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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(b) OR 12(g) OF THE SECURITIES ACT OF 1934
SCOTTSDALE TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
Delaware 86-0877595
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
7580 E. Gray Road, Suite 102, Scottsdale Arizona 85260
(Address of principal executive offices)
(602) 998-7300 (Voice) (602) 998-7986 (Fax)
Issuer's Telephone and Fax number
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class to be registered
Common Stock OTC Bulletin Board Service
Securities registered under Section 12(g) of the Act:
None
Fee Calculation Under Rule 12b-7: $250.00
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-SB contains forward-looking statements with respect to the
financial condition, results of operations and business of the Company,
including statements under the captions "DESCRIPTION OF BUSINESS," "RISK
FACTORS" and "MANAGEMENT DISCUSSION AND ANALYSIS." These forward-looking
statements involve certain risks and uncertainties. No assurance can be given
that such results will be realized. Factors that may cause actual results to
differ materially from those contemplated by such forward-looking statements
include, among others, the following: (1) the Company has not earned any
significant operating revenues; (2) the Company's success depends largely upon
the success of the Program Master(TM), which is a new product being distributed
in the retail market; (3) the Company's cash and other financial resources are
limited; (4) competitive pressure in the Company's industry could increase
significantly; (5) costs or difficulties relating to the introduction of the
Company's products into the marketplace could be greater than expected; (6) the
difficulties associated with introducing new products into the retail market;
and (7) general economic conditions may be less favorable than expected. For
other information on such factors and other factors that could affect the
financial results of the Company and such forward-looking statement statements
is included in the section herein entitled "RISK FACTORS."
PART I
DESCRIPTION OF BUSINESS
GENERAL
Scottsdale Technologies, Inc., a Delaware corporation formerly known as WO
Consulting, Inc. ("Scottsdale"), was incorporated in Delaware on March 6, 1996.
On October 30, 1997, Scottsdale merged with Sound Industries, Ltd., a Utah
corporation ("Sound"), with Scottsdale remaining as the surviving corporation of
such merger (the "Scottsdale Merger"). Immediately prior to the Scottsdale
Merger, Scottsdale had been a wholly owned subsidiary of Sound. For more
information regarding Scottsdale's history, see "DESCRIPTION OF BUSINESS--Recent
Corporate Developments."
Scottsdale files reports pursuant to rule 15c2-11(a)(5) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and shares of
Scottsdale's common stock are currently quoted in the OTC Bulletin Board service
through the National Association of Securities Dealers, Inc. ("NASD") pursuant
to the 6500 and 6600 series Rules promulgated by the NASD. Scottsdale is not
subject to the reporting requirements of Sections 12, 13 or 15(d) of the
Exchange Act, and has not filed any reports pursuant to such sections prior to
the filing of this Form 10-SB.
EXISTING PRODUCTS
ETV Host Software
Scottsdale markets software containing an electronic television guide
called "Electronic TV Host" to OEM, retail, educational and direct response
channels of distribution pursuant to a Distribution Agreement with TV Host, Inc.
dated September 25, 1995. Sound and Scottsdale as merged into Scottsdale
following the Scottsdale Merger are sometimes referred to herein as the
"Company".
The Electronic TV Host software (the "Software") allows a subscriber to
receive through the modem of his personal computer ("PC") up-to-date weekly
listings of television programs offered in the subscriber's city, regardless of
whether the programs are offered by network and local television stations or by
the subscriber's cable or digital satellite system. The television program
information appears on the computer screen in a grid format similar to the
standard format of printed guides in newspapers or magazines. Up to ten days of
television listings may be viewed at any time. The Software allows the
subscriber to search the listings by time, channel, station, theme or sub-theme,
actor or actress or by other customized topics that the subscriber can create
based upon his or her personal preferences. Information about particular
programs such as plot descriptions and the actors and actresses starring in such
programs are displayed as a subscriber chooses individual programs.
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After selecting particular programs, the subscriber also can select
whether to view the program or record it. The Software will record the
subscriber's selections, which may be printed so that the subscriber has a
personal television listing for quick reference. The selections can also be
loaded into the Company's proprietary Program Master(TM) device that operates
the user's home entertainment system.
Program Master(TM)
The Program Master(TM) is a one button, egg shaped, hand-held infrared
device that controls the television, videocassette recorder and cable box in a
user's home using a proprietary wireless technology called "Light Link" embodied
in the software containing the electronic television guide. Using this
technology, viewers can download their viewing selections into the Program
Master(TM), which then takes control of the home entertainment system and
automatically records the viewer's selections and/or turns the viewer's
television on and off in the manner selected, without the viewer having to
operate the dials, knobs, clocks or buttons of the equipment itself. During the
1996 calendar year and through June 1997, the Company either acquired or
developed and refined the technology incorporated in the Program Master(TM). The
Company began marketing and distributing the Program Master(TM) in July 1997.
The Program Master(TM) and the Software are sometimes collectively referred to
herein as the "System."
The Software runs on any DOS-based computer with the Windows (version 3.1
or later) operating system, a 386 or higher processor and at least 4Mb of RAM.
To the Company's knowledge, the Program Master(TM) is compatible with the
majority of televisions, videocassette recorders, cable boxes and digital
satellite receivers currently on the market. With minor modifications to the
Company's software, the Program Master(TM) is also, to the Company's knowledge,
compatible with all electronic television listing providers that have scheduling
capabilities, regardless of whether such listing providers are accessed through
an online service or directly from the Internet.
The current retail price of twelve and six month subscription to the
Electronic TV Host service is $49.95 and $29.95, respectively. The retail price
of the Program Master(TM) will initially be $49.95. Each purchaser of a Program
Master(TM) device will receive a free six month subscription to the Electronic
TV Host service. The target market for the System is composed of U.S. households
with personal computers, which is currently estimated to consist of 37.2 million
households. However, the Company only began distributing its products
commercially in July 1997, and has not generated any significant operating
revenues.
Because of technological developments in the areas of fiber optics and
digital compression, as well as recent legislation, cable operators and
satellite dish providers will soon be able to offer hundreds of television
channels. Even with standard cable offerings of 40 to 50 channels, program
offerings can approach 15,000 per week. In this increasingly complex
environment, products will be needed to assist viewers in navigating through the
plethora of program offerings. Management believes that the Program Master(TM),
when combined with the Software, will enable its users to find, select, record
and enjoy television programs, even when program offerings become so numerous.
For a description of the Company's business strategy, see "MANAGEMENT DISCUSSION
AND ANALYSIS."
COMPETITION
Although the Company is not aware of any product on the market provides
the features available by subscribing to the Software and buying the Program
Master(TM), there can be no assurance that another such product will not be
developed and marketed to the public. Moreover, the Company's products will be
distributed in the consumer electronics market, a highly competitive
marketplace, and through the retail market. Because the Company does not have a
past history of success and is marketing a new product, it may be very difficult
for the Company to acquire shelf space with retailers. The consumer electronics
market is also a marketplace that requires significant marketing expenditures
and support to gain consumer awareness of any product, expenditures that cannot
presently be supported by the Company unless sales of the Company's products
prove sufficient. Virtually all of the Company's competitors and potential
competitors possess significantly greater capital and marketing resources than
the Company. While the Company is not aware of products that offer the same
features as its products, there are potential products in the marketplace that
consumers may view as substitutes. Those substitutes may be separated into three
categories: (1) printed guides; (2) electronic programming guides; and (3)
programming devices.
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Printed Guides
Historically, printed guides have been the source for television schedule
information and consist mainly of TV Guide (a weekly guide with over 14 million
subscribers), as well as local newspaper guides and cable TV guides. These
guides provide comprehensive listings for all available channels and often
contain brief plot descriptions. Such guides offer the advantages of familiarity
and simplicity. The usefulness of these guides is diminishing as cable and
satellite dish providers increase the number of channels available to
subscribers and with the advent of extensive 24-hour programming.
Electronic Programming Guides
Electronic programming guides range from the non-interactive on-screen
scrolling of the Prevue Channel provided as part of some cable systems to the
interactive on-screen menu systems of Video Guide and StarSight. Video Guide has
been shipping a device costing approximately $100 that sits on top of the
television to markets across the U.S. StarSight, which is available in a limited
number of televisions and videocassette recorders, is also marketing a similar
device costing approximately $100. The Video Guide and StarSight services enable
users to view program listings, search for programs by title, and offer a brief
program description. Subscription rates for such services, in addition to the
initial up-front cost of the device, run about $5 per month, and the marketing
of the two products emphasizes the one-button recording capability of both
systems.
TV Guide On Screen ("TVGO") is a joint venture among News Corp. Ltd. (the
publisher of TV Guide), Tele-communications Inc. and Liberty Media Corporation.
While not yet available, TVGO's system will provide scheduling information and
menu selection similar to StarSight. The system will allow the user to order
premium cable services on screen and block programs by rating. TVGO has
announced that it will not offer VCR programming capabilities. The TVGO service
will be offered exclusively through TVGO and will require the installation of
special cable boxes.
Other competing electronic television guides include World Wide Web-based
GIST, TV Quest, and TV Guide On-Line (under development). None of these guides
are downloadable to the PC, as is the Software; hence the Company believes that
these alternatives do not compare favorably to the Software in terms of their
response time in search modes.
Internet television guides such as GIST, TV Guide On-Line and the WebTV
concept can be considered to compete with the Software. These guides are usually
free and available on the Internet. Many users, however, find the Internet
overburdened and slow. As a result, search and response times can be slow in
comparison to the software. Notwithstanding the current problems with the
Internet, the Company recognizes that it has vast potential and is in the
process of developing a marketing strategy to make its product available over
the Internet without competing with its existing software. However, there can be
no assurances that the Company will be able to make the necessary inroads to
implement this strategy.
In addition, some cable companies are currently offering more
sophisticated program guides than they have previously made available. These
guides allow cable subscribers to analyze and select programs and view
programming notes. While these guides do not have all the features that the
System offers, cable companies are enhancing their ability to provide program
guides with more features. The increasing level of competition and technology
may require the Company to spend significant amounts on research and development
in order to be able to offer products that have more features than those offered
by competitors.
Investors should be aware that the System does not work directly with a
user's cable box, but relies on subscribers having personal computers. While the
Company believes that the market of households with personal computers is a
large one, the fact that all users of the System must have a personal computer
limits the Company's potential market for its product. In addition, some
companies are offering products that combine the features of televisions and
personal computers. To the extent that these products offer the features
provided by the System, sales of such products could have an adverse effect on
the Company. In view of all of the foregoing, significant expenditures in
research and development by the Company may be required in order to acquire and
maintain a competitive edge.
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Programming Devices
VCR Plus, VCR Voice Programmer, StarSight and Video Guide are four
products designed to facilitate VCR recording. VCR Plus enables users to program
their VCR's by pressing a series of numbers, representing specific programs,
readily available in printed schedule guides. The VCR Voice Programmer responds
to a human voice, announcing the channel, day and time of a program selection.
StarSight and Video Guide both allow the viewer to receive select and record
programs from their TV screens. The Company believes that hardware to accomplish
the recording and selection functions in both systems presently costs five times
or more than the retail cost of the Program Master(TM). In addition, none of the
VCR programming devices described above is computer-based, which to some extent
limits the scope of their available functions.
INTELLECTUAL PROPERTY
The Company has applied for patents with respect to an optically
programmable controller included in Program Master(TM). In particular these
inventions relate to transmitting and receiving data over self-calibrating
optical links. While the Company believes it's inventions and patent
applications as well as its copyright and trade secrets are of value, the
Company intends to depend on engineering, marketing and service skills more so
than its intellectual properties. In any case, although the Company has a policy
of seeking patents or other forms of protection on its intellectual property,
these forms of protection do not necessarily prevent competition from designing
around or successfully challenging the Company's intellectual property. The
Company believes that deciphering the encryption codes on its microchip is
impractical unless a party dedicated significant resources to attaining such a
goal. The Company intends to rigorously defend its intellectual property rights
against infringement.
RAW MATERIALS
The Company's Program Master(TM) product is manufactured and assembled by
a company whose operations are in South Korea. Such company has been contracted
to provide "turnkey" manufacturing of the Program Master(TM) product; all
components, including microchips, are purchased by the manufacturer and
assembled in the Program Master(TM) unit. The programming of the microchip is
presently done in the United States. Such South Korean company is one of the
largest manufacturers of universal remote products in the world and has acquired
an equity interest in the Company.
The Company realizes that there are general risks of relying on others to
supply the parts and components used to construct the Company's products, as
well as the risks of relying on a foreign company to manufacture the Program
Master(TM). These risks include delays in shipments, work stoppages, adverse
fluctuations in currency exchange rates and political instability abroad. The
loss of certain of the Company's suppliers and manufacturers could adversely
affect the Company's business until alternative arrangements could be secured.
There can be no assurance, that the Company would be able to replace such
suppliers and manufacturers in a timely manner and on terms substantially
similar to those that are now in effect should any of the above risks
materialize.
All other raw materials not used to construct Program Master(TM) devices
are provided locally in Arizona. These materials primarily include packaging
materials for the retail market. The major suppliers of services to support the
retail marketing effort (such as technical support and order fulfillment) are
also located in Arizona.
GOVERNMENTAL AND ENVIRONMENTAL LAWS AND REGULATIONS
To the Company's knowledge, it has obtained all permits, licenses and
authorizations required under, and is in compliance with, all applicable laws.
No notice from any governmental authority has been received by the Company
claiming any material violation of any law or requiring any work, construction
or expenditure, or asserting any tax, assessment or penalty. To the Company's
knowledge, the business and operations of the Company have been and are in
compliance with all environmental laws in effect, and no condition exists or has
existed or event is occurring or has occurred which, with or without notice or
the passage of time or both, would or did constitute a material violation of or
give rise to any present or future liability or lien under any environmental
law. The costs of complying with environmental laws and regulations are not
material to the Company.
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RESEARCH AND DEVELOPMENT
The Company estimates that as of August 1, 1997, approximately $1,250,000
has been spent by the Company and Dalescott (as defined below) on research and
development in connection with the development of the System. The Company hopes
that the revenues its earns from sales of the System will enable it to recover
the amounts that have been spent, and that will in the future be spent, on
research and development of the System and any other products the Company
develops.
EMPLOYEES
The Company currently has five full-time employees and works with
approximately ten consultants that provide significant services to the Company
on a part-time basis. Should the Company achieve its business plan, it plans to
add approximately four additional full-time employees within the next six
months. The Company intentionally plans to manage its growth by outsourcing its
manufacturing and assembling operations, technical support, and engineering
requirements rather than building an internal infrastructure. It plans to market
its products by developing joint programs with retailers and contracting with
independent sales representatives and distributors to open new retail
opportunities. Presently the Company has eleven sales representatives and two
major distributors who are marketing the Company's Software and Program
Master(TM) products.
RECENT CORPORATE DEVELOPMENTS
Merger with Sound
Sound was incorporated in Utah on October 24, 1980. Prior to the Sound
Merger described below, Sound had been a development stage company pursuing a
number of different business opportunities from time to time, all of which
businesses were discontinued and/or divested. Among the businesses formerly
pursued by Sound were the development, production and marketing of sound
reproduction equipment; the acquisition of U.S. patents pertaining mainly to
positive displacement vane rotary pumps; and the acquisition of eight lode
mining claims. During the three year period preceding the Sound Merger, Sound
did not engage in any significant business activity.
On March 21, 1997, Sound formed Sound Acquisition Corp., a Utah corporation
and wholly owned subsidiary of Sound ("SAC"). On May 27, 1997, and in accordance
with a Plan and Agreement of Reorganization dated as of March 21, 1997 (the
"Sound Reorganization Agreement"), effective March 31, 1997 SAC merged with
Scottsdale, with Scottsdale being the surviving entity of such merger (the
"Sound Merger"). Pursuant to the terms of the Sound Merger, each outstanding
share of common stock of Scottsdale was converted into one share of common stock
of Sound, and all but 1,400,000 shares of Sound's outstanding common stock were
redeemed. Thus, immediately after the consummation of the Sound Merger, the
outstanding capital stock of Sound consisted of 3,604,130 shares of common stock
("Common Stock").
Acquisition by Scottsdale of Assets of Dalescott
Pursuant to a Plan and Agreement of Reorganization dated as of February 28,
1997, but intended by the parties to be effective as of January 1, 1997 (the
"Reorganization Agreement"), Scottsdale acquired substantially all of the assets
of Dalescott, Inc., a Delaware corporation formerly known as Scottsdale
Technologies Inc. ("Dalescott") .
Under the terms of the Reorganization Agreement, as amended by the First
Amendment to the Plan and Agreement of Reorganization dated as of May 15, 1997,
Scottsdale issued 1,461,585 shares of its common stock to Dalescott in exchange
for the assets of Dalescott acquired by Scottsdale. Scottsdale also agreed to
issue no less than 481,000 and no more than 650,000 shares of its common stock
to certain officers and employees of Dalescott.
In connection with the closing of the transactions contemplated by the
Reorganization Agreement, Dalescott entered into separate Restructuring
Agreements with certain of its senior creditors, pursuant to which Scottsdale
agreed to pay a continuing royalty of four percent (4%) of all net sales
proceeds derived by Scottsdale from the sale of the Program Master(TM) and
Software products and to place such proceeds into an escrow account for the
benefit of certain senior creditors of Dalescott. One such senior creditor that
had a security interest in the assets of Dalescott has received $49,260.14 in
cash from Dalescott and is entitled to receive an additional $11,962.28 in cash
as well as the first $200,000 disbursed by the escrow account to such senior
creditors. Thereafter, all payments made to such senior creditors out of funds
received by the escrow account shall be distributed pari passu among the senior
creditors until all amounts owed by Dalescott to such senior creditors have been
paid in full. Such Restructuring Agreements provide that Scottsdale shall not be
obligated to pay in excess of $1,543,130 in royalties to such senior creditors
of Dalescott.
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Following the senior secured creditor's receipt of initial cash payments
of $61,222.42 in the aggregate and the first $200,000 disbursed by the escrow
account, such secured creditor will remain entitled to receive an additional
$137,242 out of royalties deposited into the escrow account, and only after all
such amounts are paid to the senior secured creditor will such security interest
be released.
The Company has included, for informational purposes, the financial
statements of Dalescott as an exhibit hereto. However, the Company has not
assumed any of the liabilities of Dalescott other than certain liabilities
specifically assumed pursuant to the terms of the Reorganization Agreement. It
should also be noted that the performance of Dalescott is not necessarily
indicative of how the Company will perform, and investors should not assume that
the Company has the same business plan and products that Dalescott had.
Note and Warrant Purchase Agreement
In connection with the closing of the transactions contemplated by the
Reorganization Agreement, Scottsdale and Scottsdale Technologies-I, Ltd., a
Delaware limited partnership (the "Partnership") entered into a Note and Warrant
Purchase Agreement dated as of February 28, 1997, but intended by the parties
thereto to be effective as of January 1, 1997 (the "Note Purchase Agreement").
Pursuant to the terms of the Note Purchase Agreement, Scottsdale agreed to issue
to the Partnership one or more Senior Convertible Promissory Notes
(collectively, the "Senior Note") in the aggregate principal amount of up to
$1,928,250 bearing interest at the rate of twelve percent (12%) per annum, and
the Partnership agreed to disburse the principal of the Senior Note in one or
more advances from time to time in exchange for the Senior Note. The Senior Note
is due on December 1, 1997.
Dalescott had previously issued a certain Promissory Note dated May 31,
1996 (the "Dalescott Note") in favor of Software Funding Corp., a Delaware
corporation and the general partner of the Partnership (the "General Partner"),
as agent for certain investors. Such investors subsequently assigned their
interest in the Dalescott Note to the Partnership in exchange for partnership
interests in the Partnership. Under the terms of the Note Purchase Agreement,
the Partnership assigned the Dalescott Note to Scottsdale in exchange for
$424,000 in principal amount under the Senior Note, and the Partnership agreed
to provide a line of credit in the amount of up to $1,504,250. (Such line of
credit, together with the $424,000 in principal and interest outstanding on the
Dalescott Note, constitutes the aggregate principal amount of $1,928,250 under
the Senior Note.) As of June 30, 1997, the aggregate principal amount
outstanding under the Senior Note was $1,251,010.
In addition, the terms of the Note Purchase Agreement require Scottsdale
to issue the Partnership warrants to purchase up to 1,641,111 shares of
Scottsdale's common stock at a price of $10.00 per share (the "Warrants"), at an
initial price of $0.01 per Warrant. The Warrants expire at the close of business
on June 30, 2006.
Subject to compliance with certain provisions set forth therein, the Note
Purchase Agreement provides that the Senior Note is convertible in whole or in
part at the option of the Partnership at any time as follows: (1) the initial
$428,250 of principal advanced pursuant to the Senior Note is convertible into
955,000 shares of Scottsdale's common stock and (2) the remaining principal and
accrued and unpaid interest outstanding are convertible into shares of
Scottsdale's common stock at a conversion price of $1.35 per share, subject to
customary adjustments to prevent dilution or account for reverse stock splits.
Scottsdale is required under the terms of the Note Purchase Agreement to file a
registration statement registering the resale of the shares of common stock of
Scottsdale issuable upon conversion of the Senior Note and the exercise of the
Warrants within 120 days of the consummation of the merger (the "Registration
Statement"). In the event (a) the Registration Statement becomes effective and
such shares are registered for resale under the Securities Act of 1933, as
amended, and qualified for issuance and resale under the various state laws
prior to December 1, 1997 and (b) Scottsdale or its successor is a reporting
company under the Securities Exchange Act of 1934, as amended, then the Senior
Note is subject to mandatory conversion into the number of shares determined in
a manner similar to that described in the preceding paragraph.
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Governance Matters
Pursuant to the Note Purchase Agreement, Scottsdale has covenanted that it
shall cause three (3) directors nominated by the General Partner to be elected
to Scottsdale's Board of Directors (out of a total of five (5) directors), and
the committees thereof. In the event any principal or accrued interest of the
Senior Note is not paid when due or there exists an Event of Default (as defined
therein), Scottsdale shall, at the request of the Partnership, cause two
additional directors designated by the Partnership to be elected to Scottsdale's
Board of Directors, and such additional directors shall be permitted to serve as
such until the overdue principal and interest is paid in full or such Event of
Default is cured. Scottsdale also agreed that its Board of Directors will not
consist of more than seven (7) directors. The arrangements described in this
paragraph that relate to Scottsdale's Board of Directors shall automatically
terminate (a) at the end of the one year period during which the Registration
Statement has been continuously effective and Scottsdale has been subject to the
reporting requirements under Section 12 of the Exchange Act or, if earlier, (b)
the date on which Scottsdale closes an underwritten public offering of at least
$1,500,000 where the public offering price is at least $5.00 per share if the
terms of such offering permit the Partnership and/or the partners thereof to
sell the shares of Scottsdale common stock issuable upon conversion of the
Senior Note and the exercise of the Warrants in connection therewith and the
underwriter objects in writing to the right of the General Partner and the
holders of the Senior Note to select members of Scottsdale's Board of Directors.
The Partnership, Scottsdale, Sound, Eric J. Schedeler, C. Kimball McCusker,
Michael L. Slover, Stuart N. Rubin and David M. Butler have executed a
Shareholder's Voting Agreement that reflects the terms of the foregoing
agreements and covenants relating to the Board of Directors of Scottsdale (the
"Voting Agreement").
In connection with the Merger, Sound agreed in both the Sound
Reorganization Agreement and a certain Guarantee Agreement among Sound,
Scottsdale and the Partnership (the "Sound Guarantee") to guarantee the
performance and observance by Scottsdale of all of Scottsdale's obligations
pursuant to the Senior Note, the Warrants, the Note Purchase Agreement and any
other agreement or instrument executed in connection with any of the foregoing.
In addition, Sound agreed in the Sound Guarantee (a) that upon a conversion of
the Senior Note, Sound shall issue shares of Sound's common stock to the same
extent that Scottsdale is required to issue shares of Scottsdale's common stock
upon a conversion of the Senior Note pursuant to the terms of the Senior Note
and the Note Purchase Agreement and (b) that upon an exercise of the Warrants,
Sound shall issue shares of Sound's common stock to the same extent that
Scottsdale is required to issue shares of Scottsdale's common stock upon an
exercise of the Warrants pursuant to the terms of the Warrants and the Note
Purchase Agreement. The Partnership agreed in the Sound Guarantee that upon a
conversion of the Senior Note or an exercise of the Warrants, the Partnership
shall accept delivery of shares Sound's common stock in lieu of receiving shares
of Scottsdale's common stock. The arrangements described in the preceding
paragraph relating to the election of directors nominated by the General Partner
to Scottsdale's Board of Directors shall also apply to the Board of Directors
(and committees thereof) of Sound pursuant to the terms of the Voting Agreement.
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RISK FACTORS
Investment in the Company's Common Stock entails a very high degree of
risk. In addition to those risks specifically inherent in the consumer
electronics industries, the Company faces all of the risks inherent in the
establishment of what is, in effect, a start-up business, including, among other
things, limited access to capital, delays in the completion of its business plan
in certain markets and intense competition. There can be no assurance that the
Company's business will be successful. For these and other the other factors
discussed herein, an investment in shares of Common Stock must be regarded as
the placing of funds at a high risk in a new or developing venture with all of
the unforeseen costs, expenses, problems, and difficulties to which such
ventures are subject. In addition to the information presented elsewhere in this
document, the following factors should be considered carefully in evaluating any
such investment.
Lack of Commercial Sales; New Product. The Company has a limited operating
history and has generated approximately $100,000 from the sale of the Program
Master(TM) and subscriptions to the Electronic TV Host service. Computer-related
products as complex as those offered by the Company generally contain a number
of undetected errors or "bugs" when they are first released and may require a
high level of technical support. There can be no assurance that such errors will
not be found in the Software or Program Master(TM), possibly resulting in delays
in market acceptance. During the period of development of the System, Dalescott
incurred significant losses. Given the history of substantial losses during the
developmental stage of its products, there can be no assurance that the Company
will be profitable or will be able to satisfy any of its obligations.
Negative Net Worth; Certain Liabilities. As of October 31, 1997, the
Company had a negative book value of $4,694,605, and had liabilities of
$5,463,618, including $1,251,010 owed to the Partnership under the Senior Note.
After the conversion of the Senior Note and the issuance of shares pursuant to
such conversion, the Company anticipates that the total liabilities of the
Company will be reduced to approximately $1.2 million and the Company's book
balance will be increased to a negative net worth of approximately $484,000.
Prior to Scottsdale's acquisition of substantially all the assets of Dalescott,
Dalescott owed approximately $108,788.00 to a number of other creditors. In
connection with such acquisition, Dalescott agreed to distribute to some of such
creditors a number of the shares of Scottsdale's common stock that Dalescott
received in connection therewith in exchange for such creditors' agreement to
release and/or cancel Dalescott's obligations to such creditors. Dalescott also
owes an additional amount of up to $1,543,130.00 to certain senior creditors. In
connection with such acquisition, Scottsdale has agreed to pay royalties based
on the net sales price of the System to an escrow agent in order to satisfy
claims against Dalescott aggregating up to $1,293,130.00. The Company has no
obligation to pay such amounts; rather the obligation is limited solely to the
payment of royalties. However, the payment of the royalties will reduce the
Company's net revenues and hence its earnings. In addition, and in connection
with such acquisition, Scottsdale agreed to pay approximately $100,000 to
various trade creditors of Dalescott.
The Company has also agreed to assume the obligations of Dalescott under
a certain Stipulation for Entry of Judgment (the "Judgment") and a Covenant Not
to Execute a Stipulated Judgment (the "Covenant Not to Execute"). Pursuant to
the terms of the Covenant Not to Execute, Dalescott agreed to pay GrandeTel
Technologies, Inc. ("GrandeTel") or its order the amount of $145,000 during the
period between August 1, 1997 and July 1, 1998. In the event Dalescott defaults
on any of its obligations under the Covenant Not to Execute, GrandeTel may file
the Judgment, record the Judgment and/or execute upon it. The Judgment is for
the sum of $250,000 with interest thereon at the prime rate of Citibank plus two
percent per annum from August 1, 1994 until paid. See "LEGAL PROCEEDINGS."
The Company's balance sheet is leveraged, and given the development stage
of the System, there can be no assurance that the Company will be profitable or
will be able to satisfy any of its obligations, including those arising under
the Senior Note.
While Dalescott represented in the Purchase Agreement that there are no
liabilities or claims relating to its business or assets other than those
liabilities being assigned to Scottsdale, there can no assurance that other
creditors will not surface. If they do, such creditors may attempt to assert
claims directly against the Company and/or Scottsdale. While the Company intends
to vigorously defend against any such claims, there can be no assurance that
such creditors will not prove to be successful.
The Company has included, for informational purposes, the financial
statements of Dalescott as an exhibit hereto. However, the Company has not
assumed any of the liabilities of Dalescott other than certain liabilities
specifically assumed pursuant to the terms of the Reorganization Agreement. It
should also be noted that the performance of Dalescott is not necessarily
indicative of how the Company will perform, and investors should not assume that
the Company has the same business plan and products that Dalescott had.
Competition. Although the Company is not aware of any product on the
market provides the features available by subscribing to the Software and buying
the Program Master(TM), there can be no assurance that another such product will
not be developed and marketed to the public. Moreover, the Company's products
will be distributed in
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<PAGE> 10
the consumer electronics market, a highly competitive marketplace, and through
the retail market. Because the Company does not have a past history of success
and is marketing a new product, it may be very difficult for the Company to
acquire shelf space with retailers. The consumer electronics market is also a
marketplace that requires significant marketing expenditures and support to gain
consumer awareness of any product, expenditures that cannot presently be
supported by the Company unless sales of the Company's products prove
sufficient. Even if the Company successfully implements its business plan, the
Company expects other companies to attempt to copy its products or to develop
alternative products. Other firms may develop products that may be
technologically superior to the Company's products. Virtually all of the
Company's competitors and potential competitors possess significantly greater
capital and marketing resources than the Company. While the Company is not aware
of products that offer the same features as its products, there are potential
products in the marketplace that consumers may view as substitutes. Those
substitutes may be separated into three categories: (1) printed guides; (2)
electronic programming guides; and (3) programming devices. The Company's
financial resources and innovative and technical abilities may be insufficient
to enable the Company to compete successfully. See "DESCRIPTION OF BUSINESS --
Competition."
Limited Intellectual Property Rights. The Company has applied for patents
with respect to inventions included in the Program Master(TM). The Company
recognizes that although it may obtain patents included in the Program
Master(TM), it is possible that competitors may be able to design around such
patents, or successfully challenge the validity of such patents; if such
competitors successfully design around the patents or successfully challenge the
patents they may be able to develop products that would be directly competitive
with the System.
Although the Company has a policy of seeking patents or other forms of
protection on its intellectual property, these forms of protection do not
necessarily prevent competition from designing around or successfully
challenging the Company's intellectual property. To the extent that the
Company's products are not protected by patents or copyrights, it may be
possible for other companies to duplicate those products. Furthermore, because
of technological changes in the consumer electronics industry, the current
extensive patent coverage and rate of issuance of new patents, certain
components of the Company's products and intended products might involve
infringement of existing or subsequently issued patents of others. If any such
infringement does occur, the Company will attempt to obtain any necessary
licenses or rights under such patents or copyrights. There can be no assurance,
however, that such licenses or rights will not have to be obtained and no
assurance that, if necessary, they can be obtained on reasonable terms or at
all. The failure to obtain any necessary licenses or rights under patents could
have a material adverse effect on the Company's business.
Possible Need for Additional Financing. The Company anticipates that there
will be a need in the future for additional financing in order to maintain or
expand its operations. There can be no assurance that the Company would be
successful in obtaining additional financing if the need arises. In addition,
the Company plans to distribute its product through commercial retail channels
to retailers who will have the ability to return such products in certain
circumstances; the Company may therefore require additional financing in order
to build its inventory.
Possible Inventory Shortages or Surpluses. Since the Company's lead times
are necessarily long because most of its components are manufactured in and its
products are assembled in South Korea, production and procurement planning are
critically related to the Company's anticipated sales volume. Any significant
deviation from projected future sales could result in material shortages or
surpluses of inventory. Shortages could cause the Company's distribution base to
contract as customers turn to the Company's competitors, and inventory surpluses
could cause severe cash flow and other financial problems which might cause the
Company to sell its products at sharply reduced prices in order to reduce
inventory. There can be no assurance that the Company's forecasts of demand for
its products will be accurate; inaccurate forecasts, or unsuccessful efforts by
the Company to cope with surpluses or shortages, could have a material adverse
effect on the Company's business.
Liberal Return Policy. The Company maintains a 90-day warranty policy
which allows customers to exchange products found defective for new products.
Because the Company's products are new, it is difficult to estimate the rates of
return of the Company's products, but there is a risk that such returns will be
substantial. In addition, returns may occur because general merchandise
retailers often maintain liberal return policies. The newness of the Company's
products may also result in increased returns. Retailers are also entitled to
return products they are
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<PAGE> 11
unable to sell. In view of the foregoing, there is a possibility that a large
number of unsold products will be returned to the Company. A significant number
of returns could have a material adverse effect upon the Company's business.
Conflicts of Interest Between the Company and Officers and Directors.
Potential conflicts of interest may arise between the Company on one hand and
the Company's officers and directors on the other hand. Each officer and
director may engage in other business activities in addition to his involvement
with the Company. As a result, conflicts of interest may arise in the area of
corporate opportunities or the area of conflicting time commitments. Conflicts
of interest also may develop with respect to contractual relationships that
exist or may be entered into between the Company and any of its officers and
directors. In the event any conflicts of interest arise with respect to any
officer or director of the Company, the Company anticipates that the particular
officer or director will exercise judgment consistent with his fiduciary duties
arising under applicable state law; however, there can be no assurance that all
conflicts of interest will be resolved in favor of the Company.
Dependence on Key Personnel. The success of the Company is largely
dependent upon the efforts of its officers. The loss of the services of any of
the Company's officers could have an adverse effect on the Company unless a
suitable replacement could be found. In addition, the Company presently has only
five employees. The limited number of personnel available may make it difficult
for the Company to manage its growth and implement its business development
strategies.
Control by Present Stockholders and Management. A substantial majority of
the outstanding shares of Common Stock are held by Eric J. Schedeler and Stuart
N. Rubin, both of whom will serve as officers of the Company. In addition, the
Partnership has the right under the Note Purchase Agreement and Shareholders'
Voting Agreement to select a majority of the Company's board members. See
"DESCRIPTION OF BUSINESS--Recent Corporate Developments--Governance Matters".
Accordingly, the current group of officers and directors will be able to
substantially influence the election of the Company's directors, to cause an
increase in authorized capital or the dissolution, merger or sale of the assets
of the Company and generally to control the affairs of the Company.
Lack of Diversification; Risks of Investing in the Industry. The success
of the Company's business will depend on the market acceptance of the Software
and the Program Master(TM). The plan of operation, therefore, subjects the
Company to the economic fluctuations within this industry and increases the risk
associated with its operations. This primary dependence on one product (a
situation the Company expects will continue for the foreseeable future) renders
the Company more vulnerable than companies with a more diversified product line.
Significant delays in development could greatly affect the Company's
competitiveness. There can be no assurance that the Company's products will not
become obsolete earlier than anticipated. Nor can there be any assurance that
the Company will be able to devote sufficient resources to the research and
development effort required to enable the Company to meet future technological
changes. An investment in any aspect of the consumer electronics industry is
speculative and historically has involved a high degree of risk.
Shortage of Parts and Components. The Company's activities are subject to
the general risks of relying on others to supply the parts and components used
to construct the Company's products, as well as the risks of relying on a
foreign company to manufacture the Program Master(TM). A supplier in South Korea
currently assembles a large percentage of the Company's products. The Company is
dependent upon such manufacturer for timely delivery of its products and
compliance with the Company's specifications. In the event that this assembler
were unable to meet its commitments to the Company, such failure would have a
material adverse effect on the Company's business. Other risks include delays in
shipments, work stoppages, adverse fluctuations in currency exchange rates and
political instability abroad. The loss of certain of the Company's suppliers and
manufacturers could adversely affect the Company's business until alternative
arrangements could be secured. There can be no assurance that the Company would
be able to replace such suppliers and manufacturers in a timely manner and on
terms substantially similar to those that are now in effect should any of the
above risks materialize.
Risk of Dilution. The securities to be offered by the Company are and will
be subject to immediate dilution. Additional dilution could also occur upon the
conversion of the Senior Note, pursuant to which up to 2,066,111 shares of
Common Stock could be issued, representing a total dilution of approximately 36%
to the existing shares of Common Stock. Additionally, the Company will have
authorized shares of Common Stock and will be free to issue additional shares of
such Common Stock in the future. Moreover,
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the Company also has 10,000,000 authorized shares of "blank check" preferred
stock and will be free to issue shares of such preferred stock in the future.
See "DESCRIPTION OF SECURITIES -- Common and Preferred Stock of Scottsdale."
Technological Change. Rapid technological change in the consumer
electronics industry will require substantial resources and expenditures by the
Company for research, design and development of existing and new products to
avoid technological or market obsolescence. There can be no assurance that the
Company will have sufficient financial resources or the innovative or technical
ability to improve its existing reference products and develop new products at
competitive prices. the Company's success will depend, among other things, on
its ability to maintain a competitive position technologically. Technological
advances by any one or more of the Company's present competitors, or future
entrants into the field, may result in the Company's present or future products
becoming uncompetitive or obsolete. In addition, some cable companies are in the
process of enhancing the program guides they offer to their subscribers as part
of their standard service. See "DESCRIPTION OF BUSINESS -- Competition."
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MANAGEMENT DISCUSSION AND ANALYSIS
BUSINESS STRATEGY
Overview
The Company's goal is to become the market leader in television program
navigation and home entertainment control through the personal computer.
According to Data Quest, Inc., there are presently about 37.2 million cable and
VCR users with personal computers in the U.S. This potential consumer base could
grow as these products are displayed and marketed aggressively.
In order to realize its goal, the Company intends to implement one or more
of the following strategies:
- Preempt competition by being the first to offer an intuitive,
computer-based downloadable software television guide and the
Program Master(TM).
- Maximize demand by targeting all 37.2 million television and
computer households, through providing a wide range of distribution
modes through OEM, direct response, retail, and electronic
marketing.
- Educate the consumer market with respect to the Company's products
through a comprehensive public relations program.
- Continue to forge strategic alliances with entities critical to the
Company's success, such as the following:
- Online services and Internet access providers
- Television listing publishers
- Computer and computer peripheral manufacturers
- Direct response marketing
- Retail marketing
- Consumer electronics manufacturers
Undertaking any or all of these activities will require a substantial
amount of capital. Given the Company's size and capital resources, the Company
probably will not be able to implement all of these strategies at one time, and
no assurance can be given that such activities will ever be implemented.
Online Services and Internet Access Providers
Subscribers to online services such as American Online, CompuServe and
Prodigy represent a natural market for both the Software and Program Master(TM)
products. The growth of the Internet has created a high degree of interest in
the World Wide Web among home computer users and Corporate America. Online
services are also enjoying growth driven, in part, by the growth of the
Internet. According to industry data, the number of subscribers to online
services currently exceeds twelve million. As a result, a large number of U.S.
corporations are establishing their own web sites in order to access potential
and existing customers browsing the World Wide Web. The Company has formulated a
marketing strategy that it believes may in the future enable it to capitalize on
corporate interest and participation in the World Wide Web.
More specifically, working with TV Host, Inc., the Company plans to create
a custom TV search file for corporate web sites for placement on their "home
page" that relates to interests that a specific company has. As an example, an
athletic shoe company could offer a free weekly search of program events in
which athletes that endorse its footwear participate. Each participating company
would provide a "click on" link on its home page that would take the customer
into a free demo of the Software and a subscription offer, as well as an
opportunity to purchase the Program Master(TM). The participating company would
then receive a commission for each subscription received through such
participating company's home page. Although the Company intends to pursue this
strategy, no search files have been
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created as of yet that could be installed on a corporate web site, but the
Company hopes to be able to develop this technology in the future.
Television Listing Providers
The Company currently has a distribution agreement with TV Host, Inc. that
permits the Company to sell and distribute the Software and permits the Company
to bundle the Software with the Program Master(TM) product for sale in multiple
distribution channels. Pursuant to this agreement, the Company is a
non-exclusive retail distributor and direct response marketing entity of TV
Host, Inc. and has the right to sell the electronic products of TV Host, Inc. in
the United States, excluding online services, television programming and
distribution services, cable guides and daily newspapers. In addition, the
Company is the exclusive distributor to original equipment manufacturers of
computer, computer peripheral and consumer electronic products excluding
products for the cable/satellite industry, and has the right to sell the
electronic products of TV Host, Inc. in the United States to and/or through any
and all OEM's, provided that TV Host, Inc. agrees to such sales.
The Company also has another distribution agreement with TV Host, Inc.
pursuant to which TV Host, Inc. is a non-exclusive distributor of the Program
Master(TM) to customers of daily newspapers, Internet, the World Wide Web,
online service channels of distribution that offer the Electronic TV Host and
has the right to sell the Program Master(TM) in the United States and other
countries where the Program Master(TM) and Electronic TV Host software are
offered. Such agreement also appoints TV Host, Inc. as the exclusive distributor
to customer of printed cable TV viewer guides and grants TV Host, Inc. the right
to sell the Program Master(TM) in the United States to and/or through any and
all printed cable TV guides, provided that the Company agrees to such sales.
The foregoing agreements do not prohibit either the Company or TV Host,
Inc. from entering into distributing agreements with other parties. More
specifically, TV Host, Inc. could enter into distribution agreements with
manufacturers of other programmable remote devices with features similar to the
Program Master(TM), and the Company could enter into distribution agreements
with other publishers of electronic television program guides.
TV Host, Inc. has been publishing printed cable listings since 1967 and
currently has over 2.5 million subscribers. The Software represents TV Host,
Inc.'s entry into electronic publishing. Thus far, TV Host, Inc. has completed
and launched content with the New York Times' web site, the AT&T Worldnet, and
the Microsoft Network. TV Host will market the Program Master(TM) through its
online presence, which the Company believes will reach in excess of 25 million
computer users in the first full year. In addition, TV Host, Inc. has
contractual obligations to offer the Program Master(TM) for sale through
independent and affiliated cable operators as well as their existing electronic
and print subscribers.
Computer and Computer Peripheral Manufacturers
The Company has an agreement with Packard Bell pursuant to which the ETV
Software will be pre-loaded on all computers manufactured by Packard Bell in
1997. Packard Bell manufactures a broad range of multimedia PC's for the U.S.
Market and is one of the leading manufacturers of personal computers in the
world. Pursuant to this agreement, Packard Bell agreed to load an introductory
version of the Software and a subscription offer of the Software on the hard
drive of each computer it ships into retail distribution. The distribution of
the Software on computers manufactured by Packard Bell began in September 1996
and went full line in August 1997. Purchasers of Packard Bell computers on which
the software is loaded are entitled to receive a free one month subscription to
the Electronic TV Host Service. Packard Bell has also placed an offer to
subscribe to the Software on its World Wide Web site and a sales promotion that
would offer a free six month subscription to the Electronic TV Host service with
the purchase of any Packard Bell Computer and Program Master(TM) is being
considered. Thus, if such promotion is implemented, purchasers of Packard Bell
computers and the Program Master(TM) would receive a thirteen month subscription
to the Electronic TV Host Service -- the one month already available to
purchasers of Packard Bell computers, the six month subscription that is bundled
with the Program Master(TM) and six additional months that may be offered by the
Company.
In addition to its arrangement with Packard Bell, the Company signed a
three-year agreement with Compaq Computer Corp. in July 1996. Under this
agreement, the expressed intent of the parties is to work together on the
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development of technology relating to computer based television listings and
control of home electronics through personal computer interface. While the
Company hopes that these efforts will result in a more concrete business
relationship with Compaq that would result in sales of the Company's products to
Compaq, no such relationship has developed and there can be no assurance that
such a relationship will develop.
Direct Response Marketing
The Company intends in the future to supplement the marketing strategies
already outlined for both the Software and Program Master(TM) with direct
response marketing efforts that will include, depending on the availability of
cash and other resources to the Company, some or all of the following
activities:
- Promotional sales literature packed in computers, computer
peripherals and consumer electronic products. This would help
provide a base for Program Master(TM) sales in the future.
- Direct response print ads in computer specialty magazines, in-flight
magazines, and other appropriate print media; an advertising program
is already in place pursuant to which ads have been placed in over 1
million printed cable guides to be distributed in August 1997.
- "Bill stuffers" through credit card syndicators.
- Short television and radio infomercials.
If the Company is able to implement a direct response marketing approach,
the Company believes that it would be able to improve communications with
ultimate consumers differentiate the Software and Program Master(TM) from
competitors using non-computer based technologies and obtain more timely sales
data, which would allow better control by management over production rates and
inventory levels and significantly improve cash flow and gross margins relative
to those normally realized in traditional retail distribution. The Company
intends to pursue, to the extent permitted by its resources, direct response
marketing efforts through its own channels as well as channels developed by
others.
At present, the Company has entered into informal agreements with two
magazine publishers of monthly cable guides pursuant to which the Company's ads
will be placed in such guides in exchange for compensation based on the number
of sales generated by such ads. More specifically, the Company has informal
agreements with TV Host, Inc. and Smart TV pursuant to which ads promoting the
sale of the Program Master(TM) will be placed in three monthly cable guides
published by these companies, beginning with the August 1997 issues. These
guides are read by over 1 million people each month. Under these agreements, the
Company has agreed to pay a commission for each Program Master(TM) device sold
in response to a particular ad. The Company believes that these arrangements
will continue through the December 1997 issues of these guides.
Retail Marketing
Retail marketing provides a broad forum for both distribution and market
penetration. Although the distribution costs are cumbersome in comparison to
direct response marketing, it could be effective if it is limited to the top 25
retail chains. A drawback to retail marketing is the significant cost associated
with providing products to retail distributors at low prices in order to permit
them to realize the margins they require. The Company hopes to be able to
generate a sufficiently large volume of sales through its retail distributors to
enable the Company to earn a profit.
One of the difficulties associated with retail marketing is that numerous
other products compete for the consumer's attention. The Company hopes to be
able to conduct a public relations campaign to increase the public's awareness
of its products.
Thus far, the Company believes that the Program Master(TM) has received
favorable reviews from magazine publications such as PC World and Popular
Mechanics in their March and April 1997 editions, respectively, and hopes that
these reviews will improve sales of this product. The Program Master(TM) has
also been named as an Editor's Top 5 Retail Vision Pick from Twice Magazine.
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Consumer Electronic Manufacturers
The Company has reached an agreement with Go Video, Inc. to launch an
"in-box" merchandising program for the Software in all of their VCR's shipped
into retail distribution beginning in June 1997. The Company hopes to enter into
similar arrangements with other manufacturers of electronic devices.
FINANCING ACTIVITIES
As of August 31, 1997, Scottsdale had raised approximately $1,251,000 in
connection with its issuance of the Senior Note to the Partnership. The Company
does not believe that additional advances will be made pursuant to the Senior
Note.
Pursuant to an agreement with Express Business Financing, the Company will
be able to obtain financing through the sale (with recourse) of such accounts
receivable that are mutually acceptable to the parties ("asset-based
financing"). Pursuant to the terms of the asset-based financing, the Company is
entitled to sell such accounts receivable for an amount equal to 60% of the face
value thereof and is obligated to pay interest at a rate of 3.2% per month on
funds provided to the Company. Amounts borrowed must be repaid with interest
within sixty days. The Company believes that, on average, it takes approximately
five months from the time a customer order is received until the cash generated
by that order is received. This includes obtaining the necessary raw materials,
shipping the product to the manufacturer, packaging the product, shipping the
product to the consumer and awaiting payment. As stated above, substantially all
of these activities are outsourced to other vendors; as a result, the Company
has limited control over the timeliness of the performance of these activities.
the Company believes that it will require $2 million of asset-based financing in
order to be able to continuously provide a steady stock of raw materials as
sales grow. Stuart N. Rubin, the Company's Executive Vice President, Chief
Financial Officer and Secretary, has agreed to personally guarantee the amounts
funded pursuant to such agreement.
The manufacturer of the Program Master(TM) has agreed to extend payment
terms to 90 days from date of receipt of the product in the United States. The
manufacturer is able to finance this inventory with a South Korean export
insurance agency at what appears to be no greater than 15 percent per annum,
which is less than the aforementioned asset based financing being offered to the
Company. The effect of this agreement is to provide the Company with an
additional $1.0 million line of credit.
The Company believes that these financing arrangements will satisfy its
cash requirements at projected operating levels over the next twelve months, in
large part because it has relatively low operational and administrative
overhead, with virtually all of the Company's engineering, manufacturing and
order fulfillment requirements being outsourced. However, if sales of the
Program Master(TM) fall below the Company's expectations, then these financing
arrangements will be insufficient to meet the Company's requirements. In the
event the Company requires additional financing, no assurance can be given that
the Company will be able to obtain such financing.
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NEW PRODUCT DEVELOPMENTS
The Company believes that it can use its technology to transfer data with
light to create other products in addition to Program Master(TM). Among these
products is a data-ready remote control unit. Currently, universal remote
controls are limited in memory and in the amount of information that they can
maintain by the memory of the microprocessor in the unit. Due to its ability to
transfer data, Light Link technology permits the Company to circumvent many of
the limitations caused by the limited memory storage capacity of inexpensive
microprocessors. Consequently, universal remote controls using Light Link
technology could continuously add commands; features and device codes by
transferring the necessary information from computer software.
The Company is negotiating with several remote control manufacturers to
license the Company's Light Link technology and incorporate it in their remote
controls. According to leading industry sources, 40 million remote controls are
currently being manufactured annually. In addition, the Company has developed
its own universal remote control. Based on current estimates, the Company
believes its universal remote control and derivative products could be
introduced into the market in the latter part of 1997.
The Company, in cooperation with TV Host, Inc., is also in the process of
designing an advertising-based Electronic TV Guide. Such a product would be
designed for more casual television viewers and would lack the sophistication of
the Software. Like the Software, this new service could become a vehicle to
promote the Program Master(TM). Moreover, given that there are between 500,000
and 1,000,000 subscribers to the Electronic TV Host service, there is a
possibility that advertising revenues could be generated, particularly because
of the ability to target particular demographic groups identified through their
viewing preferences. This new service may potentially allow marketers to know in
advance what programs particular groups of users intend to watch. If so, that
information could be a valuable asset to advertisers because it would provide
more certainty as to viewers' television preferences than the current technique
of trying to determine future viewing preferences based on past viewing habits.
In the event such a service can be developed and successfully marketed to a
large subscriber base, the Company believes that revenues generated from
advertisers could exceed revenues derived from sales of subscriptions to the
Electronic TV Host service.
PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT; EMPLOYEES
The Company does not plan to make any major capital expenditures, or hire
a significant number of employees within the foreseeable future. If the Company
is successful in executing its business plan and meeting its internal
benchmarks, it may seek to acquire a provider of television information. Such an
acquisition would give the Company more control over the ultimate content of its
TV software and provide the Company with all of the revenues resulting from the
TV software vis-a-vis a revenue sharing agreement with the provider of
television information.
DESCRIPTION OF PROPERTY
The Company's corporate headquarters are located in Scottsdale, Arizona.
The Company's office space is leased by its wholly-owned subsidiary, Scottsdale
Technologies, Inc. The lease extends through September 30, 1999 and consists of
approximately 2,800 square feet of office space. Rent expense, excluding the
business' share of real estate taxes and insurance, totals approximately $50,000
annually.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company with
respect to the number of shares of Common Stock that are beneficially owned as
of September 12, 1997 by all directors, executive officers and beneficial owners
of more than 5% of the outstanding shares of Common Stock. As of September 12,
1997, the Company had 3,604,130 outstanding shares of Common Stock. In addition,
the Senior Note is convertible into up to 2,066,111 shares of Common Stock,
depending on the aggregate amount advanced to the Company thereunder.
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<TABLE>
<CAPTION>
Amount And Nature Of Beneficial Percent Of
Name Of Beneficial Owner Ownership Class
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
Eric J. Schedeler 1,648,574(1) 45.7%
c/o Scottsdale Technologies, Inc.
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
Stuart N. Rubin 2,194,376(2) 38.7%
c/o Scottsdale Technologies, Inc.
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
David M. Butler 2,566,111(3) 45.3%
1315 East Briarwood Terrace
Phoenix, Arizona 85048
C. Kimball McCusker 184,175 5.1%
c/o Scottsdale Technologies, Inc.
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
Larry Duvall 125,000(4) 3.4%
2401 E. Magnolia
Phoenix, Arizona 85034
Lane C. Clissold 900,000(5) 25.0%
135 West 900 South
Salt Lake City, Utah 84101
All Directors, Officers and Five Percent 4,927,125(6) 86.9%
Beneficial Owners of
The Company as a Group
(6 Persons)
Software Funding Corp. 2,066,111(7) 36.4%
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
Scottsdale Technologies-I, Ltd. 2,066,111(8) 36.4%
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
</TABLE>
(1) Mr. Schedeler has agreed to distribute 304,000 shares to various creditors
and other third parties. Additionally, 230,000 shares are subject to
purchase options that Mr. Schedeler has granted to third parties. After
giving effect to such distributions and grants, no such creditor or third
party would own more than 5% of the outstanding shares of Common Stock.
(2) Mr. Rubin is a control person of the general partner of the Partnership,
which holds a note convertible into up to 2,066,111 shares of Common
Stock. As of September 12, 1997, such note was convertible into
approximately 1,782,000 shares of Common Stock. Of such 2,066,111 shares
attributed to Mr. Rubin above, Mr. Rubin disclaims beneficial ownership of
all but 292,000 of such shares. Upon the conversion of the Senior Note and
a distribution by such partnership of its shares to its partners, Mr.
Rubin would hold 420,265 shares of Common Stock in the aggregate.
(3) Mr. Butler is a control person of the general partner of the Partnership,
which holds a note convertible into up to 2,066,111 shares of Common
Stock. As of September 12, 1997, such note was convertible into
approximately 1,782,000 shares of Common Stock. Of such 2,066,111 shares
attributed to Mr. Butler above,
18
<PAGE> 19
Mr. Butler disclaims beneficial ownership of all but 167,000 of such
shares. The shares attributed to Mr. Butler above also include 500,000
shares owned of record by Lane C. Clissold. Upon the conversion of the
Senior Note and a distribution by such partnership of its shares to its
partners, Mr. Butler would hold 667,000 shares of Common Stock in the
aggregate.
(4) Mr. Duvall is a limited partner of the Partnership, which holds a note
convertible into up to 2,066,111 shares of Common Stock. Mr. Duvall's
equity in such partnership would entitle him to receive 125,000 shares of
Common Stock following a conversion of such note and a distribution by
such partnership of its shares to its partners.
(5) This figure includes 500,000 shares of Common Stock beneficially owned by
David M. Butler, but owned of record by Mr. Clissold. Mr. Clissold
disclaims beneficial ownership of such 500,000 shares.
(6) This number includes 2,066,111 shares of Common Stock subject to issuance
upon the conversion of a note convertible into up to 2,066,111 shares of
Common Stock. As of September 12, 1997, such note was convertible into
approximately 1,782,000 shares of Common Stock.
(7) This number consists of 2,066,111 shares of Common Stock subject to
issuance upon the conversion of a note issued to the Partnership
convertible into up to 2,066,111 shares of Common Stock. As of September
12, 1997, such note was convertible into approximately 1,782,000 shares of
Common Stock. Software Funding Corp. is the general partner of the
Partnership and as such would have the power to direct the voting of the
shares that would be held by the Partnership upon a conversion of such
note. Upon the conversion of the Senior Note and following the dissolution
and winding up of the Partnership, Software Funding Corp. would hold no
shares of Common Stock.
(8) This number consists of 2,066,111 shares of Common Stock subject to
issuance upon the conversion of a note issued to the Partnership
convertible into up to 2,066,111 shares of Common Stock. As of September
12, 1997, such note was convertible into approximately 1,782,000 shares of
Common Stock. Upon the conversion of the Senior Note and following the
dissolution and winding up of the Partnership, the Partnership would hold
no shares of Common Stock.
19
<PAGE> 20
CURRENT HOLDINGS OF COMMON STOCK OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company with
respect to the number of outstanding shares of Common Stock that are currently
owned as of September 12, 1997 by all directors, executive officers and
beneficial owners of more than 5% of the outstanding shares of Common Stock,
prior to the conversion of the Senior Note. The following table also sets forth
the number of shares the listed persons would hold following the conversion of
the Senior Note and a distribution by the Partnership of the shares issued upon
such conversion to its partners.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Percent of
Number of Shares Shares
Percent of to be Owned Following Outstanding
Shares Conversion and Following
Name of Number of Shares Currently Distribution of Shares Conversion and
Beneficial Owner Currently Owned(1) Outstanding(2) by Partnership(3) Distribution(4)
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eric J. Schedeler 1,648,574(5) 45.7% 1,648,574(5) 29.0%
- - --------------------------------------------------------------------------------------------------------------------
Stuart N. Rubin 128,265(6) 3.6%(6) 420,265(6) 7.4%(6)
- - --------------------------------------------------------------------------------------------------------------------
David M. Butler 500,000(7) 13.9%(7) 667,000(7) 11.8%(7)
- - --------------------------------------------------------------------------------------------------------------------
C. Kimball McCusker 184,175 5.1% 184,175 3.3%
- - --------------------------------------------------------------------------------------------------------------------
Larry Duvall 0 0.0% 125,000 2.2%
- - --------------------------------------------------------------------------------------------------------------------
Lane C. Clissold 900,000(8) 25.0%(8) 900,000(8) 15.9%(8)
- - --------------------------------------------------------------------------------------------------------------------
Software Funding Corp. 0(9) 0.0%(9) 0(9) 0.0%(9)
- - --------------------------------------------------------------------------------------------------------------------
Scottsdale Technologies-I, Ltd. 0(10) 0.0%(10) 0(10) 0.0%(10)
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
(1) The figures in this column do not include shares issuable upon the
conversion of the Senior Note.
(2) The percentages in this column do not account for the issuance of shares
upon the conversion of the Senior Note.
(3) The figures in this column reflect the number of shares each person listed
in the table above will own assuming that the Senior Note is converted
into the maximum number of shares into which it may be converted, i.e.,
2,066,111 shares, and assuming a distribution by the Partnership of all of
the shares the Partnership will receive upon conversion of the Senior Note
to the partners of the Partnership. At present, the Senior Note is
convertible into only 1,782,000 shares.
(4) The percentages in this column reflect the percentage of all outstanding
shares of Common Stock each person listed in the table above will own
assuming that the Senior Note is converted into the maximum number of
shares into which it may be converted, i.e., 2,066,111 shares, and
assuming a distribution by the Partnership of all of the shares the
Partnership will receive upon conversion of the Senior Note to the
partners of the Partnership. At present, the Senior Note is convertible
into only 1,782,000 shares.
(5) Mr. Schedeler has agreed to distribute 304,000 shares to various creditors
and other third parties. Additionally, 230,000 shares are subject to
purchase options that Mr. Schedeler has granted to third parties. After
giving effect to such distributions and grants, no such creditor or third
party would own more than 5% of the outstanding shares of Common Stock.
(6) Mr. Rubin is deemed to be the beneficial owner of 2,194,376 shares in the
aggregate, largely because of his status as a control person of the
general partner of the Partnership, which holds a note convertible into up
to 2,066,111 shares of Common Stock. Of such 2,066,111 shares attributed
to Mr. Rubin above, Mr. Rubin disclaims beneficial ownership of all but
292,000 of such shares. For more information regarding Mr. Rubin's
beneficial ownership of shares, see "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT -- Security Ownership of Certain
Beneficial Owners and Management" above.
(7) Mr. Butler is deemed to be the beneficial owner of 2,566,111 shares in the
aggregate, largely because of his status as a control person of the
general partner of the Partnership, which holds a note convertible into up
to 2,066,111 shares of Common Stock. Of such 2,066,111 shares attributed
to Mr. Butler above, Mr. Butler disclaims beneficial ownership of all but
167,000 of such shares. For more information regarding Mr. Butler's
beneficial ownership of shares, see "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT -- Security Ownership of Certain
Beneficial Owners and Management" above. In addition, the shares
attributed to Mr. Butler above also include 500,000 shares owned of record
by Lane C. Clissold.
(8) This figure includes 500,000 shares of Common Stock beneficially owned by
David M. Butler, but owned of record by Mr. Clissold. Mr. Clissold
disclaims beneficial ownership of such 500,000 shares.
(9) Software Funding Corp. is deemed to be the beneficial owner of 2,066,111
shares because of its status as the general partner of the Partnership,
which holds a note convertible into up to 2,066,111 shares of Common
Stock. For more information regarding Software Funding Corp.'s beneficial
ownership of shares, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT -- Security Ownership of Certain Beneficial Owners and
Management" above.
(10) The Partnership is deemed to be the beneficial owner of 2,066,111 shares
because of it holds a note convertible into up to 2,066,111 shares of
Common Stock. For more information regarding the Partnership's beneficial
ownership of shares, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT -- Security Ownership of Certain Beneficial Owners and
Management" above.
21
<PAGE> 22
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
DIRECTORS
The Board of Directors of the Company consists of five (5) directors. Two
directorships are currently vacant. The term of office of each member of the
Board of Directors is one year. The Company plans to fill these positions during
the remainder of 1997.
The directors of the Company are as follows:
ERIC J. SCHEDELER is President and CEO of the Company. He became a
director as of January 1, 1997. From 1993 to 1997, Mr. Schedeler served as
President, CEO and a Director of Dalescott. Mr. Schedeler continues to serve
Dalescott in those capacities, but it is contemplated that Dalescott will be
dissolved sometime in the latter part of 1997. From 1987 through 1991, Mr.
Schedeler served as a Director of Go Video, Inc., a consumer electronics company
listed on the American Stock Exchange, and served as its President and Chief
Operating Officer from 1988 through 1991. From June 1987 through April 1988, he
served as Go Video's Chief Financial Officer, and from October 1986 through June
1987, he served as a full-time consultant to Go Video.
He previously served on the Board of Directors of the Arizona Economic
Council, and has participated at the American Electronics Association Capitol
Caucus in Washington, D.C. for international trade matters in the electronics
industry. Mr. Schedeler has also been involved in the early stages of certain
consumer electronics companies engaged in the development of optical storage
devices, voice mail, application specific integrated circuits, satellite
receivers, computer keyboards and speech recognition systems and the
incorporation of such devices in consumer electronics products.
STUART N. RUBIN is Executive Vice President, Chief Financial Officer and
Secretary of the Company, positions he has held as of January 1, 1997. He became
a director as of December 26, 1996. From September 1996 through December 1996,
Mr. Rubin served as a consultant to Dalescott. From January 1993 through October
1996, Mr. Rubin served in various capacities at Enviropur Waste Refining and
Technologies, Inc. ("Enviropur"), a successor company to Moreco as either its
President or Chief Financial Officer. He also served as a Director of Enviropur.
In November 1996, Enviropur filed for bankruptcy after the departure of Mr.
Rubin. From April 1986 through December 1988, Mr. Rubin served as a management
consultant to, and vice-chairman of, Moreco, which had filed for bankruptcy. In
December 1988, Mr. Rubin became President, Chief Executive Officer, and Chairman
of Moreco, and served in such capacity through December 1992. From 1981 through
April 1986, Mr. Rubin was an executive officer of Koomey, Inc., an international
manufacturing company. Prior to his association with Koomey, Inc., Mr. Rubin was
a partner of the accounting firm of Arthur Andersen & Company.
LARRY DUVALL became a Director of the Company as of January 1, 1997. From
1976 to 1985 Mr. Duvall worked in all manufacturing areas at Parkway
Manufacturing of Phoenix, Arizona. From 1985 through 1996 Mr. Duvall was the
owner and Vice President of Parkway Manufacturing. Parkway Manufacturing was the
contract manufacturer of Healthrider from 1991 to 1996. Prior to the Healthrider
contract, Parkway was a prototype manufacturing facility catering to the
semi-conductor industry. Mr. Duvall is currently owner and Vice President of
KLR, Inc. and Magnolia Street, L.L.C.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee will recommend to the Board of
Directors the independent accountants to be selected to audit the Company's
annual financial statements and approve any special assignments given such
accountants. The Audit Committee will also review the planned scope of the
annual audit and the independent accountants' letter of comments and
management's responses thereto, possible violations of the Company's business
ethics and conflicts of interest policies, and any major accounting changes made
or contemplated. The Compensation Committee will determine compensation policies
for key employees consider and recommend employee incentive plans (including
stock-based incentive plans), and evaluate the performance of the Company's
senior officers.
The Board of Directors may also establish a Business Advisory Board
consisting of up to ten members, chosen by the Company, and consisting of
leaders in related and emerging industries to serve the Board of Directors in an
advisory capacity. Planned annual compensation to each member would be in the
form of an option to purchase 5,000 shares of Common Stock at an exercise price
equal to the market value of the Common Stock at the time of the grant.
22
<PAGE> 23
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information concerning the persons
who serve as executive officers, other than directors, and a significant
employee of the Company. Each such person serves at the pleasure of the Board of
Directors of the Company:
NAME AGE POSITION
Eric J. Schedeler 40 Chief Executive Officer, President and Director
Stuart N. Rubin 47 Executive Vice President, Chief Financial
Officer, Secretary and Director
Michael L. Slover 46 Director of Marketing
MICHAEL L. SLOVER has been Director of Marketing of the Company as of
January 1, 1997. Mr. Slover has served Dalescott as the Director of Marketing
since September 1993. With over 19 years experience in the consumer electronics,
appliance and computer markets, Mr. Slover's background includes both retail
merchandising and electronics warranty administration marketing. Most recently,
Mr. Slover was Vice President, Director of Warranty Programs, for ITT Consumer
Financial Corporation, targeting the consumer electronics and computer markets
nationally. Previous positions include National Buyer for CBS-Columbia
Electronics Group and General Merchandise Manager for both Platt Music
Corporation and Home America Stores, Inc.
23
<PAGE> 24
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Because the Company was not a reporting company pursuant to Section 13(a)
or Section 15(d) of the Exchange Act prior to the last fiscal year, the
following table sets forth information concerning each of the highest paid
persons who are officers or directors of the Company, or its predecessor
companies during the last fiscal year ending on December 31, 1996.
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
Awards --------------------------------------
Restricted
Name and Principal Stock
Position Year Salary($) Bonus($) Award(s)($)
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eric J. Schedeler (1)
Chief Executive Officer,
President and Director 1996 $64,346 $0 $55,654
Stuart N. Rubin (2)
Executive Vice President
Chief Financial Officer
and Director 1996 $25,500 $0 $14,500
</TABLE>
(1) Mr. Schedeler's annual salary is $120,000. He received 55,654 restricted
shares of Common Stock in lieu of cash during the 1996 fiscal year. The
Company believes that the fair market value of such shares was $55,654.
(2) Mr. Rubin worked for no compensation during most of the 1996 fiscal year.
However, during the period in which he worked for compensation, he was
paid at the annual rate of $120,000. Mr. Rubin received 14,500 restricted
shares of Common Stock in lieu of cash during the 1996 fiscal year. The
Company believes that the fair market value of such shares was $14,500.
COMPENSATION OF DIRECTORS
The intention of the Company is to compensate its outside directors with
the issuance of 5,000 shares of the Company's common stock annually and the
reimbursement for out-of-pocket expenses for each Board meeting attended by
such director. The directors who are executive officers of the Company are not
paid for serving on the Company's Board or for attending Board meetings (other
than through reimbursement of expenses).
EMPLOYMENT CONTRACTS AND RELATED MATTERS
The Company is not a party to any employment agreement, but is presently
negotiating with Messrs. Eric Schedeler and Stuart Rubin with respect to the
possibility of entering into employment agreements with these individuals. The
initial salaries of each of Messrs. Schedeler and Rubin will be $120,000 per
year.
OPTION GRANTS IN THE LAST FISCAL YEAR
No options to purchase shares of Sound's common stock were granted to any
of the Company's executive officers during the last completed fiscal year.
OMNIBUS PLAN
The Board of Directors and stockholders of the Company have adopted the
Sound Industries, Ltd. 1997 long-term Incentive Plan (the "Omnibus Plan"). The
purpose of the Omnibus Plan is, among other things, to encourage the long-term
commitment and to motivate performance of selected key employees by means of
long-term, performance-related incentives and to provide key employees with a
formal program for obtaining an ownership interest in the Company. Awards under
the Omnibus Plan may be in the form of stock options (including incentive stock
options), stock appreciation rights, restricted stock, performance units,
performance shares or other stock-based awards and certain additional payments
in
24
<PAGE> 25
the amount of federal income taxes payable by a grantee and relating to an award
under the Omnibus Plan (all such options, awards and rights are collectively
referred to as "Incentive Awards"). The Omnibus Plan authorizes the grant of
Incentive Awards for up to 500,000 shares of Common Stock.
The shares available for Incentive Awards will be made available from
either authorized and unissued shares, treasury shares, if any, or shares to be
purchased or acquired by the Company. Unless terminated earlier, the Omnibus
Plan will terminate after it has been in effect for ten (10) years. All
employees of the Company, including executive officers, management personnel,
directors of the Company who are also employees, and consultants to the Company
will be eligible to receive Incentive Awards. The Omnibus Plan may also provide
for the automatic grant of outside director stock options to non-employee
members of the Board of Directors. See "Compensation of Directors."
The Omnibus Plan will be administered by a Compensation Committee.
Subject to the provisions of the Omnibus Plan, the Compensation Committee will
determine the employees and individuals to whom Incentive Awards will be
granted, the number and type of Incentive Awards and type of Incentive Awards to
be granted, the combination of Incentive Awards to be granted and the specific
terms of each grant. It is impracticable to estimate the total number of
employees who would be considered eligible to receive grants under the Omnibus
Plan. No Incentive Awards may vest or be exercised under the Omnibus Plan prior
to the expiration of six months from the date of award.
Except as the Board of Directors may otherwise provide prior to any
Change in Control (as defined below), in the event of a Change in Control, all
Incentive Awards outstanding become immediately and fully exercisable, and all
performance-related Incentive Awards and stock-based awards are vested and
deemed earned in full and promptly paid to grantees without regard to payment
schedules. A "Change in Control," for purposes of the Omnibus Plan, occurs if
any "person" as defined under Section 13(d) and 14(d)(2) of the Securities Act
acquires beneficial ownership of securities representing 30% or more of the
combined voting power for election of directors of the Company, in the event of
a replacement of a majority of the Board of Directors of the Company over any
two-year period, or in the event of certain mergers or consolidations by the
Company or sales of a substantial portion of the Company's assets.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stuart N. Rubin, the Company's Executive Vice President, Chief Financial
Officer and Secretary, and David M. Butler, a beneficial owner of over five
percent of the Company's securities, each own fifty percent of the outstanding
shares of capital stock of the General Partner and therefore can be regarded as
controlling the Partnership. Pursuant to the terms of the Note Purchase
Agreement, Scottsdale has issued the Senior Note in the aggregate principal
amount of up to $1,928,250 bearing interest at the rate of twelve percent (12%)
per annum, and the Partnership agreed to disperse the principal of the Senior
Note in one or more events as from time to time in exchange for the Senior Note.
As of June 30, 1997, the aggregate principal amount outstanding under the Senior
Note was approximately $1,251,000. See "DESCRIPTION OF BUSINESS--Recent
Corporate Developments--Note and Warrant Purchase Agreement".
In addition, the Company has covenanted that it shall cause three (3)
directors nominated by the General Partner to be elected to its Board of
Directors (out of a total of five (5) directors), and the committees thereof. In
addition, in the event any principal or accrued interest of the Senior Note is
not paid when due or there exists an event of default, the Company shall, at the
request of the Partnership, cause two additional directors designated by the
Partnership to be elected to its Board of Directors. See "DESCRIPTION OF
BUSINESS--Recent Corporate Developments--Governance Matters".
Mr. Rubin has also guaranteed all amounts to be funded pursuant to the
Company's asset based financing agreement with Express Business Financing. See
"MANAGEMENT DISCUSSION AND ANALYSIS--Financing Activities".
25
<PAGE> 26
DESCRIPTION OF SECURITIES
COMMON AND PREFERRED STOCK OF SCOTTSDALE
The Certificate of Incorporation of Scottsdale authorizes the issuance of
25,000,000 shares of common stock, $.01 par value per share, and up to
10,000,000 additional shares of preferred stock, par value $0.01 per share.
Scottsdale's Board of Directors will be authorized to issue such additional
preferred stock in series and, with respect to each series, to determine the
number of shares in any such series and fix the designations, preferences,
qualifications, limitations, restrictions and special or relative rights of
shares of any series of additional preferred stock. Scottsdale's Board of
Directors could, without stockholder approval, issue preferred stock with voting
and other rights that could adversely affect the voting power of holders of
common stock of Scottsdale and that could be used to prevent a third party from
acquiring control of Scottsdale. There is no present plan to issue any shares of
preferred stock. Holders of Scottsdale's common stock do not have preemptive
rights or cumulative voting rights.
As of September 12, 1997, the Company had 3,604,130 outstanding shares
of Common Stock.
The transfer agent for the Company is Fidelity Transfer Company, Salt
Lake City, Utah. The primary market makers for the Company are Spelman &
Co.; Paragon Capital Corp.; Wm. V. Frankel & Co., Inc.; Hill, Thompson, Magid
& Co., Inc.; and Acap Financial #101.
26
<PAGE> 27
PART F/S
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF PAGE
SOUND INDUSTRIES LTD. AND SUBSIDIARY AS OF
MARCH 31, 1997 AND SEPTEMBER 30, 1996 AND 1995
Independent Auditor's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholder's Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-9
Notes to the Consolidated Financial Statements F-11
CONSOLIDATED PROFORMA BALANCE SHEET
OF SOUND INDUSTRIES LTD. AND SUBSIDIARY
AS OF MARCH 31, 1997 (UNAUDITED)
Accountants Report F-16
Consolidated Proforma Balance Sheet (Unaudited) F-17
Statements of Assumption and Disclosure F-19
27
<PAGE> 28
[JONES, JENSEN LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sound Industries, Inc. and Subsidiary
(A Development Stage Company)
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Sound
Industries, Inc. and Subsidiary (a development stage company) as of March 31,
1997 and September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the six months
ended March 31, 1997 and for the years ended September 30, 1996, 1995 and 1994
and from inception on October 24, 1980 through March 31,1997. 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 audit 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 financial position of Sound Industries,
Inc. and Subsidiary (a development stage company) as of March 31, 1997 and
September 30, 1996 and 1995 and the results of its operations and its cash flows
for the six months ended March 31, 1997 and for the years ended September 30,
1996, 1995 and 1994 and from inception on October 24, 1980 through March 31,
1997 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 3 to the
consolidated financial statements, the Company is a development stage company
with no significant operating results to date, which together raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
S/ Jones Jensen & Company
Jones, Jensen & Company
May 15, 1997
50 South Main Street, Suite 1450, Salt Lake City, Utah 84144 - Telephone (801)
328-4408,
Facsimile (801) 328-4461
F-1
<PAGE> 29
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
September 30.
