landlord a bond of insurance protecting
Landlord against mechanics' and materialmen's liens in an amount equal to the
work which is to be performed at the Demised Premises, together with a
performance and completion bond in an amount equal to the proposed cost of any
improvements and labor. Landlord retains the right at any time and from time to
time to enter upon the Demised Premises in order to inspect the progress of any
alterations being made thereto by Tenant and to post any signs or notices
disclaiming the Landlord's responsibility or liability for the payment of any
mechanics' or materialmen's fees, or the furnishing of any labor or services to
the Demised Premises. Tenant shall not permit any party to file any lien or
claim against Landlord or its interest in the Demised Premises on account of any
such improvements or alteration for work done or supplies furnished to the
Demised Premises at the insistence of the Tenant. In the event a lien or claim
is filed against the Demised Premises, Tenant shall immediately cure and pay the
amount of such lien or claim (including any costs) or in good faith diligently
pursue the defense of any such lien or claim provided that Tenant shall first
post with the Landlord adequate security (in the landlord's sole judgment)
covering 125 percent of the amount of such lien or claim or, in the alternative,
post a bond with the appropriate court in compliance with the Colorado law then
in existence to cause the removal of the lien from such property.
h. Failure on the part of the tenant to comply with any or all of the above
mentioned conditions shall be deemed to be a material breech of this lease.
i. A penalty of $500 will be assessed 7 days after notification if not
cured for every violation of the above section 10 or any other infraction of
this lease by the Tenant that the Landlord deems minor enough to not cancel the
lease over.
11. RIGHT of ENTRY of LANDLORD: The Tenant, at any time during the Term,
shall permit inspection of the Demised Premises during reasonable business hours
and upon reasonable notice by Landlord or by the Landlord's agents or
representatives of the purpose of ascertaining the condition of the Demised
Premises and in order that Landlord may make such repairs as may be required to
be made by the Landlord under the terms of this Lease. Ninety (90) days prior to
the expiration of this Lease, Landlord may post suitable notice on the Demised
Premises that the same are "For Rent" and may show the Demised Premises to
prospective tenants at reasonable times and upon reasonable notice to Tenant.
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Landlord shall not, however, thereby unnecessarily interfere with the use
of the Demised Premises by the Tenant.
12. PAYMENT of UTILITIES: Tenant shall pay all charges for heat, gas,
electricity, snow removal, and other public utilities used on the Demised
Premises. Water and sewer used in processing manufacturing will be charged to
Tenant. Landlord is to pay domestic water and sewer usage.
13. PAYMENT of TAXES and OTHER ASSESSMENTS: Landlord shall pay, when they
are due, the general real estate property taxes on the Demised Premises except
that Tenant shall be responsible for increases over the Base Tax Rate as set
forth in Paragraph 3. Tenant shall pay when due all general ad valorem personal
property taxes upon Tenant's personal property or fixtures located upon the
Demised Premises. Tenant shall further pay all other taxes, assessments, license
fees or other charges during the Term of this Lease which may be imposed by any
governmental authority by reason of Tenant's business within the Demised
Premises during the Term. In the event that Tenant shall fail to pay any of said
taxes when due, Landlord may pay the same pursuant to the provisions of
Paragraph 14 hereinafter set forth. Tenant shall have the right, at Tenant's
expense, in its or landlord's name, to contest the validity of any tax
assessment which Tenant is required to bear, pay and discharge hereunder by
appropriate legal proceedings instituted at least ten (10) days before the tax
or assessment complained of shall become delinquent, if and provided Tenant,
before instituting any such contest, gives Landlord written notice of its
intention so to do, and if and provided further Tenant shall prosecute any such
contest, tenant shall at all times effectually stay or prevent any official or
judicial sale thereof, under execution or otherwise, and shall pay any final
judgment enforcing the tax or assessment so contested and thereafter promptly
procure and record satisfaction thereof.