March 31, -------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ -- $ -- $ --
----------------------------------------------
Total Current Assets -- -- --
----------------------------------------------
OTHER ASSETS
Organization costs (Note 1) 500 -- --
----------------------------------------------
Total Other Assets
TOTAL ASSETS 500 -- --
----------------------------------------------
CURRENT LIABILITIES $ 500 $ -- $ --
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 4,067 $ -- $ 4,022
Taxes payable (Note 5) -- -- 3,845
Note payable - related party (Note 2) 19,956 13.713
----------------------------------------------
Total Current Liabilities 4.067 19.956 21.580
----------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock: 50,000,000 shares
authorized of $0 005 par value,
4,491,200 500,000 and 500,000
shares issued and outstanding, respectively 22,457 2,501 2,501
Additional paid-in capital 1,080,138 1,079,638 1,079,638
Deficit accumulated during the
development stage (1,106,162) (1,102,095) (1.103.719)
----------------------------------------------
Total Stockholders' Equity (Deficit) (3.567) (19.956) (21.580)
----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 500 $ -- $ --
----------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE> 30
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Six From Inception on
Months Ended For the Years Ended October 24, 1980
March 31, September 30. Through March 31,
1997 1996 1995 1994 1997
<S> <C> <C> <C> <C> <C>
REVENUES $ -- $ -- $ -- $ -- $ --
------------------------------------------------------------
EXPENSES 4,067 2.220 16,235 1,500 198,752
------- -------- -------- ------ -----------
NET LOSS BEFORE
LOSS FROM
DISCONTINUED
OPERATIONS (4,067) (2,220) (16,235) 1,500) (198,752)
GAIN (LOSS) FROM
DISCONTINUED
OPERATIONS
(NOTE 4) -- 3.844 -- -- (907.410)
------- -------- -------- ------ -----------
NET INCOME (LOSS) $(4,067) $ 1,624 $(16,235) $1.500) $(1.106,162)
------- -------- -------- ------ -----------
NET INCOME (LOSS)
PER SHARE OF
COMMON STOCK $ (0.00) $ 0.00 $ (0.00) $(0.00)
------- -------- -------- ------
</TABLE>
F-3
<PAGE> 31
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the
Stockholders'
Common Stock
------------ Paid-in Development Equity
Shares Amount Capital Stage Shares Amount (Deficit)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 24, 1980 -- $ -- $ -- $ -- -- $ -- $ --
Common stock
issued at $14.58
per share for cash 11,800 59 171,941 -- -- -- 172,000
Forgiveness of
indebtedness by
shareholders -- -- 237,621 -- -- -- 237,621
Common stock
issued at $0.10 per
share for patents 50,000 250 4,750 -- -- -- 5,000
Common stock
issued st $5.00 per
share for legal
services 6,000 30 29,970 -- -- -- 30,000
Common stock
issued at$0.10 per
share for marketing
rights 4,000 20 380 -- -- -- 400
Common stock
issued at $5.00 per
share for engineering
services 1,000 5 4,995 -- -- -- 5,000
Common stock
issued at $0.10 per
share per settlement
negotiation 8,000 40 760 -- -- -- 800
Common stock
issued at $0.001
per share 1,000 5 95 -- (1,000) (100) --
Contribution of common
stock per settlement
negotiation (10,000) (50) (950) -- -- -- (1,000)
Net loss for the period
October 24, 1980
(inception) through
September 30, 1984 -- -- (468,719) -- -- -- (468,719)
Balance,
September 30, 1984 71,800 359 $ 449,562 $(468,719) (1,000) $ (100) $ (18,898)
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
F-4
<PAGE> 32
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the
Stockholders'
Common Stock
------------ Paid-in Development Equity
Shares Amount Capital Stage Shares Amount (Deficit)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1984 71,800 $ 359 $ 449,562 $(468,719) (1,000) $ (100) $ (18,898)
Common stock
issued at $5.00
per share 2,400 12 119,988 -- -- -- 120,000
Common stock
subscription issued at
$10.00 per share for
loan fee 500 3 4,997 -- -- -- 5,000
Retirement of
treasury shares -- -- (100) -- 1,000 100 --
Net loss for the
year ended
September 30, 1985 -- -- -- (293,395) -- -- (293,395)
--------- --------- --------- --------- --------- --------- ---------
Balance,
September 30, 1985 74,700 374 574,447 (762,114) -- -- (187,293)
Common stock issued
at $2.50 per share
for settlement of
notes payable and
accrued expenses
(Note 6) 70,824 354 176,707 -- -- -- 177,061
Common stock
Subscriptions
issued at $4.21
per share for loan
fees and services
(Note 6) 5,250 26 22,099 -- -- -- 22,125
Net loss for the
year ended
September 30, 1986 -- -- -- (205,987) -- -- (205,987)
--------- --------- --------- --------- --------- --------- ---------
Balance,
September 30, 1986 150,774 $ 754 $ 773,253 $(968,101) -- $ -- $(194,094)
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
F-5
<PAGE> 33
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the
Stockholders'
Common Stock
------------ Paid-in Development Equity
Shares Amount Capital Stage Shares Amount (Deficit)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1986 150,774 $ 754 $ 773,253 $(968,101) -- $ -- $(194,094)
Common stock issued
at $28.00 per share for
settlement of litigation 2,000 10 55,990 -- -- -- 68,000
Forgiveness of
indebtedness by
shareholders -- -- 64,000 -- -- -- 64,000
Common stock issued
at $10.00 for settlement
of note payable
(Note 6) 800 4 7,996 -- -- -- 8,000
Cancellation of
common stock (700) (4) 4 -- -- -- --
Contribution of
capital by
shareholder -- -- 4,523 -- -- -- 4,523
Net income for the
year ended
September 30, 1987 -- -- -- 60.226 -- -- 60,226
--------- --------- --------- --------- ----- ----- ---------
Balance,
September 30, 1987 152,874 764 905,766 (907,875) -- -- (1,345)
Contribution of capital
by shareholder -- -- 880 -- -- -- 880
Net loss for the
year ended
September 30, 1988 (3,380) (3,380)
--------- --------- --------- --------- ----- ----- ---------
Balance,
September 30, 1988 152,874 764 906,646 (911,255) -- -- (3,845)
Net loss for the
year ended
September 30, 1989 -- -- -- -- -- -- --
--------- --------- --------- --------- ----- ----- ---------
Balance,
September 30, 1989 152,874 $ 764 $ 906,646 $(911,255) -- -- (3,380)
--------- --------- --------- --------- ----- ----- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE> 34
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the
Stockholders'
Common Stock
------------ Paid-in Development Equity
Shares Amount Capital Stage Shares Amount (Deficit)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1989 152,874 $ 764 $ 906,646 $ (911,255) -- $ -- (3,845)
Net loss for the
year ended
September 30, 1990 -- -- -- -- -- -- --
----------- ----------- ----------- ----------- --- ----------- -----------
Balance,
September 30, 1990 152,874 764 906,646 (911,255) -- -- (3,845)
Net loss for the
year ended
September 30, 1991 -- -- -- -- -- -- --
----------- ----------- ----------- ----------- --- ----------- -----------
Balance,
September 30, 1991 152,874 764 906,646 (911,255) -- -- (3,845)
Contribution of capital
by shareholder (Note 2) -- -- 1,119 -- -- 1,119 --
Net loss for the
year ended
September 30, 1992 -- -- -- (1,119) -- -- --
----------- ----------- ----------- ----------- --- ----------- -----------
Balance,
September 30, 1992 152,874 764 907,765( (912,374) -- -- (3,845)
Contribution of capital
by shareholder -- -- 50 -- -- -- 50
Common stock issued
at $0.50 for services
rendered 347,126 1737 171,823 -- -- -- (173,560)
Net loss for the
year ended
September 30, 1993 -- -- -- (173,610) -- -- (173,610)
----------- ----------- ----------- ----------- --- ----------- -----------
Balance,
September 30, 1993 500,000 $ 2,501 $ 1,079,638 $(1,085,984) -- $ -- $ (3,845)
----------- ----------- ----------- ----------- --- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE> 35
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During the
Stockholders'
Common Stock
------------ Paid-in Development Equity
Shares Amount Capital Stage Shares Amount (Deficit)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1993 500,000 $ 2,501 $ 1,079,638 $(1,085,984) -- -- (3,845)
Net loss
for the year ended
September 30, 1994 -- -- -- (1,500) -- -- (1,500)
----------- ----------- ----------- ----------- ----- ----- -----------
Balance,
September 30, 1994 500,000 2,501 1,079,638 (1,087,484) -- -- (5,345)
Net loss
for the year ended
September 30, 1995 -- -- -- (16,235) -- -- (16,235)
----------- ----------- ----------- ----------- ----- ----- -----------
Balance,
September 30, 1995 500,000 2,501 1,079,638 (1,103,719) -- -- (21,580)
Net loss
for the year ended
September 30, 1996 -- -- -- 1.624 -- -- 1.624
----------- ----------- ----------- ----------- ----- ----- -----------
Balance,
September 30, 1996 500,000 2,501 1,079,638 (1,102,095) -- --
(19,956)
Common stock issued
at $0.005 for debt
conversion 3,991,200 19,956 -- -- -- -- 19,956
Contribution of capital -- -- 500 -- -- -- 500
Net loss
for the six months
ended March 31, 1997 -- -- -- (4,067) -- -- (4.067)
----------- ----------- ----------- ----------- ----- ----- -----------
Balance,
March 31, 1997 4,491,200 $ 22,457 $ 1,080.138 $(1,106,162) -- $ -- $ (3,567)
----------- ----------- ----------- ----------- ----- ----- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-8
<PAGE> 36
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Inception on
Six Months October 24,
Ended For the Years Ended 1980 Through
March 31, ---------------------September 30--------------- March 31,
1997 1996 1995 1994 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Income (loss) from operations $ (4,067) $ 1,624 $ (16,235) $ (1,500) $(1,106,162)
Loss from disposal of assets` -- -- -- -- 72,823
Payment of liabilities by a
Shareholder -- -- -- -- 234,370
Common stock issued for
services and wages -- -- -- -- 241,885
Common stock issued for notes
payable and accrued expenses 19,956 -- -- -- 205,017
Common stock issued for
settlement of litigation -- -- -- -- 56,000
Increase (decrease)
in accounts payable (15,889) (4,022) 2,622 1,500 (15,889)
Decrease in taxes payable -- (3.845) -- -- --
----------- ---------- ----------- ----------- -----------
Net Cash (Used) by
Operating Activities (6.243) (13.713) -- (311.956)
----------- ---------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES -- -- -- -- --
----------- ---------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from note payable -- 6,243 13,713 -- 19,956
Common stock issued for cash -- -- -- -- 292.000
----------- ---------- ----------- ----------- -----------
Net Cash Provided by
Financing Activities -- 6.243 13.713 -- 311.956
----------- ---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS -- -- -- -- --
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD -- -- -- -- --
----------- ---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ -- $ -- $ -- $ -- $ --
----------- ---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-9
<PAGE> 37
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
For the Inception on
Six Months October 24,
Ended For the Years Ended 1980 Through
March 31, --------September 30-------- March 31,
1997 1996 1995 1994 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH PAID FOR:
Interest $ -- $ -- $ -- $ -- $ --
Income taxes $ -- $ -- $ -- $ -- $ --
NON CASH FINANCING
ACTIVITIES
Common stock issued
for services rendered
and wages $ -- $ -- $ -- $ -- $241,885
Liabilities paid by
shareholders added
to additional paid-in
capital $ 500 $ -- $ -- $ -- $234,870
Common stock issued
for notes payable and
accrued expenses $ 19,956 $ -- $ -- $ -- $205,017
Common stock issued
For settlement of
litigation $ -- $ -- $ -- $ -- $ 56,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-10
<PAGE> 38
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 1997 and September 30, 1996, 1995
NOTE 1 - ORGANIZATION AND HISTORY
a. Organization
The consolidated financial statements presented are those of Sound Industries,
Inc. and Subsidiary (a development stage company). The Company was incorporated
under the laws of the State of Utah on October 24, 1980. The Company was
initially engaged in the development, production and marketing of sound
reproduction equipment. During 1982, the Company acquired six U.S. patents. Four
of the six patents acquired, covered a positive displacement vane type rotary
pump. The Company's primary activities following the acquisition of the patents,
were directed toward the development and testing of proto-type pumps in an
effort to determine if they would be commercially manufactured and marketed.
During 1987, the Company purchased eight lode mining claims. It was estimated
that the claims contained a 17 foot wide mineralized zone that contained
significant amounts of gold, silver and platinum. The Company has been in the
development stage since its inception and is presently seeking new business
opportunities believed to hold a potential profit.
Sound Acquisition Corp. was organized on March 21, 1997 under the laws of the
State of Utah. Sound Acquisition was organized for any lawful purposes available
to Utah corporations.
b Accounting Method
The Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected a September 30, -year end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with maturities
of three months or less at the time of acquisition.
d. Loss Per Share
The computations of loss per share of common stock are based on the weighted
average number of shares outstanding at the date of the consolidated financial
statements.
e. Provision for Taxes
At March 31, 1997 the Company had net operating loss carry forwards of
approximately $1,100,000 that may be offset against future taxable income
through 2011. No tax benefit has been reported in the consolidated financial
statements, because the Company believes there is a 50% or greater chance the
carry forward will expire unused. Accordingly, the potential tax benefits of the
loss carry forward are offset by a valuation account of the same amount.
F-11
<PAGE> 39
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 1997, and September 30, 1996, 1995
NOTE 1 - ORGANIZATION AND HISTORY (Continued)
f. Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
g. Principles of Consolidation
The financial statements presented are those of Sound Industries, Inc. and Sound
Acquisition Corp. Together they are referred to as the Company. All significant
inter-company accounts have been eliminated.
h. Organization Costs
The costs of organizing the Company's Subsidiary have been capitalized and are
being amortized over 5 years.
Accumulated
Costs Amortization Value
March 31, 1997 $500 $ -- $500
NOTE 2 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 1995 an officer of the Company paid expenses
of the Company totaling $13,713. On May 3, 1995, the Company issued a note to
the officer in that same amount. The note has no stated interest rate and it is
payable on demand. The note was convertible into common stock upon written
notification of the Board of Directors of the Company. The issuance of shares
was based on the par value of the Company's common stock. Additional expenses
were paid in 1995 and 1996. The officer had paid total expenses of $19,956 by
the year ended September 30, 1996. On January 10, 1997, the Company issued
3,991,200 post-split "unregistered" and "restricted" shares of common stock as a
full conversion of the note payable.
NOTE 3 - GOING CONCERN
The Company'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. However, the Company does not have significant cash or other material
assets, nor does it have an established source of revenues sufficient to cover
its operating costs and to allow it to continue as a going concern. It is the
intent of the Company to seek a merger with an existing, operating company.
Until that time shareholders of the Company have committed to meeting its
minimal operating needs.
F-12
<PAGE> 40
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 1997, and September 30, 1996, 1995
NOTE 4 - DISCONTINUED OPERATIONS
In 1987 the Company abandoned all of its patents and mining claims and
management has determined to seek new business opportunities, therefore, all
revenues generated by the Company have been netted against the expenses and are
grouped into the discontinued operations line on the statement of operations.
NOTE 5 -
TAXES PAYABLE
The payroll tax liability incurred during 1984 and 1985 was released in 1996. No
other tax liability existed at March 31, 1997.
NOTE 6 - STOCK TRANSACTIONS
In May, 1986, the Company issued 70,824 shares of its common stock to certain
employees and creditors in settlement of notes payable and accrued expenses. The
directors received an aggregate of 41,324 for accrued salaries, un-reimbursed
travel and office expenses totaling $103,310. Unrelated individuals received an
aggregate of 29,500 shares for notes payable, accrued interest, accrued
consulting and expense totaling $73,751.
During 1987, the Company issued 2,000 shares of its common stock in settlement
of a lawsuit. The Company also issued 800 shares of its common stock in
settlement of a note payable to an unrelated party.
In May 1993, the Company issued 347,126 shares of its common stock for services
rendered valued at $173,560 or $0.50 per share.
On January 10, 1997, the Company affected a 1 for 100 reverse split of its
common stock and issued 3,991,200 post-split "unregistered" and "restricted'
shares of common stock for conversion of the related party note payable. All
references to common stock have been retroactively restated to reflect the
reverse stock split.
NOTE 7 - CONTINGENCIES
Prior to discontinuing operations, the Company incurred certain liabilities
which were never paid. The Company has written the liabilities off because no
collection action has been taken by the creditors and the statute of limitations
for making such claims has expired. An officer of the Company has indemnified
the Company against the liabilities; however, there is no assurance that the
creditors will not make a claim against the Company.
F-13
<PAGE> 41
SOUND INDUSTRIES, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to the Consolidated Financial Statements
March 31, 1997, and September 30, 1996, 1995
NOTE 8 - SUBSEQUENT EVENT
On April 15, 1997, the Company finalized a merger with WO Consulting, Inc. (WO).
The merger for accounting purposes was effective March 31, 1997. WO purchased
all the assets of Scottsdale Technologies, Inc. (STI), a Company that has
developed technology that when combined with an Electronic Television Guide, can
transfer preselected Cable Box, TV and VCR programming information through the
emittance of light. The terms of the merger call for the current executive
officers and directors of the Company and its wholly owned subsidiary to resign
and for the current management of STI to be installed in their places. Each
outstanding share of WO will be converted into one share of Sound. It is
estimated that the shareholders of WO including the investors in STI will own
approximately 80% of the Company after the transaction. It is also contemplated
that the Company will change its name to Scottsdale Technologies, Inc. within 90
days of the effective date of the merger. The merger is expected to be a
tax-free reorganization.
F-14
<PAGE> 42
SOUND INDUSTRIES, LTD.
Consolidated Proforma Balance Sheet
March 31, 1997
F-15
<PAGE> 43
ACCOUNTANT'S REPORT
The Board of Directors
Sound Industries, Ltd.
Scottsdale, Arizona
We have compiled the accompanying consolidated proforma balance sheet of Sound
Industries, Ltd. as of March 31, 1997.
The accompanying presentation and this report was prepared for your company for
the purpose of examining the results of the proposed transactions as outlined in
the assumptions and disclosures presented with these proforma financial
statements and should not be used for any other purpose.
A compilation is limited to presenting in the form of proforma financial
statements information that is the representation of management and does not
include evaluation of the support for the assumptions underlying the proforma
transactions. We have not examined the accompanying proforma balance sheet and,
accordingly, we do not express an opinion or any form of assurance on it.
Jones, Jensen & Company
October 20, 1997
F-16
<PAGE> 44
SOUND INDUSTRIES, LTD.
Consolidated Proforma Balance Sheet
March 31, 1997
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Proforma
Sound Scottsdale Adjustments
Industries Technologies, Increase Proforma
Ltd. Inc. (Decrease) Consolidation
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash $ -- $ -- $ -- $ --
Inventory -- 23,287 -- 23,287
-------- -------- ---------- --------
Total Current Assets -- 23,287 -- 23,287
-------- -------- ---------- --------
PROPERTY AND
EQUIPMENT - NET -- 43,291 -- 43,291
-------- -------- ---------- --------
OTHER ASSETS
Deposits -- 16,506 -- 16,506
Prepaid expenses -- 35,322 -- 35,322
Organization costs 500 -- -- 500
Note receivable -- 20,746 -- 20,746
-------- -------- ---------- --------
Total Other Assets 500 72,574 -- 73,074
-------- -------- ---------- --------
TOTAL ASSETS $ 500 $139,152 $ -- $139,652
======== ======== ========== ========
</TABLE>
F-17
<PAGE> 45
SOUND INDUSTRIES, LTD.
Consolidated Proforma Balance Sheet
March 31, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Proforma
Sound Scottsdale Adjustments
Industries Technologies, Increase Proforma
Ltd. Inc. (Decrease) Consolidation
------- ------- ----------- -------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,067 $ 434,904 $ -- $ 438,971
Accrued expenses -- 188,513 -- 188,513
Related party notes payable -- 1,536,313 -- 1,536,313
Interest payable -- 64,878 -- 64,878
Dividends payable -- 31,653 -- 31,653
Redeemable preferred stock -- 1,859,954 -- 1,859,954
----------- ----------- ----------- -----------
Total Current Liabilities 4,067 4,116,215 -- 4,120,282
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; par value
$0.005; 50,000,000 shares
authorized; 4,491,200
issued and outstanding 22,457 900 (900) 22,457
Additional paid-in capital
(deficit) 1,080,138 103 (1,105,262) (25,021)
Accumulated deficit (1,106,162) (3,978,066) 1,106,162 (3,978,066)
----------- ----------- ----------- -----------
Total Stockholders' Equity
(Deficit) (3,567) (3,977,063) -- (3,980,630)
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT) $ 500 $ 139,152 $ -- $ 139,652
=========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 46
SOUND INDUSTRIES, LTD.
Statements of Assumptions and Disclosures for the
Consolidated Proforma Balance Sheet
March 31, 1997
(Unaudited)
BACKGROUND AND HISTORICAL INFORMATION
Sound Industries, Ltd. (Sound) (the Company) was incorporated under the
laws of Utah on October 24, 1980. Prior to May 27, 1997, Sound had been
a development stage company pursuing a number of different business
opportunities from time to time, all of which businesses were
discontinued and/or divested. Among the businesses formerly pursued by
Sound were the development, production and marketing of sound
reproduction equipment; the acquisition of U.S. patents pertaining
mainly to positive displacement vane rotary pumps; and the acquisition
of eight lode mining claims.
On May 27, 1997, Sound Acquisition Corp. (SAC), a wholly owned
subsidiary of Sound merged into WO Consulting, Inc. (New Scottsdale), a
Delaware corporation, with New Scottsdale remaining as the surviving
corporation of the merger and a wholly owned subsidiary of Sound. New
Scottsdale had previously acquired substantially all of the assets of
Scottsdale Technologies Inc. (Old Scottsdale) and following such
acquisition was in the business of developing and marketing software
and consumer electronic products within certain regions of the United
States. In connection with such merger, New Scottsdale's name was
changed to Scottsdale Technologies, Inc., and Old Scottsdale's name was
changed to Dalescott, Inc.
On October 30, 1997, Sound merged into New Scottsdale, with New
Scottsdale remaining as the surviving corporation of the merger.
PROFORMA TRANSACTIONS
The historical financial information contained herein has been
consolidated assuming the acquisition by New Scottsdale of
substantially all of the assets of Old Scottsdale, and the contribution
of all of the outstanding shares of New Scottsdale to Sound by the
shareholders of New Scottsdale in connection with the merger of SAC
into New Scottsdale. The transaction is accounted for using the pooling
of interests method of accounting whereby the acquired company, New
Scottsdale, is accounted for as the acquiring company (reverse merger).
Therefore the historical financial statements of Old Scottsdale become
the historical financial statements of the Company with no adjustment
to the historical carrying value of the assets or liabilities. The
balance sheets of Sound and Old Scottsdale are shown at March 31, 1997.
PROFORMA ADJUSTMENTS
Sound Acquisition Corp. will acquire 100% of Scottsdale. The proforma
adjustments have been prepared under the pooling of interests method of
accounting for business combinations and all significant inter-company
transactions have been eliminated. The proforma adjustments to record
the merger of the companies under the pooling of interests method of
accounting for business combinations are:
F-19
<PAGE> 47
SOUND INDUSTRIES, LTD.
Statements of Assumptions and Disclosures for the
Consolidated Proforma Financial Statements
March 31, 1997
(Unaudited)
PROFORMA ADJUSTMENTS (Continued)
1) Acquisition of assets of Old Scottsdale by New Scottsdale:
<TABLE>
<CAPTION>
Common
stock $(900)
<S> <C>
Additional paid-in capital 900
------------
Total $ --
============
2) Eliminate the accumulated deficit of Sound:
Accumulated deficit $ 1,106,162
Additional paid-in capital (1,106,162)
------------
Total $ --
============
</TABLE>
F-20
<PAGE> 48
PART II
MARKET PRICE AND DIVIDENDS FOR COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS
LISTING AND TRADING
The Company's Common Stock trades on the NASDAQ bulletin board market
(NASDAQ BB: SDNI). Until the Sound Merger, Sound was an inactive company. The
transfer agent has advised the Company that there were no reported trades of
Common Stock during the last two fiscal years until April 10, 1997. On November
28, 1997, the bid-ask spread of the Common Stock was $1.50-$2.50.
As of April 25, 1997, there were approximately 250 shareholders of the
Company's Common Stock.
DIVIDENDS
The Company has no intention at this time to declare dividends on its
Common Stock. The Company intends to retain future earnings, if any, to finance
the future growth of the Company. The Company's future dividend policy will
depend on the Company's earnings, capital requirements, expansion plans, product
development, financial condition and other relevant factors.
LEGAL PROCEEDINGS
On July 18, 1997, Dalescott agreed to the Judgment and the Covenant Not
to Execute. Pursuant to the terms of the Covenant Not to Execute, Dalescott
agreed to pay GrandeTel or its order the amount of $145,000 during the period
between August 1, 1997 and July 1, 1998. In the event Dalescott defaults on any
of its obligations under the Covenant, GrandeTel may file the Judgment, record
the Judgment and/or execute upon it. The Judgment is for the sum of $250,000
with interest thereon at the prime rate of Citibank plus two percent per annum
from August 1, 1994 until paid. The Company has executed an Assumption Agreement
to which it shall assume the obligations of Dalescott under the Covenant. See
"RISK FACTORS-- Negative Net Worth; Certain Liabilities."
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
RECENT SALES OF UNREGISTERED SECURITIES
As of May 27, 1997, a total of 1,937,586 shares to purchase Common Stock
of the Company was issued to the following persons in connection with the merger
between Sound Acquisition Corp. and Scottsdale Technologies, Inc.: Eric J.
Schedeler, C. Kimball McCusker, Stuart N. Rubin, Michael L. Slover, Creative
Strategies Research International, Mesa Research, Wall Street Financial Corp.,
The Martz Agency, Amerasia International Group, Ltd., Merrill Ridgway, Jack
Korff and Mary Steele. The foregoing issuance was a private transaction exempt
from registration pursuant to Section 4(2) of the Securities Act.
In connection with the Sound Merger, Sound agreed in both the Sound
Reorganization Agreement and the Sound Guarantee to guarantee the performance
and observance by Scottsdale of all of Scottsdale's obligations pursuant to the
Senior Note, the Warrants, the Note Purchase Agreement and any other agreement
or instrument executed in connection with any of the foregoing. In addition,
Sound agreed in the Sound Guarantee (a) that upon a conversion of the Senior
Note, Sound shall issue shares of Sound's common stock to the same extent that
Scottsdale is required to issue shares of Scottsdale's common stock upon a
conversion of the Senior Note pursuant to the terms of the Senior Note and the
Note Purchase Agreement and (b) that upon an exercise of the Warrants, Sound
shall issue shares of Sound's common stock to the same extent that Scottsdale is
required to issue shares of Scottsdale's common stock upon an exercise of the
Warrants pursuant to the terms of the Warrants and the Note Purchase Agreement.
28
<PAGE> 49
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law ("DGCL") and the Certificate of
Incorporation and Bylaws of Scottsdale govern the indemnification of the
directors and officers of the Company.
Delaware General Corporation Law
Section 145 of the DGCL permits a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interest of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful, Sections 145(e) and 145(g),
respectively, of the DGCL provide that a corporation may advance expenses of
defense (upon receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. Section 145(b) of the DGCL provides that indemnification
may not be made for any claim, issue or matter as to which a person has been
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the corporation, except only to the extent a court
determines that the person is entitled to indemnity for such expenses that such
court deems proper.
In addition, Section 102(b)(7) of the DGCL permits a corporation to
include a provision in its certificate of incorporation eliminating or limiting
the personal liability of a director to the corporation or its stockholders for
damages for breach of the director's fiduciary duty subject to certain
limitations.
Provisions Under Scottsdale Certificate of Incorporation
The Certificate of Incorporation of Scottsdale provides that Scottsdale
shall, to the fullest extent permitted by the DGCL, as the same may be amended
and supplemented, indemnify any and all past, present and future directors and
officers of Scottsdale from and against any and all costs, expenses (including
attorneys' fees), damages, judgments penalties, fines, punitive damages, excise
taxes assessed with respect to an employee benefit plan and amounts paid in
settlement in connection with any action, suit or proceeding, whether by or in
the right of Scottsdale, a class of its security holders or otherwise, in which
the director or officer may be involved as a party or otherwise, by reason of
the fact that such person was serving as a director, officer, employee or agent
of Scottsdale.
Moreover, the Certificate of Incorporation of Scottsdale provides that a
director of Scottsdale shall not be personally liable to Scottsdale or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
Scottsdale or its stockholders, (ii) for acts of omissions not in good faith or
which involved intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, as the same exists or may be amended, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
DGCL is amended to authorize corporation action further limiting or eliminating
the personal liability of directors, then the liability of a director to the
Corporation shall be limited or eliminated to the fullest extent permitted by
the DGCL, as so amended from time to time.
29
<PAGE> 50
<PAGE> 51
In addition, the Certificate of Incorporation of Scottsdale provides that
any repeal or modification of the foregoing provisions of Scottsdale's
Certificate of Incorporation shall be prospective only, and shall not adversely
affect the right of a director or officer of Scottsdale to receive
indemnification from Scottsdale existing at the time of such repeal or
modification, and shall not adversely affect any limitation on the personal
liability of a director of Scottsdale, in either case existing at the time of
such repeal or modification.
Provisions Under Scottsdale Bylaws
Article VIII of the Bylaws of Scottsdale contains the following provisions
with respect to indemnification and insurance:
SECTION 1. The Company shall indemnify any person who was or is a party or
who was or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, advisory director, officer, employee
or agent of the Company or of any entity a majority of the voting stock of which
is owned by the Company, or is or was serving at the request of the Company as a
director, advisory director, employee or agent of another Company, partnership,
joint venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonable believed to be in or not opposed to the best
interests or the Company, and with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
SECTION 2. The Company shall indemnify any person who was or is a party or
who was or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director, advisory
director, officer, employee or agent of the Company or of any entity a majority
of the voting stock of which is owned by the Company or is or was serving at the
request of the Company as a director, advisory director, officer, employee or
agent of another Company, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable for gross negligence in the performance of
his duty to the Company unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all circumstances of the case, such person is fairly and reasonable
entitled to indemnity for such expenses which the Court of Chancery of the State
of Delaware or such other court shall deem proper.
SECTION 3. To the extent that any person who is or was a director,
advisory director, officer, employee or agent of the Company or of any entity a
majority of the voting stock of which is owned by the Company, or who is or was
serving at the request of the Company as a director, advisory director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Sections 1 and 2 of this Article
VIII, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith. Any other indemnification under
Sections 1 and 2 of this Article VIII shall (unless ordered by court) be made by
the Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the applicable standard
of conduct set forth therein has been met. Such determination shall be made (a)
by the board of directors of the Company by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
of (b) if such a quorum is not obtainable, or even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders of the Company.
30
<PAGE> 52
SECTION 4. Expenses incurred in defending a civil or criminal action, suit
or proceeding may be paid by the Company in advance of the final disposition of
such action, suit or proceeding as authorized by the board of directors of the
Company in the specific case upon receipt of an undertaking by or on behalf of
the director, advisory director, officer, employee of agent to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the Company pursuant to this Article VIII.
SECTION 5. The indemnification provided by this Article VIII shall not be
deemed exclusive of any right to which those seeking indemnification may be
entitled from the Company or any other entity under any statute, other bylaw,
agreement, provision of the Company's certificate of incorporation, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
advisory director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person. However, any amount
actually received as the proceeds of any such other indemnification shall be
deducted from the amount, if any, which he may entitled to receive pursuant to
this Article VIII.
SECTION 6. By action of its board of directors, notwithstanding any
interest of the directors in the action, to the fullest extent permitted by the
General Corporation Law of the State of Delaware, the Company may purchase and
maintain insurance, in such amounts and against such risks as the board of
directors deems appropriate, on behalf of any person who is or was a director,
advisory director, officer, employee or agent of the Company, or who is or was
serving at the request of the Company as a director, advisory director, officer,
employee or agent of another Company, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Company would have the power or would be required to indemnify him against such
liability under the provisions of this Article VIII, or of the Company's
certificate of incorporation of the General Corporation Law of the State of
Delaware.
* * * *
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
31
<PAGE> 53
INDEX TO EXHIBITS
The following list describes the exhibits filed as part of this document.
DESCRIPTION OF EXHIBITS
Exhibits Page No. Description
-------- -------- -----------
2.1 Certificate of Incorporation of Scottsdale
Technologies, Inc.
2.2 Bylaws of Scottsdale Technologies, Inc.
3.1 Form of Common Stock Certificate
3.2 Shareholders' Voting Agreement
3.3 Note and Warrant Purchase Agreement effective as of
January 1, 1997 between WO Consulting, Inc. and
Scottsdale Technologies-I, Ltd.
3.4 WO Consulting, Inc. 12% Senior Convertible Promissory
Note
3.5 Warrant to Purchase Common Stock of WO Consulting, Inc.
6.1 Plan and Agreement of Reorganization among Lane
Clissold, Sound Industries, Ltd., WO Consulting, Inc.,
Stuart N. Rubin, Scottsdale Technologies-I, Ltd., Eric
J. Schedeler and Scottsdale Technologies, Inc.
6.2 Plan and Agreement of Reorganization among Scottsdale
Technologies, Inc., WO Consulting, Inc., Eric J.
Schedeler and C. Kimball McCusker
6.3 First Amendment to Plan and Agreement of Reorganization
among Scottsdale Technologies, Inc., WO Consulting,
Inc., Eric J. Schedeler and C. Kimball McCusker
6.4 Guarantee Agreement among Sound Industries, Ltd., WO
Consulting, Inc. and Scottsdale Technologies-I, Ltd.
6.5 Thunderbird Executive Office Park Lease Agreement
between Pacific Realty Holdings Ltd. Partnership and
Scottsdale Technologies, Inc.
6.6 Sound Industries, Ltd. 1997 Long-Term Incentive Plan
6.7 Transcap Restructuring Agreement between Transcap
Manufacturing Services, Inc. and Scottsdale
Technologies, Inc.
6.8 NGIC Restructuring Agreement between Network Gaming
International Corp. and Scottsdale Technologies, Inc.
6.9 General Security Agreement by WO Consulting, Inc. in
favor of Scottsdale Technologies-I, Ltd.
10.1 Scottsdale Technologies, Inc. Audited Financial
Statements, December 31, 1996 and 1995
10.2 Consent of Jones, Jensen & Company
32
<PAGE> 54
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant causes this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUND INDUSTRIES, INC.
By: s/ Eric J.Schedeler
-------------------
Date: December 10, 1997 Eric J. Schedeler
Chief Executive Officer,
President and Director
Date: December 10, 1997 By: s/ Stuart N.Rubin
-----------------
Stuart N. Rubin
Executive Vice President,
CFO, Secretary and Director
33
<PAGE> 1
Exhibit 2.1
CERTIFICATE OF INCORPORATION
OF
WO CONSULTING, INC.
FIRST: The name of the corporation is WO Consulting, Inc.
SECOND: The address of the registered office of the corporation in the
State of Delaware is 1013 Centre Road, Wilmington, Delaware, 19805. New Castle
County. The name of the registered agent of the corporation at such address is
Corporation Service Company.
THIRD: The nature of the business or purposes to be conducted or
promoted by the corporation is to engage in any lawful business, act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware. The private property of the stockholders shall not be subject
to the payment of corporate debts to any extent whatsoever.
FOURTH: The aggregate number of shares of all classes which the
corporation shall have authority to issue is 1,000 shares of common stock having
a par value of $0.01 per share.
FIFTH: No holder of shares of stock of the corporation shall have a
preemptive right to purchase or subscribe for and receive any shares of any
class, or series thereof, of the stock of the corporation, whether now or
hereafter authorized, or any warrants, options, bonds, debentures, or other
securities convertible into, exchangeable for or carrying any right to purchase
any shares of any class, or series thereof, of stock.
SIXTH: No stockholders of the corporation shall have the right or power
to cumulate votes attributable to their shares for the election of directors.
SEVENTH: Election of directors need not be by written ballot, except
and to the extent provided in the bylaws of the corporation.
EIGHTH: The incorporator of the corporation is Carlos R. Escobar, 700
Louisiana, Suite 1900, Houston, Texas 77002.
NINTH: The name and mailing address of the person who is to serve as
the sole director of the corporation until the first annual meeting of
stockholders or until his successor is elected and qualified is as follows:
NAME MAILING ADDRESS
Jeff C. Dodd 700 Louisiana, Suite 1900
Houston, Texas 77002
<PAGE> 2
The number of directors of the corporation shall be fixed as specified
or provided for in the bylaws of the corporation. Election of directors need not
be by written ballot unless the bylaws shall so provide.
TENTH: Except as otherwise provided by statute, any action that might
have been taken at a meeting of stockholders by a vote of the stockholders may
be taken with the written consent of stockholders owning (any by such written
consent, voting) in the aggregate not less than the minimum percentage of the
total number of shares that by statute, this Certificate of Incorporation, the
bylaws of the corporation or an agreement of all of the stockholders are
required to be voted with respect to such proposed corporate action; provided,
however, that the written consent of a stockholder who would not have been
entitled to vote upon the action if a meeting were held shall not be counted;
and further provided, that prompt notice shall be given to all stockholders of
the taking of such corporate action without a meeting if less than unanimous
written consent of all stockholders who have been entitled to vote on the action
if a meeting were held is obtained.
ELEVENTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
amend or repeal the bylaws of the corporation of adopt new bylaws, without any
action on the part of the stockholders; provided, however, that no such
adoption, amendment, or repeal shall be valid with respect to bylaw provisions
which have been adopted, amended, or repealed by the stockholders; and further
provided, that bylaws adopted or amended by the Directors and any powers thereby
conferred may be amended, altered, or repealed by the stockholders.
TWELFTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them, and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor of stockholders thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this corporation under the provisions of
section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors; and/or of the stockholders of class of stockholders or class
of stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement, the said compromise or arrangement and
the said reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors of class of
creditors, and/or on all stockholders or class of stockholders, of this
corporation, as the case may be, and also on this corporation.
2
<PAGE> 3
THIRTEENTH: A director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for such liability as is expressly not
subject to limitation under the Delaware General Corporation Law, as the same
exists or may hereafter be amended to further limit or eliminate such liability.
Moreover, the corporation shall, to the fullest extent permitted by law,
indemnify any and all officers and directors of the corporation, and may, to the
fullest extent permitted by law or to such lesser extent as is determined in the
discretion of the Board of Directors, indemnify any and all other persons whom
it shall have the power to indemnify from and against all expenses, liabilities
or other matters arising out of their status as such or their acts, omissions or
services rendered in such capacities. The corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability.
FOURTEENTH: The corporation shall have the right, subject to any express
provisions or restrictions contained in the Certificate of Incorporation, bylaws
of the corporation or any written agreement of all of the stockholders of the
corporation, from time to time, to amend the Certificate of Incorporation or any
provisions thereof in any manner now or hereafter provided by law, and all
rights and powers of any kind conferred upon a director or stockholder of the
corporation by the Certificate of Incorporation or any amendment thereof are
conferred subject to such right.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 6th day
of March, 1996.
/s/ CARLOS R. ESCOBAR
-----------------------------------
Carlos R. Escobar
3
<PAGE> 4
AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
WO CONSULTING, INC.
Pursuant to Section 242 of the Delaware General Corporation Law, WO
Consulting, Inc., a corporation organized and existing under the laws of
Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation, declaring its advisability and directing that
such amendment be submitted for consideration by the stockholders of the
Corporation in accordance with applicable law. Such resolution provided as
follows:
RESOLVED, that subject to the approval of the Corporation's
stockholders, the Corporation amend its Certificate of Incorporation by amending
and restating Article FOURTH thereof in its entirety to read as follows:
"The maximum amount of shares of stock that this corporation
shall be authorized to issue shall be 28,000,000 shares which
are to be divided into two classes as follows:
25,000,000 shares of Common Stock, par value
$0.01 per share; and
3,000,000 shares of Preferred Stock, par value
$0.01 per share.
The Common Stock may be created and issued from time to time
in one or more series with voting rights for each series as
determined by the Board of Directors of the corporation and
set forth in the resolution or resolutions providing for the
creation and issuance of the stock in such series. The
Preferred Stock may be created and issued from time to time in
one or more series with such designations, preferences,
limitations, conversion rights, cumulative, relative,
participating, optional or other rights, including voting
rights, qualifications, limitations or restrictions thereof as
determined by the Board of Directors of the
4
<PAGE> 5
corporation and set forth in the resolution or resolutions
providing for the creation and issuance of the stock in such
series."
SECOND: That thereafter, the stockholders of the Corporation duly
approved the foregoing amendment by written consent in accordance with Section
228 of the Delaware General Corporation Law, and written notice was given to any
stockholders who had not consented in writing as provided in such Section 228.
THIRD: That such amendment was duly adopted in accordance with Section
242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed and acknowledged as its act and deed by Stuart N. Rubin, its President
and Secretary, to be effective as of the 12th day of February, 1997.
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
--------------------------------
Stuart N. Rubin
President
ATTEST:
By: /s/ STUART N. RUBIN
-------------------------------
Stuart N. Rubin, Secretary
5
<PAGE> 6
SECOND AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
WO CONSULTING, INC.
Pursuant to Section 242 of the Delaware General Corporation Law, WO
Consulting, Inc., a corporation organized and existing under the laws of
Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth a proposed Second Amendment to the Certificate of
Incorporation of the Corporation (the "Amendment"), declaring its advisability
and directing that such Amendment be submitted for consideration by the
stockholders of the Corporation in accordance with applicable law. Such
resolution provided as follows:
RESOLVED, that subject to the approval of the Corporation's
stockholders, the Corporation amend its Certificate of Incorporation by
amending and restating Article FOURTH thereof in its entirety to read
as follows:
"The maximum amount of shares of stock that this corporation
shall be authorized to issue shall be 6,000,000 shares of one
class of Common Stock, par value $0.01 per share.
The Common Stock may be created and issued from time to time
in one or more series with voting rights for each series as
determined by the Board of Directors of the corporation and
set forth in the resolution or resolutions providing for the
creation and issuance of the stock in such series."
SECOND: That thereafter, the stockholders of the Corporation duly
approved the foregoing Amendment by written consent in accordance with Section
228 of the Delaware General Corporation Law, and written notice was given to any
stockholders who had not consented in writing as provided in such Section 228.
THIRD: That such Amendment was duly adopted in accordance with Section
242 of the Delaware General Corporation Law.
6
<PAGE> 7
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed and acknowledged as its act and deed by Stuart N. Rubin, its President,
to be effective as of March 17, 1997.
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
--------------------------------
Stuart N. Rubin
President
ATTEST:
By: /s/ STUART N. RUBIN
-------------------------------
Stuart N. Rubin, Secretary
7
<PAGE> 8
CERTIFICATE OF MERGER
OF
SOUND ACQUISITION CORP.
(A UTAH CORPORATION)
INTO
WO CONSULTING, INC.
(A DELAWARE CORPORATION)
The undersigned, WO CONSULTING, INC., a Delaware corporation, hereby
certifies as follows:
FIRST: The name and state of incorporation of each of the constituent
corporations are:
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C> <C>
WO Consulting, Inc. Delaware
Sound Acquisition Corp. Utah
</TABLE>
SECOND: A Plan and Agreement of Reorganization (the "Reorganization
Agreement") for the merger (the "Merger") of Sound Acquisition Corp. with and
into WO Consulting, Inc. has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with the
provisions of subsection (c) of Section 252 of the General Corporation Law of
the State of Delaware.
THIRD: The surviving corporation of the Merger is WO Consulting, Inc.,
a Delaware corporation, which shall continue in existence under the corporate
name "Scottsdale Technologies, Inc."
FOURTH: Article FIRST of the Certificate of Incorporation of WO
Consulting, Inc. shall be amended to read in its entirety as follows:
"FIRST: The name of the corporation is Scottsdale
Technologies, Inc."
As so amended, the Certificate of Incorporation of WO Consulting, Inc. shall be
the Certificate of Incorporation of the surviving corporation.
8
<PAGE> 9
FIFTH: The executed Merger Agreement is on file at the principal place
of business of WO Consulting, Inc. at 7580 East Gray Road, Suite 102,
Scottsdale, Arizona 85260.
SIXTH: A copy of the Merger Agreement will be furnished by the
surviving corporation, on request and without cost, to any stockholder of either
constituent corporation.
SEVENTH: The authorized capital stock of Sound Acquisition Corp. is
50,000 shares of Common Stock, par value $.001 per share.
EIGHTH: This Certificate of Merger shall be effective immediately upon
the filing of the same with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, WO Consulting, Inc. has caused this certificate to
be signed on May 21, 1997.
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
-------------------------------
Name: Stuart N. Rubin
Title: President
9
<PAGE> 10
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
SOUND INDUSTRIES, LTD.
(A UTAH CORPORATION)
INTO
SCOTTSDALE TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
Pursuant to Section 253 of the General Corporation Law of the State of
Delaware, Sound Industries, Ltd. certifies that:
1. Sound Industries, Ltd. (the "Corporation") is a business corporation
of the State of Utah.
2. The Corporation owns all the outstanding shares of capital stock of
Scottsdale Technologies, Inc., which is a business corporation of the State of
Delaware.
3. The laws of the jurisdiction of organization of the Corporation
permit the merger of a business corporation of that jurisdiction with a business
corporation of another jurisdiction.
4. The Corporation hereby merges itself into Scottsdale Technologies,
Inc.
5. The following is a copy of the resolutions adopted on September 30,
1997 by unanimous written consent of the Board of Directors of the Corporation
to merge the Corporation into Scottsdale Technologies, Inc.:
RESOLUTIONS APPROVING MERGER
WHEREAS, the Corporation owns all of the capital stock of
Scottsdale Technologies, Inc., a Delaware corporation ("Scottsdale");
and
WHEREAS, the Board of Directors of the Corporation have been
provided with drafts of the Plan of Merger attached hereto as Exhibit
A, the Certificate of Ownership and Merger attached hereto as Exhibit B
and the Articles of Merger attached hereto as Exhibit C (collectively,
the "Merger Documents"), all of which provide for the merger of the
Corporation with and into Scottsdale Technologies, Inc.; and
WHEREAS, the Board of Directors deems it advisable that such
Merger Documents be adopted, so that the Corporation merge with and
into Scottsdale, with Scottsdale remaining as the surviving corporation
of such merger, in the manner contemplated by such Merger Documents;
NOW, THEREFORE, BE IT:
<PAGE> 11
RESOLVED, that each of the Merger Documents be and hereby is
approved in their entirety; and further
RESOLVED, that the officers of the Corporation be directed to
submit the Merger Documents to the Corporation's stockholders for their
approval, with the recommendation of the Board of Directors that such
Merger Documents be approved; and further
RESOLVED, that subject to the approval of the Corporation's
stockholders, that the Corporation be merged with and into Scottsdale,
with Scottsdale remaining as the surviving corporation of such merger,
in the manner contemplated by such Merger Documents, and that all of
the estate, property, rights, privileges and franchises of the
Corporation shall vest in and be possessed by Scottsdale as fully and
entirely and without change or diminution as the same were before held
and enjoyed by the Corporation in its name; and further
RESOLVED, that Scottsdale assume all the obligations of the
Corporation upon the consummation of such merger; and further
RESOLVED, that upon the consummation of such merger, (a) the
only outstanding share of Scottsdale's common stock shall be canceled
and (b) each outstanding share of common stock of the Corporation held
of record by the Corporation's stockholders shall be converted into one
share of common stock, par value $0.01 per share, of Scottsdale,
certificates for which shall be issued to each such stockholder upon
surrender to the Corporation's transfer agent or the Corporation of
such stockholder's certificates formerly representing such shares of
common stock of the Corporation; and further
RESOLVED, that the officers of the Corporation are hereby
authorized and directed to make, execute and file, as appropriate, or
cause to be made, executed and filed, as appropriate, in the name and
on behalf of the Corporation and/or Scottsdale, the Merger Documents
substantially in the forms attached as Exhibits A, B and C, with such
changes, amendments, modifications or revisions thereto as any such
officer may deem necessary, advisable or convenient and as such officer
may approve in his sole discretion, which approval shall be evidenced
by his execution thereof, and any other documents or instruments
prescribed by the laws of the States of Delaware and Utah; and further
RESOLVED, the officers of the Corporation be, and each of them
hereby is, authorized and directed, for and on behalf of the
Corporation and/or Scottsdale, to prepare, revise, execute, acknowledge
and deliver, and as applicable, file with government or regulatory
authorities any and all notices, reports, certificates, schedules,
exhibits, consents, forms, agreements, documents or instruments
relating directly or indirectly to the merger of the Corporation with
and into Scottsdale and any related documents and to incur and pay such
expenses (including without limitation accountants'
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and attorneys' fees), and to take any other actions they may deem
necessary, advisable or convenient to carry out the purpose or intent
of the foregoing resolutions and to consummate the merger.
RESOLUTIONS APPROVING AMENDMENTS TO SCOTTSDALE CHARTER
WHEREAS, in connection with the merger of the Corporation with
and into Scottsdale, the Board of Directors has reviewed a Plan of
Merger and Certificate of Ownership and Merger providing for the
amendment of Articles FOURTH and THIRTEENTH of Scottsdale's Certificate
of Incorporation; and
WHEREAS, in the judgment of the Board of Directors it is
advisable and in the best interest of the Corporation and its
stockholders that such amendments be adopted and approved in their
entirety;
NOW, THEREFORE, BE IT:
RESOLVED, that the foregoing amendments to Articles FOURTH and
THIRTEENTH of Scottsdale's Certificate of Incorporation be and hereby
are approved in their entirety; and further
RESOLVED, that the officers of the Corporation be directed to
submit such amendments to the Corporation's stockholders for their
approval, with the recommendation of the Board of Directors that such
amendments be approved; and further
RESOLVED, that in connection with the filing of the
Certificate of Ownership and Merger, and subject to the approval of the
Corporation's stockholders, that Article FOURTH of the Certificate of
Incorporation of Scottsdale be amended in its entirety to read as
follows:
"The maximum amount of shares of stock that this corporation
shall be authorized to issue shall be 25,000,000 shares of one
class of Common Stock, par value $0.01 per share; and
10,000,000 shares of Preferred Stock, par value
$0.01 per share.
The Common Stock may be created and issued from time to time
in one or more series with voting rights for each series as
determined by the Board of Directors of the corporation and
set forth in the resolution or resolutions providing for the
creation and issuance of the stock in such series. The
Preferred Stock may be created and issued from time to time in
one or more
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series with such designations, preferences, limitations,
conversion rights, cumulative, relative, participating,
optional or other rights, including voting rights,
qualifications, limitations or restrictions thereof as
determined by the Board of Directors of the corporation and
set forth in the resolution or resolutions providing for the
creation and issuance of the stock in such series."
; and further
RESOLVED, that in connection with the filing of the
Certificate of Ownership and Merger, and subject to the approval of the
Corporation's stockholders, that Article THIRTEENTH of the Certificate
of Incorporation of Scottsdale be amended in its entirety to read as
follows:
THIRTEENTH: (a) A director of the corporation shall
not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General
Corporation Law, as the same exists or hereafter may be
amended, or (iv) for any transaction from which the director
derived an improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to authorize corporate
action further limiting or eliminating the personal liability
of directors, then the liability of a director to the
corporation shall be limited or eliminated to the fullest
extent permitted by the Delaware General Corporation Law, as
so amended form time to time.
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(b) The corporation shall, to the fullest extent
permitted by the Delaware General Corporation Law, as the same
may be amended and supplemented, indemnify any and all past,
present and future directors and officers of the corporation
from and against any and all costs, expenses (including
attorneys' fees), damages, judgments, penalties, fines,
punitive damages, excise taxes assessed with respect to an
employee benefit plan and amounts paid in settlement in
connection with any action, suit or proceeding, whether by or
in the right of the corporation, a class of its security
holders or otherwise, in which the director or officer may be
involved as a party or otherwise, by reason of the fact that
such person was serving as a director, officer, employee or
agent of the corporation.
(c) Any repeal or modification of this Article
THIRTEENTH shall be prospective only, and shall not adversely
affect any limitation on the personal liability of a director
of the corporation, or adversely affect the right of a
director or officer to receive indemnification from the
corporation, in either case existing at the time of such
repeal or modification.
; and further
RESOLVED, that the effective time of the Certificate of
Ownership and Merger setting forth a copy of these resolutions shall be
on or after September 30, 1997, and that, insofar as the General
Corporation Law of the State of Delaware shall govern the same, said
time shall be the effective time of the merger; and further
RESOLVED, that upon the approval of the foregoing amendments
by the Corporation's stockholders, the and officers of the Corporation
are hereby authorized and directed to prepare and file with the
Secretary of State of Delaware a Certificate of Ownership and Merger in
the form attached hereto as Exhibit B, setting forth the preceding
amendments and, to the extent necessary, certifying that such
amendments have been duly adopted in accordance with applicable
provisions of the Delaware General Corporation Law.
The merger herein provided for shall be effective in the State of
Delaware on or after the 30th day of September 1997.
Executed on September 30, 1997.
SOUND INDUSTRIES, LTD.
By: /s/ STUART RUBIN
Name: Stuart Rubin
-----------------------------
Title: Director
----------------------------
<PAGE> 1
Exhibit 2.2
WO CONSULTING, INC.
BYLAWS
ARTICLE I.
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Company in
the State of Delaware is located at 1013 Centre Road, in the City of Dover,
County of Kent.
SECTION 2. PRINCIPAL OFFICE. The principal office of the Company will
be in Scottsdale, Arizona, or at such other place as the board of directors may
from time to time determine.
SECTION 3. OTHER OFFICES. The Company may also have offices at such
other places as the board of directors may from time to time determine or the
business of the corporation may require.
ARTICLE II.
MEETING OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All meetings of stockholders will be held
at the principal office of the Company, or at such other place as will be
determined by the board of directors and specified in the notice of the meeting.
SECTION 2. ANNUAL MEETING. The annual meeting of the stockholders will
be held at such date and time as will be designated from time to time by the
board of directors and stated in the notice of the meeting, at which meeting the
stockholders will elect by written ballot a board of directors and transact such
other business as may properly be brought before the meeting of the
stockholders.
SECTION 3. NOTICE OF ANNUAL MEETING. Written or printed notice of the
annual meeting stating the place, day and hour thereof, will be served upon or
mailed to each stockholder entitled to vote thereat at such address as appears
on the books of the Company, not less than ten (10) nor more than sixty (60)
days before the date of the meeting.
SECTION 4. SPECIAL MEETING. Special meetings of stockholders will be
called by the chief executive officer of the board of directors, and will be
called by the president or secretary at the request in writing of the
stockholders owning one-third of the outstanding shares of capital stock of the
Company. Such request will state the purpose(s) of the proposed meeting, and any
purpose so stated will be conclusively deemed to be a "proper" purpose.
SECTION 5. NOTICE OF SPECIAL MEETING. Written or printed notice of a
special meeting stating the place, day, hour and purpose(s) thereof, will be
served upon or mailed to each
[remaining pages of Bylaws not attached]
<PAGE> 2
stockholder entitled to vote thereat at such address as appears on the books of
the Company, not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
SECTION 6. BUSINESS AT SPECIAL MEETING. Business transacted at all
special meetings of stockholders will be confined to the purpose or purposes
stated in the notice.
SECTION 7. STOCKHOLDER LIST. At least ten (10) days before each meeting
of stockholders, a complete list of stockholders entitled to vote at each such
meeting or in any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, will be prepared by the
secretary. Such list will be open to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours for such ten (10)
day period either at a place within the city where the meeting is to be held,
or, if not so specified, the place where the meeting is to be held. Such list
will also be produced and kept open at the time and place of the meeting.
SECTION 8. QUORUM. The holders of a majority of the shares of capital
stock issued and outstanding and entitled to vote thereat, represented in person
or by proxy, constitute a quorum at all meetings of the stockholders for the
transaction of business. The stockholders present may adjourn the meeting
despite the absence of a quorum. When a meeting is adjourned for less than
thirty (30) days in any one adjournment, it will not be necessary to give any
notice of the adjourned meeting if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken, and at
the adjourned meeting any business may be transacted which might have been
transacted on the original date of the meeting. When a meeting is adjourned for
thirty (30) days or more, notices of the adjourned meeting will be given as in
the case of an original meeting.
SECTION 9. PROXIES. At any meetings of the stockholders, every
stockholder having the right to vote will be entitled to vote in person or by
proxy appointed by an instrument in writing subscribed by such stockholder or by
his duly authorized attorney-in-fact and bearing a date not more than eleven
(11) months prior to said meeting.
SECTION 10. VOTING. Unless otherwise provided by statute, each
stockholder having the right to vote will be entitled to vote each share of
stock having voting power registered in his name on the books of the Company.
Cumulative voting for directors is prohibited.
SECTION 11. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action
which may be taken at a special or annual meeting of the stockholders may be
taken without a meeting, without prior notice, and without a vote, if a consent
in writing, setting forth the action so taken, will be signed by all of the
holders of outstanding stock having not less than the minimum number of votes
which would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent will be given to those stockholders who have not consented in writing.
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ARTICLE III.
BOARD OF DIRECTORS
SECTION 1. NUMBER OF DIRECTORS. The number of directors comprising the
full board of directors will initially consist of one (1) director but the
number of directors may be increased or decreased (provided such decrease does
not shorten the term of any incumbent director), from time to time by the
amendment to these bylaws by the board of directors.
SECTION 2. ELECTION AND TERM. Except as provided in Section 3 of this
Article, directors will be elected at the annual meeting of the stockholders,
and each director will be elected to serve until the next annual meeting or
until his successor will have been elected and will qualify. Directors need not
be stockholders.
SECTION 3. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Vacancies and
newly created directorships resulting from any increase in the authorized number
of directors may be filled by a majority of the directors, although less than a
quorum, except where the vacancies have been created by removal of directors by
the owners of a majority of the outstanding shares of capital stock. In the
event of such removal, the resulting vacancies will be filled by the owners of
the majority of the outstanding shares of capital stock.
SECTION 4. RESIGNATION; REMOVAL. Any director may resign at any time by
giving written notice thereof to the board of directors. Any such resignation
will take effect as of its date unless some other date is specified therein, in
which event it will be effective as of that date. The acceptance of such
resignation will not be necessary to make it effective. The board of directors
may, by majority vote of the directors then in office, remove a director for
cause. The owners of a majority of the outstanding shares of capital stock may
remove any director or the entire board of directors, with or without cause,
either by a vote at a special meeting or annual meeting, or by written consent.
ARTICLE IV.
MEETINGS OF THE BOARD
SECTION 1. REGULAR MEETINGS. Upon the adjournment of the annual meeting
of stockholders, the board of directors will meet as soon as practicable to
appoint the members of such committees of the board of directors as the board
may deem necessary or advisable, to elect officers for the ensuing year, and to
transact such other business as may properly come before the board of directors
at such meeting. No notice of such meeting will be necessary to the newly
elected directors in order legally to constitute the meeting provided a quorum
will be present. Regular meetings may be held at such other time as shall be
designated by the board of directors without notice to the directors.
SECTION 2. SPECIAL MEETINGS. Special meetings of the board of directors
will be held whenever called by the chairman of the board, chief executive
officer, chairman of the executive
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committee or by two or more directors. Notice of each meeting will be given at
least three (3) days prior to the date of the meeting either personally, or by
telephone or telegraph to each director, and will state the purpose, place, day
and hour of the meeting.
SECTION 3. QUORUM AND VOTING. At all meetings of the board of directors
(except in the case of a meeting convened for the purpose specified in Article
III, Section 3 of these bylaws) a majority of the directors will be necessary
and sufficient to constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at which there is a
quorum will be the act of the board of directors. If a quorum will not be
present at any such meeting of directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum will be present.
SECTION 4. TELEPHONE MEETINGS. At any meeting of the board of
directors, a member may attend by telephone, radio, television, or similar means
of communication which permits him to participate in the meeting, and a director
so attending will be deemed present at the meeting for all purposes including
the determination of whether a quorum is present.
SECTION 5. ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken by the board of directors may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all the
members of the board.
SECTION 6. ATTENDANCE FEES. Directors will receive any stated salary,
as such, for their services, but by resolution of the board of directors a fixed
sum and expenses of attendance may be allowed for attendance at each regular or
special meeting of the board; however, this provision will not preclude any
director from serving the Company in any other capacity and receiving
compensation therefor.
ARTICLE V.
COMMITTEES
SECTION 1. EXECUTIVE COMMITTEE. The board of directors, by resolution
may designate one or more directors to constitute an Executive Committee, which
committee, to the extent provided in such resolution, will have and may exercise
all of the powers and authority of the board of directors in the management of
the business and affairs of the Company, except where action of the board of
directors is required by statute.
SECTION 2. OTHER COMMITTEES. The board of directors may by resolution
create other committees for such other terms and within such powers and duties
as the board shall deem appropriate.
SECTION 3. ORGANIZATION OF COMMITTEES. The chairman of each committee
of the board of directors will be chosen by the members thereof. Each committee
will elect a secretary, who will be either a member of the committee or the
secretary of the Company. The chairman of each committee will preside at all
meetings of such committee.
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SECTION 4. MEETINGS. Regular meetings of each committee may be held
without the giving of notice if a day of the week, a time, and a place will have
been established by the committee for such meetings. Special meetings (and, if
the requirements of the preceding sentence have not been met, regular meetings)
will be called as provided in Article IV, Section 3 with respect to notices of
special meetings of the board of directors.
SECTION 5. QUORUM AND MANNER OF ACTING. A majority of the members of
each committee must be present either in person or by telephone, radio,
television, or similar means of communication, at each meeting of such committee
in order to constitute a quorum for the transaction of business. The act of a
majority of the members so present at a meeting at which a quorum is present
will be the act of such committee. The members of each committee will act only
as a committee, and will have no power of authority, as such, by virtue of their
membership on the committee.
SECTION 6. ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken by any committee may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all members of the
committee.
SECTION 7. RECORD OF COMMITTEE ACTION; REPORTS. Each committee will
maintain a record, which need not be in the form of complete minutes, of the
action taken by it at each meeting, which record will include the date, time,
and place of the meeting, the names of the members present and absent, the
action considered, and the number of votes cast for and against the adoption of
the action considered. All action by each committee will be reported to the
board of directors at its meeting next succeeding such action, such report to be
in sufficient detail as to enable the board to be informed of the conduct of the
Company's business and affairs since the last meeting of the board.
SECTION 8. REMOVAL. Any member of any committee may be removed from
such committee, either with or without cause, at any time, by resolution adopted
by a majority of the whole board of directors at any meeting of the board.
SECTION 9. VACANCIES. Any vacancy in any committee will be filled by
the board of directors in the manner prescribed by these bylaws for the original
appointment of the members of such committee.
ARTICLE VI.
OFFICERS
SECTION 1. APPOINTMENT AND TERM OF OFFICE. The officers of the Company
shall consist of a chief executive officer and a president, and there may be a
chairman of the board, one or more vice presidents, a secretary, one or more
assistant secretaries, a treasurer, one or more assistant treasurers, and such
other officers as may be later appointed by the board of directors, by
resolution, if they deem it necessary for the conduct of the business of the
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Company. One of the directors may also be chosen chairman of the board. Each of
such officers (except as may be appointed pursuant to Section 5(h) of this
Article), will be chosen annually by the board of directors at its regular
meeting immediately following the annual meeting of the stockholders and,
subject to any earlier resignation or removal, will hold office until the next
annual meeting of stockholders of until his successor is elected and qualified.
Two or more offices may be held by the same person.
SECTION 2. REMOVAL. Any officer or agent elected or appointed by the
board of directors may be removed by the board of directors whenever in its
judgment the best interests of the corporation will be served thereby, but such
removal will be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent will not of itself
create contract rights.
SECTION 3. VACANCIES. A vacancy in the office of any officer may be
filled by vote of a majority of the directors for the unexpired portion of the
term.
SECTION 4. SALARIES. The salaries of all officers of the corporation
will be fixed by the board of directors except as otherwise directed by the
board.
SECTION 5. POWERS AND DUTIES. The powers and duties of the officers
will be those usually pertaining to their respective offices, subject to the
general discretion and supervision of the board of directors. Such powers and
duties will include the following:
a. CHAIRMAN OF THE BOARD. The chairman of the board will
preside at all meetings of the board of directors and of the shareholders.
Unless the board of directors has appointed a chief executive officer, he will
act as the chief executive officer of the Company.
b. CHIEF EXECUTIVE OFFICER. He will be responsible for general
supervision of the business of the Company, and over its several officers and be
the Company's general manager. He may execute and deliver in the name and on
behalf of the Company, deeds, mortgages, leases, assignments, bonds, contracts
or other instruments authorized by the board of directors. He will, unless
otherwise directed by the board, attend in person or by proxy appointed by him
and act and vote on behalf of the Company at all meetings of the stockholders of
any corporation in which the Company holds stock.
c. PRESIDENT. The president will be the chief operating
officer of the Company and shall exercise all powers of a general manager, to
the extent limited by directives from the chairman of the board, chief executive
officer or the board of directors. The president shall perform all duties and
exercise all powers of the chairman of the board and Chief Executive Officer if
same are absent or are unable to act. The President may also be appointed as
Chief Executive Officer.
d. VICE CHAIRMEN OF THE BOARD. Vice chairmen will perform the
duties assigned to them by the board of directors, and at the request of the
president, will perform as well the duties of the president. Each vice president
will have the power also to execute and
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deliver in the name and on behalf of the Company, deeds, mortgages, leases,
assignments, bonds, contracts, and other instruments authorized by the board of
directors.
e. EXECUTIVE VICE PRESIDENTS. Executive vice presidents will
perform the duties assigned to them by the board of directors, and, in the order
designated by the president, at the request of the president or in the absence
of the president will perform as well the duties of the president's office. Each
executive vice president will have power also to execute and deliver in the name
and on behalf of the Company, deeds, mortgages, leases, assignments, bonds,
contracts, and other instruments authorized by the board of directors.
f.. VICE PRESIDENTS. Vice presidents will perform the duties
assigned to them by the board of directors, and at the request of the president,
will perform as well the duties of the president's office. Each vice president
will have the power also to execute and deliver in the name and on behalf of the
Company, deeds, mortgages, leases, assignments, bonds, contracts, and other
instruments authorized by the board of directors.
g. SECRETARY. The secretary will keep the minutes of all
meetings of the board of directors and the minutes of all meetings of the
stockholders and will be the custodian of all corporate records and of the seal
of the Company. He will see that all notices required to be given to the
stockholders and to the board of directors are duly given in accordance with
these bylaws or as required by law.
h. TREASURER. The treasurer will be the principal financial
officer of the Company and will have charge of the corporate funds and
securities and will keep a record of the property and indebtedness of the
Company. He will, if required by the board of directors, give bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the board may require.
i. OTHER OFFICERS. The board of directors may appoint such
other officers, agents, or employees as it may deem necessary for the conduct of
the business of the Company. In addition, the board may authorize the president
or some other officers to appoint such agents or employees as they deem
necessary for the conduct of the business of the Company.
SECTION 6. RESIGNATIONS. An officer may resign at any time by giving
written notice thereof to the board of directors. Any such resignation will take
effect as of its date unless some other date is specified therein, in which
event it will be effective as of that date. The acceptance of such resignation
will not be necessary to make it effective.
SECTION 7. VACANCIES. A vacancy in any office arising at any time from
any cause, may be filled by the board of directors or by the officer authorized
by the board to fill the vacancy in that office.
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ARTICLE VII.
SHARES OF STOCK AND THEIR TRANSFER; BOOKS
SECTION 1. FORMS OF CERTIFICATES. Shares of the capital stock of the
Company will be represented by certificates in such form, not inconsistent with
law or with the Certificate of Incorporation of the Company, as will be approved
by the board of directors, and will be signed by the chairman of the board or
president or a vice president and the secretary or an assistant secretary or the
treasurer or an assistant treasurer and sealed with seal of the Company. Such
seal may be facsimile, engraved or printed. Where any such certificate is
countersigned by a transfer agent or by a registrar, the signature of such
chairman of the board, president, vice president, secretary, assistant
secretary, treasurer, or assistant treasurer upon such certificate may be
facsimiles, engraved or printed.
SECTION 2. TRANSFER OF SHARES. Shares of stock of the Company will be
transferred only on the stock books of the Company by the holder of record
thereof in person, or by his duly authorized attorney, upon surrender of the
certificates therefor.
SECTION 3. STOCKHOLDERS OF RECORD. Stockholders of record entitled to
vote at any meeting of stockholders or entitled to receive payment of any
dividend or to any allotment of rights or to exercise the rights in respect of
any change or conversion or exchange of capital stock will be determined
according to the Company's record of stockholders, and, if so determined by the
board of directors in the manner provided by statute, will be such stockholders
of record (a) at the date fixed for closing the stock transfer books, or (b) as
of the date of record.
SECTION 4. LOST, STOLEN, OR DESTROYED CERTIFICATES. The board of
directors may direct the issuance of new or duplicate stock certificates in
place of lost, stolen or destroyed certificates, upon being furnished with
evidence satisfactory to it of the loss, theft, or destruction and upon being
furnished with indemnity satisfactory to it. The board of directors may delegate
to any officer authority to administer the provisions of this Section.
SECTION 5. CLOSING OF TRANSFER BOOKS. The board of directors will have
power to close the stock transfer books of the Company for a period not
exceeding sixty (60) days nor less than ten days preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or the
date for the allotment of rights, or the date when change or conversion or
exchange of capital stock will go into effect, or for a period not exceeding
sixty (60) days nor less than ten (10) days in connection with obtaining the
consent of stockholders for any purpose; or the board may, in its discretion,
fix a date, not more than sixty (60) days nor less than ten (10) days before any
stockholders' meeting, or the date for the payment of any dividend, or the date
for the allotment of rights, or the date when any change or conversion or
exchange of capital stock will go into effect as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting and at any adjournment thereof, or entitled to receive payment of
any such dividend, or to any such allotment of rights, or to exercise the rights
in respect of such change, conversion, or exchange of capital stock, or to give
such consent, and in such case such stockholders and only such stockholders as
will be stockholders of record on the date so fixed will be entitled to notice
of and to vote at such meeting and at any adjournment
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thereof, or to receive payment of such dividend, or to exercise rights, or to
give such consent as the case may be, notwithstanding any transfer if any stock
on the books of the company after such record date fixed as aforesaid.
SECTION 6. REGULATIONS. The board of directors may make such rules and
regulations s it may deem expedient concerning the issuance, transfer, and
registration of certificates of stock. The board of directors may appoint on one
more transfer agents or registrars, or both, and may require all certificates of
stock to bear the signature of either or both.
SECTION 7. EXAMINATION OF BOOKS BY STOCKHOLDERS. The original or
duplicate stock ledger of the Company containing the names and addresses of the
stockholders and the number of shares held by them and the other books and
records of the Company will, at all times during the usual hours of business, be
available for inspection at its principal office, and any stockholder, upon
compliance with the conditions set forth in and to the extent authorized by
Section 220 of the Delaware General Corporation Law, will have the right to
inspect such books and records.
SECTION 8. EXAMINATION OF BOOKS BY STOCKHOLDERS. The original or
duplicate stock ledger of the Company containing the names and addresses of the
stockholders and the number of shares held by them and the other books and
records of the Company will, at all times during the usual hours of business, be
available for inspection at its principal office, and any stockholder, upon
compliance with the conditions set forth in and to the extent authorized by
Section 220 of the Delaware General Corporation Law, will have the right to
inspect such books and records.
ARTICLE VIII.
INDEMNIFICATION AND INSURANCE
SECTION 1. The Company shall indemnify any person who was or is a party
or who was or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, advisory director, officer, employee
or agent of the Company or of any entity a majority of the voting stock of which
is owned by the Company, or is or was serving at the request of the Company as a
director, advisory director, employee or agent of another Company, partnership,
joint venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonable believed to be in or not opposed to the best
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interests or the Company, and with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
SECTION 2. The Company shall indemnify any person who was or is a party
or who was or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director, advisory
director, officer, employee or agent of the Company or of any entity a majority
of the voting stock of which is owned by the Company or is or was serving at the
request of the Company as a director, advisory director, officer, employee or
agent of another Company, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable for gross negligence in the performance of
his duty to the Company unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all circumstances of the case, such person is fairly and reasonable
entitled to indemnity for such expenses which the Court of Chancery of the State
of Delaware or such other court shall deem proper.
SECTION 3. To the extent that any person who is or was a director,
advisory director, officer, employee or agent of the Company or of any entity a
majority of the voting stock of which is owned by the Company, or who is or was
serving at the request of the Company as a director, advisory director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Sections 1 and 2 of this Article
VIII, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith. Any other indemnification under
Sections 1 and 2 of this Article VIII shall (unless ordered by court) be made by
the Company only as authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the applicable standard
of conduct set forth therein has been met. Such determination shall be made (a)
by the board of directors of the Company by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
of (b) if such a quorum is not obtainable, or even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders of the Company.
SECTION 4. Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the Company in advance of the final
disposition of such action, suit or proceeding as authorized by the board of
directors of the Company in the specific case upon receipt of an undertaking by
or on behalf of the director, advisory director, officer, employee of agent to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Company pursuant to this Article VIII.
10
<PAGE> 11
SECTION 5. The indemnification provided by this Article VIII shall not
be deemed exclusive of any right to which those seeking indemnification may be
entitled from the Company or any other entity under any statute, other bylaw,
agreement, provision of the Company's certificate of incorporation, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
advisory director, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person. However, any amount
actually received as the proceeds of any such other indemnification shall be
deducted from the amount, if any, which he may entitled to receive pursuant to
this Article VIII.
SECTION 6. By action of its board of directors, notwithstanding any
interest of the directors in the action, to the fullest extent permitted by the
General Corporation Law of the State of Delaware, the Company may purchase and
maintain insurance, in such amounts and against such risks as the board of
directors deems appropriate, on behalf of any person who is or was a director,
advisory director, officer, employee or agent of the Company, or who is or was
serving at the request of the Company as a director, advisory director, officer,
employee or agent of another Company, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Company would have the power or would be required to indemnify him against such
liability under the provisions of this Article VIII, or of the Company's
certificate of incorporation of the General Corporation Law of the State of
Delaware.
ARTICLE IX.
EXECUTION OF INSTRUMENTS
SECTION 1. CONTRACTS, ETC. The board of directors or any committee
thereunto duly authorized may authorize any officer or officers, agent or
agents, to enter into any contract or to execute and deliver in the name and on
behalf of the Company any contract or other instruments, except certificates
representing shares of stock of the company, and such authority may be general
or may be confined to specific instances.
SECTION 2. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes, acceptance or other evidence of indebtedness issued
by or in the name of the Company will be signed by such officer of officers,
agent or agents of the Company and in such manner as will be determined from
time to time by resolution of the board of directors. Unless otherwise provided
by resolution of the board, endorsements for deposits to the credit of the
Company in any of its duly authorized depositories may be made by a hand-stamped
legend in the name of the Company or by written endorsement of an officer with
countersignature.
SECTION 3. LOANS. No loans will be contracted on behalf of the Company
unless authorized by the board of directors, but when so authorized, unless a
particular officer or agent is directed to negotiate the same, may be
negotiated, up to the amount so authorized, by the chairman of the board or the
president or vice-president or the treasurer; and such officers are
11
<PAGE> 12
hereby severally authorized to execute an deliver in the name and on behalf of
the Company, notes or other evidences of indebtedness countersigned by the
chairman of the board or the president or vice-president for the amount of such
loans and to give security for the payment of any and all loans, advances, and
indebtedness by hypothecating, pledging or transferring any part or all of the
property of the Company, real or personal, at any time owned by the Company.
SECTION 4. SALE OR TRANSFER OF SECURITIES HELD BY THE COMPANY. Stock
certificates, bonds or other securities at any time owned by the Company may be
held on behalf of the Company or sold, transferred, or otherwise disposed of
pursuant to authorization by the board of directors, or of any committee
thereunto duly authorized, and , when so authorized to be sold, transferred, or
otherwise disposed of, may be transferred from the name of the Company by the
signature of the chairman of the board or the president or a vice president and
the treasurer or the assistant treasurer or the secretary of assistant
secretary.
ARTICLE X.
MISCELLANEOUS
SECTION 1. FISCAL YEAR. Until otherwise determined by the board of
directors, the fiscal year-end of the Company will be December 31.
SECTION 2. METHODS OF NOTICE. Whenever any notice is required to be
given in writing to any stockholder or director pursuant to any statute, the
Certificate of Incorporation, or these bylaws, it will not be construed to
require personal or actual notice, and such notice will be deemed for all
purposes to have been sufficiently given at the time the same is deposited in
the United States mail with postage thereon prepaid, addressed to the
stockholder or director at such address as appears on the books of the Company.
Whenever any notice may be or is required to be given by telegram to any
director, it will deemed for all purposes to have been sufficiently given tat
the time the same is filed with the telegraph or cable office, properly
addressed.
SECTION 3. WAIVER OF NOTICE. The giving of any notice of the time,
place, or purpose of holding any meeting of stockholders or directors and any
requirements as to publication thereof, whether statutory or otherwise, will be
waived by attendance at such meeting by any person entitled to receive such
notice and may be waived by such person by an instrument in writing executed and
filed with the records of the meeting, either before or after the holding
thereof.
12
<PAGE> 1
Exhibit 3.1
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
-0- -0-
WO CONSULTING, INC.
COMMON STOCK
The Corporation is Authorized to Issue 25,000,000 Shares Common Stock--
Par Value $.01 Per Share
This Certifies that Specimen is the owner of - 0 - fully paid
and non-assessable Shares
of the Capital Stock of WO CONSULTING, INC.
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney upon surrender of this Certificate
properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated______________________________
[Corporate Seal]
_______________________________ _____________________________
SECRETARY PRESIDENT
<PAGE> 2
THE SHARES OF COMMON STOCK ("SHARES") OF WO CONSULTING, INC. ("WO
CONSULTING") CONSTITUTE SECURITIES THAT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE APPLICABLE SECURITIES
LAWS OF ANY STATE ("STATE LAWS"). THE SHARES MAY NOT, AT ANY TIME, BE OFFERED
FOR SALE, SOLD OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE ACT AND
STATE LAWS, OR DELIVERY TO WO CONSULTING OF AN OPINION OF LEGAL COUNSEL
SATISFACTORY TO WO CONSULTING THAT SUCH REGISTRATION IS NOT REQUIRED.
RESTRICTIONS ON TRANSFER WILL BE IMPRINTED ON THE DOCUMENTS EVIDENCING THE
SHARES TO THE FOREGOING EFFECTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used though not in the list.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT--......Custodian......(Minor)
under Uniform Gifts to Minors Act.....(State)
For value received, the undersigned hereby sells, assigns and transfers unto
____________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
____________________________________________________________
________________________________________________________Shares
represented by the within Certificate, and hereby irrevocably constitutes and
appoints ____________________________________________________________________
Attorney to transfer the said Shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated, _________________________
In presence of ___________________________
_______________________________________________________
PLEASE INSERT SOCIAL SECURITY OF OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face of
the certificate in every particular without alteration or
enlargement, or any change whatever
<PAGE> 1
Exhibit 3.2
SHAREHOLDERS' VOTING AGREEMENT
THIS SHAREHOLDERS' VOTING AGREEMENT (the "Agreement") is dated August 31,
1997 but is intended by the parties to be effective as of January 1, 1997, among
Scottsdale Technologies-I, Ltd., a Delaware limited partnership (the
"Partnership"), WO Consulting, Inc., a Delaware corporation (the "Company"),
Sound Industries, Ltd., a Utah corporation ("Sound") and the individuals whose
names appear on the signature page hereto (the "Shareholders").
W I T N E S S E T H:
WHEREAS, the Company has an authorized capitalization of 6,000,000 shares
of capital stock, par value $.01 per share consisting of 6,000,000 shares of
common stock (the "Company Common Stock").
WHEREAS, the Company has issued to the Partnership that certain 12% Senior
Convertible Promissory Note payable to the Partnership (as amended, supplemented
or restated the "Note") and has entered into that certain Note and Warrant
Purchase Agreement dated as of the date hereof (the "Note Purchase Agreement")
by and between the Company and the Partnership, a condition of which is the
execution of this Agreement by the Company and the Shareholders;
WHEREAS, the Company has entered into that certain Plan and Agreement of
Reorganization (the "Reorganization Agreement") with Sound, Sound Acquisition
Corp., a Utah corporation (the "Subsidiary"), Stuart N. Rubin, the Partnership,
Eric J. Schedeler and Scottsdale Technologies, Inc., a Delaware corporation,
pursuant to which the Company will merge with the Subsidiary, and the Company
will be the surviving corporation of such merger and a wholly-owned subsidiary
of Sound;
WHEREAS, Sound has an authorized capitalization of 50,000,000 shares of
capital stock, par value $.001 per share consisting of 50,000,000 shares of
common stock (the "Sound Common Stock");
WHEREAS, the Shareholders have determined that their execution, delivery
and performance of this Agreement directly benefit and are in the best interest
of the Company, Sound and the Shareholders and each of them desires to promote
their mutual interests and benefits by imposing certain restrictions,
limitations and obligations with respect to the voting of the shares of Company
Common Stock and Sound Common Stock now owned or hereafter acquired by them and
with respect to certain other matters pertaining to the Company, Sound and the
Partnership;
NOW, THEREFORE, for and in consideration of the mutual covenants,
agreements, representations and warranties herein contained, and for other
valuable consideration, the receipt
<PAGE> 2
and sufficiency of which are hereby acknowledged by the parties here-to, the
Company, Sound and the Shareholders hereby agree as follows:
ARTICLE I.
VOTING AGREEMENT
1.01 Nomination of Certain Directors.
(a) The Bylaws of the Company provide that the Board of Directors of
the Company shall consist of at least one (1) but no more than seven (7)
members, which number shall be fixed by the Board of Directors, but shall never
be less than one (1), provided, however, that no decrease shall effect the
shortening of the term of any incumbent Director.
(b) The Bylaws of Sound provide that the Board of Directors of Sound
shall consist of at least three (3) but no more than seven (7) members, which
number shall be fixed by the Board of Directors, but shall never be less than
one (1), provided, however, that no decrease shall effect the shortening of the
term of any incumbent Director.
(c) During the term of this Agreement, the Company, Sound and
Shareholders covenant and agree that at all times the Board of Directors of the
Company and Sound shall each consist of five (5) members, three (3) of which
shall be designated by the Partnership pursuant to Sections 1.02 and 1.03 hereof
unless the Company or Sound has suffered an Event of Default pursuant to the
terms of the Note Purchase Agreement, in which case the Board of Directors of
both the Company and Sound shall consist of seven (7) members, five (5) of which
shall be designated by the Partnership pursuant to Sections 1.02 and 1.03
hereof.
1.02 Nomination of Directors. The Company and Sound, on each occasion at
which directors of the Company or Sound are elected by shareholders, shall
nominate for election as directors of the Company or Sound, as the case may be,
such persons designated by the Partnership as provided for in this Section 1.02
or Section 1.03 below. Each of the Company and Sound agrees to solicit from its
shareholders proxies for such nominees and to direct the persons who have been
appointed to act as attorneys-in-fact and proxies by the Company and Sound to
vote all proxies solicited and received by the Company and Sound in favor of
such nominees except for such proxies that specifically indicate to the
contrary. If any director of the Company and Sound designated by the Partnership
shall cease to be a director of the Company or Sound for any reason whatsoever,
the Board of Directors of the Company or Sound, as the case may be, shall
promptly upon the request of the Partnership elect a person designated by the
Partnership to replace such director. If the total number of seats on the Board
of Directors of the Company or Sound is increased at any time, the Board of
Directors of the Company or Sound, as the case may be, shall cause all necessary
action to be taken to elect such number of persons designated by the Partnership
so that at all times after such increase in the number of seats the proportion
of the Partnership's designees to the total number of seats on the Board of
Directors is not decreased by such increase in total number of seats (although
such proportion may increase as a result of such election of additional nominees
of the Partnership).
2
<PAGE> 3
1.03 Designation of Candidates by the Partnership. The number of persons
designated by the Partnership that shall be nominated by the Company and Sound
for election as directors at each meeting of shareholders of the Company or
Sound, as the case may be, at which such directors are elected or that shall
otherwise be elected or appointed as director of the Company or Sound shall be
as follows: (i) so long as the Partnership and/or any Affiliated Persons (as
defined in Section 4.01 below) of the Partnership hold all or any portion of the
Note, then the number of nominees the Partnership shall be entitled to designate
under the terms of this Agreement shall be three (3); except (ii) following such
time as the Company or Sound has suffered an Event of Default under the terms of
the Note and until such default is cured pursuant to the terms of the Note, the
Partnership shall be entitled to designate five (5) nominees (out of a total of
seven (7) directors).
1.04 Committees of the Board of Directors. The Company and Sound shall at
all times include at least two of the Partnership's designees (the identity of
which shall be selected by the Partnership) on each committee of the Board of
Directors and shall fill vacancies caused by such nominees in the manner set
forth in Section 1.02 with respect to vacancies filled by the Board of Directors
of the Company or Sound, as the case may be. It is agreed that each committee of
the Board of Directors will initially consist of three members. In the event
that the number of members of any committee of the Board of Directors of the
Company or Sound is increased, the Board of Directors of the Company or Sound,
as the case may be, shall cause all necessary action to be taken to appoint an
additional director, if any, designated by the Partnership to such committee if
necessary to prevent the proportion of the Partnership's designees on such
committee from falling below the proportion of the Partnership's designees on
the Board of Directors as a whole.
1.05 Voting by Shareholders. During the term of this Agreement, the
Shareholders hereby agree to vote their shares of Company Common Stock and Sound
Common Stock held by them in favor of those persons designated by the
Partnership pursuant to the terms hereof on each occasion at which such
directors of the Company or Sound are elected by shareholders and shall not vote
for the removal of any such person.
1.05 Additional Shares. Unless waived in writing by the Partnership, when
and if additional shares of Company Common Stock or Sound Common Stock are
issued to new shareholders in addition to, rather than as transferees of, the
Shareholders, the Company, Sound and the Shareholders shall require that such
new shareholders shall be required to become parties hereto and subject to the
terms hereof. In such event, this Agreement shall be amended in writing and
signed by all shareholders to reflect the same, and the term "Shareholder" as
used herein shall thereafter include such new shareholders.
1.06 Termination of Right to Designate Directors. Notwithstanding anything
herein to the contrary, the covenants set forth in this Article I shall
automatically terminate (a) at the end of the one year period during which the
registration statement to be filed by Sound with the SEC registering the resale
of the Note Shares and Warrant Shares (as such terms are defined in the Note
Purchase Agreement) following the conversion of the Note or exercise of the
Warrants issued pursuant to the Note Purchase Agreement, as applicable, has been
continuously effective
3
<PAGE> 4
and Sound has been subject to the reporting requirements under Section 12 of the
Exchange Act or, if earlier, (b) the date on which Sound closes an underwritten
public offering of at least $1,500,000 where the public offering price was at
least $5.00 per share if the terms of such offering permit the Partnership
and/or the partners thereof to sell the Note Shares and Warrant Shares in
connection therewith and the underwriter objects in writing to the right of
Software Funding Corp. and the holders of the Note to select members of the
Board of Directors of Sound and/or the Company.
ARTICLE II.
STANDSTILL AND ANTI-DILUTION PROVISIONS
2.01 Standstill Provision. So long as any amount is outstanding under the
Note, (i) Sound shall not provide any information to or negotiate with any other
party with respect to the merger, acquisition, or sale of all or substantially
all of the assets or the capital stock of Sound or with respect to obtaining any
financing, whether debt or equity, (ii) Sound agrees to notify the Partnership
immediately of any unsolicited acquisition proposals or third-party financing
proposals and provide reasonable detail as to the identity of the proposed
acquiror and the nature of the proposed transaction, and (iii) the Partnership
shall have the right to have a representative present at any presentation made
by a third-party to Sound or its stockholders.
2.02 Anti-Dilution Provision. So long as any amount is outstanding under
the Note, Sound shall not, except to the extent expressly permitted in the Note
Purchase Agreement, issue any equity securities, or any options, warrants or
convertible securities exercisable for or convertible into such equity
securities, of Sound or any subsidiary of Sound, without the mutual consent of
Sound and the Partnership; provided, however, that Sound may issue Sound Common
Stock for not less than $5.00 per share without the consent of the Partnership.
Notwithstanding the foregoing, following the merger of the Company with the
Subsidiary pursuant to the Reorganization Agreement, and at the end of the
ninety day period following the effective date of such merger the Partnership
has not provided the Company and/or Sound with the aggregate, cumulative amount
of $1,200,000 pursuant to the Note Purchase Agreement and the transactions
contemplated thereby, then Sound may, without the consent of the Partnership,
issue shares of Sound Common Stock at $1.50 per share in connection with an
equity financing that raises an amount equal to the difference between
$1,200,000 and the aggregate, cumulative amount actually provided by the
Partnership pursuant to the Note Purchase Agreement and the transactions
contemplated thereby.
ARTICLE III.
REPRESENTATIONS, WARRANTIES AND COVENANTS
3.01 Representations and Warranties of Shareholders. Each Shareholder
represents and warrants to all other Shareholders as of the date hereof that,
as to such Shareholder:
(a) the shareholder is the owner of record and beneficially of the
number of shares of Company Common Stock and Sound Common Stock set
forth below the signature of the Shareholder on the signature page
of this agreement;
4
<PAGE> 5
(b) the Shareholder has not pledged, hypothecated or granted any
security interest in such shares to any Person other than the
Partnership;
(c) the Shareholder has not granted to any Person any right to purchase
or otherwise acquire any interest in such shares;
(d) the Shareholder owns such shares free and clear of any liens,
claims, options, charges, encumbrances or rights (other than
possible community property rights of a spouse) of other Persons
except the Partnership; and
(e) the Shareholder has the right to enter into this Agreement without
the consent or approval of any other Person.
For purposes of this Agreement, "Person" means a natural person or any legal,
commercial or governmental entity, such as, but not limited to, a business
association, corporation, general partnership, joint venture, limited
partnership, limited liability company, trust or any person acting in a
representative capacity.
ARTICLE IV.
TRANSFERS
4.01 Successors and Assigns; Transfers to Affiliates. The right to
designate persons for nomination as directors of the Company and Sound set forth
in this Agreement shall be personal to the Partnership and shall not inure to
the benefit of any successor, assignee or transferee of the Partnership, except
that the Partnership may distribute the Note to its partners and this Agreement
and the rights and benefits hereunder shall inure to the benefit of such
partners receiving all or any portion of the Note (an "Affiliated Person"). This
Agreement shall be binding upon and, except as otherwise provided in the
preceding sentence, shall inure to the benefit of and be enforceable by and
against the transferees, successors and assigns of the parties hereto. Until the
termination of the covenants set forth in Article I, each of the Shareholders
agrees that he or it will not transfer any shares of Company Common Stock or
Sound Common Stock owned by it to any Person unless such Person agrees to be
bound by the terms of this Agreement to the same extent as if it were the
Shareholder. Except as provided in the next preceding sentence, nothing herein
shall restrict the transfer of such Company Common Stock or Sound Common Stock.
Whenever shares of Company Common Stock or Sound Common Stock or any portion of
the Note have been transferred to a Person or an Affiliated Person, as
applicable, as provided herein and thereafter any designation, consent or other
determination under the terms of this Agreement is required or permitted to be
made by the Partnership or a Shareholder, such designation, consent or other
determination shall be made by the Partnership or such Shareholder so long as
the Partnership or such Shareholder continues to hold the Note or shares of
Company Common Stock or Sound Common Stock, as applicable.
5
<PAGE> 6
ARTICLE V.
MISCELLANEOUS
5.01 Notices. All notices, consents, waivers or other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been received on the date of confirmed telecopy transmission or personal
delivery, or two (2) business days after the date of deposit with the United
States Postal Service, and shall be sufficiently given if delivered personally,
sent by confirmed telecopy or other confirmed electronic transmission, or sent
by certified mail, return receipt requested, postage prepaid and addressed to
the address set forth next to each party's name on the signature page.
5.02 Specific Performance. Inasmuch as the Partnership has purchased and
held the Note in part in consideration of the provisions herein contained, the
parties acknowledge and agree that irreparable damage would result if this
Agreement were not specifically enforced. Therefore, the rights and obligations
set forth herein shall be enforceable in any court of equity of competent
jurisdiction by decree of specific performance, and appropriate injunctive
relief may be applied for and granted in connection therewith.
5.03 Expenses and Attorneys' Fees. In the event that any party hereto
shall find it necessary to resort to litigation to enforce its rights hereunder,
the parties hereto agree that the party prevailing in such litigation shall also
be entitled to recover its reasonable expenses actually incurred in connection
therewith, including reasonable attorneys' fees.
5.04 Governing Law. All provisions of this Agreement shall be construed
according to the laws of the State of Delaware exclusive of any such laws under
which the laws of any other jurisdiction would apply.
5.05 Headings. The headings used in this Agreement are inserted for
convenience only and are not intended to be a part of, nor shall they be used in
interpreting, this Agreement.
5.06 Severability. This Agreement is intended to be performed in
accordance with, and only to the extent permitted by, all applicable laws,
ordinances, rules and regulations. If any provision of this Agreement or the
application thereof to any person or circumstance is for any reason and to any
extent in-valid or unenforceable, the remainder of this Agreement and the
application of such provision to the other persons or circumstances will not be
affected thereby, but rather are to be en-forced to the greatest extent
permitted by law.
5.07 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
[SIGNATURE PAGES TO FOLLOW]
6
<PAGE> 7
EFFECTIVE as of the date set forth above.
PARTNERSHIP:
Scottsdale Technologies-I, Ltd.
By: Software Funding Corp., its general partner
By: /s/ STUART N. RUBIN
----------------------
Name: STUART N. RUBIN
Title: General Partner
Address: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
COMPANY:
WO Consulting, Inc.
By: /s/ STUART N. RUBIN
----------------------
Name: STUART N. RUBIN
Title: Vice President
Address: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
SOUND:
Sound Industries, Ltd.
By: /s/ STUART N. RUBIN
----------------------
Name: STUART N. RUBIN
Title: Vice President
Address: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
7
<PAGE> 8
SHAREHOLDERS:
/s/ ERIC J. SCHEDELER
--------------------------
Eric J. Schedeler
Address: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Number of Shares: 1,648,574
/s/ C. KIMBALL MCCUSKER
--------------------------
C. Kimball McCusker
Address: 11053 E. Hedgehog Pl.
Scottsdale, Arizona 85255
Number of Shares: 184,175
/s/ MICHAEL L. SLOVER
--------------------------
Michael L. Slover
Address: 12625 N. 78th St.
Scottsdale, Arizona 85260
Number of Shares: 134,344
/s/ STUART N. RUBIN
--------------------------
Stuart N. Rubin
Address: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Number of Shares: 420,265
/s/ DAVID M. BUTLER
--------------------------
David M. Butler
Address: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Number of Shares: 667,000
8
<PAGE> 1
Exhibit 3.3
WO CONSULTING, INC.
--------------------------------------------------
NOTE AND WARRANT PURCHASE AGREEMENT
---------------------------------------------------
UP TO $1,928,250 PRINCIPAL AMOUNT
12% SENIOR CONVERTIBLE PROMISSORY NOTES
DUE DECEMBER 1, 1997
WARRANTS TO PURCHASE
SHARES OF COMMON STOCK
$.01 PAR VALUE PER SHARE
EXECUTED ON FEBRUARY 28, 1997, BUT INTENDED BY THE PARTIES HERETO TO BE
EFFECTIVE AS OF JANUARY , 1997
<PAGE> 2
WO CONSULTING, INC.
Note and Warrant Purchase Agreement
TABLE OF CONTENTS
PAGE
Article 1. DEFINITIONS....................................................1
1.2 Defined Terms.............................................1
1.3 Other Definitional Provisions.............................6
Article 2. PURCHASE AND SALE OF SENIOR NOTES AND WARRANTS...........7
2.1 Senior Notes..............................................7
2.2 Disbursements.............................................7
2.3 Warrants..................................................7
2.3 Consideration for Purchase of the Senior Note.............7
2.4 Consideration for Purchase of the Warrants................7
2.5 Return of Warrants........................................8
2.6 Issue Price; No Discount..................................8
Article 3. TERMS OF THE SENIOR NOTES; USE OF PROCEEDS,
REGISTRATION RIGHTS.............................................8
3.1 Terms of the Senior Note..................................8
(a) Prepayments........................................8
(b) Prepayment upon Sale, Third-Party Financing or
Change of Control..................................8
(c) Interest...........................................9
(d) Default Rate of Interest...........................9
(e) Maximum Legal Rate of Interest.....................9
(f) Manner of Payment..................................9
(g) Application of Payments............................9
3.2 Use of Proceeds...........................................9
3.3 Conversion Privilege and Conversion Price.................9
3.4 Senior Note..............................................10
3.5 Security for Promissory Note.............................10
3.6 Registration of Note Shares and Warrant Shares...........10
3.7 Mandatory Conversion.....................................11
Article 4. REPRESENTATIONS AND WARRANTIES.................................11
4.1 Corporate Existence; Capitalization......................11
4.2 Authority................................................12
4.3 Due Execution and Delivery; Binding Effect...............12
4.4 Consents; Governmental Approvals.........................12
4.5 Absence of Conflicts.....................................12
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4.6 No Default...............................................12
4.7 Financial Data...........................................13
4.8 Title to Property and Assets.............................13
4.9 Solvency.................................................13
4.10 Tax Liabilities..........................................14
4.10 Margin Securities........................................14
4.11 Subsidiaries; Joint Ventures.............................14
4.12 Litigation and Proceedings...............................14
4.14 Defaults; Adverse Changes................................14
4.15 Insurance................................................15
4.16 Patents, Trademarks, Licenses, etc.......................15
4.17 Environmental Matters....................................15
4.18 Brokers' Fees............................................15
4.19 Investment Company Act...................................16
4.20 Disclosure...............................................16
4.21 Benefit Plan Matters.....................................16
4.22 Liabilities and Obligation...............................16
4.23 Material Contracts and Commitments.......................17
Article 5. CONDITIONS PRECEDENT...........................................17
5.1 Purchaser Documents. ....................................17
5.2 Other Documents..........................................17
5.3 Representations and Warranties; No Default or
Event of Default.........................................18
5.4 Consent of Stockholders of Surviving Corporation.........18
5.5 Additional Matters.......................................18
5.6 Due Diligence; No Adverse Change or Events...............18
Article 6. AFFIRMATIVE COVENANTS......................................... 18
6.1 Financial and Other Information..........................19
6.2 Inspection...............................................20
6.3 Taxes....................................................20
6.4 Notice of Suit or Adverse Change in Business.............20
6.5 Environmental Laws.......................................21
6.6 Notices Relating to Transactions.........................21
6.7 Boards of Directors......................................21
6.8 Profit Sharing or ESOP Plan..............................22
6.9 Merger with Public Shell.................................22
Article 7. NEGATIVE COVENANTS.............................................22
7.1 Liens or Encumbrances....................................23
7.2 Indebtedness.............................................23
7.3 Consolidations, Mergers or Acquisitions..................23
7.4 Investments or Loans.....................................23
7.5 Contingent Obligations...................................23
7.6 Disposal of Property.....................................24
7.7 Capital Expenditure Limitations..........................24
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<PAGE> 4
7.8 Contracts with Manufacturers.............................24
7.9 Compensation.............................................24
7.10 Dividends, Stock Redemptions, Etc........................24
7.11 Issuances of Stock.......................................24
7.12 Amendment of Certificate of Incorporation or By-laws.....25
7.13 Fiscal Year End..........................................25
7.14 Transactions with Affiliates.............................25
Article 8. EVENTS OF DEFAULT..............................................25
Article 9. CONSENTS.......................................................27
Article 10. SECURITIES LAW MATTERS.........................................27
10.1 Securities Act...........................................27
10.2 Resales..................................................27
10.3 Legends..................................................28
Article 11. TRANSFERS......................................................28
11.1 Transfers................................................28
11.2 Participation of Partners................................28
11.3 Issuance of New Notes....................................29
Article 12. EFFECTIVENESS OF AGREEMENT.....................................29
Article 13. STANDSTILL AND ANTI-DILUTION PROVISIONS........................30
13.1 Standstill Provision.....................................30
13.2 Anti-Dilution Provision..................................30
Article 14. JUDICIAL PROCEEDINGS...........................................30
Article 15. MISCELLANEOUS..................................................31
15.1 Notices..................................................31
15.2 Cumulative Remedies, Etc.................................32
15.3 No Oral Changes; Assignment; Survival of Representations.32
15.4 Expenses.................................................32
15.5 Loss or Destruction of a Senior Note.....................32
15.6 Indemnification Generally................................33
15.7 Governing Law............................................33
15.8 Counterparts.............................................33
15.9 Captions; Gender.........................................33
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LIST OF EXHIBITS
EXHIBIT A Form of 12% Senior Convertible Note
EXHIBIT B Form of Warrant
EXHIBIT C Form of Security Agreement for the Promissory Note
LIST OF SCHEDULES
Schedule 4.1 List of Stockholders (including Common Stock, preferred stock,
warrants, stock options and convertible securities)
Schedule 4.15 List of Insurance Policies
Schedule 4.16 List of Patents, Trademarks, Licenses, etc.
Schedule 4.22 List of Company Liabilities
Schedule 4.23 List of Company's Material Contracts, Commitments and Similar
Agreements
Schedule 7.9 List of Officer Compensation
Schedule 7.14 List of Transactions with Affiliates
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<PAGE> 6
WO CONSULTING, INC.
NOTE AND WARRANT PURCHASE AGREEMENT
Up to $1,928,250 Principal Amount
12% Senior Convertible Promissory Notes
Due December 1, 1997
Warrants to Purchase Shares
of Common Stock
$.01 Par Value Per Share
This Note and Warrant Purchase Agreement ("Agreement") is executed on
February 28, 1997, but is intended by the parties to be effective as of January
1, 1997, between WO Consulting, Inc., a Delaware corporation (the "Company"),
and Scottsdale Technologies-I, L.P., a Delaware limited partnership (the
"Partnership").
The Company wishes to issue and sell the 12% Senior Convertible Promissory
Notes due December 1, 1997 to the Partnership in exchange for the principal and
interest outstanding pursuant to the Promissory Note (the "Existing Note")
issued by the Company's predecessor, Scottsdale Technologies, Inc.
("Scottsdale"), in favor of Software Funding Corp., the Partnership's general
partner ("Software Funding"), as agent for certain investors and an additional
principal amount of up to $1,504,250 and Warrants to purchase up to an aggregate
of 1,641,111 shares of the Company's Common Stock for $10.00 per share (subject
to certain adjustments) (the "Warrants") in exchange for $.01 per Warrant.
The Senior Notes and Warrants will be issued pursuant to and subject to
the terms and conditions of this Agreement.
In connection with the issuance of the Senior Notes and Warrants, the
Company agrees with the Partnership and the Partnership agrees with the Company
as follows:
Article 1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate" of any Person shall mean any other Person (a) that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with such first Person, (b) that
directly or beneficially owns five percent (5%) or more of any class of the
voting stock of such first Person, or (c) five percent (5%) or more of whose
<PAGE> 7
voting stock (or in the case of a Person which is not a corporation, five
percent (5%) or more of whose equity interest) is owned directly or beneficially
by such first Person.
"Agreement" shall mean this Note and Warrant Purchase Agreement,
together with all Exhibits and Schedules hereto, as from time to time amended,
modified or supplemented.
"Business Day" shall mean a day other than a Saturday, Sunday or
other day on which commercial banks in Phoenix, Arizona are authorized or
required by law to close.
"Capital Expenditures" shall mean the cost of any fixed asset or
improvement, or replacement, substitution, or addition thereto which is required
by GAAP to be included in or reflected by property, plant and equipment or
similar fixed assets on the balance sheet of a Person, having a useful life of
more than one year, including as a cost the aggregate amount of expenses,
charges, goods exchanged or services rendered or payments due or arising in
connection with the direct or indirect acquisition of such assets or
improvements, replacements, substitutions or additions by way of increased
product or service charges or offset items or barter exchange or in connection
with Capital Leases, and the entire principal amount of any Indebtedness assumed
or incurred in connection therewith, in each case without duplication; provided,
that the value of any property leased pursuant to operating leases shall also be
included in Capital Expenditures.
"Capital Lease" shall mean any lease of any property (whether real,
personal or mixed) of any Person as lessee which, in conformity with GAAP, is,
or is required to be, accounted for as a capital lease on the balance sheet of
such Person.
"Capital Stock" shall mean any and all shares, interests,
participation or other equivalents (however designated) of capital stock of a
corporation, any and all equivalent ownership or equity interests in a Person
other than a corporation (including partnership interests and membership
interests), and any and all warrants, options, conversion rights or other rights
to obtain any of the foregoing.
"Change of Control" shall mean any event by which any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) becomes the "beneficial owner" (as that
term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not
applicable, except that a person deemed to have "beneficial ownership" of all
shares that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power entitled to vote in the
election of directors of the Company.
"Closing" shall mean the completion of the transactions contemplated
by this Agreement, including the purchase of the Senior Notes and Warrants.
"Closing Date" shall mean the date of the closing of the
Transactions.
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<PAGE> 8
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Company" shall mean WO Consulting, Inc.
"Contingent Obligations" shall mean as to any Person any direct or
indirect liability, by guaranty, endorsement, assumption agreement or otherwise,
of that Person or with respect to the obligations of another, whether to
purchase, repurchase or otherwise acquire such obligation or any security
therefor, or to provide funds for the payment or discharge of such obligation
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise), or to maintain the solvency or any balance sheet item, level of
income or financial condition of another.
"Default" shall mean any of the events specified in Article 8,
whether or not any requirement for the giving of notice, the lapse of time, or
both, or the happening of any other condition, has been satisfied.
"Dollars" and "$" shall mean dollars in lawful currency of the
United States of America.
"Environmental Law" means any federal, state or local statute, law,
rule, regulation, ordinance, code, policy or rule of common law now or hereafter
in effect and in each case as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative order, consent
decree or judgment, relating to the environment, health, safety or any hazardous
materials, including without limitation, the Rivers and Harbors Act of 1899, 33
U.S.C. Section 401, et seq., the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendment
and Reauthorization Act of 1986, as amended ("CERCLA") 42 U.S.C. Section 9601 et
seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section
1801 et seq.; the Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq.; the
Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.;
the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Clean Air
Act, 42 U.S.C. Section 7401 et seq.; the Clean Water Act, 33 U.S.C. Section
1251, et seq., the Safe Drinking water Act, 42 U.S.C. Section 3808 et seq.; and
their counterparts under state and any local law.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Event of Default" shall mean any of the events specified in Article
8, provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Existing Note" shall have the meaning set forth in the recitals to
this Agreement.
3
<PAGE> 9
"Financial Statements" shall have the meaning set forth in Section
4.7.
"GAAP" shall mean generally accepted accounting principles as used
by the Financial Accounting Standards Board, as in effect from time to time,
consistently applied.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Holder" shall mean any holder from time to time of a Senior Note, a
Warrant, a Note Share or a Warrant Share.
"Indebtedness" of any Person shall mean (without duplication) (i)
all indebtedness for borrowed money or evidenced by notes, bonds, debentures or
similar evidences of indebtedness of such Person, all obligations of such Person
for the deferred and unpaid purchase price of any property, service or business
(other than trade accounts payable and accrued liabilities incurred in the
ordinary course of business and constituting current liabilities in accordance
with GAAP), (ii) all obligations under any Capital Leases of such Person, (iii)
any liability of such Person secured by any lien on property owned or acquired
by such Person, whether or not such liability shall have been assumed (but if
such liability has not been assumed by such Person, only to the extent that the
value of the asset(s) is subject to such lien), (iv) all Contingent Obligations
of such Person, (v) letters of credit and all obligations of such Person
relating thereto, and (vi) all obligations of such Person in respect of interest
rate swap agreements, currency swap agreements and other similar agreements
designed to hedge against fluctuations in interest rates or foreign exchange
rates.
"Material Adverse Effect" shall mean a material adverse effect on
(a) the assets, performance, condition (financial or otherwise), operations,
business or prospects of the Company, or (b) the ability of the Company to pay
or perform when due its obligations under any of the Purchaser Documents.
"Note Shares" shall mean the shares of Common Stock issuable or
issued upon the conversion of the Senior Notes, and shall also include in the
case of any reorganization, reclassification, consolidation, merger or sale of
assets of the Company, the stock or other equity interest, securities or assets
provided for in the Senior Notes.
"Partnership" shall mean Scottsdale Technologies-I, Ltd., a Delaware
limited partnership.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, limited
liability company, association, corporation, institution, entity, party, or
government (whether national, federal, state, county, city, municipal or
otherwise, including without limitation any instrumentality, division, agency,
body or department thereof).
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<PAGE> 10
"Plan" shall mean any employee benefit plan within the meaning of
Section 3(3) of ERISA.
"Principal Stockholders" shall mean Eric J. Schedeler, C. Kimball
McCusker and Michael L. Slover.
"Pro Forma Balance Sheet" shall have the meaning set forth in
Section 4.7.
"Pro Forma Date" shall have the meaning set forth in Section 4.7.
"Projections" shall have the meaning set forth in Section 4.7.
"Promissory Note" shall mean the Convertible Promissory Note in the
aggregate principal amount of up to $1,928,250 executed by the Scottsdale in
exchange for the agreement of Software Funding on behalf of certain investors to
disburse funds to Scottsdale to finance the operations of the Company prior to
Closing.
"Purchaser" shall have the meaning set forth in Section 11.1.
"Purchaser Documents" shall mean, collectively, this Agreement, the
Promissory Note, the Senior Notes, the Warrants, the Security Agreement and any
other agreement, document or certificate relating to any thereof.
"Registration Statement" shall have the meaning set forth in Section
3.6.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Security Agreement" shall mean the Security Agreement between the
Company and Partnership securing the obligations of the Company pursuant to the
Senior Notes substantially in the form attached hereto as Exhibit C.
"Senior Notes" shall have the meaning set forth in the recitals to
this Agreement, and shall be substantially in the form attached hereto as
Exhibit A.
"Subsidiary" shall mean, with respect to any Person, (i) any
corporation of which fifty percent (50%) or more of the outstanding Capital
Stock having ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether at the time stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or
indirectly owned by such Person or (ii) any partnership, limited liability
company or joint venture or other entity of which fifty percent (50%) of the
outstanding equity interests are at the time, directly or indirectly, owned by
such Person.
5
<PAGE> 11
"Tax" shall mean any United States or other federal, state,
provincial, local or foreign income, gross receipts, property, sales, goods and
services use, license, excise, franchise, employment, payroll, withholding,
alternative or add-on minimum, ad valorem, transfer or excise tax, or any other
tax, custom, duty, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or penalty, imposed by any
Governmental Authority.
"Tax Return" shall mean any return, report or similar statement
required to be filed with respect to any Tax (including any attached schedules),
including, without limitation, any information return, claim for refund, amended
return and declaration of estimated Tax.
"Transactions" shall mean all transactions contemplated by this
Agreement and the Purchaser Documents which are to be consummated on the Closing
Date.
"Warrants" shall mean Warrants to purchase up to 1,641,111 shares of
Common Stock of the Company or its successors, subject to certain adjustments
set forth in this Agreement, dated as of the Closing and shall be substantially
in the form attached hereto as Exhibit B.
"Warrant Shares" shall mean the shares of Common Stock issuable or
issued upon exercise of the Warrants, and shall also include in case of any
reorganization, reclassification, consolidation, merger or sale of assets, the
stock or other equity interest, securities, or assets provided for in the
Warrants.
1.4 Other Definitional Provisions.
(a) Any term used herein which is not defined herein has the
meaning given thereto in the Promissory Note, Senior Notes or Warrants.
(b) As used herein, in the other Purchaser Documents, and in any
certificate, report or other document made or delivered pursuant hereto or
thereto, unless otherwise defined herein accounting terms shall have the
respective meanings given to them under GAAP.
(c) The words "hereof," "herein," "hereunder" and "hereto" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement; and
Section, Schedule and Exhibit references contained in this Agreement are
references to Sections, Schedules and Exhibits in or to this Agreement, unless
otherwise specified.
(d) The meanings given to the terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
Article 2. PURCHASE AND SALE OF SENIOR NOTES AND WARRANTS
2.1 Senior Notes. The Company agrees to sell to the Partnership, and
the Partnership agrees to purchase from the Company, on the Closing Date, a
Senior Note in the
6
<PAGE> 12
principal amount of up to $1,928,250. The Senior Note shall be dated the Closing
Date and substantially in the form of Exhibit A and shall be payable on December
1, 1997 (subject to mandatory prepayment provisions set forth herein).
2.2 Disbursements. Holder will disburse the principal of the Senior
Note to the Company in one or more advances from time to time, in each case upon
not less than two Business Days prior request by the Company. In no event shall
the total of such advances be more than the principal amount of this Note.
Holder will not be obligated to disburse any advance unless (a) no Event of
Default exists; (b) the disbursement of the advance is permitted by law; (c) the
Holder shall determine in its sole discretion that the enforcement,
collectibility or protection of the principal of this Note is not, and would not
be, at an unacceptable risk; and (d) the disbursement of the advance would not
adversely effect the Company's ability to register shares of its Common Stock
(including the Note Shares and Warrant Shares) for sale to the public.
2.3 Warrants. The Company agrees to issue and sell to the
Partnership and the Partnership agrees to purchase from the Company, on the
Closing Date, one or more Warrants to purchase up to 1,641,111 shares of Common
Stock of the Company. The exercise price for each Warrant shall be $10.00 per
share subject to subsequent adjustment as set forth in the Warrants. The
Warrants shall be exercisable at any time or from time to time after the Closing
Date, and shall expire at the close of business on June 30, 2006. The Warrants
shall be issued pursuant to this Agreement and shall be substantially in the
form of Exhibit B attached hereto, with the blanks appropriately filled in
conformity herewith, and shall be dated the Closing Date.
2.4 Consideration for Purchase of the Senior Note. Subject to the
terms of this Agreement, the Partnership hereby agrees to exchange the principal
amount of the Promissory Note and any accrued and unpaid interest thereon in
exchange for $424,000 in principal amount of the Senior Note and agrees to
provide the Company a line of credit in the amount of up to $1,504,250 which
will be disbursed at Closing), pursuant and subject to the terms of the Senior
Note (the "Note Consideration").
2.5 Consideration for Purchase of the Warrants. Subject to the terms
of this Agreement, the Partnership hereby agrees to pay to the Company at
Closing, by cashier's check or wire transfer to the account of the Company,
$16,411, or $0.01 per Warrant, as the consideration for the purchase of the
Warrants.
2.6 Return of Warrants. Upon maturity of the Senior Note, if: (i)
the total of all advances under the Note is less than $1,928,250, including the
$424,000 of principal received in exchange for the Promissory Note; and (ii) the
Partnership has declined to make an advance pursuant to Section 2.3 of the
Senior Note (and did not subsequently make an advance for a substantially
similar purpose or in a substantially similar amount) (a "Declined Advance"),
then the Partnership shall return to the Company an amount of Warrants equal to
the quotient of the lesser of (x) the difference between _________ minus the
total amount of advances or disbursements under the Senior Notes (including the
principal amount exchanged for the Promissory Note) or (y) the Declined Advances
divided by $1.50, rounded to the nearest whole number.
7
<PAGE> 13
2.7 Issue Price; No Discount. Having considered all facts relevant
to a determination of the value of the Senior Note and the Warrants being
acquired by the Partnership, including among other things the highly leveraged
nature of the Company's capitalization and the nature of its business and
prospects, the Company and the Partnership have concluded and do hereby agree
that the present value of all scheduled payments of principal of and interest on
the Senior Note is $1,504,250, based on yields of comparable debt instruments
of comparable issuers. Accordingly, the Company and the Partnership agree that
for purposes of the Code, and for purposes of determining any original issue
discount with respect to the Senior Note thereunder, the "issue price" of the
Senior Note is $1,504,250. Neither the Company nor the Partnership shall take a
position on any income tax return, before any Governmental Authority charged
with the collection of any income tax or in any judicial proceeding that is
inconsistent with the terms of this Section 2.7.
Article 3. TERMS OF THE SENIOR NOTES; USE OF PROCEEDS;
REGISTRATION RIGHTS.
3.1 Terms of the Senior Note.
(a) Prepayments. At any time before the Maturity Date the Company
may prepay the Senior Note, in whole or in part, upon thirty (30) days' prior
written notice given to Holder. Notwithstanding anything to the contrary herein,
if the Company elects to prepay the Senior Note in whole or in part, other than
pursuant to a mandatory prepayment set forth below, the Holder shall have a
period of thirty (30) days from the date on which it receives notice of such
prepayment in which to elect to convert the Senior Note or that portion of the
Senior Note that the Company elects to prepay, as the case may be, and to
acquire shares of Common Stock, on the terms and subject to the conditions set
forth in the Senior Note.
(b) Prepayment upon Sale, Third-Party Financing or Change of
Control. If (i) the Company at any time sells, exchanges or otherwise transfers
25% or more of its assets (other than inventory sold in the ordinary course of
business) or (ii) there shall be a Change of Control, then the Company may be
required to repurchase the Senior Notes in the sole and absolute discretion of
the Holder or Holders of such Senior Note, together with accrued interest
thereon to the date of such prepayment as set forth in the Senior Notes. In
addition, in the event the Company (A) is unable to register the resale of the
Note Shares and Warrant Shares under the Securities Act pursuant to a valid
registration statement and (B) completes any debt or equity financing with any
third-party, the Senior Notes shall become immediately due and payable, unless
waived in writing in the sole and absolute discretion of the Holder or Holders
of such Senior Note, in an amount equal to the lesser of (y) the aggregate
amount of principal and unpaid interest outstanding on such Senior Note or (z)
the net proceeds of any such financing.
(c) Interest. Interest on the Notes shall accrue at the rate of 12%
per annum and shall be deferred and interest on such deferred interest shall
accrue at the rate of 12% per annum, compounded monthly.
8
<PAGE> 14
(d) Default Rate of Interest. If any principal or accrued interest
of the Senior Notes is not paid when due, or there exists an Event of Default,
the Senior Notes shall bear interest thereafter, until such overdue principal or
interest is paid in full or such Event of Default is cured, at the maximum rate
permitted by applicable law.
(e) Maximum Legal Rate of Interest. Nothing in this Agreement or in
the Senior Notes shall require the Company to pay interest at a rate in excess
of the maximum rate permitted by applicable law.
(f) Manner of Payment. All payments and prepayments of principal of,
premium, if any, and interest on the Senior Notes, and any other fees or
payments due hereunder, shall be made, without setoff or counterclaim, to the
Holders of the Senior Notes by wire transfer or other transfer or delivery of
funds, in accordance with each Holder's instructions from time to time, so that
such funds are received by and available to the Holders on or before the due
date of each such payment. Any principal, interest or other amount payable
hereunder that becomes due on a day that is not a Business Day shall be payable
on the preceding Business Day.
(g) Application of Payments. All payments of principal and interest
on the Senior Notes shall be applied (to the extent thereof) to the Senior Notes
pro rata based on the principal amount outstanding and held by each Holder
thereof.
3.2 Use of Proceeds. The Company will use the proceeds of the sale
of the Senior Notes and Warrants for working capital purposes. The Company
agrees that until all amounts outstanding under the Senior Notes have been
repaid or converted into shares of Common Stock, it shall provide the
Partnership at least ten (10) days prior to the beginning of each month a
monthly budget showing all planned and expected expenditures for such month, and
the proceeds will be used only as provided in such monthly budget approved by
the Partnership.
3.3 Conversion Privilege and Conversion Price. Subject to and upon
compliance with the provisions of this Section, at the option of Holder, all or
any part of the Senior Note may be converted into fully paid and nonassessable
shares (calculated as to each conversion to the nearest 1/100 of a share) of
Common Stock at any time (i) for 955,000 shares of Common Stock for the initial
$428,250 of principal advanced pursuant to the Senior Note and (ii) the
remaining principal and accrued and unpaid interest outstanding under the Senior
Note may be converted at the Conversion Price, determined as hereinafter
provided, in effect at the time of conversion. The Conversion Price shall be
initially $1.35 per share of Common Stock.
3.4 Senior Note. This Note is the senior obligation of the Company
senior in right of payment to all Indebtedness of the Company. As of the date
hereof, the Company has no Indebtedness outstanding senior to the Senior Note.
The Company will not incur any Indebtedness unless such Indebtedness is
expressly made subordinate to this Note.
3.5 Security for Promissory Note. The Convertible Note will be
secured by a General Security Agreement pursuant to which the Partnership is
granted a security interest in all personal property, licenses, patents,
copyrights, trademarks, trade names, and all other
9
<PAGE> 15
intellectual property, fixtures, goods, inventory, equipment, accounts, chattel
paper, contract rights, fixtures and other property of the Company, wherever
located, whether now or hereafter existing and whether now owned or hereafter
acquired of every kind and description, tangible or intangible, and all products
and proceeds thereof, including, but not limited to, any rights, title or
interest of the Company in any contract, software, license, copyright or other
intellectual property related to the programmable remote control device
trademarked as Program Master.
3.6 Registration of Note Shares and Warrant Shares. Within 120 days
of the consummation of the merger described in Section 6.9 hereof, the Company
will file with the SEC a registration statement registering the resale of the
Note Shares and Warrant Shares following the conversion of the Senior Note or
exercise of the Warrants, as applicable (the "Registration Statement"). The
Company shall use its best efforts to cause the Registration Statement to become
effective as soon as practicable and to cause the Note Shares and Warrant Shares
to be qualified in such state jurisdictions as the Holder of such Senior Note or
Warrant may reasonably request, provided that the Company shall not be required
to incur inordinate expense or inordinate actions to qualify the resale in any
such other state jurisdiction. The Company shall take all reasonable steps
necessary to keep the Registration Statement current and effective, including
any necessary refiling of any additional registration statements, until (a) such
Registration Statement has been effective for one year, (b) the Company is
subject to the reporting requirements under Section 12 of the Exchange Act and
(c) either (i) all Note Shares and Warrant Shares have been distributed by the
Partnership or the Holder of such shares or (ii) all Note Shares and Warrant
Shares may be sold on an unrestricted basis pursuant to Rule 144(k) or any other
exemption available under the Securities Act as long as any purchasers who
acquire any shares pursuant to such other exemption may freely resell all such
shares without any restriction. In the event the Company effectively registers
the resale of the Note Shares or Warrant Shares, the Company may stop or prevent
the transfer of such Common Stock for a period not to exceed 60 days in the
event the Company files a Registration Statement for the sale of its securities,
and for an indefinite period of time if the Company, in its sole discretion,
believes the Holder or Holders of such securities have material non-public
information.
3.7 Mandatory Conversion. In the event (i) the Registration
Statement becomes effective and the Note Shares and Warrant Shares are
registered for resale under the Securities Act and qualified for issuance and
resale under the various state laws prior to December 1, 1997, and (ii) the
Company or its successor is a reporting company under the Exchange Act, then, on
the fifth (5th) day after mailing written notice to the Holders of the Senior
Notes that these conditions have been satisfied, the Senior Note shall be
converted into the Note Shares at the conversion price then in effect determined
pursuant to the provisions of the Senior Note.
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Article 4. REPRESENTATIONS AND WARRANTIES.
In order to induce the Partnership to enter into this Agreement and
to purchase the Senior Notes and Warrants, the Company hereby represents and
warrants to the Partnership that all of the following representations and
warranties shall be true and correct as of the date of this Agreement and shall
be true and correct at the time of the Closing.
4.1 Corporate Existence; Capitalization.
(a) The Company is a corporation duly organized and in good standing
under the laws of Delaware and is duly qualified as a foreign corporation and in
good standing under the laws of all jurisdictions where the nature and extent of
the business to be transacted by it or assets owned or to be owned by it after
the Closing Date makes such qualification necessary, except those jurisdictions
in which the failure to qualify or be in good standing is not reasonably likely
to have a Material Adverse Effect.
(b) The Company has all corporate power and authority necessary to
own, operate or lease its properties and assets and to conduct its business as
now being conducted and as now intended to be conducted.
(c) Immediately after the Closing, the Capital Stock of the Company
(including Common Stock, preferred stock, warrants, stock options and
convertible securities) will be owned of record and beneficially as set forth on
Schedule 4.1. All such Capital Stock has been duly authorized and, immediately
after the Closing, will be validly issued and fully paid, non-assessable and
free of preemptive rights. Except as set forth on Schedule 4.1, there are no
options, warrants or other rights to acquire Capital Stock of the Company, or
agreements or other rights binding upon the Company to issue or sell its Capital
Stock, whether on conversion or exchange of convertible securities, exercise of
warrants or options, or otherwise, or agreements or other instruments providing
registration rights to stockholders or holders of other securities of the
Company.
(d) The Company will at all times have authorized, and reserve and
keep available, free from pre-emptive rights, the number of shares of Common
Stock issuable upon the conversion of all outstanding Senior Notes or exercise
of all outstanding Warrants for the purpose of enabling it to satisfy any
obligation to issue Note Shares and/or Warrant Shares upon any conversion of the
Senior Notes or exercise of the Warrants.
(e) Except the Voting Agreement between the Partnership and the
Principal Stockholders dated the date hereof, there are no agreements or other
instruments of any kind to which any person, firm or corporation is, or
immediately after the Closing will be, a party, which relate to the voting of
the Company's Common Stock or the control of the Company.
4.2 Authority. The Company has all power and authority necessary to
issue and sell the Senior Notes and Warrants, and to execute, deliver, and
perform this Agreement, the Senior Notes and the Warrants. The Company has taken
all action required to authorize the
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issuance and sale of the Senior Notes and the Warrants, and to authorize the
execution, delivery and performance of the Purchaser Documents.
4.3 Due Execution and Delivery; Binding Effect. The Company has duly
executed and delivered each of the Purchaser Documents. Each of the Purchaser
Documents is a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
4.4 Consents; Governmental Approvals. No consent or approval of any
person, firm or corporation, and no consent, license, approval or authorization
of, or registration, filing or declaration with, any Governmental Authority is
required to be obtained or made by or on behalf of any corporation in connection
with the issuance or sale of the Senior Notes or the Warrants, the execution,
delivery or performance of the Purchaser Documents or the completion of the
transactions contemplated thereby.
4.5 Absence of Conflicts. The assumption of the Promissory Notes and
the issuance and sale of the Senior Notes and the Warrants and the execution,
delivery and performance of the Purchaser Documents by the Company and its
stockholders do not and will not (a) conflict with or violate any provision of
the Company's Certificate of Incorporation or Bylaws, (b) conflict with or
result in a violation, breach or default under (i) any provision of any existing
statute, law, rule or regulation binding on the Company or any order, judgment,
award, decree, license or authorization of any court or Governmental Authority
binding on it, or (ii) any mortgage, indenture, lease or other contract,
agreement, instrument or undertaking to which the Company is a party or will be
a party immediately after the Closing, or by which or to which it or any of its
property or assets is now or immediately after the Closing will be bound or
subject, or (c) result in the creation or imposition of any lien, encumbrance or
other charge on any of its properties or assets.
4.6 No Default. No Default or Event of Default has occurred and is
continuing or will have occurred and be continuing at the time of or immediately
after the Closing.
4.7 Financial Data.
(a) The Company has furnished to the Partnership audited financial
statements of Scottsdale for the fiscal years ended December 31, 1995 and 1994,
along with all of the notes and comments included with a certificate of
independent certified public accountants, together with unaudited financial
statements of Scottsdale for the fiscal year ended December 31, 1996
(collectively referred to as the "Financial Statements"). All of the Financial
Statements have been prepared in accordance GAAP with and fairly present the
financial condition of Scottsdale at the dates thereof and the results of
operations for the periods indicated (subject, in the case of interim financial
statements, to normal year-end adjustments).
(b) The Company has furnished to the Partnership two-year projected
financial statements (the "Projections") for the Company, including projected
balance sheets, projected funds flow statements, projected profit and loss
statements, and appropriate supporting
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details and statements of underlying assumptions. The Projections have been
prepared by the Company and its financial personnel in light of the past
business of Scottsdale and the Company and represent the good faith belief of
the Company as to the anticipated course of the business of the Company based
upon the assumptions and qualifications stated therein. The Company has no
present reason to believe that the future consolidated results of its operations
and financial condition will not be at least as favorable as indicated in such
projections.
(c) The Company has furnished to the Partnership a pro forma
consolidated balance sheet (the "Pro Forma Balance Sheet") reflecting the
consolidated financial condition of the Company as at the Closing Date (the "Pro
Forma Date"), on the assumption that the transactions contemplated by this
Agreement occur on such date. Such balance sheet was prepared in good faith and
fairly presents, on a pro forma basis, the consolidated financial position of
the Company at the date hereof, assuming that the Transactions had then been
completed. The Company does not have, and immediately after the Closing will not
have, any Indebtedness or other material liabilities, contingent or otherwise,
which are not reflected in such Pro Forma Balance Sheet.
4.8 Title to Property and Assets. The Company has good and
marketable title to all properties and assets, tangible and intangible, owned by
them, including all property and assets reflected in the Pro Forma Balance
Sheet, except as disposed of after the date thereof in the ordinary course of
business, subject in each case to no mortgage, pledge, option, escrow,
hypothecation, lien, security interest, financing statement, lease, charge,
encumbrance, easement, conditional sale or other title retention or security
agreement.
4.9 Solvency. Immediately after giving effect to the Transactions,
the Company will be solvent, will be able to pay its debts as they become due
and will have capital sufficient to carry on its business, and will own property
having a value both at fair valuation and at present fair saleable value greater
than the amount required to pay its Indebtedness as it becomes due. By issuing
the Senior Notes, the Company will not incur debts beyond its ability to pay its
debts as they mature and will not be left with unreasonably small capital. The
Company has not incurred (and pursuant to the Purchaser Documents will not
incur) obligations, and has not made and will not make any transfer, with actual
intent to hinder, delay or defraud present or future creditors.
4.10 Tax Liabilities. The Company has timely filed all requisite
federal and other Tax Returns for all fiscal periods ended on or before the date
hereof; and there are no open years, examinations in progress or claims against
them for federal and other Taxes (including penalties and interest) for any
period or periods prior to and including the date hereof and no notice of any
claim, whether pending or threatened, for Taxes has been received. The Company
is not a party to any Tax allocation or sharing agreement (i.e., any agreement
or arrangement for the payment of Tax liabilities or payment for Tax benefits
with respect to a consolidated, combined or unitary Tax Return which includes
the Company) with any corporation, there are no requests for rulings in respect
of any Tax pending by the Company with any tax authority; and no penalty or
deficiency in respect of any Taxes which has been assessed against the Company
remains unpaid. The amounts shown as accruals for Taxes on the Financial
Statements of the Company are sufficient for the payment of all Taxes of the
kinds indicated (including penalties
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and interest) for all fiscal periods ended on or before that date. Copies of (i)
any tax examinations, (ii) extensions of statutory limitations and (iii) the
federal and local income tax returns and franchise tax returns of the Company
during its existence have been provided to the Partnership.
4.11 Margin Securities. The Company does not own any margin
securities, and no portion of the proceeds of the sale of the Senior Notes or
Warrants will be used for the purpose of purchasing or carrying any margin
securities or for the purpose of reducing or retiring any Indebtedness which was
originally incurred to purchase any margin securities or for any other purpose
not permitted by Regulation U of the Board of Governors of the Federal Reserve
System.
4.12 Subsidiaries; Joint Ventures. On the Closing Date, (a) the
Company will not have any Subsidiaries and (b) the Company will not be engaged
in any joint venture or partnership with, or have any equity investment in, any
other Person.
4.13 Litigation and Proceedings. No judgments or injunctions are
outstanding against the Company, nor is there now pending or threatened, any
litigation, contested claim, or proceeding by or against the Company.
4.14 Defaults; Adverse Changes. The Company is not, and immediately
after the Closing will not be, in default under or in violation of (a) its
Certificate of Incorporation or Bylaws, (b) any agreement or instrument to which
it is a party or will be a party immediately after the Closing, (c) any statute,
rule, writ, injunction, judgment, decree, order or regulation of any
Governmental Authority having jurisdiction over the Company, or (d) any license,
permit, certification or approval requirement of any customer, supplier,
Governmental Authority or other Person. No Material Adverse Effect has occurred
or could reasonably be expected to occur as a result of any past or proposed
legislative or regulatory change or any revocation of any license or right to do
business or any casualty, labor trouble, condemnation, requisition, embargo or
otherwise.
4.15 Insurance. Attached hereto as Schedule 4.15 is a list and
description of all insurance policies (including expiration dates) owned or
maintained by the Company. All the insurable properties of the Company are
insured for its benefit, in all material respects in compliance with applicable
requirements of any law, rule, regulation or order and of any material contract
or other agreement to which the Company is a party and otherwise in amounts and
on terms reasonably adequate in relation to the nature of such Company's
business and assets, under policies believed by the Company to be valid and
enforceable and issued by insurers set forth in Schedule 4.15. The Company is
not in default of any obligation under any such policy.
4.16 Patents, Trademarks, Licenses, etc. Attached hereto as Schedule
4.16 is a list of all patents, patent applications, registered and unregistered
trademarks, service marks, trade names, brands and material copyrights
(collectively, "Intellectual Property") owned or licensed by the Company. Except
as disclosed in Schedule 4.16 hereto, the Company owns the entire unencumbered
right, title and interest in and to all such properties, no rights or licenses
to or from others have been granted with respect to such properties, and the
Company owns or
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possesses the right to use all the patents, patent applications, trademarks,
service marks, trade names, brands, copyrights and licenses, both domestic and
foreign, and rights with respect to the foregoing, necessary for the conduct of
its business as now conducted, without any conflict with the rights of others.
No stockholder, officer, director or any other Affiliate owns or possesses any
rights in any patents, patent applications, registered or unregistered
trademarks, service marks, trade names, brands, copyrights, or domestic or
foreign licenses which are used by the Company in its business. The Company has
not infringed upon and is not infringing upon, and has not engaged in and is not
engaged in any unauthorized use or misappropriation of, any patent, trademark,
trade name, copyright, trade secret, process, design, invention, know-how or
technology owned by or belonging to any other person; and there is no pending or
threatened claim, and no basis for the assertion of any claim, against the
Company with respect to any such infringement, unauthorized use or
misappropriation.
4.17 Environmental Matters. The Company is in compliance with, and
is not subject to any liability under, any Environmental Law or public or
occupational health or safety law, regulation or code. The Company has not
received any notice, oral or written, of any environmental or public health or
safety liability or violation. The Company has not buried, dumped, disposed of,
spilled or released any pollutants, contaminants or hazardous or toxic wastes,
substances or materials, including paint and similar substances, which would
constitute a violation of the Environmental Laws.
4.18 Brokers' Fees. The Company is not in any way obligated to any
Person in respect of any finder's or broker's fee or similar commission in
connection with the closing of the Transactions. The Company agrees to indemnify
the Partnership and hold the Partnership harmless from any claims for any such
fees or commissions from any Persons.
4.19 Investment Company Act. The Company is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended. The Company is not
subject to regulation under any federal or state statute or regulation which
limits its ability to incur Indebtedness.
4.20 Disclosure. Except as corrected in writing prior to the date
hereof, all written information provided by or on behalf of the Company to the
Partnership in connection with the Transactions is or was true and accurate in
all material respects as of the date on which such information was dated or
furnished and is or was not incomplete by omitting to state any material fact
necessary to make the statements therein, taken as a whole and in light of the
circumstances under which they were made, not misleading. There is no fact of
which the Company is aware that has not been disclosed to the Partnership and
that materially adversely affects or can reasonably be expected to materially
adversely affect the properties, business, prospects or condition (financial or
otherwise) of the Company.
4.21 Benefit Plan Matters. Neither the Company nor any company which
is under common control with the Company under Section 414 of the Code has ever
maintained or contributed to, or participated in, any Plan or a multiemployer
plan under Section 3(37) of ERISA. The Company has never provided any medical,
dental or other insurance or other welfare benefits to its employees. Neither
the execution and delivery of this Agreement nor the
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consummation of the transactions contemplated hereby will result in any payment
to be made by the Company (including, without limitation, severance,
unemployment compensation, golden parachute (defined in Section 280G of the
Code), or otherwise) becoming due to any employee.
4.22 Liabilities and Obligation. The Company has delivered to the
Partnership on Schedule 4.22 an accurate list of all liabilities of the Company
of any kind, character and description, whether accrued, absolute, secured or
unsecured, contingent or otherwise, together with, in the case of those
liabilities which are not fixed, an estimate of the maximum amount which may be
payable. For each such liability for which the amount is not fixed or is
contested, the Company shall provide a summary description of the liability
together with the following:
(i) copies of all relevant documentation relating thereto;
(ii) amounts claimed and any other action or relief sought;
(iii) name of claimant and all other parties to the claim, suit or
proceeding;
(iv) the name of each court or agency before which such claim, suit
or proceeding is pending;
(v) the date such claim, suit or proceeding was instituted; and
(vi) a reasonable best estimate by the Company of the maximum
amount, if any, which is likely to become payable with respect to each
such liability. If no estimate is provided, the Company's best estimate
shall for purposes of this Agreement be deemed to be zero.
4.23 Material Contracts and Commitments. The Company has delivered to the
Partnership on Schedule 4.23 an accurate list of all material contracts,
commitments and similar agreements to which the Company is a party or by which
it or any of its properties are bound (including, but not limited to, joint
venture or partnership agreements, contracts with any labor organizations, loan
agreements, indemnity or guaranty agreements, bonds, mortgages, options to
purchase land, liens, pledges or other security agreements) and has delivered
true copies of such agreements to the Partnership. Except to the extent set
forth on Schedule 4.23, the Company has complied with all commitments and
obligations pertaining to such contracts and agreements and is not in material
default under any such contract and agreement and no notice of default has been
received, nor is the Company aware of any default on the part of any other party
to such contract or agreement, or any intent of any such party to attempt to
terminate or amend any such contract or agreement. The Company is not a party to
any contract, agreement or other instrument or commitment which, singly or in
the aggregate, materially and adversely affects or is likely to materially and
adversely affect, the business, operations, properties, assets or condition,
(financial or otherwise) of the Company. The Company is not bound by or subject
to (and none of its respective assets or properties is bound by or subject to)
any arrangement with any labor union. No employees of the Company are
represented by any labor union or covered by any collective bargaining agreement
nor, to the best of the Company's knowledge, is any campaign to establish such
representation in progress. There is no pending or, to the best of the
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Company's knowledge, threatened labor dispute involving the Company and any
group of its employees nor has the Company experienced any labor interruptions
over the past three years and the Company considers its relationship with
employees to be good. No such contract or agreement will be terminated or
modified by virtue of the Transactions, nor will the Transactions give rise to
the right of any party to terminate or modify any such contract or agreement.
Article 5. CONDITIONS PRECEDENT.
The obligation of the Partnership to purchase Senior Notes and
Warrants shall be subject to the satisfaction of each of the following
conditions precedent on or prior to the Closing Date:
5.1 Purchaser Documents. The Company shall have issued and delivered
to the Partnership the Senior Notes and Warrants as required by this Agreement;
and the Partnership shall have received two or more counterparts of this
Agreement and each of the other Purchaser Documents, duly executed by each party
thereto.
5.2 Other Documents. The Partnership shall have received all
agreements, instruments and documents in respect of any aspect or consequence of
the Transactions as the Partnership may reasonably request, including without
limitation all documents listed on the List of Closing Documents provided by the
Partnership to the Company on or prior to the Closing Date, all of which shall
be in form and substance satisfactory to the Partnership.
5.3 Representations and Warranties; No Default or Event of Default.
Each of the representations and warranties made by the Company in each Purchaser
Document to which it is a party shall be true and correct in all material
respects as of the Closing Date, with the same force and effect as though made
again on such date at the time of, and giving effect to, the issuance and sale
of the Senior Notes and the Warrants. At the time of, and giving effect to, the
issuance and sale of the Senior Notes and the Warrants and the consummation of
the other Transactions on the Closing Date, no Default or Event of Default shall
have occurred and be continuing.
5.4 Consent of Stockholders of Surviving Corporation. Prior to the
Closing of the Transactions, the Company shall receive the approval of its
stockholders with respect to any portion of the Transactions for which such
stockholder approval is required in order to permit the Company to validly
consummate the Transactions in accordance with applicable law.
5.5 Additional Matters. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
Transactions shall be satisfactory in form and substance to the Partnership; the
Partnership and its counsel shall be satisfied that the Company are in
compliance with all environmental and other laws applicable to the operation of
their business and the use and occupancy of its property and that it possesses
all licenses, permits and authorizations necessary or appropriate to conduct its
businesses; and the Partnership shall have received satisfactory information,
documentation and certifications regarding the status and scope of all pending
and threatened litigation and liability claims against the Company.
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5.6 Due Diligence; No Adverse Change or Events. The Partnership
shall have completed its due diligence investigations of the Company and the
results thereof shall be satisfactory to the Partnership in its sole discretion;
and there shall not exist in the Partnership's judgment (i) any Material Adverse
Change in the financial condition or prospects of the Company, (ii) any law or
regulation which, in the opinion of the Partnership's counsel, prevents or
prohibits the Partnership from funding its purchase of the Senior Notes or the
Warrants or maintaining its investment therein, and (iii) any other matter which
might have a Material Adverse Effect on the Company.
Article 6. AFFIRMATIVE COVENANTS.
The Company hereby agrees that the following covenants shall remain
in full force and effect during the appropriate period specified in Section 6.9
or Article 12 hereof:
6.1 Financial and Other Information. The Company will keep proper
books and records in which full and true entries will be made of all dealings or
transactions relating to the business and affairs of the Company, and the
Company shall cause to be furnished to the Partnership and each holder of a
Senior Note or Warrant:
(a) as soon as practicable and in any event within thirty (30)
days after the end of each month (i) unaudited consolidated statements of
income, retained earnings and cash flows of the Company and its
Subsidiaries, if any, for such month, and unaudited consolidated balance
sheets of the Company and its Subsidiaries as of the end of such month, in
the forms prepared by the Company and its Subsidiaries for their internal
use consistent with past practice, and (ii) in comparative form, figures
for the actual results for the corresponding month in the immediately
preceding fiscal year, if available;
(b) within ten (10) days after it files them with the SEC,
copies of its reports, if any, and copies of the information, documents
and other reports which the Company is required to file with the SEC, if
any, pursuant to Section 13 or Section 15(d) of the Exchange Act. The
Company shall timely comply with its reporting and filing obligations, if
any, under the applicable federal securities laws;
(c) together with each delivery of financial statements
required by Section 6.1(a) or (b) above, the Company shall deliver to the
Partnership a certificate of the president or chief financial officer of
the Company stating that there exists no Default or Event of Default, or,
if any Default or Event of Default exists, specifying the nature thereof,
the period of existence thereof and what action the Company proposes to
take with respect thereto;
(d) as soon as practicable and in any event at least ten (10)
days before the end of each month, an operating budget and projected
financial statements for each month of the next succeeding year (including
a statement of underlying assumptions), in the same format as the
financial statements provided pursuant to Section 6.1(a);
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(e) as soon as practicable, but in any event not more than
five (5) days after any officer of the Company obtains knowledge of the
occurrence of an event or the existence of a circumstance giving rise to a
Default or an Event of Default, notice of any and all Defaults and Events
of Default hereunder; and
(f) with reasonable promptness, such other business or
financial data as the Partnership may reasonably request.
The Partnership shall exercise reasonable efforts to keep such information, and
all information acquired as a result of any inspection conducted in accordance
with Section 6.2 below, confidential; provided, that Software Funding may
communicate such information to the Partnership's professional advisors, to any
other Person in accordance with customary commercial practices relating to
routine trade inquiries, to any regulatory authority having jurisdiction over
the Partnership or its general partner, to any other Person in connection with
the Partnership's sale or assignment of the Senior Notes or the Warrants, and to
any other Person in connection with the exercise of the Partnership's rights
hereunder or under any of the other Purchaser Documents and as may be required
by applicable law. During the period in which the Company is subject to Section
6.1(a), the Company may designate information as being material, non-public
information and the Partnership and/or the partners who the receive any such
designated information pursuant thereto will be advised and will advise any
party to whom the Partnership and/or the partners provide such information that
the Company has advised them that such information constitutes material,
nonpublic information, and that during the period in which such information
remains material, non-public information, such party is legally prohibited from
transacting in the Company's securities or disclosing such information to
others.
6.2 Inspection. The Partnership, Software Funding, or any Person
designated by the Partnership or Software Funding, shall have the right, from
time to time hereafter, to call at the place or places of business of the
Company during ordinary business hours and upon reasonable notice (a) to
inspect, audit, check and make copies of and extracts from any of their books,
records, journals, orders, receipts and any correspondence and other data
relating to its business or to any transactions among the parties to the
Purchaser Documents and (b) to discuss the affairs, finances and business of any
of the Company with any of its officers, employees or directors. Upon request by
the Partnership, the Company shall direct its independent accountants to discuss
the affairs, finances and business of the Company with the Partnership. The
Company hereby authorizes such accountants to (i) communicate directly with the
Partnership and (ii) disclose to the Partnership any and all financial
statements and other information of any kind that they may have with respect to
the Company or its representatives and its affairs (business, financial and
other).
6.3 Taxes. The Company shall pay or cause to be paid the Company's
license fees, bonding premiums and related Taxes and charges and shall pay or
cause to be paid all of the Company's real and personal property taxes,
assessments and charges and all of the Company's franchise, income,
unemployment, use, excise, old age benefit, withholding, sales and other Taxes
and other governmental charges assessed against the Company, or payable by the
Company, at such times and in such manner as to prevent any penalty from
accruing or any
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lien or charge from attaching to its property, provided that the Company shall
have the right to contest in good faith, by an appropriate proceeding promptly
initiated and diligently conducted, the validity, amount or imposition of any
such Tax, assessment or charge, and upon such good faith contest to delay or
refuse payment thereof, if the Company establishes adequate reserves to cover
such contested Tax, assessment or charge.
6.4 Notice of Suit or Adverse Change in Business. The Company shall,
as soon as possible, and in any event within five (5) days after the Company
learns of any of the following, give written notice to the Partnership:
(a) any proceeding(s) being instituted or threatened to be
instituted by or against the Company in any federal, state, local or foreign
court or before any Governmental Authority, and any litigation, proceeding,
investigation or claim that relates in any way to this Agreement or any of the
other Purchaser Documents;
(b) any change in the business, assets or condition, financial or
otherwise, of the Company which can reasonably be expected to have a Material
Adverse Effect; and
(c) the occurrence of any Default or Event of Default.
6.5 Environmental Laws. The Company shall comply with all
Environmental Laws and promptly comply with all lawful orders and directives of
all Governmental Authorities respecting Environmental Laws (and provide copies
of all such orders and directives to the Partnership), except, in each case, to
the extent that the same are being contested in good faith by appropriate
proceedings and the pendency of such proceedings could not be reasonably
expected to have a Material Adverse Effect.
6.6 Notices Relating to Transactions. The Company shall promptly
provide the Partnership with copies of (a) all amendments, consent letters,
waivers or modifications to, and any material notices or reports provided by any
Person to the Company pursuant to the terms of or in connection with, any
Purchaser Document or the Certificate of Incorporation or By-laws of the Company
or by the Company to any such Person.
6.7 Boards of Directors.
(a) The Company shall cause three (3) directors designated by
Software Funding to be elected to the Board of Directors (or any comparable
governing body) consisting of five (5) total directors, and committees thereof;
cause each such Board of Directors to hold at least four meetings per year;
cause the Company's Board of Directors to create an audit committee and a
compensation committee, each consisting of a majority of outside directors; pay
compensation to such directors or representatives in the same amount paid to
directors who are not full time employees of the Company; pay the reasonable
expenses of such directors or representatives in connection with meetings and
other activities of such Board of Directors, committees thereof or other such
governing body of the Company; use best efforts to obtain directors and officers
liability insurance for the benefit of such directors and representatives, as
applicable; provide to such director all notices, documents and information
furnished to the directors of the Company,
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at the same time as furnished to such other directors; and use best efforts to
notify such director of and permit the director to participate by telephone in
emergency meetings of the Board of Directors, committees thereof or comparable
governing body, and to provide such director copies of the minutes of all such
meetings promptly after they are held.
(b) Notwithstanding anything to the contrary contained in the
preceding paragraph (a), if any principal or accrued interest of the Senior
Notes is not paid when due or there exists an Event of Default, the Company
shall at the request of the Holders of a majority in interest of the Senior
Notes, cause two additional directors designated by such Holders to be elected
to the Boards of Directors of the Company, and such additional directors shall
be permitted to serve on such Boards of Directors until such overdue principal
and interest is paid in full or such Event of Default is cured. The Company
agrees that the Board of Directors will not consist of more than seven (7)
directors (including all directors designated by Software Funding or the Holders
of the Senior Notes).
6.8 Profit Sharing or ESOP Plan. The Company and the Partnership are
contemplating and negotiating the adoption and approval by the Company of an
employee stock option plan and/or an employee profit sharing plan. Pursuant to
the employee stock option plan, as contemplated, the Company would be authorized
to issue options to certain employees in the maximum aggregate amount of the
lesser of (i) 1,000,000 shares or (ii) 10% of the issued and outstanding shares
of common stock of the Company. The Company would issue options pursuant to the
employee stock option plan, if and only if, certain predetermined objectives are
achieved by the Company.
6.9 Merger with Public Shell. The Company and the Partnership agree
that a corporation currently filing reports under Section 13 or Section 15 of
the Securities Exchange Act of 1934, as amended, and traded on a national stock
exchange or on any of the NASDAQ markets (including trading on the "pink
sheets") ("Shell Company") may merge with the Company so that the Shell Company
is the surviving entity provided that (a) the shareholders of the Shell Company
represent and warrant that the Shell Company does not have any liability or
obligation, contingent or otherwise, that would adversely affect the Shell
Company or the public trading of its shares and (b) the aggregate number of
shares of the Shell Company or the surviving entity outstanding after the merger
or reserved for issuance pursuant to a stock option plan or other benefit plan
of the surviving entity plus shares of the Shell Company or surviving entity
received by or reserved for issuance to the shareholders of the Company or the
Holders of the Senior Notes and Warrants in exchange for their securities shall
not be more than 20% greater than the aggregate number of shares of the Company
outstanding or reserved for issuance pursuant to a stock option plan or other
benefit plan prior to the merger (adjusted by the conversion ratio established
for purposes of the merger). Contemporaneously with the execution of this
Agreement, the Principal Stockholders shall execute an irrevocable proxy having
a term of one year granting to the Partnership the right to vote in favor of the
merger of the Company and a Shell Company on behalf of the Principal
Stockholders if such merger satisfies the conditions set forth above.
Notwithstanding anything herein to the contrary, following the closing of a
merger between the Company and a Shell Company in accordance with this Section
6.9, the Company shall no longer be subject to any of the covenants set forth in
this Article 6 or
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in Article 7 other than the covenants set forth in Sections 6.1(b) and 6.7,
which shall continue in full force and effect in accordance with Article 12.
Article 7. NEGATIVE COVENANTS.
The Company hereby agrees that the following negative covenants shall remain in
full force and effect during the appropriate period specified in Section 6.9 or
Article 12.
7.1 Liens or Encumbrances. The Company will not create, incur,
assume or suffer to exist any security interest, mortgage, pledge, lien or other
encumbrance of any nature whatsoever on any of its assets, whether now owned or
hereafter acquired, other than:
(a) liens securing the payment of Taxes, either not yet due or the
validity of which is being contested in good faith by appropriate proceedings,
and as to which the Company shall have set aside on its books and records
adequate reserves;
(b) statutory liens of landlords and liens of carriers,
warehousemen, mechanics, materialmen and other like liens, in each case only to
the extent such lien is imposed by law and created in the ordinary course of
business for amounts not yet due or which are being contested in good faith by
appropriate proceedings for which adequate reserves have been established; and
(c) easements, rights-of-way, zoning and similar restrictions and
other charges or encroachments or encumbrances not interfering with the ordinary
conduct of the business of the Company and which do not detract materially from
the value of the property to which they attach or impair materially the use
thereof by the Company.
7.2 Indebtedness. The Company will not incur, create, assume, become
or be liable in any manner with respect to, or permit to exist, any
Indebtedness, except (a) the Indebtedness evidenced by the Senior Notes and
other obligations of the Company under this Agreement and the other Purchaser
Documents and (b) other Indebtedness expressly made subordinate to the Senior
Notes.
7.3 Consolidations, Mergers or Acquisitions. Except for the merger
of the Company into a Public Shell pursuant to Section 6.10 or any other merger
or consolidation specifically permitted herein, the Company will not
recapitalize or consolidate with, merge with, acquire the Capital Stock of, or
otherwise acquire all or any substantial part of the assets or properties of any
other Person. The Company will not create any Subsidiaries.
7.4 Investments or Loans. The Company will not make or permit to
exist any investments or loans (including without limitation capital
contributions, guaranties, advances and so forth) in or to any Person other than
(i) direct obligations of the United States Government due within one year or
(ii) certificates of deposit and deposit accounts with a commercial bank having
capital, surplus and undivided profits of at least $500,000,000.
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7.5 Contingent Obligations. The Company will not incur, assume or
become or be liable in any manner with respect to any Contingent Obligation or
permit any Contingent Obligation to exist, except endorsements of negotiable
instruments for deposit or collection in the ordinary course of business.
7.6 Disposal of Property. The Company will not sell, lease, transfer
or otherwise dispose of any of its properties, assets (including Capital Stock)
and rights to any Person except (a) sales of inventory in the ordinary course of
business or (b) sales or other dispositions in the ordinary course of business
of equipment which is obsolete, uneconomical or no longer useful in its business
or which is being replaced with other equipment of equal or greater utility.
7.7 Capital Expenditure Limitations. The Company will not permit the
aggregate amount of payments made for Capital Expenditures, including
obligations pursuant to Capital Leases and Indebtedness in any period to exceed
the amount set forth in the monthly budget previously approved by the
Partnership without the prior written consent of the Partnership.
7.8 Contracts with Manufacturers. Until all amounts outstanding
under the Senior Notes have been repaid or converted into shares of Common
Stock, the Company shall not execute, agree to or otherwise enter into any
contract, understanding, arrangement or any other agreement, oral or written,
with any manufacturer of any product utilizing or purporting to utilize any
technology, or intellectual property of the Company without the written consent
of the Partnership.
7.9 Compensation.
(a) Except as provided in paragraph (b) of this Section 7.9, the
Company will not (i) pay any salaries, bonuses or other compensation for
services to its officers, directors or stockholders, or (ii) pay any management,
consulting, advisory or similar fees to its officers, directors, stockholders or
Affiliates, whether for services rendered to the Company or otherwise.
(b) Notwithstanding anything to the contrary contained in paragraph
(a) above or elsewhere in this Agreement, (i) the Company may pay compensation
for services to full-time employees of the Company in the ordinary course of
business in amounts that are customary for businesses similar to that of the
Company to pay to employees with similar responsibilities; and (ii) the Company
may pay compensation to the officers at current levels (including payments
pursuant to existing incentive compensation plans) as set forth on Schedule 7.9.
7.10 Dividends, Stock Redemptions, Etc. The Company will not (a)
declare or pay, or set apart any funds for the payment of, any dividends in any
fiscal year on any shares of the Company, (b) apply any of its funds, property
or assets to, or set apart any funds, property or assets for, the purchase,
redemption or retirement of, or make any distribution, by reduction of capital
or otherwise, in respect of any of its shares or other securities, whether now
or hereafter outstanding.
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7.11 Issuances of Stock. Except as expressly permitted under another
Section of this Agreement, the Company will not issue or distribute any Capital
Stock, for consideration or otherwise, other than issuances required upon
conversion of the Senior Notes or exercise of the Warrants.
7.12 Amendment of Certificate of Incorporation or By-laws. The
Company will not amend its Certificate of Incorporation or Bylaws or other
organizational document except pursuant to Article 3.
7.13 Fiscal Year End. The Company will not change the end of its
fiscal year from December 31 of each year.
7.14 Transactions with Affiliates. Except as provided on Schedule
7.14 or as expressly permitted under another Section of this Agreement, the
Company will not transfer any cash or property to any officer, director,
employee or Affiliate, enter into any contract or transaction with any such
Person, or modify any outstanding contract or transaction with any such Person,
including without limitation the purchase, lease, sale or exchange of property
or the rendering of any service to any such Person.
Article 8. EVENTS OF DEFAULT.