14. ASSIGNMENT and SUBLETTING: Neither this Lease nor any interest herein
may be assigned by the Tenant voluntarily or involuntarily, or by operation of
law, and neither all nor any part of the Demised Premises shall be sublet by the
Tenant without the written consent of the Landlord. If Tenant is a corporation,
the merger, consolidation, sale of substantially all of the assets, and sale of
all or substantially all of the stock of Tenant shall constitute an assignment
of this Lease for the purposes of this paragraph. If the Tenant is a
partnership, sale or other transfer of 50 percent or more of partnership assets
shall constitute an assignment of this lease for
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purposes of this paragraph. Any consent to assignment or subletting given by
Landlord shall not constitute a waiver of the necessity for such consent to any
subsequent assignment or subletting. If the Demised Premises is assigned or
sublet by the Tenant, Tenant shall remain fully liable for this Lease and shall
not be released from performing the terms, covenants and conditions set forth
herein.
15. NON-MONETARY DEFAULT: If Tenant shall default in the fulfillment of any
of the covenants and conditions hereof, except default in payment of Rent or
other monetary amounts due to Landlord hereunder, Landlord may, at its option,
after five (5) days prior written notice to Tenant, make performance for Tenant
and for that purpose advance such amounts as may be necessary to preserve or
protect the Demised Premises. Any amounts so advanced or any expense incurred or
sum of money paid by Landlord by reason of the failure of Tenant to comply with
any covenant, agreement, obligation or provision of this Lease or in defending
any action to which Landlord may be subject by reason of any such failure or for
any reason, shall be deemed to be additional rent for the Demised Premises and
shall be due and payable to Landlord on demand. The receipt and acceptance by
Landlord of any installment of Rent or of any additional rent hereunder shall
not be a waiver of any other rent then due to Landlord. If Tenant shall default
in fulfillment of any of the covenants or conditions of this Lease (other that
the covenants for the payment of Rent additional rent or other amounts) and any
such default shall continue for a period of five (5) days after written notice
provided to Tenant by Landlord, then Landlord may, at its option, terminate this
Lease by giving Tenant notice of such termination and, thereupon, this Lease
shall expire as fully and completely as if that day were the day definitely
fixed for the expiration of the Term and the Tenant shall then quit and
surrender the Demised Premises.
16. INSOLVENCY of LEASE:
a) Default in Rent: If tenant shall default in the payment of the Rent
or additional rent as set forth in Paragraph 3 of this Lease or any provision
thereof, or in making any other payment herein provided for, and any such
default shall continue for 5 days, or if the Demised Premises or any part
thereof shall be abandoned or vacated (except as a result of a casualty
contemplated in Paragraph 17), or if Tenant shall be dispossessed therefrom by
or under any authority other than the Landlord the Tenant shall quit and
surrender the Demised premises and a late charge of additional 10% of the
payment will be paid by the tenant.
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If the payment is late beyond 30 days from the due date (1st of the month) the
total balance, including late charges will be charged a 1.5% a month until the
balance is paid in full.
b) If the Tenant shall file a voluntary petition in bankruptcy, or if
the Tenant shall file any petition or institute any bankruptcy act (or any
amendment thereto hereafter made) seeking to affect its reorganization or a
composition with its creditors, or if (in any bankruptcy proceedings) a receiver
or trustee shall be appointed for Tenant or for the Demised Premises and not be
discharged within thirty (30) days of such date of appointment, or if any
proceeding shall be commenced for the reorganization of Tenant and be not
dismissed within thirty (30) days from such date of such commencement, or if the
lease hold estate created hereby shall be taken on execution or by any process
of law, or if Tenant shall admit in writing its inability to pay its obligations
generally as they become due, then Landlord may, at its option, terminate this
Lease. Landlord or Landlord's agents and servants may immediately, or at any
time thereafter, reenter the Demised Premises and remove all persons and
property therefrom, pursuant to the Colorado Forcible Entry and Detainer Statue,
without being, liable to indictment, prosecution or damage, therefor, Landlord
may, in addition to any other remedy provided by law or permitted herein, at its
option re-lease said Demised Premised on behalf of the Tenant, applying any
moneys collected first to the payment of expenses of resuming or obtaining
possession, and second to the payment of costs of placing the Demised Premises
in rentable condition, and third to the payment of Rent or additional rent due
hereunder, and any other charges due the Landlord as set forth in this lease.
Any surplus remaining thereafter shall be paid to Tenant. Tenant shall remain
liable for any deficiency in Rent or additional rent which shall be paid to
Tenant upon demand therefor to Landlord. In the event that the Tenant breaches
this lease by default for nonpayment or failure to comply with any other terms
or conditions of this lease, then Landlord shall be entitled to recover costs
including costs and reasonable attorney's fees, damages, injunctive or
declaratory relief in addition to all other remedies otherwise provided by this
agreement or Colorado law. In the event of termination of this Lease, Tenant
shall be liable to the Landlord for the balance of the Rent due hereunder for
the remaining term; however, Landlord shall make reasonable efforts to re-lease
the Demised Premises and to mitigate its damages.
17. FIRE or OTHER CASUALTY: If the Demised Premises or any part thereof
shall be damaged or destroyed by fire or other casualty, Landlord shall promptly
repair such damage
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and restore the Demised Premises without expense to Tenant, subject to delays
due to adjustment of insurance claims, strikes, and other causes beyond
Landlord's control. If such damage or destruction shall render the Demised
Premises untenantable in whole or in part, the Rent shall be abated wholly or
proportionately, as the case may be, until the damage shall be repaired and the
Demised Premises restored and made tenantable. If the damage, destruction or
taking shall be so extensive as to require the substantial rebuilding (i.e.,
cannot be made tenantable within 75 days from the damage or casualty) of the
Demised Premises, Landlord or Tenant may elect to terminate this Lease by
written notice given to the other party within ninety (90) days after the
occurrence of such damage or destruction.
18. SURRENDER of PREMISES: Tenant agrees to surrender the Demised Premises
at the expiration or sooner termination of this Lease, or any extension thereof,
in the same condition as at the commencement of this Lease, or as altered,
pursuant to the provisions of this Lease. Nothing contained in this paragraph
shall be deemed to alter or abridge Tenant's obligations under Paragraph 7
hereof.
19. HOLDOVER: Should Tenant hold over the Demised Premises or any part
thereof after the expiration of the Term of this Lease, unless otherwise agreed
in writing such holding over shall constitute a tenancy from month to month
only, and Tenant shall pay as monthly rental the then reasonable value of the
use and occupation of the Demised Premises which shall not be less, however,
than the Rent to be paid for the last month under this Lease plus 50%.
20. QUIET ENJOYMENT: If and so long as the Tenant pays the Rent reserved by
this Lease and performs and observes all covenants and provisions hereof, Tenant
shall quietly enjoy the Demised Premises, subject however, to the terms of this
Lease, and Landlord will warrant and defend the Tenant in the quite enjoyment
and peaceful possession of the Demised Premises throughout the Term of this
Lease.
21. WAIVER of COVENANTS: It is agreed that the waiving of any of the
covenants of this Lease Agreement by either party shall be limited to each
particular instance and shall not be deemed to waive any, other or further
breach of such covenant or any other provision herein contained in the lease.
22. RIGHTS of SUCCESSORS and ASSIGNS: The covenants and agreements
contained in this Lease shall apply to, inure to the benefit of, and be binding
upon the parties hereto
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and upon their respective successors in interest, legal representatives and
permitted assigns, except as expressly otherwise herein before provided.
23. TIME: Time is of the essence of this Lease, and every term, covenant
and condition herein contained.
24. RECORDING: Either party to this Lease may record this Lease or a
summary thereof, in the records of the office of The Clerk and Recorder of the
County of Boulder, State of Colorado with the prior written consent of the other
party. It is the Tenants responsibility to obtain and execute a release of any
recorded documents as a prerequisite to the return by Landlord of Tenants
security and/or damage deposit/s.