Upon the occurrence of any of the following events:
(a) the Company fails to pay all or any portion of the principal of,
premium, if any, and/or interest on the Senior Notes when due; or the Company
fails to pay amounts payable hereunder and such failure continues for more than
five (5) days after such amount becomes due in accordance with the terms hereof;
or
(b) the Company fails to perform any obligation related to the
conversion of the Senior Note as required by the Senior Note or this Agreement
and such failure continues uncured for a period of fifteen (15) days; or
(c) the Company fails or neglects to perform, keep or observe any of
the covenants, conditions, promises or agreements contained in this Agreement;
or
(d) the Company fails or neglects to perform, keep or observe any of
the covenants, conditions, promises or agreements contained in any Purchaser
Document (other than those specified in clause (a) (b) or (c));
(e) any warranty or representation heretofore, now or hereafter made
by the Company in or pursuant to this Agreement or any of the Purchaser
Documents is untrue or incorrect, or any schedule, certificate, statement,
report, financial data, notice or other writing furnished at any time to the
Partnership by the Company under or pursuant to the Purchaser Documents, is
untrue or incorrect in any material respect on the date as of which made; or
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(f) a judgment or order requiring payment in excess of insurance
coverage by more than $100,000 shall be rendered against the Company and such
judgment or order shall remain unsatisfied or undischarged and in effect for
seventy-five (75) consecutive days without a stay of enforcement or execution;
or
(g) a notice of lien, levy or assessment is filed or recorded with
respect to any portion of the assets of the Company by any Governmental
Authority for any Taxes or debts owing at any time or times hereafter; or
(h) any material portion of the assets of the Company is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
within the possession of any receiver, trustee, custodian or assignee for the
benefit of creditors; or
(i) a proceeding under 11 U.S.C. Sections 101 et seq., as
amended, and any similar or successor Federal statute, and the rules and
regulations thereunder (collectively, the "Bankruptcy Code"), seeking an order
for relief or under any other bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed against
the Company and such proceeding is not dismissed within thirty (30) days of the
date of its filing, or a proceeding under the Bankruptcy Code seeking an order
for relief or under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed by the
Company or the Company makes an assignment for the benefit of creditors, or the
Company takes any corporate action to authorize any of the foregoing; or
(j) the Company voluntarily or involuntarily dissolves or is
dissolved, or its existence terminates or is terminated; or
(k) the Company becomes insolvent or fails generally to pay its
debts as they become due; or
(l) the Company fails to pay any principal of or interest on any of
its Indebtedness (including without limitation any such Indebtedness assumed or
guaranteed) for a period longer than the grace period, if any, provided for such
payment; or any default under any instrument or agreement evidencing, creating,
securing or otherwise relating to such Indebtedness (including without
limitation any guaranty or assumption agreement relating to such Indebtedness)
or other event occurs and continues beyond any applicable grace period, if the
effect of such default or other event is to cause, or to permit the holder or
holders of such Indebtedness (or their representative) to cause, such
Indebtedness (or the obligations under any such guaranty or assumption
agreement) to become due and payable prior to the stated maturity thereof;
then, and in any such event (an "Event of Default"), if such event
is of the type described in paragraph (i) or (j) of this Article 8, the Senior
Notes and all other amounts owing under this Agreement shall automatically
become due and payable.
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Article 9. CONSENTS.
Any provision in this Agreement to the contrary notwithstanding,
with the vote or consent of the Holder or Holders of fifty percent (50%) or more
of the aggregate principal amount then outstanding of the Senior Notes,
following an Event of Default (other than an Event of Default described in
paragraph (i) or (j) of Article 8), the Holders of the Senior Notes may declare
due and payable the principal of, premium, if any, and interest on, the Senior
Notes and all other amounts owing under this Agreement, whereupon the same shall
be immediately due and payable. In the event that the Senior Notes become or are
declared due and payable prior to their stated maturity, the same shall become
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived.
Article 10. SECURITIES LAW MATTERS.
10.1 Securities Act. The Partnership acknowledges (a) that the
Senior Notes and Warrants being acquired by the Partnership are not being
registered under the Securities Act on the grounds that the issuance thereof is
exempt from registration under Section 4(2) of the Securities Act as not
involving any public offering, and (b) that the Company's reliance on such
exemption is predicated in part on the representation hereby made to the Company
by the Partnership that it is an "accredited investor" within the meaning of
Regulation D promulgated under the Securities Act, and is acquiring the Senior
Notes and Warrants for investment for its own account, with no present intention
of dividing its participation with others or reselling or otherwise distributing
the same, subject, nevertheless, to any requirement of law that the disposition
of its property shall at all times be within its control. Except as provided in
Section 10.2, the Partnership is not aware of any particular occasion, event or
circumstance upon the occurrence or happening of which it intends to dispose of
the Senior Notes or Warrants.
10.2 Resales.
(a) The Partnership will not sell or transfer all or any part of its
Senior Notes or Warrants except:
(i) pursuant to Rule 144 under the Securities Act;
(ii) pursuant to any other exemption from, or otherwise in a
transaction not subject to, the registration
requirements of the Securities Act;
(iii) in a transfer by the Partnership to any Affiliate or
wholly-owned Subsidiary of the Partnership or by the
Partnership to its partners (pursuant to Article 11); or
(iv) pursuant to an effective registration statement under
the Securities Act.
(b) The restrictions set forth in Section 10.2(a) shall terminate
and cease to be effective with respect to any Senior Note or Warrant registered
under the Securities Act or transferred pursuant to Rule 144, or if the Company
receives an opinion of counsel reasonably
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satisfactory to the Company to the effect that the securities represented
thereby need no longer be subject to such restrictions in order to ensure
compliance with the Securities Act. Whenever such restrictions shall so
terminate the Holder of such Senior Notes or Warrants shall be entitled to
receive from the Company, without expense (other than transfer taxes, if any),
Senior Notes or Warrants not bearing the legend set forth in Section 10.3 at
which time the Company will terminate or rescind any transfer restrictions
relating thereto.
10.3 Legends. Each Senior Note and Warrant issued to the Partnership
or to a subsequent transferee or holder shall bear legends in substantially the
following form:
THIS [WARRANT] [NOTE] REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EXEMPTION FROM, OR OTHERWISE IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF SUCH SECURITIES ACT. IN ADDITION, [THIS
WARRANT] [THIS NOTE] MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS
SPECIFIED IN THE NOTE AND WARRANT PURCHASE AGREEMENT, EFFECTIVE AS OF JANUARY 1,
1997, BETWEEN THE COMPANY AND SCOTTSDALE TECHNOLOGIES-I, LTD., COMPLETE AND
CORRECT COPIES OF WHICH ARE AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF
THE COMPANY AND WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
Article 11. TRANSFERS.
11.1 Transfers. Subject only to compliance with the requirements of
Section 11.2 and all applicable laws and regulations, the Partnership shall be
entitled to assign and transfer all or any part of its Senior Notes, Warrants,
Note Shares and Warrant Shares, or any interest or participation therein, and
its related rights under this Agreement to any of its partners. Upon the
assignment or transfer by the Partnership of all or any part of its Senior
Notes, Warrants, Note Shares or Warrant Shares or its interest therein (except
in public offering registered under the Securities Act, or a sale pursuant to
Rule 144 thereunder), the term "Purchaser" as used in this Article 11 shall
thereafter include, to the extent of the interest so assigned or transferred,
the assignee or transferee of such interest, provided that such assignee or
transferee is a partner of the Partnership.
11.2 Participation of Partners. If at any time the Partnership
wishes to assign and transfer of record into the names of its partners its
participation and the rights and obligations arising under this Agreement, upon
compliance with all applicable laws and regulations the Company and the
applicable partners will execute and deliver such agreements and instruments as
the Company or Purchaser may reasonably request (including without limitation
new Senior Notes, Note Shares, Warrants and Warrant Shares in such amounts as
the Purchaser may request) to effect the assignment and transfer to such
partners (in their own names) of such participation, or such part thereof as may
be so assigned and transferred.
11.3 Issuance of New Notes. The Company will at any time, at its
expense, at the request of a holder of a Senior Note, and upon surrender of such
Senior Note for such
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purpose, issue a new Senior Note or Senior Notes in exchange therefor, payable
to the order of the Holder or (subject to this Agreement) such person or persons
as may be designated by such Holder, dated the last date to which interest has
been paid on the surrendered Senior Note, or, if such exchange shall take place
prior to the due date of the first interest payment, the Closing Date, in such
denominations as may be requested, in an aggregate principal amount equal to the
unpaid principal amount of the Senior Note so surrendered and substantially in
the form of such Senior Note with appropriate revisions. Upon such exchange the
term "Senior Note" as used herein shall include such new Senior Note or Senior
Notes.
Article 12. EFFECTIVENESS OF AGREEMENT.
Except as otherwise provided in Section 6.9, the covenants contained in
this Agreement shall continue in full force and effect until the Senior Notes
and all other indebtedness outstanding under this Agreement are paid in full,
except that the covenants enumerated in the next sentence shall continue in full
force and effect with respect to the Note Shares, Warrants and Warrant Shares
after the payment of the Senior Notes and such other indebtedness. Any Holder of
Note Shares, Warrants or Warrant Shares (whether or not such Holder also holds a
Senior Note) who is also a partner of the Partnership shall be deemed a
Purchaser hereunder with respect to such holder's ownership of Shares, Warrants
or Warrant Shares for the purposes of Sections 6.1(b), (Financial and Other
Information), 6.7 (Boards of Directors), Article 9 (Consents), 10 (Securities
Law Matters), 11.1 (Transfers), 11.2 (Participation of Partners), Article 12
(Effectiveness of Agreement), Article 13 (Standstill and Right of First
Refusal), Article 14 (Judicial Proceedings) and Article 15 (Miscellaneous).
Notwithstanding anything herein to the contrary, (a) the covenants set forth in
Section 6.7 shall automatically terminate (a) at the end of the one year period
during which the Registration Statement described in Section 3.6 has been
continuously effective and the Company has been subject to the reporting
requirements under Section 12 of the Exchange Act or, if earlier, (b) the date
on which the Company closes an underwritten public offering of at least
$1,500,000 where the public offering price was at least $5.00 per share if the
terms of such offering permit the Partnership and/or the partners thereof to
sell the Note Shares and Warrant Shares in connection therewith and the
underwriter objects in writing to the right of Software Funding and the Holders
of the Senior Notes to select members of the Board of Directors.
Article 13. STANDSTILL AND ANTI-DILUTION PROVISIONS.
13.1 Standstill Provision. So long as any amount is outstanding
under the Senior Notes, (i) the Company shall not provide any information to or
negotiate with any other party with respect to the merger, acquisition, or sale
of all or substantially all of the assets or the Capital Stock of the Company or
with respect to obtaining any financing, whether debt or equity, (ii) the
Company agrees to notify the Partnership immediately of any unsolicited
acquisition proposals or third-party financing proposals and provide reasonable
detail as to the identity of the proposed acquiror and the nature of the
proposed transaction, and (iii) the Partnership shall have the right to have a
representative present at any presentation made by a third-party to the Company
or its stockholders.
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13.2 Anti-Dilution Provision. So long as any amount is outstanding
under the Senior Notes, the Company shall not, except to the extent expressly
permitted in another Section of this Agreement, issue any equity securities, or
any options, warrants or convertible securities exercisable for or convertible
into such equity securities, of the Company or any subsidiary of the Company,
without the mutual consent of the Company and the Partnership; provided,
however, that the Company may issue Common Stock for not less than $5.00 per
share without the consent of the Partnership. Notwithstanding the foregoing, if
the Company merges with a Shell Company in accordance with Section 6.9, and at
the end of the ninety day period following the effective date of such merger the
Partnership has not provided the Company with the aggregate, cumulative amount
of $1,200,000 pursuant to this Agreement and the transactions contemplated
hereby, then the Company may, without the consent of the Partnership, issue
shares of Common Stock at no less than $1.50 per share in connection with an
equity financing that raises an amount equal to the difference between
$1,200,000 and the aggregate, cumulative amount actually provided by the
Partnership pursuant to this Agreement and the transactions contemplated hereby.
Article 14. JUDICIAL PROCEEDINGS.
(a) The Company irrevocably submits to the non-exclusive
jurisdiction of any Arizona or Texas State or Federal court sitting in the City
of Houston or Phoenix over any suit, action or proceeding arising out of or
relating to this Agreement or any of the other Purchaser Documents. To the
fullest extent it may effectively do so under applicable law, the Company
irrevocably waives and agrees not to assert, by way of motion, as a defense or
otherwise, any claim that it is not subject to the jurisdiction of any such
court, any objection that it may now or hereafter have to the laying of the
venue of any such suit, action or proceeding brought in any such court and any
claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
(b) The Company agrees, to the fullest extent it may effectively do
so under applicable law, that a judgment in any suit, action or proceeding of
the nature referred to in paragraph (a) above brought in any such court shall,
subject to such rights of appeal on issues other than jurisdiction as may be
available, be conclusive and binding upon the Company and may be enforced in the
courts of the United States of America or the State of Texas or Arizona (or any
other courts to the jurisdiction of which the Company is or may be subject) by a
suit upon such judgment.
(c) The Company consents to service of process in any suit, action
or proceeding of the nature referred to in paragraph (a) above by mailing a copy
thereof by registered or certified mail, postage prepaid, return receipt
requested, to its address specified in or designated pursuant to Section 15.1.
Such service (i) shall be deemed in every respect effective service of process
upon the Company in any such suit, action or proceeding and (ii) shall, to the
fullest extent permitted by law, be taken and held to be valid personal service
upon and personal delivery to the Company.
(d) Nothing in this Article 14 shall affect the right of the
Partnership to serve process in any manner permitted by law, or limit any right
that the Partnership may have to bring
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proceedings against the Company in the courts of any jurisdiction or to enforce
in any lawful manner a judgment obtained in one (1) jurisdiction in any other
jurisdiction.
(e) THE COMPANY HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE NOW OR
HEREAFTER TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY OF THE OTHER PURCHASER DOCUMENTS.
(f) Upon breach or default by the Company with respect to any
obligation hereunder or under any of the other Purchaser Documents, the
Partnership (or its agents) shall be entitled to protect and enforce their
rights at law, or in equity or by other appropriate proceedings for specific
performance of such obligation, or for an injunction against such breach or
default, or in aid of the exercise of any power or remedy granted hereby or
thereby or by law.
Article 15. MISCELLANEOUS.
15.1 Notices. All notices, requests, demands or other communications
to or upon the respective parties hereto shall be in writing and shall be deemed
to have been given or made, and all financial statements, information and the
like required to be delivered hereunder shall be deemed to have been delivered,
five (5) days after deposited in the mails, registered or certified with postage
prepaid, addressed to the Company at 7580 East Gray Road, Suite 102, Scottsdale,
Arizona 85260 and to the Partnership at 7580 East Gray Road, Suite 102,
Scottsdale, Arizona 85260 or to such other address as any of them shall specify
in writing to the others. The Company shall maintain registers of the Holders of
Senior Notes or Warrants which shall contain the last address specified as
provided in the preceding sentence. No other method of giving notice is hereby
precluded. Upon reasonable request of any Holder of the Senior Notes or
Warrants, the Company will deliver to any Holders of the Senior Notes or
Warrants, at the Company's expense, additional copies of all financial
statements, information and the like required hereunder.
15.2 Cumulative Remedies, Etc. No failure or delay on the part of
any of the Partnership or any Holder in exercising any right, power or privilege
hereunder, and no course of dealing between the Company and the Partnership, or
any of them, shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude the simultaneous or
later exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Partnership or the Holders, or any of them, would otherwise
have. No notice to or demand on the Company in any case shall entitle the
Company to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Partnership or the
Holders, or any of them, to take any other or further action in any
circumstances without notice or demand.
15.3 No Oral Changes; Assignment; Survival of Representations. This
Agreement may not be changed or terminated orally. This Agreement shall be
binding upon the Company and the Partnership and their successors and assigns.
The Company shall not make any assignment of its rights under this Agreement or
subject this Agreement or its rights
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hereunder to any lien or security interest of any kind whatsoever; and any such
assignment, lien or security interest shall be absolutely void and unenforceable
as against the Partnership or the Holders. All agreements, representations and
warranties made herein or in writing otherwise in connection herewith shall
survive the issuance of the Senior Notes, the Note Shares, the Warrants and the
Warrant Shares.
15.4 Expenses. The Company agrees to pay and save Software Funding
harmless against liability for the payment of all out-of-pocket expenses arising
in connection with the negotiation, preparation, execution, delivery and
enforcement of, and any executed or proposed amendment, supplement or
modification to, or waiver of any provision of, the Purchaser Documents (whether
or not any such amendment, supplement, modification or waiver is in fact
executed), including without limitation all documentary, stamp and similar taxes
and assessments, all recording and filing fees charged by any Governmental
Authority, all fees and expenses incurred by Software Funding or the Partnership
in connection with environmental and other "due diligence" investigations, and
the reasonable fees and disbursements of Mayor, Day, Caldwell & Keeton, L.L.P.,
counsel for the Partnership, such fees and disbursements in respect of such
preparation, execution and delivery to be paid by the Company on the Closing
Date; provided, however, that the aggregate amount of such out-of-pocket
expenses to be paid by the Company shall be less than or equal to $75,000. Such
other expenses shall be paid promptly by the Company as and when payment thereof
is requested by the Partnership. The obligations provided for in this Section
15.4 shall survive any termination of this Agreement.
15.5 Loss or Destruction of a Senior Note. Upon receipt of notice of
the loss, theft, destruction or mutilation of any Senior Note and upon
reimbursement to the Company of all reasonable expenses incident thereto, and
upon surrender or cancellation of such Senior Note, if mutilated, the Company
shall make and deliver a new Senior Note of like tenor in lieu of the lost,
stolen, destroyed or mutilated Senior Note.
15.6 Indemnification Generally. The Company agrees to indemnify and
hold harmless Software Funding, the Partnership and each Holder, each of their
subsidiaries, directors, officers, employees, partners and Affiliates, to the
maximum extent permitted by law, from and against any and all liability
(including, without limitation, reasonable legal fees incurred in defending
against any such liability) under, arising out of or relating to this Agreement
and the other Purchaser Documents, the transactions contemplated hereby or
thereby or in connection herewith or therewith, and all action or failures to
act and the transactions contemplated hereby and thereby, including (to the
maximum extent permitted by law) any liability arising under Federal or state
securities laws, except to the extent such liability shall result from any act
or omission on their part constituting willful misconduct or gross negligence.
The obligations of the Company under this Section 15.6 shall survive and
continue to be in full force and effect notwithstanding the termination of this
Agreement.
15.7 Governing Law. This Agreement and the other agreements and
instruments executed as provided herein and therein, and the rights and
obligations of the parties hereunder and thereunder and under the Senior Notes
and Warrants, shall be construed and interpreted in accordance with and governed
by the internal laws of the State of Delaware.
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<PAGE> 37
15.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
15.9 Captions; Gender. The descriptive headings of the Sections of
this Agreement are inserted for convenience only and shall not affect the
meaning, construction or interpretation of any of the provisions hereof. The use
of the neuter form of a pronoun shall be deemed, where appropriate, to include
the masculine and feminine forms of such pronoun.
IN WITNESS WHEREOF, the parties have executed this Agreement.
"COMPANY"
WO CONSULTING, INC.
By: /s/ ERIC J. SCHEDELER
-----------------------------
Eric J. Schedeler, President
By: /s/ STUART N. RUBIN
-----------------------------
Stuart N. Rubin, Chief Financial Officer
"PARTNERSHIP"
SCOTTSDALE TECHNOLOGIES-I, LTD.
By: Software Funding Corp., its general partner
By: /s/ STUART N. RUBIN
-----------------------------
Name: STUART N. RUBIN
Title: VICE PRESIDENT
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<PAGE> 1
Exhibit 3.4
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ("ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS DEBENTURE MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR DELIVERY TO ENVIRONMENTAL SAFEGUARDS OF
AN OPINION OF LEGAL COUNSEL SATISFACTORY TO WO CONSULTING, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES
LAWS.
WO CONSULTING, INC.
12% SENIOR CONVERTIBLE PROMISSORY NOTE
$1,928,250 Houston, Texas January 1, 1997
WO CONSULTING, INC., a Delaware corporation (hereinafter called the
"Company," which term includes any successor corporation), for value received,
hereby promises to pay to Scottsdale Technologies-I, Ltd. (hereinafter called
"Holder"), or its registered assigns, the principal sum of up to One Million
Nine Hundred Twenty-Eight Thousand Two Hundred Fifty DOLLARS ($1,928,250.00),
together with interest on the amount of such principal sum from time to time
outstanding, payable in accordance with the terms set forth below.
This Note is one of the Company's 12% Senior Convertible Promissory
Notes, each of like tenor (hereinafter, this instrument is called the "Note,"
and collectively, the class of securities of which the Note is a part is called
the "Notes").
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
1.1 DEFINITIONS. For all purposes of this Note, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles as promulgated from time to time by the
Association of Independent Certified Public Accountants; and
(c) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Note as a whole and not to any
particular Article, Section or other subdivision.
<PAGE> 2
"Board of Directors" means the board of directors of the Company as
elected from time to time or any duly authorized committee of that board.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in Phoenix, Arizona are
authorized or obligated by law or executive order to be closed.
"Change of Control" has the meaning specified in Section 7.1.
"Common Stock" means shares of common stock, par value $0.01 per share,
of the Company.
"Company Financial Statements" shall mean those financial statements of
the Company.
"Conversion Price" means the price per share determined in accordance
with Article IV and V (as adjusted in accordance with the terms of this Note) at
which shares of Common Stock shall be delivered to Holder upon conversion of
this Note into Common Stock.
"Default" means any event which is, or after notice or passage of time
would be, an Event of Default.
"Event of Default" has the meaning specified in Section 3.1.
"Indebtedness" of any Person means all indebtedness of such Person,
whether outstanding on the date of this Note or hereafter created, incurred,
assumed or guaranteed, (a) for the principal of and premium, if any, and
interest on all debts of the Person whether outstanding on the date of this Note
or thereafter created (i) for money borrowed by such Person (including
capitalized lease obligations), (ii) for money borrowed by others (including
capitalized lease obligations) and guaranteed, directly or indirectly, by such
Person, (iii) constituting purchase money indebtedness, or indebtedness secured
by property at the time of the acquisition of such property by such Person, for
the payment of which the Person is directly or contingently liable; (b) for all
accrued obligations of the Person in respect of any contract, agreement or
instrument imposing an obligation upon the Person to pay over funds; (c) for all
trade debt of the Person; and (d) for all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to, any of the
indebtedness referred to in (a), (b) or (c) above.
"Maturity Date," when used with respect to the Notes, means December 1,
1997 (or such earlier date upon which the Notes become due and payable under
Section 3.2).
"Note" means this 12% Senior Convertible Promissory Note.
"Notes" means the class of securities including this Note.
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<PAGE> 3
"Outside Financing" shall be defined as (i) any transaction where the
Company sells its equity or debt securities for cash whether in public or
private offerings or bond financings, and (ii) any financing from a bank or
other financial institution made to the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Purchase Agreement" means the Note and Warrant Purchase Agreement
dated as of the date hereof between Holder and the Company.
"SEC" means the U.S. Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act of 1933, as amended.
"Subsidiary" means a corporation or other entity more than 50% of the
outstanding voting stock of which, or more than 50% of the equity interest in
which, is owned, directly or indirectly, by the Company or by one or more other
Subsidiaries of the Company, or by any combination of the Company and one or
more other Subsidiaries. For the purposes of this definition, "voting stock"
means stock which ordinarily has voting power for the election of directors,
whether at all times or only so long as no senior class of stock has such voting
power by reason of any contingency.
ARTICLE II.
PAYMENTS
2.1 INTEREST. From the date of this Note through the Maturity Date,
interest shall accrue hereunder on the unpaid principal amount outstanding under
this Note at 12% per annum calculated on the basis of a 360-day year. All past
due amounts of principal and interest shall bear interest at the maximum amount
permitted by Applicable Law until paid.
2.2 PAYMENT OF PRINCIPAL AND INTEREST. The accrued and unpaid interest
on this Note shall be due and payable on March 31, 1997, June 30, 1997 and
September 30, 1997. The principal and unpaid interest of this Note shall be due
and payable in full on the Maturity Date.
2.3 LINE OF CREDIT. Holder will disburse the principal of this Note to
the Company in one or more advances from time to time, in each case upon not
less than two Business Days prior request by the Company. In no event shall the
total of such advances be more than the principal amount of this Note. Holder
will not be obligated to disburse any advance unless (a) no Event of Default
exists; (b) the disbursement of the advance is permitted by law; (c) the Holder
shall determine in its sole discretion that the enforcement, collectibility or
protection of the principal of this Note is not, and would not be, at an
unacceptable risk; and (d) the disbursement of the advance would not adversely
effect the Company's ability to register shares of its Common Stock (including
the shares of Common Stock issuable upon conversion of the Note) for sale to the
public.
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<PAGE> 4
2.4 PREPAYMENTS. At any time before the Maturity Date the Company may
prepay this Note, in whole or in part, upon thirty (30) days' prior written
notice given to Holder pursuant to Section 8.6. In the event the Company has
been unable to register the conversion and subsequent resale of the shares of
Common Stock issuable upon conversion of this Note under the Act pursuant to a
valid registration statement, this Note will be mandatorily prepayable on the
twentieth Business Day following written notice of the occurrence of any Outside
Financing unless prepayment is waived in writing by Holder in its sole and
absolute discretion, such prepayment to be in an amount equal to the net
proceeds received by the Company or any Subsidiary from such Outside Financing
but not to exceed the then outstanding principal and accrued and unpaid interest
on this Note. During such twenty (20) day period, the Company shall place an
amount equal to the total amount of principal and accrued and unpaid interest on
the Notes through the date of the Outside Financing in escrow for the benefit of
the Holder on terms acceptable to the Holders. During the twenty (20) day
period, a pro rata amount of the escrowed funds attributable to a Holder that
chooses to convert its Note into shares of Common Stock shall be disbursed to
the Company simultaneously with such Holder receiving a stock certificate
representing the full number of shares of Common Stock into which such Holder's
Note is converted. Upon the expiration of the twenty (20) day period, any
Holders that have not made an election to convert their Notes into shares of
Common Stock shall receive from the escrowed amount the pro rata amount
attributable to the principal and accrued and unpaid interest on the Note held
by such Holder. All payments made under this Note shall be applied first to
accrued interest, and the balance, if any, to principal; provided, however, that
interest shall accrue on any remaining principal balance and shall be payable at
the rate provided above. Notwithstanding anything to the contrary herein, if the
Company elects to prepay this Note in whole or in part, other than pursuant to a
mandatory prepayment, the Holder shall have a period of thirty (30) days from
the date on which it receives the notice contemplated by this Section 2.4 in
which to elect to convert this Note or that portion of this Note that the
Company elects to prepay, as the case may be, and to acquire shares of Common
Stock, on the terms and subject to the conditions set forth in Article V hereof.
2.5 MANNER OF PAYMENT. Payments of principal and interest on this Note
will be made by wire transfer or delivery of checks to Holder at its address as
set forth in this Note. If the date upon which the payment of principal and
interest is required to be made pursuant to this Note occurs other than on a
business day, then such payment of principal and interest shall be made on the
next occurring business day following said payment date and shall include
interest through said next occurring business day.
2.6 SECURITY. This Note is secured by all of the tangible and
intangible assets of the Company whether now existing or hereafter acquired as
set forth in that certain Security Agreement of even date herewith between the
Holder and the Company.
2.7 SENIOR NOTE. This Note is the senior obligation of the Company
senior in right of payment to any Indebtedness of the Company. As of the date
hereof, the Company has no Indebtedness outstanding senior to this Note. The
Company will not incur any Indebtedness unless such Indebtedness is expressly
made subordinate to this Note.
4
<PAGE> 5
ARTICLE III.
REMEDIES
3.1 EVENTS OF DEFAULT. An "Event of Default" occurs if:
(a) the Company defaults in the payment of the principal or
interest of the Notes when such principal or interest becomes due and
payable; or
(b) the Company fails to perform any obligation related to the
conversion of this Note as required by this Note or the Purchase
Agreement and such failure continues uncured for a period of fifteen
(15) days; or
(c) the Company defaults in the performance of any covenant
made by the Company, in either (i) that certain Purchase Agreement,
(ii) those certain Common Stock Purchase Warrants of even date
herewith, issued by the Company to the holders of the Notes, pursuant
to which the Company grants to the holders of the Notes certain rights
to purchase shares of Common Stock (the "Warrants"); (iii) the Security
Agreement; or (iv) the Notes (other than a default in the performance
of a covenant specifically addressed elsewhere in this Section 3.1); or
(d) any representation or warranty made by the Company in the
Purchase Agreement, the Warrants, the Security Agreement, or the Notes
or in any certificate furnished by the Company in connection with the
consummation of the transaction contemplated thereby or hereby, is
untrue in any material respect as of the date of making thereof; or
(e) the Company fails to pay any principal of or interest on
any of its Indebtedness (including without limitation any such
Indebtedness assumed or guaranteed) for a period longer than the grace
period, if any, provided for such payment; or any default under any
instrument or agreement evidencing, creating, securing or otherwise
relating to such Indebtedness (including without limitation any
guaranty or assumption agreement relating to such Indebtedness) or
other event occurs and continues beyond any applicable grace period, if
the effect of such default or other event is to cause, or to permit the
holder or holders of such Indebtedness (or their representative) to
cause, such Indebtedness (or the obligations under any such guaranty or
assumption agreement) to become due and payable prior to the stated
maturity thereof; or
(f) a court of competent jurisdiction enters a judgment or
judgments against the Company or any property or assets of the Company,
for the payment of money aggregating in excess of $100,000 in excess of
applicable insurance coverage and such judgment or order shall remain
unsatisfied or undischarged and in effect for seventy-five (75)
consecutive days without a stay of enforcement or execution; or
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<PAGE> 6
(g) a notice of lien, levy or assessment is filed or recorded
with respect to any portion of the assets of the Company by any
governmental authority for any taxes or debts owing at any time or
times hereafter; or
(h) any material portion of the assets of the Company is
attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes within the possession of any receiver, trustee,
custodian or assignee for the benefit of creditors; or
(i) a court of competent jurisdiction enters (i) a decree or
order for relief in respect of the Company in an involuntary case or
proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law or (ii) a decree or
order adjudging the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company under any
applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official
of the Company or of any substantial part of the property of the
Company or ordering the winding up or liquidation of the affairs of the
Company and any such decree or order of relief or any such other decree
or order remains unstayed for a period of 30 days from its date of
entry; or
(j) the Company commences a voluntary case or proceeding under
any applicable federal or state bankruptcy, insolvency, reorganization
or other similar law or any other case or proceeding to be adjudicated
a bankrupt or insolvent, or the Company files a petition, answer or
consent seeking reorganization or relief under any applicable federal
or state law, or the Company makes an assignment for the benefit of
creditors, or admits in writing its inability to pay its debts
generally as they become due; or
(k) (1) any person or group (within the meaning of Section
13(d) of the Securities Exchange Act of 1934) becomes the beneficial
owner of 50% or more of the total voting power of the Company; (2) the
Company or any Subsidiary merges or consolidates with or into any other
Person (unless the Company or any of its Subsidiaries is the surviving
or acquiring party); (3) the Company or any Subsidiary dissolves or
liquidates; or (4) the Company or any Subsidiary sells all or any
substantial portion of its assets (unless the purchaser is a Subsidiary
of the Company or the resulting, surviving or transferee entity is a
corporation organized under the laws of the United States, any state
thereof or the District of Columbia and expressly assumes by
supplemental agreement all of the obligations of the Company in
connection with this Note).
3.2 ACCELERATION OF MATURITY. This Note shall become immediately due
and payable if an Event of Default described in 3.1(i) or 3.1(j) occurs and,
this Note shall, at the option of the Holder in its sole discretion, become
immediately due and payable if any other Event of Default occurs, and in every
such case the Holder or Holders of 50% or more of the outstanding principal
balance of the Notes may declare the principal and interest on the Note to be
due and payable immediately.
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<PAGE> 7
ARTICLE IV.
CONVERSION OF NOTE
4.1 CONVERSION PRIVILEGE AND CONVERSION PRICE. Subject to and upon
compliance with the provisions of this Article, at the option of Holder, all or
any part of this Note may be converted into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100 of a share) of Common
Stock at any time (i) for 955,000 shares of Common Stock for the initial
$428,250 of principal advanced pursuant to this Note and, (ii) the remaining
principal and accrued and unpaid interest outstanding under this Note may be
converted at the Conversion Price, determined as hereinafter provided, in effect
at the time of conversion. The Conversion Price shall be initially $1.35 per
share of Common Stock.
ARTICLE V.
ADJUSTMENT OF CONVERSION PRICE
5.1 ANTI-DILUTION PROVISIONS. The Conversion Price shall be subject to
adjustment from time to time as hereinafter provided. Upon each adjustment of
the Conversion Price, the Holder of this Note shall thereafter be entitled to
purchase, at the Conversion Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Conversion Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment (including the initial
955,000 shares) and dividing the product thereof by the Conversion Price
resulting from such adjustment.
5.2 ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF COMMON STOCK.
(a) If and whenever after the date hereof the Company shall
issue or sell any Common Stock for no consideration or for a
consideration per share less than the Conversion Price then, forthwith,
upon such issue or sale, the Conversion Price shall be reduced (but not
increased, except as otherwise specifically provided in Section
5.2(b)), to the price (calculated to the nearest one-ten thousandth of
a cent) determined by dividing (x) an amount equal to the sum of (i)
the aggregate number of shares of Common Stock outstanding immediately
prior to such issue or sale multiplied by the then existing Conversion
Price plus (ii) the consideration received by the Company upon such
issue or sale by (y) the aggregate number of shares of Common Stock
outstanding immediately after such issue or sale.
(b) Notwithstanding the provisions of this Section 5.2, no
adjustment shall be made in the Conversion Price in the event that the
Company issues, in one or more transactions, (i) Common Stock upon
exercise of any options issued to officers, directors or employees of
the Company pursuant to a stock option plan or an employment, severance
or consulting agreement as now or hereafter in effect, in each case
approved by the Board of Directors (provided that the aggregate number
of shares of Common Stock which may be obtainable, including options
issued prior to the date hereof, under all such
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<PAGE> 8
employee plans and agreements shall at no time exceed 10% of all shares
of Common Stock outstanding on the date hereof on a fully diluted
basis; (ii) Common Stock upon exercise of the Notes or any warrant
issued pursuant to the terms of the Purchase Agreement; or (iii) Common
Stock upon exercise of any stock purchase warrant or option (other than
the options referred to in clause (i) above) or other convertible
security outstanding on the date hereof. In addition, for purposes of
calculating any adjustment of the Conversion Price as provided in this
Section 5.2, all of the shares of Common Stock issuable pursuant to any
of the foregoing shall be assumed to be outstanding prior to the event
causing such adjustment to be made.
(c) For purposes of this Section 5.2, the following shall be
applicable:
(1) Issuance of Rights or Options. In case at any
time after the date hereof the Company shall in any manner
grant (whether directly or by assumption in a merger or
otherwise) any rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock
(such convertible or exchangeable stock or securities being
herein called "Convertible Securities"), whether or not such
rights or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the
price per share for which shares of Common Stock are issuable
upon the exercise of such rights or options or upon conversion
or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable
by the Company as consideration for the granting of such
rights or options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon
the exercise of such rights or options, or plus, in the case
of such rights or options that relate to Convertible
Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common
Stock issuable upon the exercise of such rights or options or
upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such rights or
options) shall be less than the Conversion Price in effect as
of the date of granting such rights or options, then the total
maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon conversion or
exchange of all such Convertible Securities issuable upon the
exercise of such rights or options shall be deemed to be
outstanding as of the date of granting of such rights or
options and to have been issued for such price per share, with
the effect on the Conversion Price specified in Section
5.2(a), 5.2(c)(1) hereof. Except as provided in Section 5.2(b)
hereof, no further adjustment of the Conversion Price shall be
made upon the actual issuance of such Common Stock or of such
Convertible Securities upon exercise of such rights or options
or upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
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<PAGE> 9
(2) Change in Option Price or Conversion Rate. Upon
the happening of any of the following events, namely, if the
purchase price provided for in any right or option referred to
in Section 5.2(b) above, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible
Securities referred to in Section 5.2(a), 5.2(c)(1) hereof, or
the rate at which any Convertible Securities referred to in
Section 5.2(a), 5.2(c)(1) hereof, are convertible into or
exchangeable for Common Stock shall change (other than under
or by reason of provisions designed to protect against
dilution), the Conversion Price then in effect hereunder shall
forthwith be readjusted (increased or decreased, as the case
may be) to the Conversion Price that would have been in effect
at such time had such rights, options or Convertible
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. On the expiration of any such option or right referred
to in Section 5.2(a), 5.2(c)(1) hereof, or on the termination
of any such right to convert or exchange any such Convertible
Securities referred to in Section 5.2(a), 5.2(c)(1) hereof,
the Conversion Price then in effect hereunder shall forthwith
be readjusted (increased or decreased, as the case may be) to
the Conversion Price that would have been in effect at the
time of such expiration or termination had such right, option
or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never
been granted, issued or sold, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in Section 5.2(a), 5.2(c)(1)
hereof or the rate at which any Convertible Securities
referred to in Section 5.2(a), 5.2(c)(1) hereof are
convertible into or exchangeable for Common Stock shall be
reduced at any time under or by reason of provisions with
respect thereto designed to protect against dilution, then in
case of the delivery of Common Stock upon the exercise of any
such right or option or upon conversion or exchange of any
such Convertible Securities, the Conversion Price then in
effect hereunder shall, if not already adjusted, forthwith be
adjusted to such amount as would have applied had such right,
option or Convertible Securities never been issued as to such
Common Stock and had adjustments been made upon the issuance
of the Common Stock delivered as aforesaid, but only if as a
result of such adjustment the Conversion Price then in effect
hereunder is thereby reduced.
(3) Consideration for Stock. In case at any time
Common Stock or Convertible Securities or any rights or
options to purchase any such Common Stock or Convertible
Securities shall be issued or sold for cash, the consideration
therefor shall be deemed to be the amount received by the
Company therefor. In case at any time any Common Stock,
Convertible
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<PAGE> 10
Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued or sold
for consideration other than cash, the amount of the
consideration other than cash received by the Company shall be
deemed to be the fair value of such consideration, as
determined reasonably and in good faith by the Board of
Directors of the Company. In case at any time any Common
Stock, Convertible Securities or any rights or options to
purchase any Common Stock or Convertible Securities shall be
issued in connection with any merger or consolidation in which
the Company is the surviving corporation, the amount of
consideration received therefor shall be deemed to be the fair
value, as determined reasonably and in good faith by the Board
of Directors of the Company, of such portion of the assets and
business of the nonsurviving corporation as such Board of
Directors may determine to be attributable to such Common
Stock, Convertible Securities, rights or options as the case
may be. In case at any time any rights or options to purchase
any shares of Common Stock or Convertible Securities shall be
issued in connection with the issuance and sale of other
securities of the Company, together consisting of one integral
transaction in which no consideration is allocated to such
rights or options by the parties, such rights of options shall
be deemed to have been issued without consideration.
(4) Record Date. In the case the Company shall take a
record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution
payable in Common Stock or Convertible Securities, or (ii) to
subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the
date of the issuance or sale of the Common Stock or
Convertible Securities deemed to have been issued or sold as a
result of the declaration of such dividend or the making of
such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(5) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares
owned directly by the Company in treasury, and the disposition
of any such shares shall be considered an issuance or sale of
Common Stock for the purpose of this Section 5.2.
5.3 STOCK DIVIDENDS. In case the Company shall declare a dividend or
make any other distribution upon any shares of the Company, payable in Common
Stock or Convertible Securities, any Common Stock or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
5.4 STOCK SPLITS AND REVERSE SPLITS. In the event that the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of Shares into
which this Note may be converted immediately prior to such subdivision shall be
proportionately increased, and conversely, in the event that the outstanding
shares of Common Stock shall at any time be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased and the number of Shares into which this Note
may be converted immediately prior to such combination shall be proportionately
reduced. Except as provided in this Section 5.4, no adjustment in the Conversion
Price and no change in the number of Shares
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shall be made under this Article V as a result of or by reason of any such
subdivision or combination.
5.5 REORGANIZATION AND ASSET SALES. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another Person shall be effected in such a way that holders of Common Stock
shall be entitled to receive capital stock, securities or assets with respect to
or in exchange for their shares, then the following provisions shall apply:
(a) As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other
disposition (except as otherwise provided below in this Section 5.5),
lawful and adequate provisions shall be made whereby the holder of
Notes shall thereafter have the right to purchase and receive upon the
terms and conditions specified in this Note and in lieu of the Shares
immediately theretofore receivable upon the exercise of the rights
represented hereby, such shares of capital stock, securities or assets
as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of
Shares immediately theretofore so receivable had such reorganization,
reclassification, consolidation, merger, share exchange or sale not
taken place, and in any such case appropriate provision reasonably
satisfactory to such holder shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the
Conversion Price and of the number of Shares receivable upon the
exercise) shall thereafter be applicable, as nearly as possible, in
relation to any shares of capital stock, securities or assets
thereafter deliverable upon the exercise of Notes.
(b) In the event of a merger, share exchange or consolidation
of the Company with or into another Person as a result of which a
number of shares of Common Stock or its equivalent of the successor
Person greater or lesser than the number of shares of Common Stock
outstanding immediately prior to such merger, share exchange or
consolidation are issuable to holders of Common Stock, then the
Conversion Price in effect immediately prior to such merger, share
exchange or consolidation shall be adjusted in the same manner as
though there were a subdivision or combination of the outstanding
shares of Common Stock.
(c) The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless
prior to or simultaneously with the consummation thereof the successor
Person (if other than the Company) resulting from such consolidation,
share exchange or merger or the Person purchasing or otherwise
acquiring such assets shall have assumed by written instrument executed
and mailed or delivered to the holder hereof at the last address of
such holder appearing on the books of the Company the obligation to
deliver to such holder such shares of capital stock, securities or
assets as, in accordance with the foregoing provisions, such holder may
be entitled to receive, and all other liabilities and obligations of
the Company hereunder.
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Upon written request by the holder hereof, such Successor Person will
issue a new Warrant revised to reflect the modifications in this
Warrant effected pursuant to this Section 5.5.
(d) If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of
Common Stock, the Company shall not effect any consolidation, merger,
share exchange or sale, transfer or other disposition of all or
substantially all of the Company's assets with the Person having made
such offer or with any affiliate of such Person, unless prior to the
consummation of such consolidation, merger, share exchange, sale,
transfer or other disposition the holder hereof shall have been given a
reasonable opportunity to then elect to receive upon the conversion of
the Notes either the capital stock, securities or assets then issuable
with respect to the Common Stock or the capital stock, securities or
assets, or the equivalent, issued to previous holders of the Common
Stock in accordance with such offer.
5.6 ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property, the Conversion Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per share
of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is not taken, the date as of
which holders of record of Common Stock entitled to such dividend or
distribution are determined.
5.7 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon conversion of the Note and no adjustment in the Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least $.01 in the Conversion Price; provided, however, that any
adjustments which by reason of this Section 5.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
5.8 NOTICE OF ADJUSTMENT. Whenever the Conversion Price or the number
of Shares issuable upon the conversion of the Note shall be adjusted as herein
provided, or the rights of the holder hereof shall change by reason of other
events specified herein, the Company shall compute the adjusted Conversion Price
and the adjusted number of Shares in accordance with the provisions hereof and
shall prepare an officer's certificate setting forth the adjusted Conversion
Price and the adjusted number of Shares issuable upon the conversion of the
Notes or specifying
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the other shares of stock, securities or assets receivable as a result of such
change in rights, and showing in reasonable detail the facts and calculations
upon which such adjustments or other changes are based. The Company shall cause
to be mailed to the holder hereof copies of such officer's certificate together
with a notice stating that the Conversion Price and the number of Shares
purchasable upon conversion of the Notes have been adjusted and setting forth
the adjusted Conversion Price and the adjusted number of Shares purchasable upon
conversion of the Note.
5.9 NOTIFICATIONS TO HOLDERS. In case at any time the Company proposes:
(a) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution (other
than cash dividends) to the holders of its Common Stock;
(b) to issue any shares of Common Stock, options therefor or
securities convertible into Common Stock (except (x) pursuant to the
exercise of Warrants issued and sold pursuant to the Purchase Agreement
or (y) as set forth in Section 5.2(b));
(c) to offer for subscription pro rata to all of the holders
of its Common Stock any additional shares of capital stock of any class
or other rights;
(d) to effect any capital reorganization, or reclassification
of the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another Person, or sale, transfer or other
disposition of all or substantially all of its assets; or
(e) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder hereof
(a) at least 30 days (but not more than 90 days) prior written notice of the
date on which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, and (b) in the case of any such issuance,
reorganization, reclassification, consolidation, merger, share exchange, sale,
transfer, disposition, dissolution, liquidation or winding up, at least 30 days
(but not more than 90 days) prior written notice of the date when the same shall
take place. Such notice in accordance with the foregoing clause (a) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (b) shall also specify the
date on which the holders of Common Stock shall be entitled to exchange their
Common Stock, as the case may be, for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
as the case may be.
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5.10 COMPANY TO PREVENT DILUTION. If any event or condition occurs as
to which other provisions of this Article are not strictly applicable or if
strictly applicable would not fairly protect the exercise or purchase rights of
the Note evidenced hereby in accordance with the essential intent and principles
of such provisions, or that might materially and adversely affect the exercise
or purchase rights of the holder hereof under any provisions of this Note, then
the Company shall make such adjustments in the application of such provisions,
in accordance with such essential intent and principles, so as to protect such
exercise and purchase rights as aforesaid, and any adjustments necessary with
respect to the Conversion Price and the number of Shares purchasable hereunder
so as to preserve the rights of the holder hereunder. In no event shall any such
adjustment have the effect of increasing the Conversion Price as otherwise
determined pursuant to this Article except in the event of a combination of
shares of the type contemplated in Section 5.4 hereof, and then in no event to
an amount greater than the Conversion Price as adjusted pursuant to Section 5.4
hereof.
ARTICLE VI.
COVENANTS
Except as permitted by the Purchase Agreement:
6.1 PAYMENT OF PRINCIPAL AND ACCRUED INTEREST. The Company will duly
and punctually pay or cause to be paid the principal sum of this Note, together
with interest accrued thereon from the date hereof to the date of payment, in
accordance with the terms hereof.
6.2 CORPORATE EXISTENCE. The Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (charter and statutory) and franchises; provided, however,
that the Company shall not be required to preserve any such right or franchise
if it shall reasonably determine that the preservation thereof is no longer
desirable in the conduct of its business.
6.3 TAXES; CLAIMS; ETC. The Company will, and will cause any Subsidiary
to, promptly pay and discharge all lawful taxes, assessments, and governmental
charges or levies imposed upon it or upon its income or profits, or upon any of
its properties, real, personal, or mixed, before the same shall become in
default, as well as all lawful claims for labor, materials, and supplies or
otherwise which, if unpaid, might become a lien or charge upon such properties
or any part thereof, and which lien or charges will have a material adverse
effect on the business of the Company; provided, however, that neither the
Company nor any Subsidiary shall be required to pay or cause to be paid any such
tax, assessment, charge, levy, or claim prior to institution of foreclosure
proceedings if the validity thereof shall concurrently be contested in good
faith by appropriate proceedings and if the Company shall have established
reserves deemed by the Company adequate with respect to such tax, assessment,
charge, levy, or claim.
6.4 MAINTENANCE OF EXISTENCE AND PROPERTIES. The Company will, and will
cause each Subsidiary to, keep its material properties in good repair, working
order, and condition,
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ordinary wear and tear excepted, so that the business carried on may be properly
conducted at all times in accordance with prudent business management.
6.5 SEC REPORTS. The Company will deliver to the Holder within 20 days
after it files any reports with the SEC, copies of its reports and of the
information, documents, and other reports, if any (or copies of such portions of
any of the foregoing as the SEC may by rules and regulations prescribe) which
the Company is required to file, if any, with the SEC pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. The Company will timely comply
with its reporting and filing obligations, if any, under the applicable federal
securities laws.
6.6 INDEBTEDNESS. The Company shall not incur, assume, create or
guarantee any Indebtedness unless such Indebtedness is expressly made
subordinate to this Note.
6.7 LIENS. The Company shall not create, permit, incur, assume, affirm
or suffer to exist or become effective any lien of any kind upon any of the
tangible or intangible assets of the Company whether now owned or acquired after
the date hereof except as permitted pursuant to Section 7.1 of the Purchase
Agreement.
6.8 NOTICE OF DEFAULTS. The Company will promptly notify the Holder in
writing of the occurrence of (i) any Event of Default under this Note, and (ii)
any event of default (or if any event of default would result upon any payment
with respect to this Note) with respect to any Indebtedness as such event of
default is defined therein or in the instrument under which it is outstanding,
permitting holders to accelerate the maturity of such Indebtedness.
6.9 MERGERS AND ACQUISITIONS. Except for the Company or any Subsidiary
will not dissolve, liquidate, consolidate or merge with or sell, lease, convey
or transfer all or a substantial portion of its assets to any Person whether in
a single transaction or a series of related transactions, unless either (a) in
the case of a merger or consolidation, the Company is the surviving entity or
(b) the resulting, surviving or transferee entity is a corporation organized
under the laws of the United States, any state thereof or the District of
Columbia and expressly assumes by supplemental agreement all of the obligations
of the Company in connection with this Note.
6.10 COMPLIANCE WITH LAWS. The Company will promptly comply with all
laws, ordinances and governmental rules and regulations to which it is subject,
the violation of which would materially and adversely affect the Company.
ARTICLE VII.
REPURCHASE OF NOTE AT THE OPTION OF THE HOLDER
7.1 REPURCHASE UPON CHANGE OF CONTROL. The Company covenants and agrees
that, in the event that (i) the Company or its successor at any time sells,
exchanges or otherwise transfers 25% or more of its assets (other than inventory
sold in the ordinary course of business) or (ii) there occurs a Change of
Control, the Holder will have the right, at such Holder's option,
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<PAGE> 16
to require the Company to repurchase this Note on the Repurchase Date selected
as provided below at a repurchase price (the "Repurchase Price") which is equal
to 100% of the principal of and accrued interest on this Note at the Repurchase
Date. "Change of Control" means any event by which any "person" or "group" (as
such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act, whether or not applicable) becomes the "beneficial owner" (as that term is
used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable,
except that a person deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power entitled to vote in the election of directors
of the Company.
7.2 NOTICES, ETC. Unless the Company shall have theretofore delivered
to the Holder notice of its intention to prepay this Note pursuant to Section
2.4 hereof, on or before the 30th day after the occurrence of a Change of
Control, the Company shall deliver to the Holder a written notice (the "Company
Notice"). The Company Notice shall describe the occurrence of the Change of
Control and of the repurchase right set forth herein arising as a result thereof
and shall state (i) the final date by which this Note must be surrendered for
repurchase, (ii) the last day on which an election to require repurchase may be
revoked, (iii) the Conversion Price then in effect, (iv) the Repurchase Date,
(v) the Repurchase Price, and (vi) the procedure which the Holder must follow to
elect repurchase. No failure of the Company to give the foregoing notices or
defect therein shall limit any Holder's right to exercise a repurchase right or
affect the validity of the proceedings for the repurchase of Note.
7.3 EXERCISING REPURCHASE RIGHT.
(a) To elect repurchase of this Note or a portion hereof, the
Holder will be required to surrender, on or before the Final Surrender
Date (as defined below), at the office set forth in Section 8.6, this
Note duly endorsed or assigned to the Company or in blank, together
with written notice of the Holder's election to have the Company
repurchase this Note. Election of repurchase by a Holder shall be
revocable at any time prior to the Final Surrender Date by delivering
written notice to that effect to the Company. "Final Surrender Date" is
defined to mean the date which is, subject to any contrary requirements
of applicable law, 30 days after the date of the Company Notice.
"Repurchase Date" is defined to mean the date selected by the Company
for the repurchase of the Note that is not less than 10 nor more than
30 days after the Final Surrender Date.
(b) In the event a repurchase right shall be exercised in
accordance with the terms hereof, the Company shall pay or cause to be
paid the Repurchase Price (including installments of interest that
mature on or prior to the Repurchase Date) in cash to the Holder on the
Repurchase Date.
(c) If this Note is surrendered for repurchase and is not so
paid on the Repurchase Date, the principal amount which is payable at
maturity shall, until the Repurchase Price (as calculated at the date
of payment) is paid, continue to bear interest
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from the Repurchase Date at the rate borne by this Note, and this Note
shall continue to remain convertible into Common Stock until said
Repurchase Price shall have been paid or duly provided for.
ARTICLE VIII.
MISCELLANEOUS
8.1 COLLECTION FEES. If this Note is placed in the hands of an attorney
for collection, and if it is collected through any legal proceedings at law or
in equity or in bankruptcy, receivership or other court proceedings, the Company
hereby undertakes to pay all costs and expenses of collecting including, but not
limited to, court costs and the reasonable attorney's fees of Holder.
8.2 CONSENT TO AMENDMENTS. This Note may be amended, and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if and only if the Company shall obtain the
written consent to such amendment, action or omission to act from the holders of
51 % of the aggregate principal amount of the Notes.
8.3 BENEFITS OF NOTE: NO IMPAIRMENT OF RIGHTS OF HOLDER OF SENIOR
INDEBTEDNESS. Nothing in this Note, express or implied, shall give to any
Person, other than the Company, Holder, and their successors any benefit or any
legal or equitable right, remedy or claim under or in respect of this Note.
8.4 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Note
contained by or on behalf of the Company and the Holder shall bind and inure to
the benefit of the respective successors and assigns of the Company and the
Holder.
8.5 RESTRICTIONS ON TRANSFER. Subject to the provisions of this Section
8.5, this Note is transferable in the same manner and with the same effect as in
the case of a negotiable instrument payable to a specified person. The Company,
however, may treat Holder as the owner hereof for all purposes until this Note
shall have been surrendered for transfer as hereinafter provided. Upon surrender
of this Note duly executed by Holder or his agent or attorney, the Company shall
execute and deliver a new Note in the name of the assignee or assignees and in
the denominations specified in such instrument of assignment, and this Note
shall promptly be canceled.
This Note is not transferable directly or indirectly, in whole or in
part, except in the case of any such transfer (a) which is in compliance with
applicable federal and state securities laws, including but not limited to, the
Securities act of 1933, as amended, and (b) for which the Company is provided
with an opinion of counsel to Holder, reasonably satisfactory to the Company, to
the effect that such transfer is not in violation of any of said securities
laws.
8.6 NOTICE: ADDRESS OF PARTIES. Except as otherwise provided, all
communications to the Company or Holder provided for herein or with reference to
this Note shall be deemed to
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have been sufficiently given or served for all purposes on the third business
day after being sent as certified or registered mail, postage and charges
prepaid, to the following addresses: if to the Company, 7580 East Gray Road,
Suite 102, Scottsdale, Arizona 85260 or at any other address designated by the
Company in writing to Holder; if to Holder, to 7580 East Gray Road, Suite 102,
Scottsdale, Arizona 85260 or at any other address designated by Holder to the
Company in writing.
8.7 SEPARABILITY CLAUSE. In case any provision in this Note shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions in such jurisdiction shall not in
any way be affected or impaired thereby; provided, however, such construction
does not destroy the essence of the bargain provided for hereunder.
8.8 GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware (without regard to
principles of choice of law).
8.9 USURY. It is the intention of the parties hereto to conform
strictly to the applicable laws of the State of Delaware and the United States
of America, and judicial or administrative interpretations or determinations
thereof regarding he contracting for, charging and receiving of interest for the
use, forbearance, and detention of money (hereinafter referred to in this
Section 8.9 as "Applicable Law"). The Holder shall have no right to claim, to
charge or to receive any interest in excess of the maximum rate of interest, if
any, permitted to be charged on that portion of the amount representing
principal which is outstanding and unpaid from time to time by Applicable Law.
Determination of the rate of interest for the purpose of determining whether
this Note is usurious under Applicable Law shall be made by amortizing,
prorating, allocating and spreading in equal parts during the period of the
actual time of this Note, all interest or other sums deemed to be interest
(hereinafter referred to in this Section 8.9 as "Interest") at any time
contracted for, charged or received from the Company in connection with this
Note. Any Interest contracted for, charged or received in excess of the maximum
rate allowed by Applicable Law shall be deemed a result of a mathematical error
and a mistake. If this Note is paid in part prior to the end of the full stated
term of this Note and the Interest received for the actual period of existence
of this Note exceeds the maximum rate allowed by Applicable Law, Holder shall
credit the amount of the excess against any amount owing under this Note or, if
this Note has been paid in full, or in the event that it has been accelerated
prior to maturity, Holder shall refund to the Company the amount of such excess,
and shall not be subject to any of the penalties provided by Applicable Law for
contracting for, charging or receiving Interest in excess of the maximum rate
allowed by Applicable Law. Any such excess which is unpaid shall be canceled.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed on the date first above written.
WO CONSULTING, INC.
By: /s/ ERIC J. SCHEDELER
Name: ERIC J. SCHEDELER
Title: President
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Exhibit 3.5
THE SECURITIES REPRESENTED BY THIS WARRANT AND THE COMMON STOCK ISSUABLE THEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE
SECURITIES REPRESENTED BY THIS WARRANT MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE
TRANSFERRED, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS.
WARRANT
TO PURCHASE COMMON STOCK OF
WO CONSULTING, INC.
EXPIRING ON AUGUST 31, 2000
This Common Stock Purchase Warrant (the "Warrant") certifies that for
value received, SCOTTSDALE TECHNOLOGIES-I, LTD. (the "Holder") or its assigns,
is entitled to subscribe for and purchase from the Company (as hereinafter
defined), in whole or in part, 1,641,111 shares of duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock (as hereinafter
defined) at an initial Exercise Price (as hereinafter defined) per share of
$10.00 per share, subject, however, to the provisions and upon the terms and
conditions hereinafter set forth. The number of Warrants (as hereinafter
defined), the number of shares of Common Stock purchasable hereunder, and the
Exercise Price therefor are subject to adjustment as hereinafter set forth. This
Warrant and all rights hereunder shall expire at 5:00 p.m., Phoenix, Arizona
time, on August 31, 2000.
As used herein, the following terms shall have the meanings set forth
below:
"Company" shall mean WO Consulting, Inc., a Delaware corporation, and
shall also include any successor thereto with respect to the obligations
hereunder, by merger, consolidation or otherwise.
"Common Stock" shall mean and include the Company's Common Stock, par
value $0.01 per share, authorized on the date of the original issuance of this
Warrant and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale, transfer or
other disposition of assets of the character referred to in Section 3.5 hereof,
the stock or other securities provided for in such Section 3.5, and (ii) any
other shares of Common Stock of the Company into which such shares of Common
Stock may be converted.
"Exercise Date" see Section 1.1.
<PAGE> 2
"Exercise Price" shall mean the initial purchase price of $10.00 per
share of Common Stock, payable upon exercise of the Warrants, as adjusted from
time to time pursuant to the provisions hereof.
"Outstanding," when used with reference to Common Stock, shall mean
(except as otherwise expressly provided herein) at any date as of which the
number of shares thereof is to be determined, all issued shares of Common Stock,
except shares then owned or held by or for the account of the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Warrant" shall mean the right upon exercise hereof to purchase one
Warrant Share.
"Warrant Office" see Section 2.1.
"Warrant Share" shall mean a share of Common Stock of the Company
purchased or purchasable by the holder hereof upon the exercise of a Warrant.
ARTICLE I.
Exercise of Warrants
1.1. Method of Exercise. The Warrants represented hereby may be
exercised by the holder hereof, in whole or in part, at any time and from time
to time until 5:00 p.m., Phoenix, Arizona time, on August 31, 2000. To exercise
the Warrants, the holder hereof shall deliver to the Company, at the Warrant
Office designated in Section 2.1 hereof, (i) a written notice in the form of the
Subscription Notice attached as an exhibit hereto, stating therein the election
of such holder to exercise the Warrants in the manner provided in the
Subscription Notice; (ii) payment in full of the Exercise Price in cash or by
bank check for all Warrant Shares purchased thereunder and (iii) this Warrant.
The Warrants shall be deemed to be exercised on the date of receipt by the
Company of the Subscription Notice, accompanied by payment for the Warrant
Shares and surrender of this Warrant, as aforesaid, and such date is referred to
herein as the "Exercise Date". Upon such exercise, the Company shall, as
promptly as practicable and in any event within five business days, issue and
deliver to such holder a certificate or certificates for the full number of the
Warrant Shares purchased by such holder hereunder, and shall, unless the
Warrants have expired, deliver to the holder hereof a new Warrant representing
the number of Warrants, if any, that shall not have been exercised, in all other
respects identical to this Warrant. As permitted by applicable law, the Person
in whose name the certificates for Common Stock are to be issued shall be deemed
to have become a holder of record of such Common Stock on the Exercise Date and
shall be entitled to all of the benefits of such holder on the Exercise Date,
including without limitation the right to receive dividends and other
distributions for which the record date falls on or after the Exercise Date and
the right to exercise voting rights.
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1.2. Expenses and Taxes. The Company shall pay all expenses, and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes of the Holder, attributable to the
preparation, issuance or delivery of the Warrants and of the shares of Common
Stock issuable upon exercise of the Warrants.
1.3. Reservation of Shares. The Company shall reserve at all times so
long as the Warrants remain outstanding, free from preemptive rights, out of its
treasury Common Stock or its authorized but unissued shares of Common Stock, or
both, solely for the purpose of effecting the exercise of the Warrants, a
sufficient number of shares of Common Stock to provide for the exercise of the
Warrants.
1.4. Valid Issuance. All shares of Common Stock that may be issued upon
exercise of the Warrants will, upon issuance by the Company, be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issuance thereof and, without limiting the generality of the
foregoing, the Company shall take no action or fail to take any action which
will cause a contrary result (including, without limitation, any action that
would cause the Exercise Price to be less than the par value, if any, of the
Common Stock).
1.5. Acknowledgment of Rights. At the time of the exercise of the
Warrants in accordance with the terms hereof and upon the written request of the
holder hereof, the Company will acknowledge in writing its continuing obligation
to afford to such holder any rights (including, without limitation, any right to
registration of the Warrant Shares) to which such holder shall continue to be
entitled after such exercise in accordance with the provisions of this Warrant;
provided, however, that if the holder hereof shall fail to make any such
request, such failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
1.6. No Fractional Shares. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of this Warrant. If more than
one Warrant shall be presented for exercise at the same time by the same holder,
the number of full shares of Common Stock which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of whole shares
of Common Stock purchasable on exercise of the Warrants so presented. If any
fraction of a share of Common Stock would, except for the provisions of this
Section 1.6, be issuable on the exercise of this Warrant, the Company shall pay
an amount in cash calculated by it to be equal to the fair market value of one
share of Common Stock at the time of such exercise multiplied by such fraction
computed to the nearest whole cent.
ARTICLE II.
Transfer
2.1. Warrant Office. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall initially
be the Company's offices at 7580 East Gray Road, Suite 102, Scottsdale, Arizona
85260, and may subsequently be such other office of the Company or of any
transfer agent of the Common Stock in the continental United
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States as to which written notice has previously been given to the holder
hereof. The Company shall maintain, at the Warrant Office, a register for the
Warrants in which the Company shall record the name and address of the Person in
whose name this Warrant has been issued, as well as the name and address of each
permitted assignee of the rights of the registered owner hereof.
2.2. Ownership of Warrants. Company may deem and treat the Person in
whose name the Warrants are registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Article II. Notwithstanding the foregoing, the Warrants
represented hereby, if properly assigned in compliance with this Article II, may
be exercised by an assignee for the purchase of Warrant Shares without having a
new Warrant issued.
2.3. Restrictions on Transfer of Warrants. The Company agrees to
maintain at the Warrant Office books for the registration and transfer of the
Warrants. Subject to the restrictions on transfer of the Warrants in this
Section 2.3, the Company, from time to time, shall register the transfer of the
Warrants in such books upon surrender of this Warrant at the Warrant Office
properly endorsed or accompanied by appropriate instruments of transfer and
written instructions for transfer satisfactory to the Company. Upon any such
transfer and upon payment by the holder or its transferee of any applicable
transfer taxes, new Warrants shall be issued to the transferee and the
transferor (as their respective interests may appear) and the surrendered
Warrants shall be cancelled by the Company. The Company shall pay all taxes
(other than securities transfer taxes or income taxes) and all other expenses
and charges payable in connection with the transfer of the Warrants pursuant to
this Section 2.3.
2.3.1. Restrictions in General. The holder of the Warrants
agrees that it will neither (i) transfer the Warrants prior to delivery to the
Company of written notice of such transfer, nor (ii) transfer such Warrant
Shares prior to delivery to the Company of written notice of such transfer, or
until registration of such Warrant Shares under the Securities Act and any
applicable state securities or blue sky laws has become effective.
2.4. Compliance with Securities Laws. The holder hereof understands and
agrees that the following restrictions and limitations shall be applicable to
all Warrant Shares and to all resales or other transfers thereof pursuant to the
Securities Act:
2.4.1. The holder hereof agrees that the Warrant Shares shall
not be sold or otherwise transferred unless the Warrant Shares are registered
under the Securities Act and applicable state securities or blue sky laws or are
exempt therefrom.
2.4.2. A legend in substantially the following form will be
placed on the certificate(s) evidencing the Warrant Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE
SECURITIES LAW AND, ACCORDINGLY, THE
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SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE RESOLD,
PLEDGED, OR OTHERWISE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION
EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS."
2.4.3. Stop transfer instructions will be imposed with respect
to the Warrant Shares so as to restrict resale or other transfer thereof,
subject to this Section 2.4.
ARTICLE III.
Anti-Dilution
3.1. Anti-Dilution Provisions. The Exercise Price shall be subject to
adjustment from time to time as hereinafter provided. Upon each adjustment of
the Exercise Price, the holder of this Warrant shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
3.2. Adjustment of Exercise Price Upon Issuance of Common Stock.
3.2.1. (A) If and whenever after the date hereof the Company
shall issue or sell any Common Stock for no consideration or for a consideration
per share less than the Exercise Price, then, forthwith upon such issue or sale,
the Exercise Price shall be reduced (but not increased, except as otherwise
specifically provided in Section 3.2.2(C) hereof), to the price (calculated to
the nearest one-ten thousandth of a cent) determined by dividing (x) an amount
equal to the sum of (i) the aggregate number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by then
existing Exercise Price plus (ii) the consideration received by the Company upon
such issuance or sale by (y) the aggregate number of shares of Common Stock
outstanding immediately after such issuance or sale.
(B) Notwithstanding the provisions of this Section
3.2, no adjustment shall be made in the Exercise Price in the event that the
Company issues, in one or more transactions, (i) Common Stock or convertible
securities upon exercise of any options issued to officers, directors or
employees of the Company pursuant to a stock option plan or an employment,
severance or consulting agreement as now or hereafter in effect, in each case
approved by the Board of Directors (provided that the aggregate number of shares
of Common Stock which may be issuable, including options issued prior to the
date hereof, under all such employee plans and agreements shall at no time
exceed 10% of all shares of Common Stock outstanding on the date hereof on a
fully diluted basis; (ii) Common Stock upon conversion of the Note pursuant to
the terms of the Note; (iii) Common Stock upon exercise of the Warrants; or (iv)
Common Stock upon exercise of any stock purchase warrant or option (other than
the
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options referred to in clause (i) above) or other convertible security
outstanding on the date hereof. In addition, for purposes of calculating any
adjustment of the Exercise Price as provided in this Section 3.2, all of the
shares of Common Stock issuable pursuant to any of the foregoing shall be
assumed to be outstanding prior to the event causing such adjustment to be made.
3.2.2. For purposes of this Section 3.2, the following
Sections 3.2.2(A) to 3.2.2(E) inclusive, shall be applicable:
(A) Issuance of Rights or Options. In case at any time after
the date hereof the Company shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to purchase,
or any options for the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such convertible or
exchangeable stock or securities being herein called "Convertible Securities"),
whether or not such rights or options or the right to convert or exchange any
such Convertible Securities are immediately exercisable, and the price per share
for which shares of Common Stock are issuable upon the exercise of such rights
or options or upon conversion or exchange of such Convertible Securities
(determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the granting of such rights or options, plus
the minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise of such rights or options, or plus, in the case of
such rights or options that relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than the Exercise Price in effect as of the date of
granting such securities, rights or options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such rights or options or
upon conversion or exchange of all such Convertible Securities issuable upon the
exercise of such rights or options shall be deemed to be outstanding as of the
date of the granting of such rights or options and to have been issued for such
price per share, with the effect on the Exercise Price specified in Section
3.2.1 hereof. Except as provided in Section 3.2.2 hereof, no further adjustment
of the Exercise Price shall be made upon the actual issuance of such Common
Stock or the Convertible Securities; upon the exercise of such rights or
options; or upon the issuance of the Common Stock upon conversion or exchange of
such Convertible Securities.
(B) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price provided
for in any right or option referred to in Section 3.2.2, the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in Section 3.2.2(A), or the rate at which any
Convertible Securities referred to in Section 3.2.2(A), are convertible into or
exchangeable for Common Stock shall change (other than under or by reason of
provisions designed to protect against dilution), the Exercise Price then in
effect hereunder shall forthwith be readjusted (increased or decreased, as the
case may be) to the Exercise Price that would have been in effect at such time
had such rights, options or Convertible 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. On the
expiration of any such option or right referred to in
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Section 3.2.2, or on the termination of any such right to convert or exchange
any such Convertible Securities referred to in Section 3.2.2, the Exercise Price
then in effect hereunder shall forthwith be readjusted (increased or decreased,
as the case may be) to the Exercise Price that would have been in effect at the
time of such expiration or termination had such right, option or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
termination, never been granted, issued or sold, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the purchase price
provided for in Section 3.2.2(A) or the rate of conversion of any Convertible
Securities referred to in Section 3.2.2(A) is reduced at any time under or by
reason of provisions with respect thereto designed to protect against dilution,
then in case of the delivery of Common Stock upon the exercise of any such right
or option or upon conversion or exchange of any such Convertible Securities, the
Exercise Price then in effect hereunder shall, if not already adjusted,
forthwith be adjusted to such amount as would have applied had such right,
option or Convertible Securities never been issued as to such Common Stock and
had adjustments been made upon the issuance of the Common Stock delivered as
aforesaid, but only if as a result of such adjustment the Exercise Price then in
effect hereunder is thereby reduced.
(C) Consideration for Stock. In case at any time Common Stock
or Convertible Securities or any rights or options to purchase any such Common
Stock or Convertible Securities shall be issued or sold for cash, the
consideration therefor shall be deemed to be the amount received by the Company
therefor. In case at any time any Common Stock, Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible Securities
shall be issued or sold for consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to be the
fair value of such consideration, as determined reasonably and in good faith by
the Board of Directors of the Company. In case at any time any Common Stock,
Convertible Securities or any rights or options to purchase any Common Stock or
Convertible Securities shall be issued in connection with any merger or
consolidation in which the Company is the surviving corporation, the amount of
consideration received therefor shall be deemed to be the fair value, as
determined reasonably and in good faith by the Board of Directors of the
Company, of such portion of the assets and business of the nonsurviving
corporation as such Board of Directors may determine to be attributable to such
Common Stock, Convertible Securities, rights or options as the case may be. In
case at any time any rights or options to purchase any shares of Common Stock or
Convertible Securities shall be issued in connection with the issuance and sale
of other securities of the Company, together consisting of one integral
transaction in which no consideration is allocated to such rights or options by
the parties, such rights or options shall be deemed to have been issued without
consideration.
(D) Record Date. In the case the Company shall take a record
of the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock or Convertible
Securities, or (ii) to subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the date of the issuance
or sale of the Common Stock or Convertible Securities deemed to have been issued
or sold as a result of the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
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(E) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned directly by the
Company in treasury, and the disposition of any such shares shall be considered
an issuance or sale of Common Stock for the purpose of this Section 3.2.
3.3. Stock Dividends. In case the Company shall declare a dividend or
make any other distribution upon any shares of the Company, payable in Common
Stock or Convertible Securities, any Common Stock or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
3.4. Stock Splits and Reverse Splits. In the event that the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of Warrant Shares
purchasable pursuant to this Warrant immediately prior to such subdivision shall
be proportionately increased, and conversely, in the event that the outstanding
shares of Common Stock shall at any time be combined into a smaller number of
shares, the Exercise Price in effect immediately prior to such combination shall
be proportionately increased and the number of Warrant Shares purchasable upon
the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced. Except as provided in this Section 3.4, no adjustment
in the Exercise Price and no change in the number of Warrant Shares purchasable
shall be made under this Article III as a result of or by reason of any such
subdivision or combination.
3.5. Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another Person, or the sale,
transfer or other disposition of all or substantially all of its assets of the
Company to another Person shall be effected in such a way that holder of Common
Stock shall be entitled to receive capital stock, securities or assets with
respect to or in exchange for their shares, then the following provisions shall
apply:
3.5.1. As a condition of such reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer or other
disposition (except as otherwise provided below in this Section 3.5), lawful and
adequate provisions shall be made whereby the holder of Warrants shall
thereafter have the right to purchase and receive upon the terms and conditions
specified in this Warrant and in lieu of the Warrant Shares immediately
theretofore receivable upon the exercise of the rights represented hereby, such
shares of capital stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of Warrant Shares immediately theretofore receivable
by the holder had such reorganization, reclassification, consolidation, merger,
share exchange or sale not taken place, and in any such case appropriate
provision reasonably satisfactory to such holder shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Exercise Price
and of the number of Warrant Shares receivable upon the exercise) shall
thereafter be applicable, as nearly as possible, in relation to any shares of
capital stock, securities or assets thereafter deliverable upon the exercise of
Warrants.
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3.5.2. In the event of a merger, share exchange or
consolidation of the Company with or into another Person as a result of which a
number of shares of Common Stock or Common Stock equivalents of the successor
Person greater or lesser than the number of shares of Common Stock outstanding
immediately prior to such merger, share exchange or consolidation are issuable
to holders of Common Stock, then the number of Warrant Shares purchasable
pursuant to the Warrants and the Exercise Price in effect immediately prior to
such merger, share exchange or consolidation shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock.
3.5.3. The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor Person (if other than
the Company) resulting from such consolidation, share exchange or merger or the
Person purchasing or otherwise acquiring such assets shall have assumed by
written instrument executed and mailed or delivered to the holder hereof at the
last address of such holder appearing on the books of the Company the obligation
to deliver to such holder such shares of capital stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be entitled to
receive, and all other liabilities and obligations of the Company hereunder.
Upon written request by the holder hereof, such successor Person will issue a
new Warrant revised to reflect the modifications in this Warrant effected
pursuant to this Section 3.5.
3.5.4. If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange or
sale, transfer or other disposition of all or substantially all of the Company's
assets with the Person having made such offer or with any affiliate of such
Person, unless prior to the consummation of such consolidation, merger, share
exchange, sale, transfer or other disposition the holder hereof shall have been
given a reasonable opportunity to then elect to receive upon the exercise of the
Warrants either the capital stock, securities or assets then issuable with
respect to the Common Stock or the capital stock, securities or assets, or the
equivalent, issued to previous holders of the Common Stock in accordance with
such offer.
3.6. Adjustment for Asset Distribution. If the Company declares a
dividend or other distribution payable to all holders of shares of Common Stock
in evidences of indebtedness of the Company or other assets of the Company
(including, cash (other than regular cash dividends declared by the Board of
Directors), capital stock (other than Common Stock, Convertible Securities or
options or rights thereto) or other property), the Exercise Price in effect
immediately prior to such declaration of such dividend or other distribution
shall be reduced by an amount equal to the amount of such dividend or
distribution payable per share of Common Stock, in the case of a cash dividend
or distribution, or by the fair value of such dividend or distribution per share
of Common Stock (as reasonably determined in good faith by the Board of
Directors of the Company), in the case of any other dividend or distribution.
Such reduction shall be made whenever any such dividend or distribution is made
and shall be effective as of the date as of which a record is taken for purpose
of such dividend or distribution or, if a record is
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not taken, the date as of which holders of record of Common Stock entitled to
such dividend or distribution are determined.
3.7. De Minimis Adjustments. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of the Warrants and no adjustment in the Exercise
Price shall be required unless such adjustment would require an increase or
decrease of at least $0.01 in the Exercise Price; provided, however, that any
adjustments which by reason of this Section 3.7 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest full share or nearest one
hundredth of a dollar, as applicable.
3.8. Notice of Adjustment. Whenever the Exercise Price or the number of
Warrant Shares issuable upon the exercise of the Warrants shall be adjusted as
herein provided, or the rights of the holder hereof shall change by reason of
other events specified herein, the Company shall compute the adjusted Exercise
Price and the adjusted number of Warrant Shares in accordance with the
provisions hereof and shall prepare an Officer's Certificate setting forth the
adjusted Exercise Price and the adjusted number of Warrant Shares issuable upon
the exercise of the Warrants or specifying the other shares of stock, securities
or assets receivable as a result of such change in rights, and showing in
reasonable detail the facts and calculations upon which such adjustments or
other changes are based. The Company shall cause to be mailed to the holder
hereof copies of such Officer's Certificate together with a notice stating that
the Exercise Price and the number of Warrant Shares purchasable upon exercise of
the Warrants have been adjusted and setting forth the adjusted Exercise Price
and the adjusted number of Warrant Shares purchasable upon the exercise of the
Warrants.