25. NOTICES: All notices required to be given or desired to be given
hereunder shall be in writing and shall be deemed duly served for all purposes
by being mailed by registered or certified mail, return receipt requested,
postage prepaid, and addressed as follows:
Landlord:
Robert Law, Trustee
Robert Law Family Trust
1045 Emerald
Broomfield, Colorado 80020
Tenant:
Sytron, Inc.
2770 Industrial Lane
Broomfield, Co.
80020
26. CONDITION of the PREMISES: Tenant accepts the Demised Premises in its
condition as of the date of occupancy in accordance with the terms hereof.
Tenant agrees that if during said Term the Tenant shall change the usual method
of conducting Tenants business on the Demised Premises, or should Tenant install
thereon or therein any new facilities, Tenant shall at the cost and expense of
the Tenant, make any and all alterations or improvements in or to the Demised
Premises which may be required by reason of any federal or state law or by any
municipal ordinance or regulation applicable thereto.
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27. EMINENT DOMAIN: In the event the Demised Premises or any part thereof,
shall be taken under the power of eminent domain by any public or quasi-public
authority, the rights and duties of the parties hereto with respect to this
Lease in and to the aggregate award for such taking shall be as follows:
a. If the entire Demised Premises is taken, this Lease shall terminate
and expire as of the date of such taking, and Tenant thereupon shall be released
from any liability thereafter accruing hereunder, and all awards shall be sought
and received by the tenant and landlord separately according to their respective
interests.
b. If only parts of the Demised Premises is taken, and, if in the
reasonable judgment of the Tenant, the part remaining is of such shape or size
as to prevent its being reasonably used by Tenant for the purposes for which the
Demised Premises were being used at the time of such taking, this Lease shall
terminate with the same effect as the total taking, and all awards shall be
sought and received by the tenant and landlord separately according to their
respective interests.
c. If only part of the Demised Premises is taken, and, if in the
reasonable judgment of the Tenant and Landlord, the part remaining is of such
size and shape as to permit its being reasonably used by Tenant for the purpose
for which the Demised Premises were being used at the time of such taking, this
Lease shall continue in full force and effect as to the said remaining portion,
but the rent shall be reduced equitably in proportion to the amount of the
Demised Premised lost by the taking and all awards shall be sought and received
by the tenant and landlord separately according to their respective interests.
28. SUBORDINATION of LEASE to MORTGAGE: This Lease is made with the
understanding that the Landlord may, from time to time, desire to encumber
Landlord's interest in the Property of which the Demised Premises is a part with
a mortgage, deed of trust, or similar security interest ("the Mortgage"), and
may desire, in connection with the execution of such Mortgage to cause this
Lease to be made subordinate in lien, dignity, priority and claim to the lien or
liens of the Mortgage. Tenant therefore, covenants and agrees with Landlord that
Tenant will, from time to time, at the request of Landlord execute an instrument
or instruments in such form as may be reasonably required by Landlord or by the
mortgagee of any such Mortgage, which instrument or instruments will be executed
in such fashion as to entitle
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it to recording, and will subordinate this Lease and the rights of the Tenant
hereunder to the lien, priority and dignity of such Mortgage.
29. ESTOPPEL CERTIFICATE: Tenant shall, after twenty(20) days prior written
notice by Landlord execute, acknowledge, and deliver to Landlord a written
statement certifying that this Lease continues unmodified and in full force and
effect (or if there have been modifications, that this Lease continues in full
force and effect as modified and stating the modifications); the dates to which
the Rent and the additional rent have been paid and stating whether Landlord
and/or Tenant is in default in performing any covenant of this Lease, and should
Landlord or Tenant be in default, specifying each and every such default. It
being intended that any such statement delivered pursuant to this paragraph may
be relied on by Landlord or any prospective purchaser or mortgagee of the fee
interest or any assignee of any mortgagee. Tenant's failure to execute and
deliver to Landlord the above described certification within the time specified
shall be deemed the equivalent of the delivery of the certification by Tenant to
Landlord to the effect that the Lease is in effect and continues unmodified.