3.9. Notifications to Holders. In case at any time the Company
proposes:
(i) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution (other than
cash dividends) to the holders of its Common Stock;
(ii) to offer for subscription pro rata to all of the holders
of its Common Stock any additional shares of capital stock of any class or other
rights;
(iii) to effect any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation, merger
or share exchange of the Company with another Person, or sale, transfer or other
disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the holder hereof
(a) at least 10 days' (but not more than 90 days') prior written notice of the
date of which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for determining rights
to vote in respect of any such issuance, reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition, dissolution,
liquidation or winding up, and (b) in the case of any such issuance,
reorganization,
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reclassification, consolidation, merger, share exchange, sale, transfer,
disposition, dissolution, liquidation or winding up, at least 10 days' (but not
more than 90 days') prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause (a) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (b) shall also specify the
date on which the holders of Common Stock shall be entitled to exchange their
Common Stock, as the case may be, for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, share
exchange, sale, transfer, disposition, dissolution, liquidation or winding up,
as the case may be.
3.10. Company to Prevent Dilution. If any event or condition occurs as
to which other provisions of this Article III are not strictly applicable or if
strictly applicable would not fairly protect the exercise or purchase rights of
the Warrants evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect the
exercise or purchase rights of the holder hereof under any provisions of this
Warrant, then the Company shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such exercise and purchase rights as aforesaid, and any adjustments
necessary with respect to the Exercise Price and the number of Warrant Shares
purchasable hereunder so as to preserve the rights of the holder hereunder. In
no event shall any such adjustment have the effect of increasing the Exercise
Price as otherwise determined pursuant to this Article III except pursuant to
Section 3.2.2(B) or in the event of a combination of shares of the type
contemplated in Section 3.4 hereof, and then in no event to an amount greater
than the initial Exercise Price.
ARTICLE IV.
Miscellaneous
4.1. Governing Law. This warrant shall be governed by and construed in
accordance with the laws of the State of Delaware.
4.2. Waiver and Amendment. Any term or provision of this Warrant may be
waived at any time by the party which is entitled to the benefits thereof and
any term or provision of this Warrant may be amended or supplemented at any time
by agreement of the holder hereof and the Company, except that any waiver of any
term or condition, or any amendment or supplementation, of this Warrant shall be
in writing. A waiver of any breach or failure to enforce any of the terms or
conditions of this Warrant shall not in any way effect, limit or waive a party's
rights hereunder at any time to enforce strict compliance thereafter with every
term or condition of this Warrant.
4.3. Illegality. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the
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remaining provisions of this Warrant shall not, at the election of the party for
whom the benefit of the provision exists, be in any way impaired.
4.4. Copy of Warrant. A copy of this Warrant shall be filed among the
records of the Company.
4.5. Notice. Any notice or other document required or permitted to be
given or delivered to the holder hereof shall be in writing and delivered at, or
sent by certified or registered mail to such holder at, the last address shown
on the books of the Company maintained at the Warrant Office for the
registration of this Warrant or at any more recent address of which the holder
hereof shall have notified the Company in writing. Any notice or other document
required or permitted to be given or delivered to the Company, other than such
notice or documents required to be delivered to the Warrant Office, shall be
delivered at, or sent by certified or registered mail to, the offices of the
Company at 7580 East Gray Road, Suite 102, Scottsdale, Arizona 85260, or such
other address within the continental United States of America as shall have been
furnished by the Company to the holder of this Warrant.
4.6. Limitation of Liability; Not Stockholders. No provision of this
Warrant shall be construed as conferring upon the holder hereof the right to
vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election of
directors of the Company or any other matter whatsoever as a stockholder of the
Company. No provision hereof, in the absence of affirmative action by the holder
hereof to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such holder for the purchase price of any shares of Common Stock or as a
stockholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
4.7. Exchange, Loss, Destruction, etc. of Warrant. Upon receipt of
evidence satisfactory to the Company of the loss, theft, mutilation or
destruction of this Warrant, and in the case of any such loss, theft or
destruction upon delivery of a bond of indemnity or such other security in such
form and amount as shall be reasonably satisfactory to the Company, or in the
event of such mutilation upon surrender and cancellation of this Warrant, the
Company will make and deliver a new Warrant of like tenor, in lieu of such lost,
stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions
of this Section 4.7 in lieu of any Warrant alleged to be lost, destroyed or
stolen, or in lieu of any mutilated Warrant, shall constitute an original
contractual obligation on the part of the Company. This Warrant shall be
promptly canceled by the Company upon the surrender hereof in connection with
any exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section 4.7.
4.8. Headings. The Article and Section and other headings herein are
for convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name.
Dated: January 1, 1997
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
Name: STUART N. RUBIN
Title: Chief Financial Officer
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SUBSCRIPTION NOTICE
The undersigned, the holder of the foregoing Warrant, hereby elects to
exercise purchase rights represented thereby and to purchase thereunder ________
shares of the Common Stock covered by such Warrant, and herewith makes payment
in full for such shares pursuant to Section 1.1 of such Warrant, and requests
(a) that certificates for such shares (and any other securities or other
property issuable upon such exercise) be issued in the name of, and delivered to
_____________________________________ and (b), if such shares shall not include
all of the shares issuable as provided in such Warrant, that a new Warrant of
like tenor and date for the balance of the shares issuable thereunder be
delivered to the undersigned.
___________________________________
Name:
Date:
___________________
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ASSIGNMENT
For value received, _______________________, hereby sells, assigns, and
transfers unto _________________________ the within Warrant, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ________________________ attorney, to transfer such Warrant on the books
of the Company, with full power of substitution.
___________________________________
Name:
Date:
___________________
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Exhibit 6.1
PLAN AND AGREEMENT OF REORGANIZATION
PLAN AND AGREEMENT OF REORGANIZATION ("Agreement"), made as of March
21, 1997, by and among LANE CLISSOLD ("Clissold"), SOUND INDUSTRIES, INC., a
Utah corporation (the "Company"), SOUND ACQUISITION CORP., a Utah corporation
(the "Subsidiary"), WO CONSULTING, INC., a Delaware corporation ("WOC" or the
"Surviving Corporation"), STUART N. RUBIN ("Rubin"), SCOTTSDALE TECHNOLOGIES-I,
LTD., a Delaware limited partnership (the "Partnership"), ERIC J. SCHEDELER
("Schedeler") and SCOTTSDALE TECHNOLOGIES, INC., a Delaware corporation
("Scottsdale").
R E C I T A L S
WHEREAS, Clissold owns a majority of the issued and outstanding shares
of capital stock of the Company;
WHEREAS, the Company owns all of the issued and outstanding shares of
capital stock of the Subsidiary;
WHEREAS, Rubin, Schedeler, the Partnership and Scottsdale
(collectively, the "WOC Stockholders") directly or beneficially own
substantially all of the issued and outstanding shares of capital stock of WOC;
WHEREAS, it is the intent of the parties hereto that the transactions
contemplated in this Agreement will be treated as a tax-free reorganization;
WHEREAS, pursuant to the terms and conditions hereof, the Company
wishes to merge the Subsidiary into WOC, and WOC desires to merge with the
Subsidiary;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants, conditions and agreements set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged, it hereby is agreed that:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings specified:
1.1 Affiliate shall mean, with respect to any specified Person, (a) any
other Person which, directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such specified Person,
(b) any other Person which is a director, officer
<PAGE> 2
or partner or is, directly or indirectly, the beneficial owner of 10 percent or
more of any class of equity securities, of the specified Person or a Person
described in clause (a) of this paragraph, (c) another Person of which the
specified Person is a director, officer or partner or is, directly or
indirectly, the beneficial owner of 10 percent or more of any class of equity
securities, (d) another Person in which the specified Person has a substantial
beneficial interest or as to which the specified Person serves as trustee or in
a similar capacity, (e) any relative or spouse of the specified Person or any of
the foregoing Persons, any relative of such spouse or any spouse of any such
relative and/or (f) any Other Person who is a member of a "group" with such
specified Person (with the meaning of Section 13(d) of the Exchange Act;
provided, however, that at any time after the Closing Date, the Company and WOC,
on the one hand, and Clissold and his Affiliates (other than the Company) on the
other hand, shall not be deemed to be Affiliates of each other.
1.2 Agreement shall mean this Agreement, together with the Exhibits and
Schedules attached hereto, as the same may be amended from time to time in
accordance with the terms hereof.
1.3 Clissold shall mean Lane Clissold, an individual and a resident of
Utah.
1.4 Closing is defined in Section 2.1.
1.5 Closing Date shall mean the date that is on the later of (a) March
21, 1997 or (b) the date that is two business days following WOC's receipt of
all Schedules required to be attached hereto and the Disclosure Documents, or at
such time and place as the parties may agree. The failure to consummate the
purchase and sale provided for in this Agreement on the date and time and at the
place determined pursuant to this Agreement will not result in the termination
of this Agreement and will not relieve any party of any obligation under this
Agreement, except if the Closing has not occurred on or before April 15, 1997
either party may terminate this Agreement by giving the other party notice of
such termination in writing.
1.6 Code shall mean the Internal Revenue Code of 1986, as amended.
1.7 Commission means the Securities Exchange Commission.
1.8 Common Stock shall mean the capital stock of the Company,
consisting of shares of common stock, $.005 par value.
1.9 Company shall mean Sound Industries, Inc., a Utah corporation.
1.10 Contracts shall mean all contracts, agreements, arrangements,
leases, relationships and commitments, written or oral, to which the Company is
a party or which is intended or purports to be binding and enforceable as
against the Company or any other party thereto.
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1.11 Disclosure Documents means the Disclosure Statement dated May 20,
1996, and all exhibits thereto and documents referenced therein, filed by the
Company pursuant to Rule 15c2-11 as promulgated by the Commission pursuant to
the Exchange Act.
1.12 Environmental Law shall mean any applicable federal, foreign,
state or local Laws, statutes, ordinances, regulations, rules, administrative
orders, consent decrees that relate to or impose liability or standards of
conduct or create any lien concerning mining or reclamation of mined land,
discharges, emissions, releases or threatened releases of noises, odors or any
pollutants, contaminants, wastes or hazardous or toxic wastes, substances or
materials, whether as matter or energy, into ambient air, water or land, or
otherwise relating to the manufacture, processing, generation, distribution,
use, treatment, storage, disposal, cleanup, transport, handling or sifting or
zoning of facilities for treatment, storage or disposal of pollutants,
contaminants, wastes or Hazardous Substances, including (but not limited to) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. Sections 9601 et seq., as amended, the Resource Conservation and Recovery
Act of 1976, 42 U.S.C. Sections 6901 et seq., as amended, the Toxic Substances
Control Act of 1976, 15 U.S.C. Sections 2601 et seq., as amended, the Federal
Water Pollution Control Act of 1972, 33 U.S.C. Sections 1251 et seq., as
amended, the Clean Air Act, 41 U.S.C. Sections 7401 et seq., as amended, any
other so-called "superfund" or "superlien" Law and any other similar federal,
foreign, state or local Laws.
1.13 Exchange Act means the Securities Exchange Act of 1934, as
amended.
1.14 Financial Statements shall mean the consolidated balance sheets of
the Company as of May 20, 1996 and September 30, 1995 and 1994, and the notes
thereto, and the related consolidated statements of income and cash flows of the
Company for the periods ended as of such dates, all of which are attached hereto
as Schedule 1.14.
1.15 GAAP shall mean U.S. generally accepted accounting principles at
the time in effect.
1.16 Governmental Authority shall mean the government of the United
States or any foreign country or any state or political subdivision thereof and
any entity, body or authority exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, including
the Pension Benefit Guaranty Corporation and other quasi-governmental entities
established to perform such functions.
1.17 Hazardous Substance shall mean any material or substance which
constitutes or is regulated or controlled as a hazardous substance, hazardous
waste, toxic substance, petroleum product, pollutant, contaminant or hazardous,
dangerous or toxic chemical, material or substance, as such terms are defined by
or required pursuant to any Environmental Law.
1.18 Law shall mean any federal, state, foreign, local order, consent
decree, treaty, statute, ordinance, regulation, decision, administrative order,
requirement, settlement agreement or other law or governmental requirement of
any kind imposed by, agreed to by, enforced by or
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<PAGE> 4
promulgated by any Governmental Authority, and the rules, regulations and orders
promulgated thereunder, all of the foregoing as in effect on the date hereof.
1.19 Lien shall mean any mortgage, lien, charge, restriction, pledge,
security interest, option, lease or sublease, claim, right of any third party,
easement, encroachment, encumbrance, imposition or any other matter affecting
the asset or right in question.
1.20 Loss or Losses shall mean any and all liabilities, losses, costs,
claims, damages, Taxes, penalties and expenses (including attorneys' fees and
expenses and costs of investigation and litigation). In the event any of the
foregoing are indemnifiable hereunder, the terms "Loss" and "Losses" shall
include any and all attorneys' fees and expenses and costs of investigation and
litigation incurred by the Indemnified Person in enforcing such indemnity.
1.21 NASD shall mean the National Association of Securities Dealers,
Inc.
1.22 Ordinary Course of Business shall mean the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency).
1.23 Partnership shall mean Scottsdale Technologies-I, Ltd., a Delaware
limited partnership.
1.24 Person shall mean any individual, corporation, proprietorship,
firm, partnership, limited partnership, trust, association or other entity.
1.25 Pre-Closing Transactions shall mean claims, liabilities, or
proceedings asserted by or against the Company arising with respect to any
event, circumstance, or action relating to or involving the Company or its
activities, assets or securities on or before the Closing Date.
1.26 Remaining Shares is defined in Section 3.5(c).
1.27 Rubin shall mean Stuart N. Rubin.
1.28 Schedeler shall mean Eric J. Schedeler.
1.29 Securities Laws means the Securities Act of 1933, as amended, the
Securities Exchange Act, all other laws as to which the Securities Exchange
Commission or the Commodities Futures Trading Commission have been granted
enforcement authority, all state securities laws (including so-called "blue sky"
laws), and all rules, regulations, orders and pronouncements of any Governmental
Authority relating to any of the foregoing.
1.30 Shares is defined in Section 2.1.
1.31 Subsidiary shall mean Sound Acquisition Corp., a Utah corporation.
1.32 Surviving Corporation shall mean WO Consulting, Inc., a Delaware
corporation.
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1.33 Taxes shall mean all taxes, charges, fees, duties, levies or other
assessments, including income, gross receipts, net proceeds, ad valorem,
turnover, real and personal property (tangible and intangible), sales, use,
franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel,
excess profits, occupational, interest equalization, windfall profits,
severance, employee's income withholding, other withholding, unemployment and
Social Security taxes, which are imposed by any Governmental Authority, and such
term shall include any interest, penalties or additions to tax attributable
thereto. Thus, for example, any obligation to hold a party harmless from federal
income tax for a taxable period includes the obligation to hold the party
harmless from any addition to tax, interest, or penalty imposed with respect to
such federal income tax.
1.34 Tax Return shall mean any report, return or other information
required to be filed with a Governmental Authority in connection with any Taxes.
1.35 Tax Statute of Limitations Date shall mean the close of business
on the 90th day after the expiration of the applicable statute of limitations
with respect to the Taxes in question, including any extensions thereof (or if
such date is not a Business Day, the next Business Day).
1.36 WOC shall mean WO Consulting, Inc., a Delaware corporation.
1.37 WOC Indemnified Parties shall mean WOC and each of its Affiliates
(including, after the Closing, the Company and the Subsidiary) and their
respective officers, directors, employees, agents and representatives, provided
that in no event shall Clissold or his Affiliates be deemed a WOC Indemnified
Party.
1.38 WOC Stock shall mean the capital stock of WOC, consisting of
shares of common stock, $.01 par value.
1.39 WOC Stockholders shall mean Rubin, Schedeler, the Partnership and
Scottsdale.
ARTICLE II
MERGER
2.1 The Merger.
(a) Agreement of Merger. The terms and conditions of the
merger shall be as set forth in the Articles of Merger which are
attached hereto as Exhibit A-1 (the "Articles of Merger") and the Plan
of Merger which is attached hereto as Exhibit A-2 (the "Plan of
Merger") and as further provided herein.
(b) Authorization of Stock. The Company shall authorize the
issuance and delivery of a sufficient number of shares of Common Stock,
and reserve for issuance
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<PAGE> 6
sufficient shares of Common Stock, to permit the consummation of the
Merger (as defined below) and the transactions contemplated by this
Agreement; provided, however, that no such shares shall be issued until
legally sufficient consideration therefor has been provided therefor.
(c) Approval by Stockholders and Directors. The stockholders
and the directors of the Subsidiary and WOC shall have approved and
adopted this Agreement and the Articles of Merger in accordance with
and to the extent required by applicable law, and any other applicable
legal requirements (such as notice to stockholders) shall have been
performed by the Subsidiary and WOC.
(d) Guarantee; Conversion of Stock; Issuance of Additional
Shares. On the Closing Date, the Subsidiary shall be merged (the
"Merger") into WOC and WOC shall be the surviving corporation in such
Merger; the Company shall execute and deliver a Guarantee in form and
substance satisfactory to WOC and the Partnership pursuant to which the
Company shall become joint and severally liable for the obligations
under the 12% Senior Convertible Promissory Notes due December 1, 1997
issued by WOC to the Partnership (the "Notes"), the Note and Warrant
Purchase Agreement effective as of January 1, 1997 between WOC and the
Partnership relating thereto and other obligations associated therewith
and agrees that shares of Common Stock will be issued in conversion of
such Notes to the same extent as shares of common stock of WOC would
have been issued in conversion thereof if the Merger had not occurred;
the Company will adopt an Executive Incentive Plan in replacement of
WOC's Incentive Plan, which plans shall have substantially, the same
terms and conditions; each outstanding share of WOC Stock shall be
converted into one share of Common Stock and sufficient shares of
Common Stock shall be reserved for issuance upon conversion of the
Notes and issuance under the Executive Incentive Plan; 3,091,200 shares
of Common Stock (the "Shares") currently held by Clissold shall be
redeemed by the Company; and $6,782.40 in immediately available funds
shall be remitted to Clissold from WOC (the "Cash Payment").
(e) Merger Date. The merger described herein shall become
effective on the date that the Articles of Merger or other similar
instrument are duly executed by the parties to the Merger, and are
filed and accepted in accordance with the laws of Delaware and Utah.
(f) Effect of the Merger. At the Closing Date, the Surviving
Corporation shall thereupon possess all of the rights, privileges,
powers and franchises of the Subsidiary then merged into the Surviving
Corporation.
(g) Corporate Governance. Immediately upon the effectiveness
of the Merger, all of the officers and directors of the Company
immediately prior to the effectiveness of the Merger shall resign and
Eric J. Schedeler shall be the President and a director of the Company,
and Rubin shall be Chief Financial Officer, Executive Vice President
and a director of the Company. Additional directors of the Company
shall
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thereafter be elected by the shareholders of the Company in a manner
consistent with the terms of that certain Note and Warrant Purchase
Agreement effective as of January 1, 1997 between WOC and the
Partnership. The officers and directors of WOC shall remain as the
officers and directors of the Surviving Corporation following the
Closing Date. The Certificate of Incorporation and Bylaws of WOC shall
remain as the Certificate of Incorporation and Bylaws of the Surviving
Corporation following the Closing Date, except that immediately upon
the effectiveness of the Merger, the name of the Surviving Corporation
shall be changed to "Scottsdale Technologies, Inc." Prior to Closing,
Scottsdale shall have amended its certificate of incorporation to
change its name to permit the Company to use the name "Scottsdale
Technologies, Inc." Subject to the Closing of the transactions
contemplated hereby, the Surviving Corporation shall have the right to
use the names "Scottsdale Technologies" and "Scottsdale" in all
jurisdictions in which Scottsdale or any of Scottsdale's Affiliates
have the right to use such names, and Scottsdale shall execute any
instruments necessary or convenient to permit the Surviving Corporation
or any of its successors to use such names in such jurisdictions and to
disclaim any right Scottsdale might have to use any such name.
(h) Filing of Merger Documents. Immediately after any
necessary approvals of the stockholders and directors of the Subsidiary
and WOC of (i) this Agreement, (ii) the Plan of Merger, (iii) the
Articles of Merger and any similar instrument and (iv) the transactions
contemplated hereby have been obtained and each other condition to the
obligations of the parties hereto have been satisfied or waived, the
Subsidiary and WOC will deliver for filing with the Secretaries of
State of Delaware and Utah duly executed Articles of Merger and any
other instruments that may be required by applicable law and take such
further actions as may be required by applicable law to make the Merger
effective as soon as possible after the time of such delivery for
filing, provided that each and every condition precedent to the Closing
shall have been fulfilled or waived by the party authorized to waive
such condition.
(i) The Closing. The closing of the transactions contemplated
by this Agreement (the "Closing") shall take place at such offices in
Phoenix, Arizona as are specified by WOC, or at such other place and on
such other date as WOC and the Company may mutually determine (the
"Closing Date").
2.2 Closing. At the Closing:
(a) Clissold will deliver to the Surviving Corporation:
(i) certificates representing the Shares, duly
endorsed (or accompanied by duly executed stock powers), for
redemption by the Company;
(ii) a release in the form of Exhibit 2.2(a)(ii)
executed by Clissold ("Clissold's Release");
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(iii) resignations from all officers and directors of
the Company and the Subsidiary in office immediately prior to
the Merger, and written consents of the directors of the
Company electing Eric J. Schedeler as the President and a
director, and electing Rubin as the Chief Financial Officer,
Executive Vice President and a director, of the Company;
(iv) a certificate executed by Clissold representing
and warranting to the Surviving Corporation that each of
Clissold's representations and warranties in this Agreement
was accurate in all respects as of the date of this Agreement
and is accurate in all respects as of the Closing Date as if
made on the Closing Date;
(v) an opinion of Clissold's counsel, in form and
substance reasonably satisfactory to the Surviving
Corporation, covering the matters described in Sections 3.1,
3.3, 3.5(a), (b), (d), (f) and (g) and 3.10 and indicating
that (A) the execution and delivery of this Agreement, and the
consummation of the transactions contemplated hereby, by the
Company and the Subsidiary will not conflict with, result in a
breach of, or constitute a default under, the Articles of
Incorporation or Bylaws of either the Company or the
Subsidiary and (B) the instruments necessary to effect the
Merger are in good form for filing in Utah and Delaware, and
that upon the filing of such instruments in Utah and Delaware
and the issuance of the appropriate certificates by the
Secretaries of State of Utah and Delaware, the Merger will be
valid under Utah and Delaware law in accordance with the terms
of this Agreement; and
(vi) a certificate issued by the Company's transfer
agent attesting to the aggregate number of shares of Common
Stock owned by each shareholder of the Company.
(b) WOC will remit the Cash Payment to Clissold.
(c) The WOC Stockholders will deliver or cause to be delivered
to the Surviving Corporation certificates representing all outstanding
shares of WOC Stock, duly endorsed (or accompanied by duly executed
stock powers).
(d) The Company will deliver to the WOC Stockholders that are
holders of record of WOC's shares of common stock certificates
representing one share of Common Stock for each share of WOC common
stock bearing appropriate legends regarding restrictions on transfer
for delivery by the WOC Stockholders to the Persons holding WOC Stock
prior to the Merger.
(e) The Company will deliver to the Surviving Corporation
certificates representing all outstanding shares of capital stock of
the Subsidiary, duly endorsed (or accompanied by duly executed stock
powers).
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(f) The Surviving Corporation will deliver to the Company a
certificate representing one hundred shares of common stock of the
Surviving Corporation bearing appropriate legends regarding
restrictions on transfer.
(g) The Company shall execute and deliver the Guarantee and
related documents and adopt the Executive Incentive Plan as
contemplated by Section 2.1(d).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CLISSOLD
Clissold hereby represents and warrants to the Surviving Corporation
(which representations and warranties shall be deemed remade and be effective as
of the Closing Date) that:
3.1 Organization and Qualification. Each of the Company and the
Subsidiary is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Utah, and has all requisite power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated herein.
3.2 Execution, Delivery and Performance. The execution, delivery and
performance by each of Clissold, the Company and the Subsidiary of this
Agreement and the consummation of the transactions contemplated herein and
therein will not, with or without the giving of notice or the passage of time,
or both, (a) conflict with, give any third party an additional right (including
transaction rights or rights to issuance payments or result in a violation or
breach of, or a default, right to accelerate obligations or indebtedness, permit
the loss of rights under, or result in the creation of any Lien, under or
pursuant to, any provision of the Articles of Incorporation or Bylaws of either
the Company or the Subsidiary, or any Law (including any finding, order,
judgment, writ, injunction or decree issued by any Governmental Authority), or
any Contract to which Clissold, the Company or the Subsidiary is a party or by
which Clissold, the Company or the Subsidiary may be bound or affected; or (b)
require the approval, consent or authorization of, or prior notice to, filing
with or registration with, any Governmental Authority or any other Person,
except for certain instruments necessary to consummate the Merger.
3.3 Authorization. Each of Clissold, the Company and the Subsidiary has
full legal capacity and authority to enter into, deliver and perform this
Agreement and to consummate the transactions contemplated hereby, and this
Agreement constitutes the legal, valid and binding obligation of, and is
enforceable against, each of Clissold, the Company and the Subsidiary in
accordance with its terms.
3.4 Status; Securities Compliance.
(a) Neither the Company nor the Subsidiary has qualified, or
is required to qualify, as a foreign corporation in any jurisdiction
outside Utah. Copies of the Articles
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of Incorporation and Bylaws of the Company and the Subsidiary, as
heretofore delivered to WOC, are true, complete and correct. Each of
the Company and the Subsidiary has the corporate power and authority to
own those properties purportedly owned by it and to carry on its
business as now being conducted. Neither the Company nor the Subsidiary
leases any property, and none of the properties used by the Company in
connection with its business as now being conducted are required to be
leased by the Company or the Subsidiary. Except for the Subsidiary, the
Company does not have any subsidiaries and does not own shares or
capital stock or otherwise have any ownership interest or other
investment in or advance to any corporation, partnership, joint
venture, entity, enterprise or organization, and the Company is not a
partner (general or limited), joint venturer or other member or
participant in any partnership, joint venture or other unincorporated
association.
(b) The Company is not subject to the reporting requirements
of Sections 12, 13 or 15(d) of the Exchange Act and the Company has not
filed any reports pursuant to such Sections.
(c) The Company has prepared (and has updated to reflect all
events and transactions on or before January 31, 1997) the Disclosure
Documents, which Disclosure Documents comply in all respects (and
disclose all information required to be disclosed) pursuant to Rule
15c2-11(a)(5) and, which Disclosure Documents has been furnished to all
brokers and dealers who, to Clissold's or the Company's knowledge, have
published any quotations or submitted for quotation for the Company's
Common Stock. The Company has not filed any document pursuant to Rule
15c2-11 as promulgated by the Commission under the Exchange Act, other
than the Disclosure Documents, a complete and accurate copy of which
has been delivered to the WOC Stockholders. Such Disclosure Documents
do not contain any misstatement of material fact and do not omit to
state a material fact necessary to make the statements therein not
misleading. To the best of Clissold's and the
Company's knowledge, the Disclosure Documents have been made "publicly
available" within the meaning of Rule 144 promulgated by the Commission
under the Securities Act of 1933, as amended.
(d) There has been no trading suspension order issued by the
Commission respecting any securities of the Company or its predecessor
during the preceding 5 years.
(e) The Company's shares of Common Stock are eligible for
qualification in, and currently are quoted in, the OTC Bulletin Board
service through the NASD, pursuant to the 6500 and 6600 series Rules
promulgated by the NASD.
(f) The Company has made all filings with the Commission and
any other Governmental Authority required by any Securities Laws to be
made, and all such filings have been made timely and are complete and
accurate. All such filings comply in all material respects with the
requirements of the Securities Laws.
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(g) As of the date hereof, and during the ninety day period
prior to the date hereof, 500,000 shares of the Company's Common Stock
are owned by Persons other than Clissold and Clissold's Affiliates, all
of which shares may be sold by the holders thereof without restrictions
on resale under the Securities Act (or comparable provisions under the
Laws of the State of Utah) (the "Non-Affiliated Shares"). To the best
of Clissold's knowledge, no claim as against Clissold, the Company or
the Non-Affiliated Shares may be asserted by any Person by reason of
the acquisition or ownership of the Non-Affiliated Shares by the
holders thereof.
(h) To the best of Clissold's knowledge, Clissold has complied
with applicable federal and state securities laws in connection with
all transactions involving shares of Common Stock in which Clissold has
been a party.
3.5 Capital Stock of the Company and the Subsidiary.
(a) On January 10, 1997, the Company approved a 1 for 100
reverse stock split in accordance with the applicable provisions of the
Laws of the State of Utah, which has since taken effect. As a result of
such stock split the authorized capital stock of the Company consists
of 50,000,000 shares of the Company's common stock, $.005 par value, of
which 4,491,200 shares are issued and outstanding as of the date
hereof. All of the shares of Common Stock have been duly and validly
authorized and issued, are fully-paid and nonassessable, are held of
record by the holders listed on Schedule 3.5(e), and were not issued in
violation of the preemptive rights of any stockholder. Clissold owns
good, valid, marketable, legal and beneficial title to 3,991,200 shares
of Common Stock (including the Shares and Remaining Shares), free and
clear of all Liens and claims of every kind, whether absolute, matured,
contingent or otherwise. There are no treasury shares of the Company,
no existing subscription options, warrants, calls or commitments or
reservations relating to, or any securities or rights convertible into,
exercisable for or exchangeable for, any capital stock of the Company.
(b) Except as set forth above, there are no shares of capital
stock or other securities (whether or not such securities have voting
rights) of the Company issued or outstanding or other agreements or
commitments of any character obligating Clissold or the Company, or
obligating Clissold or any of his Affiliates to cause the Company, to
issue, transfer or sell, or cause the issuance, transfer or sale of,
any shares of capital stock or other securities (whether or not such
securities have voting rights) of the Company. Other than as set forth
in this Agreement, there are no outstanding contractual obligations of
Clissold or the Company which relate to the purchase, sale, issuance,
repurchase, redemption, acquisition, transfer, disposition, holding or
voting of any shares of capital stock or other securities of the
Company or the management or operations of the Company. Except for the
rights of the holders of the Common Stock, no Person has any right to
participate in, or receive any payment based on any amount relating to,
the revenue, income, value or net worth of, or business conducted by,
the Company or any component or portion thereof, or any increase or
decrease in any of the foregoing.
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(c) After giving effect to the redemption of the Shares by the
Company, Clissold will own, legally and beneficially, 900,000 shares of
Common Stock, which have been beneficially owned by Clissold
continuously since May 3, 1995 (the "Remaining Shares"). No claim as
against Clissold, the Company, the Shares or the Remaining Shares may
be asserted by any Person by reason of Clissold's acquisition or
ownership of the Remaining Shares, Clissold has paid or has delivered
all consideration to be paid or delivered with respect to the Remaining
Shares, and Clissold has continually owned all beneficial interests
since such dates, without any puts, calls or any other rights to
purchase or sale attaching thereto during such period.
(d) After giving effect to the redemption of the Shares by the
Company, the only shares of Common Stock that shall be outstanding
immediately after the consummation of the Merger (other than shares of
Common Stock issued to the holders of WOC Stock in connection with the
Merger) shall be the Remaining Shares and the NonAffiliated Shares.
(e) To the best of Clissold's and the Company's knowledge, the
list of the Company's stockholders as of March 21, 1997 provided by the
Company's transfer agent is true and correct.
(f) The authorized capital stock of the Subsidiary consists of
50,000 shares of the Subsidiary's common stock, $.001 par value, of
which 1,000 shares are issued and outstanding as of the date hereof.
All of the shares issued by the Subsidiary have been duly and validly
authorized and issued, are fully-paid and nonassessable and are held of
record by the Company. The Company owns good, valid, marketable, legal
and beneficial title to all such shares, free and clear of all Liens
and claims of every kind, whether absolute, matured, contingent or
otherwise. There are no treasury shares of the Subsidiary, no existing
subscription options, warrants, calls or commitments or reservations
relating to, or any securities or rights convertible into, exercisable
for or exchangeable for, any capital stock of the Subsidiary.
(g) Except as set forth above, there are no shares of capital
stock or other securities (whether or not such securities have voting
rights) of the Subsidiary issued or outstanding or other agreements or
commitments of any character obligating Clissold, the Company or the
Subsidiary, or obligating Clissold, the Company or any of their
Affiliates to cause the Subsidiary, to issue, transfer or sell, or
cause the issuance, transfer or sale of, any shares of capital stock or
other securities (whether or not such securities have voting rights) of
the Subsidiary. Other than as set forth in this Agreement, there are no
outstanding contractual obligations of Clissold, the Company or the
Subsidiary which relate to the purchase, sale, issuance, repurchase,
redemption, acquisition, transfer, disposition, holding or voting of
any shares of capital stock or other securities of the Subsidiary or
the management or operations of the Subsidiary. Except for the rights
of the holders of the Common Stock, no Person has any right to
participate in, or receive any payment based on any amount relating to,
the revenue, income, value or net worth of,
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or business conducted by, the Company or any component or portion
thereof, or any increase or decrease in any of the foregoing.
3.6 Financial Statements; No Undisclosed Liabilities.
(a) Clissold has delivered to the WOC Stockholders copies of
the Financial Statements. The Financial Statements have been prepared
in accordance with GAAP consistently applied and present fairly the
consolidated financial condition, assets, liabilities, reserves,
expenses, results of operations and cash flows of the Company, as of
the dates, and for the periods indicated. The Financial Statements are
in accordance with the books and records of the Company, do not reflect
any transactions which are not bona fide transactions and do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading.
(b) Except as set forth in the Financial Statements, the
Company has no liabilities, debts, claims or obligations, whether
accrued, absolute, contingent or otherwise, whether due or to become
due. On February 25, 1995, the Company transferred all right, title and
interest in and to the mining claims (the "Mining Claims") and the
patents (the "Patents") referred to in Note 1 of the Financial
Statements, and the Company is not subject to any liabilities with
respect to the Mining Claims, the Patents, the operations with respect
to the properties purportedly subject to such Mining Claims or the
transactions pursuant to which Clissold acquired control of the
Company. Neither Clissold nor the Company is subject to any claim of
Raleigh Cummings of any kind whatsoever, including, without limitation,
any claim for any liabilities, debts, obligations, whether accrued,
absolute, contingent or otherwise, whether due or to become due.
(c) Except as set forth in the Financial Statements, neither
Clissold nor the Company has prepared, is in possession of, or has been
provided with, any document that lists or otherwise discloses any
liabilities, debts, claims or obligations, whether accrued, absolute,
contingent or otherwise, whether due or to become due, of the Company.
3.7 Absence of Changes. Except as set forth in Schedule 3.7, or as
fully reflected in the Financial Statements, or as disclosed in the Disclosure
Documents since May 20, 1996, the Company has not:
(a) borrowed or agreed to borrow any funds or incurred, or
become subject to, any obligation or liability (absolute or
contingent);
(b) paid any obligation or liability (absolute or contingent)
or agreed to pay any amount other than current liabilities reflected in
or shown on the Financial Statements as of the date thereof and current
liabilities incurred since the date of the Financial Statements in the
Ordinary Course of Business, except for the payroll taxes incurred
during 1984 and 1985 that are referenced in Note 7 to the Financial
Statements (the "Payroll Taxes");
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(c) sold, transferred or otherwise disposed of, or agreed to
sell, transfer or otherwise dispose of any of its assets, property or
rights, or waived, released, canceled or otherwise terminated, or
agreed to cancel or otherwise terminate, any debts or claims, except in
the Ordinary Course of Business;
(d) terminated, modified, amended or otherwise altered or
changed any of the terms or provisions of any Contract except in the
Ordinary Course of Business, made or permitted any amendment or
termination of any other Contract or license to which it is a party or
to which it or any of its properties are subject;
(e) made any capital expenditures or commitment therefor or
created any obligation or commitment with respect to capital items or
equipment;
(f) merged or consolidated with any other corporation or
entity, or acquired or agreed to acquire any corporation, association,
partnership, joint venture or other entity or any interest therein or
entered into any Contract to do so;
(g) granted or suffered to exist any Liens with respect to any
of its assets or properties, except for any Lien incurred with respect
to the Payroll Taxes;
(h) suffered any material damage, destruction or Loss, whether
or not covered by insurance;
(i) changed any of the accounting systems, practices or
principles followed by it or the methods of applying such principles;
(j) incurred any obligation or entered into any Contract which
either (x) required a payment by any party in excess of, or a series of
payments which in the aggregate exceed, $1,000 or provides for the
delivery of goods or performance of services, or any combination
thereof, having a value in excess of $1,000, or (y) has a term of, or
requires the performance of any obligations by the Company over a
remaining period that, as of the date of this Agreement, in excess of
one month or longer;
(k) entered into, authorized, or permitted any transaction
with Clissold or any Affiliate of Clissold, except for the issuance of
shares of Common Stock to Clissold on or about March 19, 1997;
(l) except as described in Section 3.5(a), 3.5(f) or as
contemplated hereby, authorized for issuance, issued, sold, delivered
or agreed or committed to issue, sell or deliver (whether through the
issuance or granting of options, warrants, convertible or exchangeable
securities, commitments, subscriptions, rights to purchase or
otherwise) any shares of its capital stock or any other securities, or
amended any of the terms of any such securities or split, combined, or
reclassified any shares of its capital stock, declared, set aside or
paid any dividend or other distribution (whether in cash, stock or
property or
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any combination thereof) in respect of its capital stock, or redeemed
or otherwise acquired any securities of the Company;
(m) made any loans, advances (other than expense advances made
to employees in the Ordinary Course of Business) or capital
contributions to, or investments in, any other Person; or
(n) made any Tax election or settled or compromised any
federal, state, local or foreign Tax liability, or waived or extended
the statute of limitations in respect of any such Taxes.
3.8 Compliance with Law. The Company has obtained all permits, licenses
and authorizations required under, and is in compliance in all respect with, all
applicable Laws. No notice from any Governmental Authority has been received by
the Company claiming any material violation of any Law or requiring any work,
construction or expenditure, or asserting any Tax, assessment or penalty, except
with respect to the Payroll Taxes. The business and operations of the Company
have been and are in compliance with all Environmental Laws in effect, and no
condition exists or has existed or event is occurring or has occurred which,
with or without notice or the passage of time or both, would or did constitute a
material violation of or give rise to any present or future liability or Lien
under any Environmental Law.
3.9 Contracts, Agreements, etc. Schedule 3.9 attached hereto contains a
correct and complete list of all of the Contracts to which the Company is a
party (including all Contracts relating to Pre-Closing Transactions), for which
it is obligated, or to which its respective assets or properties are subject
(and summarizes in reasonable and meaningful detail all of the listed Contracts
and arrangements that are not evidenced by written Contracts delivered to WOC).
Clissold has provided WOC with access to true and complete copies of all
Contracts listed on referenced on any Schedule hereto, including all amendments,
modifications, waivers and elections applicable thereto and the summaries set
forth on Schedule 3.9 are true and correct and do not omit any information
necessary to make the summaries not misleading. All such Contracts are, and
after the Closing will continue to be, valid and binding, enforceable in
accordance with their respective terms as against third Persons that are parties
thereto, and are in full force and effect. Except as disclosed in Schedule 3.9,
the Company (and, to the extent the Company would be affected, Clissold) has in
all material respects performed all the obligations required to be performed by
it to date under each Contract listed or required to be listed in Schedule 3.9
and there is not under any such Contract, any existing breach or default (or
event or condition, which after notice or lapse of time, or both, would
constitute a material breach or material default), by the Company, with respect
thereto or, to the knowledge of Clissold, a breach or default by any other party
thereto. Without limiting the foregoing in any way, the Indemnification
Agreement between Raleigh Cummings and the Company (the "Indemnification
Agreement") has not been revoked or rescinded, and neither Clissold nor the
Company is aware of (a) any basis under which the Company would be entitled to
assert any right to indemnification under such agreement or (b) any basis under
which Raleigh Cummings would be entitled to offset any amount payable to the
Company under the Indemnification Agreement.
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3.10 Proceedings. There is no claim, legal action, suit, litigation,
arbitration, dispute or investigation, judicial, administrative or otherwise, or
any order, decree or judgment, now pending or in effect, or, to the knowledge of
Clissold threatened or contemplated, that, if adversely determined, would have
an adverse affect on the Company, or the transactions contemplated by this
Agreement and each of Clissold or the Company is not actually aware of any facts
or circumstances which may give rise to any of the foregoing. Neither the
Company nor Clissold is subject to any order, judgment, decree, injunction,
stipulation or consent order of or with any court or other Governmental
Authority. Neither the Company nor Clissold has entered into any agreement to
settle or compromise any proceeding pending or threatened against it which has
involved any obligation other than the payment of money or for which the Company
has any continuing obligation (including the payment of money on or after the
date of this Agreement).
3.11 Taxes. Except as set forth in the Financial Statements in Schedule
3.11 hereto or as otherwise provided in this Section 3.11:
(a) The Company has filed or caused to be filed all Tax
Returns and reports required to have been filed by or for the Company
for all periods through and including the Closing Date as required by
Law. All such Tax Returns were correct and complete, and all Taxes
shown as due on all such Tax Returns and other filings have been paid,
except with respect to the Payroll Taxes. None of the Tax Returns or
other filings that include the operations of the Company has ever been
audited or investigated by any Governmental Authority, and no facts
exist which would constitute grounds for the assessment of any
additional Taxes by any Governmental Authority with respect to the
operation of the Company for the taxable years covered in such Tax
Returns and filings. No material issues have been raised in any
examination by any Governmental Authority with respect to the
businesses and operations of the Company which, by application of
similar principles, reasonably could be expected to result in a
proposed adjustment to the liability for Taxes for any other period not
so examined. All Taxes which the Company is required by Law to withhold
or collect, including without limitation, sales and use taxes, and
amounts required to be withheld for Taxes of employees and other
withholding taxes, have been duly withheld or collected and, to the
extent required, have been paid over to the proper Governmental
Authorities or are held in separate bank accounts for such purpose. All
information returns required to be filed by the Company, or any of
them, prior to the Closing Date have been filed, and all statements
required to be furnished to such payees by the Company prior to the
Closing Date have been furnished to such payees, and the information
set forth on such information returns and statements is true, complete
and correct.
(b) The amounts provided as a liability on the Financial
Statements for all Taxes are adequate to cover all unpaid liabilities
for all Taxes, whether or not disputed, that have accrued with respect
to or are applicable to the period ended on and including the Closing
Date (including any Taxes due or that may become due by reason of the
Pre-Closing Transactions and the transactions contemplated hereby) and
to any years and periods prior thereto and for which the Company may be
directly or contingently liable in
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its own rights, as a transferee of the assets of, or successor to, any
Person or under Treasury Regulation Section 1.1502-6 or any similar
provision of any other Law. The Company has not incurred any Tax
liabilities other than in the Ordinary Course of Business for any
taxable year for which the applicable statute of limitations has not
expired; there are no Liens for Taxes (other than Liens for current
Taxes not yet due and payable) upon the properties or assets of the
Company.
(c) The Company has not granted (or is subject to) any waiver
of the period of limitations for the assessment of tax for any
currently open taxable period, and no unpaid tax deficiency has been
asserted against or with respect to the Company by a taxing authority.
The Company is not a party to and is not otherwise subject to any
arrangement having the effect of or giving rise to the recognition of a
deduction or loss in a taxable period ending on or before the Closing
Date, and a corresponding recognition of taxable income or gain in a
taxable period ending after the Closing Date, or any other arrangement
that would have the effect of or give rise to the recognition of
taxable income or gain in a taxable period ending after the Closing
Date without the receipt of or entitlement to a corresponding amount of
cash.
(d) The Company is not subject to any joint venture,
partnership or other arrangement or Contract which is treated as a
partnership for federal income tax purposes. The Company has not been
and is not a party to any tax sharing agreement.
3.12 Transactions With Affiliates. Except as set forth in Notes 2 and 9
to the Financial Statements attached hereto, or as contemplated by this
Agreement, the Company has not in the Ordinary Course of Business or otherwise,
purchased, leased or otherwise acquired any material property or assets or
obtained any services from, or sold, leased or otherwise disposed of any
material property or assets or provided any services to (except with respect to
remuneration for services rendered as a director, officer or employee of the
Company ), any Affiliate, officer, director or employee of the Company, Clissold
or any Affiliate of Clissold (collectively, "Covered Affiliate"). Except as set
forth in Schedule 3.12, (a) the Contracts listed on the Schedule hereto do not
include any obligation or commitment between the Company and any Covered
Affiliate, (b) the assets of the Company do not include any receivable or other
obligation or commitment from a Covered Affiliate to the Company. Neither
Clissold nor any of his Affiliates has or claims to have any direct or indirect
interest in any tangible or intangible property used in the business of the
Company, except as a holder of Shares, and (c) neither Clissold nor any of his
Affiliates has any direct or indirect interest in any other Person which
conducts a business similar to, has any Contract or arrangement with, or does
business or is involved in any way with the Company.
3.13 No Broker. Neither Clissold nor the Company (a) has had any
dealings, negotiations or communications with or retained any broker or other
intermediary in connection with the transactions contemplated by this Agreement
and (b) is committed to any liability for any brokers' or finders' fees or any
similar fees in connection with the transactions contemplated by this Agreement.
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3.14 Accuracy of Statements. Neither this Agreement nor any schedule,
exhibit, statement, list, document, certificate or other written information
furnished or to be furnished by or on behalf of Clissold, the Company or the
Subsidiary to the WOC Stockholders or any representative or Affiliate of the WOC
Stockholders in connection with this Agreement (including the Disclosure
Documents) or any of the transactions contemplated hereby contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading.
3.15 Not an Investment Company. The Subsidiary is not an investment
company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WOC STOCKHOLDERS
Each of the WOC Stockholders hereby represents and warrants to Clissold
(which representations and warranties shall be deemed remade and effective as of
the Closing Date) that:
4.1 Authorization of Transaction. Such WOC Stockholder has full power
and authority to execute and deliver this Agreement and to perform his or its
obligations hereunder and in connection with the consummation of the
transactions contemplated hereby. This Agreement constitutes the valid and
legally binding obligation of such WOC Stockholder, enforceable in accordance
with its terms and conditions. Such WOC Stockholder need not give any notice to,
make any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the transactions
contemplated by this Agreement.
4.2 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(a) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which such WOC Stockholder is subject, (b)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which such WOC Stockholder is a
party or by which he is bound or to which any of his assets is subject or (c) if
applicable, violate any provision of such WOC Stockholder's Articles of
Incorporation or Bylaws, or its Agreement of Limited Partnership or Certificate
of Limited Partnership.
4.3 Investment. Such WOC Stockholder understands that (a) the shares of
Common Stock have not been, and may not be, registered under the Securities Act,
or under any state securities laws, and are being offered and sold in reliance
upon federal and state exemptions for transactions not involving any public
offering, (b) the shares of Common Stock must be held indefinitely unless a
subsequent disposition thereof is registered under the Securities Act or is
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exempt from such registration, (c) the shares of Common Stock will bear a legend
to such effect, (d) the Company will make a notation on its transfer books to
such effect. Such WOC Stockholder further represents that (i) the shares of
Common Stock are being acquired for investment and without any present view
toward distribution thereof to any other person within the meaning of the
Securities Act, (ii) he or it will not sell or otherwise dispose of the shares
of Common Stock except in compliance with the registration requirements or
exemption provisions under the Securities Act, the rules and regulations
thereunder, and as otherwise set forth by the Securities and Exchange
Commission, (iii) he or it has knowledge and experience in financial and
business matters and is capable of evaluating the risks and merits of an
investment in common stock, (iv) he or it has consulted with counsel, to the
extent deemed necessary, as to all matters covered by this Agreement and has not
relied upon the Company for any explanation of the application of the various
federal or state securities laws with regard to the acquisition of the shares of
Common Stock, (v) he or it has investigated and is familiar with the affairs,
financial condition and prospects of the Company, has been given sufficient
access to and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Shares of Common Stock, and
(vi) he or it is able to bear the economic risks of such an investment.
4.4 WOC Stock. Such WOC Stockholder holds of record and owns
beneficially the number of shares of WOC Stock set forth next to his or its name
in Schedule 4.4, 4.5 free and clear of any restrictions on transfer (other than
any restrictions under the Securities Act and state securities laws), Taxes,
security interests, encumbrances, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands. Such WOC Stockholder is not a party
to any option, warrant, purchase right, or other contract or commitment that
could require such WOC Stockholder to sell, transfer, or otherwise dispose of
any capital stock of WOC (other than this Agreement). Such WOC Stockholder is
not a party to any voting trust, proxy, or other agreement or understanding
with respect to the voting of any capital stock of WOC.
4.5 Planned Acquisition. It is the intention of WOC to acquire
substantially all of the assets of Scottsdale. Financial statements of
Scottsdale as of and for the years ended December 31, 1995 and December 31, 1994
have been or will be provided to Clissold on or before the Closing.
ARTICLE V
CERTAIN MATTERS PENDING THE CLOSING
5.1 Carry on in Regular Course. From the date of this Agreement until
the Closing Date, Clissold shall cause the Company and the Subsidiary to operate
only in the Ordinary Course of Business except insofar as is contemplated by
this Agreement.
5.2 Indebtedness. Without limiting Section 5.1 and without the prior
written consent of WOC, Clissold shall not cause or permit the Company or the
Subsidiary to: (a) create, incur or assume any indebtedness for borrowed money,
(b) mortgage, pledge or otherwise encumber
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any of its properties or assets, except for Permitted Liens or (c) create or
assume any other liability except accounts payable and other liabilities.
5.3 Transactions with Stock. Without limiting Section 5.1, Clissold
shall not cause or permit the Company or the Subsidiary to issue any shares of
capital stock of any class or grant any warrants, options or rights to subscribe
for any shares of capital stock of any class or securities convertible into or
exchangeable for, or which otherwise confer on the holder any right to acquire,
any shares of capital stock of any class or to split, combine, or reclassify any
shares of its capital stock, declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of its capital stock, or redeem or otherwise acquire any capital stock
or other securities of the Company or the Subsidiary, or to sell or trade any
such capital stock other than in accordance with the terms of this Agreement.
5.4 Compliance with Law. Clissold shall cause the Company and the
Subsidiary to comply in all material respects with all applicable Laws and with
all orders of any court or of any federal, state, municipal or other
governmental department.
5.5 Access to Information. From and after the date of this Agreement,
Clissold shall, and shall cause the Company and the Subsidiary to, give the WOC
Stockholders and the WOC Stockholder's representatives unrestricted access
during normal business hours to all of the facilities, properties, books,
Contracts, commitments and records of the Company and the Subsidiary, and shall
make the officers and employees of the Company and the Subsidiary available to
the WOC Stockholders and their representatives as the WOC Stockholders and its
representatives shall from time to time request. The WOC Stockholders and their
representatives will be furnished with any and all information concerning the
Company and the Subsidiary which the WOC Stockholders or their representatives
reasonably request. Clissold shall cause the Company and the Subsidiary to
cooperate in all reasonable respects with the WOC Stockholders' examinations and
investigations.
5.6 Cooperation; Best Efforts. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper and advisable under applicable Law and
otherwise, to consummate the transactions contemplated by this Agreement. In
case at any time after the Closing Date any further action is necessary or
desirable to carry out the purposes of this Agreement, (including the execution
of any additional instruments necessary to consummate the transactions
contemplated hereby) each of the parties agrees to perform such action as soon
as practicable.
5.7 Consents. Clissold, the Company, the Subsidiary and each of the WOC
Stockholders will use his or its reasonable best efforts to obtain consents of
all third Persons and Governmental Authorities that are necessary to the
consummation of the transactions contemplated by this Agreement.
5.8 Publicity. All general notices, releases, statements and
communications to employees, suppliers, distributors and customers of the
Company to the general public and the
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press relating to the transactions covered by this Agreement shall be made only
at such times and in such manner as may be mutually agreed upon by Clissold and
the WOC Stockholders; provided, however, that any party hereto shall be entitled
to make a public announcement of the foregoing if, in the opinion of its legal
counsel, such announcement is required to comply with Law or any listing
agreement with any national securities exchange or inter-dealer quotation system
and if it first gives notice to the other parties hereto of its intention to
make such public announcement.
5.9 Supplemental Information. From time to time prior to the Closing,
Clissold will promptly disclose in writing to the WOC Stockholders any matter
hereafter arising which, if existing, occurring or known at the date of this
Agreement would have been required to be disclosed to the WOC Stockholders or
which would render inaccurate any of the representations, warranties or
statements set forth in Article III hereof. However, notwithstanding the
foregoing, no information provided to a party pursuant to this Section shall be
deemed to cure any breach of any representation, warranty or covenant made in
this Agreement.
5.10 Exclusivity. Prior to July 1, 1997, none of Clissold, the Company,
the Subsidiary nor any of their respective directors, officers, employees,
representatives, agents or Affiliates shall, directly or indirectly, continue,
maintain, solicit, initiate, encourage, respond favorably to, permit or condone
inquiries or proposals from, or provide any confidential information to, or
participate in any discussions or negotiations with, any Person (other than the
WOC Stockholders and their representatives and agents) concerning (i) any
merger, sale of assets or joint venture not in the Ordinary Course of Business,
acquisition, business combination, change of control or other similar
transaction involving the Company or any subsidiary or division of the Company,
or (ii) any purchase or other acquisition by any Person of shares of Common
Stock or shares of capital stock issued by the Subsidiary, or (iii) any sale of
issuance by the Company or the Subsidiary of any shares of its capital stock.
Any such actions commenced prior to the date of this Agreement with any Person
other than the WOC Stockholders shall be formally terminated. Clissold will
promptly advise the WOC Stockholders of, and communicate to the WOC Stockholders
the terms and conditions of (and the identity of the Person making), any such
inquiry or proposal received.
ARTICLE VI
SURVIVAL; INDEMNIFICATION
6.1 Limitation on and Survival of Representations and Warranties. The
representations and warranties of the parties hereto contained herein shall
survive the Closing for a period of two years, provided, however, that the
applicable period with respect to Section 3.11 shall extend until the Tax
Statute of Limitations Date and, with respect to Sections 3.1, 3.2, 3.3, 3.4 and
3.5, there shall be no expiration. Any claim for indemnification for which
notice has been given within the prescribed period may be prosecuted to
conclusion notwithstanding the subsequent expiration of such period.
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6.2 Indemnification by Clissold. Subject to the limitations set forth
in Sections 6.1, 6.4 and 6.5 hereof, Clissold hereby indemnifies and agrees to
hold each of WOC Indemnified Parties harmless from and against any and all
Losses imposed upon, asserted against, or suffered or incurred by a WOC
Indemnified Party (a "WOC Claim") as a result of or in connection with any of
the following, provided that the event giving rise to such WOC Claim occurs on
or after February 25, 1995:
(a) Any breach of or any inaccuracy in any representation or
warranty made by Clissold in this Agreement;
(b) The breach of or default in the performance by Clissold of
any covenant, agreement or obligation to be performed by Clissold
pursuant to this Agreement (including the obligations of Clissold under
Article IV);
(c) Any occurrence arising on or before the Closing Date with
respect to defective or allegedly defective products sold, distributed
or manufactured or in any components or materials thereof acquired, by
the Company, or their predecessors on or before the Closing Date
(including defects, actual or alleged) and any failures or alleged
failures to warn resulting in products liability claims; and/or
(d) The Pre-Closing Transactions, to the extent not covered by
(a)-(c) above.
6.3 Notice of Indemnity Claims.
(a) If a WOC Indemnified Party intends to assert a WOC Claim,
the WOC Indemnified Party intending to assert such WOC Claim shall
promptly provide Clissold with notice of such WOC Claim as soon as
reasonably practicable after becoming aware of a WOC Claim; provided
that the failure of WOC Indemnified Party to give notice shall not
relieve Clissold of its obligations under this Article V, except to the
extent (if any) that Clissold shall have been prejudiced thereby.
(b) If Clissold does not object in writing to such
indemnification claim within 30 calendar days of receiving notice
thereof, WOC Indemnified Party shall be entitled to recover promptly
from Clissold the amount of such claim (but such recovery shall not
limit the amount of any additional indemnification to which WOC
Indemnified Party may be entitled pursuant to this Agreement), and no
later objection by Clissold shall be permitted. If Clissold agrees that
it has an indemnification obligation but objects that it is obligated
to pay only a lesser amount, WOC Indemnified Party shall nevertheless
be entitled to recover promptly from Clissold (and Clissold shall
promptly pay) the lesser amount, without prejudice to WOC Indemnified
Party's claim for the difference.
(c) Clissold may, at its own expense, participate in the
defense of any claim, suit, action or proceeding and upon notice to WOC
Indemnified Party and Clissold's delivering to WOC Indemnified Party a
written agreement (without reservation or condition) that WOC
Indemnified Party entitled to indemnification pursuant to this
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Agreement for all Losses arising out of such claim, suit, action or
proceeding and that Clissold shall be liable for the entire amount of
any Loss, at any time during the course of any such claim, suit, action
or proceeding, assume the defense thereof; provided, however, that WOC
Indemnified Party, and Clissold shall thereafter consult with WOC
Indemnified Party upon WOC Indemnified Party's reasonable request for
such consultation from time to time with respect to such claim, suit,
action or proceeding. If Clissold assumes such defense, WOC Indemnified
Party shall have the right (but not the duty) to participate in the
defense thereof and to employ counsel, at its own expense, separate
from the counsel employed by Clissold. If, however, WOC Indemnified
Party reasonably determines in its judgment that representation by
Clissold's counsel of both Clissold and WOC Indemnified Party would
present such counsel with a conflict of interest, then such WOC
Indemnified Party may employ separate counsel to represent or defend it
in any such claim, action, suit or proceeding and Clissold shall pay
the fees and disbursements of such separate counsel. Whether or not
Clissold chooses to defend or prosecute any such claim, suit, action or
proceeding, all of the parties hereto shall cooperate in the defense or
prosecution thereof. Any settlement or compromise made or cause to be
made by WOC Indemnified Party or Clissold, as the case may be, of any
such Indemnity Claim by reason of a claim brought by a third Person
shall also be binding upon Clissold or WOC Indemnified Party, as the
case may be, in the same manner as if a final judgment or decree had
been entered by a court of competent jurisdiction in the amount of such
settlement or compromise; provided, however, that no obligation,
restriction or Loss shall be imposed on WOC Indemnified Party as a
result of such settlement without its prior written consent. WOC
Indemnified Party will give Clissold at least 20 days' notice of any
proposed settlement or compromise of any claim, suit, action or
proceeding it is defending, during which time Clissold may reject such
proposed settlement or compromise; provided, however, that from and
after such rejection, Clissold shall be obligated to assume the defense
of and full and complete liability and responsibility for such claim,
suit, action or proceeding and any and all Losses in connection
therewith in excess of the amount of unindemnifiable Losses which WOC
Indemnified Party would have been obligated to pay under the proposed
settlement or compromise. In the event that Clissold does not elect to
assume the defense of any claim, suit, action or proceeding, then any
failure of WOC Indemnified Party to defend or to participate in the
defense of any such claim, suit, action or proceeding or to cause the
same to be done, shall not relieve Clissold of its obligations
hereunder. The failure of any party against which an Indemnity Claim is
asserted to assume the defense of any such claim shall not affect any
indemnification obligation under this Agreement.
6.4 Reliance on Indemnification Agreement. Clissold acknowledges that
WOC is agreeing to the proviso set forth in Section 6.2 (which permits WOC to
assert WOC Claims only with respect to events occurring on or after February 25,
1995) in reliance upon the Company's ability to assert its rights under the
Indemnification Agreement. In the event the Company has any liability or
obligation, contingent or otherwise, that would adversely affect the Company or
the public trading of its shares, and such liability or obligation relates to an
event occurring on or before February 25, 1995, WOC shall first seek recovery
pursuant to such Indemnification Agreement. If WOC is unable to recover under
such Indemnification Agreement, then such
23
<PAGE> 24
proviso shall have no force or effect and WOC shall be entitled to assert any
WOC Claim that WOC may have against Clissold, regardless of the date on which
the event giving rise to any such claim arises; provided, however, that WOC's
recovery for any obligations of Clissold hereunder shall be limited in
accordance with Section 6.5.
6.5 Satisfaction of Obligations. NOTWITHSTANDING ANYTHING HEREIN TO THE
CONTRARY, WOC'S RECOVERY FOR ANY OBLIGATIONS OF CLISSOLD HEREUNDER SHALL BE
LIMITED TO THE REMAINING SHARES AND AN AMOUNT EQUAL TO ALL SALES PROCEEDS
THEREFROM; PROVIDED, HOWEVER, THAT CLISSOLD SHALL HAVE NO OBLIGATION TO
INDEMNIFY WOC HEREUNDER UNTIL THE LOSSES RELATING TO ALL WOC CLAIMS EXCEEDS
$75,000 IN THE AGGREGATE, IN WHICH CASE CLISSOLD SHALL BE OBLIGATED TO INDEMNIFY
WOC FOR ALL AMOUNTS RELATING TO WOC CLAIMS IN EXCESS OF $75,000 (SUBJECT TO THE
FOREGOING CAP LIMITING CLISSOLD'S AGGREGATE LIABILITY).
ARTICLE VII
MISCELLANEOUS
7.1 Entire Agreement. This Agreement and the documents referred to
herein and to be delivered pursuant hereto constitute the entire agreement
between the parties pertaining to the subject matter hereof, and supersede all
prior and contemporaneous agreements understandings, negotiations and
discussions of the parties, whether oral or written, and there are no
warranties, representations or other agreements between the parties in
connection with the subject matter hereof, except as specifically set forth
herein or therein.
7.2 Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of Utah, without regard to the conflicts of
law rules thereof.
7.3 Assignment. This Agreement shall be binding upon the inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that no assignment of any rights or obligations shall be made
by Clissold without the written consent of WOC or by WOC without the written
consent of Clissold, except that WOC may assign its rights or claims hereunder
without such consent to any Affiliate of WOC or to any lender or financial
institution providing financing to WOC or its Affiliates.
7.4 Notices. All communications, notices and disclosures required or
permitted by this Agreement shall be in writing and shall be deemed to have been
given when delivered personally or by messenger or by overnight delivery
service, or when mailed by registered or certified United States mail, postage
prepaid, return receipt requested, or when received via telecopy, telex or other
electronic transmission, in all cases addressed to the person for whom it is
intended at his address set forth below or to such other address as a party
shall have designated by notice in writing to the other party in the manner
provided by this Section 7.4:
24
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C>
If to Clissold: Lane Clissold
135 West 900 South
Salt Lake City, Utah 84101
Facsimile No.: (801) 364-9947
If to Company: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
If to Subsidiary: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
If to Rubin: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
If to WOC: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
If to the Partnership: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
If to Schedeler: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
If to Scottsdale: 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Facsimile No.: (602) 998-7986
</TABLE>
7.5 Counterparts; Headings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The Article and
Section headings in this Agreement are inserted for convenience of reference
only and shall not constitute a part hereof.
7.6 Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any of the provisions of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
7.7 Interpretation; No Waiver. Unless the context requires otherwise,
all words used in this Agreement in the singular number shall extend to and
include the plural, all words in the plural number shall extend to and include
the singular and all words in any gender shall extend to and include all
genders. All references to contracts, agreements, leases, Employee Benefit Plans
25
<PAGE> 26
or other understandings or arrangements shall refer to oral as well as written
matters. The use of the terms "including" or "include" shall in all cases herein
mean "including, without limitation" or "include, without limitation,"
respectively. Consummation of the transactions contemplated herein shall not be
deemed a waiver of a breach of or inaccuracy in any representation, warranty or
covenant or of any party's rights and remedies with regard thereto. No specific
representation, warranty or covenant contained herein shall limit the generality
or applicability of a more general representation, warranty or covenant
contained herein. A breach of or inaccuracy in any representation, warranty or
covenant shall not be affected by the fact that any more general or less general
representation, warranty or covenant was not also breached or inaccurate. The
failure of a party hereto at any time or times to require performance of any
provision hereof shall in no manner affect its right at a later time to enforce
the same. No waiver by a party of any condition or of any breach of any term,
covenant, representation or warranty contained in this Agreement shall be
effective unless in writing, and no waiver in any one or more instances shall be
deemed to be a further or continuing waiver of any such condition or breach in
other instances or a waiver of any other condition or breach of any other term,
covenant, representation or warranty.
7.8 Further Assurances. Upon the reasonable request of WOC, Clissold
will on and after the Closing Date execute and deliver to WOC such other
documents, releases, assignments and other instruments as may be required to
effectuate completely the transfer and assignment to WOC of, and to vest fully
in WOC title to, the Shares, and to otherwise carry out the purposes of this
Agreement.
7.9 Remedies Cumulative. The remedies provided in this Agreement shall
be cumulative and shall preclude the assertion or exercise of any other rights
or remedies available by law, in equity or otherwise.
7.10 Effect of Investigation. Any due diligence review, audit or other
investigation or inquiry undertaken or performed by or on behalf of WOC shall
not limit, qualify, modify or amend the representations, warranties or covenants
of, or indemnities by, Clissold made or undertaken pursuant to this Agreement,
irrespective of the knowledge and information received (or which should have
been received) therefrom by WOC.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
SCOTTSDALE TECHNOLOGIES-I, LTD.
By: Software Funding Corp.,
general partner
By: /s/ STUART N. RUBIN
Its: Vice President
/s/ LANE CLISSOLD
26
<PAGE> 27
LANE CLISSOLD
SOUND INDUSTRIES, INC.
/s/ ERIC J. SCHEDELER
By: /s/ LANE CLISSOLD ERIC J. SCHEDELER
Its: President
SOUND ACQUISITION CORP. WO CONSULTING, INC.
By: /s/ LANE CLISSOLD By: /s/ STUART N. RUBIN
Its: President Its: Director
/s/ STUART N. RUBIN SCOTTSDALE TECHNOLOGIES, INC.
STUART N. RUBIN
By: /s/ ERIC J. SCHEDELER
Its: President
27
<PAGE> 1
Exhibit 6.2
PLAN AND AGREEMENT OF REORGANIZATION
AMONG
SCOTTSDALE TECHNOLOGIES, INC.,
WO CONSULTING, INC.,
ERIC J. SCHEDELER
AND
C. KIMBALL MCCUSKER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. SALE OF ASSETS..................................................... 3
Section 1.1 Description of Assets.......................................... 3
Section 1.2 Retained Items................................................. 4
ARTICLE 2. PURCHASE PRICE..................................................... 4
Section 2.1 Consideration.................................................. 4
ARTICLE 3. NON-ASSUMPTION OF LIABILITIES; INDEMNIFICATION..................... 5
Section 3.1 Non-Assumption of Liabilities.................................. 5
Section 3.2 Indemnification by Seller and Executive Officers............... 5
Section 3.3 Indemnification by Schedeler................................... 6
Section 3.4 Procedure for Indemnification.................................. 7
Section 3.5 Security....................................................... 7
Section 3.6 Satisfaction of Obligations.................................... 7
ARTICLE 4. CLOSING............................................................ 8
Section 4.1 Time and Place of Closing...................................... 8
Section 4.2 Deliveries by Seller........................................... 8
Section 4.3 Deliveries by Buyer............................................ 9
ARTICLE 5. CLOSING CONDITIONS................................................. 9
Section 5.1 Conditions of Seller and Executive Officers.................... 9
Section 5.2 Conditions of Buyer............................................ 9
ARTICLE 6. REPRESENTATIONS AND WARRANTIES..................................... 11
Section 6.1 Representations and Warranties of Seller and Executive Officers 11
(a) Authorization of Transaction................................... 11
(b) Capitalization of Seller....................................... 11
(c) Compliance with Law............................................ 11
(d) Title to the Assets............................................ 12
(e) Financial Statements........................................... 12
(f) Litigation..................................................... 12
(g) Employees; Employee Relations and Benefit Plans................ 13
(h) Intellectual Property.......................................... 13
(i) Taxes.......................................................... 16
(j) Government Notices............................................. 16
(k) Permits and Environmental Matters.............................. 16
(l) Applicable Laws Compliance..................................... 16
(m) Premises....................................................... 17
(n) Contracts...................................................... 18
</TABLE>
<PAGE> 3
(o) Disclosure................................................... 18
Section 6.2 Representations and Warranties of Buyer...................... 18
Section 6.3 Survival..................................................... 19
ARTICLE 7. GENERAL.......................................................... 19
Section 7.1 Use of Names................................................. 19
Section 7.2 Notices...................................................... 19
Section 7.3 Entire Agreement............................................. 20
Section 7.4 Assignment................................................... 20
Section 7.5 Expenses of Transaction...................................... 20
Section 7.6 Modification................................................. 20
Section 7.7 Specific Performance......................................... 20
Section 7.8 Further Assurances........................................... 21
Section 7.9 Sales and Other Taxes........................................ 21
Section 7.10 Governing Law................................................ 21
SCHEDULE 2.1(D) TRADE PAYABLES....................ERROR! BOOKMARK NOT DEFINED.
SCHEDULE 6.1(a) CONTRACTS.........................ERROR! BOOKMARK NOT DEFINED.
EXHIBITS
Exhibit A Stock Pledge Agreement
Exhibit B Note and Warrant Purchase Agreement
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule 2.1(a) List of Stockholders
Schedule 2.1(d) List of Trade Payables
Schedule 5.2(d) List of Parties Required to Execute Intellectual Property
Assignment Agreements
Schedule 6.1(b) List of Equity Security Owners
Schedule 6.1(c) List of Alleged Violations
Schedule 6.1(f) List of Pending Litigation
Schedule 6.1(h)(i) List of Intellectual Property
Schedule 6.1(h)(iii) List of Patents or Registrations on Intellectual Property
Schedule 6.1(h)(iii)(D) List of Company's Indemnity Obligations
Schedule 6.1(h)(iv) List of Intellectual Property Owned by Third Party
Schedule 6.1(h)(v) List of Intellectual Property Right Filings
Schedule 6.1(i) Hazardous Materials
Schedule 6.1(k) Permits and Environmental Matters
Schedule 6.1(l) Applicable Laws Compliance
Schedule 6.1(n) Contracts
</TABLE>
ii
<PAGE> 4
PLAN AND AGREEMENT OF REORGANIZATION
THIS PLAN AND AGREEMENT OF REORGANIZATION (this "Agreement") is executed
on February 28, 1997 but intended by the parties hereto to be effective as of
January 1, 1997, between SCOTTSDALE TECHNOLOGIES, INC., a Delaware corporation
("Seller"), WO CONSULTING, INC., a Delaware corporation ("Buyer"), and ERIC J.
SCHEDELER ("Schedeler") and C. KIMBALL McCUSKER ("McCusker") (Schedeler and
McCusker are collectively referred to herein as the "Executive Officers").
R E C I T A L:
WHEREAS, Seller wishes to sell, and Buyer wishes to purchase, the business
of Seller and substantially all of the assets used in connection therewith, in
exchange for securities of the Buyer in a transaction intended to qualify as a
tax free "reorganization" within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended; and
WHEREAS, pursuant to this Agreement, Seller wishes to sell substantially
all of its assets to Buyer in exchange for 1,461,585 shares of Buyer's common
stock ("Common Stock") and Buyer's agreement to pay certain royalties to an
escrow agent to facilitate the repayment of certain obligations of Seller in
accordance with that certain Escrow Agreement effective as of January 1, 1997
(the "Escrow Agreement") and those certain Restructuring Agreements between the
Company and certain of its creditors;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and other good and valuable consideration, received to the full
satisfaction of each of them, the parties hereby agree as follows:
A G R E E M E N T:
ARTICLE 1.
SALE OF ASSETS
SECTION 1.1 DESCRIPTION OF ASSETS. Subject to and in accordance with the
terms of this Agreement, Seller shall grant, convey, sell, transfer and assign
to Buyer at Closing (as defined below) the following assets, properties and
contractual rights of Seller, wherever located:
(a) all tangible personal property (including, without limitation,
machinery, equipment, computers, inventories, parts, components, goods,
furniture and vehicles) relating to the operation of Seller's business
located at 7580 E. Gray Rd., Suite 102, Scottsdale, Arizona, 85260 (the
"Premises") and all activities and operations incidental thereto
(collectively the "Business");
3
<PAGE> 5
(b) all Intellectual Property (as defined below), goodwill
associated therewith, licenses and sublicenses granted and obtained with
respect thereto, and rights thereunder, remedies against infringement
thereof, and rights to protection of interests therein under the laws of
all jurisdictions;
(c) all books, records, ledgers, files, documents, correspondence,
lists, plats, drawings, specifications, advertising and promotional
materials, studies, reports and other printed and written materials
relating to the Business;
(d) all permits, authorities, licenses, franchises, consents and
other approvals relating to the business of developing, constructing or
operating the Business;
(e) all contractual rights of Seller relating to the Business;
(f) all deposits, advances, prepaid amounts, refunds, causes of
action and rights of recovery, set-off or recoupment of Seller relating to
the Business;
(g) the name "Scottsdale Technologies" in all jurisdictions in which
the Seller has the right to use such names; and
(h) all of the goodwill of the Business.
All of the foregoing assets, properties and contractual rights are hereinafter
sometimes collectively called the "Assets".
All of such Assets shall be delivered free and clear of any liens, claims,
pledges, security interests, mortgages or encumbrances of any kind. The sale,
conveyance, assignment, transfer and delivery of the Assets shall be effected by
bills of sale, endorsements, assignments, or other instruments in such
reasonable or customary form as shall be requested by the Buyer and its counsel.
Seller shall at any time from and after the Closing Date, upon the reasonable
request of Buyer and at Seller's expense, execute, acknowledge and deliver such
additional conveyances, assignments, transfers or other instruments, as may be
reasonably required to assign, transfer or convey the Assets to Buyer, or vest
ownership of such Assets in Buyer, as contemplated by this Agreement.
SECTION 1.2 RETAINED ITEMS. Seller does not transfer to Buyer hereunder,
and Seller retains all rights and liabilities in respect of or in connection
with, all obligations of Seller not expressly transferred to and assumed by
Buyer hereunder (collectively the "Retained Items").
4
<PAGE> 6
ARTICLE 2.
PURCHASE PRICE
SECTION 2.1 CONSIDERATION. Subject to and in accordance with the terms of
this Agreement, as full consideration for the Assets, Buyer will deliver to
Seller the following:
(a) At Closing, Buyer will issue and deliver 1,461,585 shares of
Common Stock to the parties listed on Schedule 2.1(a) hereto ("Shares"),
and Buyer shall sell no less than 481,000 shares of Common Stock and no
more than 550,000 shares of Common Stock in the aggregate to the Executive
Officers and Mike Slover, as agreed upon among the Company, the Executive
Officers and Mr. Slover; provided, however, that the Executive Officers
shall deliver to Buyer the aggregate amount of 213,221 shares of Common
Stock (apportioned among such officers in the manner described in Section
3.4) to serve as collateral for the period set forth in Section 9 of the
Stock Pledge Agreement between Executive Officers and Buyer in the form
attached hereto as Exhibit A (the "Stock Pledge Agreement");
(b) At Closing, Buyer shall assume and undertake to discharge and
perform Seller's obligations under that certain Promissory Note issued by
Seller in favor of Software Funding Corp. (the "General Partner") as agent
for certain investors, which note has a principal balance of $400,000 (the
"Existing Note");
(c) At Closing, Buyer shall assume and undertake to discharge and
perform Seller's obligations pursuant to the express terms of those
specific written contracts set forth on Schedule 6.1(n) (the "Listed
Contracts"); and
(d) At Closing, Buyer shall assume and undertake to discharge and
perform Seller's obligations with respect to the trade payables listed on
Schedule 2.1(d) hereto (the "Trade Payables"). The obligations assumed by
Buyer with respect to the Existing Note, the Listed Contracts and the
Trade Payables are collectively referred to herein as the "Assumed
Liabilities".
ARTICLE 3.
NON-ASSUMPTION OF LIABILITIES; INDEMNIFICATION
SECTION 3.1 NON-ASSUMPTION OF LIABILITIES. Except for the Assumed
Liabilities, Buyer shall not, by the execution and performance of this Agreement
or otherwise, assume, become responsible for or incur any liability or
obligation of any nature of Seller, whether legal or equitable, matured or
contingent, known or unknown, foreseen or unforeseen, ordinary or extraordinary,
patent or latent, whether arising out of occurrences prior to, at or after the
date of this Agreement. Seller and each of the Executive Officers hereby jointly
and severally agrees to indemnify Buyer, its successors and assigns from and
against any and all of the foregoing liabilities and obligations (other than the
Assumed Liabilities) in accordance with this Article 3.
SECTION 3.2 INDEMNIFICATION BY SELLER AND EXECUTIVE OFFICERS. Subject to
the limitations set forth in Section 3.6, and notwithstanding any investigation
at any time made by or
5
<PAGE> 7
on behalf of Buyer, Seller and the Executive Officers each jointly and severally
agree to defend, indemnify and hold harmless Buyer, its officers, stockholders,
directors, affiliates, employees, agents, successors and assigns, and the
Assets, from and against all losses, claims, actions, causes of action, damages,
liabilities, expenses and other costs of any kind or amount whatsoever
(including, without limitation, reasonable attorneys' fees), whether equitable
or legal, matured or contingent, known or unknown, foreseen or unforeseen,
ordinary or extraordinary, patent or latent, which result, either before or
after the date of this Agreement, from or in connection with any:
(a) inaccuracy in or breach of any representation or warranty made
by Seller and Executive Officers in this Agreement;
(b) failure of Seller duly to perform and observe any term,
provision, covenant, agreement or condition under this Agreement; and
(c) liability of Seller of any kind whatsoever other than the
Assumed Liabilities, including, without limitation, any liability arising
out of or in connection with any claims or rights of Seller's creditors or
any other person or entity who may now or hereafter have a claim resulting
from or arising out of any actions or operations of Seller.
Buyer shall be deemed to have suffered such loss, claim, action, cause of
action, damage, liability, expense or other cost, or to have paid or to have
become obligated to pay any sum on account of, the matters referred to in
subparagraphs (a) - (c) of this Section 3.2 if the same shall be suffered, paid
or incurred by Buyer or any parent, subsidiary, affiliate, or successor of
Buyer. The amount of the loss, claim, action, cause of action, damage,
liability, expense or other cost deemed to be suffered paid or incurred by Buyer
shall be an amount equal to the loss, claim, action, cause of action, damage,
liability, expense or other cost suffered, paid or incurred by such parent,
subsidiary, affiliate, or successor.
SECTION 3.3 INDEMNIFICATION BY SCHEDELER. In addition to the requirements
of Section 3.2, and subject to the limitations set forth in Section 3.6, and
notwithstanding any investigation at any time made by or on behalf of Buyer,
Schedeler hereby agrees to defend, indemnify and hold harmless Buyer, its
officers, stockholders, directors, affiliates, employees, agents, successors and
assigns, and the Assets, from and against all losses, claims, actions, causes of
action, damages, liabilities, expenses and other costs of any kind or amount
whatsoever (including, without limitation, reasonable attorneys' fees), whether
equitable or legal, matured or contingent, known or unknown, foreseen or
unforeseen, ordinary or extraordinary, patent or latent, which result, either
before or after the date of this Agreement, from or in connection with any
liability of Mark Force Ltd., a Delaware corporation ("Force"), other than the
amount Buyer is obligated to pay with respect to such liability in accordance
with the Escrow Agreement and that certain Force Restructuring Agreement between
Force and Seller.
6
<PAGE> 8
Buyer shall be deemed to have suffered such loss, claim, action, cause of
action, damage, liability, expense or other cost, or to have paid or to have
become obligated to pay any sum on account of, the matters referred to in this
Section 3.3 if the same shall be suffered, paid or incurred by Buyer or any
parent, subsidiary, affiliate, or successor of Buyer. The amount of the loss,
claim, action, cause of action, damage, liability, expense or other cost deemed
to be suffered paid or incurred by Buyer shall be an amount equal to the loss,
claim, action, cause of action, damage, liability, expense or other cost
suffered, paid or incurred by such parent, subsidiary, affiliate, or successor.
SECTION 3.4 PROCEDURE FOR INDEMNIFICATION. Promptly after a party hereto
(hereinafter the "Indemnified Party") has received notice of or has knowledge of
any claim by a person not a party to this Agreement ("Third Person") or the
commencement of any action or proceeding by a Third Person, the Indemnified
Party shall, as a condition precedent to a claim with respect thereto being made
against any party obligated to provide indemnification pursuant to this
Agreement (hereinafter the "Indemnifying Party"), give the Indemnifying Party
written notice of such claim or the commencement of such action or proceeding
(the "Notice"). The Notice shall state the nature and the basis of such claim
and a reasonable estimate of the amount thereof. The Indemnifying Party, after
receipt of the Notice, shall defend and settle, at its own expense and by its
own counsel, each such matter; provided, however, that the Indemnifying Party
will not consent to the entry of any judgment or enter into any settlement with
respect to the third party claim without the prior written consent of the
Indemnified Party (not to be withheld unreasonably); and provided further, that
the Indemnifying Party may consent to the entry of a judgment or enter into a
settlement with respect to a third party claim without the prior written consent
of the Indemnified Party if such judgment or settlement involves only the
payment by the Indemnifying Party of monetary damages (if any) and does not (a)
impose an injunction or other equitable relief upon (or constitute an admission
of guilt, liability, fault or responsibility by) the Indemnified Party, or (b)
result in any adverse consequences for the business and operations of the
Indemnified Party. Notwithstanding the foregoing, the Indemnified Party shall
have the right to participate in any matter through counsel of its own choosing.
Such separate representation shall be at the cost and expense of the Indemnified
Party as long as the Indemnifying Party is pursuing the defense of such matter
diligently, reasonably and in good faith. If the Indemnifying Party fails to
defend any such matter to which the Indemnified Party is entitled to
indemnification hereunder diligently, reasonably and in good faith, the
Indemnified Party may undertake such defense through counsel of its choice and
at the Indemnifying Party's expense.
SECTION 3.5 SECURITY. On the Closing Date, to secure performance of
Seller's and Executive Officers' indemnification obligations to Buyer hereunder,
the Executive Officers shall execute and deliver to Buyer the Stock Pledge
Agreement, certificates for 213,221 shares of Common Stock owned by the
Executive Officers (the "Pledged Shares") and irrevocable stock powers
corresponding to such shares. The Pledged Shares shall consist of 195,430 shares
of Common Stock pledged by Eric J. Schedeler; and 17,791 shares of Common Stock
pledged by C. Kimball McCusker, all in accordance with the terms of the Stock
Pledge Agreement.
7
<PAGE> 9
SECTION 3.6 SATISFACTION OF OBLIGATIONS. Notwithstanding anything herein
to the contrary, Buyer's recovery for any obligations of Seller or the Executive
Officers under this Agreement shall be limited to recovery against the Pledged
Shares. Subject to the foregoing qualification, to the extent an Executive
Officer becomes liable to Buyer under Article 3 hereof, such Executive Officer
may satisfy any such liability by tendering (a) cash in the amount of such
liability, (b) shares of Buyer's Common Stock pledged by such officer in
accordance with the terms of the Stock Pledge Agreement or (c) any combination
of cash and such shares. Any such shares tendered by such Executive Officer
shall be valued at their fair market value. For purposes of this Agreement, the
term "fair market value" shall mean (i) if the shares of Common Stock of Buyer
are publicly traded on a national market, the price per share determined by
averaging the closing sales prices of shares of Common Stock as reported in the
Wall Street Journal for the five (5) trading days immediately preceding the date
such shares are tendered or (ii) if the shares of Common Stock are not publicly
traded or the closing sales price of such shares is not reported in the Wall
Street Journal on a daily basis, the price per share determined by written
agreement between such Executive Officer and Buyer, or, if no such agreement is
reached within ten (10) days after such Executive Officer notifies Buyer in
writing that he wishes to tender such shares, then the price per share shall be
determined by an independent appraiser selected by Buyer; provided, however,
that such appraiser shall have no past or present relationship with Buyer or
such Executive Officer. Such Executive Officer and Buyer shall share the
expenses of such appraiser equally. Notwithstanding anything herein to the
contrary, however, Buyer shall first seek to satisfy any claims it has against
any Executive Officer hereunder by enforcing its rights under the Stock Pledge
Agreement in accordance with the terms thereof before seeking to recover any
amount from the Executive Officer individually.
ARTICLE 4.
CLOSING
SECTION 4.1 TIME AND PLACE OF CLOSING. This transaction shall be closed
simultaneously with the execution and delivery of this Agreement and the other
documents and instruments referred to in this Article 4 (the "Closing"). The
Closing shall take place at the offices of Seller on February 28, 1997, or on
such other place and date as the parties may mutually agree (the "Closing
Date").
SECTION 4.2 DELIVERIES BY SELLER. At the Closing, Seller shall deliver to
Buyer, all duly executed:
(a) proper and adequate evidence that all permits, licenses,
registrations and governmental authorizations necessary or appropriate for
the operation of the Business have been obtained by the Seller and have
been issued in the name of the Seller or can properly be transferred to
the Buyer;
8
<PAGE> 10
(b) a general conveyance, assignment and bill of sale, in form and
substance satisfactory to Buyer, conveying, selling, transferring and
assigning to Buyer all of the Assets (the "Bill of Sale"); and
(c) such other additional instruments of sale, assignment or
transfer as may be reasonably required by Buyer.
SECTION 4.3 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver the
Shares to the parties listed on Schedule 2.1(a) and shall further execute and
deliver an assumption agreement regarding Buyer's assumption of the Assumed
Liabilities consistent with the terms hereof.
ARTICLE 5.
CLOSING CONDITIONS
SECTION 5.1 CONDITIONS OF SELLER AND EXECUTIVE OFFICERS. The obligation of
Seller and Executive Officers to consummate the transactions to be performed by
them pursuant to this Agreement is subject to satisfaction of the following
conditions:
(a) The representations and warranties of Buyer set forth in Section
6.2 shall be true and correct;
(b) Buyer shall have performed and complied with all of their
covenants hereunder in all material respects through the Closing Date;
(c) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (i) prevent consummation of any of the transactions
contemplated by this Agreement; (ii) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation; or
(iii) affect adversely the right of Buyer to acquire the assets and to
operate the Business (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect); and
(d) Buyer and Scottsdale Technologies-I, Ltd. (the "Partnership")
shall have executed the Note and Warrant Purchase Agreement attached
hereto as Exhibit B (the "Note and Warrant Purchase Agreement").
SECTION 5.2 CONDITIONS OF BUYER. The obligation of Buyer to consummate the
transactions to be performed by it pursuant to this Agreement is subject to
satisfaction of the following conditions:
(a) The representations and warranties of Seller and Executive
Officers set forth in Section 6.1 shall be true and correct;
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(b) Seller and Executive Officers shall have performed and complied
with all of their covenants hereunder in all material respects through the
Closing Date;
(c) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (i) prevent consummation of any of the transactions
contemplated by this Agreement; (ii) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation; or
(iii) affect adversely the right of Buyer to acquire the assets and to
operate the Business (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect);
(d) Each person or entity listed on Schedule 5.2(d) hereto
(collectively, the "Listed Persons") shall have executed and delivered an
agreement in form and substance satisfactory to Buyer and the Partnership
providing that (i) he or she assigns all right, title and interest that
he, she or it may have in and to any of the Intellectual Property that are
or have been owned, used, promoted or distributed by Seller or its
affiliates or predecessors and any such property or asset that is
equivalent thereto or is related thereto or is incorporated in any of the
products that have been or intended to be distributed by Seller
(collectively, the "Intellectual Property Assets"), (ii) that he, she or
it has no right, title or interest, after given effect to the assignment
described above, in and to any of the Intellectual Property Assets, (iii)
that he, she or it has no claim or right as against Buyer or Seller after
giving effect to the purchase of the Assets other than the right of the
Executive Officers and Mike Slover to purchase no less than 481,000 Shares
of Common Stock and no more than 550,000 shares of Common Stock in the
aggregate, as agreed upon among the Company, the Executive Officers and
Mr. Slover, and to receive Shares, if any, to be issued or distributed to
them as provided on Schedule 2.19(a), and (iv) he, she or it will not
compete with Buyer with respect to any business related to or competing
with the Assets or the Intellectual Property Assets or any improvement to
such products developed by Buyer or use or divulge confidential
information included within the Intellectual Property Assets or otherwise
relating to Buyer or Seller. In addition, in each such agreement executed
by a Listed Person, such Listed Person shall represent and warrant that he
or it has no interest in any of the Assets or any other property or
intellectual property that is used by or is material to the operations of
Seller (collectively, the "Covered Assets"), that he or it has no interest
in any business that is competitive with Seller in the Program Master
product line or technology related thereto (including, without limitation,
the light-link technology) and that he or it has no interest in any
Covered Asset or any enhancement or add-on to any Covered Asset for which
such Listed Person has been engaged by the Company to develop or provide
any assistance in the development of such enhancement or add-on; provided,
however, that nothing herein or in any such agreement shall limit the
right of Schedeler & Company, L.L.C. (in which Eric J. Schedeler has no
interest) to directly or indirectly own any interest in any business that
produces or markets electronic programming guides; and provided further
that
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nothing herein or in any such agreement shall limit the right of any
Listed Person to collect payment for any services rendered by such Listed
Person to the Company.
(e) Buyer and Seller shall have entered into written restructuring
agreements with Transcap Manufacturing Services, Inc. ("Transcap") and
Network Gaming International Corp. (formerly known as AI Software, Inc.)
("NGIC"), pursuant to which Transcap and NGIC agree to accept the payment
of certain royalties in exchange for their claims against Seller;
(f) Seller shall have entered into agreements in form and substance
satisfactory to Seller and General Partner with both Chambord
Technologies, Inc. ("Chambord") and Mesa Research pursuant to which Seller
shall have acquired programs relating to a code library, light link
technology, operating systems and other technologies incorporated in or
used in connection with the development of any of Seller's products
(including, without limitation, the ETV Host Software and the Program
Master (collectively, the "System")), which agreement shall be assignable
to Buyer;
(g) Seller shall have entered into an agreement in form and
substance satisfactory to Seller and General Partner with Mark Force Ltd.,
a Delaware corporation, pursuant to which Seller shall have acquired all
right, title and interest in and to any and all Intellectual Property
owned by Mark Force Ltd., including, without limitation, any and all
trademarks relating to the Program Master owned by Mark Force Ltd.;
(h) Seller shall provide an opinion of counsel satisfactory in form
and substance to Buyer regarding the capital structure of Seller; and
(i) Buyer and the Partnership shall have executed the Note and
Warrant Purchase Agreement substantially in the form attached hereto as
Exhibit B.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES
SECTION 6.1 REPRESENTATIONS AND WARRANTIES OF SELLER AND EXECUTIVE
OFFICERS. Seller and Executive Officers each jointly and severally represent and
warrant to Buyer that each of the following shall be true and correct as of the
date hereof and as of the Closing Date:
(a) AUTHORIZATION OF TRANSACTION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware. Seller and Executive Officers have full power and
authority to execute and deliver this Agreement and to perform their
obligations hereunder. This Agreement constitutes the valid and legally
binding obligation of Seller and Executive Officers, enforceable in
accordance with its terms and conditions. Seller is not required to give
any notice to, make any filing with, or obtain any authorization, consent,
or approval of, any government or
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governmental agency in order to consummate the transactions contemplated
by this Agreement.
(b) CAPITALIZATION OF SELLER. All of the equity securities of Seller
are owned by the persons and entities set forth in Schedule 6.1.(b)
hereto. Seller has provided copies of all agreements relating to the
acquisition of such equities from Seller and Seller's former parent.
(c) COMPLIANCE WITH LAW. Seller is in compliance with all applicable
federal, state or local laws, statutes, ordinances, permits, licenses,
orders, approvals, variances, rules or regulations or judicial or
administrative decisions, except for insignificant instances of
non-compliance that would not, individually or in the aggregate, have an
adverse effect upon the Assets or the Business. Seller has not received
any notice of an alleged violation of any of the foregoing matters other
than as set forth in Schedule 6.1(c). Seller has been granted all
licenses, permits, consents, authorizations and approvals from federal,
state and local government regulatory bodies necessary or desirable to
carry on the Business, all of which are currently in full force and
effect, and may be transferred to Buyer without the consent, action or
approval of any other party. Each of the Assets complies in all respects
with all federal, state and local laws, statutes, ordinances, permits,
licenses, approvals, rules and regulations applicable thereto.
(d) TITLE TO THE ASSETS. Seller has good and marketable title to the
Assets, free and clear of all liens, encumbrances, security interests,
equities or restrictions whatsoever. By virtue of the grant, conveyance,
sale, transfer, and assignment of the Assets hereunder, Buyer shall
receive good and marketable title to the Assets, free and clear of all
liens, encumbrances, security interests, equities or restrictions
whatsoever. The Assets include all of (i) the licenses necessary to use
the intellectual property of any third party used in connection with the
conduct of the Business as presently conducted, (ii) any third party
approvals required under any agreement to which Seller is a party, and
(iii) any governmental approvals or permits of which Seller is aware that
are necessary to conduct the Business as presently conducted. Seller has
independently developed all of its products, and no third party other than
a Listed Person or Chambord has participated in the development or
marketing of any product of Seller. In addition, Seller has not been
informed that any of its products violates any copyright or issued or
pending patent owned by another party.
(e) FINANCIAL STATEMENTS. The financial statements of Seller as of
and for the fiscal years ended December 31, 1995 and December 31, 1994
audited by Jones, Jensen & Company and the unaudited financial statements
of Seller as of and for the fiscal year ended December 31, 1996 have been
prepared in accordance with generally accepted accounting principles
consistently applied and present fairly the financial condition of Seller
as of such dates. Seller is not subject to any liability that is not
disclosed on such financial statements except for liabilities that (i)
have been incurred since December 31,
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1996 in the ordinary course of business as known to Buyer and (ii) do not
in the aggregate exceed $100,000.
(f) LITIGATION. Except as set forth in Schedule 6.1(f) hereof, there
is no claim, litigation, action, suit or proceeding, administrative or
judicial, pending or threatened against Seller, or involving the Assets or
the Business, at law or in equity, before any federal, state or local
court or regulatory agency, or other governmental authority. Seller has
received no notice of any of the above and to the best of each Executive
Officer's knowledge, no facts or circumstances exist which would, with the
passage of time or giving of notice (or both), give rise to any of the
above.
(g) EMPLOYEES; EMPLOYEE RELATIONS AND BENEFIT PLANS. Except as
otherwise expressly provided herein, Buyer shall not, by the execution and
delivery of this Agreement or otherwise, become obligated to employ any
employee of Seller or assume any liabilities or contractual obligations
with respect to such employees or otherwise become liable for or obligated
in any manner (contractual or otherwise) to any employee of Seller,
including, without limiting the generality of the foregoing, any liability
or obligation pursuant to any collective bargaining agreement, employment
agreement, or pension, profit sharing or other employee benefit plan
(within the meaning of Section 3(3) of the Employment Retirement Income
Security Act 1974, as amended) or any other fringe benefit program
maintained by Seller or to which Seller contributes or any liability for
the withdrawal or partial withdrawal from or termination of any such plan
or program by Seller.
(h) INTELLECTUAL PROPERTY.
(i) Seller owns or has the right to use, pursuant to license,
sublicense, agreement, or permission, all Intellectual Property
necessary for the operation of the Business of Seller as presently
conducted and as presently proposed to be conducted. Each item of
Intellectual Property owned or used by Seller immediately prior to
the Closing and that is being transferred to the Buyer hereunder
will be owned or available for use by the Buyer on identical terms
and conditions immediately subsequent to the Closing hereunder.
Seller has taken all necessary action to maintain and protect each
item of Intellectual Property that it owns or uses. Except as set
forth in Schedule 6.1(h)(i) hereof, no person or entity other than
Seller has any right, title or interest in or to any of the
Intellectual Property.
(ii) Seller has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any
Intellectual Property rights of third parties, and Seller has not
ever received any charge, complaint, claim, demand, or notice
alleging any such interference, infringement, misappropriation, or
violation (including any claim that Seller must license or refrain
from using any Intellectual Property rights of any third party). To
the best knowledge of Seller and each
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Executive Officer, no third party has interfered with, infringed
upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of Seller.
(iii) Schedule 6.1(h)(iii) identifies each patent or
registration which has been issued to Seller with respect to any of
its Intellectual Property, identifies each pending patent, trademark
and copyright application for registration which Seller has made
with respect to any of its Intellectual Property, and identifies
each license, agreement, or other permission which Seller has
granted to any third party with respect to any of its Intellectual
Property (together with any exceptions). Seller has delivered to the
Buyer correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions
(as amended to date) and has made available to the Buyer copies of
all other written documentation evidencing ownership and prosecution
(if applicable) of each such item that are correct and complete in
all material respects. Schedule 6.1(h)(iii) also identifies each
copyright, trademark, trade name, unregistered trademark or other
intellectual property owned or licensed by Seller. With respect to
each item of Intellectual Property required to be identified in
Schedule 6.1(h)(iii):
(A) Seller possess all right, title, and interest in and
to the item, free and clear of any security interest, pledge,
lien, charge or other encumbrance of any kind whatsoever,
license, or other restriction;
(B) Such item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
(C) No action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the best
knowledge of Seller, is threatened which challenges the
legality, validity, enforceability, use, or ownership of the
item; and
(D) Except as set forth on Schedule 6.1(h)(iii)(D),
Seller has never agreed to indemnify any person or entity for
or against any interference, infringement, misappropriation,
or other conflict with respect to the item.
(iv) Schedule 6.1(h)(iv) identifies each item of Intellectual
Property that any third party owns and that Seller uses pursuant to
license, sublicense, agreement, or permission, except for generally
available software costing less than $500. Seller has delivered to
the Buyer correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). With
respect to each item of Intellectual Property required to be
identified in Schedule 6.1(h)(iv):
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(A) The license, sublicense, agreement, or permission
covering the item is legal, valid, binding, enforceable, and
in full force and effect, subject to applicable bankruptcy,
insolvency, fraudulent conveyance or transfer, reorganization,
arrangement, moratorium or other similar laws from time to
time in effect that affect creditor's rights generally;
(B) The license, sublicense, agreement, or permission
will continue to be legal, valid, binding, enforceable, and in
full force and effect on identical terms following the
consummation of the transactions contemplated hereby, subject
to applicable bankruptcy, insolvency, fraudulent conveyance or
transfer, reorganization, arrangement, moratorium or other
similar laws from time to time in effect that affect
creditor's rights generally;
(C) Seller is not, and to the best knowledge of Seller
and each Executive Officer, no party to the license,
sublicense, agreement, or permission is, in breach or default,
and no event has occurred which with notice of lapse of time
would constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(D) Seller has not repudiated, and to the best knowledge
of Seller and each Executive Officer, no party to the license,
sublicense, agreement, or permission has repudiated, any
provision thereof;
(E) With respect to each sublicense, the representations
and warranties set forth in subsections (A) through (D) above
are true and correct with respect to the underlying license;
(F) The underlying item of Intellectual Property is not
subject to any outstanding injunction, judgment, order,
decree, ruling, or charge;
(G) No action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or, to the best
knowledge of Seller and each Executive Officer, is threatened
which challenges the legality, validity, or enforceability of
the underlying item of Intellectual Property; and
(H) Seller has not granted any sublicense or similar
right with respect to the license, sublicense, agreement, or
permission.
(v) Schedule 6.1(h)(v) identifies each filing made, and each
filing in the process of being prepared, by Seller that is intended
to perfect any intellectual property rights claims.
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(vi) To the best knowledge of Seller and each Executive
Officer, Seller does not interfere with, infringe upon,
misappropriate, or otherwise conflicts with, any Intellectual
Property rights of any third party as a result of the operation of
their businesses as presently conducted.
As used herein, the term "Intellectual Property" means (a) all inventions
(whether patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (b)
all trademarks, service marks, trade dress, logos, trade names and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all masks works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium), that are or have been
owned, used, promoted or distributed by Seller or its affiliates or predecessors
and any intellectual property or asset that is equivalent thereto, related
thereto or is incorporated in any of the products that have been or intended to
be distributed by the Company, including, without limitation, the System and the
programs relating to a code library, light link technology, operating systems
and other technologies incorporated or used in connection with the System.
(i) TAXES. Buyer will have no liability for any taxes, assessments,
fees or other governmental charges imposed upon the Assets or Buyer,
whether as a transferee of the Assets or otherwise. All federal, state and
local taxes due and payable with respect to the Business or the Assets
have been paid, including, without limiting the generality of the
foregoing, all federal, state and local income, sales, use, franchise,
excise and property taxes. The Assets are and will be subject to no
encumbrance in respect of taxes. All taxes of any type incurred or accrued
by Seller in respect of the Assets or the Business for any period on or
prior to the date of Closing have been or will be paid by Seller.
(j) GOVERNMENT NOTICES. Seller has delivered to Buyer a description
and copies, as of the date of this Agreement, of all notifications, filed
or submitted, or required be filed or submitted, to governmental agencies
and of all material notifications from such governmental agencies relating
to Seller and the Assets or relating to the discharge or release of
materials into the environment or otherwise relating to the protection of
the public health or the environment.
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(k) PERMITS AND ENVIRONMENTAL MATTERS. Attached hereto as Schedule
6.1(k) is an accurate list and summary description as of the date hereof
of all permits, titles (including motor vehicles titles and current
registrations), fuel permits, licenses, franchises and other,
certificates, owned or held by the Seller, to the extent such relate to
the Business or operation thereof, none of which permits, titles,
licenses, franchises and certificates infringe on the rights of others and
all of which are now valid, in good standing and in full force and effect.
All such permits, titles, licenses, franchises and certificates required
by law have been obtained, are in good standing and are adequate for the
operation of the Business. No such permits, titles, licenses, franchises
or certificates will terminate, require any change or payment to be made
by Buyer or any other party, or in any respect be adversely affected as a
result of the acquisition of the Assets by Buyer or the consummation of
the transactions contemplated by this Agreement.
(l) APPLICABLE LAWS COMPLIANCE. Except as set forth in Schedule
6.1(l):
(i) Seller is, and at all times during its operation has been,
fully licensed, permitted and authorized under all federal, state
and local statutes, laws, rules, regulations, orders, permits
(including, without limitation, zoning restrictions and land use
requirements) and licenses affecting or otherwise applicable to the
Premises or Business and any operations or activities in connection
therewith (collectively, the "Applicable Laws").
(ii) The Premises are usable for their current uses, without
violating any Applicable Laws or private restriction, and such uses
are legal conforming uses.
(iii) All activities and operations conducted in connection
with the Business or on the Premises, whether by Seller or any third
parties, have at all times been and continue to be conducted in
compliance with all Applicable Laws.
(iv) Neither Seller, nor the Premises, are now nor have ever
been involved in any litigation or administrative proceedings
seeking to impose fines, penalties or other liabilities or seeking
injunctive relieve for violation of any Applicable Laws with regard
to the Business or the Premises and there are no facts or
circumstances that would give rise to same.
(v) Seller has provided Buyer all reports, notices, filings
and other disclosures related to the Premises or the Business
required by Applicable Laws to be filed with any government
agencies; and Seller has duly and timely filed all such reports with
such agencies.
(vi) Neither Company nor Seller is in default under any
Applicable Laws or under any order of any court or governmental
administrative body having jurisdiction over Company, the Premises,
or any operations or activities thereon
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or thereunder, and there are no claims, actions, suits or
proceedings, pending or threatened, against or affecting Company or
Seller at law or in equity, or before or by any administrative body
having jurisdiction; no notice of any claim, action, suit or
proceeding, whether pending or threatened, has been received; and
there are no facts or circumstances which would give rise to the
same.
(m) PREMISES. With respect to the Premises:
(i) there are no pending or, to the knowledge of any Executive
Officer, threatened, condemnation proceedings, lawsuits, or
administrative actions relating to the Premises or other matters
affecting the current use, occupancy or value thereof;
(ii) the buildings and improvements on the Premises are
located within the boundary lines of such land and are not in
violation of applicable setback requirements, zoning laws, and
ordinances, and do not encroach on any easement which may burden
such Premises; such Premises does not serve any adjoining property
for any purpose inconsistent with the use of the Premises; and the
Premises are not located within any flood plain or subject to any
similar type restriction for which any permits or licenses necessary
to the use thereof have not been obtained;
(iii) all facilities on the Premises have received all
approvals of governmental authorities (including licenses and
permits) required in connection with the ownership or operation
thereof and have been operated and maintained in accordance with
applicable laws, rules, and regulations;
(iv) except for the lease agreement pursuant to which Seller
is leasing the Premises, there are no leases, subleases, licenses,
concessions, or other agreements, written or oral, granting to any
party or parties the right of use or occupancy of any portion of the
Premises; and
(v) there are no parties (other than Seller) in possession of
the Premises.
(n) CONTRACTS. Schedule 6.1(n) lists all contracts and other
agreements, written or oral, to which Seller is a party. Seller has
delivered to Buyer a correct and complete copy of each written agreement
listed on Schedule 6.1(n) (as amended to date) and a written summary
setting forth the terms of each oral agreement referred to in Schedule
6.1(n). To the best knowledge of Seller and each Executive Officer, with
respect to each such agreement: (i) the agreement is legal, valid,
binding, enforceable, and in full force and effect, subject to applicable
bankruptcy, insolvency, fraudulent conveyance or transfer, reorganization,
arrangement, moratorium or other similar laws from time to time in effect
that affect creditor's rights generally (collectively, "Creditor's
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Laws"); (ii) the agreement will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby, subject to
Creditor's Laws; (iii) no party is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; and (iv) no party has repudiated any provision of the
agreement.
(o) DISCLOSURE. To the best knowledge of Seller and each Executive
Officer, the representations and warranties contained in this Article 6 do
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statement and information
contained in this Article 6 not misleading.
SECTION 6.2 REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller and Executive Officers that as of the date hereof and as of
the Closing Date, Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Buyer has full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of Buyer, enforceable in accordance with its terms and conditions. Buyer is not
required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of, any government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
SECTION 6.3 SURVIVAL. Each of the representations and warranties set forth
in this Agreement shall survive the Closing and the transfer of the Assets.
ARTICLE 7.
GENERAL
SECTION 7.1 USE OF NAMES. Subject to the Closing of the transactions
contemplated hereby, Seller and/or the Executive Officers shall execute any
instruments reasonably necessary to permit Buyer to use the name "Scottsdale
Technologies" in all jurisdictions in which Seller has the right to use such
names in such jurisdictions and to disclaim any right either Seller or Executive
Officers might have to use any such name in such jurisdictions. Without limiting
the generality of the foregoing, Seller shall change its name to a name that is
not similar to "Scottsdale Technologies" as soon as reasonably practicable
following the Closing.
SECTION 7.2 NOTICES. All notices or communications required or permitted
under this Agreement shall be given in writing and served either by personal
delivery, overnight courier or by deposit in the United States mail and sent by
first class registered or certified mail, return receipt requested, postage
prepaid:
If to Seller:
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Scottsdale Technologies, Inc.
7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
If to Executive Officers:
c/o Mr. Eric J. Schedeler
7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
If to Buyer:
WO Consulting, Inc.
7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Attn: Mr. Stuart N. Rubin
With a copy to:
Mayor, Day, Caldwell & Keeton, L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002
Attn: Jeff C. Dodd
Notice shall be deemed given and effective the day personally delivered, the day
after being sent by overnight courier and three days after deposit in the U.S.
mail as provided above, or when actually received, if earlier. Either party may
change the address for notices or communications to be given to it by written
notice to the other party given as provided in this Section.
SECTION 7.3 ENTIRE AGREEMENT. This Agreement, the Schedules hereto and the
other agreements referred to herein constitute the entire agreement and
understanding of the parties with respect to the subject matter hereof, and
supersede all prior and contemporaneous agreements and understandings, oral or
written, relative to said subject matter.
SECTION 7.4 ASSIGNMENT. 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 permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties and
such consent shall not be unreasonably withheld; provided that Buyer may assign
this Agreement and its rights, interests and obligations hereunder to any
subsidiary of Buyer.
SECTION 7.5 EXPENSES OF TRANSACTION. Each party hereto shall pay all costs
and expenses incurred by such party in connection with this Agreement and the
transactions
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contemplated hereby, including, without limitation, the fees and expenses of
such party's attorneys and accountants. No party hereto has employed any
investment banker, broker or finder or has incurred any liability for any
brokerage fee, commission or finder's fee in connection with the transactions
contemplated hereby.
SECTION 7.6 MODIFICATION; Remedies Cumulative. This Agreement may not be
changed, amended, terminated, augmented, rescinded or otherwise altered, in
whole or in part, except by a writing executed by all of the parties hereto. No
right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
SECTION 7.7 SPECIFIC PERFORMANCE. Each party hereto acknowledges and
agrees that the other party would be damaged irreparably in the event any of the
terms and provisions hereof are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each party hereto agrees that the
other party shall be entitled to one or more injunctions to prevent breaches of
this Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court having jurisdiction over
the parties and the matter in addition to any other remedy to which a party may
be entitled at law or in equity.
SECTION 7.8 FURTHER ASSURANCES. From time to time after the Closing,
Seller will, without further consideration, execute and deliver such other
instruments of conveyance and transfer, and take such other action including,
without limitation, assistance in connection with litigation, as Buyer
reasonably may request to more effectively convey and transfer to and vest in
Buyer and to put Buyer in possession of the Assets to be transferred hereunder.
SECTION 7.9 SALES AND OTHER TAXES. Seller shall pay any and all sales,
transfer or similar taxes due and owing as a result of the sale, transfer,
conveyance and assignment of Assets provided for herein, and shall furnish to
Buyer receipts, certificates or other evidence of such payment satisfactory to
Buyer.
SECTION 7.10 GOVERNING LAW. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of Arizona,
without regard to its conflict of laws principles.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
BUYER: SELLER:
WO CONSULTING, INC. SCOTTSDALE TECHNOLOGIES, INC.
By: /s/ STUART N. RUBIN By: /s/ ERIC J. SCHEDELER
-------------------- ----------------------
21
<PAGE> 23
Stuart N. Rubin, President Eric J. Schedeler, President
EXECUTIVE OFFICERS:
/s/ ERIC J. SCHEDELER
- - --------------------------------------
Eric J. Schedeler
/s/ C. KIMBALL MCCUSKER
- - --------------------------------------
C. Kimball McCusker
22
<PAGE> 1
Exhibit 6.3
FIRST AMENDMENT TO
PLAN AND AGREEMENT OF REORGANIZATION
THIS FIRST AMENDMENT TO PLAN AND AGREEMENT OF REORGANIZATION (this
"Amendment") effective as of May 15, 1997 is among Dalescott, Inc., a Delaware
corporation formerly known as Scottsdale Technologies, Inc., Scottsdale
Technologies, Inc., a Delaware corporation formerly known as WO Consulting,
Inc., Eric J. Schedeler and C. Kimball McCusker.
RECITALS
A. The parties hereto have executed and delivered that certain Plan and
Agreement of Reorganization ("Reorganization Agreement").
B. The parties desire to amend the Reorganization Agreement in certain
respects.
NOW, THEREFORE, the parties hereto agree as follows:
1. Definitions. Any capitalized term not defined herein shall have the
meaning ascribed to such term in the Reorganization Agreement.
2. Amendment to Reorganization Agreement. Section 2.1 of the
Reorganization Agreement is hereby amended to delete the reference to "550,000
shares of Common Stock" and to substitute a reference to "650,000 shares of
Common Stock" in lieu thereof.
3. Counterparts; Effect. This Amendment may be signed in counterparts
and shall be effective only for the specific purposes set forth herein. Except
as modified by this Amendment, the terms covenants and provisions of the
Reorganization Agreement are hereby ratified and confirmed and shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment on
September 17, 1997 to be effective as of May 15, 1997.
<PAGE> 2
DALESCOTT, INC.
By: /s/ ERIC J. SCHEDELER /s/ ERIC J. SCHEDELER
---------------------- ----------------------
Eric J. Schedeler Eric J. Schedeler
SCOTTSDALE TECHNOLOGIES, INC.
By: /s/ STUART N. RUBIN /s/ C. KIMBALL MCCUSKER
---------------------- ------------------------
Stuart N. Rubin C. Kimball McCusker
Chief Financial Officer
<PAGE> 1
EXHIBIT 6.4
GUARANTEE AGREEMENT
This Guarantee Agreement (this "Agreement") is dated as of April 28,
1997 among Sound Industries, Inc., a Utah corporation (the "Guarantor"), WO
Consulting, Inc., a Delaware corporation (the "Company"), and Scottsdale
Technologies-I, Ltd., a Delaware limited partnership (the"Partnership").
WHEREAS, the Guarantor and the Company have entered into a Plan and
Agreement of Reorganization (the "Reorganization Agreement"), pursuant to which
the Company will merge with Sound Acquisition Corp., a Utah corporation and
wholly-owned subsidiary of the Guarantor (the "Merger"); and
WHEREAS, in Section 2.1(d) of the Reorganization Agreement, the
Guarantor has agreed to execute a Guarantee in form and substance satisfactory
to the Guarantor and the Partnership pursuant to which (a) the Guarantor shall
become jointly and severally liable for the obligations of the Company under the
12% Senior Convertible Promissory Notes issued by the Company to the Partnership
(collectively, the "Senior Note") pursuant to the terms of that certain Note and
Warrant Purchase Agreement between the Company and the Partnership (the "Note
Purchase Agreement") and (b) the Guarantor shall issue shares of common stock of
the Guarantor ("Common Stock") upon conversion of the Senior Note to the same
extent that the Company would have issued shares of the Company's common stock
("WOC Stock") upon the conversion thereof if the Merger had not occurred; and
WHEREAS, subject to and in accordance with the terms hereof, the
parties wish to enter into this Agreement in connection with the Merger and in
order to induce one another to consummate the transactions contemplated by the
Reorganization Agreement;
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I.
GUARANTEE OF OBLIGATIONS
1.1. Guarantee. The Guarantor hereby unconditionally, absolutely and
irrevocably guarantees, undertakes and promises to cause, as herein provided
(its "Guarantee") the due and punctual performance and observance by the Company
of all terms and provisions to be performed or observed by or on the part of the
Company pursuant to the Senior Note, the Warrants to purchase up to an aggregate
of 1,641,111 shares of WOC Stock for ten dollars per share (subject to certain
adjustments) (the "Warrants" ), the Note Purchase Agreement and any other
agreement or instrument executed in connection with any of the foregoing
(collectively, the "Governing Agreements") (all such terms and provisions to be
performed or observed by or on the part of the Company now or hereafter in
existence being collectively called the
<PAGE> 2
"Obligations") as follows: in the event that the Company shall fail in any
manner whatsoever to perform or observe any of its Obligations, when and as the
same shall be required to be performed or observed under the terms of the
Governing Agreement, the Guarantor will itself duly and punctually perform or
observe, as the case may be, such Obligations, or cause the same to be duly and
punctually performed or observed, in each case as if the Guarantor were itself
the obligor with respect to such Obligations under the Governing Agreement.
1.2. No Demand or Notice. It shall not be a condition to the Guarantee
that the Partnership, any of the general or limited partners of the Partnership,
or any of the successors or assigns thereof (collectively, the "Beneficiaries"
and individually, a "Beneficiary") shall have first made any request of or
demand upon, or given any notice of the occurrence of a default under the Senior
Note or the Note Purchase Agreement or any other notice whatsoever to, the
Guarantor or the Company or any other person or entity, or shall have instituted
any action or proceeding against the Company or any other person or entity in
respect thereof, or shall have joined the Company in any such action or
proceeding. A Beneficiary in asserting the benefit of the Guarantee shall give
prompt notice to the Guarantor of any failure by the Company to perform or
observe any Obligation; provided, however, that any failure, delay or defect in
the giving of such notice shall not alter or affect the Guarantee under this
Agreement.
1.3. Waiver of Resort to Security. The Guarantor further agrees that
this Agreement, insofar as it constitutes a guarantee of monetary Obligations,
constitutes a guarantee of payment when due and not of collection, and the
Guarantor waives any right to require as a condition to its Guarantee that any
resort be had by a Beneficiary to any security held for the payment of any
Obligations.
1.4. No Discharge. The Guarantee is and shall remain absolute and
unconditional irrespective of any circumstance that might otherwise constitute a
legal or equitable discharge of a surety or guarantor, as the case may be, with
respect to its Guarantee.
1.5. Waivers by the Guarantors. The Guarantor hereby waives, with
respect to its Guarantee but without prejudice to the rights of the parties to
the Senior Note and the Note Purchase Agreement, any notice of acceptance of
this Agreement, presentment, demand, protest, notice of the occurrence of a
default under the Senior Note or the Note Purchase Agreement and any other
notice of any kind whatsoever and promptness in making any claim or demand
hereunder. The Guarantee shall not be affected by (i) the failure of a
Beneficiary to assert any claim or demand or to enforce any right or remedy
under the provisions of any of the Senior Note, Note Purchase Agreement or any
agreement related thereto or otherwise, (ii) any extension or renewal of any of
the Senior Note, Note Purchase Agreement or any agreement related thereto, (iii)
any rescission, waiver, amendment or modification of any of the terms or
provisions of any of the Senior Note, Note Purchase Agreement or of any
agreement related thereto, including, without limitation, any change in the
time, manner or place of payment or performance of any of the obligations under
the Senior Note, Note Purchase Agreement, or (iv) the release of any security
held for payment of any Obligations.
2
<PAGE> 3
1.6. No Reduction. The Guarantee shall not be subject to any reduction,
limitation, impairment or termination for any reason, including, without
limitation, any claim of waiver, release, surrender, alteration or compromise,
and shall not be subject to any defense or set-off, counterclaim, recoupment or
termination whatsoever.
1.7. Enforcement. Notwithstanding anything herein to the contrary, a
Beneficiary may proceed to enforce the Guarantee without first pursuing or
exhausting any right or remedy that it or any of its successors or assigns may
have against the Company or the Guarantor or any other person or entity.
1.8. Continued Effectiveness. The Guarantee shall continue to be
effective or be reinstated, as the case may be, if at any time payment, or any
part thereof, of any Obligation of the Company is rescinded or must otherwise be
restored or returned by the person receiving such payment upon the insolvency,
bankruptcy or reorganization of the Company, all as though such payment or part
thereof had not been made.
1.9. Certain Defenses. Nothing herein is intended to deny to the
Guarantor, and it is expressly agreed that the Guarantor shall have and may
assert, any and all of the defenses, set-offs, counterclaims and other rights
(other than those relating to insolvency, bankruptcy or reorganization as
described in Section 1.8) with regard to any Obligations that the Company may
possess except any defense the Company may possess relating to lack of validity
or enforceability of the Senior Note, Note Purchase Agreement or any other
agreement or instrument relating thereto as against the Company.
1.10. Parties in Interest. This Agreement shall inure solely to the
benefit of the Partnership, its general partner, each of its limited partners
and their respective successors and assigns, each of whom has the right to
enforce the Guarantee against the Guarantor. As used in this Agreement, the term
Guarantor includes any successor of the Guarantor, and the term Company includes
any successor of the Company.
ARTICLE II.
ISSUANCE OF SHARES
In view of the fact that following the consummation of the Merger, the
Company shall become a wholly-owned subsidiary of the Guarantor, the Guarantor
hereby agrees that upon a conversion of the Senior Note it shall issue shares of
its Common Stock to the same extent that the Company is presently required to
issue shares of WOC Stock upon a conversion of the Senior Note pursuant to the
terms of the Senior Note and the Note Purchase Agreement. In addition, the
Guarantor hereby agrees that upon an exercise of the Warrants, it shall issue
shares of its Common Stock to the same extent that the Company is presently
required to issue shares of WOC Stock upon an exercise of the Warrants pursuant
to the terms of the Warrants and the Note
3
<PAGE> 4
Purchase Agreement. The Partnership hereby agrees that subject to the execution
and delivery of this Agreement by all parties hereto, upon a conversion of the
Senior Note or an exercise of the Warrants, it shall accept delivery of shares
of Common Stock of the Guarantor in accordance with the terms of this Article II
in lieu of receiving shares of WOC Stock. In addition, and simultaneously with
the filing of the instruments necessary to consummate the Merger under Delaware
and Utah law, the Partnership shall automatically release the Company from all
of its obligations under Section 4.1(d) of the Note Purchase Agreement
pertaining to the Company's representation to have authorized, reserved,
available and free from pre-emptive rights, the number of shares of common stock
of the Company issuable upon the conversion of the Senior Note or the exercise
of all outstanding Warrants.
ARTICLE III.
MISCELLANEOUS
3.1. Acceptability of Merger. The Partnership and the Company hereby
agree that notwithstanding anything to the contrary in the Note Purchase
Agreement, the Merger contemplated by the Reorganization Agreement is acceptable
to both the Partnership and the Company and is of the type contemplated by
Section 6.9 of the Reorganization Agreement.
3.2. No Waivers. No failure or delay by a Beneficiary or the Guarantor
in exercising any right or power under this Agreement, or any single or partial
exercise of any such right or power, shall preclude any other or further
exercise thereof or the exercise of any other right or power. Such single or
partial exercise of any right or power shall be cumulative and not exclusive of
any rights or remedies provided by law.
3.3. Expenses in Connection with Exercise. The Guarantor will be
liable, and hereby agrees, to reimburse, on demand, each Beneficiary for any and
all costs and expenses, including, without limitation, the fees and expenses of
legal counsel and of any other counsel, experts, consultants or agents, that
such Beneficiary may incur in connection with the exercise or enforcement of any
of the rights of a Beneficiary under this Agreement or the failure by the
Guarantor to perform or observe any of the provisions of this Agreement.
3.4. Further Assurances. From time to time, the Guarantor agrees to
execute and deliver such additional documents, and will provide such additional
information and assistance as the Partnership or any of its successors may
reasonably require to carry out the terms of this Agreement.
3.5. Successors and Assigns. Except as may be expressly provided
herein, this Agreement shall be binding upon and inure to the benefit of the
successors of the Beneficiaries. No Guarantor may not assign or delegate any of
its rights or obligations under this Agreement without the prior written consent
of all the Beneficiaries, which consent shall be in the sole and
4
<PAGE> 5
absolute discretion of such Beneficiaries. Any purported assignment or
delegation by the Guarantor without such consent shall be void and ineffective.
3.6. Notices. All notices, requests, demands and other communications
(collectively, "notices") required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given if and when (i)
transmitted by telecopier facsimile, (ii) delivered personally or (iii) mailed,
first class mail, postage prepaid, return receipt requested, as follows:
If to Guarantor: If to the Purchaser:
Sound Industries, Inc. Scottsdale Technologies-I, Ltd.
7580 East Gray Road, Suite 102 7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260 Scottsdale, Arizona 85260
Telecopy Number: Telecopy Number: 602-998-7986
If to Company:
WO Consulting, Inc.
7580 East Gray Road, Suite 102
Scottsdale, Arizona 85260
Telecopy Number: 602-998-7986
or to such other address as either the Guarantor, the Company or the Partnership
shall have specified by notice to the other.
3.7. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral and written, between the parties with
respect to the subject matter hereof.
3.8. Severability. In the event that any provisions of this Agreement
shall finally be determined to be unlawful, such provision shall, so long as the
economic and legal substance of the transactions contemplated hereby is not
affected in any materially adverse manner as to any party hereto, be deemed
severed from this Agreement and every other provision of this Agreement shall
remain in full force and effect.
3.9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, and all of which when
taken together shall constitute one and the same original document.
3.10. Governing Law. The laws of the State of Arizona shall govern the
construction, interpretation and effect of this Agreement without giving effect
to any conflicts of law principles.
5
<PAGE> 6
3.11. Amendment. All waivers, modifications, amendments or alterations
of this Agreement shall require the execution of a written instrument signed by
each of the parties hereto.
[SIGNATURE PAGE TO FOLLOW]
IN WITNESS WHEREOF, the parties have executed this Agreement.
GUARANTOR:
SOUND INDUSTRIES, INC.
By: /s/ LANE CLISSOLD
-------------------------------
Lane Clissold, President
COMPANY
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
-------------------------------
Stuart N. Rubin, Vice President
PARTNERSHIP:
SCOTTSDALE TECHNOLOGIES-I, LTD.
By: Software Funding Corp.,
Its General Partner
By: /s/ STUART N. RUBIN
-------------------------------
Stuart N. Rubin, Vice President
6
<PAGE> 1
Exhibit 6.5
THUNDERBIRD EXECUTIVE OFFICE PARK LEASE AGREEMENT
(GROSS)
THIS OFFICE LEASE, dated for reference purposes as of the 23rd day of
September, 1996, is entered into by and between PACIFIC REALTY HOLDINGS LTD.
PARTNERSHIP, an Arizona limited partnership, as Landlord, and SCOTTSDALE
TECHNOLOGIES, INC., a Delaware corporation, as Tenant.
ARTICLE 1 - TERMS DEFINED AND TABLE OF CONTENTS
The terms set forth below in this Article 1 shall have the following
meanings when used in this Lease:
1.01 Property: 7580 E. Gray Road, Scottsdale, Arizona 85260.
1.02 Premises: Suite 102.
1.03 Rentable Square Footage in Premises: 2,759 square feet approximately.
1.04 Term: Thirty Six (36) months.
1.05 Scheduled Term Commencement Date: October 1, 1996.
1.06 Expiration Date: September 30, 1999.
1.07 Monthly Rent: $ see below plus sales tax.
1.08 Annual Operating Expense and Imposition Base (combined): 1996 base year
($ per Property square foot).
1.09 Tenant's Percentage: 18.12%
1.10 Permitted Uses: administrative offices.
1.11 Security Deposit: $13,105.26.
1.12 Prepaid Rent:$4,506.03 including sales tax.
1.13 Default Interest Rate: 18% per annum.
1.14 Late Fee: $ 10% of amount due.
1.15 Insurance Limits: Combined - $500,000.00
Each Person - $500,000.00
Each Occurrence - $500,000.00
Property Damage - $500,000.00
1.16 Landlord's Address: c/o R. E. Cornwell & Co.
7580 E. Gray Road, Suite 202
Scottsdale, AZ 85260
1.17 Tenant's Address: 7580 E. Gray Road, Suite 102
Scottsdale, AZ 85260
Attn: Eric Schedeler
Phone No. (602) 998-7300
Monthly Rent: 10/1/96 - 09/30/97 $4,368.42 plus applicable
rental tax
10/1/97- 09/30/98 $4,598.33 " "
10/1/98 - 9/30/99 $4,828.25 " "
<PAGE> 2
ARTICLE 2 - PREMISES
2.01 Landlord hereby leases to Tenant and Tenant leases from Landlord
the Premises as shown on Exhibit A attached hereto, subject to all the terms and
conditions of this Lease.
ARTICLE 3 - TERM
3.01 The term of this Lease shall commence on the Scheduled Term
Commencement Date and shall continue until the Expiration Date or earlier
termination as herein provided. Landlord agrees to use due diligence to complete
Landlord's construction obligations as set forth in Section 7.02 and as shown on
Exhibit C on or before the Scheduled Term Commencement Date, but in case of
delays due to inclement weather, governmental regulation, scarcity of or
inability to obtain materials, labor difficulties casualty, acts of God or other
causes beyond Landlord's reasonable control, the Scheduled Term Commencement
Date shall be extended by a period equal to such delays without liability on the
part of Landlord and without extending the Expiration Date. If Landlord's
construction obligations are not completed and possession of the Premises is not
given or tendered to Tenant by Landlord on or before the Scheduled Term
Commencement Date, as the same may be extended as provided above, Tenant's sole
right shall be to terminate this Lease by giving notice of Termination to
Landlord within five (5) days after the end of said extension, and Landlord
shall in no case be liable in any manner for failure to have the Premises ready
for occupancy. Upon such termination, the parties shall be released from all
duties, obligations and liabilities hereunder, and any Security Deposit and
Prepaid Rent shall be returned to Tenant. Tenant's failure to complete
construction and installation of any leasehold improvements and fixtures as
described in Section 7.02 or on Exhibit B shall not affect commencement of the
Term.
ARTICLE 4 - MONTHLY RENT
4.01 On or before the first day of each calendar month during the Term,
Tenant shall pay to Landlord the Monthly Rent, subject to the adjustments set
forth below. Tenant shall pay the Monthly Rent to Landlord in advance, without
deduction or offset and without notice or demand, in lawful money of the United
States of American at Landlord's address, or at such other place or to such
other person as Landlord may designate from time to time by written notice. If
this Lease commences or ends on a day other than the first day of a calendar
month, then the rental for such partial month will be computed on a daily basis
in an amount equal to one-thirtieth (1/30) of the Monthly Rent for each such
day. In addition to the Monthly Rent, Tenant further agrees to pay to Landlord
with each installment of Monthly Rent any excise, sales or privilege tax imposed
or levied by any government or governmental agency upon Landlord on account of
such payment or any other payments made hereunder by Tenant.
4.02 If Tenant fails to pay Monthly Rent when due or fails to pay when
due any other amounts of any kind payable by Tenant under this Lease, such
unpaid sum shall bear interest at the Default Interest Rate from the date due to
the date of payment. In addition, if Tenant fails to pay Monthly Rent by the
fifth (5th) day of the month in which such installment is due, a Late Fee
2
<PAGE> 3
shall be added to the Monthly Rent. Any such Late Fee and all such interest
shall be payable together with Monthly Rent. The Default Interest Rate and Late
Fee provisions contained herein are intended to reimburse Landlord for the
additional costs and expenses Landlord will incur by reason of such late payment
and are in addition to and not in lieu of any or all of Landlord's rights and
remedies under Article 23 or other provisions hereof.
ARTICLE 5 - IMPOSITIONS AND OPERATING EXPENSES
5.01 Tenant shall pay to Landlord as additional rent Tenant's
Percentage of the amount by which, if any, the Property's annual operating
expenses exceed the Annual Operating Expense Base. For the purposes of
clarification, as stated in Article 1.08, both the Annual Operating and
Impositions Bases have been combined and shall be used to determine any
"overages" that may occur. The term "annual operating expenses" as used herein
shall include all reasonable and necessary costs and expenses incurred by
Landlord for the operating, cleaning, maintenance, repair, insurance and
management of the Property in a first class manner as determined by generally
accepted accounting practices.
By way of illustration, but not limitation, annual operating expenses
shall include the cost or charges for the following items: utilities and
services not separately metered or billed to tenants, materials, supplies,
equipment and tools, service or maintenance agreements, management fees and
costs, accounting and legal expenses, insurance premiums (including without
limitation premiums for insurance coverage which Landlord, or any ground lessor
or lender with a lien affecting the requires or deems desirable), repair,
maintenance and all other costs connected with the parking and other common
areas, repair and maintenance costs incurred by Landlord under Article 8,
depreciation on personal property and extraordinary nonrecurring costs normally
capitalized under recognized accounting principles which costs shall be included
as operating expenses in the amount amortized in each year over the useful life
of such capitalized item.
5.02 Tenant shall also pay to Landlord as additional rent Tenant's
Percentage of the amount by which, if any, the Property's impositions exceed the
Annual Imposition Base. As used herein, the term "impositions" shall include all
forms of real property taxes and assessments, license fees and taxes, commercial
rental taxes, levies, charges, penalties excepting penalties as it relates to
the delinquent payment of real estate taxes and other taxes and similar
impositions imposed upon the Property or Landlord by an city, county, state or
federal government or any school, agricultural, lighting, drainage or other
improvement or special assessment district or similar taxing authority.
"impositions" shall not include Landlord's federal or state income, franchise,
inheritance or estate taxes or any excise, sales or privilege tax otherwise
payable by Tenant under Section 4.01.
5.03 Tenant shall also pay to Landlord as additional rent required by
Sections 5.01 and 5.02 upon demand by Landlord. Landlord shall have the right to
demand periodic payments in advance with underpayments or overpayments to be
adjusted annually, or on such other basis as Landlord may select, in such manner
as Landlord selects. Notwithstanding anything to the
3
<PAGE> 4
contrary herein, no credit or other adjustment for overpayment shall ever be
applicable to reduce Monthly Rent. ARTICLE 6 - USE OF PREMISES
6.01 Tenant shall use the Premises for the Permitted Uses and for no
other purpose. Tenant in its use of the Premises shall not commit, or suffer to
be committed, any nuisance or other act which may disturb the quiet enjoyment of
any other tenant of the Property, and Tenant agrees not to deface or damage the
Premises or any other portion of the Property in any manner or overload the
floors of the Premises. Tenant will not use or permit the use of the Premises or
any part thereof for any purpose prohibited by law and at its sole expense will
comply with and conform to all requirements of all governmental authorities
relating in any way to Tenant's use or occupancy of the Premises.
6.02 No flammable or other hazardous goods, merchandise or materials
shall be kept by Tenant on or about the Premises, and Tenant shall not otherwise
suffer or permit any acts of omission or commission which could increase the
premiums for fire or liability insurance. If the fire or liability insurance
premiums are increased by any such act of Tenant, then the increased premium
costs shall be paid by Tenant to Landlord forthwith upon demand. Tenant, at its
sole expense, shall comply with any and all requirements of any insurance
organization or company necessary for the maintenance of reasonable fire and
public liability insurance covering the Premises and the Property.
4
<PAGE> 5
ARTICLE 7 - ALTERATIONS
7.01 Except as provided in Section 7.02, Tenant will not make or allow
to be made to the Premises any alteration of any kind without the prior written
consent of Landlord. All alterations except Tenant's movable trade fixtures and
equipment shall be a part of the Premises, belong to Landlord and be surrendered
with the Premises on expiration or termination of the Lease, except that
Landlord may elect to require Tenant at Tenant's cost to remove any alterations
Tenant has made to the Premises and repair any damage to the premises caused by
such removal.
7.02 Subject to the terms and conditions herein contained, Tenant shall
have the right, but shall not be obligated to, construct and install at its sole
expense in accordance with generally accepted construction standards the
leasehold improvements and fixtures described on Exhibit B. Landlord's sole
construction obligation is to construct and install, in accordance with
generally accepted construction standards, the walls doors, flooring and such
finished partitioning, electrical outlets and electrical fixtures as may be
shown on Exhibit C. Tenant shall keep the Premises and the improvements thereon
free and clear of all liens arising out of or claimed by reason of any work
performed, material furnished or obligations incurred by or at the instance of
Tenant, and indemnify and save Landlord, the Premises and the Property harmless
of all such liens or claims of lien and all attorneys' fees and other costs and
expenses incurred by reason thereof.
7.03 Landlord shall have the right at any time to alter, repair or
improve the Premises or Property, and Landlord and its representatives for that
purpose may enter on and about the Premises and the Property with such material
as Landlord may deem necessary, and may erect scaffolding and all other
necessary structures on or about the Premises and the Property. Tenant waives
any claim for damages, including without limitation, loss of business resulting
therefrom. In the exercise of its rights under this Section, Landlord shall not
unreasonably interfere with the conduct of Tenant's business on the Premises.
ARTICLE 8 - MAINTENANCE
8.01 Except as provided in Section 8.02 and Article 11, Landlord will
maintain in good condition and repair the structural portions of the building of
which the Premises are a part and the unexposed electrical and plumbing systems
and the heating, ventilating and air conditioning system servicing the Premises;
provided, however, the cost of any maintenance or repairs necessitated by the
negligence of Tenant shall be reimbursed to Landlord by Tenant promptly upon
Demand. Landlord shall have no other duty or obligation to maintain or repair
any portion of the Premises except as expressly provided herein. There shall be
no abatement of or offset in rent and Landlord will not be liable to Tenant for
any damage resulting from or caused by Landlord's delay or failure to maintain
or make repairs.
8.02 Except as provided in Section 8.01 and Article 11, Tenant at its
expense shall maintain in good condition and repair all portions of the
Premises, including without limitation:
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<PAGE> 6
interior wall surfaces (painting the same as often as necessary), partitions,
ceilings, lighting fixtures, floors, doors, locks and all glass and glazing.
ARTICLE 9 - UTILITIES AND SERVICES
9.01 Landlord will furnish to the Premises reasonable quantities of
electricity (110 volt), water, heating and cooling (8 A.M. to 6 P.M. Monday
through Friday and 8 A.M. to 12 noon Saturdays, excepting holidays) and
janitorial services (only ordinary dusting and cleaning and not shampooing of
carpets, cleaning draperies or furniture or cleaning inside surfaces of
windows). Landlord shall not be liable for and there shall be no reduction or
abatement of Monthly Rent by reason of the stoppage or interruption of any
utilities or services to the Premises caused by vandalism, accidents, repairs or
other conditions beyond Landlord's reasonable control.
9.02 Tenant shall pay for all water, electricity, telephone, sewage
disposal, refuse collection and other utilities or services separately metered
to the Premises or separately billed to Tenant by the person furnishing the
service. Landlord reserves the right to install separate meters for any utility
serving the Premises for which separate meters are not presently installed, and
Tenant shall pay the cost of such installation for the Premises. Utilities or
services not separately metered or billed (including those described in Section
9.01 above to be furnished by Landlord) shall be part of the Operating Expenses
as described in Article 5, except that if Tenant should cause any such utility
or service charges to increase above what is deemed by Landlord to be normal
usage for the Premises, then Tenant shall pay such additional charges within
five (5) days after demand by Landlord.
ARTICLE 10 - ACCEPTANCE AND SURRENDER OF PREMISES
10.01 By entry hereunder, Tenant accepts the Premises, including
without limitation, the improvements made therein by Landlord pursuant to
Section 7.02, as being free from defects and in good, clean and sanitary order,
condition and repair and agrees to keep the Premises in such condition. On the
last day of the Term, Tenant will surrender the Premises to Landlord in a state
of good repair, excepting only reasonable wear and tear, act of God and damage
by fire or the elements not caused by Tenant's negligence.
ARTICLE 11 - DESTRUCTION OF PREMISES
11.01 In the event of partial or total destruction of the Premises
during the Term from any casualty insured against under a standard fire and
extended coverage policy, Landlord shall repair the Premises (unless Landlord
elects to terminate this Lease as hereinafter set forth) and this Lease shall
remain in full force and effect, except that Tenant shall be entitled to a
proportionate reduction of the Monthly Rent while repairs are being made, such
proportionate reduction to be based upon the extent to which the destruction and
the making of repairs interferes with the business carried on by Tenant in the
Premises.
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11.02 In the event the Premises are partially or totally destroyed by a
cause or casualty not covered by standard fire and extended coverage insurance
or the building in which the Premises are situated is destroyed by any cause or
casualty to the extent of one-third (1/3) or more of the then replacement cost
thereof or the destruction occurs during the last twelve (12) months of the
Term, Landlord may elect to terminate this Lease by giving notice to Tenant
within sixty (60) days after the occurrence of such destruction. If Landlord
does not elect to terminate, then Landlord shall repair the Premises and this
Lease shall remain in full force and effect except for a proportionate reduction
of the Monthly Rent as provided above.
ARTICLE 12 - EMINENT DOMAIN
12.01 If any part of the Premises shall be taken by exercise of the
right Of eminent domain or transferred by agreement in lieu thereof with or
without any condemnation action or proceeding being instituted, this Lease shall
terminate as of the date title vests in the condemnor or grantee. In the event
of any such taking or transfer of a portion of the Property, but not any part of
the Premises, this Lease shall remain in full force and effect without abatement
or reduction of rent. All compensation or damages awarded upon any taking or
transfer of all or any portion of the Premises or the Property shall belong
totally to Landlord and Tenant shall have no claim thereto.
ARTICLE 13 - INSURANCE
13.01 Tenant at its expense will maintain in full force during the Term
public liability and property damage insurance in the amount of the Insurance
Limits insuring against all liability of Tenant arising out of or in connection
with Tenant's use or occupancy of the Premises. Tenant will from time to time
upon request of Landlord furnish to Landlord a certificate evidencing the fact
that such insurance has been obtained and is in full force and effect, that
Landlord and any mortgagee or other person as Landlord may designate are
additional insureds thereunder, and that such insurance cannot be cancelled
without thirty (30) days' prior written notice to Landlord and any other
additional insureds. Landlord will maintain standard fire and extended coverage
insurance on the building in which the Premises are situated in such amount and
under such terms and conditions as Landlord shall in its sole discretion elect.
Landlord shall have no obligation whatsoever to maintain any other insurance of
any kind, including without limitation, any insurance on property of the Tenant
or tenant's improvement, and Tenant at its sole cost shall maintain any
insurance coverage Tenant shall desire on its personal property, trade fixtures
and improvements in, on or about the Premises.
ARTICLE 14 - EXCULPATION AND INDEMNITY
14.01 Tenant agrees that Landlord shall not at any time to any extent
whatsoever be liable, responsible or in any way accountable for loss, injury,
death or damage to persons or property on or about the Premises or the Property
from any cause or causes whatsoever, except that caused by the gross negligence
of Landlord, its agents or employees, which at any time may be suffered or
sustained by Tenant or any person whomsoever using, occupying or visiting the
Premises, and Tenant agrees to indemnify and save Landlord harmless and defend
Landlord by
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and through legal counsel satisfactory to Landlord from any and all claims,
liabilities, losses, damages, costs and expenses whatsoever arising out of any
such loss, injury, death or damage except that caused by the gross negligence of
Landlord, its agents or employees, however occurring.
ARTICLE 15 - PARKING AND OTHER COMMON AREAS
15.01 Landlord will keep or cause to be kept all parking and other
common areas (collectively "common areas") of the Property in a neat, clean and
orderly condition, but all costs and expenses thereof shall be charged and
prorated in the manner hereinabove set forth in Article 5. Nothing herein
contained shall be construed to mean or imply that any portion of the sidewalks,
driveways, parking and common areas are being leased to Tenant, but it is agreed
that Landlord will provide sidewalks, driveways, parking and common areas, as
such may from time to time be designated and constituted by Landlord, for use by
Tenant in common with other tenants and their employees and customers.
15.02 Landlord shall at all times have the right and privilege of
determining the nature and extent of the common areas and of making such changes
therein and thereto from time to time which in Landlord's opinion are desirable
and in the best interest of all persons using the common areas, including
without limitation, the location and relocation of driveways, entrances, exits,
parking spaces, landscaped areas and equipment and facilities on the common
areas, the direction and flow of traffic, and the assignment of parking spaces
or areas for the use of particular tenants.
15.03 Nothing contained herein shall be deemed to limit the effect of
Article 14 or to create any liability upon Landlord for any injury to persons or
loss or damage to motor vehicles or the contents thereof of any person using the
common areas unless caused by the gross negligence of Landlord, its agents or
employees.
ARTICLE 16 - ENTRY BY LANDLORD
16.01 Landlord and its representatives shall have the right to enter
the Premises at all reasonable times to inspect the same, to make repairs and to
maintain the building of which the Premises are a part as provided in Section
7.03, to post such reasonable notices as Landlord may desire to protect its
rights, to exhibit the Premises to prospective purchasers or mortgagees of the
Property and, during the ninety (90) days prior to the Expiration Date, to
exhibit the Premises to prospective tenants and to place upon the doors or in
the windows of the Premises any usual or ordinary "for rent" or "for lease"
signs.
ARTICLE 17 - TENANT'S FIXTURES
17.01 Tenant, at any time Tenant is not in default hereunder, may
remove from the Premises its movable trade fixtures and equipment, and upon
expiration or termination of this Lease, if so requested by Landlord, shall
remove all fixtures and equipment installed on the Premises by the Tenant,
whether or not such fixtures and equipment are fastened to the building
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and regardless of the manner in which they are so fastened; provided, however,
that Tenant shall fully repair damage of any kind or character occasioned by the
removal of any such fixtures or equipment and shall leave the Premises and
building in a good, clean and sanitary condition.
ARTICLE 18 - ABANDONMENT
18.01 Tenant shall not vacate or abandon the Premises at any time
during the Term; and, if Tenant shall vacate, abandon or surrender the Premises
or be dispossessed by process of law or otherwise, any personal property left on
the Premises shall at the option of the Landlord be deemed to be abandoned and
belong to Landlord free and clear of any further interest of Tenant.
ARTICLE 19 - TRANSFER OF LANDLORD'S INTEREST
19.01 Landlord reserves the right to sell, assign or transfer all or
any part of the Property and this Lease, and in such event, this Lease will
remain in full force and effect, and Tenant shall continue to perform and abide
by all the terms, covenants and conditions on its part to be performed. Upon any
such sale, assignment or transfer, other than merely as security, Tenant agrees
to look solely to the assignee or transferee with respect to all matters in
connection with this Lease, and the assignor or transferor shall be released
from any further duties, obligations and liabilities hereunder. Landlord may
transfer any Security Deposit to such assignee or transferee, and thereupon
Landlord shall be discharged from any further liability in reference thereto.
ARTICLE 20 - ASSIGNMENT AND SUBLETTING
20.01 Tenant shall not assign Tenant's rights or delegate Tenant's
duties under this Lease, nor sublet all or any portion of the Premises, nor
permit the use of all or any part of the Premises by persons other than Tenant,
its employees and agents, without the prior written consent of Landlord , and
any such assignment, delegation, sublease or permission about such consent shall
be void.
Landlord understands that Tenant plans to transfer its patent to a
newly formed company. At which time, Landlord agrees to consent to the
assignment of this Lease to that new company.
ARTICLE 21 - RULES AND REGULATIONS
21.01 Landlord shall have the right from time to time to establish,
alter and amend rules and regulations, which, in Landlord's judgment, may be
necessary or desirable for the use, entry, operation and management of the
Premises and the Property, and Tenant agrees to comply with all such rules and
regulations. The existing rules and regulations, if any are attached hereto as
Exhibit D.
ARTICLE 22 - SIGNS
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22.01 Tenant shall not place or permit to be placed any sign,
advertisement, notice or other display on any part of the inside or outside of
the Premises, except of such color, size and style and in such locations as
shall be designated by Landlord. Tenant, upon request of Landlord, shall
immediately remove any sign, advertisement, notice or other display which Tenant
has placed or permitted to be placed on any part of the inside or outside of the
Premises which, in the opinion of the Landlord, is objectionable, offensive or
not in good taste, and if Tenant shall fail to do so, Landlord may enter the
Premises and remove the same at the expense of Tenant.
ARTICLE 23 - DEFAULT
SEE ARTICLE 35.01.
23.01 If Tenant shall fail to pay any part of the Monthly Rent herein
provided or any other sum required by this Lease to be paid to Landlord at the
time or in the manner provided or to abide by or perform any of the other
covenants or conditions on Tenant's part agreed to be observed or performed, and
such failure continues for five (5) days after written notice thereof from
Landlord to Tenant, or if any proceedings under the Bankruptcy Act or any
amendment thereto are commenced by or against Tenant, or Tenant is adjudged
insolvent or makes an assignment for the benefit of its creditors, or if a write
of attachment or execution is levied on the leasehold estate hereby created and
is not released or satisfied within five (5) days thereafter, or if a receiver
is appointed in any proceeding or action to which Tenant is a party with
authority to take possession or control of the Premises or the business
conducted thereon by Tenant and such receiver is not discharged within a period
of five (5) days after appointment, then Landlord, in addition to any other
rights or remedies Landlord may have whether under this Lease or at law or in
equity, may:
(a) terminate this Lease; or
(b) re-enter the Premises by summary proceedings or otherwise,
with or without terminating this Lease, remove all persons and
property from the Premises without liability to any person for
damages sustained by reason of such removal and re-let the
Premises at such rental and upon such other terms and
conditions as Landlord in its sole discretion may deem
advisable. In such event, Tenant shall remain liable for
Monthly Rent and Operating Expenses and other amounts payable
by Tenant hereunder as well as the cost of obtaining
possession of and re-letting the Premises and of any repairs
and alterations necessary to prepare the Premises for
re-letting, together with interest at the Default Interest
Rate, less the rents received from such re-letting, if any.
Any and all monthly deficiencies so payable by Tenant shall be
paid monthly on the date herein provided for the payment of
Monthly Rent. No such re-entry or taking possession of the
Premises by Landlord. Shall be construed as an election by
Landlord. To terminate this Lease or accept a surrender
thereof unless a written notice of such intention is given to
Tenant. Notwithstanding any such re-letting without
termination, Landlord. May at any time thereafter elect to
terminate this Lease for such previous breach or any other
breach.
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ARTICLE 24 - ATTORNEYS' FEES
24.01 If an action is brought to recover Monthly Rent or any other sum
payable under this Lease, or for or on account of any breach of or to enforce or
interpret any of the terms, covenants or conditions of this Lease, or for the
recovery of possession of the Premises, the prevailing party shall be entitled
to recover from the other party, as part of the prevailing party's costs,
reasonable attorneys' fees, the amount of which shall be fixed by the court, and
not by a jury, and shall be made a part of any judgment rendered.
ARTICLE 25 - HOLDING OVER
25.01 Should Tenant hold possession hereunder after the Expiration Date
without the express, written consent of Landlord, Tenant shall be deemed a
tenant at sufferance permitting Landlord to exercise hereunder or at law or in
equity. Should Tenant hold possession hereunder after the Expiration Date with
the express, written consent of Landlord, Tenant shall be deemed a tenant on a
month-to-month basis upon all the terms, covenants and conditions herein
specified unless and only unless a different basis is expressly set forth in the
consent.
ARTICLE 26 - SUBORDINATION AND ESTOPPEL CERTIFICATES
26.01 This Lease, at the option of the Landlord, shall be subject,
subordinate and inferior to the lien and estate of any liens, encumbrances or
ground leases and any renewals, extensions or replacements thereof, now or
hereafter affecting the Premises or the Property. Such subordination shall be
effective without any further act of Tenant, but Tenant agrees to execute,
acknowledge and deliver promptly upon demand such further instrument or
instruments subordinating this Lease to any such liens, encumbrances or ground
leases as shall be desired by Landlord, and hereby irrevocably appoints Landlord
its attorney in fact to execute and deliver any such instrument or instruments
for and in the name of Tenant if Tenant fails to do so within five (5) days
after written request by Landlord.
26.02 Tenant also agrees from time to time within five days of receipt
of written request by Landlord, to execute, acknowledge and deliver to Landlord
a statement in writing certifying (a) that this Lease is unmodified and in full
force and effect, or if there have been any modifications, that the Lease is in
full force and effect as modified and stating the modifications, (b) that Tenant
has no defenses, offsets or counterclaims against its obligations to pay Monthly
Rent and other monies hereunder and to perform its other covenants under this
Lease, or if there are any defenses, offsets or counterclaims, setting forth the
same in reasonable detail, (c) the current amount of Monthly Rent, (d) the dates
to which the Monthly Rent has been and paid and the amount of any Prepaid Rent
and Security Deposit, and (e) the commencement and expiration dates of the Term.
Any such statement delivered pursuant to this Section may be relied upon by any
prospective purchaser, ground lessor, mortgagor or other encumbrancer of the
Premises or any prospective assignee of any mortgage, ground lease or
encumbrance upon the Premises. Tenant shall, in the event any proceedings are
brought for the foreclosure of, or in the event of exercise of the power of sale
under, any mortgage or deed of trust made by Landlord, its
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successors or assigns, encumbering the Premises, attorn to the purchaser upon
such foreclosure or sale and recognize such purchaser as the Landlord under this
Lease.
ARTICLE 27 - SUBSTITUTION OF PREMISES
27.01 If the Premises contain less than two thousand (2,000) square
feet, Landlord reserves the right, on thirty (30) days' written notice to
Tenant, to substitute other space within the Property for the Premises as though
such substitute space was originally leased to Tenant at the time of execution
and delivery of this Lease; provided, however, that the substituted Premises
shall contain not less than the square footage of the originally Leased Premises
and there will be no increase in rental by reason of the substitution. Landlord
agrees to pay all reasonable moving expenses of Tenant incidental to such
substitution of premises.
ARTICLE 28 - NOTICES
28.01 All notices or demands to be given, made or sent hereunder by
either party to the other shall be deemed to have been given, made or sent when
deposited in the Untied States mail, certified or registered, return receipt
requested, postage prepaid and addressed to Landlord's Address or Tenant's
Address as the case may be. The address to which notices and demands are to be
given may be changed by written notice given by such party as above provided.
ARTICLE 29 - SECURITY DEPOSIT
29.01 Any Security Deposit made by Tenant shall be held by Landlord to
secure performance by Tenant of all of the terms, covenants and conditions of
this Lease to be kept and performed by Tenant. Landlord may from time to time
use all or any portion of the deposit to cure Tenant's defaults hereunder, and
if so used, Tenant shall within five (5) days after demand from Landlord deposit
with Landlord such additional amounts as may be necessary to restore the
Security Deposit to the amount stated in Section 1.12. The Security Deposit, or
any remaining portion thereof, shall be returned to Tenant, without interest,
upon the expiration of this Lease, provided Tenant has complied with all of the
terms, covenants and conditions hereof.
ARTICLE 30 - WAIVER
30.01 The waiver by Landlord of Tenant's breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained. The subsequent acceptance of rental hereunder by Landlord shall not
be deemed a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, other than the failure of Tenant to pay the particular
rental so accepted, regardless of Landlord's knowledge of such breach at the
time of acceptance of such rental, or a waiver of Landlord's right to collect
any applicable Late Fee or interest at the Default Interest Rate. None of the
terms, covenants or conditions of this Lease may be waived by either Landlord or
Tenant except by an instrument in writing signed by each party.
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ARTICLE 31 - CONSTRUCTION OF LEASE
31.01 The language in all parts of this Lease shall be construed as a
whole according to its fair meaning and not strictly for or against either
Landlord or Tenant. Article titles are inserted for convenience only and are not
to be construed as a part of this Lease or in any way defining, limiting or
amplifying the provisions hereof. The words "Landlord" and "Tenant" as herein
used shall include the plural as well as the singular and the neuter gender
includes the masculine and feminine. Landlord and Tenant agree that in the event
any term, covenant or condition herein contained is held to be invalid or void
by any court of competent jurisdiction, the invalidity of any such term,
covenant or condition shall in no way affect any other term, covenant or
condition herein contained.
ARTICLE 32 - SUCCESSORS AND ASSIGNS
32.01 Subject to the restrictive conditions of Article 20, all the
terms, covenants and conditions of this Lease shall be binding upon and inure to
the benefit of and shall apply to the respective heirs, executors,
administrators, successors, assigns and legal representatives of Landlord and
Tenant.
ARTICLE 33 - GOVERNING LAW
33.01 This Lease shall be governed by and construed in accordance with
the laws of the State of Arizona .
ARTICLE 34 - NO REPRESENTATIONS
34.01 It is mutually agreed that no representations, warranties,
covenants or agreements, express or implied, have been made with respect to the
Premises and this lease other than as may be expressly set forth herein.