30. INTEGRATION: This agreement contains the entire agreement of the
parties. This agreement supersedes any prior written or oral agreements or
representations of the parties and all such prior written agreements or
representations are merged into this agreement. This agreement shall be
controlled by Colorado law.
31. STORAGE of HAZARDOUS MATERIAL: Tenant shall indemnify and hold Landlord
harmless from and against all claims, liabilities, damages or losses that
Landlord may incur, directly, or indirectly, arising from Tenant's (or its
agents, employees or business associates) transportation, storage, use or other
handling of any harmful or hazardous or potentially harmful or hazardous
materials on the Demised Premises or in the surrounding area. Such indemnity
shall include without limitation, liability of any nature to Landlord whether
arising from damage to the Demised Premises the Building other tenants or
persons, or property located in the Building or in the surrounding area.
Further, upon demand tenant shall give Landlord a complete list of all
hazardous material stored or used on the Demised Premises within 10 working days
of written demand.
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32. MOVING TENANT OPTION: In the event that the lessor has the opportunity
to rent the premises to a long term tenant, he has the option of moving this
tenant to an equivalent space with a dock high door and a equal number of doors.
33. DAMAGE DEPOSIT: Tenant shall pay a damage deposit, as outlined
below, in the amount equal to one month's rent.
2770 Industrial Lane $7,750 has been paid
2780 Industrial Lane $1,000 on 6/30/98
$1,000 on 811/98
$1,000 on 9/1/98
$2,000 on 10/1/98
$2,000 on 11/1/98
$1,100 on 12/1/98
Total $8,100
This damage deposit will be refunded if the premises is returned to the Landlord
in good condition according to the terms of this lease. The damage deposit will
not be used as the last month's rent.
34. OPTION of TENANT to RENEW LEASE: Tenant is hereby given one 5 year
option to renew the Term of this Lease upon expiration of the initial Term
hereof (said renewal period being hereinafter sometimes referred to as the
"Renewal Period") provided that this Lease shall be in full force and effect,
that tenant has been on time and current with rent payments for eighteen months
prior to the renewing of the lease, and that no other violations of lease have
occurred for eighteen months prior to the renewing of the lease. If Tenant
desires to exercise the option herein granted to renew the Lease for the Renewal
Period, Tenant shall give Landlord written notice of its intention to do so on
or before ninety (90) days prior to the expiration of this Lease. The Renewal
Period shall be on the same terms, covenants and conditions as in this Lease
provided, except that: (a) there shall be no provision for the renewal of the
Term of this Lease beyond the renewal period set forth herein, and the monthly
rental shall be mutually agreed to by the parties hereto on or before 180 days
prior to the then existing lease expiration date.
35. EXPIRATION OF OFFER: This offer to lease 2770, 2780 Industrial Lane is
expressly subject to and conditioned upon tenant being current and in full
compliance with previous lease dated August 8th 1996 and said offer expires on
and is void on June 30th 1998 at 12:00 Noon. Time is of the essence.
15
/s/ RL RH
245
<PAGE>
LEASE of 2770, 2780 to SYTRON
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and
year first above written.
LANDLORD: TENANT:
Robert Law Family Trust Sytron Inc.
By By
------------------------- ----------------------------
Trustee an Authorized agent of
Sytron Inc.
16
/s/ RH
246
<PAGE>
10/29/98
ADDENDUM #1 TO THE LEASE BETWEEN ROBERT LAW FAMILY TRUST
AND SYTRON INC. SIGNED JUNE 13, 1998
STATEMENT: The purpose of this addendum is to change the amount of space
rented by Sytron Inc. (Tenant) from 35,040sf back to the original 17,040sf. This
Addendum was requested by Sytron Inc. (x 5.40 divided by 12 = 7668/mo till
2-1-99.
This addendum to the current lease dated June 13th 1996 between Sytron (the
Tenant) and Robert Law Family Trust (the Landlord) for the space whose address
is 2770 and 2780 Industrial Lane. This addendum takes precedence over any
conflicting language in the lease.