ARTICLE 35 - ADDENDA
35.01 Notwithstanding anything to the contrary herein, if Tenant is
late three times during the term hereof in payment of Monthly Rent or other sums
herein provided for, upon notice by Landlord of the third untimely payment,
Tenant shall have no opportunity to cure said default and shall forfeit any
further right or interest to the Premises or hereunder, including without
limitation, forfeiture of Tenant's Security Deposit and possession of the
Premises, and at Landlord's sole election made by written notice to the
Premises, this Lease shall be of no further force and effect for Tenant's
obligation to pay all sums due hereunder accrued through the date of Landlord's
notice to terminate.
35.02 Tenant shall have the right to use three (3) covered parking
spaces during the term of this Lease at a monthly rate of $35.00 each plus
applicable rental tax.
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IN WITNESS WHEREOF, the parties hereto have executed this instrument by
proper persons thereunto duly authorized so to do the day and year first
hereinabove written.
PACIFIC REALTY HOLDINGS LTD. SCOTTSDALE TECHNOLOGIES, INC.,
PARTNERSHIP, an Arizona Limited a Delaware corporation
Partnership
/s/ Richard E. Cornwell /s/ Eric J. Schedeler
"LANDLORD" "TENANT"
By:
Its: President & Chief Executive
Officer
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[Display Graph Here]
EXHIBIT A
<PAGE> 16
RULES AND REGULATIONS
1. Tenant agrees not to store or cause to be stored any items outside or
around the Premises except with Tenant's leased space.
2. Tenant agrees to keep all refuse contained within designated refuse
containers and keep all grounds around the Premises free from litter.
3. Tenant will not obstruct sidewalks and driveways or use them for any
purpose other than for ingress and egress to and from the Premises.
4. Tenant shall adhere to and obey all parking control measures as may be
placed into effect by Landlord through the use of signs, identifying
decals or other instructions.
5. Any electrical wiring that Tenant desires to introduce into the
Premises must be connected as directed by Landlord. No boring or
cutting for wires will be allowed except with a specific consent of
Landlord.
6. Tenant shall not conduct any auction nor permit any fire or bankruptcy
sale to be held on the Premises.
7. Tenant shall not permit or suffer the Premises to be occupied or used
in a manner offensive or objectionable to Landlord or other occupants
of the Property by reason of noise, odors or vibrations or interfere in
any way with other tenants or those having business therein.
8. Tenant upon termination of the tenancy shall deliver to Landlord all
keys of the offices, rooms and toilet rooms which may have been
furnished to Tenant.
9. Tenant shall not lay floor coverings so that the same shall be affixed
to the Premises in any manner by paste or other material, except that
which may easily be removed with water. The use of cement or other
similar adhesive materials is expressly prohibited.
10. Landlord reserves the right to approve or disapprove Tenant's selection
of any drapes or window coverings installed by Tenant.
11. Landlord reserves the right, at any time, to rescind any one or more of
these rules and regulations, or to make such other and further
reasonable rules and regulations as in Landlord's judgment may from
time to time be necessary for the safety, care and cleanliness of the
Premises or the Property and for the preservation of order therein.
EXHIBIT D
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Exhibit 6.6
SOUND INDUSTRIES, LTD.
1997 LONG-TERM INCENTIVE PLAN
EFFECTIVE OCTOBER 10, 1997
<PAGE> 2
TABLE OF CONTENTS
PAGE
SECTION 1. GENERAL PROVISIONS RELATING TO PLAN GOVERNANCE,
COVERAGE AND BENEFITS........................................1
1.1. Purpose......................................................1
1.2. Definitions..................................................1
(a) Appreciation........................................1
(b) Board...............................................1
(c) Change in Control...................................1
(d) Code................................................1
(e) Committee...........................................1
(f) Common Stock........................................2
(g) Company.............................................2
(h) Consultant..........................................2
(i) Covered Employee....................................2
(j) Deferred Stock......................................3
(k) Disability..........................................3
(l) Employee............................................3
(m) Employment..........................................3
(n) Exchange Act........................................3
(o) Fair Market Value...................................3
(p) Grantee.............................................4
(q) Incentive Award.....................................4
(r) Incentive Plan Agreement............................4
(s) Incentive Stock Option..............................4
(t) Independent SAR.....................................4
(u) Nonstatutory Stock Option...........................4
(v) Other Stock-Based Award.............................4
(w) Outside Director....................................4
(x) Parent..............................................4
(y) Performance Period..................................4
(z) Performance Share or Performance Unit...............4
(aa) Plan................................................5
(bb) Restricted Stock....................................5
(cc) Restricted Stock Award..............................5
(dd) Restriction Period..................................5
(ee) Retirement..........................................5
(ff) Spread..............................................5
(gg) Stock Appreciation Right............................5
(hh) Stock Option........................................5
(ii) Subsidiary..........................................5
(jj) Supplemental Payment................................5
(kk) Tandem SAR..........................................5
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(ll) Termination for Cause...............................5
1.3. Administration...............................................6
(a) Committee Powers....................................6
(b) No Liability........................................6
(c) Meetings............................................6
1.4. Shares of Common Stock Subject to the Plan...................7
(a) Common Stock Authorized.............................7
(b) Common Stock Available..............................7
(c) Incentive Award Adjustments.........................7
(d) Special Limitation..................................7
1.5. Participation................................................8
(a) Eligibility.........................................8
(b) Incentive Stock Option Eligibility..................8
1.6. Incentive Awards.............................................8
SECTION 2. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS........................8
2.1. Grant of Stock Options.......................................8
2.2. Stock Option Terms...........................................9
(a) Written Agreement...................................9
(b) Number of Shares....................................9
(c) Exercise Price......................................9
(d) Term................................................9
(e) Exercise............................................9
(f) Incentive Stock Options.............................9
2.3. Stock Option Exercises.......................................9
(a) Method of Exercise..................................9
(b) Notification with respect to Incentive
Stock Options......................................10
(c) Proceeds...........................................10
2.4. Stock Appreciation Rights in Tandem with Nonstatutory
Stock Options...............................................10
(a) Grant..............................................10
(b) General Provisions.................................10
(c) Exercise...........................................10
(d) Settlement.........................................11
2.5. Stock Appreciation Rights Independent of Nonstatutory
Stock Options...............................................11
(a) Grant..............................................11
(b) General Provisions.................................11
(c) Exercise...........................................11
(d) Settlement.........................................11
2.6. Reload Options..............................................12
2.7. Supplemental Payment on Exercise of Nonstatutory Stock
Options or Stock Appreciation Rights........................12
SECTION 3. RESTRICTED STOCK..................................................12
3.1. Award of Restricted Stock...................................12
(a) Grant..............................................12
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(b) Immediate Transfer Without Immediate Delivery
of Restricted Stock................................13
3.2. Restrictions................................................13
(a) Restrictive Conditions.............................13
(b) Forfeiture of Restricted Stock.....................13
(c) Removal of Restrictions............................13
3.3. Restriction Period..........................................14
3.4. Delivery of Shares of Common Stock..........................14
3.5. Supplemental Payment on Vesting of Restricted Stock.........14
SECTION 4. PERFORMANCE UNITS AND PERFORMANCE SHARES..........................14
4.1. Performance Based Awards....................................14
(a) Grant..............................................14
(b) Performance Criteria...............................14
(c) Modification.......................................15
(d) Payment............................................15
(e) Special Rule for Covered Employees.................15
4.2. Supplemental Payment on Vesting of Performance Units
or Performance Shares.......................................16
SECTION 5. OTHER STOCK-BASED AWARDS..........................................16
5.1. Grant of Other Stock-Based Awards...........................16
5.2. Other Stock-Based Award Terms...............................16
(a) Written Agreement..................................16
(b) Purchase Price.....................................16
(c) Performance Criteria and Other Terms...............17
(d) Payment............................................17
(e) Dividends..........................................17
SECTION 6. PROVISIONS RELATING TO PLAN PARTICIPATION.........................17
6.1. Plan Conditions.............................................17
(a) Incentive Plan Agreement...........................17
(b) No Right to Employment or Service..................18
(c) Securities Requirements............................18
6.2. Transferability.............................................18
(a) Non-Transferable Awards and Options................18
(b) Ability to Exercise Rights.........................18
6.3. Rights as a Stockholder.....................................19
(a) No Stockholder Rights..............................19
(b) Holder of Restricted Stock.........................19
6.4. Listing and Registration of Shares of Common Stock..........19
6.5. Change in Stock and Adjustments.............................19
(a) Changes in Capitalization..........................19
(b) Changes in Law or Circumstances....................19
6.6. Termination of Employment, Death, Disability and Retirement.20
(a) Termination of Employment or Service...............20
(b) Retirement.........................................20
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(c) Disability or Death................................20
(d) Continuation.......................................21
6.7. Changes in Control..........................................21
(a) Changes in Control.................................21
(b) Right of Cash-Out..................................22
6.8. Amendments to Incentive Awards..............................23
6.9. Exchange of Incentive Awards................................23
6.10. Financing...................................................23
SECTION 7. MISCELLANEOUS.....................................................24
7.1. Effective Date and Grant Period.............................24
7.2. Funding.....................................................24
7.3. Withholding Taxes...........................................24
(a) Mandatory Withholding..............................24
(b) Incentive Stock Options............................24
7.4. Conflicts with Plan.........................................25
7.5. No Guarantee of Tax Consequences............................25
7.6. Severability................................................25
7.7. Gender, Tense and Headings..................................25
7.8. Amendment and Termination...................................25
7.9. Governing Law...............................................26
7.10. Section 16 Compliance.......................................26
iv
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SOUND INDUSTRIES, LTD.
1997 LONG-TERM INCENTIVE PLAN
SECTION 1.
GENERAL PROVISIONS RELATING TO
PLAN GOVERNANCE, COVERAGE AND BENEFITS
1.1. PURPOSE
The purpose of the Sound Industries, Ltd. 1997 Long-Term Incentive Plan
(the "Plan") is to foster and promote the long-term financial success of Sound
Industries, Ltd. (the "Company") and to materially increase stockholder value
by: (a) encouraging the long-term commitment of selected key Employees, (b)
motivating superior performance of key Employees by means of long-term
performance related incentives, (c) encouraging and providing key Employees,
Consultants and Outside Directors with a formal program for obtaining an
ownership interest in the Company, (d) attracting and retaining key Employees by
providing incentive compensation opportunities that are competitive with similar
companies, and (e) enabling participation by key Employees, Consultants and
Outside Directors in the long-term growth and financial success of the Company.
The Plan provides for payment of various forms of incentive compensation and,
accordingly, is not intended to be a plan that is subject to the Employee
Retirement Income Security Act of 1974, as amended, and thus shall be
interpreted and administered accordingly.
1.2. DEFINITIONS
The following terms shall have the meanings set forth below:
(a) Appreciation. The difference between the option exercise
price per share of the Nonstatutory Stock Option to which a Tandem SAR
relates and the Fair Market Value of a share of Common Stock on the
date of exercise of the Tandem SAR.
(b) Board. The Board of Directors of the Company.
(c) Change in Control. Any of the events described in and
subject to Section 6.7.
(d) Code. The Internal Revenue Code of 1986, as amended.
References herein to any provision of the Code shall refer to any
successor provision thereto.
(e) Committee. The committee, which shall be comprised of not
less than two members of the Board, appointed by the Board to
administer the Plan, which Board shall have the power to fill vacancies
on the Committee arising by resignation, death, removal or otherwise.
The Board may, in its sole discretion, bifurcate the powers and duties
of the Committee among one or more separate Committees, or retain all
powers and duties of the Committee in a single Committee; provided,
however, that from and after the
<PAGE> 7
effective date of the registration of the Company's shares pursuant to
the Exchange Act, and to the extent that by reason of the position or
relationship of any Employee to the Company, Section 16(b) of the
Exchange Act applies to the Employee, the Committee with the power or
authority with respect to such Employee shall be exclusively comprised
of members of the Board who are "non-employee directors" (as defined
under rules and regulations promulgated under Section 16(b) of the
Exchange Act) and there shall not be less than two such non-employee
directors serving as members of the Committee; and provided further,
that if Section 162(m) of the Code applies to the Company (upon the
expiration of any applicable transition period provided in the
regulations promulgated under Section 162(m) of the Code, including
Treas. Reg. Section 1.162-27(f)), at least two such Committee members
shall also be "outside directors" as defined in Section 162(m) of the
Code and the regulations promulgated thereunder.
Notwithstanding the preceding provisions of this Section
1.2(e), the term "Committee" as used in the Plan may also, as to any
given Incentive Award, refer to the Board to the extent that the Board,
in its discretion, elects to grant the Incentive Award. In the case of
such a grant, the Board shall have all the powers and responsibilities
of the Committee hereunder as to the Incentive Award so granted, and
any actions as to such Incentive Award may be acted upon only by the
Board (unless it otherwise approves). If and when the Board exercises
its authority to act in the capacity as the Committee hereunder, it
shall so designate in writing with respect to any action that it
undertakes in its designated capacity as the Committee. Notwithstanding
the foregoing, the Board shall not act in the capacity as the Committee
hereunder with respect to any particular action under the Plan to the
extent that doing so would cause an Employee to fail to qualify for an
exemption from liability under Section 16(b) of the Exchange Act,
violate the rules of any stock exchange on which the Common Stock is
listed or traded, or at the time of grant of the Incentive Award result
in the non-deductibility of compensation pursuant to Section 162(m) of
the Code and the regulations promulgated thereunder.
(f) Common Stock. The Common stock of Sound Industries, Ltd.
$.001 par value, per share and any class of common stock into which
such common shares may hereafter be converted, reclassified or
recapitalized.
(g) Company. Sound Industries, Ltd., a corporation organized
under the laws of the State of Delaware, and any successor thereto.
(h) Consultant. An independent agent, consultant, attorney or
other individual who is not an employee or prospective employee of the
Company or any Parent or Subsidiary and who, in the opinion of the
Committee, is in a position to contribute materially to the continued
growth and development and to the continued financial success of the
Company or any Parent or Subsidiary.
(i) Covered Employee. Any Covered Employee as defined in
Section 162(m) of the Code and the regulations promulgated thereunder.
2
<PAGE> 8
(j) Deferred Stock. Shares of Common Stock to be issued or
transferred to a Grantee under an Other Stock-Based Award granted
pursuant to Section 6 at the end of a specified deferral period, as set
forth in the Incentive Plan Agreement pertaining thereto.
(k) Disability. Any permanent and total disability defined in
Section 22(e)(3) of the Code.
(l) Employee. Any common-law employee of the Company or any
Parent or Subsidiary who, in the opinion of the Committee, is one of a
select group of executive officers, other officers, or other key
management personnel of the Company or any Parent or Subsidiary, who is
in a position to contribute materially to the growth and development
and to the financial success of the Company or any Parent or
Subsidiary, including officers who are members of the Board.
(m) Employment. Employment by the Company or any Parent or
Subsidiary, or by any corporation issuing or assuming an incentive
award in any transaction described in Section 424(a) of the Code, or by
a parent corporation or a subsidiary corporation of such corporation
issuing such incentive award, and the parent-subsidiary relationship
shall be determined at the time of the corporate action described in
Section 424(a) of the Code. In this regard, neither the transfer of a
Grantee from Employment by Company to Employment by any Parent or
Subsidiary (or other corporation described in the next sentence) nor
the transfer of a Grantee from Employment by any Parent or Subsidiary
(or other corporation described in the next sentence) to Employment by
Company shall be deemed to be a termination of Employment of the
Grantee. Moreover, the Employment of a Grantee shall not be deemed to
have been terminated because of absence from active Employment on
account of temporary illness or during authorized vacation or during
temporary leaves of absence from active Employment granted for reasons
of professional advancement, education, health, or government service,
or during military leave for any period (if the Grantee returns to
active Employment within 90 days after the termination of military
leave), or during any period required to be treated as a leave of
absence by virtue of any valid law or agreement. Unless otherwise
provided in the Incentive Plan Agreement, Employment will include
services performed by a Consultant for the Company or any Parent or
Subsidiary.
(n) Exchange Act. The Securities Exchange Act of 1934, as
amended.
(o) Fair Market Value. If the Common Stock is not publicly
traded at the time a determination of its value is required to be made
hereunder, the determination of its Fair Market Value shall be made in
good faith by the Committee in its sole discretion. Otherwise, Fair
Market Value means, as of any specified date, the closing price of the
Common Stock on the national securities exchange on which the Common
Stock is then listed on that date, or if no prices are reported on that
date, on the last preceding date on which such prices of the Common
Stock are so reported. If the Common Stock is not then listed on any
national securities exchange but is traded over the counter at the time
a determination of its Fair Market Value is required to be made
hereunder, its Fair Market Value shall be deemed to be equal to the
average between the reported high and low sales
3
<PAGE> 9
prices of Common Stock on the most recent date on which Common Stock
was publicly traded.
(p) Grantee. Any Employee, Consultant or Outside Director who,
in the opinion of the Committee, performs significant services for the
benefit of the Company and who is granted an Incentive Award under the
Plan.
(q) Incentive Award. Any incentive award, individually or
collectively, as the case may be, including any Nonstatutory Stock
Option, Incentive Stock Option, Reload Option, Stock Appreciation
Right, Restricted Stock Award, Performance Unit, Performance Share, or
Other Stock-Based Award as well as any Supplemental Payment, granted
under the Plan to a Grantee.
(r) Incentive Plan Agreement. The written agreement (including
any written notification signed only by an officer of the Company)
entered into between the Company and the Grantee pursuant to which an
Incentive Award shall be made under the Plan.
(s) Incentive Stock Option. A Stock Option granted by the
Committee to an Employee under Section 2 of the Plan which is
designated by the Committee as an Incentive Stock Option and intended
to qualify as an Incentive Stock Option under Section 422 of the Code.
(t) Independent SAR. A Stock Appreciation Right described in
Section 2.5.
(u) Nonstatutory Stock Option. A Stock Option granted by the
Committee to a Grantee under Section 2 of the Plan, which is not
designated by the Committee as an Incentive Stock Option.
(v) Other Stock-Based Award. An award granted by the Committee
to a Grantee under Section 6 of the Plan that is valued in whole or in
part by reference to, or is otherwise based upon, Common Stock.
(w) Outside Director. A member of the Board who is not at that
time an Employee of the Company or any Parent or Subsidiary.
(x) Parent. Any corporation (whether now or hereafter
existing) which constitutes a "parent" of the Company, as defined in
Section 424(e) of the Code.
(y) Performance Period. A period of time determined by the
Committee over which performance is measured for the purpose of
determining a Grantee's right to and the payment value of any
Performance Units, Performance Shares or Other Stock-Based Awards.
(z) Performance Share or Performance Unit. An Incentive Award
representing a contingent right to receive cash or shares of Common
Stock (which may
4
<PAGE> 10
be Restricted Stock) at the end of a Performance Period and which, in
the case of Performance Shares, is denominated in Common Stock, and, in
the case of Performance Units, is denominated in cash values.
(aa) Plan. The Sound Industries, Ltd. 1997 Long-Term Incentive
Plan as set forth herein and as it may be amended from time to time.
(bb) Restricted Stock. Shares of Common Stock issued or
transferred to a Grantee subject to the restrictions set forth in
Section 3.2 hereof.
(cc) Restricted Stock Award. An authorization by the Committee
to issue or transfer Restricted Stock to a Grantee.
(dd) Restriction Period. The period of time determined by the
Committee during which Restricted Stock is subject to the restrictions
under the Plan.
(ee) Retirement. The termination of Employment from the
Company or any Parent or Subsidiary constituting retirement as
determined by the Committee.
(ff) Spread. The difference between the exercise price per
share specified in any Independent SAR grant and the Fair Market Value
of a share of Common Stock on the date of exercise of the Independent
SAR.
(gg) Stock Appreciation Right. A Tandem SAR described in
Section 2.4 or an Independent SAR described in Section 2.5.
(hh) Stock Option. Pursuant to Section 2 hereof, an Incentive
Stock Option or Nonstatutory Stock Option granted to an Employee, or a
Nonstatutory Stock Option granted to a Consultant or Outside Director,
whereunder the Grantee has the right to purchase shares of Common
Stock; provided that no Consultant or Outside Director shall be granted
an Incentive Stock Option.
(ii) Subsidiary. Any corporation (whether now or hereafter
existing) which constitutes a "subsidiary" of the Company, as defined
in Section 424(f) of the Code.
(jj) Supplemental Payment. Any amounts described in Sections
2.7, 3.5, 4.2 and/or 5.2 dedicated to payment of any federal income
taxes that are payable on an Incentive Award as determined by the
Committee.
(kk) Tandem SAR. A Stock Appreciation Right described in
Section 2.4.
(ll) Termination for Cause. There shall be deemed a
Termination for Cause if an Employee, Consultant or Outside Director is
terminated as a result of a breach of his written Employment agreement,
engagement agreement or directorship, as applicable, or if the
Committee determines that such Employee, Consultant or Outside Director
is being terminated as a result of misconduct, dishonesty, disloyalty,
disobedience or any action
5
<PAGE> 11
that might reasonably be expected to injure the Company, or any Parent
or Subsidiary thereof, or its or their business interests, goodwill or
reputation.
1.3. ADMINISTRATION
(a) Committee Powers. The Plan shall be administered by the
Committee which, subject to Section 3, shall have full power and
authority to: (i) designate Grantees; (ii) determine the Incentive
Awards to be granted to Grantees; (iii) subject to Section 1.4 of the
Plan, determine the Common Stock (or securities convertible into Common
Stock) to be covered by Incentive Awards and in connection therewith,
to reserve shares of Common Stock as needed in order to cover grants of
Incentive Awards; (iv) determine the terms and conditions of any
Incentive Award; (v) determine whether, to what extent, and under what
circumstances Incentive Awards may be settled or exercised in cash,
Common Stock, other securities, or other property, or canceled,
substituted, forfeited or suspended, and the method or methods by which
Incentive Awards may be settled, exercised, canceled, substituted,
forfeited or suspended; (vi) interpret and administer the Plan and any
instrument or agreement relating to, or Incentive Award made under, the
Plan; (vii) establish, amend, suspend or waive such rules and
guidelines; (viii) appoint such agents as it shall deem appropriate for
the administration of the Plan; provided, however that the Committee
with the power and authority over Employees who are subject to Section
16(b) of the Exchange Act or who cause Section 162(m) of the Code to
apply to the Company pursuant to Treas. Reg. Section 1.162-27(f), shall
not delegate any of the power or authority set forth in (i) through
(vii) above in respect of such Employees; and (ix) make any other
determination and take any other action that it deems necessary or
desirable for such administration. All designations, determinations,
interpretations and other decisions with respect to the Plan or any
Incentive Award shall be within the sole discretion of the Committee,
and shall be final, conclusive and binding upon all persons, including
the Company or any Parent or Subsidiary, any Grantee, any holder or
beneficiary of any Incentive Award, any stockholder and any Employee or
Consultant.
(b) No Liability. No member of the Committee shall be liable
for any action or determination made in good faith by the Committee
with respect to this Plan or any Incentive Award under this Plan, and
to the full extent permitted by the Company's Bylaws, the Company shall
indemnify each member of the Committee.
(c) Meetings. The Committee shall designate a chairman from
among its members, who shall preside at all of its meetings, and shall
designate a secretary, without regard to whether that person is a
member of the Committee, who shall keep the minutes of the proceedings
and all records, documents, and data pertaining to its administration
of the Plan. Meetings shall be held at such times and places as shall
be determined by the Committee. The Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken with or
without a meeting, of a majority of its members.
6
<PAGE> 12
1.4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
(a) Common Stock Authorized. Subject to adjustment under
Section 6.5, the aggregate number of shares of Common Stock available
for granting Incentive Awards (including, without limitation, Stock
Appreciation Rights) under the Plan shall be Five Hundred Thousand
(500,000) shares of Common Stock. If any Incentive Award shall (i)
expire or terminate for any reason, without being exercised or paid, or
(ii) be forfeited or reacquired by the Company pursuant to rights
reserved upon issuance of the Incentive Award, shares of Common Stock
subject to the unexercised, forfeited or reacquired portion of such
Incentive Award shall again be available for grant in connection with
grants of subsequent Incentive Awards; provided, that with respect to
any Stock Option or Stock Appreciation Right granted to a Grantee who
is a Covered Employee that is canceled or repriced, the number of
shares subject to such Stock Option or Stock Appreciation Right shall
continue against the maximum number of shares that may be the subject
of Stock Options or Stock Appreciation Rights granted to such Grantee
and such maximum number shall be determined in accordance with Section
162(m) of the Code and the regulations promulgated thereunder.
(b) Common Stock Available. The Common Stock available for
issuance or transfer under the Plan shall be made available from shares
now or hereafter held in the treasury of the Company or from authorized
but unissued shares or from shares to be purchased or acquired by the
Company. No fractional shares shall be issued under the Plan; payment
for fractional shares shall be made in cash.
(c) Incentive Award Adjustments. Subject to the limitations
set forth in Sections 6.8 and 7.8, the Committee may make any
adjustment in the exercise price or the number of shares subject to, or
the terms of, any Incentive Award other than an Incentive Stock Option.
Such adjustment shall be made by amending, substituting or canceling
and regranting such Incentive Award with the inclusion of terms and
conditions that may differ from the terms and conditions of the
original Incentive Award. If such action is effected by amendment, the
effective date of such amendment shall be determined by the Committee
(including an effective date that may be the same date as the original
grant of the Incentive Award); provided, however, such effective date
shall not affect or contravene any treatment required by applicable
securities law or otherwise with respect to the effective date of the
grant or such amendment. In addition, any such action shall be
effective only to the extent that such action would not cause (i) the
holder of the Incentive Award to lose an exemption from liability under
Section 16(b) of the Exchange Act, or (ii) an Incentive Award to fail
to qualify as performance based compensation as defined in Section
162(m) of the Code.
(d) Special Limitation. In no event shall the number of shares
of Common Stock subject to Stock Options or Stock Appreciation Rights
awarded to any one Grantee who is a Covered Employee in any calendar
year exceed Five Hundred Thousand (500,000) shares of the Common Stock.
In all events, determinations under the preceding sentence shall be
made in a manner that is consistent with Section 162(m) of the Code and
regulations promulgated thereunder (including Treas. Reg. Section
1.162- 27(f)).
7
<PAGE> 13
Except as otherwise provided in the two immediately preceding
sentences, the provisions of this Section 1.4(d) shall not limit the
number of shares of Common Stock that otherwise may be awarded to any
one Grantee who is a Covered Employee under any form of Incentive Award
authorized under the Plan.
1.5 PARTICIPATION
(a) Eligibility. The Committee shall from time to time
designate those Employees, Consultants and/or Outside Directors, if
any, to be granted Incentive Awards under the Plan, the type of awards
granted, the number of shares, options, rights or units, as the case
may be, which shall be granted to each such person, and any other terms
or conditions relating to the awards as it may deem appropriate,
consistent with the provisions of the Plan. A Grantee who has been
granted an Incentive Award may, if otherwise eligible, be granted
additional Incentive Awards at any time.
(b) Incentive Stock Option Eligibility. No Consultant or
Outside Director shall be eligible for the grant of any Incentive Stock
Option. In addition, no Employee shall be eligible for the grant of any
Incentive Stock Option who owns or would own immediately before the
grant of such Incentive Stock Option, directly or indirectly, stock
possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, or any Parent or
Subsidiary. This restriction does not apply if, at the time such
Incentive Stock Option is granted, the Incentive Stock Option exercise
price is at least one hundred and ten percent (110%) of the Fair Market
Value on the date of grant and the Incentive Stock Option by its terms
is not exercisable after the expiration of five (5) years from the date
of grant. For the purpose of the immediately preceding sentence, the
attribution rules of Section 424(d) of the Code shall apply for the
purpose of determining an Employee's percentage ownership.
1.6 INCENTIVE AWARDS
The forms of Incentive Awards under this Plan are Stock Options, Stock
Appreciation Rights and Supplemental Payments as described in Section 2,
Restricted Stock and Supplemental Payments as described in Section 3,
Performance Units or Performance Shares and Supplemental Payments as described
in Section 4, Other Stock-Based Awards and Supplemental Payments as described in
Section 5, or any combination of the foregoing.
SECTION 2.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1. GRANT OF STOCK OPTIONS
The Committee is authorized to grant Stock Options to Employees,
Consultants and/or Outside Directors in accordance with the terms and conditions
required pursuant to this Plan and with such additional terms and conditions,
not inconsistent with the provisions of the Plan, as the
8
<PAGE> 14
Committee shall determine. Successive grants may be made to the same Grantee
whether or not any Stock Option previously granted to such person remains
unexercised.
2.2. STOCK OPTION TERMS
(a) Written Agreement. Each grant of an Stock Option shall be
evidenced by a written Incentive Plan Agreement described in Section
6.1(a).
(b) Number of Shares. Each Stock Option shall specify the
number of shares of Common Stock to which it pertains.
(c) Exercise Price. The exercise price per share of Common
Stock under each Stock Option shall be determined by the Committee;
provided, however, that in the case of Incentive Stock Options such
purchase price shall not be less than one hundred percent (100%) of the
Fair Market Value per share of such stock on the date the Incentive
Stock Option is granted, as determined by the Committee. Each Stock
Option shall specify the method of exercise which shall be consistent
with the requirements of Section 2.3(a).
(d) Term. The Committee shall fix the term of each Stock
Option which shall be not more than ten (10) years from the date of
grant. In the event no term is fixed, such term shall be ten (10) years
from the date of grant.
(e) Exercise. The Committee shall determine the time or times
at which a Stock Option may be exercised in whole or in part. Each
Stock Option may specify the required period of continuous Employment
(or service) and/or the performance objectives to be achieved before
the Stock Option or portion thereof will become exercisable. Each Stock
Option, the exercise of which, or the timing of the exercise of which,
is dependent, in whole or in part, on the achievement of performance
objectives, may specify a minimum level of achievement in respect of
the specified performance objectives below which no Stock Options will
be exercisable and may set forth a method for determining the number of
Stock Options that will be exercisable if performance is at or above
such minimum but short of full achievement of the performance
objectives.
(f) Incentive Stock Options. Anything in the Plan
notwithstanding, to the extent that the aggregate Fair Market Value
(determined as of the time the Incentive Stock Option is granted) of
the shares of Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by any Grantee during any
single calendar year (under the Plan and any other Incentive Stock
Option plans of the Company and its Subsidiaries or any Parent) exceeds
the sum of $100,000, such Stock Option shall be treated as Stock
Options which are not Incentive Stock Options. This paragraph shall be
applied by taking Stock Options into account in the order in which they
are granted.
2.3. STOCK OPTION EXERCISES
(a) Method of Exercise. To purchase shares under any Stock
Option granted under the Plan, a Grantee must give notice in writing to
the Company of his intention to
9
<PAGE> 15
purchase and specify the number of shares as to which he intends to
exercise his Stock Option. Upon the date or dates specified for the
completion of the purchase of the shares, the purchase price shall be
payable in full. The purchase price may be paid in cash or an
equivalent acceptable to the Committee. At the discretion of the
Committee, and provided that such payment can be effected without
causing the Grantee to incur liability under Section 16(b) of the
Exchange Act, the exercise price may be paid by the assignment and
delivery to the Company of shares of Common Stock owned by the Grantee
or a combination of cash and such shares equal in value to the exercise
price. Any shares so assigned and delivered to the Company in payment
or partial payment of the purchase price shall be valued at their Fair
Market Value on the exercise date. In addition, at the request of the
Grantee and to the extent permitted by applicable law, the Company in
its discretion may selectively approve "cashless exercise" arrangements
with a brokerage firm under which such brokerage firm, on behalf of the
Grantee, shall pay to the Company the exercise price of the Stock
Options being exercised, and the Company, pursuant to an irrevocable
notice from the Grantee, shall promptly deliver the shares being
purchased to such firm.
(b) Notification with respect to Incentive Stock Options.
Notwithstanding any other provision of the Plan, a Grantee who disposes
of shares of Common Stock acquired upon the exercise of an Incentive
Stock Option by a sale or exchange either (i) within two (2) years
after the date of the grant of the Incentive Stock Option under which
the stock was acquired or (ii) within one (1) year after the transfer
of such shares to him pursuant to exercise, shall notify the Company of
such disposition, the amount realized and his adjusted basis in such
shares.
(c) Proceeds. The proceeds received by the Company from the
sale of shares of Common Stock pursuant to Stock Options exercised
under the Plan shall be used for general corporate purposes.
2.4. STOCK APPRECIATION RIGHTS IN TANDEM WITH NONSTATUTORY STOCK OPTIONS
(a) Grant. The Committee may, at the time of grant of a
Nonstatutory Stock Option, or at any time thereafter during the term of
the Nonstatutory Stock Option, grant Stock Appreciation Rights with
respect to all or any portion of the shares of Common Stock covered by
such Nonstatutory Stock Option. A Stock Appreciation Right in tandem
with a Nonstatutory Stock Option is referred to herein as a "Tandem
SAR."
(b) General Provisions. Each Tandem SAR shall be evidenced by
a written Incentive Plan Agreement as described in Section 4.1(a). The
exercise price per share of Common Stock of a Tandem SAR shall be fixed
in the Incentive Plan Agreement and shall not be less than one hundred
percent (100%) of the Fair Market Value of a share of Common Stock on
the date of the grant of the Nonstatutory Stock Option to which it
relates.
(c) Exercise. The Committee may impose conditions on the
exercise of a Tandem SAR as may be required to satisfy the requirements
of applicable securities laws.
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<PAGE> 16
A Tandem SAR may be exercised at any time the Nonstatutory Stock Option
to which it relates is then exercisable, but only to the extent such
Nonstatutory Stock Option is exercisable, and shall otherwise be
subject to the conditions applicable to such Nonstatutory Stock Option.
When a Tandem SAR is exercised, the Nonstatutory Stock Option to which
it relates shall terminate to the extent of the number of shares with
respect to which the Tandem SAR is exercised. Similarly, when a
Nonstatutory Stock Option is exercised, the Tandem SARs relating to the
shares covered by such Nonstatutory Stock Option exercise shall
terminate. Any Tandem SAR which is outstanding on the last day of the
term of the related Nonstatutory Stock Option shall be automatically
exercised on such date for cash without any action by the Grantee.
(d) Settlement. Upon exercise of a Tandem SAR, the holder
shall receive, for each share with respect to which the Tandem SAR is
exercised, an amount equal to the Appreciation. The Appreciation shall
be payable in cash, Common Stock, or a combination of both, at the
option of the Committee, and shall be paid within 30 calendar days of
the exercise of the Tandem SAR. The number of shares of Common Stock
which shall be issuable upon exercise of a Tandem SAR shall be
determined by dividing (1) by (2) where (1) is the number of shares of
Common Stock as to which the Tandem SAR is exercised multiplied by the
Appreciation in such shares and (2) is the Fair Market Value of a share
of Common Stock on the exercise date.
2.5. STOCK APPRECIATION RIGHTS INDEPENDENT OF NONSTATUTORY STOCK OPTIONS
(a) Grant. Subject to the following provisions, the Committee
may grant Stock Appreciation Rights independent of Nonstatutory Stock
Options ("Independent SARs").
(b) General Provisions. Each Independent SAR shall be
evidenced by a written Incentive Plan Agreement described in Section
4.1(a). The exercise price per share of Common Stock shall be not less
than one hundred percent (100%) of the Fair Market Value of a share of
Common Stock on the date of the grant of the Independent SAR. The term
of an Independent SAR shall be determined by the Committee and,
notwithstanding any other provision of this Plan, no Independent SAR
shall be exercised after the expiration of its term.
(c) Exercise. Independent SARs shall be exercisable at such
time or times and subject to such terms and conditions as the Committee
shall specify in the Independent SAR grant including, without
limitation, conditions on the exercise of an Independent SAR as may be
required to satisfy the requirements of applicable securities laws.
Unless the Independent SAR grant specifies otherwise, the Committee
shall have discretion at any time to accelerate such time or times and
otherwise waive or amend any conditions in respect of all or any
portion of the Independent SARs held by any Grantee.
(d) Settlement. Upon exercise of an Independent SAR, the
holder shall receive, for each share specified in the Independent SAR
grant, an amount equal to the Spread. The Spread shall be payable in
cash, Common Stock, or a combination of both,
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at the option of the Committee, and shall be paid within 30 calendar
days of the exercise of the Independent SAR. The number of shares of
Common Stock which shall be issuable upon exercise of an Independent
SAR shall be determined by dividing (1) by (2) where (1) is the number
of shares of Common Stock as to which the Independent SAR is exercised
multiplied by the Spread in such shares and (2) is the Fair Market
Value of a share of Common Stock on the exercise date.
2.6. RELOAD OPTIONS
At the discretion of the Committee, the Grantee may be granted by
agreement that contains such terms and conditions to be determined by the
Committee, Stock Options that permit the Grantee to purchase an additional
number of shares equal to the number of shares already owned and surrendered by
the Grantee to pay all or a portion of the exercise price of Stock Options.
2.7. SUPPLEMENTAL PAYMENT ON EXERCISE OF NONSTATUTORY STOCK OPTIONS OR STOCK
APPRECIATION RIGHTS
The Committee, either at the time of grant or as of the time of
exercise of any Nonstatutory Stock Option or Stock Appreciation Right, may
provide for a supplemental payment (the "Supplemental Payment") by the Company
to the Grantee with respect to the exercise of any Nonstatutory Stock Option or
Stock Appreciation Right. The Supplemental Payment shall be in the amount
specified by the Committee, which shall not exceed the amount necessary to pay
the federal income tax payable with respect to both the exercise of the
Nonstatutory Stock Option and/or Stock Appreciation Right and the receipt of the
Supplemental Payment, assuming the holder is taxed at the maximum effective
federal income tax rate applicable thereto. The Committee shall have the
discretion to grant Supplemental Payments that are payable solely in cash or
Supplemental Payments that are payable in cash, Common Stock, or a combination
of both, as determined by the Committee at the time of payment. The Supplemental
Payment shall be paid within 30 calendar days of the date of exercise of a
Nonstatutory Stock Option or Stock Appreciation Right (or, if later, within 30
calendar days of the date on which income is recognized for federal income tax
purposes with respect to such exercise).
SECTION 3.
RESTRICTED STOCK
3.1. AWARD OF RESTRICTED STOCK
(a) Grant. In consideration of the performance of services by
any Grantee who is an Employee, Consultant or Outside Director, shares
of Restricted Stock may be awarded under this Plan by the Committee on
such terms and conditions and with such restrictions as the Committee
may from time to time designate, all of which may differ with respect
to each Grantee. Such Restricted Stock shall be awarded for no
additional
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consideration or such additional consideration as the Committee may
determine, which consideration may be less than, equal to or more than
the Fair Market Value of the shares of Restricted Stock on the grant
date. Each grant or sale of Restricted Stock shall be evidenced by an
Incentive Plan Agreement described in Section 6.1(a).
(b) Immediate Transfer Without Immediate Delivery of
Restricted Stock. Each Restricted Stock Award shall constitute an
immediate transfer of the record and beneficial ownership of the shares
of Restricted Stock to the Grantee in consideration of the performance
of services as an Employee, Consultant or Outside Director, entitling
such Grantee to all voting and other ownership rights, but subject to
the restrictions hereinafter specified. Each Restricted Stock Award may
limit the Grantee's dividend rights during the Restriction Period in
which the shares of Restricted Stock are subject to a "substantial risk
of forfeiture" within the meaning given to such term under Section 83
of the Code and restrictions on transfer. Shares of Common Stock
awarded pursuant to a grant of Restricted Stock will be issued in the
name of the Grantee and held, together with a stock power endorsed in
blank, by the Company or in trust or in escrow pursuant to an agreement
satisfactory to the Committee, as determined by the Committee, until
such time as the restrictions on transfer have expired.
3.2. RESTRICTIONS
(a) Restrictive Conditions. Restricted Stock awarded to a
Grantee shall be subject to the following restrictions until the
expiration of the Restriction Period: (i) the shares of Common Stock
included in the Restricted Stock Award shall be subject to one or more
restrictions including, without limitation, a restriction that
constitutes a "substantial risk of forfeiture" (as defined in Section
3.1(b) above), and to the restrictions on transferability set forth in
Section 6.2; (ii) unless otherwise specified by the Committee, the
shares of Common Stock included in the Restricted Stock Award that are
subject to restrictions which are not satisfied at the time the Grantee
ceases Employment or service shall be forfeited and all rights of the
Grantee to such shares shall terminate without further obligation on
the part of the Company at such time; and (iii) any other restrictions
that the Committee determines in advance are necessary or appropriate,
including, without limitation, rights of repurchase or first refusal in
the Company or provisions subjecting the Restricted Stock to a
continuing substantial risk of forfeiture in the hands of any
transferee.
(b) Forfeiture of Restricted Stock. If for any reason, the
restrictions imposed by the Committee upon Restricted Stock are not
satisfied at the end of the Restriction Period, any Restricted Stock
remaining subject to such restrictions shall thereupon be forfeited by
the Grantee and reacquired without charge by the Company.
(c) Removal of Restrictions. The Committee shall have the
authority to remove any or all of the restrictions on the Restricted
Stock, including the restrictions under the Restriction Period, if it
determines that, by reason of a change in applicable law or another
change in circumstance arising after the grant date of the Restricted
Stock Award, such action is deemed appropriate by the Committee.
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3.3. RESTRICTION PERIOD
The Restriction Period of Restricted Stock shall commence on the date
of grant and shall be established by the Committee in the Incentive Plan
Agreement setting forth the terms of the award of Restricted Stock.\
3.4. DELIVERY OF SHARES OF COMMON STOCK
Subject to Section 7.3, at the expiration of the Restriction Period, a
stock certificate evidencing the Restricted Stock (to the nearest full share)
with respect to which the Restriction Period has expired shall be delivered
without charge to the Grantee free of all restrictions under the Plan.
3.5. SUPPLEMENTAL PAYMENT ON VESTING OF RESTRICTED STOCK
The Committee, either at the time of grant or vesting of Restricted
Stock, may provide for a Supplemental Payment by the Company to the holder in an
amount specified by the Committee which shall not exceed the amount necessary to
pay the federal income tax payable with respect to both the vesting of the
Restricted Stock and receipt of the Supplemental Payment, assuming the Grantee
is taxed at the maximum effective federal income tax rate applicable thereto.
The Supplemental Payment shall be paid within 30 calendar days of each date that
Restricted Stock vests. The Committee shall have the discretion to grant
Supplemental Payments that are payable solely in cash or Supplemental Payments
that are payable in cash, Common Stock, or a combination of both, as determined
by the Committee at the time of payment.
SECTION 4.
PERFORMANCE UNITS AND PERFORMANCE SHARES
4.1. PERFORMANCE BASED AWARDS
(a) Grant. The Committee is authorized to grant Performance
Units and Performance Shares to Grantees who are Employees or
Consultants. Each grant of Performance Units and/or Performance Shares
shall be evidenced by an Incentive Plan Agreement described in Section
6.1(a). The Committee may make grants of Performance Units or
Performance Shares in such a manner that more than one Performance
Period is in progress concurrently. For each Performance Period, the
Committee shall establish the number of Performance Units or
Performance Shares and the contingent value of any Performance Units or
Performance Shares, which may vary depending on the degree to which
performance criteria established by the Committee are met.
(b) Performance Criteria. At the beginning of each Performance
Period, the Committee shall (i) establish for such Performance Period
specific financial or non-financial performance objectives as the
Committee believes are relevant to the
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Company's business objectives; (ii) determine the value of a
Performance Unit or the number of shares under a Performance Share
grant relative to performance objectives; and (iii) notify each Grantee
in writing of the established performance objectives and, if
applicable, the minimum, target, and maximum Performance Unit or Share
value for such Performance Period.
(c) Modification. If the Committee determines in its sole
discretion that the established performance measures or objectives are
no longer suitable to Company objectives because of a change in the
Company's business, operations, corporate structure, capital structure,
or other conditions the Committee deems to be appropriate, the
Committee may modify the performance measures and objectives as it
considers to be appropriate, unless such modification would cause the
Performance Unit or Share to fail to qualify as "performance-based
compensation" under Section 162(m) of the Code and the regulations
promulgated thereunder to the extent applicable to the Employee or
Consultant.
(d) Payment. The basis for payment of Performance Units or
Performance Shares for a given Performance Period shall be the
achievement of those financial and non-financial performance objectives
determined by the Committee at the beginning of the Performance Period.
If minimum performance is not achieved for a Performance Period, no
payment shall be made and all contingent rights shall cease. If minimum
performance is achieved or exceeded, the value of a Performance Unit or
Performance Share shall be based on the degree to which actual
performance exceeded the preestablished minimum performance standards,
as determined by the Committee in its discretion. The amount of payment
shall be determined by multiplying the number of Performance Units or
Performance Shares granted at the beginning of the Performance Period
times the final Performance Unit or Performance Share value. Payments
shall be made, in the discretion of the Committee, solely in cash or
Common Stock, or a combination of cash and Common Stock, following the
close of the applicable Performance Period, in such manner as may be
permissible without causing the Grantee to incur liability under
Section 16(b) of the Exchange Act.
(e) Special Rule for Covered Employees. Without limiting the
generality of the foregoing, it is intended that the Committee shall
establish performance goals applicable to Performance Units or
Performance Shares awarded to Grantees who, in the judgment of the
Committee, may be Covered Employees in such a manner as shall permit
payments with respect thereto to qualify as "performance-based
compensation" as described in Section 162(m)(4)(C) of the Code and in
accordance with the regulations promulgated thereunder (including
Treas. Reg. Section 1.162-27(f)). It is specifically provided that the
material terms of such performance goals for Grantees who, in the
judgment of the Committee, may be Covered Employees, shall, until
changed by the Committee with the approval of the stockholders, be as
follows: (i) the business criteria on which the performance goals shall
be based shall be the attainment of such target levels of earnings per
share from continuing operations, total stockholder return, Common
Stock price per share, sales or market share as may be specified by the
Committee; and (ii) the maximum amount of compensation that may be paid
under
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Performance Units and Performance Shares to any one Grantee with
respect to any one year shall be Five Million Dollars ($5,000,000).
4.2. SUPPLEMENTAL PAYMENT ON VESTING OF PERFORMANCE UNITS OR PERFORMANCE
SHARES
The Committee, either at the time of grant or at the time of vesting of
Performance Units or Performance Shares (other than Restricted Stock), may
provide for a Supplemental Payment by the Company to the holder in an amount
specified by the Committee which shall not exceed the amount necessary to pay
the federal income tax payable with respect to both the vesting of such
Performance Units or Performance Shares and receipt of the Supplemental Payment,
assuming the Grantee is taxed at the maximum effective federal income tax rate
applicable thereto. The Supplemental Payment shall be paid within 30 days of
each date that such Performance Units or Performance Shares vest. The Committee
shall have the discretion to grant Supplemental Payments that are payable in
cash, Common Stock, or a combination of both, as determined by the Committee at
the time of payment.
SECTION 5.
OTHER STOCK-BASED AWARDS
5.1. GRANT OF OTHER STOCK-BASED AWARDS
Other Stock-Based Awards may be awarded, subject to requirements of
applicable law, that are denominated or payable in, valued in whole or in part
by reference to, or otherwise based on, or related to, shares of Common Stock,
as deemed by the Committee to be consistent with the purposes of the Plan,
including, without limitation, Deferred Stock, purchase rights, shares of Common
Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, other rights convertible into shares of
Common Stock, Awards valued by reference to the value of securities of or the
performance of specified Subsidiaries, and settlement in cancellation of rights
of any person with a vested interest in any other plan, fund, program or
arrangement that is or was sponsored, maintained or participated in by the
Company or any Parent or Subsidiary, or with respect to which the Company or any
Parent or Subsidiary is or was a party. As is the case with other Incentive
Awards, Other Stock-Based Awards may be awarded either alone or in addition to
or in tandem with any other Incentive Awards or any other plan of the Company or
any Parent or Subsidiary.
5.2. OTHER STOCK-BASED AWARD TERMS
(a) Written Agreement. Each grant of an Other Stock-Based
Award shall be evidenced by an Incentive Plan Agreement described in
Section 6.1.
(b) Purchase Price. Except to the extent that an Other
Stock-Based Award is granted in substitution for an outstanding
Incentive Award or is delivered upon exercise of a Stock Option, the
amount of consideration to be required to be received by the Company
shall be either (i) no consideration other than services actually
rendered (in the
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case of authorized and unissued shares) or to be rendered, or (ii) in
the case of an Other Stock-Based Award in the nature of a purchase
right, consideration (other than services rendered or to be rendered)
at least equal to 50% of the Fair Market Value of the Common Stock
covered by such grant on the date of grant.
(c) Performance Criteria and Other Terms. The Committee may
specify such criteria, periods or goals for vesting in Other
Stock-Based Awards and payment thereof to the Grantee as it shall
determine; and the extent to which such criteria, periods or goals have
been met shall be conclusively determined by the Committee. Any other
terms and conditions of Other Stock-Based Awards shall be determined by
the Committee, including provision for a Supplemental Payment similar
to such payment as described in Section 4.2 of the Plan.
(d) Payment. Other Stock-Based Awards may be paid in shares of
Common Stock or other consideration related to such shares, in a single
payment or in installments as determined by the Committee and specified
in the Incentive Plan Agreement, and shall be payable on such dates as
determined by the Committee and specified in the Incentive Plan
Agreement.
(e) Dividends. The Grantee of an Other Stock-Based Award shall
be entitled to receive, currently or on a deferred basis, dividends or
dividend equivalents with respect to the number of shares covered by
the Other Stock-Based Award, as determined by the Committee and set
forth in the Incentive Plan Agreement. The Committee may provide in the
Incentive Plan Agreement that such amounts (if any) shall be deemed to
have been reinvested in additional Common Stock.
SECTION 6
PROVISIONS RELATING TO PLAN PARTICIPATION
6.1. PLAN CONDITIONS
(a) Incentive Plan Agreement. Each Grantee to whom an
Incentive Award is granted shall be required to enter into an Incentive
Plan Agreement with the Company, in a form provided by the Committee,
which shall contain specific terms as determined by the Committee with
respect to such Incentive Award. The Incentive Plan Agreement may
include, for example, vesting and other provisions particular to the
Incentive Award, as well as provisions that the Grantee (i) shall not
disclose any confidential information of the Company acquired during
Employment or service with the Company, (ii) shall abide by all the
terms and conditions of the Plan and such other terms and conditions as
may be imposed by the Committee, and (iii) shall not interfere with the
Employment or service of any Grantee. An Incentive Plan Agreement may
also include a noncompetition agreement with respect to the Grantee
and/or such other terms and conditions, not inconsistent with the Plan,
as may be determined from time to time by the Committee in its
discretion with respect to each individual Grantee.
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(b) No Right to Employment or Service. Nothing in the Plan or
any instrument executed pursuant to the Plan shall create any
Employment rights (including without limitation, rights to continued
Employment or directorship) in any Grantee or affect the right of the
Company to terminate the Employment or service of any Grantee at any
time for any reason whether before the exercise date of any Stock
Option or during the Restriction Period of any Restricted Stock (or
Other Stock-Based Award) or during the Performance Period of any
Performance Unit or Performance Share (or Other Stock-Based Award).
(c) Securities Requirements. No shares of Common Stock shall
be issued or transferred pursuant to an Incentive Award unless and
until all then applicable requirements imposed by federal and state
securities and other laws, rules and regulations and by any regulatory
agencies having jurisdiction and by any stock market or exchange upon
which the Common Stock may be listed, have been fully met. As a
condition precedent to the issuance of shares pursuant to the grant or
exercise of an Incentive Award, the Company may require the Grantee to
take any reasonable action to meet such requirements. The Company shall
not be obligated to take any affirmative action in order to cause the
issuance or transfer of shares pursuant to an Incentive Award to comply
with any law, rule or regulation.
6.2. TRANSFERABILITY
(a) Non-Transferable Awards and Options. No Incentive Award
and no right under the Plan, contingent or otherwise, other than
Restricted Stock as to which restrictions have lapsed, will be (i)
assignable, saleable, or otherwise transferable by a Grantee except by
will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order, or (ii) subject to any encumbrance,
pledge or charge of any nature. No transfer by will or by the laws of
descent and distribution shall be effective to bind the Company unless
the Committee has been furnished with a copy of the deceased Grantee's
enforceable will or such other evidence as the Committee may deem
necessary to establish the validity of the transfer. Any attempted
transfer in violation of this Section 6.2(a) shall be void and
ineffective for all purposes.
(b) Ability to Exercise Rights. Only the Grantee or his
guardian (if the Grantee becomes Disabled), or in the event of his
death, his legal representative or beneficiary, may exercise Stock
Options, receive cash payments and deliveries of shares, or otherwise
exercise rights under the Plan. The executor or administrator of the
Grantee's estate, or the person or persons to whom the Grantee's rights
under any Incentive Award will pass by will or the laws of descent and
distribution, shall be deemed to be the Grantee's beneficiary or
beneficiaries of the rights of the Grantee hereunder and shall be
entitled to exercise such rights as are provided hereunder.
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6.3. RIGHTS AS A STOCKHOLDER
(a) No Stockholder Rights. Except as otherwise provided in
Section 6.3(b), a Grantee of an Incentive Award or a transferee of such
Grantee shall have no rights as a stockholder with respect to any
shares of Common Stock until the issuance of a stock certificate for
such shares. Except as otherwise provided in Section 6.3(b) and Section
6.5, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities, or other property) or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued.
(b) Holder of Restricted Stock. Unless otherwise approved by
the Committee in the grant of a Restricted Stock Award, a Grantee of
Restricted Stock, or a permitted transferee of such Grantee, shall not
have any rights of a stockholder until such time as a stock certificate
has been issued to him with respect to such Restricted Stock Award.
6.4. LISTING AND REGISTRATION OF SHARES OF COMMON STOCK
The Company, in its discretion, may postpone the issuance and/or
delivery of shares of Common Stock upon any exercise of an Incentive Award until
completion of such stock exchange listing, registration, or other qualification
of such shares under any state and/or federal law, rule or regulation as the
Company may consider appropriate, and may require any Grantee to make such
representations and furnish such information as it may consider appropriate in
connection with the issuance or delivery of the shares in compliance with
applicable laws, rules and regulations.
6.5. CHANGE IN STOCK AND ADJUSTMENTS
(a) Changes in Capitalization. Except as provided in Section
6.7, in the event the outstanding shares of the Common Stock, as
constituted from time to time, shall be changed as a result of a change
in capitalization of the Company or a combination, merger, or
reorganization of the Company into or with any other corporation or any
other transaction with similar effects, there then shall be substituted
(at no additional cost to any Grantee) for each share of Common Stock
theretofore subject, or which may become subject, to issuance or
transfer under the Plan, the number and kind of shares of Common Stock
or other securities or other property into which each outstanding share
of Common Stock shall be changed or for which each such share shall be
exchanged, and the Committee may make other equitable adjustments which
it deems to be warranted at no additional cost to any Grantee but
subject to any required stockholder approval.
(b) Changes in Law or Circumstances. In the event of any
change in applicable laws or any change in circumstances which results
in or would result in any dilution of the rights granted under the
Plan, or which otherwise warrants equitable adjustment because it
interferes with the intended operation of the Plan, then, if the
Committee shall, in its sole discretion, determine that such change
equitably requires an adjustment in the number or kind of shares of
stock or other securities or property theretofore subject, or which may
become subject, to issuance or transfer under the Plan
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or in the terms and conditions of outstanding Incentive Awards, such
adjustment shall be made in accordance with such determination. Such
adjustments may include changes with respect to (i) the aggregate
number of shares that may be issued under the Plan, (ii) the number of
shares subject to Incentive Awards, and (iii) the price per share for
outstanding Incentive Awards. Any adjustment of an Incentive Stock
Option under this paragraph shall be made only to the extent not
constituting a "modification" within the meaning of Section 424(h)(3)
of the Code. The Committee shall give notice to each Grantee, and upon
notice such adjustment shall be effective and binding for all purposes
of the Plan.
6.6. TERMINATION OF EMPLOYMENT, DEATH, DISABILITY AND RETIREMENT
(a) Termination of Employment or Service. Subject to Section
3.2 and unless otherwise provided under the express terms of the
Grantee's Incentive Plan Agreement, if an Employee's or Consultant's
Employment or an Outside Director's service is terminated for any
reason other than his (i) death or Disability or (ii) Retirement in the
case of an Employee only, unless otherwise specifically provided in the
Incentive Plan Agreement, any outstanding Incentive Award at the time
of such termination shall automatically expire and terminate, no
further vesting shall occur, and the Grantee shall be entitled to
exercise his rights only with respect to the portion of the Incentive
Award that is vested as of the termination date for a period that shall
end on the earlier of (i) the expiration date set forth in the
Incentive Plan Agreement with respect to the vested portion of such
Incentive Award or (ii) the date that occurs sixty (60) calendar days
after his termination date; provided, however, if the Grantee's
Employment or service is terminated due to a Termination for Cause, the
Grantee's right to exercise the vested portion of the Incentive Award
shall automatically terminate and expire as of the date of his
termination of Employment or service.
(b) Retirement. Subject to Section 3.2 and unless otherwise
provided under the express terms of the Employee's Incentive Plan
Agreement, upon the Retirement of an Employee:
(i) any nonvested portion of any outstanding
Incentive Award shall immediately terminate and no further
vesting shall occur; and
(ii) any vested Incentive Award shall expire on the
earlier of (A) the expiration date set forth in the Incentive
Plan Agreement with respect to such Incentive Award; or (B)
the expiration of (1) six (6) months after the date of
Retirement in the case of any Incentive Award other than an
Incentive Stock Option or (2) three (3) months after the date
of Retirement in the case of an Incentive Stock Option.
(c) Disability or Death. Subject to Section 3.2 and unless
otherwise provided under the express terms of the Grantee's Incentive
Plan Agreement, upon termination of Employment as a result of an
Employee's, Consultant's or Outside Director's Disability or death, or
with respect to a Grantee who is either (i) a retired former Employee
who dies
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during the period described in Section 6.6(b)(ii) (hereinafter the
"Retirement Exercise Period"), or (ii) a disabled former Employee,
Consultant or Outside Director who dies during the period that expires
on the earlier of (A) the expiration date set forth in the Incentive
Plan Agreement or (B) the first anniversary of his termination of
Employment due to Disability (hereinafter the "Disability Exercise
Period"),
(i) any nonvested portion of any outstanding
Incentive Award shall immediately terminate upon termination
of Employment or service and no further vesting shall occur;
and
(ii) any vested Incentive Award shall expire upon the
earlier of (A) the expiration date set forth in the Incentive
Plan Agreement or (B) the later of (1) the first anniversary
of the Grantee's termination of Employment or service as a
result of his Disability or death, or (2) the first
anniversary of the Grantee's death during the Retirement
Exercise Period or the Disability Exercise Period, as
applicable.
(d) Continuation. Subject to the provisions of the Plan and
the applicable Incentive Plan Agreement, the Committee, in its
discretion, may provide for the continuation of any Incentive Award for
such period and upon such terms and conditions as determined by the
Committee in the event that a Grantee ceases to be an Employee,
Consultant or Outside Director.
6.7. CHANGES IN CONTROL
(a) Changes in Control. In the event of a Change in Control
(as defined below), the following actions shall automatically occur
unless the Committee, as it was comprised prior to the Change in
Control, decides otherwise in its discretion with respect to any or all
of the Grantees:
(i) all of the Stock Options and Stock Appreciation
Rights then outstanding shall become 100% vested and
immediately and fully exercisable, notwithstanding any
provision in the Plan or the Incentive Plan Agreement;
(ii) all of the restrictions and conditions of any
Restricted Stock and any Other Stock-Based Awards then
outstanding shall be deemed satisfied, and the Restriction
Period with respect thereto shall be deemed to have expired,
as of the date of the Change in Control; and
(iii) all of the Performance Shares, Performance
Units and any Other Stock-Based Awards shall become fully
vested, deemed earned in full and promptly paid within thirty
(30) days to the Grantees without regard to payment schedules
and notwithstanding that the applicable performance cycle,
retention cycle or other restrictions and conditions have not
been completed or satisfied.
For purposes of this Section 6.7, a "Change in Control" shall mean a
change in control of a nature that would be required to be reported in response
to item 6(e) of Schedule 14A of
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Regulation 14A promulgated under the Exchange Act as such Schedule, Regulation
and Act were in effect on the date of adoption of this Plan by the Board,
assuming that such Schedule, Regulation and Act applied to the Company, provided
that such a Change in Control shall be deemed to have occurred at such time as:
(i) any "person" (as that term is used in Section
13(d) and 14(d)(2) of the Exchange Act) is or becomes,
directly or indirectly, the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of securities representing
more than fifty percent (50%) of any class of stock of the
Company entitled to elect a majority of the Board of the
Company or any successor of the Company;
(ii) during any period of two (2) consecutive years
or less, individuals who at the beginning of such period
constituted the Board of the Company cease, for any reason, to
constitute at least a majority of the Board, unless the
election or nomination for election of each new director was
approved by a vote of more than one-half (50%) of the
directors then still in office who were directors at the
beginning of the period;
(iii) the stockholders of the Company approve any
merger or consolidation to which the Company is a party as a
result of which the persons who held any class of stock
entitled to elect a majority of the directors of the Company
immediately prior to the effective date of the merger or
consolidation (and excluding, however, any shares held by any
party to such merger or consolidation and their affiliates)
shall have beneficial ownership of less than fifty percent
(50%) of such class of stock of the surviving corporation
following the effective date of such merger or consolidation;
or
(iv) the stockholders of the Company approve any
merger or consolidation as a result of which the Common Stock
shall be changed, converted or exchanged (other than a merger
with a wholly-owned subsidiary of the Company) or any
liquidation of the Company or any sale or other disposition of
fifty percent (50%) or more of the assets or earning power of
the Company;
provided, however, that no Change in Control shall be deemed to have
occurred if, prior to such time as a Change in Control would otherwise
be deemed to have occurred, the Board determines otherwise.
Notwithstanding any of the foregoing provisions of this Section 6.7(a),
a Change in Control shall not be deemed to have occurred solely as the
result of the initial public offering of the Company's Common Stock.
(b) Right of Cash-Out. If approved by the Board prior to or
within thirty (30) days after such time as a Change in Control shall be
deemed to have occurred, the Board shall have the right for a
forty-five (45) day period immediately following the date that the
Change in Control is deemed to have occurred to require all, but not
less than all, Grantees to transfer and deliver to the Company all
Incentive Awards previously granted to Grantees in exchange for an
amount equal to the "cash value" (defined below) of the Incentive
Awards. Such right shall be exercised by written notice to all
Grantees. For
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purposes of this Section 6.7(b), the cash value of an Incentive Award
shall equal the sum of (i) for cash-denominated Incentive Awards, all
cash to which the Grantee would be entitled upon settlement or exercise
of such Incentive Award, and/or (ii) for stock options and other
stock-denominated Incentive Awards, the excess of the "market value"
(defined below) per share over the option price, multiplied by the
number of shares subject to such Incentive Award. For purposes of the
preceding sentence, "market value" per share shall mean the higher of
(i) the average of the Fair Market Value per share on each of the five
trading days immediately following the date a Change in Control is
deemed to have occurred or (ii) the highest price, if any, offered in
connection with the Change in Control. The amount payable to each
Grantee by the Company pursuant to this Section 6.7(b) shall be in cash
and shall be reduced by any taxes required to be withheld.
6.8. AMENDMENTS TO INCENTIVE AWARDS
Subject to the following sentence, the Committee may waive any
conditions or rights with respect to, or amend, alter, suspend, discontinue, or
terminate, any unexercised Incentive Award theretofore granted, prospectively or
retroactively, with the consent of the relevant Grantee; provided, however, with
respect to a Covered Employee, the Committee shall have no authority to take any
such action to the extent that such action would likely result in the failure of
payments under an Incentive Award to qualify as "performance-based compensation"
(as described in Section 162(m)(4)(C) of the Code and the regulations
promulgated thereunder (including Treas. Reg. Section 1.162-27(f)) where such
payments otherwise would have qualified as "performance-based compensation" with
respect to the Covered Employee.
6.9. EXCHANGE OF INCENTIVE AWARDS
The Committee may, in its discretion, permit any Grantee to surrender
outstanding Incentive Awards in order to exercise or realize his rights under
other Incentive Awards or in exchange for the grant of new Incentive Awards, or
require holders of Incentive Awards to surrender outstanding Incentive Awards
(or comparable rights under other plans or arrangements) as a condition
precedent to the grant of new Incentive Awards.
6.10. FINANCING
The Company may extend and maintain, or arrange for and guarantee, the
extension and maintenance of financing to any Grantee to purchase shares
pursuant to exercise of an Incentive Award on such terms as may be approved by
the Committee in its discretion. In considering the terms for extension or
maintenance of credit by the Company, the Committee shall, among other factors,
consider the cost to the Company of any financing extended by the Company.
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<PAGE> 29
SECTION 7
MISCELLANEOUS
7.1. EFFECTIVE DATE AND GRANT PERIOD
This Plan is conditioned upon its approval by stockholders before
December 31, 1997 by the vote of the holders of a majority of stock of the
Company at such meeting or by proxy; except that this Plan is adopted by the
Board of Directors effective September 30, 1997, to permit the grant of
Incentive Awards prior to stockholder approval. If the requisite stockholder
approval is not obtained, then the Plan shall become null and void and of no
force or effect. Unless sooner terminated by the Board, no Incentive Award shall
be granted under the Plan after December 31, 2006.
7.2. FUNDING
Except as provided under Section 3, no provision of the Plan shall
require or permit the Company, for the purpose of satisfying any obligations
under the Plan, to purchase assets or place any assets in a trust or other
entity to which contributions are made or otherwise to segregate any assets, nor
shall the Company maintain separate bank accounts, books, records or other
evidence of the existence of a segregated or separately maintained or
administered fund for such purposes. Grantees shall have no rights under the
Plan other than as unsecured general creditors of the Company except that,
insofar as they may have become entitled to payment of additional compensation
by performance of services, they shall have the same rights as other Employees,
Consultants or Outside Directors under general law.
7.3. WITHHOLDING TAXES
(a) Mandatory Withholding. The Company shall have the right to
(i) make deductions from any settlement of an Incentive Award made
under the Plan, including the delivery of shares, or require shares or
cash or both be withheld from any Incentive Award, in each case in an
amount sufficient to satisfy withholding of any federal, state or local
taxes required by law, or (ii) take such other action as may be
necessary or appropriate to satisfy any such withholding obligations.
The Committee may determine the manner in which such tax withholding
may be satisfied, and may permit whole shares of Common Stock to be
used to satisfy required tax withholding based on their Fair Market
Value as of the delivery date of such shares in exercise or
satisfaction of the applicable Incentive Award.
(b) Incentive Stock Options. With respect to shares received
by a Grantee pursuant to the exercise of an Incentive Stock Option, if
such Grantee disposes of any such shares within (i) two years from the
date of grant of such option or (ii) one year after the transfer of
such shares to the Grantee, the Company shall have the right to
withhold from any salary, wages or other compensation payable by the
Company to the Grantee an amount sufficient to satisfy federal, state
and local tax withholding requirements attributable to such
disposition.
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<PAGE> 30
7.4. CONFLICTS WITH PLAN
In the event of any inconsistency or conflict between the terms of the
Plan and an Incentive Plan Agreement, the terms of the Plan shall govern.
7.5. NO GUARANTEE OF TAX CONSEQUENCES
Neither the Company nor the Committee makes any commitment or guarantee
that any federal, state or local tax treatment will apply or be available to any
person participating or eligible to participate hereunder.
7.6. SEVERABILITY
In the event that any provision of this Plan shall be held illegal,
invalid or unenforceable for any reason, such provision shall be fully
severable, but shall not affect the remaining provisions of the Plan, and the
Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision was not included herein.
7.7. GENDER, TENSE AND HEADINGS
Whenever the context so requires, words of the masculine gender used
herein shall include the feminine and neuter, and words used in the singular
shall include the plural. Section headings as used herein are inserted solely
for convenience and reference and constitute no part of the Plan.
7.8. AMENDMENT AND TERMINATION
The Plan may be amended or terminated at any time by the Board by the
affirmative vote of a majority of the directors in office. To the extent that
the Committee determines that the listing for qualification requirements of any
principle national securities exchange or quotation system on which the
Company's Common Stock is then listed or quoted, or the Code or regulations
thereunder require stockholder approval with respect to any of the following
described amendments in order to maintain compliance with such listing or
qualification requirements or to maintain any favorable tax advantages or
qualifications with respect to any of the Incentive Awards covered by this Plan,
then the Plan shall not be amended, without prior approval of the stockholders,
(a) to materially increase the number of shares which may be issued or
transferred to Grantees or transferees under the Plan, (b) to materially modify
the eligibility requirements of the Plan, (c) to materially increase the
benefits accruing to participants under the Plan, or (d) to cause the Plan to
not comply with the rules and regulations promulgated under Section 16(b) of the
Exchange Act. Notwithstanding anything to the contrary contained herein or in
any Incentive Plan Agreement relating to an Incentive Stock Option, this Plan
and any such Incentive Plan Agreement shall be subject to amendment by action of
the Committee to the extent necessary to comply with any applicable requirement
of the Code relating to favorable tax treatment of Incentive Stock Options.
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<PAGE> 31
7.9. GOVERNING LAW
The Plan shall be construed in accordance with the laws of the State of
Delaware, except as superseded by federal law, and in accordance with applicable
provisions of the Code and regulations or other authority issued thereunder by
the appropriate governmental authority.
7.10. SECTION 16 COMPLIANCE
The Plan, and transactions hereunder by persons subject to Section 16
of the Exchange Act, are intended to comply with all applicable conditions of
Rule 16b-3 or any successor exemption provision promulgated under the Exchange
Act. To the extent that any provision of the Plan or any action by the Committee
or the Board fails, or is deemed to fail, to so comply, such provision or action
shall be null and void but only to the extent permitted by law and deemed
advisable by the Committee in its discretion.
IN WITNESS WHEREOF, Sound Industries, Ltd. has caused this Plan to be
duly executed in its name and on its behalf by its duly authorized officer, to
be effective as of October 10, 1997.
ATTEST: SOUND INDUSTRIES, LTD.
By: /s/ ERIC J. SCHEDELER By: /s/ STUART N. RUBIN
Name: ERIC J. SCHEDELER Name: STUART N. RUBIN
Title: President & CEO Title: Chief Financial Officer
26
<PAGE> 1
EXHIBIT 6.7
TRANSCAP RESTRUCTURING AGREEMENT
This Transcap Restructuring Agreement (this "Agreement"), effective as of
October 28, 1996, is between Transcap Manufacturing Services, Inc., an Illinois
corporation ("Transcap"), and Scottsdale Technologies, Inc., a Delaware
corporation (the "Company").
RECITALS
A. The Company, Mark Force Ltd., a Delaware corporation, and Mark Two
Inc., a Delaware corporation (collectively, the "Scottsdale Entities"), and
Transcap are the parties to that certain Master Purchase Order Assignment
Agreement dated September 9, 1993, as amended by Amendment No. 1 ("Amendment No.
1") to Master Purchase Order Assignment Agreement entered into as of September
29, 1995 (as amended, the "Master Agreement"). Capitalized terms used but not
defined in this Agreement shall have the meaning given them in Amendment No. 1.
B. In connection with the terms of Amendment No. 1, Transcap acquired
127,243 shares of the Company's Series B Convertible Redeemable Preferred Stock
("Series B Stock") and 200,000 shares of the Company's Series S Senior
Convertible Redeemable Preferred Stock ("Series S Stock") (the Series B and
Series S Stock are collectively referred to herein as the "Preferred Stock")
from the Company pursuant to the terms of a certain Accredited Investor
Subscription Agreement between the Company and Transcap dated October 2, 1995.
C. It is contemplated that WO Consulting, Inc., a Delaware corporation
that plans to do business as "Scottsdale Technologies, Inc." or a similar name
("New Scottsdale"), will purchase the assets of the Company (the "Asset
Purchase") following New Scottsdale's issuance of debentures to Scottsdale
Technology-I, Ltd., a Delaware limited partnership. The Company and New
Scottsdale contemplate the execution of a letter of intent to reflect the
proposed terms of the Asset Purchase.
D. Certain obligations owed by the Scottsdale Entities to Transcap remain
outstanding, and Transcap holds a security interest in certain assets of the
Scottsdale Entities.
E. Subject to the terms and conditions set forth herein, the parties
hereto wish to provide for the assignment of the claims Transcap has against the
Scottsdale Entities to New Scottsdale and the payment of certain amounts to
Transcap. New Scottsdale is entering into this Agreement solely for the purposes
of acknowledging its agreements in Sections 1 and 3.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. PAYMENTS. In consideration of Transcap's agreements hereunder,
the following payments shall be made:
<PAGE> 2
a. Initial Payment. Concurrently herewith, New Scottsdale shall pay the
Escrow Agent $10,000 in cash. The Escrow Agent shall immediately remit such
$10,000 payment to Transcap (the "Initial Payment") upon the execution of this
Agreement.
b. Additional Payment. If and when the execution and delivery of a
definitive Asset Purchase Agreement pertaining to the Asset Purchase takes
place, New Scottsdale shall pay the Escrow Agent $51,222.42 in cash. The
Escrow Agent shall remit $51,222.42 to Transcap (the "Additional Payment")
on the date that the Escrow Agent receives payment of the same amount.
Transcap acknowledges and agrees that following Transcap's receipt of the
Initial Payment and the Additional Payment in full, the only payments Transcap
shall be entitled to receive in connection with its claims against the
Scottsdale Entities are the royalty payments described in Section 3.
SECTION 2. OBLIGATIONS OF TRANSCAP. In consideration of the payments to be
made to Transcap hereunder, Transcap hereby agrees as follows:
a. Assignment of Obligations Owed by Scottsdale Entities. Subject to
the terms and conditions set forth herein and in the Escrow Agreement (as
defined below), Transcap hereby assigns to New Scottsdale subject to the
terms of the Escrow Agreement all of Transcap's right, title and interest
in and to all indebtedness, obligations, claims and other liabilities
incurred by the Scottsdale Entities as a result of or in connection with
the Master Agreement (collectively, the "Transcap Claims"), including,
without limitation, the Preferred Stock held by Transcap and all security
interests and security agreements relating to assets of the Scottsdale
Entities (collectively, the "Transcap Security Interest"), all of which
shall be held by the Escrow Agent pursuant to the Escrow Agreement;
notwithstanding the foregoing, however, the Transcap Security Interest
shall not be assigned to New Scottsdale unless and until Transcap has
received $61,222.42 from the Escrow Agent in accordance with Section 1.
Following Transcap's receipt of $61,222.42 from the Escrow Agent, the
Escrow Agent shall release the Transcap Security Interest to New
Scottsdale. Provided, however, that if Transcap has not received the
Initial Payment as of December 1, 1996, the Escrow Agent shall, upon
receiving written notice from Transcap, return the Transcap Security
Interest and all documents relating to the assignment thereof to Transcap.
b. Consent to Sale. Transcap hereby consents to the sale of any
assets of the Company to New Scottsdale that may be subject to the
Transcap Security Interest, which security interest will be assigned
pursuant to Section 2(a) above (subject to timely payment of the Initial
Payment and Additional Payment) and which security interest shall remain
in full force and effect following such sale.
c. Effective Date of Transfer of Transcap Claims. Upon Transcap's
receipt of $388,465.42 pursuant to the terms hereof and the Escrow
Agreement (which amount represents the Initial Payment, the Additional
Payment and the maximum amount of
2
<PAGE> 3
royalties payable to Transcap in accordance with the terms of the Escrow
Agreement) (collectively, the "Transcap Payments"), all Transcap Claims
and all evidences thereof, including the Preferred Stock shall be
automatically transferred by the Escrow Agent to New Scottsdale. If for
any reason there is a release of any Transcap Claims from the Escrow
Agreement prior to the receipt of the full amounts set forth above then
Transcap shall receive from the Escrow Agent and be deemed to own that
portion of the Transcap Claims as is equal to the aggregate amount of
Transcap Claims (i.e., $388,465.42) minus the aggregate amount of Transcap
Payments received prior to such release. All other Transcap Claims shall
be delivered by the Escrow Agent to New Scottsdale. To facilitate such
assignments, Transcap shall execute and deliver into the Escrow Account
any UCC statements or other instrument reasonably requested by New
Scottsdale or any of the Scottsdale Entities to reflect the assignment of
any such security interests, and similarly, the Escrow Agent shall be
authorized to execute and deliver any such statement or instrument
reasonably requested by New Scottsdale or any of the Scottsdale Entities
to reflect the assignment of any such security interests.
d. Release of Personal Guarantees. Upon Transcap's receipt of the
Transcap Payments in full, Transcap shall automatically release the
personal guarantees of Eric Schedeler, Roy Dunlap and C. Kimball McCuster
granted pursuant to the Master Agreement. Either or both of the Escrow
Agent and Transcap shall execute any instrument reasonably requested by
the foregoing individuals to reflect the termination of such guarantees.