1. Sytron will pay the commission incurred with the COLORADO GROUP when the
Landlord and Tenant signed the current lease on 2780 Industrial Lane space. The
Landlord is in the process of paying this to THE COLORADO GROUP & have paid them
$5000.00 so far. This $5000.00 will be reimbursed to the landlord. This
$5,000.00 will not come out of the damage deposit. The Landlord also requires a
letter from THE COLORADO GROUP stating that all obligations to them have been
satisfied. This will be done by 12/1/98.
2. The Landlord lowered the rent to the Tenant to $4050/mo for the first three
months in consideration of Tenants signing a five year lease. This $12,150 will
be paid to the landlord at the rate of $1,012.50 a month for 12 months starting
on 2/1/99. This money will not come out of the damage deposit.
3. In 2780 Industrial Lane, Sytron is to frame in the hole between the two
offices.
Sytron is to frame, sheetrock(with 5/8x sheetrock), and tape the doorway
above the offices between 2780 Industrial Lane and 2770 Industrial Lane. The man
door between 2770 Industrial Lane & 2780 Industrial Lane on the ground floor
needs a 1 hour fire rated door that is lockable from both sides.
The double doors between the two spaces Sytron will either repair to
original condition or drywall up. This decision will be the Landlords.
Sytron is to install a high quality 36" steel door frame, & 36" steel door
with panic bar hardware in the
/s/ RL RH
247
<PAGE>
hole cut into the back exterior wall of 2770 Industrial Lane.
All of section 3 will be done by 12/1/98 except the double doors which will
be done by 12/31/98. If section 3 is not completed in a quality manor by 12/1/98
Landlord will have it done and take the cost out of the damage deposit of 2780.
4. Sytron's lease of 2780 Industrial Lane will expire on 1/31/99, but Sytron
will have the space vacated and ready to rent by 12/31/98. The Landlord has the
option to rent the space at any time after 12/31/98. Re-renting and showings
will begin immediately. The damage deposit will not be used for any rent.
5. 2780 Industrial Lane will be vacated on 12/31/98 in as clean & as rentable
condition as it was when Sytron moved in, otherwise the landlord will fix it up
and take the cost out of the damage deposit.
6. If returned in good condition as stated in item 5, Landlord will credit any
damage deposit Sytron paid in. The damage deposit payments for 2780 Industrial
Lane will continue to be paid until December 31, 1998.
7. Section 10 of the lease will read as follows:
10. ALTERATIONS TO THE PREMISES: Tenant shall have the right, at its
sole expense, to make changes or alterations to the Demised Premises;
subject to the Landlord's prior written consent and provided, however, that
in all cases any such changes or alterations shall be made subject to the
following conditions, which the Tenant agrees to observe and perform:
a. No Structural Changes: No change or alteration shall at any time be
made which shall impair the structural integrity or soundness or diminish
the value of the Building or the Demised Premises or disturb or interfere
with the quiet enjoyment of any other tenants or lessees of the Building.
b. Notice to Landlord: Tenant shall give the Landlord at least seven
fl days prior written notice of any proposed alteration end shall fully
cooperate with Landlord in either (i) notifying proposed contractors of the
landlord's non-liability therefor and, or (ii) posting
/s/ RL RH
248
<PAGE>
notice of non-liability in a conspicuous place on the Demised Premises in
accordance with Colorado law.
c. Consent of Landlord: No changes or alteration shall be made
involving an expenditure in excess of $500.00 without the prior written
consent of the Landlord.
d. Permits: No change or alteration shall be undertaken on the Demised
Premises until Tenant shall have procured and paid for all required
municipal and other governmental permits and authorizations of the various
municipal departments end governmental subdivisions having jurisdiction.
All plans and specifications relating to any changes or alterations shall
be submitted to the Landlord for its approval.
e. Compliance With The Law: All work done in connection with any
changes or alterations shall be done in a good and workmanlike manner and
in compliance with all applicable building and zoning laws, and with other
laws, ordinances, orders, wigs, regulations, end requirements of all
federal, state, and municipal governments and the appropriate departments,
boards and officers thereof.
f. Insurance: At all times when any change or alterations are in
progress, there shall be maintained at tenants sole expense, adequate
Workers Compensation Insurance in accordance with the law or laws now or
hereafter enacted governing all persons employed in connection with the
contemplated change or alteration and general liability insurance for the
mutual benefit of Landlord and Tenant, expressly covering the additional
hazards due to the change or alterations in amounts reasonably prudent by
industry standards for similar construction projects in the vicinity.
g. Security Against Liens: Prior to the construction of any
improvements, the repair or restoration of any improvements, or any work to
be done upon the Demised Premises, Tenant shall furnish to the Landlord a
bond of insurance protecting Landlord against mechanics' and materialmen's
liens in an amount equal to the work which is to be performed at the
Demised Premises, together with a performance and completion bond in an
amount equal to the proposed cost of any improvements and labor. Landlord
retains the right at any time and from time to time to enter upon the
Demised Premises in order to inspect the progress of any alterations being
made thereto by tenant and to post any signs or notices disclaiming the
Landlord's responsibility or liability for the payment of any mechanics' or
materialmen's fees, or the furnishing of any labor or
/s/ RL RH
249
<PAGE>
services to the Demised Premises. Tenant shall not permit any party to file
any lien or claim against Landlord or its interest in the Demised Premises
on account of any such improvements or alteratIon for work done or supplies
furnished to the Demised Premises at the Insistence of the Tenant. In the
event a lien or claim is filed against the Demised Premises, Tenant shall
immediately cure and pay the amount of such lien or claim (including any
costs) or in good faith diligently pursue the defense of any such lien or
claim provided that Tenant shall first post with the Landlord adequate
security (in the landlord's sole judgment) covering 125 percent of the
amount of such lien or claim or, in the alternative, post a bond with the
appropriate court in compliance with the Colorado law then in existence to
cause the removal of the lien from such property.
h. Failure on the part of the tenant to comply with any or all of the
above mentioned conditions shall be deemed to be a material breech of this
lease.
i. A penalty of $500 will be assessed for every violation of the above
section 10 or any other infraction of this lease by the Tenant that the
Landlord deems minor enough to not cancel the lease over.
8. The price per square foot will change to $5.70/sf/yr on 2/1/99. Therefore the
monthly rent on 17,040 SF (2770 Industrial Lane) will be $8,094.00.
9. Tenant and Landlord mutually agree that failure to comply with any of the
terms or conditions of this addendum will be deemed to be a breach of the entire
lease on the part of the tenant.
Signing this document will signify Sytron's acceptance of these additions and
changes to the lease.
LANDLORD: TENANT:
Robert Law Family Trust Sytron Inc.
By /s/ /s/
---------------------------- ------------------------------
Trustee an Authorized Agent of
Sytron Inc.
250
<PAGE>
SYTRON, INC.
--------------------------
EXHIBIT 27.1
--------------------------
FINANCIAL DATA SCHEDULE
--------------------------
251
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,359
<SECURITIES> 0
<RECEIVABLES> 1,051,196
<ALLOWANCES> 0
<INVENTORY> 510,565
<CURRENT-ASSETS> 1,631,871
<PP&E> 1,312,543
<DEPRECIATION> 1,057,121
<TOTAL-ASSETS> 3,110,029
<CURRENT-LIABILITIES> 3,796,544
<BONDS> 0
0
0
<COMMON> 69,631
<OTHER-SE> (1,164,025)
<TOTAL-LIABILITY-AND-EQUITY> 3,110,029
<SALES> 5,220,330
<TOTAL-REVENUES> 5,220,330
<CGS> 3,468,553
<TOTAL-COSTS> 3,468,553
<OTHER-EXPENSES> 1,914,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299,288
<INCOME-PRETAX> (604,412)
<INCOME-TAX> 0
<INCOME-CONTINUING> (604,412)
<DISCONTINUED> 10,036
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (594,376)
<EPS-BASIC> (.09)
<EPS-DILUTED> 0
</TABLE>