SECTION 3. SALE OF PREFERRED STOCK. As soon as reasonably practicable
following the execution of this Agreement, Transcap and the creditors of the
Company listed on Exhibit A hereto (collectively, the "Old Scottsdale
Creditors"), New Scottsdale and another party that the Old Scottsdale Creditors
and New Scottsdale shall mutually agree to appoint as "Escrow Agent" shall
execute and deliver an "Escrow Agreement" reasonably acceptable to all parties
thereto that shall create the "Escrow Account" and provide for the following
terms:
a. Royalty Payments. Following the execution of the Escrow Agreement
and the consummation of the Asset Purchase, New Scottsdale shall pay the
Escrow Account royalties in the amount of four percent (4%) of all Net
Sales Proceeds (as defined below) derived by New Scottsdale from the sale
of its "Program Master" and "ETV Host Software" products, and from the
sale of any product listed on Exhibit B hereto (collectively, the "Royalty
Products"). Without limiting the foregoing, however, the Old Scottsdale
Creditors shall acknowledge and agree that they shall not be entitled to
any royalty on any product or service that may be provided or sold by New
Scottsdale, other than its sales of the Royalty Products. As used in this
Agreement, the term "Net Sales Proceeds" shall mean the total gross
selling price of the Royalty Products less discounts, allowances and
returns of such products, as determined by reference to the invoices
relating to the Royalty Products. Such royalties shall be payable within
forty-five (45) days after the end of each fiscal quarter except for the
quarter on which New Scottsdale's fiscal year ends. Royalties for the
Company's last fiscal quarter shall be payable within
3
<PAGE> 4
ninety (90) days after the end of the corresponding fiscal year following
the reconciliation of the Company's books and records for such fiscal
year.
b. Transcap Priority. The parties shall acknowledge that because
Transcap has been the senior creditor of the Company, and Transcap will be
releasing security interests in certain assets currently owned by the
Scottsdale Entities, Transcap shall be entitled to receive the first
$200,000 received by the Escrow Account.
c. Pari Passu Payments. Following Transcap's receipt of $200,000
from the Escrow Account, Transcap shall be entitled to receive an
additional $137,243 from the Escrow Account; provided, however, that the
payment of such $137,243 shall be pari passu with the payments to be made
by the Escrow Account to the other Old Scottsdale Creditors.
d. Deposit of Preferred Stock. In connection with the execution of
the Escrow Agreement, Transcap and the other Old Scottsdale Creditors that
hold shares of any class or series of preferred stock issued by the
Company (collectively, the "Equity Creditors") shall deposit such shares
into the Escrow Account and execute and deliver to the Escrow Agent (as
defined below) a stock power in blank substantially in the form attached
hereto as Exhibit C.
e. Transfer of Preferred Stock. It shall be the intention of the
parties to the Escrow Agreement that each Equity Creditor of the Company
shall be entitled to receive from the Escrow Account an amount in dollars
equal to the number of such creditor's shares of preferred stock, and that
upon an Equity Creditor's receipt of any payments from the Escrow Account,
such Equity Creditor shall automatically sell that number of shares of
preferred stock to New Scottsdale equal to the amount of the corresponding
payment received by such creditor. For example, upon an Equity Creditor's
receipt of $10,000 from the Escrow Account, such creditor shall
automatically sell 10,000 shares of its preferred stock to New Scottsdale.
If an Equity Creditor holds shares of Series S and Series B Stock, the
automatic sale provision shall apply first to the Series S Stock and then
to the Series B Stock. For example, the first $200,000 received by
Transcap from the Escrow Account shall result in the automatic sale of all
200,000 shares of Transcap's Series S Stock to New Scottsdale, and
Transcap's subsequent receipt of an additional $137,243 from the Escrow
Account shall result in the sale of all 137,243 shares of Transcap's
Series B Stock to New Scottsdale.
f. Escrow Agent Action. The Escrow Agent shall be authorized from
time to time and at any time to deliver stock certificates and
corresponding stock powers to the Company to permit the Company to revise
its records to accurately reflect the amount of shares held by any Equity
Creditor, and if applicable, to accept delivery of new stock certificates
from the Company representing the correct number of shares owned by such
creditor. Each Equity Creditor shall agree to execute and deliver
additional stock powers from time to time to facilitate such deliveries by
the Escrow Agent.
4
<PAGE> 5
g. Waiver of Conversion Rights. In consideration of each Equity
Creditor's right to receive royalty payments from the Escrow Account, and
notwithstanding anything to the contrary in any Certificate of
Designations of the Company, each Equity Creditor shall agree to waive her
or its right to convert her or its shares of preferred stock into shares
of the Company's common stock or into warrants to purchase shares of such
common stock.
h. Dividends. To the extent the Company pays dividends on its shares
of preferred stock, such amount shall be deposited pursuant to the Escrow
Agreement and will be treated as if a royalty had been paid.
i. Covenants of Equity Creditors. Each Equity Creditor shall
covenant and agree not to sell, transfer, assign, pledge or dispose of all
or any of such creditor's preferred shares other than in the manner
contemplated herein and in the Escrow Agreement without the Company's
prior written consent, which may be withheld by the Company in its sole
discretion.
j. Reconciliation of Royalty Payments; Accounting Matters. The
parties to the Escrow Agreement shall agree that New Scottsdale shall not
be obligated to reconcile the royalty payments made to the Escrow Account
with respect to any fiscal year after the date which is one hundred eighty
(180) days after the date on which royalty payments for the Company's last
fiscal quarter are payable (i.e., two hundred seventy (270) days after the
end of the Company's fiscal year end). New Scottsdale shall provide the
other parties to the Escrow Agreement with all relevant accounting
information reasonably requested by such other parties, and such other
parties shall be entitled, at their sole cost and expense, to audit such
information to the extent necessary to ensure that the royalties paid by
New Scottsdale to the Escrow Account have been accurately computed and are
made in a timely manner.
k. Restructuring of Claims. Each of the Old Scottsdale Creditors
shall acknowledge and agree that the obligations owed to such creditors by
Old Scottsdale shall be deemed to be restructured in the manner
contemplated by the Escrow Agreement and the arrangements contemplated
hereby and by the related agreements with the other Old Scottsdale
Creditors. The obligations owed by Old Scottsdale to the Old Scottsdale
Creditors shall be limited to the amounts required to be paid to such
creditors pursuant to the Escrow Agreement and such other arrangements.
l. No Guarantee of Royalties. Notwithstanding anything herein to the
contrary, the parties to the Escrow Agreement shall acknowledge and agree
that (a) New Scottsdale is not guaranteeing the payment of a minimal
amount of royalty payments to the Escrow Account; and (b) New Scottsdale
shall have the right to set any price it deems advisable for the Royalty
Products, and is under no obligation to manufacture, market, promote,
improve, support or continue to manufacture, market, promote, improve or
support either or both of the Royalty Products. In no event shall any of
the Old Scottsdale Creditors have any claim or other recourse against New
Scottsdale or any of
5
<PAGE> 6
its shareholders, directors, officers, employees or agents; provided,
however, the foregoing shall not release New Scottsdale of its obligations
to pay royalties to the Escrow Agent with respect to Royalty Products
actually sold to the extent provided in the Escrow Agreement.
m. Right to Repay Claims. New Scottsdale shall have the right, but
not the obligation, to the defease and discharge, in whole or in part,
obligations under the Escrow Agreement by depositing funds with the Escrow
Agent. Such deposits shall be treated as if royalties in a like amount had
been paid.
n. Bankruptcy of Company. In the event a proceeding under 11 U.S.C.
Sections 101 et seq., as amended, and the rules and regulations
thereunder (collectively, the "Bankruptcy Code"), or under any other
bankruptcy, reorganization, arrangement of debt, insolvency, readjustment
of debt or receivership law or statute is filed or initiated by or against
the Company seeking an order for relief, or the Company makes an
assignment for the benefit of its creditors, or the Company takes any
action to authorize any of the foregoing, the Escrow Agent shall release
all claims of the Old Scottsdale Creditors to the appropriate Old
Scottsdale Creditors who are the beneficiaries of such claims. Each such
creditor shall use its good faith discretion in prosecuting such claims
and any cash proceeds realized upon the prosecution thereof shall be paid
to the Escrow Agent as if such amounts were royalties. No other amounts
will be payable to the Old Scottsdale Creditors. In no event shall the Old
Scottsdale Creditors have any claims against New Scottsdale by reason of
any such bankruptcy of Old Scottsdale or the amount of proceeds that are
actually received pursuant by such bankruptcy proceedings.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Each party hereby represents
and warrants to the other parties that each of the following is true and
correct:
a. Due Authorization. It has full power and authority to enter into
and perform this Agreement. The execution, delivery and performance of
this Agreement constitutes a legal, valid, and binding obligation of such
party enforceable in accordance with its terms.
b. No Violation. The execution, delivery and performance of this
Agreement is not prohibited or limited by, will not result in the breach
of, or a default under, conflict with, result in a violation of, or
require any consent, approval, authorization, exemption or other action by
or notice to any third party or any court or other governmental body,
under any agreement or instrument binding on it, or if applicable, under
any provisions of its charter document, bylaws or partnership agreement.
SECTION 5. CONDITION PRECEDENT. The parties hereto acknowledge and agree
that as a condition precedent to Transcap's execution and delivery of this
Agreement, Eric J. Schedeler and Transcap shall enter into a mutually acceptable
Stock Option Agreement pursuant to which Mr. Schedeler shall grant to Transcap,
and Transcap shall accept from Mr. Schedeler, options to
6
<PAGE> 7
purchase 30,000 shares of the common stock of New Scottsdale at an exercise
price of $1.50 per share, subject to and in accordance with the terms thereof.
SECTION 6. THIRD PARTY BENEFICIARY. The parties hereto acknowledge that
but for the execution of this Agreement, New Scottsdale would not make the
$10,000 and $51,222.42 payments to the Company contemplated hereby, and that any
additional payments made by New Scottsdale in connection with the Asset Purchase
or any royalty payments to the Escrow Agent shall be based on the full
performance of the agreements contemplated herein. Accordingly, New Scottsdale
shall be deemed a third party beneficiary hereof that may enforce the terms of
this Agreement.
SECTION 7. SPECIFIC PERFORMANCE. Each party hereto acknowledges and agrees
that the other party hereto and New Scottsdale would be damaged irreparably in
the event any of the provisions hereof are not performed in accordance with
their specific terms. Accordingly, it is agreed that each party hereto and New
Scottsdale shall be entitled to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of the United
States or any state thereof having jurisdiction over the parties and the matter,
in addition to any other remedy to which such party would be entitled, at law or
in equity.
SECTION 8. FURTHER ASSURANCES. From time to time hereafter and without
further consideration, each of the parties hereto shall execute and deliver such
additional or further instruments and take such actions as any other party
hereto may reasonably request in order to carry out the purposes of this
Agreement.
SECTION 9. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which when executed by the parties hereto shall be deemed an original
and all of which together shall be deemed the same Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement.
TRANSCAP MANUFACTURING SERVICES,
INC.
By: /s/ MICHAEL SEAR
-------------------
Name: MICHAEL SEAR
Title: Executive Vice President
SCOTTSDALE TECHNOLOGIES, INC.
By: /s/ ERIC J. SCHEDELER
------------------------
Name: ERIC J. SCHEDELER
Title: President & CEO
7
<PAGE> 8
WO CONSULTING, INC. HEREBY EXECUTES THIS AGREEMENT FOR THE SOLE PURPOSE OF
ACKNOWLEDGING ITS AGREEMENTS UNDER SECTIONS 1 AND 3:
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
----------------------
Stuart N. Rubin, Chief Executive Officer
8
<PAGE> 1
EXHIBIT 6.8
NGIC RESTRUCTURING AGREEMENT
This NGIC Restructuring Agreement (this "Agreement"), executed on March
31, 1997 is intended by the parties hereto to be effective as of November 30,
1996, and is between Network Gaming International Corp., a British Columbia
corporation formerly known as AI Software ("NGIC"), and Scottsdale Technologies,
Inc., a Delaware corporation (the "Company").
RECITALS
A. NGIC acquired 755,888 shares of the Company's Series B Convertible
Redeemable Preferred Stock ("Series B Stock") from the Company pursuant to the
terms of a certain letter agreement between the Company and NGIC dated October
5, 1996 (the "Letter Agreement") and a certain Subscription Agreement between
the Company and NGIC dated January 18, 1996 (the "Subscription Agreement").
B. It is contemplated that WO Consulting, Inc., a Delaware corporation
that plans to do business as "Scottsdale Technologies, Inc." or a similar name
("New Scottsdale"), will purchase the assets of the Company (the "Asset
Purchase") following New Scottsdale's issuance of a convertible senior note to
Scottsdale Technology-I, Ltd., a Delaware limited partnership. The Company and
New Scottsdale have executed a letter of intent to reflect the proposed terms of
the Asset Purchase.
C. Subject to the terms and conditions set forth herein, the parties
hereto wish to provide for the payment of certain amounts to NGIC in exchange
for NGIC's sale to New Scottsdale of the Series B Stock owned by NGIC and the
assignment by NGIC of any and all claims NGIC may have against the Company and
Mark Force Ltd., a Delaware corporation (collectively, the "Scottsdale
Parties"), to New Scottsdale. New Scottsdale is entering into this Agreement
solely for the purposes of acknowledging its agreements in Sections 1 and 3.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. OBLIGATIONS OF NGIC. In consideration of the payments to be
made to NGIC hereunder, NGIC hereby agrees as follows:
a. Assignment of Obligations Owed by Scottsdale Parties. Subject to
the terms and conditions set forth herein and in the Escrow Agreement (as
defined below), NGIC hereby assigns to New Scottsdale subject to the terms
of the Escrow Agreement all of NGIC's right, title and interest in and to
all indebtedness, obligations, claims and other liabilities owed by the
Scottsdale Parties to NGIC (collectively, the "NGIC Claims"), including,
without limitation, the Preferred Stock held by NGIC, all of which shall
be held by the Escrow Agent pursuant to the Escrow Agreement.
<PAGE> 2
b. Consent to Sale. NGIC hereby consents to the sale of any assets
of the Company to New Scottsdale.
c. Effective Date of Transfer of NGIC Claims. Upon NGIC's receipt of
$755,888 pursuant to the terms hereof and the Escrow Agreement (which
amount represents the maximum amount of royalties payable to NGIC in
accordance with the terms of the Escrow Agreement) (collectively, the
"NGIC Payments"), all NGIC Claims and all evidences thereof, including the
Preferred Stock, shall be automatically transferred by the Escrow Agent to
New Scottsdale. If for any reason there is a release of any NGIC Claims
from the Escrow Agreement prior to the receipt of the full amounts set
forth above then NGIC shall be assigned and be deemed to own that portion
of the NGIC Claims equal to the aggregate amount of the NGIC Claims (i.e.,
$755,888) minus the aggregate amount of NGIC Payments received prior to
such release. All other NGIC Claims shall be assigned by the Escrow Agent
to New Scottsdale. To facilitate such assignments, NGIC shall execute and
deliver into the Escrow Account any instrument reasonably requested by New
Scottsdale or any of the Scottsdale Parties to reflect the assignment of
any such claims, and similarly, the Escrow Agent shall be authorized to
execute and deliver any such instrument reasonably requested by New
Scottsdale or any of the Scottsdale Parties to reflect the assignment of
any such claims.
SECTION 2. SALE OF PREFERRED STOCK. As soon as reasonably practicable
following the execution of this Agreement, NGIC and the creditors of the Company
listed on Exhibit A hereto (collectively, the "Old Scottsdale Creditors"), New
Scottsdale and another party that the Old Scottsdale Creditors and New
Scottsdale shall mutually agree to appoint as "Escrow Agent" shall execute and
deliver an "Escrow Agreement" reasonably acceptable to all parties thereto that
shall create the "Escrow Account" and provide for the following terms:
a. Royalty Payments. Following the execution of the Escrow Agreement
and the consummation of the Asset Purchase, New Scottsdale shall pay the
Escrow Account royalties in the amount of four percent (4%) of all Net
Sales Proceeds (as defined below) derived by New Scottsdale from the sale
of its "Program Master" and "ETV Host Software" products, and from the
sale of any product listed on Exhibit B hereto (collectively, the "Royalty
Products"). Without limiting the foregoing, however, the Old Scottsdale
Creditors shall acknowledge and agree that they shall not be entitled to
any royalty on any product or service that may be provided or sold by New
Scottsdale, other than its sales of the Royalty Products. As used in this
Agreement, the term "Net Sales Proceeds" shall mean the total gross
selling price of the Royalty Products less discounts, allowances and
returns of such products, as determined by reference to the invoices
relating to the Royalty Products. Such royalties shall be payable within
forty-five (45) days after the end of each fiscal quarter except for the
quarter on which New Scottsdale's fiscal year ends. Royalties for the
Company's last fiscal quarter shall be payable within ninety (90) days
after the end of the corresponding fiscal year following the
reconciliation of the Company's books and records for such fiscal year.
Accompanying each such royalty payment shall be a statement prepared by
New Scottsdale setting forth the manner in which the Net Sales Proceeds
during the period corresponding to such
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payment were calculated, and setting forth the amount payable to each Old
Scottsdale Creditor.
b. Transcap Priority. The parties shall acknowledge that because
Transcap Manufacturing Services, Inc. ("Transcap") has been the senior
creditor of the Company, and Transcap will be releasing security interests
in certain assets currently owned by the Scottsdale Parties and Mark Two
Inc., a Delaware corporation ("Mark Two"), Transcap shall be entitled to
receive the first $200,000 received by the Escrow Account.
c. Pari Passu Payments. Following Transcap's receipt of $200,000
from the Escrow Account, NGIC shall be entitled to receive $755,888 from
the Escrow Account; provided, however, that the payment of such $755,888
shall be pari passu with the payments to be made by the Escrow Account to
the other Old Scottsdale Creditors, including Transcap.
d. Deposit of Preferred Stock. In connection with the execution of
the Escrow Agreement, NGIC and the other Old Scottsdale Creditors that
hold shares of any class or series of preferred stock issued by the
Company (collectively, the "Equity Creditors") shall deposit such shares
into the Escrow Account and execute and deliver to the Escrow Agent (as
defined below) a stock power in blank substantially in the form attached
hereto as Exhibit C.
e. Transfer of Preferred Stock. It shall be the intention of the
parties to the Escrow Agreement that each Equity Creditor of the Company
shall be entitled to receive from the Escrow Account an amount in dollars
equal to the number of such creditor's shares of preferred stock, and that
upon an Equity Creditor's receipt of any payments from the Escrow Account,
such Equity Creditor shall automatically sell that number of shares of
preferred stock to New Scottsdale equal to the amount of the corresponding
payment received by such creditor. For example, upon an Equity Creditor's
receipt of $10,000 from the Escrow Account, such creditor shall
automatically sell 10,000 shares of its preferred stock to New Scottsdale.
If an Equity Creditor holds shares of Series S and Series B Stock, the
automatic sale provision shall apply first to the Series S Stock and then
to the Series B Stock. For example, the first $200,000 received by
Transcap from the Escrow Account shall result in the automatic sale of all
200,000 shares of Transcap's Series S Stock to New Scottsdale, and
Transcap's subsequent receipt of an additional $137,243 from the Escrow
Account shall result in the sale of all 137,243 shares of Transcap's
Series B Stock to New Scottsdale.
f. Escrow Agent Action. The Escrow Agent shall be authorized from
time to time and at any time to deliver stock certificates and
corresponding stock powers to the Company to permit the Company to revise
its records to accurately reflect the amount of shares held by any Equity
Creditor, and if applicable, to accept delivery of new stock certificates
from the Company representing the correct number of shares owned by such
creditor. Each Equity Creditor shall agree to execute and deliver
additional stock powers from time to time to facilitate such deliveries by
the Escrow Agent.
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g. Waiver of Conversion Rights. In consideration of each Equity
Creditor's right to receive royalty payments from the Escrow Account, and
notwithstanding anything to the contrary in any Certificate of
Designations of the Company, each Equity Creditor shall agree to waive her
or its right to convert her or its shares of preferred stock into shares
of the Company's common stock or into warrants to purchase shares of such
common stock.
h. Dividends. To the extent the Company pays dividends on its shares
of preferred stock, such amount shall be deposited pursuant to the Escrow
Agreement and will be treated as if a royalty had been paid.
i. Covenants of Equity Creditors. Each Equity Creditor shall
covenant and agree not to sell, transfer, assign, pledge or dispose of all
or any of such creditor's preferred shares other than in the manner
contemplated herein and in the Escrow Agreement without the Company's
prior written consent, which will not be unreasonably withheld; provided,
however, that during the five-year period following the effective date
hereof, the Company may withhold such consent for any reason and any such
withholding of consent shall not be deemed to have been unreasonably
withheld.
j. Reconciliation of Royalty Payments; Accounting Matters. The
parties to the Escrow Agreement shall agree that New Scottsdale shall not
be obligated to reconcile the royalty payments made to the Escrow Account
with respect to any fiscal year after the date which is one hundred eighty
(180) days after the date on which royalty payments for the Company's last
fiscal quarter are payable (i.e., two hundred seventy (270) days after the
end of the Company's fiscal year end). New Scottsdale shall provide the
other parties to the Escrow Agreement with all relevant accounting
information reasonably requested by such other parties, and such other
parties shall be entitled, at their sole cost and expense, to audit such
information to the extent necessary to ensure that the royalties paid by
New Scottsdale to the Escrow Account have been accurately computed and are
made in a timely manner; provided, however, that if such audit indicates
that the royalty payments actually made to the Old Scottsdale Creditors
during any period were ninety percent (90%) or less than the royalty
payments required to be paid to the Old Scottsdale Creditors hereunder and
under the Escrow Agreement, New Scottsdale shall pay for the costs and
expenses of such audit.
k. Restructuring of Claims. Each of the Old Scottsdale Creditors
shall acknowledge and agree that the obligations owed to such creditors by
Old Scottsdale shall be deemed to be restructured in the manner
contemplated by the Escrow Agreement and the arrangements contemplated
hereby and by the related agreements with the other Old Scottsdale
Creditors. The obligations owed by Old Scottsdale to the Old Scottsdale
Creditors shall be limited to the amounts required to be paid to such
creditors pursuant to the Escrow Agreement and such other arrangements.
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<PAGE> 5
l. No Guarantee of Royalties. Notwithstanding anything herein to the
contrary, the parties to the Escrow Agreement shall acknowledge and agree
that (a) New Scottsdale is not guaranteeing the payment of a minimal
amount of royalty payments to the Escrow Account; and (b) New Scottsdale
shall have the right to set any price it deems advisable for the Royalty
Products, and is under no obligation to manufacture, market, promote,
improve, support or continue to manufacture, market, promote, improve or
support either or both of the Royalty Products. In no event shall any of
the Old Scottsdale Creditors have any claim or other recourse against New
Scottsdale or any of its shareholders, directors, officers, employees or
agents; provided, however, the foregoing shall not release New Scottsdale
of its obligations to pay royalties to the Escrow Agent with respect to
Royalty Products actually sold to the extent provided in the Escrow
Agreement.
m. Right to Repay Claims. New Scottsdale shall have the right, but
not the obligation, to the defease and discharge, in whole or in part,
obligations under the Escrow Agreement by depositing funds with the Escrow
Agent. Such deposits shall be treated as if royalties in a like amount had
been paid.
n. Bankruptcy of Company. In the event a proceeding under 11 U.S.C.
Sections 101 et seq., as amended, and the rules and regulations
thereunder (collectively, the "Bankruptcy Code"), or under any other
bankruptcy, reorganization, arrangement of debt, insolvency, readjustment
of debt or receivership law or statute is filed or initiated by or against
the Company seeking an order for relief, or the Company makes an
assignment for the benefit of its creditors, or the Company takes any
action to authorize any of the foregoing, the Escrow Agent shall release
all claims of the Old Scottsdale Creditors to the appropriate Old
Scottsdale Creditors who are the beneficiaries of such claims. Each such
creditor shall use its good faith discretion in prosecuting such claims
and any cash proceeds realized upon the prosecution thereof shall be paid
to the Escrow Agent as if such amounts were royalties. No other amounts
will be payable to the Old Scottsdale Creditors. In no event shall the Old
Scottsdale Creditors have any claims against New Scottsdale by reason of
any such bankruptcy of Old Scottsdale or the amount of proceeds that are
actually received pursuant by such bankruptcy proceedings.
o. Equivalent Treatment. Except for the preferential treatment to be
afforded to Transcap described herein, each of the Old Scottsdale
Creditors shall be treated as favorably as the other Old Scottsdale
Creditors are treated with respect to the payment of royalties required to
be paid to the Old Scottsdale Creditors.
SECTION 3. REPRESENTATIONS AND WARRANTIES. Each party hereby represents
and warrants to the other parties that each of the following is true and
correct:
a. Due Authorization. It has full power and authority to enter into
and perform this Agreement. The execution, delivery and performance of
this Agreement constitutes a legal, valid, and binding obligation of such
party enforceable in accordance with its terms.
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b. No Violation. The execution, delivery and performance of this
Agreement is not prohibited or limited by, will not result in the breach
of, or a default under, conflict with, result in a violation of, or
require any consent, approval, authorization, exemption or other action by
or notice to any third party or any court or other governmental body,
under any agreement or instrument binding on it, or if applicable, under
any provisions of its charter document, bylaws or partnership agreement.
SECTION 4. MODIFICATION OF SUBSCRIPTION AGREEMENT. NGIC and the Company
hereby agree to modify the terms of the Subscription Agreement and Letter
Agreement as follows:
a. Stock Issuable to NGIC. All references in the Letter Agreement
and Subscription Agreement to "703,995 shares" are hereby deleted and
replaced with a reference to "755,888 shares".
b. Waiver of Conditions. NGIC hereby waives, as of January 18, 1996,
each of the conditions on page 2 of the Letter Agreement and page 1 of the
Subscription Agreement relating to (i) the settlement of the obligations
of the Scottsdale Parties to Eric Schedeler in exchange for Series B
Stock; (ii) Transcap's agreement to settle the obligations of the
Scottsdale Parties and Mark Two in the names described in "Capitalization
of Scottsdale"; and (iii) the approval by the Vancouver Stock Exchange of
the Letter Agreement, the Subscription Agreement and the issuance of
Series B Stock to NGIC pursuant to the terms of the Letter Agreement.
SECTION 5. THIRD PARTY BENEFICIARY. The parties hereto acknowledge that
but for the execution of this Agreement, New Scottsdale would not enter into the
transactions contemplated hereby, and that any payments made by New Scottsdale
in connection with the Asset Purchase or any royalty payments to the Escrow
Agent shall be based on the full performance of the agreements contemplated
herein. Accordingly, New Scottsdale shall be deemed a third party beneficiary
hereof that may enforce the terms of this Agreement.
SECTION 6. SPECIFIC PERFORMANCE. Each party hereto acknowledges and agrees
that the other party hereto and New Scottsdale would be damaged irreparably in
the event any of the provisions hereof are not performed in accordance with
their specific terms. Accordingly, it is agreed that each party hereto and New
Scottsdale shall be entitled to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of the United
States or any state thereof having jurisdiction over the parties and the matter,
in addition to any other remedy to which such party would be entitled, at law or
in equity.
SECTION 7. FURTHER ASSURANCES. From time to time hereafter and without
further consideration, each of the parties hereto shall execute and deliver such
additional or further instruments and take such actions as any other party
hereto may reasonably request in order to carry out the purposes of this
Agreement.
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SECTION 8. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which when executed by the parties hereto shall be deemed an original
and all of which together shall be deemed the same Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement.
NETWORK GAMING INTERNATIONAL CORP.
By: /s/ DAVID ALLEN
----------------
Name: DAVID ALLEN
Title: President
SCOTTSDALE TECHNOLOGIES, INC.
By: /s/ ERIC J. SCHEDELER
----------------------
Name: ERIC J. SCHEDELER
Title: President & CEO
WO CONSULTING, INC. HEREBY EXECUTES THIS AGREEMENT FOR THE SOLE PURPOSE OF
ACKNOWLEDGING ITS AGREEMENTS UNDER SECTIONS 1 AND 3:
WO CONSULTING, INC.
By: /s/ STUART N. RUBIN
--------------------
Stuart N. Rubin, President
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<PAGE> 1
Exhibit 6.9
GENERAL SECURITY AGREEMENT
GENERAL SECURITY AGREEMENT, dated February 28, 1997, but intended by the parties
to be effective as of January 1, 1997, made by WO Consulting, Inc., a Delaware
Corporation (the "Debtor"), in favor of Scottsdale Technologies-I, Ltd., a
Delaware limited partnership (the "Secured Party") in connection with the
purchase of the 12% Senior Convertible Promissory Note issued by Debtor.
W I T N E S S E T H:
WHEREAS, the Secured Party has agreed to make a loan to the Debtor in
an aggregate principal amount not to exceed $1,928,250 (the "Loan"), evidenced
by Debtor's 12% Senior Convertible Promissory Note payable to the Secured Party
dated as of the date hereof (as amended, supplemented or restated, the "Note");
and
WHEREAS, it is a condition precedent to the making of the Loan by the
Secured Party that the Debtor shall have executed and delivered to the Secured
Party, among other things, a security agreement granting to the Secured Party a
lien upon and a security interest in all tangible and intangible personal
property and fixtures of the Debtor including all intellectual property rights;
NOW, THEREFORE, in consideration of the promises herein contained, and
in order to induce the Secured Party to make and maintain the Loan, the parties
agree as follows:
1. Definitions. The terms "accounts," "chattel paper," "documents,"
"fixtures," "general intangibles," "goods," "instruments," "inventory," and any
other terms used herein, whether or not capitalized, and defined in the Uniform
Commercial Code as adopted and in effect in the State of Arizona (the "UCC") and
not otherwise defined herein shall have the respective meanings assigned to
those terms in the UCC.
Governmental Authority shall mean any nation or government, any state
or political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
2. Grant of Lien and Security Interest. As collateral security for the
prompt satisfaction of all of the Obligations (as such term is defined in
Section 3 hereof), the Debtor hereby pledges and assigns to the Secured Party,
and grants to the Secured Party, a lien upon and a continuing security interest
(the "Security Interest") in, all personal property and fixtures of the Debtor,
wherever located, whether now or hereafter existing and whether now owned or
hereafter acquired of every kind and description, tangible or intangible, and
all products and proceeds thereof (the "Collateral"), including, without
limitation, the following (each of the following, whether now owned or hereafter
acquired, and each being listed without limiting the generality of any other of
the following listed items):
<PAGE> 2
(a) all of the Debtor's right, title and interest in and to all
accounts, contracts, contract rights, chattel paper, documents, instruments,
general intangibles and other rights, remedies, obligations or other intangibles
of any kind, including, without limitation:
(i) all of the Debtor's right, title and interest in and to
all of the foregoing arising out of or in connection with the sale or
lease of goods or the rendering of services or otherwise, including,
without limitation, all rights and remedies as seller of goods, and all
rights and remedies relating to any lease to which the Debtor is a
party as lessor or lessee, and all rights and remedies relating to the
performance by or for the Debtor of advisory, consulting or other
services, and all grants or assignments of servitudes and easements to
which the Debtor is a party or of which the Debtor is a beneficiary,
including, without limitation, all rents, issues, profits, royalties,
income, rights of use, rights of quiet enjoyment of any such leased
property, rights to sublease and assign and all other benefits derived
directly or indirectly from any such leased property or any activity
carried on in connection therewith or from any of the other Collateral;
(ii) all of the Debtor's right, title and interest in and to
all contracts or other agreements, including, without limitation, all
security agreements and leases, relating to any trade or business or
other activity of the Debtor, in each case as any of the foregoing may
be amended or otherwise modified from time to time and together with
all rights and remedies relating thereto;
(iii) all of the Debtor's right, title and interest in and to
the payment of money (whether arising from property sold or lent,
services rendered, money lent, or advances or deposits made);
(iv) to the fullest extent permitted by applicable law, all of
the Debtor's right, title and interest in and to all permits, licenses,
franchises, authorizations, approvals, allocations, entitlements,
accreditations and any other rights or benefits, from time to time
issued by or pertaining to any Governmental Authority, including,
without limitation, the federal government of the United States and the
State of Arizona, whether or not required for the Debtor lawfully to
acquire, own, lease, manage or operate any of its business or
properties, and all rights and remedies relating thereto (any and all
of the foregoing items referred to in this clause (iv) being
hereinafter referred to as "Governmental Rights");
(v) all of the Debtor's right, title and interest in and to
any and all names under or by which the Debtor's trade or business or
other activities may at any time be operated or known, and all rights
to carry on business under such names, all goodwill, trademarks, trade
names, patents, trade secrets, proprietary or confidential information,
inventions, technical information, procedures, designs, skills,
expertise, experience, processes and any other intellectual property or
other knowledge or know-how of any kind; and
(vi) all of the Debtor's right, title and interest in and to
all returned or unearned premiums that may be due upon cancellation by
the insurer of any policy of insurance for any reason whatsoever;
<PAGE> 3
including, in each case, all moneys due from time to time in respect thereof,
and all rights in and to all contracts or other agreements securing or otherwise
relating to any of the foregoing, including, without limitation, all security
agreements and leases;
(b) all of the Debtor's right, title and interest in and to all goods
and all other items of tangible personal property (the "Assigned Goods"),
including, without limitation:
(i) all of the Debtor's right, title and interest in and to
all raw materials, work in process and finished goods, and materials
used or consumed in any trade or business or other activity of the
Debtor, and all other inventory of any kind, including, without
limitation, goods returned to or repossessed by the Debtor and all
goods in which the Debtor has an interest in mass or a joint or other
interest or right of any kind, including goods in which the Debtor has
an interest or right as consignee), and all additions and accessions
thereto and products thereof; and
(ii) all of the Debtor's right, title and interest in and to
all other items of tangible personal property of any kind, including,
without limitation, all equipment of any kind, wherever located,
whether now owned or hereafter acquired, including, without limitation,
all manufacturing, distribution, selling, data processing and office
equipment and all appliances and trade fixtures (excluding equipment in
which Debtor's interest is a leasehold interest), together with all
increases, parts, fittings, accessories, equipment, and special tools
now or hereafter affixed to any part thereof and thereto, together with
all substitutes and replacements thereof, all accessions and
attachments thereto, and all tools, parts and equipment now or
hereafter added to or used in connection with the foregoing;
(c) all of the Debtor's right, title and interest in and to all
fixtures of any kind (including, without limitation, all such fixtures now or
hereafter attached to, installed in or used, whether temporarily or permanently,
in connection with any real estate now or hereafter owned or leased by the
Debtor), and all other articles of any kind that are, or in the future may be,
affixed or attached to any real estate;
(d) all of the Debtor's right, title and interest in and to all money,
whether in currency of the United States or any foreign country, and all deposit
accounts and all funds on deposit therein and all investments arising therefrom,
and all deposits with any contractors, subcontractors or suppliers for the
payment of goods or services not yet received;
(e) all of the Debtor's right, title and interest in and to all models,
drawings, blueprints, designs, plans, correspondence, memoranda, papers, books,
records, financial and accounting information, work papers and other documents
or writings of any kind whatsoever and all other information and data of any
kind and in any form, including, without limitation, any of the foregoing
whether hand-written, typed, printed, photographed, microfilmed, microfiched,
videotaped, audiotaped, recorded on computer tapes, disks, cards or other
computer records or otherwise visually or magnetically reproduced, and whether
expressed in ordinary or machine readable language or otherwise, and all
software, spread sheets and data bases of any kind and in any form; and
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<PAGE> 4
(f) all of the Debtor's right, title and interest in and to all
replacements and substitutions for, and all proceeds, cash and noncash, and
products of, any of the foregoing Collateral described in the foregoing clauses
(a) through (e) of this Section 2, including, without limitation, proceeds in
the form of accounts, chattel paper, documents, fixtures, general intangibles,
goods and instruments, and, to the extent not otherwise included, all payments
under insurance contracts (whether or not the Secured Party is the loss payee
thereof), or any indemnity, warranty or guaranty, payable by reason of loss or
damage to or otherwise with respect to any of the foregoing Collateral or any
payments, proceeds or other rights in respect of any condemnation or similar
proceeding or settlement in respect thereof with respect to any of the foregoing
Collateral;
in each case, howsoever the Debtor's interest therein may arise or appear
(whether by ownership, security interest, claim or otherwise). In furtherance
and not in limitation of all of the fore-going provisions of this Section 2, the
Debtor hereby pledges, assigns, transfers and sets over to the Secured Party all
of its right, title and interest in and to, and grants to the Secured Party, as
security for the Obligations, a lien upon and a security interest in, all
property of the Debtor of any kind held in the possession of or under control
of, or in transit to, the Debtor, the Secured Party or any keeper or other agent
or bailee therefor, including, without limitation, property held in safekeeping,
and all amounts that may be owing from time to time by the Secured Party to the
Debtor in any capacity, including, without limitation, any balance or share
belonging to the Debtor, which lien and security interest shall be independent
of, and in addition to, any right of set-off that the Secured Party may have.
3. Security for Obligations. The security inter-est created hereby in
the Collateral constitutes continuing collateral security for all of the
following obligations, whether now existing or hereafter incurred (the
"Obligations"):
(a) the prompt payment by the Debtor, as and when due and payable, of
all amounts from time to time owing by it in respect of the Note, this Agreement
and any other documents in connection with the Loan (together, the "Loan
Documents");
(b) the due performance and observance by the Debtor of all of its
other obligations from time to time existing hereunder or in respect of any Loan
Document; and
(c) all other liabilities of any kind of the Debtor to the Secured
Party, whether now existing or hereafter incurred, matured or unmatured, direct
or contingent, joint or several, evidenced by a writing or otherwise, including,
without limitation, any extensions, modifications or renewals thereof and
substitutions therefor.
4. Fraudulent Conveyance. Notwithstanding anything contained in this
Agreement to the contrary, Debtor agrees that if, but for the application of
this Section 4, the Obligations or any Security Interest would constitute a
preferential transfer under 11 U.S.C. Section 547, a fraudulent conveyance under
11 U.S.C. Section 548 (or any successor section of that Code) or a fraudulent
conveyance or transfer under any state fraudulent conveyance or fraudulent
transfer law or similar law in effect from time to time (each a "Fraudulent
Conveyance"), then the Obligations and each affected Security Interest will be
enforceable to the maximum extent possible without
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<PAGE> 5
causing the Obligations or any Security Interest to be a Fraudulent Conveyance,
and shall be deemed to have been automatically amended to carry out the intent
of this Section 4.
5. Representations and Warranties. Debtor represents and warrants to
Secured Party that:
(a) Authority. (i) Debtor is duly organized, validly existing, and
in good standing in the jurisdiction of its formation, (ii) this
Agreement has been duly authorized and approved by all necessary
corporate action and no approval or consent of any Court or other
person or entity is required which has not been obtained and (iii) the
execution, delivery, and performance of and compliance with the terms
of this Agreement and the Note will not cause Debtor to be in violation
of or default under any applicable laws, or any material agreement,
document, or instrument to which Debtor is a party or by which any of
its assets may be bound.
(b) Place of Business; Location of Records. Schedule 1 to this
Agreement sets forth Debtor's place of business and chief executive
office, the present and foreseeable location of its books and records
concerning any of the Collateral that is accounts or general
intangibles, and the location of all other Collateral except for
certain inventory. Except as noted on Schedule 1, all such books,
records and Collateral are in its possession at the location set forth
thereon.
(c) No Prior Lien. Debtor has not executed any prior transfer,
assignment, pledge, security interest or hypothecation covering the
Collateral or any interest in the Collateral.
(d) Authority. Debtor has full power and authority to execute this
Agreement without breaching any material agreement to which Debtor is
party.
(e) Status of Receivables. The accounts receivable and other
tangible and intangible rights of Debtor arise from sales or the
performance of services by Debtor which have been performed in the
ordinary course of the Debtor's business.
The delivery at any time by Debtor to Secured Party of Collateral or of
additional specific descriptions of certain Collateral shall constitute a
representation and warranty by Debtor to Secured Party under this Agreement that
the representations and warranties of this Section 5 are true and correct with
respect to each item of such Collateral.
6. Covenants. Debtor further covenants and agrees with Secured Party
that until the Obligations are paid and performed in full, Debtor will:
(a) Relocation of Office or Books and Records; Change of Name or
Address: Give Secured Party 30 days prior written notice of any
proposed relocation of its principal place of business, chief executive
office, the place where its books and records relating to accounts and
general intangibles are kept or changing its name and the address to
which it is entitled to notice
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<PAGE> 6
under the Note or this Agreement. The notice must include the street address,
zip code, telephone number, city, county or parish and state.
(b) Relocation of Collateral. Not relocate any of the
Collateral to any commonwealth, nation, territory, possession or country outside
the United States of America.
(c) Material Change. Promptly notify Secured Party of any
change in any material fact or circumstance represented or warranted by Debtor
with respect to the Collateral.
(d) Record of Collateral. Maintain, at the place where it is
entitled to receive notices under this Agreement, a current record of where all
Collateral is located, upon reasonable notice permit Secured Party's
representatives to inspect and make abstracts from such records at any
reasonable time during normal business hours.
(e) Adverse Claim. Promptly notify Secured Party of any claim,
action or proceeding challenging the Security Interest or affecting title to all
or any portion of the Collateral and, at Secured Party's request, appear in and
defend any such action or proceeding at Debtor's expense.
(f) Hold Collateral in Trust. Upon the occurrence and during
the continuation of a Default, hold in trust (and not commingle with its other
assets) for Secured Party all Collateral that is chattel paper, instruments or
documents of title at any time received by it and promptly deliver same to
Secured Party unless Secured Party at its option gives Debtor written permission
to retain that Collateral. Upon the occurrence and during the continuation of a
Default, at Secured Party's request, each chattel paper, instrument or document
of title so retained shall be marked to state that it is assigned to Secured
Party and each instrument shall be endorsed to the order of Secured Party (but
failure to so mark or endorse shall not impair the Security Interest).
(g) No Assignment. Not sell, assign or otherwise dispose of,
or permit the sale, assignment or disposition of, any Collateral except as
permitted by the Loan Documents or with the written consent of Secured Party.
(h) Permitted Liens. Not create or permit the creation of, or
allow the existence of, any lien upon or against any of the Collateral except
for liens permitted by the Loan Documents or approved by Secured Party in
writing.
(i) Further Assurances. From time to time promptly execute and
deliver to Secured Party all other assignments, certificates, supplemental
documents and financing statements, and do all other acts or things as Secured
Party may reasonably request in order to create, evidence, perfect, continue or
maintain the existence and priority of the Security Interest.
(j) Perform Obligations. Perform all of its obligations under
or in connection with the Collateral in accordance with customary business
practices.
6
<PAGE> 7
(k) Amendment. Not amend, alter or modify, or permit the
amendment, alteration or modification of, any material portion (individually or
collectively) of the Collateral without Secured Party's prior written consent as
to the form and content of the amendment, alteration or modification.
(l) Impairment of Collateral. Not do or permit any act which
would impair any portion of the Collateral.
(m) Default under Collateral. Promptly notify Secured Party of
any default or event of default by Debtor or any other party under or in
connection with any portion (individually or collectively) of the Collateral and
immediately use reasonable efforts to remedy the same or immediately demand that
the same be remedied.
(n) No Lien or Assignment. Except for liens approved by
Secured Party, not execute in favor of any other person or entity, any
assignment, pledge or hypothecation of, or security interest in, all or any
portion of the Collateral.
7. Default; Remedies. Upon the occurrence of a Default, subject to the
terms and conditions of the Note, Secured Party has the following cumulative
rights and remedies under this Agreement:
(a) Debtor's Agent. Secured Party shall be deemed to be
irrevocably appointed as Debtor's agent and attorney-in-fact with all right and
power to enforce all of Debtor's rights and remedies under or in connection with
the Collateral. All reasonable cost, expenses and liabilities incurred and all
payments made by Secured Party as Debtor's agent and attorney-in-fact,
including, without limitation, reasonable attorney's fees and expenses, shall be
considered a loan by Secured Party to Debtor which shall be repayable on demand
and shall accrue interest at the same rate as amounts due under the Note and
shall be part of the Obligations.
(b) Account Debtors and Obligors. Secured Party may notify or
require each account debtor or other obligor to make payment directly to Secured
Party and Secured Party may take control of the proceeds paid to Secured Party.
Until Secured Party elects to exercise these rights, Debtor is authorized to
collect and enforce the Collateral and to retain and expend all payments made on
Collateral. After Secured Party elects to exercise these rights, Secured Party
shall have the right in its own name or in the name of Debtor to (i) compromise
or extend time of payment with respect to all or any portion of the Collateral
for such amounts and upon such terms as Secured Party may reasonably determine,
(ii) demand, collect, receive, receipt for, sue for, compound and give
acquittance for any and all amounts due or to become due with respect to
Collateral, (iii) take control of cash and other proceeds of any Collateral,
(iv) endorse Debtor's name on any notes, acceptances, checks, drafts, money
orders or other evidences of payment on Collateral that may come into Secured
Party's possession, and (v) do all other acts and things reasonably necessary to
carry out the intent of this Agreement. If any person owing money or other
remuneration to Debtor ("Obligor") fails to make payment on any Collateral when
due, Secured Party is authorized, in its sole discretion, either in its own name
or in Debtor's name, to take such action as Secured Party reasonably shall deem
appropriate for the collection
7
<PAGE> 8
of any amounts owed with respect to Collateral or upon which a delinquency
exists. Regardless of any other provision of this Agreement, however, Secured
Party shall never be liable for its failure to collect, or for its failure to
exercise diligence in the collection of, any amounts owed with respect to
Collateral except for its own fraud, gross negligence, willful misconduct or
violation of any law, nor shall it be under any duty whatever to anyone except
Debtor to account for funds that it shall actually receive under this Agreement.
A receipt given by Secured Party to any Obligor shall be a full and complete
release, discharge and acquittance to such Obligor, to the extent of any amount
so paid to Secured Party. Secured Party may apply or set off the deposits
against any liability of Debtor to Secured Party.
(c) UCC Rights. Secured Party may exercise any and all rights
available to a secured party under the UCC, in addition to any and all other
rights afforded by the Loan Documents, at law, in equity, or otherwise,
including, without limitation, (i) requiring Debtor to assemble all or part of
the Collateral and make it available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to Debtor and Secured
Party, (ii) applying by appropriate judicial proceedings for appointment of a
receiver for all or part of the Collateral, (iii) applying to the Obligations
any cash held by Secured Party under this Agreement, (iv) reducing any claim to
judgment, (v) exercising the rights of offset or banker's lien against the
interest of Debtor in and to every account and other property of Debtor in
Secured Party's possession to the extent of the full amount of the Obligations,
(vi) foreclosing the Security Interest and any other liens Secured Party may
have or otherwise realize upon any and all of the rights Secured Party may have
in and to the Collateral, or any part thereof, and (vii) bringing suit or other
proceedings before any tribunal either for specific performance of any covenant
or condition contained in any of the Loan Documents or in aid of the exercise of
any right granted to Secured Party in any of the Loan Documents.
(d) Notice. Reasonable notification of the time and place of
any public sale of the Collateral, or reasonable notification of the time after
which any private sale or other intended disposition of the Collateral is to be
made, shall be sent to Debtor and to any other Person entitled to notice under
the UCC; provided that, to the extent permitted by applicable law, if any of the
Collateral threatens to decline speedily in value or is of the type customarily
sold on a recognized market, Secured Party may sell or otherwise dispose of the
Collateral without notification, advertisement or other notice of any kind. It
is agreed that notice sent or given not less than ten calendar days prior to the
taking of the action to which the notice relates is reasonable notification and
notice for the purposes of this subparagraph. It shall not be necessary that the
Collateral be at the location of the sale.
(e) Application of Proceeds. Secured Party shall apply the
proceeds of any sale or other disposition of the Collateral under this Section 7
in the following order: First, to the payment of all its reasonable expenses
incurred in retaking, holding and preparing any of the Collateral for sale(s) or
other disposition, in arranging for such sale(s) or other disposition, and in
actually selling or disposing of the same (all of which are part of the
Obligations); second, toward repayment of amounts reasonably expended by Secured
Party under Section 8; third, toward payment of the balance of the Obligations
in the order and manner specified in the Note. Any surplus remaining shall be
delivered to Debtor or as a court of competent jurisdiction may direct.
8
<PAGE> 9
(f) Sale. Secured Party's sale of less than all the Collateral
shall not exhaust Secured Party's rights under this Agreement and Secured Party
is specifically empowered to make successive sales until all the Collateral is
sold. If the proceeds of a sale of less than all the Collateral shall be less
than the Obligations, this Agreement and the Security Interest shall remain in
full force and effect as to the unsold portion of the Collateral just as though
no sale had been made. In the event any sale under this Agreement is not
completed or is, in Secured Party's opinion, defective, such sale shall not
exhaust Secured Party's rights under this Agreement and Secured Party shall have
the right to cause a subsequent sale or sales to be made. Any and all statements
of fact or other recitals made in any bill of sale or assignment or other
instrument evidencing any foreclosure sale under this Agreement as to nonpayment
of the Obligations, or as to the occurrence of any Default, or as to Secured
Party's having declared all of such Obligations to be due and payable, or as to
notice of time, place and terms of sale and the properties to be sold having
been duly given, or as to any other act or thing having been duly done by
Secured Party, shall be taken as prima facie evidence of the truth of the facts
so stated and recited. Secured Party may appoint or delegate any one or more
persons as agent to perform any act or acts necessary or incident to any sale
held by Secured Party, including the sending of notices and the conduct of sale,
but such acts must be done in the name and on behalf of Secured Party.
(g) Existence of Default. Regarding the existence of any
Default for purposes of this Agreement, Debtor agrees that the obligors on any
Collateral may rely upon written certification from Secured Party that such a
Default exists. Debtor expressly agrees that Secured Party shall not be liable
to Debtor for any claims, damages, costs, expenses or causes of action of any
nature whatsoever in connection with, arising out of, or related to Secured
Party's exercise of any rights, powers or remedies under the Note or this
Agreement except for its own fraud, gross negligence, willful misconduct or
violation of any law.
8. Other Rights of Secured Party.
(a) Performance. In the event Debtor fails to preserve the
priority of the Security Interest in any of the Collateral, or, upon the
occurrence and during the continuance of a Default, otherwise fails to perform
any of its obligations under the Note or this Agreement with respect to the
Collateral, then Secured Party may (but is not required to) prosecute or defend
any suits in relation to the Collateral or take any other action which Debtor is
required to take under the Note or this Agreement, but has failed to take. Any
sum which may be reasonably expended or paid by Secured Party under this
subparagraph (including, without limitation, court costs and reasonable
attorneys' fees and expenses) shall bear interest from the date of expenditure
or payment at the same rate as amounts due under the Note until paid and,
together with such interest, shall be payable by such Debtor to Secured Party
upon demand and shall be part of the Obligations.
(b) Collateral in Secured Party's Possession. If, upon the
occurrence and during the continuance of a default, any Collateral comes into
Secured Party's possession, Secured Party may use such Collateral for the
purpose of preserving it or its value pursuant to the order of a court of
appropriate jurisdiction or in accordance with any other rights held by Secured
Party in respect of such Collateral. Debtor covenants to promptly reimburse and
pay to Secured
9
<PAGE> 10
Party, at Secured Party's request, the amount of all reasonable expenses
incurred by Secured Party in connection with its custody and preservation of
such Collateral, and all such expenses, costs, Taxes and other charges shall
bear interest at the same rate as amounts due under the Note until repaid and,
together with such interest, shall be payable by Debtor to Secured Party upon
demand and shall be part of the Obligations. However, the risk of accidental
loss or damage to, or diminution in value of, Collateral is on Debtor, except
for Secured Party's own fraud, gross negligence, willful misconduct or violation
of any law. Provided that Secured Party acts in accordance with all applicable
laws, Secured Party shall have no liability for failure to obtain or maintain
insurance, nor to determine whether any insurance ever in force is adequate as
to amount or as to the risks insured. With respect to Collateral that is in the
possession of Secured Party, except for its own fraud, gross negligence, willful
misconduct or violation of any law, Secured Party shall have no duty to fix or
preserve rights against prior parties to such Collateral and shall never be
liable for any failure to use diligence to collect any amount payable in respect
of such Collateral, but shall be liable only to account to Debtor for what it
may actually collect or receive thereon.
9. Miscellaneous.
(a) Term. Upon full and final payment of the Obligations
without Secured Party having exercised its rights under this Agreement, this
Agreement shall terminate; provided that no Obligor on any of the Collateral
shall be obligated to inquire as to the termination of this Agreement, but shall
be fully protected in making payment directly to Secured Party, which payment
shall be promptly paid over to Debtor after termination of this Agreement.
(b) Actions Not Releases. This Security Interest and Debtor's
obligation and Secured Party's Rights under this Agreement shall not be
released, diminished, impaired or adversely affected by the occurrence of any
one or more of the following events: (i) the taking or accepting of any other
security or assurance for any or all of the Obligations; (ii) any release,
surrender, exchange, subordination or loss of any security or assurance at any
time existing in connection with any or all of the Obligations; (iii) the
modification of, amendment to, or waiver of compliance with any terms of any of
the other Loan Documents without the consent of Debtor, except as required
therein; (iv) the insolvency, bankruptcy, or lack of corporate or trust power of
any party at any time liable for the payment of any or all of the Obligations,
whether now existing or hereafter occurring; (v) any renewal, extension or
rearrangement of the payment of any or all of the Obligations, either with or
without notice to or consent of Debtor, or any adjustment, indulgence,
forbearance, or compromise that may be granted or given by Secured Party to
Debtor; (vi) any neglect, delay, omission, failure or refusal of Secured Party
to take or prosecute any action in connection with any other agreement,
document, guaranty or instrument evidencing, securing or assuring the payment of
all or any of the Obligations; (vii) any failure of Secured Party to notify
Debtor of any renewal, extension or assignment of the Obligations or any part
thereof, or the release of any security under any other document or instrument,
or of any other action taken or refrained from being taken by Secured Party
against Debtor or any new agreement between Secured Party and Debtor, it being
understood that, except as expressly required by the Note, Secured Party shall
not be required to give Debtor any notice of any kind under any circumstances
whatsoever with respect to or in connection with the Obligations, including,
without limitation, notice of acceptance of this Agreement or any Collateral
ever
10
<PAGE> 11
delivered to or for the account of Secured Party under this Agreement;
(viii) the illegality, invalidity or unenforceability of all or any part of the
Obligations against any third party obligated with respect thereto by reason of
the fact that the Obligations, or the interest paid or payable with respect
thereto, exceeds the amount permitted by law, the act of creating the
Obligations, or any part thereof, is ultra vires, or the officers, partners, or
trustees creating same acted in excess of their authority, or for any other
reason; or (ix) if any payment by any party obligated with respect thereto is
held to constitute a preference under applicable laws or for any other reason
Secured Party is required to refund such payment or pay the amount thereof to
someone else.
(c) Waivers. Except to the extent expressly otherwise provided
in this Agreement or in other Loan Documents, Debtor waives (i) any right to
require Secured Party to proceed against any other Person, to exhaust its rights
in Collateral, or to pursue any other right which Secured Party may have; (ii)
with respect to the Obligations, presentment and demand for payment, protest,
notice of protest and nonpayment, notice of acceleration and notice of the
intention to accelerate; and (iii) all rights of marshaling in respect of any
and all of the Collateral.
(d) Financing Statement. Secured Party shall be entitled at
any time to file this Agreement or a carbon, photographic, or other reproduction
of this Agreement, as a financing statement, but the failure of Secured Party to
do so shall not impair the validity or enforceability of this Agreement.
(e) Amendments. This Agreement may only be amended by a
writing executed by Debtor and Secured Party.
(f) Multiple Counterparts. This Agreement may be executed in
any number of identical counterparts. Each counterpart shall be deemed an
original for all purposes and all counterparts, collectively, shall constitute
one Agreement. In making proof of this Agreement, it shall not be necessary to
produce or account for more than one set of counterpart signatures.
(g) Parties Bound. This Agreement shall be binding on Debtor
and its successors and assigns and shall inure to the benefit of Secured Party
and its successors and assigns. The obligations and agreements of Debtor under
this Agreement shall be binding upon its successors and assigns, and, except for
Secured Party's fraud, gross negligence, willful misconduct, and violation of
any applicable law, delivery or other accounting of Collateral to Debtor shall
discharge Secured Party of all liability therefor.
(h) Assignment. Debtor may not, without Secured Party's prior
written consent, assign any rights, duties or obligations under this Agreement.
(i) Notice. Any notice or communication required or permitted
under this Agreement must be given in writing (which may be by telex or
telecopy) to the parties at the following addresses or to such other address for
a party as such party may provide to the other in writing:
11
<PAGE> 12
Debtor: WO Consulting, Inc.
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
Secured Party: Scottsdale Technologies-I, Ltd.
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
(j) Governing Law. THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AND, AS
APPLICABLE, THE LAWS OF THE UNITED STATES OF AMERICA.
EFFECTIVE as of the date set forth in the preamble.
DEBTOR:
WO CONSULTING, INC.
a Delaware corporation
By: /s/ STUART N. RUBIN
---------------------------------------
Name: STUART N. RUBIN
Title: Chief Financial Officer
SECURED PARTY:
SCOTTSDALE TECHNOLOGIES-I, LTD.,
a Delaware limited partnership
By: SOFTWARE FUNDING CORP., a Delaware
corporation, its sole general partner
By: /s/ STUART N. RUBIN
------------------------------
Name: STUART N. RUBIN
Title: Vice President
<PAGE> 13
SCHEDULE 1
Location of Books and Records as to Accounts and Chief Executive
Offices:
7580 East Gray Road
Suite 102
Scottsdale, Arizona 85260
<PAGE> 1
Exhibit 10.1
SCOTTSDALE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE> 2
C O N T E N T S
Independent Auditors' Report ........................................... 3
Balance Sheets ......................................................... 4
Statements of Operations ............................................... 6
Statements of Stockholders' Equity (Deficit) ........................... 7
Statements of Cash Flows ............................................... 8
Notes to the Financial Statements ...................................... 10
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Scottsdale Technologies, Inc.
(A Development Stage Company)
Scottsdale, Arizona
We have audited the accompanying balance sheets of Scottsdale Technologies, Inc.
(a development stage company) as of December 31, 1996 and 1995 and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 1996, 1995 and 1994 and from inception on September 20,
1993 through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Scottsdale Technologies, Inc.
(a development stage company) as of December 31, 1996 and 1995 and the results
of its operations and its cash flows for the years ended December 31, 1996, 1995
and 1994 and from inception on September 20, 1993 through December 31, 1996 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company is a development stage company with no
significant operating results to date that together raise 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 financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Jones, Jensen & Company
April 3, 1997
3
<PAGE> 4
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 604 $ 287
Inventories (Notes 1 and 2) 19,126 --
-------- --------
Total Current Assets 19,730 287
-------- --------
EQUIPMENT (Net) (Note 3) 40,314 6,387
-------- --------
OTHER ASSETS
Discount on equipment 4,327 --
Deposits 16,506 --
Prepaid expenses 35,322 --
Patent (Note 1) 20,746 --
-------- --------
Total Other Assets 76,901 --
-------- --------
TOTAL ASSETS $136,945 $ 6,674
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE> 5
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 432,156 $ 151,218
Notes payable (Note 6) 292,464 270,964
Payroll payable 158,513 2,380
Shareholder and related party loans payable (Note 7) 945,065 304,058
Interest payable 260,803 77,200
Redeemable preferred stock (Note 5) 1,859,954 1,859,954
----------- -----------
Total Current Liabilities 3,948,955 2,665,774
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10) -- --
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; 6,000,000 shares authorized of $0.001 par value
-0-, shares issued and outstanding, -- --
Common stock; 10,000,000 shares authorized of $0.001 par value,
900,000, shares issued and outstanding, 900 900
Additional paid-in capital 103 103
Deficit accumulated during the development stage (3,813,013) (2,660,103)
----------- -----------
Total Stockholders' Equity (Deficit) (3,812,010) (2,659,100)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 136,945 $ 6,674
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE> 6
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
From
Inception on
September 20,
For the Years Ended December 31, 1993 Through
------------------------------------ December 31,
1996 1995 1994 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Sales (net) $ 2,998 $ -- $ -- $ 2,998
Cost of sales 2,780 -- -- 2,780
----------- ----------- ----------- -----------
Gross Profit 218 -- -- 218
----------- ----------- ----------- -----------
EXPENSES
Research and development 150,670 100,999 381,482 1,126,796
General and administrative 813,357 132,362 139,720 1,194,064
Depreciation 4,455 1,873 1,648 8,184
----------- ----------- ----------- -----------
Total Expenses 968,482 235,234 522,850 2,329,044
----------- ----------- ----------- -----------
Income (Loss) from Operations (968,264) (235,234) (522,850) (2,328,826)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (183,602) (134,842) (213,358) (624,592)
Other expense (1,044) -- -- (1,044)
----------- ----------- ----------- -----------
Total Other Income (Expense) (184,646) (134,842) (213,358) (625,636)
----------- ----------- ----------- -----------
Income (Loss) Before Loss on
Discontinued Operations (1,152,910) (370,076) (736,208) (2,954,462)
Gain (Loss) from Discontinued
Operations -- 252,543 (875,876) (858,551)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,152,910) $ (117,533) $(1,612,084) $(3,813,013)
=========== =========== =========== ===========
INCOME (LOSS) PER SHARE $ (1.28) $ (0.25) $ (537.36)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 900,000 462,333 3,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE> 7
SCOTTSDALE TECHNOLOGIES, INC.
(a Development Stage Company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Preferred Stock Additional During the Stockholders
------------ --------------- Paid-in Development Equity
Shares Amount Shares Amount Capital Stage (Deficit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock issued for
cash at $0.33
per share 3,000 $ 3 -- $ -- $ 1,000 $ -- $ 1,003
Net loss for the
year ended
December 31, 1993 -- -- -- -- -- (930,486) (930,486)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1993 3,000 3 -- -- 1,000 (930,486) (929,483)
Purchase of
preferred stock
for cash at
$0.001 per share -- -- 3,000 3 -- -- 3
Net loss for the
year ended
December 31, 1994 -- -- -- -- -- (1,612,084) (1,612,084)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1994 3,000 3 3,000 3 1,000 (2,542,570) (2,541,564)
Cancellation of
common stock (3,000) (3) -- -- -- -- (3)
Conversion of
preferred shares
to common shares 900,000 900 (3,000) (3) (897) -- --
Net loss for the
year ended
December 31, 1995 -- -- -- -- -- (117,533) (117,533)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1995 900,000 900 -- -- 103 (2,660,103) (2,659,100)
Net loss for the
year ended
December 31, 1996 -- -- -- -- -- (1,152,910) (1,152,910)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1996 900,000 $ 900 -- $ -- $ 103 $(3,813,013) $(3,812,010)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
7
<PAGE> 8
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
From
Inception on
September 20,
For the Years Ended December 31, 1993 Through
------------------------------------------- December 31,
1996 1995 1994 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) $(1,152,910) $ (117,533) $(1,612,084) $(3,813,013)
Adjustments to reconcile net
income (loss) to net cash:
Depreciation 4,455 1,873 1,648 8,184
Loss on disposition of equipment (1,794) -- -- (1,794)
Changes in assets and liabilities:
(Increase) decrease in inventory (19,126) 149,380 344,795 (19,126)
(Increase) decrease in accounts
receivables and related receivables -- -- 177,834 --
(Increase) decrease in other assets (56,155) -- -- (56,155)
Increase (decrease) in accounts
payable and other current liabilities 592,171 31,211 177,736 822,969
----------- ----------- ----------- -----------
Net Cash Provided (Used) by
Operating Activities (633,359) 64,931 (910,071) (3,058,935)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of fixed assets (8,086) (1,200) (1,260) (18,202)
Payments on patent (20,746) -- -- (20,746)
----------- ----------- ----------- -----------
Net Cash Provided (Used)
by Investing Activities (28,832) (1,200) (1,260) (38,948)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from related party payables 662,508 (63,936) 911,653 3,097,481
Common stock issued for cash -- -- -- 3
Preferred stock issued for cash -- -- 3 3
Contribution of capital -- -- -- 1,000
----------- ----------- ----------- -----------
Net Cash Provided (Used) by
Financing Activities $ 662,508 $ (63,936) $ 911,656 $ 3,098,487
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
8
<PAGE> 9
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
From
Inception on
September 20,
For the Years Ended December 31, 1993 Through
-------------------------------------- December 31,
1996 1995 1994 1996
----- ----- ----- -------------
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 317 $(205) $ 325 $ 604
CASH AT BEGINNING OF PERIOD 287 492 167 --
----- ----- ----- -----
CASH AT END OF PERIOD $ 604 $ 287 $ 492 $ 604
===== ===== ===== =====
SUPPLEMENTAL CASH FLOW
INFORMATION
CASH PAID FOR:
Interest $ -- $ -- $ -- $ --
Income taxes $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements
9
<PAGE> 10
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
a. Organization
Scottsdale Technologies, Inc. (the Company) was incorporated under the
laws of the State of Delaware on September 20, 1993. At the date of
incorporation, the Company was a wholly owned subsidiary of Mark
Force, Ltd. which was a wholly owned subsidiary of A. I. Software,
Inc. (a Canadian publicly-held company). The Company and Mark Force
Ltd. completed a dissolution agreement on October 5, 1995 whereby the
Company was no longer a subsidiary of Mark Force, Ltd. The accounts
presented are those of the Company only and do not include any
accounts of Mark Force, Ltd. or A. I. Software, Inc. The Company is
involved in the development of certain computer and consumer
electronic products and operates as a distribution company to market
multi-media consumer electronic products and accessories to
distributors and retailers within certain regions of the United
States.
b. Accounting Method
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
d. Net Income (Loss) Per Share
The computations of net income (loss) per share of common stock are
based on the weighted average number of shares outstanding at the date
of the financial statements. No adjustment has been made for the
convertible preferred stock as it is anti-dilutive.
e. Inventories
Inventory is stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
f. Revenue Recognition
The Company operates as a sales representative for certain suppliers
of consumer electronic products and, accordingly, records commissions
earned on sales of such products to wholesalers and distributors upon
shipment. The Company also records revenues for its television
programming service upon subscription by the customer.
The accompanying notes are an integral part of these financial statements
10
<PAGE> 11
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)
g. Equipment and Depreciation
Equipment is stated at cost. Expenditures for small tools, ordinary
maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed
using the straight-line method as follows:
Equipment 5 years
h. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
i. Discontinued Operations
The Company initially was involved in the development and sale of the
Amstrald Pen Pad. This project was unsuccessful. Consequently all
operations from the development and sale of the Amstrald Pen Pad were
discontinued in 1995. The financial statements have been restated to
reflect the gain (loss) from discontinued operations.
j. Patent
The amounts capitalized relate to legal fees associated with the
Program Master patent. The patent has not yet been approved. When the
patent is approved, the costs will be amortized over a 10 year period.
At December 31, 1996, the Company had incurred $20,746 in costs
relating to the patent application.
NOTE 2 - INVENTORIES
Inventory consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
Electronic products held for sale $19,126 $ --
======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements
11
<PAGE> 12
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 3 - EQUIPMENT
Equipment consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Telephone System,
Computer Equipment and Furniture $46,015 $10,116
Less accumulated depreciation (5,701) (3,729)
------- -------
Balance $40,314 $ 6,387
======= =======
</TABLE>
Depreciation expense was $4,455, $1,873 and $1,648 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 4 - PAYABLE TO FINANCING COMPANY
During 1993, the Company entered into a financing agreement with a
financing company which provided for borrowings up to $2,250,000. The
financing company provided funds to purchase product based on
acceptable purchase orders from Company customers.
The terms of the financing agreement include various transaction fees
which total to 5% of the customer order, and advance fees of .06% per
day of the customer order. In addition, the agreements requires
delinquency fees of .06% per day of the customer order for amounts
delinquent greater than 30 days.
The amounts due to the financing company at December 31, 1996 and 1995
were $47,757, and $57,757 (Note 7), respectively.
The Company is also required to redeem 200,000 shares of Series S
Preferred Stock and 127,243 shares of Series B Preferred Stock which
are owned by the financing company based on their redemption
requirements (Note 5).
All of the Company's assets are collateralized by the financing
agreement. The president of the Company has also provided a personal
guarantee on the financing agreements. The financing agreement was
terminated before December 31, 1995.
NOTE 5 - REDEEMABLE PREFERRED STOCK
On October 5, 1995 as part of the Company's dissolution agreement, the
Company amended its articles of incorporation to allow for the
issuance of three series of preferred stock: Series A, B, and S.
12
<PAGE> 13
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 5 - REDEEMABLE PREFERRED STOCK (Continued)
The Series S convertible redeemable preferred stock (senior preferred
stock) is 100% owned by a financing company. This senior preferred
stock is required to be redeemed by the Company utilizing 25 percent
of the cumulative proceeds received by the Company from any equity
financing or financings after the Company has first received the
cumulative aggregate amount of $400,000 of proceeds from said equity
financings.
This senior preferred stock has a liquidation preference senior to the
Company's common stock and all other series of preferred stock.
Each share of this senior preferred stock may be converted on or
before January 2, 1997 into one share of common stock and a warrant to
purchase one-half share of common stock. The warrants would be
exercisable at any time on or before January 2, 1998 at a price of
$4.00 per share.
The conversion of the senior preferred stock is subject to the
Company's right to redeem the senior preferred stock at $1.00 per
share for 30 days after the notice of conversion is given.
In addition to the mandatory redemption requirement described above,
the Company has the right, but not the obligation, to redeem the
shares of senior preferred stock on a voluntary basis at any time at
the redemption price of $1.00.
The senior preferred stock is not entitled to receive dividends.
The series B convertible redeemable preferred stock has the same
rights and obligations as does the series S convertible redeemable
preferred stock except that the series S preferred stock is senior
with respect to the liquidation preference and the Series B preferred
stock is entitled to receive a dividend of $0.08 per share per year as
declared by the Company and payable from funds legally available.
The amounts which reflect the issuance of the various shares of the
preferred stock are accounted for as a current liability of the
Company. This is because the Company has a mandatory redemption
requirement associated with the shares of preferred stock.
At December 31, 1996 and 1995, the Company had issued 200,000 shares
of series S preferred stock valued at $200,000 and 1,659,954 shares of
series B preferred stock valued at $1,659,954. The amount of the
dividend payable at December 31, 1996 and 1995 was $164,449 and
$31,652 respectively.
13
<PAGE> 14
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at December 31 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to an investor, interest accruing at
prime +2%, unsecured, payable upon demand $249,964 $249,964
Note payable to an investor, interest accruing at
prime + 2%, unsecured, payable upon
completion of private placement 27,500 21,000
Note payable to investors, non interest bearing,
unsecured, payable upon demand 15,000 --
-------- --------
$292,464 $270,964
======== ========
</TABLE>
NOTE 7 - SHAREHOLDER AND RELATED PARTY LOANS PAYABLE
Shareholder and related party loans payable consisted of the following
at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable to officers and directors, bearing
interest at 12%, convertible into common stock,
unsecured and payable upon demand $897,308 $246,301
Note payable to financing company payable upon
completion of private placement, secured by assets
of corporation and a personal guarantee from the
Company's president and payable upon demand
(Note 4) 47,757 57,757
-------- --------
$945,065 $304,058
======== ========
</TABLE>
NOTE 8 - GOING CONCERN
The Company's 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 significant
losses which have resulted in an accumulated deficit of $3,813,013 at
December 31, 1996 which raises substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result from the
outcome of this uncertainty. It is the intent of management to create
additional revenues through the sale of the Program Master and related
technologies and to rely upon additional equity financing if required
to sustain operations. The management of the Company has committed to
covering the operating expenses of the Company until adequate sales
are generated.
14
<PAGE> 15
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 9 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109),
which requires the use of the asset and liability method for
calculating deferred income taxes.
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $3,810,000 at December 31, 1996. The
net operating loss carryforwards will expire between the years 2007
and 2011. Use of these loss carryforwards may be limited due to
changes in ownership and changes in the type of business operations.
Due to a history of losses, the Company's deferred tax asset has been
reserved 100% , thus resulting in a net deferred tax asset of zero at
December 31, 1996.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Consulting/Marketing Agreements
The Company has entered into a marketing agreement wherein the
marketer will identify target markets through direct response T.V. The
contract expires December 31, 1998. The Company will be obligated to
pay 3% on gross process of the sales which occur as a direct result of
the marketer.
The Company has entered into a marketing and consulting agreement
wherein the two parties will develop and execute agreements with
Original Equipment Manufacturers. The agreement expires in December
1998 and calls for a $6,000 per month retainer and 3% on gross
proceeds of the sales which occur as a direct result of the marketer.
Distribution Agreements
The Company has entered into several distribution agreements with
vendors wherein the Company will pay the vendors between $5.00 and
$12.00 on a first year subscription between $4.00 and $6.00 on a
second year subscription and between $3.00 and $5.00 on a third year
subscription agreement.
The Company has entered into several sub-distribution agreements
wherein the Company has authorized various companies to act as
sub-distributors of its products. These agreements require payments of
3.00% to 3.50% of sales of subscription agreements to the
sub-distributors.
Litigation
The Company and the president of the Company have been named as
defendants in a breach of contract action involving promissory notes
totalling $250,000. The matter is presently the subject of discovery
efforts by both sides. Management is seeking an out-of-court
settlement. The promissory notes have been recorded at $250,000 with
accrued interest of approximately $96,000.
15
<PAGE> 16
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 11 - SUBSEQUENT EVENTS
Pursuant to an asset purchase agreement, on February 10, 1997, WO
Consulting, Inc., a Delaware Corporation, d/b/a Scottsdale
Technologies (the new company) acquired all of the assets of the
Company in exchange for 1,461,585 shares of common stock; however, the
Intellectual Property Assets, as defined will not be transferred to
the Company until a partnership, whose general partners include
members of senior management of the new company, is successful in
raising capital, that is expected to be converted into common stock of
the new company if certain conditions are met. Under the terms of the
agreement, the new company will not assume any debt, obligation or
liability of the Company except those as defined in the asset purchase
agreement, the company's rights and obligations under certain
specified contracts and $100,000 in trade accounts payable of the
company to be paid in cash or common stock of the new company as
negotiated between the new company and each such creditor. Promptly
after the consummation of the purchase of the assets, the Company
plans to liquidate.
Prior to the purchase by the new company, the Company entered into
separate restructuring agreements with several major creditors. Such
agreements will require the new company to pay a royalty of four
percent (4%) of all net sales proceeds derived by the Company from the
sale of its core products.
In exchange for entering into these royalty agreements and subject to
the creditors receiving amounts owed to them by the Company, these
creditors may assign to the new company their security interests in
the assets of the Company and may rescind their rights to all
indebtedness, obligations, claims and other liabilities incurred by
the Company (and/or one or more affiliates of the Company) and rescind
their rights to preferred stock of the Company.
As of the date hereof, one major creditor has not agreed to enter into
a similar agreements. See Note 10, Litigation.
As a result of the asset purchase, the new company is relieved of any
obligation to pay such major creditors that entered into such royalty
agreements until it generates revenues from its core products.
16
<PAGE> 17
SCOTTSDALE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Financial Statements
December 31, 1996 and 1995
NOTE 11 - SUBSEQUENT EVENTS (Continued)
The new company is presently negotiation to merge with Sound
Industries, Inc., a Utah Corporation (Sound). Under the terms of the
proposed merger, the Company would remit approximately $7,000 to an
owner of the majority of the common stock of Sound. Upon the execution
of the merger, the executive officers and directors of Sound and its
wholly-owned subsidiary would resign, and officers and directors of
the new company would control the newly formed company. Each
outstanding share of WO Consulting, Inc. d/b/a Scottsdale Technologies
will be convertible into one share of the newly formed company. It is
estimated that shareholders of WO Consulting, Inc., d/b/a Scottsdale
Technologies, including new investors that would be shareholders if
the new company is successful in raising capital through the issuance
of additional common stock, will own approximately 80% of the newly
formed company at the time of the merger. It is contemplated that the
new company will change its name to Scottsdale Technologies, Inc. soon
after the merger is consummated. The merger is expected to be a
tax-free reorganization. WO Consulting, Inc. d/b/a Scottsdale
Technologies will be the surviving corporation. Such a merger is
expected to be effective by the end of May 1997.
17
<PAGE> 1
Exhibit 10.2
<TABLE>
<S> <C> <C>
A PARTNERSHIP OF JONES, JENSEN
PROFESSIONAL CORPORATIONS MEMBERS
R. Gordon Jones, CPA, PC & CO M P A N Y American Institute of Certified Public Accountants
Mark P. Jensen, CPA, PC Utah Association of Certified Public Accountants
Franklin L. Hunt, CPA, PC SEC Practice Section
Private Companies Practice Section
C E R T I F I E D P U B L I C A C C O U N T A N T S Independent Accountants International
</TABLE>
CONSENT OF INDEPENDENT AUDITORS'
Board of Directors
Sound Industries, Ltd. And Subsidiary
Scottsdale, Arizona
WE CONSENT TO THE USE IN THIS REGISTRATION STATEMENT OF SOUND INDUSTRIES, LTD.
AND SUBSIDIARY ON FORM 10-SB, OF OUR REPORT DATED MAY 15, 1997 OF SOUND
INDUSTRIES, LTD. AND SUBSIDIARY FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
AND FOR THE SIC MONTHS ENDED MARCH 31, 1997 AND OUR REPORT DATED APRIL 3, 1997
OF SCOTTSDALE TECHNOLOGIES, INC. FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995,
WHICH ARE PART OF THIS REGISTRATION STATEMENT AND TO ALL REFERENCES TO OUR FIRM
INCLUDED IN THIS REGISTRATION STATEMENT.
Jones, Jensen & Company
/s/ Jones Jensen & Company
Salt Lake City, Utah
November 18, 1997
50 SOUTH MAIN STREET, SUITE 1450, SALT LAKE CITY, UTAH 84144 TELEPHONE (801)
328-4408, FACSIMILE (801) 328-4461
